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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 you're at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg P M L

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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. We

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Speaker 1: are broadcasting from the Red Hat Summit in Boston and

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Speaker 1: joining us now in our New York studio is Peter Anderson.

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Speaker 1: He is the chief investment officer of Fiduciary Trust. And Peter,

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Speaker 1: thanks for being with us. And I know that it's

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Speaker 1: it's what happens. You're based in Boston, you come to

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Speaker 1: New York, and you know it's like two ships crossing

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Speaker 1: in the night. That's right. So thanks very much for

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Speaker 1: being for being with us. Here's here's my question to you.

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Speaker 1: Does it make any ends that you can invest in

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Speaker 1: a company that's still making money and is one of

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Speaker 1: the leaders in its field Ford Motor Company and you're

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Speaker 1: gonna get a five and a half percent dividend or

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Speaker 1: do you want to lend your money to the US

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Speaker 1: government for thirty years? Uh? And get. Well, you're you're

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Speaker 1: picking two very different um securities to examine him, right,

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Speaker 1: I mean, you've got I'm wondering if you could use

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Speaker 1: it as an example for how we've gotten here, Like

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Speaker 1: how how is this possible? Well, let's look at the

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Speaker 1: U S. Treasury yield, because I think that is more

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Speaker 1: telling in its own way than the Ford example you

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Speaker 1: gave right now. You know when you look at the

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Speaker 1: SMB five hundred also, and that's up about seven percent

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Speaker 1: or so a year to date. And then you've got

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Speaker 1: the ten uere treasury, which really has stopped tracking the

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Speaker 1: anticipated growth that we all thought was going to happen

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Speaker 1: post Trump's announcement of his victory. So I think what's

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Speaker 1: happening is we're starting to look more carefully at the

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Speaker 1: prospect for growth in treasuries, are reflecting that doubt that's

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Speaker 1: gradually creeping into our market and forcing us to take

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Speaker 1: a second look at the promises of the Trump policies

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Speaker 1: and whether or not they will actually come to fruition. Peter,

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Speaker 1: is this one of the most boring markets you've ever

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Speaker 1: dealt with? Always by far boring, I mean we've got

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Speaker 1: if you look at the vix I guess you could

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Speaker 1: say that that might be an indication of boredom, but uh,

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Speaker 1: in contrary to that, I think that this is one

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Speaker 1: of the most unprecedented markets in terms of what's happening.

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Speaker 1: If you want to talk on a global perspective, all

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Speaker 1: the uncertainty that we're living through right now, and on

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Speaker 1: a domestic perspective, so many unanswered questions, totally without a doubt,

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Speaker 1: so many unanswered questions and unanswerable questions. Uh. You know,

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Speaker 1: we hear a lot about a lack of conviction. We

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Speaker 1: heard that Goldman saxes. Uh. David Solomon came out yesterday

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Speaker 1: on Bloomberg Television was saying the reason why trading volumes

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Speaker 1: and revenues were down so much at Coleman Sects relative

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Speaker 1: to the expectations in the first quarter was simply just

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Speaker 1: because of a lack of conviction. Do you feel like

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Speaker 1: you have conviction? And if so, what is your boldest bet? Okay,

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Speaker 1: So here's the way we're thinking of this. Um, if

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Speaker 1: you just use what I would call a building block

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Speaker 1: approach to US equities, uh, and you assume earnings growth

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Speaker 1: is going to be seven percent this year, which is

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Speaker 1: fairly typical and then you add on another two percent

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Speaker 1: for the dividend. That's nine percent growth for the year

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Speaker 1: or nine percent total return. And as you know, so

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Speaker 1: we're a third through the year, so we should actually

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Speaker 1: be tracking about only three percent up, but instead the

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Speaker 1: SMP is tracking north of seven percent. So you've got

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Speaker 1: what I would call this four percent UH premium, and

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Speaker 1: what is baked into that premium a lot of hope

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Speaker 1: that the Trump policies, in our opinion, will be UH materialized.

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Speaker 1: And if that doesn't, I think that's a big concern,

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Speaker 1: and you could be seeing a sell off of anywhere

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Speaker 1: from say four to seven percent this year based on

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Speaker 1: how these things play out. Peter Anderson, Um, what kind

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Speaker 1: of yield would you have to be offered if the

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Speaker 1: Treasury Secretary Stephen Manuchin was selling hundred year bonds? Well,

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Speaker 1: you know the other thing, when people are starting it's

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Speaker 1: a little bit um challenging to present that to the

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Speaker 1: general public pain because you've been involves the daunted bond math, right,

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Speaker 1: and people tend to think that, well, a hundred year bond,

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Speaker 1: you know, its duration or its interest sensitivity is that,

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Speaker 1: you know, uh, four times as great as a twenty

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Speaker 1: five year bond and UH for those that have done

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Speaker 1: the calculation, it doesn't turn out to be that way.

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Speaker 1: So people would expect probably a much higher yield just

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Speaker 1: subjectively than the math will probably prove out to be.

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Speaker 1: So at the current rates, you would have to have.

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Speaker 1: Let me, just in practical terms, I think for people

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Speaker 1: to be interested, for the retail or non professional investor

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Speaker 1: to be interested, the yield that they have in mind

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Speaker 1: would probably be not anywhere near what the yield the

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Speaker 1: market yield would present, which I would think is below

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Speaker 1: easily below five at this point if they were to

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Speaker 1: issue it. Right now, let's talk about credit corporate credit.

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Speaker 1: We've heard from scottman Or from Guggenheim Partners yesterday at

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Speaker 1: the Milk and conference, and he was saying that he's

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Speaker 1: recommending his clients steer away from you as credit markets,

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Speaker 1: particularly the riskier segments. What's your view. I have a

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Speaker 1: long history and love hate relationship with hil bonds, and

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Speaker 1: I am currently very supportive of them. I think, just

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Speaker 1: in the same vein as you would think of a

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Speaker 1: small cap US equity, they tend to be ring fence

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Speaker 1: in terms of their revenues. They're more dependent upon their

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Speaker 1: domestic economy, which we haven't talked at all about how

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Speaker 1: positive we are on the domestic stick economy. We think

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Speaker 1: that that's very consistently strong, and so if you're a

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Speaker 1: high yield borrower, you probably will be looking very good,

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Speaker 1: unless you're an international high yield borrower, which lends more

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Speaker 1: complexities to the calculation. But US domestic small cap companies

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Speaker 1: that tend to be high yield issuers would look very

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Speaker 1: positive to us. So you're also positive on those same

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Speaker 1: equities small small cap domestic companies, depending upon how their

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Speaker 1: revenue segments are. Yes, because they tend to be smaller,

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Speaker 1: they tend to be what I would call unitary focus

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Speaker 1: on one or two product lines, simpler to analyze, would

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Speaker 1: be somewhat insulated from the whole Brexit conundrum that we're

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Speaker 1: we are looking at for the next two years. Much

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Speaker 1: simpler strips away those unanswered questions and are much easier

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Speaker 1: to analyze from a fundamental mathemata spreadsheet perspective. What about

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Speaker 1: emerging market steps? You know, uh, emerging markets, there is

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Speaker 1: a place and everybody's portfolio for it. But let's not

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Speaker 1: go overboard. I mean we are going overboard, they really

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Speaker 1: are and I think it's because of a relationship between

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Speaker 1: you look at US and what's going on here, and

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Speaker 1: you look at the developed markets, and for some reason,

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Speaker 1: people are using a logic saying, well, there aren't as

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Speaker 1: many unanswered questions in emerging markets right now, so therefore

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Speaker 1: they look less risky. But as we know, that is

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Speaker 1: not the right logic to use. I mean, emerging markets

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Speaker 1: are the most risky uh. Second to say, frontier markets.

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Speaker 1: So while you want to have exposure, we're advocating UH

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Speaker 1: anywhere from save three to five percent in a portfolio,

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Speaker 1: not double that, which is what I've been reading recently.

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Speaker 1: Well and has that changed to the three to five No,

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Speaker 1: we tend to stay fairly constant with these UH with

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Speaker 1: these asset locations, because we think moving or trimming or

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Speaker 1: rebalancing more frequently than a year as a fool's errand

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Speaker 1: because you need at least a years of data, and

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Speaker 1: right now there is as you mentioned, you know, is

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Speaker 1: this the most boring market. No, I would say it's

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Speaker 1: the most unstable market in terms of information. And until

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Speaker 1: we get new clarity, fact based clarity, especially in the US,

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Speaker 1: we just have to wait and see how these things

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Speaker 1: are going to develop fact based clarity. We all are

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Speaker 1: praying for that. Peter Anderson, chief investment officer and vice

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Speaker 1: president at Fiduciary Trust in Boston, but he's in New York.

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Speaker 1: We're in Boston. Makes sense of that. We can't at least.

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Speaker 1: Abramy was here with Pim Fox and we're broadcasting live

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Speaker 1: from red Hat Summit. We're broadcasting from the Red Hat

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Speaker 1: Summit and the Boston I'm Pim Fox Long Lisa brahm Witz.

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Speaker 1: And you know, we understand what the word infrastructure means

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Speaker 1: when we talk about bridges or roads or even airports.

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Speaker 1: But technology infrastructure that exists withincorporations has also various lifespans

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Speaker 1: and various histories. And here to understand help us understand

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Speaker 1: how to knit these things together in a more efficient way,

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Speaker 1: is Joe Fitzgerald. He is the vice president Management Business

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Speaker 1: Unit for Red Hat. Joe, thanks for for being here, um,

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Speaker 1: and thanks for having us. Is that a reasonable? Uh?

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Speaker 1: Analogy that I a picture that I painted? Yes, I

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Speaker 1: mean the world started off simple. Things were physical, you

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Speaker 1: could touch them, you know, they sort of stayed where

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Speaker 1: you left them, and then over time they become virtual

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Speaker 1: right where you know, you can have many more virtual

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Speaker 1: machines running on physical servers than there really are there.

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Speaker 1: And then the world evolved sort of into different cloud

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Speaker 1: architectures which are even more abstracted and virtual. So it's

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Speaker 1: getting very complicated. Well, Joe, you have a vision for

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Speaker 1: automated enterprise and this UH is sort of represented in

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Speaker 1: the answable technology by red Hat and I am. We

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Speaker 1: were just talking offline about the idea that, for example,

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Speaker 1: there are all these small automated parts of everyday items

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Speaker 1: that we use and it's up to us to update

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Speaker 1: our system or prevent you know, security threats and press

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Speaker 1: okay and know what depress and what not to press.

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Speaker 1: But this is basically a way to do that for

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Speaker 1: you and have some kind of UH intermediary to like

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Speaker 1: remove anything that a human actually has to do. Yeah,

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Speaker 1: So we have this vision of an automated enterprise, and

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Speaker 1: the irony is at enterprises have dozens of automation tools.

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Speaker 1: And if you think about automation and other areas, like

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Speaker 1: your car, you have automation for cruise control or for

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Speaker 1: you know, different things that help the driver. Well, what

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Speaker 1: we need to get to is the point where the

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Speaker 1: thing can talk across these different silos of automation and

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Speaker 1: be able to automate much higher level functions in a car.

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Speaker 1: We've we've hit that with the cell driving car, which

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Speaker 1: takes all these inputs, for example, and and coordinates them

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Speaker 1: in a very sophisticated way. Enterprises don't have that yet.

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Speaker 1: So what has been the main blockade? Why hasn't this

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Speaker 1: already been created? What's been the obstacle? So it's a

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Speaker 1: couple of things. First of all, it's complexity. A lot

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Speaker 1: of the automation tools are really programming languages or scripting languages,

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Speaker 1: which means that you have to find really smart people

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Speaker 1: who are effectively developers to go write automation. And I

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Speaker 1: think one of the things we see an answerable finally

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Speaker 1: there's a human readable automation language which sort of democratize

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Speaker 1: his automation. More people can do it, they can understand it,

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Speaker 1: they can participate, So it really changes the whole dynamic.

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Speaker 1: Can you give us an example of an industry that

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Speaker 1: you see in the future that doesn't use this approach

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Speaker 1: but will and will adopt it. Well, So it's interesting.

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Speaker 1: So you know, we acquired Ansball about a year and

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Speaker 1: a half ago, and so you know, red hats Global company.

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Speaker 1: So I've traveled the world talking to customers UM in

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Speaker 1: many countries and in many different industries. The answerable sort

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Speaker 1: of technology uptake is viral. It's across almost every industry now,

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Speaker 1: from government agencies to financial services, healthcare, manufacturing. It's stunning

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Speaker 1: how many industries have self selected that technology. And then

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Speaker 1: the use cases range from traditional I've got to rule

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Speaker 1: out some physical servers to I've got to put my

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Speaker 1: Alexa application out so that I can you know, deploy

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Speaker 1: my new services for financial services. So if I said

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Speaker 1: within the airlines, how would answer will be used? What

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Speaker 1: would they be bringing together? So what they would be

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Speaker 1: using answall for is things like devloped practices where they

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Speaker 1: can move their applications much faster from development to production

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Speaker 1: to get them online, to be able to deploy new

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Speaker 1: environments so their developers can be instantly productive. UM to

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Speaker 1: track and manage the process of getting effectively new business

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Speaker 1: services out. There is there a risk when we start

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Speaker 1: automating the automation, when we start creating, you know, systems

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Speaker 1: to sort of oversee the systems. I mean this is

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Speaker 1: like the tech version of c d O squared. I mean,

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Speaker 1: at what point if there's a if there's some kind

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Speaker 1: one of these areas will have become a catastrophe. Yeah,

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Speaker 1: automation gone wrong can can do some very you know,

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Speaker 1: damaging things. But I think back to my science fiction roots. Yes,

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Speaker 1: but one of the things I think that you know,

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Speaker 1: helps eliminate that is simplicity. If you've got very complex

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Speaker 1: programming that has you know, one line of programming that's

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Speaker 1: wrong right, or something that wasn't considered, then that the

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Speaker 1: automation can go crazy. When you have a simpler um

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Speaker 1: automation language where people can read it. Okay, well, so

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Speaker 1: so is this simple language something like, uh, please take

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Speaker 1: this system, put it with this system, make sure it's

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Speaker 1: updated and safe. Thanks, I mean with yeah, yeah, So effectively,

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Speaker 1: you can put a recipe or or um a simple

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Speaker 1: way of defining a system, and if you run that

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Speaker 1: same recipe or that same you know, automation a thousand times,

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Speaker 1: you're gonna get exactly the same result a thousand times.

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Speaker 1: So it makes it very predictable and reliable to be

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Speaker 1: able to generate those things. So if you're depointing new

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Speaker 1: systems in the cloud or you're deploying a new you

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Speaker 1: know again, bank or airline application or healthcare application. That

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Speaker 1: thing is going to be the same every time. It's

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Speaker 1: gonna be reliable, so you don't get those errors that

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Speaker 1: people make or complexity you know causes. No. It's an

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Speaker 1: interesting topic because it really does pull together the legacy systems,

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Speaker 1: the older systems that many companies still use. Can you

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Speaker 1: in your travels, what was the oldest system you came into.

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Speaker 1: Did you ever go to go to a company and think, wow,

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Speaker 1: I can't believe they're even running this. There are people

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Speaker 1: using automation tools that are fifteen plus years old, okay,

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Speaker 1: that you know deploy some of their their systems. They're

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Speaker 1: afraid to touch it, right, And the companies that originally

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Speaker 1: sold it to them have been acquired three times right,

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Speaker 1: and you know, the original people aren't there um, but

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Speaker 1: they don't want to change it because it's so fragile.

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Speaker 1: So one of the challenges here is really getting to

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Speaker 1: this newer age of automation. Any company that us an automate,

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Speaker 1: it's not gonna be able to keep up with all

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Speaker 1: the digital transformation that they have to do. It's just

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Speaker 1: not going to be possible. I unfortunately can relate having

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Speaker 1: a really old thing being like, just don't touch it

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Speaker 1: and it'll be okay. Joe Fitzgerald, thank you so much

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Speaker 1: for joining us. Joe FitzGeralds as vice president of the

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Speaker 1: Management Business Unit at red Hat, and we are here

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Speaker 1: red Hat Summit in Boston talking about all things cloud

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Speaker 1: and open source and the future of our world. Frankly,

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Speaker 1: we want to take a moment to let you know

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Speaker 1: We're broadcasting from the seventeen red Hat Summit in Boston,

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Speaker 1: and UH I want to cast our attention now to

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Speaker 1: Puerto Rico. UH, the Commonwealth of Puerto Rico is now

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Speaker 1: going to face a series of bondholder lawsuits. In addition,

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Speaker 1: Puerto Rico is also experiencing an outflow of people as

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Speaker 1: well as a real missed opportunity when it comes to

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Speaker 1: a refinancing its debt. Here to tell us More's Michelle

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Speaker 1: Caski of Bloomberg News. Michelle, thanks for being with us,

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Speaker 1: give us an update on what has happened and maybe

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Speaker 1: put it into the context of what it's like to

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Speaker 1: be in Puerto Rico now well in in in response

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Speaker 1: to your question what it's like to be in Puerto Rico,

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Speaker 1: there's a lot of protests going on UM regarding some

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Speaker 1: of the changes of spending cuts that the governors is proposing.

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Speaker 1: But what has happened with their lawsuits recently is a

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Speaker 1: legal stay expired Monday night and last night, and that

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Speaker 1: had safeguarded Puerto Rico from creditor lawsuits. That has lifted,

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Speaker 1: so now UM investors are free to UM to sue

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Speaker 1: the commonwealth. And what has happened is we have a

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Speaker 1: suit from both UM and Back Financial Group, which ensures

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Speaker 1: UM some of Puerto Rico's debt, and also a group

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Speaker 1: of hedge funds holding senior sales tax bombs. Well, Michelle,

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Speaker 1: and this is just the opening salvo I mean, right,

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Speaker 1: I mean the deadline for when puert Rico is somewhat

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Speaker 1: immune from litigation expired at midnight. These lawsuits come today,

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Speaker 1: we can only begin to imagine that this is really

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Speaker 1: just the tip of the iceberg. Now, I would think

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Speaker 1: that there would be more suits coming. And also remember

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Speaker 1: there there are already existing lawsuits that had have been filed,

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Speaker 1: and so again with the STA being lifted, those lawsuits

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Speaker 1: can move forward. Maybe we might see some rulings in

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Speaker 1: the next few weeks or so on those suits and

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Speaker 1: um and of course UM one way that can one

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Speaker 1: thing that Puerto rican can do to stop this is

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Speaker 1: the Federal Control Board could pursue Title three, which is

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Speaker 1: this provision in the Federal Promisa law, UM, that rescue

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Speaker 1: law for Puerto Rico, that that that allows Puerto Rico

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Speaker 1: to use a bankruptcy like process to force creditors to

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Speaker 1: to take losses. Well, so why wouldn't they invoke Title three?

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Speaker 1: Why would they allow these lawsuits to continue in a

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Speaker 1: variety of jurisdictions, right, I mean, this won't necessarily be

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Speaker 1: a controlled kind of uh process of litigation without Title three. Correct,

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Speaker 1: well it yes, and no, I mean why why they're

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Speaker 1: not filing Title three so far is because, I mean

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Speaker 1: it's a very serious step. There's no going back. It's

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Speaker 1: the equivalent of filing bankruptcy. And and so Puerto Rico

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Speaker 1: really wants to UM consider that heavily before they do it. UM.

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Speaker 1: It would also turn over more control, a bit more

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Speaker 1: control over to the Federal Oversight Board. UM. So of

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Speaker 1: course politicians on island UM would prefer that UM that

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Speaker 1: they don't pursue Title three, although they may not, it

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Speaker 1: may have to be the path that they need to

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Speaker 1: go down to resolve this UM. But also in terms

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Speaker 1: of you know, one one thing that helps out with

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Speaker 1: these lawsuits is there's one judge, federal judge on the island.

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Speaker 1: His last name is Judge Bestosa, and he had so

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Speaker 1: far as been overseeing many of these cases. So in

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Speaker 1: some ways that helps corral all these different suits. Michelle,

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Speaker 1: I understand that the recent demonstrations and strikes UH took

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Speaker 1: place in front of what's the Sea Borne Airlines World

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Speaker 1: Plaza building. This is where the Fiscal Control Board is

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Speaker 1: located us UH. There are also the Golden Mile area

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Speaker 1: how bad does the violence have to get or the

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Speaker 1: protests have to get before this becomes a real political

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Speaker 1: issue as much as it is an economic and financial

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Speaker 1: issue right now. Sure it's such a political issue. I

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Speaker 1: mean it's UM this this has happened before on Puerto Rico. UM,

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Speaker 1: the the residents really do take to the streets when

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Speaker 1: UM the politicians announced that they're going to cut back

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Speaker 1: on spending and cut back on programs that help people.

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Speaker 1: And we see it on the campuses down there as well. UM,

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Speaker 1: some of the campuses get shut down and UM, but

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Speaker 1: it has turned more violent and the governor has UM

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Speaker 1: spoken out about this and and has urged people UM

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Speaker 1: to protest responsibly. You know, what are some deadlines that

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Speaker 1: we really should be focusing on because this has obviously

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Speaker 1: been ongoing for a long time. The pressure is getting

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Speaker 1: matched it up with this stay being lifted. We know

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Speaker 1: that Puerto Rico did try to offer a deal to

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Speaker 1: bondholders and bondholders rejected it. Both parties seem to think

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Speaker 1: that they're going to fare better in court. What deadlines

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Speaker 1: coming up could force Puerto Rico's hand and force them

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Speaker 1: to UH invoke Title three M. I would think UM

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Speaker 1: as we see over the next few weeks, if we

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Speaker 1: see UM a lot more lawsuits come in, a lot

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Speaker 1: more lawsuits filed, that might really push the Federal Control

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Speaker 1: Board's hand. Also, if there's any adverse rulings UM where

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Speaker 1: Puerto Rico is unable to UM skip bond payments or

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Speaker 1: is unable to shuffle around money in different revenue streams,

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Speaker 1: than that might force the Control Board to have to

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Speaker 1: pursue Title three. Yeah, and it's also become a political

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Speaker 1: issue here in the US. We know that that was

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Speaker 1: one of the issues with getting a budget crafted in

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Speaker 1: Congress in the US, where people were some Republicans were

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Speaker 1: saying that Democrats wanted to put in a Medicaid allocation

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Speaker 1: for Puerto Rico, which ended up did getting included in

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Speaker 1: the bill. Uh and and uh Republicans, some Republicans, including

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Speaker 1: President Trump, didn't want that. So I'm sure this will

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Speaker 1: be in the news going forward. And there is seventy

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Speaker 1: billion dollars of debt at stake. A lot of it

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Speaker 1: is held on the island, but a lot of it

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Speaker 1: is also held not only by Hedgeman's but also by

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Speaker 1: mutual funds in the US that HOLDMUNI bond. So there

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Speaker 1: is a great deal of import on a much broader

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Speaker 1: scale than just this Commonwealth, but in and of itself,

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Speaker 1: is is becoming human humanitarian issue as well. Thanks for

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Speaker 1: listening to the Bloomberg p m L podcast. You can

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Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or

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Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on

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Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa Abramo

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Speaker 1: wits one. Before the podcast, you can always catch us

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Speaker 1: worldwide on Bloomberg Radio k