1 00:00:00,120 --> 00:00:02,920 Speaker 1: Brought you by Bank of America, Mary Lynch. Investing in 2 00:00:03,000 --> 00:00:07,840 Speaker 1: local communities, economies and a sustainable future. That's the power 3 00:00:08,080 --> 00:00:12,360 Speaker 1: of global connections, Mary Lynch, Pierce Fenner and Smith Incorporated 4 00:00:12,760 --> 00:00:27,400 Speaker 1: member s I p C. Welcome to the Bloomberg Surveillance Podcast. 5 00:00:27,840 --> 00:00:31,520 Speaker 1: I'm Tom Keene with David Gura. Daily we bring you 6 00:00:31,560 --> 00:00:36,600 Speaker 1: insight from the best in economics, finance, investment, and international relations. 7 00:00:37,000 --> 00:00:41,600 Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and 8 00:00:41,680 --> 00:00:49,400 Speaker 1: of course on the Bloomberg. It's great to see Marvin 9 00:00:49,400 --> 00:00:51,519 Speaker 1: good Friend here in our Bloomberg eleven three O Studios 10 00:00:51,520 --> 00:00:53,519 Speaker 1: and the York the friends of Alan Meltro, Professor of 11 00:00:53,600 --> 00:00:56,520 Speaker 1: Economics of the Temper School of Business at Carnegie Mellon University. 12 00:00:56,520 --> 00:00:58,600 Speaker 1: Great to have you with us here in studio. I 13 00:00:58,640 --> 00:01:00,920 Speaker 1: have the paper here, the Case for Encumbering interest rate 14 00:01:00,960 --> 00:01:03,400 Speaker 1: policy at the zero Bound, something that Tom touted throughout 15 00:01:03,920 --> 00:01:06,199 Speaker 1: throughout August after you delivered that paper at the Jackson 16 00:01:06,200 --> 00:01:08,520 Speaker 1: Whole Economics Imposium. We'll get to that in a minute, 17 00:01:08,520 --> 00:01:11,000 Speaker 1: but let me start with the Layo Brainer's remarks at 18 00:01:11,000 --> 00:01:13,400 Speaker 1: Harvard two days ago. She said that the recent development 19 00:01:13,440 --> 00:01:16,880 Speaker 1: suggests that the macro economy maybe at a transition. You 20 00:01:16,920 --> 00:01:21,200 Speaker 1: agree with her, um absolutely that this understatement of of 21 00:01:21,240 --> 00:01:24,600 Speaker 1: all time. But but I give a credit. I mean, 22 00:01:24,600 --> 00:01:27,440 Speaker 1: when when the FED wants to change market expectations, they 23 00:01:27,440 --> 00:01:29,759 Speaker 1: bring out one of the more delish people and it's 24 00:01:29,880 --> 00:01:32,760 Speaker 1: very effective in doing so. What do you expect that 25 00:01:32,760 --> 00:01:35,120 Speaker 1: we're going to hear from from the FED chair today? 26 00:01:35,120 --> 00:01:37,160 Speaker 1: There have been instances in the past where we have 27 00:01:37,360 --> 00:01:40,040 Speaker 1: seen what we thought as groundwork and she maybe doesn't 28 00:01:40,040 --> 00:01:43,399 Speaker 1: reverse course, but mutes mutes the expectations somewhat the way 29 00:01:43,440 --> 00:01:46,959 Speaker 1: the FIT is upgraded it this week, it's been quite extraordinary. 30 00:01:47,400 --> 00:01:48,880 Speaker 1: This is the last week of the course that I 31 00:01:48,880 --> 00:01:50,520 Speaker 1: teach on money in Banking, and I had to tell 32 00:01:50,560 --> 00:01:52,600 Speaker 1: my students I have not seen I can't remember a 33 00:01:52,640 --> 00:01:54,640 Speaker 1: week in which the FIT has changed the expectations of 34 00:01:54,680 --> 00:01:57,440 Speaker 1: a short term move so radically in one in so 35 00:01:57,560 --> 00:02:00,440 Speaker 1: few days. When you look at the panoply data all 36 00:02:00,480 --> 00:02:03,160 Speaker 1: that the FED policy makers are looking at, here are 37 00:02:03,200 --> 00:02:05,480 Speaker 1: there any deficits? Anything is here that that do stand 38 00:02:05,480 --> 00:02:07,880 Speaker 1: out to you? Is as things on which jan Ellen 39 00:02:07,920 --> 00:02:12,240 Speaker 1: could hang a delay, say, uh, nothing that occurs to me. 40 00:02:12,320 --> 00:02:13,840 Speaker 1: If you mentioned one or two I might be able 41 00:02:13,840 --> 00:02:15,800 Speaker 1: to parment on that, but I'd have to search my 42 00:02:15,840 --> 00:02:19,080 Speaker 1: soul to find them. When you when you look at inflation, 43 00:02:19,360 --> 00:02:22,320 Speaker 1: where that stands? Now, what's your sense of how comfortable 44 00:02:22,360 --> 00:02:24,320 Speaker 1: are you with that? With that we're inflation is and 45 00:02:24,480 --> 00:02:26,240 Speaker 1: that in concert with what we're seeing in the labor 46 00:02:26,240 --> 00:02:30,880 Speaker 1: market as well, and personally, I'm pretty comfortable. I think that. Um, 47 00:02:30,919 --> 00:02:33,280 Speaker 1: you know, so I remember. Now here's what's interesting. I remember. 48 00:02:33,320 --> 00:02:36,000 Speaker 1: I'm only enough to remember when inflation pressures are really severe, 49 00:02:36,560 --> 00:02:38,880 Speaker 1: and it just doesn't feel like that yet. But the 50 00:02:39,040 --> 00:02:41,239 Speaker 1: but the inflation rate is at the target, and there's 51 00:02:41,240 --> 00:02:43,520 Speaker 1: absolutely no case not to move, and to move, as 52 00:02:43,520 --> 00:02:46,920 Speaker 1: I've been saying in a small campaign, to not just 53 00:02:46,960 --> 00:02:49,160 Speaker 1: go one and done, not just say your data dependent. 54 00:02:49,200 --> 00:02:50,920 Speaker 1: But there's enough water under the bridge to use a 55 00:02:50,919 --> 00:02:52,720 Speaker 1: metaphor to say, you know that, we really got to 56 00:02:52,720 --> 00:02:55,720 Speaker 1: get going, David, I gotta rudely interrupt and ask this question. 57 00:02:55,760 --> 00:02:58,280 Speaker 1: I asked it on television, and it's so important we 58 00:02:58,280 --> 00:03:00,840 Speaker 1: need to ask it on a radio as well. I 59 00:03:00,880 --> 00:03:03,800 Speaker 1: am sure that if Kevin Hassett was sitting with his 60 00:03:03,880 --> 00:03:06,880 Speaker 1: legs feet on the floor on the Oval Office couch 61 00:03:07,560 --> 00:03:09,760 Speaker 1: and the President said who should we pick your name 62 00:03:09,800 --> 00:03:13,480 Speaker 1: would come up. Have you been contacted by anyone within 63 00:03:13,520 --> 00:03:19,400 Speaker 1: the administration about being, say a governor. I haven't, absolutely not. 64 00:03:19,880 --> 00:03:21,920 Speaker 1: It's definitive. We tried that with John Taylor, and it 65 00:03:21,960 --> 00:03:25,240 Speaker 1: was we got we got more silence. Well, we'll get 66 00:03:25,280 --> 00:03:27,560 Speaker 1: to the Taylor roll in a minute. We you were 67 00:03:27,560 --> 00:03:29,320 Speaker 1: mentioning one and done and and all of that. We 68 00:03:29,320 --> 00:03:31,720 Speaker 1: were talking with Alan Blinder, the former FED vice chair yesterday, 69 00:03:31,760 --> 00:03:34,440 Speaker 1: and he said, the debate now shifts to whether it's 70 00:03:34,480 --> 00:03:36,920 Speaker 1: it's three or four? Do you what's your what's your 71 00:03:36,920 --> 00:03:39,200 Speaker 1: sense of the trajectory here going forward? You know, you 72 00:03:39,240 --> 00:03:41,920 Speaker 1: get you getting to the limits of my willingness to speculate. 73 00:03:42,760 --> 00:03:44,680 Speaker 1: Uh So, I really don't know. You're not in a 74 00:03:44,720 --> 00:03:48,320 Speaker 1: position to make a call between three and four. I 75 00:03:48,400 --> 00:03:50,160 Speaker 1: just think the way I think about it, roughly is 76 00:03:50,200 --> 00:03:51,920 Speaker 1: that the short rate needs to move up in the 77 00:03:52,000 --> 00:03:55,040 Speaker 1: vicinity of two and a little higher. And whether that's 78 00:03:55,080 --> 00:03:59,680 Speaker 1: three or four, I haven't calculated. Something else that Governor 79 00:03:59,680 --> 00:04:02,240 Speaker 1: Brainard spoke about it at Harvard was and what she's 80 00:04:02,240 --> 00:04:05,880 Speaker 1: seeing overseas? What what's your sense of of how this 81 00:04:06,040 --> 00:04:08,440 Speaker 1: the US economy dovetails with what's going on in Europe 82 00:04:08,440 --> 00:04:11,520 Speaker 1: and what's going on with China at this point. Well, 83 00:04:11,640 --> 00:04:15,160 Speaker 1: I mean, I think the US economy potentially is turning 84 00:04:15,160 --> 00:04:17,200 Speaker 1: the corner. And there's no question that that that that 85 00:04:17,279 --> 00:04:20,200 Speaker 1: there's a good reason to be hopeful about a kind 86 00:04:20,200 --> 00:04:24,280 Speaker 1: of resumption of economic growth and economic activity and and 87 00:04:24,000 --> 00:04:27,400 Speaker 1: and small business activity in particular, connected with maybe a 88 00:04:27,400 --> 00:04:30,960 Speaker 1: resurgence of community banking lending and smaller bank lending and 89 00:04:30,960 --> 00:04:32,880 Speaker 1: so forth. There's a lot of good reasons to think 90 00:04:32,880 --> 00:04:36,760 Speaker 1: that that's going to happen. Uh Uh. I'm not so 91 00:04:36,920 --> 00:04:39,840 Speaker 1: enthusiastic about China, and we can talk about that at 92 00:04:39,920 --> 00:04:42,560 Speaker 1: length later for for a bunch of reasons. And I 93 00:04:42,640 --> 00:04:46,360 Speaker 1: think you have to be cautious about Europe. I'm I 94 00:04:46,480 --> 00:04:49,080 Speaker 1: just a little bit pessimistic on on Europe and China. 95 00:04:49,120 --> 00:04:50,800 Speaker 1: But I think the US is moving there's a good 96 00:04:50,800 --> 00:04:52,200 Speaker 1: case for the US to move ahead a little bit 97 00:04:52,240 --> 00:04:54,640 Speaker 1: stronger than haus. I brought up the paper that you 98 00:04:54,720 --> 00:04:57,039 Speaker 1: delivered that last summer in Jackson. Will take us back 99 00:04:57,040 --> 00:04:59,400 Speaker 1: to when you deliver that, what the reaction was at 100 00:04:59,400 --> 00:05:01,480 Speaker 1: the time your folks us in here on the utility 101 00:05:01,520 --> 00:05:04,000 Speaker 1: of of of negative rates, and and we can get 102 00:05:04,000 --> 00:05:06,440 Speaker 1: into whether there's a likelihood of that happening. But do 103 00:05:06,560 --> 00:05:08,400 Speaker 1: we have a sense here of the efficacy of negative 104 00:05:08,480 --> 00:05:10,760 Speaker 1: rates at this point? So let me let me separate 105 00:05:10,920 --> 00:05:13,039 Speaker 1: a few things out. I mean, first of all, the 106 00:05:13,080 --> 00:05:15,960 Speaker 1: long term real interest rates in the advanced world and 107 00:05:16,400 --> 00:05:19,840 Speaker 1: have been falling for the past two decades. And and 108 00:05:19,960 --> 00:05:23,680 Speaker 1: without going into detail, the first cases that that the 109 00:05:23,720 --> 00:05:27,000 Speaker 1: circumstances and which have depressed long term real interest rates 110 00:05:27,000 --> 00:05:30,159 Speaker 1: over those two decades are not likely to dissipate anytime soon, 111 00:05:30,320 --> 00:05:32,600 Speaker 1: so that you may see some elevation of long term 112 00:05:32,600 --> 00:05:35,200 Speaker 1: bonds as a fed um makes a cyclical move here, 113 00:05:35,320 --> 00:05:36,960 Speaker 1: but I don't think that's going to undo the longer 114 00:05:37,040 --> 00:05:39,719 Speaker 1: term trend that we've seen. So with longer term bond 115 00:05:39,800 --> 00:05:43,719 Speaker 1: rates historically close to zero, I think if the globe 116 00:05:43,760 --> 00:05:46,760 Speaker 1: gets into a recession in the near future, the zero 117 00:05:46,839 --> 00:05:50,080 Speaker 1: interest bound problem might make a comeback. So I think 118 00:05:50,120 --> 00:05:52,320 Speaker 1: it's got it's out there. And what I like to 119 00:05:52,400 --> 00:05:55,919 Speaker 1: tell my classes, I think center banks um should should 120 00:05:55,960 --> 00:06:00,200 Speaker 1: be prepared and not presumptuous. And those are the kind 121 00:06:00,200 --> 00:06:02,360 Speaker 1: of that's those are the foundations for writing this paper. 122 00:06:02,640 --> 00:06:05,240 Speaker 1: If I look at a textbook, which textbook do you use? 123 00:06:06,200 --> 00:06:09,720 Speaker 1: I don't use it. I use my own your writings 124 00:06:09,760 --> 00:06:11,599 Speaker 1: over the past thirty years in which I've been trying 125 00:06:11,600 --> 00:06:14,080 Speaker 1: to teach myself and learn from being at the FED. 126 00:06:14,160 --> 00:06:16,800 Speaker 1: And and and I have what we call a course packet, 127 00:06:16,800 --> 00:06:19,640 Speaker 1: which we put a cose if I it was to 128 00:06:19,680 --> 00:06:22,880 Speaker 1: look at your course packet? Are the theories of five 129 00:06:22,960 --> 00:06:26,000 Speaker 1: years ago, ten years ago, thirty years ago? Are they 130 00:06:26,040 --> 00:06:30,120 Speaker 1: applicable right now for Cherry Ellen and your students? Well, 131 00:06:30,160 --> 00:06:33,600 Speaker 1: I would say that's the theories. There was a refashioning 132 00:06:33,640 --> 00:06:36,800 Speaker 1: of macroeconomics that occurred in the ninety nineties, which which 133 00:06:36,839 --> 00:06:39,000 Speaker 1: is called by two different names because it was tried 134 00:06:39,040 --> 00:06:42,159 Speaker 1: to it was kind of owned by both sides of 135 00:06:42,160 --> 00:06:44,240 Speaker 1: the spectrum. They used to be Montros and there used 136 00:06:44,240 --> 00:06:46,640 Speaker 1: to be Keynesians. And then there was something called new 137 00:06:46,680 --> 00:06:50,160 Speaker 1: synthesis or new Caynesian. Do we blame Richard Clarata for 138 00:06:50,200 --> 00:06:53,559 Speaker 1: this is just rich which is one of the people 139 00:06:53,600 --> 00:06:56,640 Speaker 1: who put who who created this synthesis? And I was 140 00:06:56,680 --> 00:06:59,359 Speaker 1: involved in that in earlier years, and and so Central Banks. 141 00:06:59,360 --> 00:07:02,680 Speaker 1: Basically the models are based on this new sentences, new 142 00:07:02,760 --> 00:07:06,080 Speaker 1: kyinsie in perspective in which divorced parents have been brought 143 00:07:06,120 --> 00:07:09,160 Speaker 1: together more or less to some reasonable common ground. Now 144 00:07:09,200 --> 00:07:11,320 Speaker 1: we disagree about other things, but not about the very 145 00:07:11,320 --> 00:07:16,720 Speaker 1: foundations about how the core macroeconomics works. The interest rates 146 00:07:16,760 --> 00:07:20,040 Speaker 1: that are in the Hicksie and I S l M model, 147 00:07:20,760 --> 00:07:24,680 Speaker 1: can they work within the great distortion, whether it's on 148 00:07:24,760 --> 00:07:28,040 Speaker 1: the I S curve algebra or the alum curve algebra, 149 00:07:28,360 --> 00:07:32,160 Speaker 1: to those rates work given how distorted our fixed income 150 00:07:32,480 --> 00:07:36,640 Speaker 1: world is, well, we have um. That's how do I 151 00:07:36,760 --> 00:07:40,880 Speaker 1: This is a difficult question because there's to two issues, 152 00:07:40,920 --> 00:07:42,920 Speaker 1: at least two issues, I think, and you're involved in 153 00:07:42,920 --> 00:07:44,720 Speaker 1: your question. First of all, I S N l M 154 00:07:45,520 --> 00:07:47,680 Speaker 1: is a model that doesn't talk about the president in 155 00:07:47,720 --> 00:07:50,920 Speaker 1: the future, so as a theoretical thing, it's very misleading 156 00:07:50,920 --> 00:07:53,040 Speaker 1: about what interest rates are all about. This is one 157 00:07:53,040 --> 00:07:55,160 Speaker 1: of the one of the reasons kings in economics, in 158 00:07:55,160 --> 00:07:58,200 Speaker 1: my opinion, failed as a guide for interest rate policy 159 00:07:58,200 --> 00:08:01,080 Speaker 1: as practiced by central banks. You talk in terms of 160 00:08:01,120 --> 00:08:06,240 Speaker 1: saving investment, interest rates are really about uh pessimism in 161 00:08:06,280 --> 00:08:09,600 Speaker 1: the future versus optimism in the present. The more pessimistic 162 00:08:09,600 --> 00:08:11,560 Speaker 1: the future is, the more people try to save for 163 00:08:11,600 --> 00:08:14,280 Speaker 1: the future into press interest rates. The more optimistic people 164 00:08:14,280 --> 00:08:16,280 Speaker 1: are about the future, the more they try to borrow 165 00:08:16,800 --> 00:08:18,760 Speaker 1: from from the future to do the investment in the 166 00:08:18,760 --> 00:08:21,680 Speaker 1: spending today. That so interest rates are what I call 167 00:08:21,720 --> 00:08:26,120 Speaker 1: an intertemporal price that's completely absent from the perspective. And 168 00:08:26,160 --> 00:08:27,680 Speaker 1: that's one of the reasons why there was a great 169 00:08:27,680 --> 00:08:31,600 Speaker 1: misunderstanding in what interest rate policy involves in and that 170 00:08:31,760 --> 00:08:35,079 Speaker 1: caused us in my generation to refashion macreaking. Within that 171 00:08:35,200 --> 00:08:39,400 Speaker 1: wonderful analysis is cherry Yelling working in a model that 172 00:08:39,640 --> 00:08:44,719 Speaker 1: brings in the Trump confidence boost that I don't know. 173 00:08:45,000 --> 00:08:47,599 Speaker 1: I mean, I think you know. When I talk to 174 00:08:47,679 --> 00:08:49,280 Speaker 1: my class about this, I said, what is the art 175 00:08:49,360 --> 00:08:52,240 Speaker 1: of of the Federal Open Market Committee? The art is 176 00:08:52,720 --> 00:08:55,640 Speaker 1: talking about that kind of question. And I don't think 177 00:08:55,679 --> 00:08:58,200 Speaker 1: there's any kind of concrete way to do that except 178 00:08:58,280 --> 00:09:01,320 Speaker 1: to have a conversation of members of the Federal Open 179 00:09:01,360 --> 00:09:03,559 Speaker 1: Market Committee. And I don't know how to deconstruct that 180 00:09:03,679 --> 00:09:09,800 Speaker 1: for you in this room, because particularly for this Marvin 181 00:09:09,840 --> 00:09:13,240 Speaker 1: good Friend of carnegy Melon University, someone not you're not 182 00:09:13,400 --> 00:09:15,840 Speaker 1: a hawk. That's not the right way to You must 183 00:09:15,840 --> 00:09:19,079 Speaker 1: be insulted when someone says, oh, there's good Friend the hawk. 184 00:09:20,040 --> 00:09:23,000 Speaker 1: If you're not a hawk, how do you frame yourself 185 00:09:23,559 --> 00:09:27,959 Speaker 1: versus Governor Brainerd. I'm someone who believes in stability of 186 00:09:28,040 --> 00:09:30,559 Speaker 1: the price level and that old fash fashioned way of 187 00:09:30,640 --> 00:09:34,760 Speaker 1: putting things, or a dependable purchasing power of money, meaning 188 00:09:34,920 --> 00:09:37,600 Speaker 1: in modern day and age, somebody who's serious about maintaining 189 00:09:37,640 --> 00:09:40,640 Speaker 1: inflation at some target, maybe two percent, maybe one pent 190 00:09:40,720 --> 00:09:43,640 Speaker 1: to something. If the Fed he had been more like 191 00:09:43,920 --> 00:09:47,800 Speaker 1: Marvin good Friend, would retirees today feel so broke with 192 00:09:48,000 --> 00:09:53,480 Speaker 1: the financial repression have drifted away if they gotten to 193 00:09:53,559 --> 00:09:57,120 Speaker 1: a higher rate regime sooner? Oh? I think if if 194 00:09:57,160 --> 00:10:01,119 Speaker 1: the FED were really committed to price stability um completely 195 00:10:01,240 --> 00:10:03,120 Speaker 1: and utterly, I think retirees would be in a much 196 00:10:03,160 --> 00:10:06,400 Speaker 1: better position today. Why because years ago they would have 197 00:10:06,440 --> 00:10:10,520 Speaker 1: been willing to hold longer term government bonds paying nominal interest, 198 00:10:10,840 --> 00:10:12,480 Speaker 1: and they could have counted on the fact that that 199 00:10:12,640 --> 00:10:16,160 Speaker 1: nominal return would have been locked in purchasing power terms. 200 00:10:16,720 --> 00:10:19,559 Speaker 1: One of the problems that retirees have have had for 201 00:10:19,679 --> 00:10:22,360 Speaker 1: many decades now is that the FED is not committed 202 00:10:22,480 --> 00:10:25,600 Speaker 1: enough to price stability, and so retirees cannot load up 203 00:10:25,640 --> 00:10:29,000 Speaker 1: on long term government bonds. It's not responsible because agreed, 204 00:10:29,280 --> 00:10:33,080 Speaker 1: what is the FED committed to If they're not committed 205 00:10:33,160 --> 00:10:38,439 Speaker 1: to the nominal rate to save savers. You know, the 206 00:10:38,559 --> 00:10:42,640 Speaker 1: FED is a discretionary organization that's committed to doing the 207 00:10:42,679 --> 00:10:45,480 Speaker 1: best you can for the public at the moment. He's 208 00:10:45,520 --> 00:10:47,760 Speaker 1: like a lawyer, it's like a general counsel. And now 209 00:10:47,840 --> 00:10:50,840 Speaker 1: that sounds great, doesn't you need a partially diversified There 210 00:10:50,920 --> 00:10:53,040 Speaker 1: you go. We we're talking about short bonds and long 211 00:10:53,120 --> 00:10:55,280 Speaker 1: born bonds, and you bring up something called the price 212 00:10:55,320 --> 00:10:58,480 Speaker 1: of risk transfer, suggesting that the FMC should be looking 213 00:10:58,520 --> 00:11:01,000 Speaker 1: more closely and explain why that's the case. Okay, so 214 00:11:01,080 --> 00:11:02,800 Speaker 1: this is a little bit of a little bit involved, 215 00:11:02,800 --> 00:11:09,120 Speaker 1: but let me start out the the short term. Monetary 216 00:11:09,200 --> 00:11:11,360 Speaker 1: policy over the short term is really based about moving 217 00:11:11,400 --> 00:11:14,439 Speaker 1: the short rate around whatever the long rate happens to be, 218 00:11:14,559 --> 00:11:16,920 Speaker 1: and the long rate is governed by longer run forces. 219 00:11:18,480 --> 00:11:21,320 Speaker 1: So right now, monetary policy is about moving the short 220 00:11:21,400 --> 00:11:23,760 Speaker 1: rate up relative to where the ten year yield is. 221 00:11:24,200 --> 00:11:26,480 Speaker 1: That's fine, that's a separate matter. I'm in favor of 222 00:11:26,600 --> 00:11:29,120 Speaker 1: doing that. But if we want to talk about what 223 00:11:29,520 --> 00:11:32,320 Speaker 1: what are the determinants of where the long rate is, uh, 224 00:11:32,480 --> 00:11:34,719 Speaker 1: that's that's important. That's a separate matter. So over the 225 00:11:34,800 --> 00:11:38,000 Speaker 1: longer run, long term bond rates in the United States 226 00:11:38,040 --> 00:11:41,719 Speaker 1: are are basically composed of three components. Roughly One of 227 00:11:41,760 --> 00:11:44,000 Speaker 1: them is what we call the real long term interest rate. 228 00:11:44,480 --> 00:11:47,480 Speaker 1: Real long term interest rates, say the indexed bond rate, 229 00:11:47,559 --> 00:11:51,240 Speaker 1: if you will index for inflation. That's governed by longer 230 00:11:51,320 --> 00:11:56,360 Speaker 1: run forces having to do with um, population, demographics, confidence 231 00:11:56,360 --> 00:11:59,079 Speaker 1: in the future, whether you want to borrow against a 232 00:11:59,160 --> 00:12:01,040 Speaker 1: bright future or that you want to save for a 233 00:12:01,120 --> 00:12:03,240 Speaker 1: future you think is not as bright as today. Those 234 00:12:03,280 --> 00:12:06,920 Speaker 1: are real forces that govern what we call the riskless 235 00:12:06,960 --> 00:12:10,920 Speaker 1: real bond rates in the US. Then you have expected inflation, 236 00:12:10,960 --> 00:12:13,760 Speaker 1: which is added onto the bond rate to protect investors 237 00:12:13,800 --> 00:12:17,360 Speaker 1: against inflation. And and expected inflation, I'm going to give 238 00:12:17,360 --> 00:12:19,920 Speaker 1: the Fed the benefit of the maybe two percent for 239 00:12:19,960 --> 00:12:23,120 Speaker 1: the next ten twenty years, just for fun. So then 240 00:12:23,200 --> 00:12:24,839 Speaker 1: you have a third component, which not a lot of 241 00:12:24,880 --> 00:12:27,840 Speaker 1: people discussed, which is very powerful component in long bond rates. 242 00:12:28,400 --> 00:12:32,520 Speaker 1: It's called the cyclical risk premium. And here monetary policy 243 00:12:32,600 --> 00:12:35,400 Speaker 1: has a longer run, very very important role to play. 244 00:12:35,880 --> 00:12:38,120 Speaker 1: So let me let me tell a story about the 245 00:12:38,240 --> 00:12:42,560 Speaker 1: Great Inflation back in between nine and nineteen eighty three 246 00:12:42,679 --> 00:12:46,280 Speaker 1: or four. Inflation is rising during that period, there were 247 00:12:46,320 --> 00:12:48,560 Speaker 1: a number of recessions, and they were usually caused by 248 00:12:48,640 --> 00:12:51,839 Speaker 1: inflation getting out of control. The pharaohs are of raising 249 00:12:51,880 --> 00:12:55,559 Speaker 1: short term interest rates to fight inflation. In order to 250 00:12:55,640 --> 00:12:59,000 Speaker 1: fight inflation, the FED would create a recession, weakend labor markets, 251 00:13:00,360 --> 00:13:04,280 Speaker 1: cause unemployment, cause consumption to fall, but they would The 252 00:13:04,360 --> 00:13:06,800 Speaker 1: FED would do so by raising interest rates, which means 253 00:13:06,880 --> 00:13:09,960 Speaker 1: bond prices, which go inversely to interest rates, would fall 254 00:13:10,520 --> 00:13:14,079 Speaker 1: in those inflation fighting recessions. So if you're just when 255 00:13:14,120 --> 00:13:17,560 Speaker 1: you needed the money, the bond market tanks and you're 256 00:13:17,600 --> 00:13:19,440 Speaker 1: out of work. So if you're going to be holding 257 00:13:19,520 --> 00:13:22,319 Speaker 1: long term bonds in those days, you would require a 258 00:13:22,440 --> 00:13:27,800 Speaker 1: compensation for risk, something called the term premium. Now the 259 00:13:27,920 --> 00:13:32,559 Speaker 1: term premium. Various economists have estimated these things, and it rose. 260 00:13:32,679 --> 00:13:35,600 Speaker 1: It rose as high as four percentage points by some estimates. 261 00:13:36,840 --> 00:13:39,720 Speaker 1: When Paul Boker, you know, finally grabbed the bull by 262 00:13:39,720 --> 00:13:42,800 Speaker 1: the horns and tried to end that that's inflation fighting 263 00:13:42,880 --> 00:13:46,520 Speaker 1: period and did end it. Okay, So what happens after that? 264 00:13:47,160 --> 00:13:50,280 Speaker 1: Do you have enough time to get us up to okay? So, 265 00:13:50,520 --> 00:13:53,160 Speaker 1: so if the FED ends inflation as a as a problem, 266 00:13:53,640 --> 00:13:55,559 Speaker 1: and what do we have now? The last recession we 267 00:13:55,640 --> 00:13:58,319 Speaker 1: had was not an inflation induced recession. It was a 268 00:13:58,400 --> 00:14:02,559 Speaker 1: recession induced by financial instat ability. And so when when 269 00:14:02,600 --> 00:14:05,800 Speaker 1: financial instability creates a recession, people are thrown out of work, 270 00:14:06,000 --> 00:14:08,559 Speaker 1: consumption goes down, what does the FED do? Instead of 271 00:14:08,679 --> 00:14:12,400 Speaker 1: raising rates, it immediately cut rates, meaning bond prices sore 272 00:14:12,960 --> 00:14:17,280 Speaker 1: in that sort of recession. Now, people, by my judgment, 273 00:14:18,480 --> 00:14:21,880 Speaker 1: people the market began to sense that the cyclical risk 274 00:14:22,560 --> 00:14:27,320 Speaker 1: was changing from inflation fighting to fighting financial stability. Okay, 275 00:14:27,360 --> 00:14:31,760 Speaker 1: we're done with this dissertation. And then the term premium 276 00:14:31,920 --> 00:14:35,000 Speaker 1: went to zero and in fact went negative. So now 277 00:14:35,160 --> 00:14:38,440 Speaker 1: bonds were a hedge against in Barbarn good Friend I 278 00:14:38,480 --> 00:14:41,960 Speaker 1: didn't get in my question on Sydney, Crosby and Washington capitals. 279 00:14:42,000 --> 00:15:00,920 Speaker 1: Professor good Friend is from Pittsburgh. This is Bloomberg without question. 280 00:15:01,160 --> 00:15:05,000 Speaker 1: Our interview of the day Brian Weezer. Brian, you saved 281 00:15:05,160 --> 00:15:10,560 Speaker 1: investors billions by getting out of Facebook early, billions you 282 00:15:10,760 --> 00:15:17,240 Speaker 1: suggest will be lost by people owning and buying Snapchat. Here, financially, 283 00:15:17,640 --> 00:15:21,160 Speaker 1: two bucks of cash, a couple of dollars here and 284 00:15:21,240 --> 00:15:24,040 Speaker 1: there in the core business is worth like seven dollars 285 00:15:24,320 --> 00:15:27,040 Speaker 1: a share. You rounded up to ten dollars a share 286 00:15:27,560 --> 00:15:33,120 Speaker 1: what is Silicon Valley missing in Snapchat? Oh? Well thanks, 287 00:15:33,160 --> 00:15:36,880 Speaker 1: So it's quite a quite introduction. Uh. You know, you 288 00:15:36,920 --> 00:15:39,720 Speaker 1: could argue Silicon Valley is missing nothing because they realized 289 00:15:39,720 --> 00:15:41,680 Speaker 1: they can invest in another company and have an equally 290 00:15:41,760 --> 00:15:44,480 Speaker 1: good exit. Um. The bigger questions what are investors missing 291 00:15:45,920 --> 00:15:49,440 Speaker 1: who are not the same thing? Uh. You know It's 292 00:15:49,640 --> 00:15:52,400 Speaker 1: funny because people could askually, what makes me think it 293 00:15:52,440 --> 00:15:56,880 Speaker 1: should be unsuccessful IPO the very successful IPO for the issue? Um, 294 00:15:57,280 --> 00:15:59,480 Speaker 1: The issue is again from the perspective of the buyer, 295 00:15:59,520 --> 00:16:02,840 Speaker 1: the investor, and UM, you know, I I get the 296 00:16:02,960 --> 00:16:06,960 Speaker 1: sense that there's there are two reasons why uh investors 297 00:16:06,960 --> 00:16:09,240 Speaker 1: who are buying uh the stock have bought it. Uh. 298 00:16:09,640 --> 00:16:12,280 Speaker 1: One is because they're using metrics that I think are 299 00:16:12,680 --> 00:16:16,760 Speaker 1: inappropriate for purposes of valuing a company such as snap Specifically, 300 00:16:16,760 --> 00:16:20,000 Speaker 1: they're using some kind of metric like value per user, 301 00:16:20,880 --> 00:16:23,240 Speaker 1: or they're starting off with an average revenue per user 302 00:16:23,360 --> 00:16:26,200 Speaker 1: and uh and then trying to compare them to say Facebook, 303 00:16:26,200 --> 00:16:30,440 Speaker 1: and those are totally ridiculous. Okay, they're at the top 304 00:16:30,600 --> 00:16:34,280 Speaker 1: line revenue dynamics, and your eleven page report you go 305 00:16:34,520 --> 00:16:38,520 Speaker 1: down the income statement to the margin generation away from 306 00:16:38,720 --> 00:16:42,640 Speaker 1: average revenue per user. Come on, we're going from twenty 307 00:16:42,760 --> 00:16:47,479 Speaker 1: six dollars to ten dollars. Where is the margin failure 308 00:16:48,160 --> 00:16:51,000 Speaker 1: in their belief? Well, this is a point that I 309 00:16:51,080 --> 00:16:54,440 Speaker 1: think anyone trying to make a comparison against any Facebook 310 00:16:54,520 --> 00:16:56,840 Speaker 1: on on that basis ignores that Facebook is going to 311 00:16:56,880 --> 00:17:00,760 Speaker 1: be structurally a much higher margin business, will be a 312 00:17:00,920 --> 00:17:03,920 Speaker 1: much higher margin business just based on what Snap has 313 00:17:03,960 --> 00:17:07,960 Speaker 1: said that they plan to do um And so you've 314 00:17:08,000 --> 00:17:10,760 Speaker 1: got that piece. The second piece is the fact that Okay, 315 00:17:10,840 --> 00:17:13,960 Speaker 1: well we can be generous and assume that the company 316 00:17:14,000 --> 00:17:17,080 Speaker 1: can continue to grow. Not a given, but you know, 317 00:17:17,240 --> 00:17:20,160 Speaker 1: there's some evidence that despite the slowdown and user growth, 318 00:17:20,240 --> 00:17:22,960 Speaker 1: that they can keep up consumption at least of the 319 00:17:23,000 --> 00:17:26,480 Speaker 1: platform UM. And they're never going to be able to 320 00:17:26,560 --> 00:17:30,000 Speaker 1: monetize as well as Facebook for two reasons. The first 321 00:17:30,359 --> 00:17:34,119 Speaker 1: even proportionately, and the first reason is they will never 322 00:17:34,200 --> 00:17:36,639 Speaker 1: be as international or be able to monetize the international 323 00:17:37,280 --> 00:17:41,520 Speaker 1: uh or as well as Facebook just because you just 324 00:17:41,600 --> 00:17:44,560 Speaker 1: don't have feed on the ground in Singapore as much 325 00:17:44,600 --> 00:17:46,119 Speaker 1: as say Facebook does. You don't have feed on the 326 00:17:46,160 --> 00:17:50,440 Speaker 1: ground in quality. David jump in here, please just want 327 00:17:50,440 --> 00:17:53,240 Speaker 1: to ask you about your your cautious optimism, as you 328 00:17:53,320 --> 00:17:56,120 Speaker 1: put it in the note here Visa VI, the maturity 329 00:17:56,200 --> 00:17:58,240 Speaker 1: of this company. I read this note, and so much 330 00:17:58,280 --> 00:18:00,320 Speaker 1: of what comes across here is that the say a 331 00:18:00,480 --> 00:18:03,600 Speaker 1: young company with promise. It makes me wonder why this 332 00:18:03,720 --> 00:18:06,639 Speaker 1: company debut now. And and you know, give us a 333 00:18:06,720 --> 00:18:08,800 Speaker 1: sense of the degree to which you are optimistic here 334 00:18:08,840 --> 00:18:10,760 Speaker 1: that this company is going to figure stuff out here 335 00:18:10,760 --> 00:18:13,680 Speaker 1: in the next few years. Yeah. Well, and let clarify, 336 00:18:13,680 --> 00:18:17,640 Speaker 1: I put preface the note by saying I'm cautiously optimistic 337 00:18:17,680 --> 00:18:20,320 Speaker 1: about the business. Yes, I don't. I don't think it's 338 00:18:20,359 --> 00:18:24,320 Speaker 1: necessarily a flash in the pan. Um, they have created 339 00:18:24,359 --> 00:18:26,879 Speaker 1: a successful product. They have been able to attract a 340 00:18:26,960 --> 00:18:30,440 Speaker 1: lot of great people, and that give some reason to 341 00:18:30,520 --> 00:18:32,879 Speaker 1: believe that, well, give them a benefit of they that 342 00:18:32,920 --> 00:18:35,800 Speaker 1: they can keep it going right. But um, yeah, the 343 00:18:35,880 --> 00:18:37,560 Speaker 1: bigger question is just whether or not they can grow 344 00:18:37,560 --> 00:18:40,720 Speaker 1: into the Okay, page eleven, Come on page eleven, paragraph five. 345 00:18:41,040 --> 00:18:43,200 Speaker 1: This is classic Brian Weezer. Folks, I'm not going to 346 00:18:43,280 --> 00:18:45,919 Speaker 1: send out his report. You've heard it before. We protect 347 00:18:46,000 --> 00:18:50,680 Speaker 1: his copyright. Contact Pivotal Research. You've got one point four 348 00:18:50,840 --> 00:18:55,920 Speaker 1: million per employee of greed stock on the back end, 349 00:18:56,440 --> 00:19:00,320 Speaker 1: Twitter was only greedy at six and twelve thousand, so 350 00:19:00,720 --> 00:19:06,000 Speaker 1: they're over twice. Is delutive on restrictive stock units? Is 351 00:19:06,080 --> 00:19:09,320 Speaker 1: Twitter was? And look what those shares did. I told 352 00:19:09,359 --> 00:19:11,000 Speaker 1: you they're able to hire a great talent. And if 353 00:19:11,000 --> 00:19:14,320 Speaker 1: you're paying one point for a million per average employee 354 00:19:14,440 --> 00:19:17,040 Speaker 1: in stock, even the New York Chets would win if 355 00:19:17,080 --> 00:19:20,480 Speaker 1: they did that exactly. And so that that's a reason 356 00:19:20,600 --> 00:19:23,040 Speaker 1: to have some confidence. Now the reason why you might 357 00:19:23,119 --> 00:19:26,280 Speaker 1: want to be a little less positive is because It's 358 00:19:26,320 --> 00:19:28,560 Speaker 1: employees were granted those shares with an average stock price 359 00:19:28,640 --> 00:19:32,560 Speaker 1: of fifteen or sixteen dollars. As long as the stock works, 360 00:19:33,560 --> 00:19:37,040 Speaker 1: then those employees stick gramp. But if it doesn't, then 361 00:19:37,400 --> 00:19:39,879 Speaker 1: there's a greater risk that those employees do not. And 362 00:19:40,000 --> 00:19:42,560 Speaker 1: so that's a double edged sort of source. But yeah, 363 00:19:42,600 --> 00:19:46,119 Speaker 1: it's quite something. Um now, it's it's come on, Brian, Brian, 364 00:19:46,240 --> 00:19:49,080 Speaker 1: come on, folks, let me back up here. Brian Weezer 365 00:19:49,200 --> 00:19:52,160 Speaker 1: was a pinata when Facebook came out. When he said 366 00:19:52,280 --> 00:19:53,879 Speaker 1: to a sell in the course, then he looked like 367 00:19:53,920 --> 00:19:55,840 Speaker 1: a genius and he went along at the right time. 368 00:19:55,880 --> 00:19:59,639 Speaker 1: Blah blah blah. It's just greed, Brian. They're playing by 369 00:19:59,720 --> 00:20:03,400 Speaker 1: a A friend rule book, then anybody else in Industrial 370 00:20:03,480 --> 00:20:07,359 Speaker 1: America would played by Brian Reaser. If somebody did this 371 00:20:07,520 --> 00:20:10,639 Speaker 1: at w p P, wouldn't they be If Martin Seyrel 372 00:20:10,680 --> 00:20:13,399 Speaker 1: did this at w PP, he'd be down at the SEC, 373 00:20:13,600 --> 00:20:17,040 Speaker 1: wouldn't he Not necessarily? Although, by the way, there's a 374 00:20:17,080 --> 00:20:21,360 Speaker 1: fun commentary in the document about friends and family stock issuances. 375 00:20:21,440 --> 00:20:23,600 Speaker 1: I think most people probably missed that, and that's something 376 00:20:23,640 --> 00:20:25,760 Speaker 1: that kind of raised my eyebrows. But now in terms 377 00:20:25,840 --> 00:20:29,639 Speaker 1: of uh, the stock issuances of one point four million 378 00:20:29,760 --> 00:20:32,800 Speaker 1: for employee, it's their right to do so, that's how 379 00:20:32,840 --> 00:20:34,760 Speaker 1: they want to run their business. Again, I am not 380 00:20:34,920 --> 00:20:37,119 Speaker 1: an investor, I'm an analyst. I'm saying if they think 381 00:20:37,160 --> 00:20:38,920 Speaker 1: that's how they want to run their business, that's fine. Fine. 382 00:20:39,000 --> 00:20:42,240 Speaker 1: Where I equibal with many of the investment community is 383 00:20:42,440 --> 00:20:44,920 Speaker 1: whether or not and how it's appropriate to incorporate that 384 00:20:45,000 --> 00:20:47,320 Speaker 1: into evaluation. And I think if you it's like when 385 00:20:47,600 --> 00:20:50,199 Speaker 1: Facebook bought what's app right, and then they bought Now 386 00:20:50,280 --> 00:20:53,080 Speaker 1: we can argue that strategically maybe those were great transactions, 387 00:20:53,240 --> 00:20:55,560 Speaker 1: but you have to account for it that the stocks 388 00:20:55,600 --> 00:20:58,080 Speaker 1: went up so much, well went up with What's App. 389 00:20:58,480 --> 00:21:00,680 Speaker 1: I brought my price. Are you down by percent because 390 00:21:00,800 --> 00:21:04,440 Speaker 1: they're deluding the stock? Nothing wrong with that, um, but 391 00:21:05,160 --> 00:21:06,920 Speaker 1: you know, if they're making the decision to run their business, 392 00:21:06,920 --> 00:21:08,320 Speaker 1: that's the way. That way, that's fine. But I think 393 00:21:08,359 --> 00:21:11,440 Speaker 1: that investors need to pay more attention than they do. 394 00:21:11,600 --> 00:21:13,960 Speaker 1: I want to get Let me make this clear undelution. 395 00:21:14,000 --> 00:21:17,359 Speaker 1: Google a hundred and forty four thousand, Facebook two hundred 396 00:21:17,359 --> 00:21:20,240 Speaker 1: and thirty thousand. I mentioned Twitter at six hundred and 397 00:21:20,320 --> 00:21:23,439 Speaker 1: twelve thousand. I think in snap Chat has a one 398 00:21:23,520 --> 00:21:26,240 Speaker 1: point four million dollar employee. You give David, you got 399 00:21:26,320 --> 00:21:31,560 Speaker 1: that when you joined surveyor Fens and friends found surveillance. 400 00:21:32,000 --> 00:21:34,600 Speaker 1: Brian say, your model feels potentially stretched at even getting 401 00:21:34,600 --> 00:21:37,480 Speaker 1: a ten dollars per serry sixteen billion dollar valuation. I 402 00:21:37,640 --> 00:21:39,600 Speaker 1: was reading Jim Stewart in the New York Times. He says, 403 00:21:39,800 --> 00:21:42,520 Speaker 1: you know, the only comfortable social media company that continues 404 00:21:42,600 --> 00:21:44,560 Speaker 1: to lose money is Twitter, and knowing it, Snap wants 405 00:21:44,600 --> 00:21:46,240 Speaker 1: to compare it to Twitter. He goes on to say 406 00:21:46,640 --> 00:21:49,040 Speaker 1: snap set it generated four hundred four million dollars in 407 00:21:49,119 --> 00:21:51,960 Speaker 1: sales in two thousand sixteen. Evaluation of thirty four billion 408 00:21:52,400 --> 00:21:55,320 Speaker 1: is about eighty four times revenue. Isn't that the beginning, middle, 409 00:21:55,320 --> 00:21:56,960 Speaker 1: and end of the story here. Just the degree to 410 00:21:57,000 --> 00:22:00,640 Speaker 1: which you've got evaluation here that is cute atually outside 411 00:22:00,680 --> 00:22:03,520 Speaker 1: what this company is bringing in. Yeah, no, I mean 412 00:22:03,560 --> 00:22:06,800 Speaker 1: it is. It's it's a very massively of reside. By 413 00:22:06,840 --> 00:22:08,720 Speaker 1: the way, that thirty four billion dollar number is wrong. 414 00:22:08,720 --> 00:22:10,760 Speaker 1: I think it's more like forty billion dollars. Again, if 415 00:22:10,800 --> 00:22:12,719 Speaker 1: you don't use the right number on the share account, 416 00:22:12,840 --> 00:22:15,439 Speaker 1: which I don't think most people are because of the delusion, 417 00:22:15,480 --> 00:22:16,960 Speaker 1: we know it's gonna happen if you study the arts 418 00:22:17,040 --> 00:22:20,160 Speaker 1: user issuing. Uh, it's actually a forty billion dollar valuation 419 00:22:20,440 --> 00:22:23,800 Speaker 1: as of right now. So it's even worse. You point 420 00:22:23,800 --> 00:22:25,960 Speaker 1: out in this note that you're not getting the metrics 421 00:22:26,040 --> 00:22:27,680 Speaker 1: that you really want to be seeing here. Why is 422 00:22:27,720 --> 00:22:30,000 Speaker 1: it so important for you to see monthly active users? 423 00:22:30,040 --> 00:22:31,680 Speaker 1: What does that tell you about how people are using 424 00:22:31,720 --> 00:22:34,159 Speaker 1: this service? Yeah, well that's among the metrics, so I 425 00:22:34,240 --> 00:22:37,399 Speaker 1: think would be helpful. Um, now, they're playing to their strength, 426 00:22:37,440 --> 00:22:40,200 Speaker 1: I'm sure. And if they think their daily active user 427 00:22:40,440 --> 00:22:42,560 Speaker 1: is a story they want to lead with because it 428 00:22:42,720 --> 00:22:45,800 Speaker 1: it speaks to their engagement story, it's understandable. But if 429 00:22:45,800 --> 00:22:49,239 Speaker 1: we're trying to look at the advertising business which we are, Um, 430 00:22:49,280 --> 00:22:52,440 Speaker 1: we want to be able to compare it better to Facebook, 431 00:22:52,440 --> 00:22:55,639 Speaker 1: to Instagram, to other platforms that are advertising driven. Now 432 00:22:55,720 --> 00:22:58,760 Speaker 1: that said, even if they gave us the number, it's 433 00:22:58,760 --> 00:23:02,879 Speaker 1: skeptical because as I'll try the third party analysis of 434 00:23:03,040 --> 00:23:07,159 Speaker 1: their number over their number and so, you know, but 435 00:23:07,280 --> 00:23:09,560 Speaker 1: it's still nice that they provide what they believe the 436 00:23:09,640 --> 00:23:14,359 Speaker 1: numbers of the internal metrics that they're using. You mentioned 437 00:23:14,400 --> 00:23:16,960 Speaker 1: competition there. I look at Instagram. I see the stories 438 00:23:17,000 --> 00:23:19,240 Speaker 1: function on Instagram. How how real a concern is that 439 00:23:19,359 --> 00:23:23,000 Speaker 1: the fact that Facebook Instagram via Facebook was able to 440 00:23:23,160 --> 00:23:24,920 Speaker 1: do kind of what Snap has been doing for some 441 00:23:25,080 --> 00:23:27,360 Speaker 1: time here, don't they have the might here to surpass 442 00:23:27,440 --> 00:23:31,200 Speaker 1: this company pretty quickly? Yeah? Well, I mean Instagram is 443 00:23:31,720 --> 00:23:34,960 Speaker 1: bigger than Snap among eighteen to thirty fours in the 444 00:23:35,040 --> 00:23:39,680 Speaker 1: United States. They have all the targeting capabilities that Facebook 445 00:23:39,720 --> 00:23:44,480 Speaker 1: provides them with, um, they have an existing salesforce around 446 00:23:44,520 --> 00:23:49,280 Speaker 1: the world, and the ability to mimic features and add 447 00:23:49,359 --> 00:23:52,960 Speaker 1: products um pretty quickly. So yeah, it's a it's a 448 00:23:53,000 --> 00:23:55,160 Speaker 1: big competitive threat. Now let's get you into the studios 449 00:23:55,200 --> 00:23:57,399 Speaker 1: in New York. When you're here again, Brian Weezer, thank you. 450 00:23:57,640 --> 00:23:59,480 Speaker 1: So I didn't ask you a question there, David at 451 00:23:59,480 --> 00:24:03,760 Speaker 1: the end because snap chatting John Farrell, Um, you guys 452 00:24:03,800 --> 00:24:09,040 Speaker 1: always snapping. Yeah, I just can't Brian Weezer, like with 453 00:24:09,160 --> 00:24:11,080 Speaker 1: a public good there, I can't convey that he's got 454 00:24:11,160 --> 00:24:14,640 Speaker 1: a sell on the stock. Yeah, we's got a seven 455 00:24:14,680 --> 00:24:17,840 Speaker 1: dollar value. He grosses it up to ten dollars. But 456 00:24:17,920 --> 00:24:20,240 Speaker 1: it's the meat of the report is as typical with 457 00:24:20,320 --> 00:24:23,320 Speaker 1: Brian Weezer. It's not some mouthy thing. There's some real 458 00:24:24,040 --> 00:24:36,960 Speaker 1: work involved in it. In Securities Analysis brought you by 459 00:24:37,200 --> 00:24:40,920 Speaker 1: Bank of America Mary Lynch, dedicated to bringing our clients 460 00:24:41,040 --> 00:24:45,159 Speaker 1: insights and solutions to meet the challenges of a transforming world. 461 00:24:45,680 --> 00:24:49,520 Speaker 1: That's the power of global connections. Mary Lynch, Pierce Federan 462 00:24:49,600 --> 00:24:57,800 Speaker 1: Smith Incorporated Member s I PC. David, we talked to 463 00:24:57,880 --> 00:25:00,359 Speaker 1: Brian Weezer, and he and a number of sales troops 464 00:25:00,400 --> 00:25:03,040 Speaker 1: look at the financials for Snapchat and do not like 465 00:25:03,160 --> 00:25:07,280 Speaker 1: what they see. It's really an interesting, interesting report of 466 00:25:07,400 --> 00:25:10,960 Speaker 1: getting down to a financial valuation off of the stupidity 467 00:25:11,560 --> 00:25:14,160 Speaker 1: or even Mr Weezler says it will be an uncommon 468 00:25:14,240 --> 00:25:18,119 Speaker 1: by joining us with the single best call on Facebook 469 00:25:18,160 --> 00:25:21,240 Speaker 1: I know is David Kirkpatrick. I was within the day 470 00:25:21,280 --> 00:25:24,360 Speaker 1: of the Facebook I p O with the great Paul Kadrowski, 471 00:25:24,800 --> 00:25:27,760 Speaker 1: and you nailed it. You said, whatever the valuation does 472 00:25:27,840 --> 00:25:30,400 Speaker 1: off the idiocy the I p O David, you said, 473 00:25:30,520 --> 00:25:32,960 Speaker 1: this thing is gonna work. Can you say the same 474 00:25:33,040 --> 00:25:37,240 Speaker 1: for Snapchat? If we get a weezer Snapchat seventeen to 475 00:25:37,440 --> 00:25:40,720 Speaker 1: twenty six down to ten dollars a share, that the 476 00:25:40,880 --> 00:25:46,720 Speaker 1: actual business model of Snapchat will create revenue, create cash flow, 477 00:25:47,040 --> 00:25:51,600 Speaker 1: and create shareholder value, Well, I'd say qualified yes. The 478 00:25:51,960 --> 00:25:55,320 Speaker 1: the actual business of Snapchat is almost certainly going to 479 00:25:55,480 --> 00:25:58,120 Speaker 1: make a nice, profitable business that's gonna have a lot 480 00:25:58,160 --> 00:26:01,840 Speaker 1: of meaning in the economy and in the marketplace going forward. 481 00:26:02,880 --> 00:26:08,959 Speaker 1: Is it the kind of macro once in a lifetime 482 00:26:09,080 --> 00:26:13,320 Speaker 1: opportunity that the market seems to be treating it as. No, Well, 483 00:26:13,359 --> 00:26:16,040 Speaker 1: that's what Twitter was. Is there another Twitter where it's 484 00:26:16,080 --> 00:26:20,200 Speaker 1: good people cashing out in the capitalist degree to the 485 00:26:20,280 --> 00:26:23,760 Speaker 1: moment where the shareholders are gonna get run over because 486 00:26:23,840 --> 00:26:27,040 Speaker 1: it's another Twitter. I actually think it's not another Twitter 487 00:26:27,119 --> 00:26:29,640 Speaker 1: in the sense that it will have a really good 488 00:26:29,760 --> 00:26:33,680 Speaker 1: advertising opportunity long term. Uh, it does have the potential 489 00:26:33,760 --> 00:26:36,399 Speaker 1: to sort of become the de facto place for showing 490 00:26:36,560 --> 00:26:39,480 Speaker 1: video to millennials. That's not the same thing as to 491 00:26:39,600 --> 00:26:42,840 Speaker 1: be a facelike face Facebook like company that spans the 492 00:26:42,920 --> 00:26:45,760 Speaker 1: globe and becomes for almost literally everyone and has that 493 00:26:45,880 --> 00:26:49,120 Speaker 1: aspiration and the potential to achieve it. But it does 494 00:26:49,200 --> 00:26:51,560 Speaker 1: have a real business that the analog that I've been 495 00:26:51,600 --> 00:26:54,879 Speaker 1: making is with linked In because I think actually it 496 00:26:55,000 --> 00:26:59,760 Speaker 1: has the potential to really serve a specific demographic very effectively, 497 00:27:00,080 --> 00:27:02,680 Speaker 1: but not all humans. What's the lesson to be learned 498 00:27:02,720 --> 00:27:06,040 Speaker 1: here by how easily uh, Instagram and Facebook we're able 499 00:27:06,119 --> 00:27:08,399 Speaker 1: to copy what Snap is doing here? How should how 500 00:27:08,440 --> 00:27:12,040 Speaker 1: should Snap react to what's happened They're How fearful should 501 00:27:12,040 --> 00:27:14,439 Speaker 1: they be that that happen? Well, I think that doesn't 502 00:27:14,480 --> 00:27:18,080 Speaker 1: comfort them. Um, it's a big difference. In fact, even 503 00:27:18,119 --> 00:27:20,000 Speaker 1: if you compare it to any of these companies when 504 00:27:20,040 --> 00:27:23,240 Speaker 1: they went public, pretty much none of the giant internet 505 00:27:23,320 --> 00:27:25,440 Speaker 1: companies that we talked about day in and day out 506 00:27:25,840 --> 00:27:28,399 Speaker 1: that are so important had head to head competition of 507 00:27:28,520 --> 00:27:31,000 Speaker 1: any significance at the time of their I p O. 508 00:27:31,240 --> 00:27:35,439 Speaker 1: Snap does because Facebook and through its Instagram subsidiary, has 509 00:27:36,040 --> 00:27:40,200 Speaker 1: very effectively copied key parts of what Snapchat does. So 510 00:27:40,440 --> 00:27:43,600 Speaker 1: that's something seriously to worry about. I don't think that 511 00:27:43,760 --> 00:27:47,560 Speaker 1: it's an exact either or situation. Most of the young 512 00:27:47,600 --> 00:27:50,080 Speaker 1: people I know seem to use them both very freely 513 00:27:50,160 --> 00:27:53,520 Speaker 1: for slightly different things. I'm keenly interested in how companies 514 00:27:53,600 --> 00:27:56,240 Speaker 1: like these evolved. You look at Facebook and how holy 515 00:27:56,320 --> 00:27:58,760 Speaker 1: they got into video, Sheryl Sandberg saying this is going 516 00:27:58,800 --> 00:28:00,359 Speaker 1: to be a sort of video free stick if they 517 00:28:00,359 --> 00:28:03,240 Speaker 1: can really play video up. What's snaps next step? What 518 00:28:03,280 --> 00:28:06,119 Speaker 1: are they telling investors about where it's going from here? What? 519 00:28:06,440 --> 00:28:09,320 Speaker 1: You know? The thing about Snap's long term potential is 520 00:28:09,440 --> 00:28:11,520 Speaker 1: that it sort of seems to me like you can 521 00:28:11,600 --> 00:28:16,800 Speaker 1: think of it like the ultimate cable network for millennials. 522 00:28:17,240 --> 00:28:20,159 Speaker 1: You know it's going to be. You know, it started 523 00:28:20,200 --> 00:28:23,920 Speaker 1: with disappearing messages. Now it's you know, vomiting rainbows, and 524 00:28:24,040 --> 00:28:27,520 Speaker 1: pretty soon it's gonna be watching video in short chunks 525 00:28:27,880 --> 00:28:31,080 Speaker 1: for wan. But you want to see all their video 526 00:28:31,240 --> 00:28:34,640 Speaker 1: using this mobile device. The band Vomiting Rainbow, they did 527 00:28:34,720 --> 00:28:38,160 Speaker 1: dead like no one. It was amazing. But they did 528 00:28:38,280 --> 00:28:41,360 Speaker 1: with Alabama Getaway. Let me let me read a chapter 529 00:28:41,480 --> 00:28:44,600 Speaker 1: from the paragraph from the Bible. The fact that he 530 00:28:44,720 --> 00:28:48,600 Speaker 1: was doing something slightly illicit gave Zuckerberg little pause. He 531 00:28:48,680 --> 00:28:51,880 Speaker 1: could be a touch headstrong and like to stir things up. 532 00:28:52,160 --> 00:28:55,880 Speaker 1: He didn't give asked permission before proceeding. It's not that 533 00:28:56,040 --> 00:28:59,040 Speaker 1: Zuckerberg sets out to break the rules, he just doesn't 534 00:28:59,040 --> 00:29:02,080 Speaker 1: pay much attention to them. From the book to Facebook 535 00:29:02,080 --> 00:29:05,720 Speaker 1: and I know you've got the Snapchat effect coming up. 536 00:29:05,880 --> 00:29:08,920 Speaker 1: Does the leadership of snap chap in the least bit? 537 00:29:09,080 --> 00:29:12,720 Speaker 1: Are they Zuckerberg like? In some ways they are? I 538 00:29:12,800 --> 00:29:15,280 Speaker 1: don't think at the macro level they are. It's not 539 00:29:15,360 --> 00:29:19,520 Speaker 1: a Evan Spiegel is not the kind of world visionary, 540 00:29:19,800 --> 00:29:23,680 Speaker 1: once in a century kind of person that zucker I 541 00:29:23,760 --> 00:29:26,040 Speaker 1: really think Zuckerberg is that kind of a person. But 542 00:29:26,120 --> 00:29:28,760 Speaker 1: I think Sniegel is a great business leader, great visionary, 543 00:29:28,800 --> 00:29:31,720 Speaker 1: great product. I love it. David, what's he going to 544 00:29:31,800 --> 00:29:35,880 Speaker 1: do on the second Who is the strategy guy at Snap? Really? 545 00:29:35,920 --> 00:29:37,280 Speaker 1: I don't care. What are they going to do on 546 00:29:37,360 --> 00:29:40,160 Speaker 1: the second conference call two quarters from now? I think 547 00:29:40,200 --> 00:29:43,000 Speaker 1: it's a serious concern. I think, you know, considering they 548 00:29:43,120 --> 00:29:45,960 Speaker 1: just recently had a quarter where growth was unexpectedly bad 549 00:29:46,000 --> 00:29:48,160 Speaker 1: and they blame it on the android app. I mean, 550 00:29:48,240 --> 00:29:49,920 Speaker 1: what are they how many quarters are they going to 551 00:29:50,000 --> 00:29:53,120 Speaker 1: have where they explain the problems on stupid little things? 552 00:29:53,160 --> 00:29:56,480 Speaker 1: They came one final question. You are so intertwined within 553 00:29:56,560 --> 00:29:59,080 Speaker 1: the tech community. Can you get Miranda kurr out here 554 00:29:59,120 --> 00:30:03,400 Speaker 1: with us? Please? You know you're the only ones. You're 555 00:30:03,440 --> 00:30:05,680 Speaker 1: rather every one TV than radio. Come on, no, no, 556 00:30:05,840 --> 00:30:09,240 Speaker 1: we would rather you want it here. That's that's how 557 00:30:09,320 --> 00:30:13,560 Speaker 1: closing we are. David Kirkpatrick Thomas, thanks again in congratulations 558 00:30:13,680 --> 00:30:16,680 Speaker 1: on your really work on seeing a Facebook drive to 559 00:30:16,840 --> 00:30:21,240 Speaker 1: terrific evaluations. Folks. It is dated, like David Kirkpatrick, but 560 00:30:21,320 --> 00:30:24,960 Speaker 1: I do recommend for a dose of humility. Consider the 561 00:30:25,120 --> 00:30:30,040 Speaker 1: Facebook effect. It is a lovely, beautifully written book on 562 00:30:30,160 --> 00:30:32,960 Speaker 1: a fragile kid from Harvard A little bit of time, 563 00:30:33,040 --> 00:30:49,280 Speaker 1: way better than the movies that are out there. Is well, okay, 564 00:30:49,360 --> 00:30:51,920 Speaker 1: let's dive into it. We need to get you ready 565 00:30:52,000 --> 00:30:54,480 Speaker 1: for this weekend. When you open your four oh one 566 00:30:54,600 --> 00:30:57,600 Speaker 1: k envelope and you go, how can I be this 567 00:30:57,800 --> 00:31:03,680 Speaker 1: far behind? Julian Emmanuel is with ubs and he dovetails 568 00:31:04,080 --> 00:31:09,680 Speaker 1: equities into derivatives into looking forward in the market. So 569 00:31:09,720 --> 00:31:13,400 Speaker 1: I think that's enough introduction. Great to have you back here, Barvin, 570 00:31:13,440 --> 00:31:16,239 Speaker 1: good friend here today and Mickey leave and we did 571 00:31:16,600 --> 00:31:20,080 Speaker 1: do you do step chat? Well, you know it's it's 572 00:31:20,160 --> 00:31:24,720 Speaker 1: now listed, so we're certainly we don't do it. I 573 00:31:24,880 --> 00:31:29,840 Speaker 1: leave that to my teenage the conversation. I need to 574 00:31:30,000 --> 00:31:33,720 Speaker 1: catch up. I made a set of decisions where I 575 00:31:33,920 --> 00:31:37,200 Speaker 1: was wrong on the equity market. I gotta catch up. 576 00:31:37,720 --> 00:31:42,040 Speaker 1: Do I use leverage to catch up in equities? You 577 00:31:42,200 --> 00:31:46,200 Speaker 1: don't catch up? Okay? You what's past is past, And 578 00:31:46,440 --> 00:31:49,000 Speaker 1: and this is a common mistake that we see. Next 579 00:31:49,040 --> 00:31:51,680 Speaker 1: week we're going to celebrate the eighth birthday of this 580 00:31:51,840 --> 00:31:56,560 Speaker 1: bull market up two hundred and fifty, and and that's 581 00:31:56,640 --> 00:32:00,840 Speaker 1: the time when there tends to be more emotion than usual. 582 00:32:01,120 --> 00:32:03,560 Speaker 1: When the bull market gets in the late stages, when 583 00:32:03,600 --> 00:32:07,520 Speaker 1: the economy is potentially accelerating, when the Fed is raising rates, 584 00:32:07,760 --> 00:32:12,200 Speaker 1: when optimism starts to coalesce, you have to be careful 585 00:32:12,320 --> 00:32:16,720 Speaker 1: and staying discipline means for us is taking a balance approach. 586 00:32:16,880 --> 00:32:19,680 Speaker 1: But there are certain sectors at this point that where 587 00:32:19,760 --> 00:32:22,280 Speaker 1: we think that has a lot of edge, but you 588 00:32:22,440 --> 00:32:27,000 Speaker 1: do need to maintain discipline such as well. Financials is 589 00:32:27,320 --> 00:32:30,280 Speaker 1: has been a great story obviously for the past several months, 590 00:32:30,640 --> 00:32:33,840 Speaker 1: but the issue with financials is you really have everything 591 00:32:33,960 --> 00:32:37,640 Speaker 1: going for it right now, still reasonably valued in a 592 00:32:37,800 --> 00:32:40,600 Speaker 1: market that in general is approaching the upper ends of 593 00:32:40,680 --> 00:32:44,600 Speaker 1: its valuation bands um in an environment where rates are 594 00:32:44,720 --> 00:32:49,520 Speaker 1: rising obviously positive, and deregulation is potentially on the rise 595 00:32:49,600 --> 00:32:52,760 Speaker 1: as well in Washington. So from from our viewpoint, it's 596 00:32:52,800 --> 00:32:55,280 Speaker 1: got a lot going for it. We also also like 597 00:32:55,480 --> 00:32:59,560 Speaker 1: healthcare and technology, uh, sort of for different reasons, but 598 00:32:59,760 --> 00:33:03,360 Speaker 1: for similar reason if, as we think we found out 599 00:33:03,480 --> 00:33:07,200 Speaker 1: this week, tax reform is going to be a challenging 600 00:33:07,320 --> 00:33:09,880 Speaker 1: thing to accomplish. At the end of the day, the 601 00:33:10,000 --> 00:33:13,400 Speaker 1: one thing that both Republicans and Democrats appear to agree 602 00:33:13,440 --> 00:33:17,640 Speaker 1: on right now is repatriation, and healthcare and technology are 603 00:33:17,720 --> 00:33:20,840 Speaker 1: the epicenter of the offshore cash and they will benefit. 604 00:33:20,880 --> 00:33:22,880 Speaker 1: So there's been this realization the tax reform is going 605 00:33:22,960 --> 00:33:24,520 Speaker 1: to be difficult. At the very least, it's gonna take 606 00:33:24,520 --> 00:33:26,120 Speaker 1: a lot longer than I think a lot of investors 607 00:33:26,160 --> 00:33:28,800 Speaker 1: thought it would take. Why is the same thing not 608 00:33:28,920 --> 00:33:31,120 Speaker 1: true for deregulation of what you look at financials, there's 609 00:33:31,160 --> 00:33:33,760 Speaker 1: the promise of change here, are we going to see 610 00:33:33,840 --> 00:33:36,320 Speaker 1: some some reckoning, some reevaluation of how quickly that's going 611 00:33:36,400 --> 00:33:39,800 Speaker 1: to happen as well. Likely we will, But I think 612 00:33:40,520 --> 00:33:44,600 Speaker 1: what we're we're finding, with certain exceptions, obviously the Affordable 613 00:33:44,640 --> 00:33:47,440 Speaker 1: Care Act meaning one of them, it is easier to 614 00:33:47,600 --> 00:33:51,520 Speaker 1: strike pens through things than try and try and add initiatives. 615 00:33:52,320 --> 00:33:55,520 Speaker 1: But you know, we do fully expect this review of 616 00:33:55,600 --> 00:33:57,720 Speaker 1: Dodd Frank while we don't expect to roll back in 617 00:33:57,960 --> 00:34:00,760 Speaker 1: in its entirety, there will be post and and that's 618 00:34:00,800 --> 00:34:03,400 Speaker 1: a tail in for the financial industry. What I look 619 00:34:04,120 --> 00:34:08,200 Speaker 1: at the sum of this and what people want is guidance. 620 00:34:08,239 --> 00:34:11,319 Speaker 1: I mean, there's a human condition. I got fear about 621 00:34:11,360 --> 00:34:13,400 Speaker 1: the markets whatever, and they go to guys like you 622 00:34:13,640 --> 00:34:16,600 Speaker 1: and you know everybody else that we talked to every day. 623 00:34:17,280 --> 00:34:19,560 Speaker 1: When you put your models together, you b s. Do 624 00:34:19,600 --> 00:34:23,520 Speaker 1: you have a confidence in the theories that underlie those 625 00:34:23,600 --> 00:34:27,759 Speaker 1: models or because of the great distortion you're you're an 626 00:34:27,880 --> 00:34:32,000 Speaker 1: unknown territory bringing the distortions of the bond market in 627 00:34:32,120 --> 00:34:38,200 Speaker 1: central bank theory over the equities. The distortions have definitely 628 00:34:38,440 --> 00:34:41,960 Speaker 1: changed the way that people perceive the markets and in 629 00:34:42,080 --> 00:34:44,000 Speaker 1: a lot of ways. If you think about the last 630 00:34:44,040 --> 00:34:47,839 Speaker 1: seven or eight years, the fact that monetary accommodation has 631 00:34:47,920 --> 00:34:51,560 Speaker 1: been the central focus in the investment environment has in 632 00:34:51,640 --> 00:34:55,920 Speaker 1: a lot of ways caused the inflow into passive products. Uh, 633 00:34:56,120 --> 00:34:59,800 Speaker 1: the the alpha search becoming more and more difficult. But 634 00:35:00,120 --> 00:35:02,640 Speaker 1: for us, this is a time when we really want 635 00:35:02,680 --> 00:35:06,120 Speaker 1: to lean on histories lessons, And what history's lessons show 636 00:35:06,280 --> 00:35:09,359 Speaker 1: us is that even though the market is at its 637 00:35:09,440 --> 00:35:12,719 Speaker 1: high end of valuations, it can go higher. But what 638 00:35:12,920 --> 00:35:16,080 Speaker 1: we need to see is a continued confidence. And the 639 00:35:16,160 --> 00:35:21,239 Speaker 1: way confidence stays high is seeing concrete action, you know, 640 00:35:21,440 --> 00:35:24,320 Speaker 1: the coming together of all these big plans that have 641 00:35:24,440 --> 00:35:27,279 Speaker 1: been mooted. You mentioned technology. Tom said, we weren't going 642 00:35:27,320 --> 00:35:28,799 Speaker 1: to talk about snap, but let's talk about just at 643 00:35:28,880 --> 00:35:32,000 Speaker 1: least in broadbrush here. Uh, the kind of companies that 644 00:35:32,040 --> 00:35:34,400 Speaker 1: you like in the technology space. How different are they 645 00:35:34,560 --> 00:35:37,960 Speaker 1: from this company that debuted yesterday? What about it is 646 00:35:38,200 --> 00:35:40,880 Speaker 1: is concerning to you? Interesting to you? How do you 647 00:35:40,960 --> 00:35:43,399 Speaker 1: react to it? Contextualize it for us if you wouldn't, Well, 648 00:35:43,719 --> 00:35:48,239 Speaker 1: what's interesting here is that technology has actually been, if 649 00:35:48,280 --> 00:35:51,440 Speaker 1: you go back to the election, one of the sectors 650 00:35:51,520 --> 00:35:55,640 Speaker 1: that really got left behind in November and December. Given 651 00:35:55,719 --> 00:35:58,680 Speaker 1: the fact that for the most part, the multiple, certainly 652 00:35:58,760 --> 00:36:02,080 Speaker 1: in areas like software, is much higher than the market 653 00:36:02,200 --> 00:36:06,200 Speaker 1: multiple and as rates rose, you were discounting those multiples. 654 00:36:06,600 --> 00:36:10,440 Speaker 1: But for us, the story is about you know, growth, innovation, 655 00:36:10,880 --> 00:36:14,600 Speaker 1: and as we said before, cash, and there's really a 656 00:36:14,760 --> 00:36:19,000 Speaker 1: large swath of of the technology space that actually has 657 00:36:19,120 --> 00:36:22,319 Speaker 1: all of those attributes. Tom and I were sitting here 658 00:36:22,320 --> 00:36:25,759 Speaker 1: when we hit down the cold duck was out, the 659 00:36:26,560 --> 00:36:29,920 Speaker 1: room temperature, champagne was there. That we progress farther here, 660 00:36:29,960 --> 00:36:33,120 Speaker 1: we hit twenty one thousand this week. How much further 661 00:36:33,120 --> 00:36:34,279 Speaker 1: do you think we we have to go here? What 662 00:36:34,400 --> 00:36:36,120 Speaker 1: what could set us back? What could change the direction 663 00:36:36,160 --> 00:36:40,360 Speaker 1: of this market? Well so so I think again, and 664 00:36:40,719 --> 00:36:42,879 Speaker 1: Tom alluded to this at the top of the hour, 665 00:36:43,400 --> 00:36:47,520 Speaker 1: Cherry Yellen's speech is much more important than normal because 666 00:36:47,680 --> 00:36:50,560 Speaker 1: I think what we've seen this week is really an 667 00:36:51,040 --> 00:36:55,200 Speaker 1: unprecedented ratcheting up of expectations in a you know, an 668 00:36:55,280 --> 00:37:00,200 Speaker 1: incredibly quick manner. And so you know whereas this I'm 669 00:37:00,320 --> 00:37:03,560 Speaker 1: last week there were still questions about, you know, whether 670 00:37:03,680 --> 00:37:06,920 Speaker 1: March was even on the table as as a right hike. 671 00:37:07,040 --> 00:37:09,000 Speaker 1: Now the market becas it's a done Deale, Can I 672 00:37:09,080 --> 00:37:13,719 Speaker 1: hedge seven portfolio insurance? Boy? That worked out? Can I? 673 00:37:13,880 --> 00:37:15,720 Speaker 1: I mean you and I know New Mountain Mining Gold 674 00:37:15,840 --> 00:37:18,040 Speaker 1: all these case studies you and I studied in school. 675 00:37:18,360 --> 00:37:21,080 Speaker 1: At some point hedging doesn't work. I've got locked in 676 00:37:21,200 --> 00:37:26,280 Speaker 1: bull gains, alpha's up, I'm up seventeen percent. I'm miserable, 677 00:37:26,320 --> 00:37:28,759 Speaker 1: but I got a lock in my seventeen percent? Can 678 00:37:28,840 --> 00:37:31,400 Speaker 1: I hedge here? Or is the math not work? The 679 00:37:31,520 --> 00:37:35,279 Speaker 1: vix is eleven? Okay? That that tells you that, you know, 680 00:37:35,400 --> 00:37:38,320 Speaker 1: if if you're looking for protection, there are lots of 681 00:37:39,239 --> 00:37:42,680 Speaker 1: low cost ways to implement it, and and and that 682 00:37:43,400 --> 00:37:47,239 Speaker 1: again is really part and parcel of of of what 683 00:37:47,440 --> 00:37:50,920 Speaker 1: we've seen underlying the rally. Okay, Greek letter guy, if 684 00:37:50,960 --> 00:37:54,560 Speaker 1: I hedge here, if I hedge here, am I giving 685 00:37:54,680 --> 00:37:59,320 Speaker 1: up capital gain through two thousand seventeen? You don't necessarily 686 00:37:59,400 --> 00:38:01,479 Speaker 1: have to again. And it comes down to the fact 687 00:38:01,719 --> 00:38:05,520 Speaker 1: that if you just buy options, you don't necessarily have 688 00:38:05,680 --> 00:38:08,960 Speaker 1: to sell off your upside. And interestingly enough, part of 689 00:38:09,080 --> 00:38:12,759 Speaker 1: the last several months is that stocks are moving their 690 00:38:12,800 --> 00:38:16,040 Speaker 1: own way. Correlation is low. People that are picking stocks 691 00:38:16,120 --> 00:38:19,880 Speaker 1: are actually returning alpha. And when you've got more alpha, 692 00:38:20,200 --> 00:38:22,880 Speaker 1: when you're beating the benchmarks, you can spend money on. 693 00:38:22,960 --> 00:38:25,280 Speaker 1: Which Greek letter excite you the most? Right now? Vega 694 00:38:25,360 --> 00:38:30,239 Speaker 1: Gamma theta sigma delta. I'm a cron which is it 695 00:38:30,960 --> 00:38:35,560 Speaker 1: are we at the fraternity? Right? And the options space 696 00:38:35,640 --> 00:38:38,759 Speaker 1: wise guy, which Greek letter is where you can make money? Right? 697 00:38:39,120 --> 00:38:42,840 Speaker 1: We we actually like Gamma, like yeah, Gama, because basically 698 00:38:43,560 --> 00:38:47,239 Speaker 1: what's happening here is that we're going to have to 699 00:38:47,520 --> 00:38:49,759 Speaker 1: risk events on the IDEs of March. We're going to 700 00:38:49,880 --> 00:38:52,680 Speaker 1: hear from the Fed. We're going and we're going to 701 00:38:52,800 --> 00:38:56,080 Speaker 1: start thinking about what the government has to do to 702 00:38:56,280 --> 00:39:01,640 Speaker 1: keep funding itself. So to translate, that's it. Very good guys, Gura, 703 00:39:02,440 --> 00:39:07,200 Speaker 1: Very good Gamma acceleration convexity. Good morning, Lisiane Sanders of 704 00:39:07,760 --> 00:39:10,239 Speaker 1: Charles Schwab. I don't know if she's listening. Sometimes she does, 705 00:39:10,960 --> 00:39:14,399 Speaker 1: she's gallivanting around. Lisie Sanders and I like to talk 706 00:39:14,400 --> 00:39:18,400 Speaker 1: about one Ms Wag Martin's wage, who is everyday missed, 707 00:39:18,600 --> 00:39:22,040 Speaker 1: not only in New York City but worldwide in investment, 708 00:39:22,160 --> 00:39:25,839 Speaker 1: in common sense. And there was that idea don't fight 709 00:39:25,920 --> 00:39:29,640 Speaker 1: the Fed from Mrs Wig, But Julian Emmanuel with UBS 710 00:39:30,360 --> 00:39:33,840 Speaker 1: so much was you're on the trend and the courage 711 00:39:33,920 --> 00:39:36,520 Speaker 1: to stay with a trend. I just put up Julian 712 00:39:36,560 --> 00:39:41,040 Speaker 1: a fancy Bloomberg chart which is it's not perfectly textbook, 713 00:39:41,120 --> 00:39:46,480 Speaker 1: but boy it's awfully close. Which is, the trend is extended, 714 00:39:47,480 --> 00:39:50,520 Speaker 1: but it's an elegant chart up up in a way 715 00:39:50,640 --> 00:39:54,319 Speaker 1: for equities in this case the SMP five hundred. How 716 00:39:54,400 --> 00:39:58,160 Speaker 1: do you daily find the courage to stay in an 717 00:39:58,239 --> 00:40:03,279 Speaker 1: extended trend? It with confidence or you can do other 718 00:40:03,400 --> 00:40:06,680 Speaker 1: things in your life? How do you stay in a 719 00:40:06,800 --> 00:40:10,360 Speaker 1: bull market? Well, so for us, again, these are the 720 00:40:10,440 --> 00:40:14,040 Speaker 1: lessons of history. Uh, there's two things here. The first is, 721 00:40:14,160 --> 00:40:17,319 Speaker 1: if you go back to nine, none of the bull 722 00:40:17,400 --> 00:40:22,320 Speaker 1: markets since nineteen ninety have ended without a recession following 723 00:40:22,400 --> 00:40:26,000 Speaker 1: the top within twelve months. When we look out at 724 00:40:26,040 --> 00:40:28,840 Speaker 1: two thousand seventeen and two thousand and eighteen, and you know, 725 00:40:28,920 --> 00:40:32,239 Speaker 1: the New York Fed has an indicator that it publishes, 726 00:40:32,640 --> 00:40:35,320 Speaker 1: the probability of recession in the next twelve months is 727 00:40:35,400 --> 00:40:39,399 Speaker 1: four percent, quite low. So for us, that really does 728 00:40:39,560 --> 00:40:43,640 Speaker 1: reinforce the case of staying with equities. However, I would 729 00:40:43,719 --> 00:40:47,680 Speaker 1: say this one of Marty's Wage's other famous sayings was 730 00:40:47,800 --> 00:40:50,279 Speaker 1: three steps in a stumble, because he was really the 731 00:40:50,320 --> 00:40:54,120 Speaker 1: true Fed watcher. And so from that perspective on twenty 732 00:40:54,280 --> 00:40:58,880 Speaker 1: times trailing earnings over eighteen times two thousand and seventeen earnings. 733 00:40:59,360 --> 00:41:02,279 Speaker 1: We are watch seeing the March f O MC meeting 734 00:41:02,480 --> 00:41:05,759 Speaker 1: very closely. It would be the third hike in the 735 00:41:05,880 --> 00:41:07,719 Speaker 1: series of great hikes. What are you seeing when you 736 00:41:07,760 --> 00:41:10,360 Speaker 1: look at flows flows into equities right now? How's that 737 00:41:10,600 --> 00:41:13,160 Speaker 1: affecting what the market is doing right now? The public 738 00:41:13,320 --> 00:41:17,520 Speaker 1: is very enthusiastic. It is not maximum enthusiastic as it 739 00:41:17,760 --> 00:41:21,719 Speaker 1: was in and two thousand, which gives us cause to 740 00:41:21,840 --> 00:41:25,920 Speaker 1: believe that we that valuation could move up even further um. 741 00:41:26,120 --> 00:41:30,200 Speaker 1: But that has been a distinct change based on the 742 00:41:30,280 --> 00:41:33,080 Speaker 1: last two and a half years, and certainly the change 743 00:41:33,480 --> 00:41:37,680 Speaker 1: really did happen in November, December and obviously year to date, 744 00:41:37,960 --> 00:41:41,000 Speaker 1: so we watched those very closely. Right now, we've had 745 00:41:41,040 --> 00:41:44,480 Speaker 1: this huge gravitational pull by politics here over these last 746 00:41:44,480 --> 00:41:46,040 Speaker 1: few months. I'm struck by what you're saying about the 747 00:41:46,040 --> 00:41:49,320 Speaker 1: importance of this March meeting. Has the FED sort of 748 00:41:49,400 --> 00:41:51,600 Speaker 1: come back into position? Is the thing that you're looking 749 00:41:51,640 --> 00:41:53,799 Speaker 1: most toward right now? Has politics faded back a little bit? 750 00:41:53,840 --> 00:41:57,960 Speaker 1: Are we seeing a rejiggering of what's driving What my 751 00:41:58,080 --> 00:42:01,279 Speaker 1: suspicion is politics is never really going to fade Uh, 752 00:42:01,440 --> 00:42:05,680 Speaker 1: certainly the next year. No, No, highly unlikely. But but 753 00:42:05,840 --> 00:42:08,080 Speaker 1: the fact is is that if you look at the 754 00:42:08,160 --> 00:42:11,399 Speaker 1: last several years, for the most part, the market has 755 00:42:11,480 --> 00:42:15,320 Speaker 1: dictated the narrative to the FED, with very rare exceptions, 756 00:42:15,440 --> 00:42:17,399 Speaker 1: and this is one of these times where the Fed 757 00:42:17,520 --> 00:42:20,279 Speaker 1: has taken back the narrative. You mentioned the lack of correlation. 758 00:42:20,400 --> 00:42:23,280 Speaker 1: Stocks are on their own and the shift active. Okay, 759 00:42:23,640 --> 00:42:26,799 Speaker 1: the index funds are bringing in a jillion dollars. One 760 00:42:26,840 --> 00:42:29,400 Speaker 1: of the quiet things this week we've barely talked about, folks. 761 00:42:29,480 --> 00:42:32,400 Speaker 1: We did, we touched on. It was Abby Johnson up 762 00:42:32,440 --> 00:42:36,040 Speaker 1: and Fidelity finally fallen on the cost cutting sword. They're 763 00:42:36,080 --> 00:42:39,839 Speaker 1: gonna lay off tons of people, restructure, lower commission rates. 764 00:42:40,320 --> 00:42:44,120 Speaker 1: They're an active manager dealing with the challenges. Okay, help 765 00:42:44,200 --> 00:42:46,680 Speaker 1: me here. I mean, the public has gone to index 766 00:42:46,760 --> 00:42:49,880 Speaker 1: because of low fees and they've actually done pretty well. Right, 767 00:42:50,280 --> 00:42:52,920 Speaker 1: Why is that going to change the trend of the 768 00:42:53,000 --> 00:42:56,120 Speaker 1: money flows isn't going to change? Per se? That that 769 00:42:56,320 --> 00:42:59,880 Speaker 1: is something that you know again week after week, the 770 00:43:00,080 --> 00:43:02,600 Speaker 1: flow data that we see is positive, and it's going 771 00:43:02,680 --> 00:43:05,200 Speaker 1: into e t f s and it's going into passive products. 772 00:43:05,520 --> 00:43:09,839 Speaker 1: It's just that you're in an environment where with volatility 773 00:43:09,960 --> 00:43:13,560 Speaker 1: as low as it is and stock correlation as low 774 00:43:13,640 --> 00:43:16,680 Speaker 1: as as it is, which actually causes the volatility to 775 00:43:16,719 --> 00:43:20,400 Speaker 1: stay low. It's just a good environment to make money, 776 00:43:20,600 --> 00:43:24,920 Speaker 1: you know, selecting single stocks. And actually the more investment 777 00:43:25,000 --> 00:43:29,480 Speaker 1: into et F there is, the more opportunity is created. Okay, 778 00:43:30,000 --> 00:43:36,120 Speaker 1: we have breaking news which I'm going to Yeah, you 779 00:43:36,200 --> 00:43:37,719 Speaker 1: got it up, I got it up here Dutch banks 780 00:43:37,760 --> 00:43:40,399 Speaker 1: and study options. It's month to boost its capital. Its 781 00:43:40,400 --> 00:43:42,719 Speaker 1: supervised supports it to meet in mid March, SINT to 782 00:43:42,800 --> 00:43:45,839 Speaker 1: weigh a stock sailor partial asset management. We're gonna say 783 00:43:45,880 --> 00:43:48,319 Speaker 1: goodbye right here to Julian Emmanuel because tell me. Let 784 00:43:48,360 --> 00:43:50,480 Speaker 1: me tell you folks, someone from a union Bank of 785 00:43:50,560 --> 00:43:55,799 Speaker 1: Switzerland can't comment. Julian, get out of here, save your job. 786 00:43:56,200 --> 00:44:06,880 Speaker 1: Julian Emmanuel, thank you so much. Uh. Thanks for listening 787 00:44:06,960 --> 00:44:11,640 Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews 788 00:44:11,760 --> 00:44:17,120 Speaker 1: on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm 789 00:44:17,120 --> 00:44:20,080 Speaker 1: out on Twitter at Tom Keene. David Gura is at 790 00:44:20,239 --> 00:44:24,560 Speaker 1: David Gura. Before the podcast, you can always catch us worldwide. 791 00:44:25,040 --> 00:44:40,640 Speaker 1: I'm Bloomberg Radio, brought you by Bank of America. Mary 792 00:44:40,719 --> 00:44:45,000 Speaker 1: Lynch dedicated to bringing our clients insights and solutions to 793 00:44:45,120 --> 00:44:48,640 Speaker 1: meet the challenges of a transforming world. That's the power 794 00:44:48,760 --> 00:44:53,440 Speaker 1: of global connections. Mary Lynch, Pierce, Feeder and Smith, Incorporated, 795 00:44:53,640 --> 00:44:55,239 Speaker 1: Member s I p C