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Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.

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Speaker 1: Along with my co host Lisa Abramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether at the grocery store or

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Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,

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Speaker 1: SoundCloud and at Bloomberg dot com. One share that is

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Speaker 1: moving quite a bit is that of DuPont. Another is

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Speaker 1: Dow Chemical. That's because the European Union approved the merger

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Speaker 1: of these two agro chemical behemoths to create an even

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Speaker 1: bigger company. To get a better sense of what this

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Speaker 1: means going forward is Jason Minor. He is senior Global

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Speaker 1: Chemicals Analyst for Bloomberg Intelligence and it comes to us

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Speaker 1: from Princeton, New Jersey. Jason, can you just give us

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Speaker 1: a sense of how unexpected this was that the European

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Speaker 1: Union would approve this deal? Well, on in one sense,

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Speaker 1: it's you know, it's been widely inticipated. I mean, we've

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Speaker 1: been watching this deal. This is really a shape shifter

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Speaker 1: of a deal, remember, because it's such a huge behemoth

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Speaker 1: merger and then a three way split up. But we've

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Speaker 1: been watching that unfold or sort of rumble forward. Since

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Speaker 1: two thousand fifteen when it was announced, the companies have

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Speaker 1: said that they were expecting to close this in the

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Speaker 1: first half. They have missed a couple of deadlines before,

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Speaker 1: and we're in a really mind boggling climate for regulatory

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Speaker 1: sort of antitrust approval and accempts a lot of deals

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Speaker 1: so um. On the one hand, it was really foreshadowed.

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Speaker 1: The timing though, and many folks mind was was uncertain,

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Speaker 1: and there were those who would even thought that the

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Speaker 1: divestitures required to be so massive that they might undermine

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Speaker 1: the value. So maybe it's a little bit more minor

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Speaker 1: or manageable than folks expected as well. So just to

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Speaker 1: give some perspective, and some of the things we were

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Speaker 1: talking about, I mean, there are a bunch of combined transactions,

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Speaker 1: uh that are going to reshape the agrochemical industry, bears

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Speaker 1: planned by Monsanto and China National Chemicals agreement to buy

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Speaker 1: some Genta that would bring the six major players in

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Speaker 1: this industry town to just three. Uh. The surprising thing

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Speaker 1: to me was that the European Commission said that there

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Speaker 1: was specific evidence that Dow and DuPont would cut back

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Speaker 1: on the amount they spent on the developing innovative products.

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Speaker 1: I mean, what is going to be the ramifications from

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Speaker 1: this complete reshaping of the agrochemical industry. Yeah, you have

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Speaker 1: to to to feel the fear. You've got to put

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Speaker 1: yourself in the seat of the tractor. Right. So the

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Speaker 1: fear is the farmers looking at this as exactly what

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Speaker 1: you said, which is these labs have generated the yield

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Speaker 1: gains around the world, particularly for corn and soy, but

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Speaker 1: many other crops for for decades now. Uh. And as

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Speaker 1: we as we put these all together, all the names

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Speaker 1: that you've just mentioned, Um, we're potentially cutting back on overlaps,

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Speaker 1: right and now do pot have promised US three billion

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Speaker 1: cost synergies alone? Uh? And And obviously under the hood

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Speaker 1: of that, the EU saw some specifics that looked like

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Speaker 1: it would be a few less test tubes devoted to

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Speaker 1: crop chemicals. So it raises a question though, who's left

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Speaker 1: out there. It's a strong hand that can buy what

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Speaker 1: comes out of this as it's spent off well. And

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Speaker 1: then it raises another question to which is what is

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Speaker 1: the advantage for these mergers if not for eventually jacking

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Speaker 1: up prices or having or cutting jobs to such a

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Speaker 1: degree that they are much more efficient, right, I mean

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Speaker 1: studying the context. Remember we're we're in now, we're about

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Speaker 1: to nominally break three years of declining farm incomes. It's

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Speaker 1: been tough times. After biofuels kicked in after two thousand

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Speaker 1: five or so, we had a big boom, a lot

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Speaker 1: of investment. All these companies are looking to cut back now,

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Speaker 1: from fertilizers to seeds. Everybody spent a ton and and

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Speaker 1: so ultimately, I think the first wave really is cost cuts.

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Speaker 1: Then if you get a little rise in some of

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Speaker 1: the crop prices, you're right, that could have played into

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Speaker 1: a lot of pricing power. So now the stipulation is

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Speaker 1: you've got to find strong hands to put this thing

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Speaker 1: in that will continue to compete with you. We've gotta

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Speaker 1: keep five strong players out there. Who this fifth is

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Speaker 1: going to be is is really uncertain because it will

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Speaker 1: be a big transfer, your national deal for any of

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Speaker 1: the leftover players probably who could do it? What what

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Speaker 1: parts just to that point, what parts are going to

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Speaker 1: be spun off? What businesses are going to be for sale?

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Speaker 1: So what we're taking out is a piece of DuPonts. No,

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Speaker 1: they haven't sized it one good reasonably guess it's a

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Speaker 1: couple of billion dollars of sales a year. It's it's

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Speaker 1: a a bunch of um insecticides and herbicides, uh and

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Speaker 1: then and and they so they name specific products, but

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Speaker 1: really the key is the R and D lab. They said,

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Speaker 1: you can't take those, uh, the TAO and the DuPont

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Speaker 1: R and D programs and put them together, which is

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Speaker 1: obviously where that cost concern came in. You've got to

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Speaker 1: hand that that R and D development and all of

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Speaker 1: your upcoming products, which again it's really the core that

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Speaker 1: the existing portfolios weren't the worry so much as UM

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Speaker 1: you've got to put the place where the magic happens.

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Speaker 1: You've got to keep that lab alive. You've gotta hand

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Speaker 1: it to somebody else. UM. So, so it's a it's

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Speaker 1: a few, it's herbicides, insecticides, and then the R and

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Speaker 1: D program, which is a key Jason, does this at

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Speaker 1: all play into the debate over genetically modified grains and

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Speaker 1: and other types of foods? I mean, I know that

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Speaker 1: Europe has been much more against genetically modified UH food

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Speaker 1: whereas in the US it's more accepted. Yeah, links in

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Speaker 1: two ways. So one of the concerns is, um, what's

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Speaker 1: happening in all these deals is you're putting together big

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Speaker 1: seed players who have done the biotech stuff with big

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Speaker 1: chemical players. UH. And there's those two things go hand

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Speaker 1: in hand. You often engineer a seed to work with

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Speaker 1: a chemical or a spray, So it's a sort of

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Speaker 1: a seeds plus sprays world we're going into. UH. But

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Speaker 1: it can mean that if you have only certain sprays,

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Speaker 1: you only engineer certain seeds, you reduce innovation that way.

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Speaker 1: On the other hand, there are alternatives to GMOs that

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Speaker 1: can come out of these labs, and we want to

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Speaker 1: see those alternatives come to fruition. I think Jason Miner,

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Speaker 1: thank you so much for joining us. A fascinating development

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Speaker 1: in the agrichemical industry. I'm sure we'll be talking about

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Speaker 1: it more coming up. Jason Minor is senior Global Chemicals

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Speaker 1: analyst for Bloomberg Intelligence, and he was speaking to us

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Speaker 1: from Princeton, New Jersey. Many people thought that volatility was dead.

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Speaker 1: Well today it seems to be showing that perhaps it's

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Speaker 1: not quite dead yet. We see the VIX index at

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Speaker 1: the highest level of the year, and there's somebody perfect

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Speaker 1: to talk about that today Rick sell Vola, CEO and

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Speaker 1: co founder of Harvest Volatility Management. It's as hedge fund

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Speaker 1: uh that overseas nine billion dollars of assets. Rick, thank

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Speaker 1: you so much for joining us. I want to start

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Speaker 1: with a VIX. We are seeing it tick up from

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Speaker 1: a historical perspective. It is still incredibly low. But are

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Speaker 1: we just seeing the beginning of this swell in volatility

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Speaker 1: and equity markets? Thank you, Lisa. I think it's a

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Speaker 1: pretty good way to think about it. The the fact

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Speaker 1: that the SMP hadn't had a one percent pullback since

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Speaker 1: early October, and we finally saw one late last week

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Speaker 1: and are continuing to see that today. Umans the VIX

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Speaker 1: is waking up, and so UM. The VIX is long

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Speaker 1: term average, you know, is around twenty uh interesting, the

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Speaker 1: last five years or so, the average has been closer

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Speaker 1: to sixteen. So UM and to be clear, it's still

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Speaker 1: less than fourteen, so it's still really low. It's still

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Speaker 1: it's still low. It's it's it's traded closer to you know,

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Speaker 1: eleven twelve area for much of this year, as we've

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Speaker 1: just seen a very long, sustained rally without any real pullbacks,

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Speaker 1: any real reason to be fearful. But UM, you know,

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Speaker 1: now you're seeing markets wake up to the fact that, hey,

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Speaker 1: stocks go up and down and everything that maybe was

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Speaker 1: priced in perfection. Um, maybe there's some questions and and

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Speaker 1: so now there's more reason to either be fearful or

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Speaker 1: to um to realize that. You know, we could see

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Speaker 1: a bit more chop and more reason to buy protection.

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Speaker 1: But your fun doesn't. It doesn't really bet on the

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Speaker 1: direction of fatility. It's not like you wake up every

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Speaker 1: morning and say, ah ha, we're gonna finally get it, um.

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Speaker 1: And if we don't get this pop in volatility, we're

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Speaker 1: gonna get sunker we do, and we're gonna we're gonna

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Speaker 1: we're gonn to win. Um. You're just betting on incremental

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Speaker 1: changes in volatility. Correct. Um, that's close. You're like, you're right,

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Speaker 1: we're not making judgment calls on the VIX and we're

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Speaker 1: not making judgment calls on volatility. UM. We are a

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Speaker 1: perpetual seller of volatility, but with limited risk, meaning we

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Speaker 1: use spreads, so we try to sell the expensive options

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Speaker 1: but by the cheap options to limit our risk. So

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Speaker 1: another way to think about it is, UM, you know

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Speaker 1: there is a perpetual richness of implied over realized volatility

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Speaker 1: that's been in place since the eighty seven crash, and

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Speaker 1: it's about three and a half four percent, and we're

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Speaker 1: trying to exploit and harvest that UM. And there are

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Speaker 1: many different ways you can do that, but we utilize

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Speaker 1: index options on the SMP five hundred. You know, the

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Speaker 1: deepest most liquid market UM. You know, liquidity transparency low,

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Speaker 1: you know, execution costs, etcetera. UM. And for taxable investors,

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Speaker 1: there's actually tax efficiency in using this SPX index option.

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Speaker 1: So Rick, you're FIRB started in two thousand and eight,

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Speaker 1: and one thing that I'm struck by is you're looking

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Speaker 1: to get returns of one and a half to two

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Speaker 1: percent that is sort of overlaid on top of returns

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Speaker 1: that investors are already getting on their other capital. In

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Speaker 1: other words, Uh, their investments are used as collateral for

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Speaker 1: you to go out and make these synthetic wagers. Uh.

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Speaker 1: And your goal is to gain that sort of incremental

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Speaker 1: extra yield. And in the process you have amassed nine

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Speaker 1: billion dollars. To me that this raises a question about

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Speaker 1: the hunt for yield. And you know, if yields do

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Speaker 1: go up, our investors still going to be seeking this

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Speaker 1: incremental yield. And you know, does it also represent potentially

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Speaker 1: that people are are looking too hard for it? Great question. Um,

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Speaker 1: the we are very much the tortoise. This is a

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Speaker 1: this is not a sexy, glamorous strategy where we're looking

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Speaker 1: to hit it out of the park. Um. But when

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Speaker 1: you can add one and a half to two to anything, um,

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Speaker 1: you make it a lot better. Meaning if somebody's long

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Speaker 1: equities and you can add one and a half to

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Speaker 1: two percent, that's kind of take you maybe from the

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Speaker 1: middle of the pack to the top desctile. But but

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Speaker 1: you can also lose, right well, you can also lose.

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Speaker 1: Of course, you can't add risk without adding um, you

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Speaker 1: know the possibility of loss. So uh. Part of what

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Speaker 1: we do is, you know, we're selling out of the

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Speaker 1: money spreads on the upside and on the downside, which

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Speaker 1: is another way of saying, um, a part of the

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Speaker 1: return profile distribution of the SMP to the up and

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Speaker 1: to the down. We create a nice wide band so

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Speaker 1: the market can go up or down and we don't

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Speaker 1: really care if it goes up too far too fast. Um,

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Speaker 1: we're gonna lose a little on the call spread side.

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Speaker 1: But we're gonna win in the foot spread side, etcetera. So,

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Speaker 1: so do you have certain models to get a sense

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Speaker 1: of when we are going to see these big swings

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Speaker 1: in volatility? You know, the VIX is more reactive than predictive.

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Speaker 1: Um it will um, it will wake up before big

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Speaker 1: known on owns like you will see it um higher

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Speaker 1: in front of an election, higher in front of a

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Speaker 1: FED meeting, higher in front of monthly non farm payrolls.

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Speaker 1: When there's an event that we know is there, but

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Speaker 1: we don't really know a what the outcome will be

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Speaker 1: and and and be how the market will react to

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Speaker 1: that outcome um so um. But we don't have models

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Speaker 1: that are going to tell us what is going to happen.

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Speaker 1: We more react to it. But we have a lot

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Speaker 1: of experience and and we're also looking at the curve

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Speaker 1: and looking at where things look reature and look things

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Speaker 1: like cheaper, etcetera. But you've been in the business for decades, right,

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Speaker 1: and so you've been watching the cycles. And is there

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Speaker 1: anything that gives you a sense that we are going

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Speaker 1: to see a more dramatic swing in volatility this year? Um?

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Speaker 1: I don't know. I'm not sure if it will be

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Speaker 1: more dramatic, but I do think we will see UM

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Speaker 1: higher levels of volatility. I think we'll see UM more

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Speaker 1: frequent spikes, just because there is such great uncertainty, whether

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Speaker 1: rits UM, political uncertainty, economic uncertainty, global uncertainty. UM. I

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Speaker 1: frankly and many of my colleagues have been really shocked

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Speaker 1: actually that the VIX has remained as low as it

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Speaker 1: has for as long as it has, you know, since

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Speaker 1: the election UM, and I think today is is probably

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Speaker 1: more like what we're going to see going forward. UM.

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Speaker 1: We will see the occasional drop down below twelve or so,

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Speaker 1: but I think a VIX in the mid to higher

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Speaker 1: teens is is a more likely outcome. Where are most

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Speaker 1: of your investors from UM? Most of our investors at

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Speaker 1: this point are ultra high net worth either individual investors, families,

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Speaker 1: but we partner with firms like Mary Lynch and UBS

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Speaker 1: and Morgan Stanley, and so their advisors see the value

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Speaker 1: in adding harvest to their client portfolios. They see what

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Speaker 1: it does to the risk adjusted quality of the returns

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Speaker 1: UM and so well. One thing that somebody could argue

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Speaker 1: is that your fund has been around since two thousand

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Speaker 1: and eight, but it has really been Uh, certainly not

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Speaker 1: in its current form. Has not survived through a crash.

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Speaker 1: Um when you actually volatility is going to be the

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Speaker 1: flash point. So you know what happens then, right, I

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Speaker 1: mean if you have all these alternate worth people who

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Speaker 1: are looking for uh, you know, an extra one percent,

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Speaker 1: but it could be a lot more downside in a

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Speaker 1: hurt cycle. Yes, a great question. Um. You know we

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Speaker 1: launched in April of oh eight, so we did weather

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Speaker 1: the financial crisis in the fall of oh eight. I

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Speaker 1: mean when you look at what the SMP did from

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Speaker 1: September of eight into early March of oh nine, and

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Speaker 1: that six month window the SMP was down. Um, we've

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Speaker 1: weathered a VIX that quadrupled you know, it's long term

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Speaker 1: averages twenty and that's about where it was when we launched.

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Speaker 1: You know, it doubled to its previous all time high

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Speaker 1: of forty in September of eight. It doubled again to

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Speaker 1: eighty in in October in parts of November of eight,

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Speaker 1: so um, we did weather um quite a hilacious downturn

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Speaker 1: and uh and spike involved. And then the flip side

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Speaker 1: is equally challenging. When the market surges the way it

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Speaker 1: has and and VIX has been more constrained. So well,

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Speaker 1: we'll have to check back with you when the VIX

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Speaker 1: wakes up a little bit more from its current levels.

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Speaker 1: Rick Silvala, thank you so much for joining us, CEO

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Speaker 1: and co founder of Harvest Volatility Management, which has nine

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Speaker 1: billion dollars of asses under management. Well, it's a sad day,

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Speaker 1: and they say a sad day in UH the s

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Speaker 1: n P five hundred. It is the sixth day of

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Speaker 1: falling UH index values. What do you make this, Dave Wilson, Well,

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Speaker 1: I also like to look at the down Jones Industrial

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Speaker 1: Average downy alright, fine, and if it closes lower, it

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Speaker 1: will be the longest losing streets since August when stocks

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Speaker 1: were really kind of falling out of bed. And what's

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Speaker 1: interesting is if you take a step back and think

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Speaker 1: about what's going on, it almost looks like the flip

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Speaker 1: side of what we saw post election, where you know,

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Speaker 1: you see stocks go up day in and day out

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Speaker 1: pretty much but not very extreme moves. And you look

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Speaker 1: at where we are now, it's sort of a similar situation.

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Speaker 1: You know, down down eight days in row. You're talking

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Speaker 1: about two and a half percent. Okay, but hold on

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Speaker 1: one second. Though you raise an interesting question, Dave, which is,

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Speaker 1: if we're seeing the reversal of the post election Trump bump,

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Speaker 1: how much further do the SMP five hundred and the

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Speaker 1: doubt jones have to fall to leave us flat. Well,

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Speaker 1: there's still quite a ways to go. I mean, you

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Speaker 1: look back to where we were just after the election,

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Speaker 1: you see UH change. That's where the SMP started out,

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Speaker 1: and we're about close to two hundred points higher than

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Speaker 1: that even with today's decline. I mean, you can run

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Speaker 1: the numbers on the down you see a similar UH

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Speaker 1: potential role And it really comes down to at this point,

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Speaker 1: you know how much of this is sort of people

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Speaker 1: looking for an opportunity to sell, especially as you get

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Speaker 1: close to the end of the first quarter, as opposed

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Speaker 1: to real concern about the state of the policy agenda,

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Speaker 1: if you will, given the fact that the healthcare bill

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Speaker 1: did not manage to get a vote in the House

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Speaker 1: last week. Well, the flip side to the risk off

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Speaker 1: trade is the bullish trade for treasuries. And here with

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Speaker 1: us is Brian Chapatta, who writes about treasuries and UH

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Speaker 1: and generally for Bloomberg News. Brian, you're a really compelling

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Speaker 1: story talking about how the cost of buying treasuries and

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Speaker 1: hedging against any dollar moves for Japanese investors has actually

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Speaker 1: fallen to the lowest in two years. It should make

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Speaker 1: it a buy for them. They should be rushing into

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Speaker 1: the US to capture the extra yield given how cheap

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Speaker 1: it's gotten, But they're not. Why they're not because they're

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Speaker 1: just worried about fiscal policy and monetary policy here in

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Speaker 1: the U S which is seen as way more volatile

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Speaker 1: than over in Japan, where it's you know, persistent easing

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Speaker 1: on the monetary front and there's nothing going on on

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Speaker 1: the fiscal side that's going to jeopardize things. I mean,

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Speaker 1: in fact, their tenure rate is basically fixed between like

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Speaker 1: zero and ten basis points, so they find it's much

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Speaker 1: more attractive, but potentially to just stay home and you know,

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Speaker 1: take the paltry yield that they got rather than you know,

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Speaker 1: risk further losses. The losses on the treasury index, the

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Speaker 1: Boo Bloomberg Barclays Treasury Index on the final quarter of

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Speaker 1: sixteen was the worst that it's ever been in data

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Speaker 1: going back about thirty years, so uh, it was it

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Speaker 1: was a surprising loss on their books. So I'm looking

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Speaker 1: at the ten year. It's down the most in uh

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Speaker 1: about two weeks. I'm wondering, you know, the yield is down,

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Speaker 1: the prices up. I'm wondering, who's buying, if Japan is

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Speaker 1: not buying, if China's not buying, if European investors maybe

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Speaker 1: are staying home. I mean, who who's coming into the

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Speaker 1: US right now? I mean it seems like in part

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Speaker 1: it's you know, the flip side of you know, the

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Speaker 1: equity markets. You know, people who uh you know, we're

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Speaker 1: potentially you know, betting against betting un interest rates going higher,

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Speaker 1: essentially shorting the treasury market. Uh. Then I have to

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Speaker 1: cover some of their shorts as they're seeing a risk

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Speaker 1: off here in the market. We saw the specula the

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Speaker 1: position UH in shorts really decline over the past week. So, um,

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Speaker 1: it seems like it's a lot of that, and um,

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Speaker 1: you know, I think the real interesting thing is that

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Speaker 1: a lot of these uh foreign investors that were sort

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Speaker 1: of hesitant seeing a FED poise to raise rates are

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Speaker 1: really caught in limbo here because they missed out on

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Speaker 1: a on a nice rally. But now they think, oh man,

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Speaker 1: we're at the bottom of this range that we've been

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Speaker 1: in for the past few months now. I don't want

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Speaker 1: to buy either, so they're sort of caught, uh in limbo,

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Speaker 1: which is not great for their demand. Well, Dave, to

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Speaker 1: that point, there was a story that Matt Levine highlighted

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Speaker 1: in the World. He's a Bloomberg columnist. Uh. The story

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Speaker 1: was in Wall Street Journal, quoting in Investment Manager saying,

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Speaker 1: it's like dental work. You dread it, you don't want

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Speaker 1: to get it, but you're glad when it's over and

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Speaker 1: you feel better. What is he talking about. He's talking

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Speaker 1: about a correction, Like everyone's been sort of praying for

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Speaker 1: this pullback in equity so that they can get in

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Speaker 1: a better valuation. What are you hearing from investment funds?

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Speaker 1: I mean, is this is this the time to get

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Speaker 1: back in or people waiting for it for a lot more? Well,

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Speaker 1: I mean, if you think back over the last year

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Speaker 1: or so, I mean, we've certainly seen plenty of times

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Speaker 1: when stocks have dipped, and you've seen so of recovery

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Speaker 1: in short order. You know, the question is whether this

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Speaker 1: time there's something more gradual going on that will take

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Speaker 1: more time to unwind, sort of like you say, you

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Speaker 1: know the the trunk trades, if you will, So you

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Speaker 1: know that that becomes the issue for the moment, and

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Speaker 1: you're certainly seeing that play out today within specific industry groups.

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Speaker 1: You look at the banks, they're lower. You look at

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Speaker 1: the steel companies, they're lower. You know, the banks were

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Speaker 1: supposed to benefit from deregulation, the steel companies from infrastructure spending.

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Speaker 1: And of course you've got the hospital stocks taken off

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Speaker 1: because the repealing and replacing the Affordable Care Act hit

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Speaker 1: its bumps. So you know, it's just a matter once

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Speaker 1: you get to shake out, where do things go from here?

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Speaker 1: And Brian, I mean when you talk with sources, do

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Speaker 1: you get the sense that uh bond investment managers are

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Speaker 1: generally kind of moving toward a or back toward, I

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Speaker 1: should say, a slow growth for longer type of environment.

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Speaker 1: Are they basically pricing in the same kind of environment

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Speaker 1: that people were talking about last year and kind of

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Speaker 1: ignoring and casting off the brief reflation hopes that we

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Speaker 1: got after the election. I think that's the underlying tone

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Speaker 1: of the market right now, is that you know, how

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Speaker 1: much has changed from a year ago, and I think

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Speaker 1: it's going to take a few days to shake out here.

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Speaker 1: Exactly if you know, this is the death of the

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Speaker 1: reflation trade that we've been seeing since the election, um

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Speaker 1: or if there is still that potential because we haven't

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Speaker 1: seen treasuries break out of arrange that they've been in

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Speaker 1: since basically the start of December. UM, because there's just

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Speaker 1: been this back and forth of you know, just sentiment,

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Speaker 1: I mean, will that you know, will growth take off

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Speaker 1: or will it be subdued? You know what what's going

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Speaker 1: on with inflation? Is this going to be a persistent

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Speaker 1: thing going on? And so um, It's gonna take a

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Speaker 1: little while to play out, but I think the underlying

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Speaker 1: tone definitely is you know, how how how sustainable is this?

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Speaker 1: And just to sort of underscore the confusion, New York

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Speaker 1: Fed President Bill Dudley has said that he is comfortable

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Speaker 1: with a gradual rate hiking cycle, that the economy will

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Speaker 1: cope just fine with that. But James Bullard, another FED president,

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Speaker 1: thinks that potentially it's overkill, and he said in a

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Speaker 1: Bloomberg television interview that it's not necessary to raise rates

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Speaker 1: that quickly if the goal is to keep inflation in

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Speaker 1: your target and keep employment unemployment between four and four

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Speaker 1: and a half and five percent, so definitely clearly an

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Speaker 1: important debate. Anyway, Thank you so much, Brian Chapota. When

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Speaker 1: you think of the Dodd Frank Act, which is something

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Speaker 1: that President Trump would like to overhaul, or that's what

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Speaker 1: he has promised to do, you think of trading rules,

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Speaker 1: you think of bank profits, you think of things that

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Speaker 1: are really isolated to the financial sector. But that's not

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Speaker 1: necessarily the case. Elizabeth Dexheimer, finance reporter with Bloomberg News,

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Speaker 1: reported on another part of this law that affects retailers

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Speaker 1: as much as it does the financial companies. Elizabeth, thank

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Speaker 1: you so much for joining us. Can you just give

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Speaker 1: us an overview of this part of the law that

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Speaker 1: has to do with swipe fees or how much retailers

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Speaker 1: can are charged by the banks uh per each transaction

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Speaker 1: for debit or credit cards. Yeah, at least it's good

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Speaker 1: to talk with you, so sure. This is UH. This

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Speaker 1: is an issue that really gets the heart of how

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Speaker 1: financial companies thanks payments firms like z and master Card

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Speaker 1: make money from gebit in credit cards, which is a

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Speaker 1: very lucrative business. Every time you used swipe your credit card. UH,

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Speaker 1: one big chunk of it of the money that banks

429
00:22:52,320 --> 00:22:56,040
Speaker 1: make is something called interchange fees, which are fees that

430
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Speaker 1: are charged to the retailers UH every time a card.

431
00:22:59,680 --> 00:23:03,520
Speaker 1: Is why those fees, particularly for debit cards. As part

432
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Speaker 1: of Dodd Frank, there was a provision that was added

433
00:23:05,920 --> 00:23:09,879
Speaker 1: that capped those fees for debit cards. About nine billion

434
00:23:09,920 --> 00:23:12,560
Speaker 1: dollars has been lost to the banking industry and revenue

435
00:23:12,600 --> 00:23:16,399
Speaker 1: because of that provision, well and just the direct The

436
00:23:16,440 --> 00:23:19,120
Speaker 1: opposite side of that is that retailers have kept nine

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00:23:19,119 --> 00:23:23,120
Speaker 1: billion dollars in profits right right, and they argue that

438
00:23:23,520 --> 00:23:26,440
Speaker 1: they have been able to translate that to lower prices

439
00:23:26,880 --> 00:23:30,960
Speaker 1: at the register for consumers. So you have these two

440
00:23:31,040 --> 00:23:34,000
Speaker 1: you know, the homes of industry UH. You know, we're

441
00:23:34,000 --> 00:23:38,240
Speaker 1: talking about Walmart, JP, Morgan, as well as lots of

442
00:23:38,280 --> 00:23:41,760
Speaker 1: small businesses restaurants uh. And then as well as on

443
00:23:41,800 --> 00:23:46,159
Speaker 1: the banking side, this uh stems to small banks, community banks,

444
00:23:46,480 --> 00:23:49,760
Speaker 1: credit unions that have all felt the effects on this

445
00:23:49,880 --> 00:23:52,840
Speaker 1: ston on either side. And so as the House of

446
00:23:52,880 --> 00:23:56,520
Speaker 1: Representatives in particular takes up this debate around what a

447
00:23:56,640 --> 00:23:59,840
Speaker 1: package would look like to overhaul Dodd Frank's an updated package,

448
00:24:00,400 --> 00:24:02,600
Speaker 1: one of sort of the sticking points that has come

449
00:24:02,680 --> 00:24:04,760
Speaker 1: up is whether or not to include a repeal of

450
00:24:04,840 --> 00:24:07,399
Speaker 1: this provision. Thanks would like to see a repeal of

451
00:24:07,440 --> 00:24:11,400
Speaker 1: that provision. Retailers want to keep it as the law

452
00:24:11,480 --> 00:24:14,680
Speaker 1: currently is right now. And that's put lawmakers in a

453
00:24:14,800 --> 00:24:19,399
Speaker 1: very sticky spot, both Republicans and Democrats, because retailers and

454
00:24:19,480 --> 00:24:22,320
Speaker 1: banks are a very big and important constituent for most

455
00:24:22,400 --> 00:24:26,760
Speaker 1: lawmakers as well as an important political contributor from both sides.

456
00:24:26,840 --> 00:24:29,880
Speaker 1: So the lawmakers would prefer to continue to put this off.

457
00:24:31,080 --> 00:24:33,600
Speaker 1: As you sort of highlighted, you had a great list

458
00:24:33,680 --> 00:24:38,160
Speaker 1: of responses from a number of both Republicans and Democrats,

459
00:24:38,440 --> 00:24:40,639
Speaker 1: things like, we're listening to everyone, we haven't taken a

460
00:24:40,680 --> 00:24:43,640
Speaker 1: position on this yet. If you contact our office, we'll

461
00:24:43,640 --> 00:24:45,880
Speaker 1: talk to you about that at another time when I'm prepared.

462
00:24:46,160 --> 00:24:48,639
Speaker 1: I love the quotes. That's sort of just this sense

463
00:24:48,720 --> 00:24:50,359
Speaker 1: of wanting to kick the can down the road. And

464
00:24:50,400 --> 00:24:53,160
Speaker 1: just to be clear, this is the Durban Amendment UM

465
00:24:53,160 --> 00:24:54,720
Speaker 1: And can you give us a little bit of color,

466
00:24:54,760 --> 00:24:58,199
Speaker 1: Elizabeth about how much money and time and how some

467
00:24:58,320 --> 00:25:03,080
Speaker 1: of these industries are law lobbying for their perspective. So

468
00:25:03,080 --> 00:25:05,320
Speaker 1: so this is really just the latest battle and what

469
00:25:05,400 --> 00:25:09,040
Speaker 1: has been a nearly decade long fight between these two

470
00:25:09,080 --> 00:25:11,840
Speaker 1: industries on Capitol Hill. This has also stem to the courts.

471
00:25:12,240 --> 00:25:15,160
Speaker 1: This is um you know, an issue that has also

472
00:25:15,200 --> 00:25:19,040
Speaker 1: come up just in business negotiations and of course recently

473
00:25:19,040 --> 00:25:22,120
Speaker 1: ever since you know, Donald Trump was elected and sort

474
00:25:22,119 --> 00:25:26,040
Speaker 1: of the conversation around broader god frank changes was put

475
00:25:26,080 --> 00:25:28,480
Speaker 1: on the table, if you will. Uh, they've been both

476
00:25:28,520 --> 00:25:32,639
Speaker 1: sides have been ramping up their their lobbying and advocacy efforts.

477
00:25:32,840 --> 00:25:35,159
Speaker 1: One of them one of the strategies a lot of

478
00:25:35,200 --> 00:25:37,640
Speaker 1: similar strategies that they that both sides have been using

479
00:25:37,680 --> 00:25:41,680
Speaker 1: for for many years, but again sort of really ramping up,

480
00:25:41,920 --> 00:25:46,479
Speaker 1: particularly relying on smaller constituents, uh, you know, relying on

481
00:25:46,560 --> 00:25:49,520
Speaker 1: the small banks, relying on small retailers to religious storm

482
00:25:49,520 --> 00:25:53,879
Speaker 1: Capitol Hill letters, phone calls just NonStop, uh you know.

483
00:25:54,480 --> 00:25:57,320
Speaker 1: But but it's effective, and that there are so many

484
00:25:57,400 --> 00:25:59,880
Speaker 1: that these constituents, you know, making noise in any one

485
00:26:00,000 --> 00:26:02,600
Speaker 1: on Maaker's office is you know, gets the attention of

486
00:26:02,680 --> 00:26:04,960
Speaker 1: that that lawmaker. Right what what what I mean? I

487
00:26:05,000 --> 00:26:07,600
Speaker 1: don't know one thing that that does This does raise

488
00:26:07,680 --> 00:26:12,200
Speaker 1: to me is potentially the banks could say, look, we're competitive,

489
00:26:12,440 --> 00:26:15,040
Speaker 1: We're trying to compete with one another all that this

490
00:26:15,119 --> 00:26:18,560
Speaker 1: cap does is removed the sort of inherent competition and

491
00:26:18,600 --> 00:26:23,000
Speaker 1: remove the playing field in a way that potentially limits

492
00:26:23,040 --> 00:26:26,960
Speaker 1: innovation or uh, you know, creates sort of ripples that

493
00:26:27,040 --> 00:26:29,200
Speaker 1: might not be desirable through markets. What what do the

494
00:26:29,240 --> 00:26:33,520
Speaker 1: retailers say to that? Sure, so there are both sides,

495
00:26:34,080 --> 00:26:37,040
Speaker 1: point to various data and studies that have been done

496
00:26:37,040 --> 00:26:40,399
Speaker 1: about the impact. Uh and quite frankly, it's it's not

497
00:26:40,440 --> 00:26:44,040
Speaker 1: conclusive and that there you know, different sets of data

498
00:26:44,040 --> 00:26:46,720
Speaker 1: tell different stories. The as you just pointed out, the

499
00:26:47,000 --> 00:26:50,399
Speaker 1: level playing field and the competition factor that that banks

500
00:26:50,440 --> 00:26:56,520
Speaker 1: will will cite. Retailers say that the the way that

501
00:26:56,600 --> 00:27:00,880
Speaker 1: these prices are are are putting other an input out

502
00:27:00,880 --> 00:27:03,520
Speaker 1: there is not fair. They have no real shay and

503
00:27:03,800 --> 00:27:07,000
Speaker 1: sort of how these prices are are determined, and that

504
00:27:07,760 --> 00:27:10,440
Speaker 1: by lowering the fees that they have to pay, they

505
00:27:10,480 --> 00:27:15,280
Speaker 1: can in turn lower fee lower prices of anything that

506
00:27:15,320 --> 00:27:18,679
Speaker 1: you would buy at the register. Although although you have

507
00:27:18,760 --> 00:27:20,040
Speaker 1: to wonder, I mean, if people are going to be

508
00:27:20,200 --> 00:27:23,320
Speaker 1: using other methods of payment, if you know, they just

509
00:27:23,359 --> 00:27:27,480
Speaker 1: pass along the charges for credit card transactions right right,

510
00:27:27,640 --> 00:27:30,840
Speaker 1: and and even that point about where the consumer sees

511
00:27:30,880 --> 00:27:34,520
Speaker 1: the savings If a consumer sees sees any savings from this.

512
00:27:35,280 --> 00:27:37,720
Speaker 1: That data is inconclusive as well. There have been some

513
00:27:37,760 --> 00:27:40,959
Speaker 1: studies that show that retailers did not actually do make

514
00:27:41,000 --> 00:27:43,480
Speaker 1: any changes, or if they did, it was actually to

515
00:27:43,560 --> 00:27:46,480
Speaker 1: raise fees or excuse me, raise prices. That this did,

516
00:27:46,800 --> 00:27:49,399
Speaker 1: you know, little to impact the you know what, what

517
00:27:49,720 --> 00:27:53,200
Speaker 1: they're being charged. And yes, absolutely there's other forms of payments,

518
00:27:53,200 --> 00:27:55,640
Speaker 1: and that's where the sort of what's really at stake

519
00:27:55,720 --> 00:27:58,720
Speaker 1: for for this conversation in general is that, yes, this

520
00:27:58,800 --> 00:28:02,840
Speaker 1: particular part is about choosing around the Urban Amendment, specifically

521
00:28:02,840 --> 00:28:06,080
Speaker 1: as it relates to debit cards, but this is also

522
00:28:06,119 --> 00:28:08,720
Speaker 1: about a broader conversation about credit cards, which is a

523
00:28:08,800 --> 00:28:11,959
Speaker 1: much more lucrative business as well as sort of future

524
00:28:12,040 --> 00:28:16,560
Speaker 1: when we're talking about a new technology. Unfortunately, Elizabeth, we

525
00:28:16,600 --> 00:28:18,200
Speaker 1: have to leave it there, but thank you so much.

526
00:28:18,200 --> 00:28:28,919
Speaker 1: Fascinating story. Elizabeth Dexheimer, finance reporter for Bloomberg News. Thanks

527
00:28:28,920 --> 00:28:31,520
Speaker 1: for listening to the Bloomberg P and L podcast. You

528
00:28:31,520 --> 00:28:35,640
Speaker 1: can subscribe and listen to interviews at iTunes, SoundCloud, or

529
00:28:35,720 --> 00:28:39,800
Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm out

530
00:28:39,800 --> 00:28:43,000
Speaker 1: there on Twitter at pim Fox. I'm out there on Twitter.

531
00:28:43,120 --> 00:28:46,080
Speaker 1: At Lisa Abramo. It's one before the podcast. You can

532
00:28:46,120 --> 00:28:48,640
Speaker 1: always catch us worldwide on Bloomberg Radio