WEBVTT - Broadcom-Qualcomm Would Create Cross-Sector Chips Powerhouse, Srinivasan Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P M L 0:00:20.840 --> 0:00:31.720 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Quaal 0:00:31.800 --> 0:00:35.559 calm Broadcom. Will they get together? How much will this 0:00:35.720 --> 0:00:39.200 deal cost? And will it benefit investors? Let's find out 0:00:39.240 --> 0:00:42.360 more from a Trina Aston. He is our senior semiconductor 0:00:42.360 --> 0:00:46.320 and hardware analyst for Bloomberg Intelligence. Also joining us is 0:00:46.360 --> 0:00:51.000 Brooks Sutherland, our mergers and acquisitions columnist for Bloomberg gad Fly. 0:00:51.159 --> 0:00:53.640 Thank you both for being here on Maybe you can 0:00:54.000 --> 0:00:57.520 start by just explaining why this might be a good 0:00:57.600 --> 0:01:02.120 deal for Broadcom. Look, I mean this creates a powerhouse, 0:01:02.320 --> 0:01:07.280 create an alto Intel, if you will. And Broadcom's um 0:01:07.600 --> 0:01:10.720 claim to the semiconductor industry comes from the fact that 0:01:10.760 --> 0:01:14.240 it is a phenomenal roller up of companies. It's done 0:01:14.280 --> 0:01:19.200 this pretty extensively since its existence, and in in doing 0:01:19.600 --> 0:01:24.640 Broadcom first acquiring Brocade first, Avago buying Broadcom then the 0:01:24.720 --> 0:01:29.360 renaming themselves to Broadcom, buying Brocade, and then potentially buying Qualcom, 0:01:29.360 --> 0:01:31.399 which is in and of itself. In the process of 0:01:31.400 --> 0:01:35.600 buying n XP will assemble a company that is very 0:01:35.680 --> 0:01:37.920 very strong in the data center and all your routers, 0:01:37.959 --> 0:01:41.560 which is all your networking gear. Number one. It will 0:01:41.600 --> 0:01:45.440 be incredibly powerful in your phone, both from a modem 0:01:45.480 --> 0:01:48.720 and processor perspective as well as the RF chip. And 0:01:48.840 --> 0:01:51.960 if they're able to swing an XP into that equation, 0:01:52.360 --> 0:01:57.120 they will own your auto two, so, so and and in. 0:01:57.320 --> 0:02:00.080 One of the things that comes as a byproduct of 0:02:00.240 --> 0:02:05.760 UH Qualcomm's management focus in this equation is that they 0:02:05.840 --> 0:02:09.840 are an incredible leverager of costs. UH there a s 0:02:09.880 --> 0:02:12.160 g n A is a percentage of sales is actually 0:02:12.240 --> 0:02:16.440 incredibly low in the semiconductor industry. UM, they'll have a 0:02:16.480 --> 0:02:19.960 tremendous amount of scale and reduced manufacturing costs. So from 0:02:20.040 --> 0:02:23.880 a whole host of angles, this makes a lot of sense. 0:02:23.960 --> 0:02:27.040 Now if you look at Qualcom, the target entity, it's 0:02:27.080 --> 0:02:30.280 got some drama going on with its intellectual property assets 0:02:30.400 --> 0:02:33.960 and it's embroiled with in litigation with with with Apple. 0:02:35.160 --> 0:02:39.240 Broad Broadcom is much much more friendly with Apple so 0:02:39.320 --> 0:02:46.679 potentially they come in, they readjust this relationship, reassess where 0:02:46.720 --> 0:02:50.800 royalty rates are, and UM start a new relationship going forward. 0:02:50.840 --> 0:02:53.800 I think that that is doable. UM. If they're not 0:02:54.200 --> 0:02:56.960 willing to do that, you can potentially corral the i 0:02:57.080 --> 0:03:01.480 P assets in a in a particular UH basket, potentially 0:03:01.520 --> 0:03:04.600 sell it off or potentially diminish its value, move all 0:03:04.639 --> 0:03:06.720 the IP over to the chip division. There's a whole 0:03:06.760 --> 0:03:09.600 host of things you can do here, UM, and I 0:03:09.639 --> 0:03:13.960 think it makes for a very very compelling semiconductor company. 0:03:14.000 --> 0:03:17.800 All right, Son, you seem to be pretty optimistic about 0:03:17.919 --> 0:03:20.960 this whole deal and sort of the rationale behind it. Brooke, 0:03:21.040 --> 0:03:24.320 come on in here, because you express some skepticism in 0:03:24.360 --> 0:03:27.720 a recent column saying that u Qualcom is not such 0:03:27.760 --> 0:03:31.120 an obvious target, and there are so many moving pieces 0:03:31.120 --> 0:03:33.320 here that all have to fit together perfectly. Given the 0:03:33.360 --> 0:03:36.000 fact that the n XP purchase hasn't been completed yet 0:03:36.440 --> 0:03:38.480 and because of all these mergers, can you just walk 0:03:38.560 --> 0:03:40.840 us through your your thinking here? Yeah? I think that 0:03:40.880 --> 0:03:42.920 would be You know, my biggest sort of pushback is 0:03:42.960 --> 0:03:45.360 that you are piling you know, I think at this 0:03:45.400 --> 0:03:48.320 point six big deals on top of each other if 0:03:48.320 --> 0:03:50.600 this goes ahead, if you include you know, the purchases 0:03:50.640 --> 0:03:53.560 and a n XP made before clock n XP, or 0:03:53.600 --> 0:03:57.240 the purchases that Brocade Maine. I mean, so I you know, 0:03:57.320 --> 0:03:59.800 to and on the point, I think that Broadcom CEO 0:04:00.040 --> 0:04:03.000 Hawk Tan is known as this good operator and this 0:04:03.120 --> 0:04:06.160 sort of skilled master of rolling up deals. But we're 0:04:06.160 --> 0:04:09.360 talking about multitudes of what he's done in the past. 0:04:09.440 --> 0:04:12.440 And any time you talk about a mega merger, there's 0:04:12.520 --> 0:04:15.839 integration risk there. If you start piling them on top 0:04:15.880 --> 0:04:18.400 of each other, it just makes everything more complicated. And 0:04:18.440 --> 0:04:22.279 it's not like these companies are just humming along perfectly 0:04:22.279 --> 0:04:24.080 at this point. You know, I think there are probably 0:04:24.120 --> 0:04:27.719 opportunities to reassess the Apple situation or to you know, 0:04:27.800 --> 0:04:30.880 sort of rethink the configuration of the businesses, but that 0:04:31.040 --> 0:04:33.159 is also going to be complicated, and it does sort 0:04:33.200 --> 0:04:36.479 of open up maybe the potential for increased competition from 0:04:36.480 --> 0:04:39.720 some of these companies rivals um and you know, I 0:04:39.760 --> 0:04:42.280 think sort of just raises the question of ultimately what 0:04:42.480 --> 0:04:44.560 this company is going to look like and how well 0:04:44.600 --> 0:04:46.400 it's going to be able to What about the debt, 0:04:46.480 --> 0:04:48.440 I mean, how is it going to pay for it? Well, 0:04:48.480 --> 0:04:50.080 that's The other thing is that you you know, the 0:04:50.160 --> 0:04:52.760 debt load after all of these deals. Their companies are 0:04:52.800 --> 0:04:56.080 sitting on a pretty hefty burden here. And I think 0:04:56.120 --> 0:04:58.599 you know that that is another factor here that you 0:04:58.640 --> 0:05:01.479 have to think about, is that what is the motivation 0:05:01.560 --> 0:05:03.679 for all of these deals. I mean, they're not doing 0:05:03.720 --> 0:05:06.000 it because they're growing really well on their own. They're 0:05:06.040 --> 0:05:08.599 doing that because this is the opportunity for them to 0:05:08.640 --> 0:05:11.280 get scale and to sort of build growth through M 0:05:11.320 --> 0:05:13.320 and A. And I think you know, anytime you sort 0:05:13.360 --> 0:05:16.799 of see that happening in the companies simultaneously piling on debt, 0:05:17.320 --> 0:05:19.080 I you know, I think that should give you pause. 0:05:19.880 --> 0:05:21.560 You know, I'm actually going to push back on that 0:05:21.640 --> 0:05:24.080 for a whole host of reasons. One is that if 0:05:24.080 --> 0:05:26.719 you look at the revenue profiles on on all of 0:05:26.720 --> 0:05:31.000 these companies, there's very little overlap. If you look at Broadcom, Brocade, 0:05:31.240 --> 0:05:36.719 n XP, Qualcom, the overlap the adjacencies are are between 0:05:36.720 --> 0:05:40.400 Broadcomm and Brocade are pretty significant. Between Broadcom and Qualcom 0:05:40.400 --> 0:05:43.840 are pretty significant. But there's no reason Qualcom is buying 0:05:43.960 --> 0:05:46.760 n xp s because it wants to diversify away from handsets. 0:05:46.760 --> 0:05:48.560 And how far do you have to get away. You 0:05:48.560 --> 0:05:51.520 can go go to autos. The other part of it is, 0:05:51.600 --> 0:05:54.280 for the last five years we've been writing about semiconductors 0:05:54.360 --> 0:05:56.599 being the new industrials and the fact that they are 0:05:56.760 --> 0:06:01.200 cash rich and debt poor. And you know, debt has 0:06:01.279 --> 0:06:05.080 never been a good word in the technology industry. And 0:06:05.360 --> 0:06:09.840 debt is cheap, right, and there is capital term set 0:06:09.880 --> 0:06:13.960 stake here, and an optimal mix of debt is is 0:06:14.080 --> 0:06:18.480 good UM investor friendly nights Brook, what do you think 0:06:19.400 --> 0:06:22.159 at a response? No, I mean, I think, you know, 0:06:22.839 --> 0:06:25.039 there's there's two sides of this coin, but I just think, 0:06:25.040 --> 0:06:27.080 you know, having seen a lot of these big deals, 0:06:27.120 --> 0:06:30.200 and you know, I understand that the semi conductor industry 0:06:30.200 --> 0:06:34.080 is sort of adapting to this new sort of financial profile, 0:06:34.200 --> 0:06:38.160 but you know that is debt and integration risk is 0:06:38.160 --> 0:06:39.880 is still there, and so I think we'll just sort 0:06:39.880 --> 0:06:42.280 of see how this plays out. But there certainly are 0:06:42.600 --> 0:06:45.920 risks here. It's definitely gonna be interesting to watch, especially 0:06:45.920 --> 0:06:49.719 because Upqualcom is saying that they're not going to accept it, 0:06:49.839 --> 0:06:51.839 so Broadcom is going to probably have to wage some 0:06:51.920 --> 0:06:53.760 kind of proxy war. So it should be interesting to 0:06:53.800 --> 0:06:56.400 see how this plays out. A non screen of US 0:06:56.440 --> 0:06:59.760 and senior semi conductor and hardware analyst for Bloomberg Intelligence. 0:06:59.800 --> 0:07:02.200 Our thanks to you and our thanks to you. Brook Sutherland, 0:07:02.279 --> 0:07:06.800 Mergers and Acquisitions columnist for Bloomberg Gadfly Bloomberg dot com 0:07:06.920 --> 0:07:09.080 slash goad Fly. You can find all the columns there. 0:07:09.080 --> 0:07:10.960 And you know both of you raise really good points. 0:07:10.960 --> 0:07:12.440 I mean, I think it's going to be interesting to 0:07:12.440 --> 0:07:28.920 watch the biggest tech deal on record. Shares of Michael 0:07:28.960 --> 0:07:32.120 Course Holdings they're up more than thirteen and a half percent. 0:07:32.200 --> 0:07:36.240 This comes after the company handily beats earnings estimates in 0:07:36.320 --> 0:07:40.440 the fiscal second quarter. Despite the drop in the same 0:07:40.480 --> 0:07:43.960 store sales, they posted better than expected results. The retailer 0:07:44.000 --> 0:07:47.120 preparing a yes for that all important holiday shopping season. 0:07:47.360 --> 0:07:49.400 And here to help us understand what's going on is 0:07:49.480 --> 0:07:51.720 the all important Craig Johnson. He is the president of 0:07:51.760 --> 0:07:54.720 Customer Growth Partners. They're based in New Canaan, Connecticut, and 0:07:54.800 --> 0:07:56.640 he joins us now. Craig, thank you very much for 0:07:56.680 --> 0:08:00.520 being with us. Tell us what do you see as 0:08:00.600 --> 0:08:04.560 the positive and negative aspects of what Michael Core's Holdings 0:08:04.640 --> 0:08:07.960 is doing right now? Uh? Well, first, good morning him. 0:08:08.120 --> 0:08:10.960 Great to be with you and Lisa. Um. Of course, 0:08:11.000 --> 0:08:13.160 of course we've been noticing, and you know, we have 0:08:13.480 --> 0:08:16.200 a team of eighteen people across the country's another person 0:08:16.280 --> 0:08:19.320 in London, so we're in the stores every week, and 0:08:19.360 --> 0:08:23.360 we've seen kind of a step by step recovery there. 0:08:24.160 --> 0:08:27.400 Um that you know, it's not quite in the positive territories, 0:08:27.400 --> 0:08:29.200 but it had been mid to high single digits and 0:08:29.200 --> 0:08:32.160 the guided to negative mid single digits. Now the only 0:08:32.200 --> 0:08:35.640 one point a percent negative. And um, we think there's 0:08:35.679 --> 0:08:39.600 a company that slowly, slowly returning to health after some 0:08:39.800 --> 0:08:43.760 very severe damage to the brand by via over distribution, 0:08:44.320 --> 0:08:46.880 over promotion and so forth, and by going back to 0:08:46.920 --> 0:08:51.520 the basics of its core DNA style and fashion skills. 0:08:51.679 --> 0:08:54.360 We think it's on the way back. So those are 0:08:54.360 --> 0:08:57.280 the major factors. Uh, there's you know a couple of 0:08:57.280 --> 0:08:59.920 the factors. You know that the watches there are strong 0:09:00.040 --> 0:09:01.720 and you know, watches have been in the ditch for 0:09:01.760 --> 0:09:03.880 a couple of years now. The watches are having a 0:09:03.960 --> 0:09:07.640 nice comeback this holiday and that's another factor as well. 0:09:08.200 --> 0:09:11.200 So Craig, can you sort of expand out based on 0:09:11.640 --> 0:09:15.360 the success that Michael course has had and turning itself around, 0:09:15.640 --> 0:09:18.280 can you extra polate out who you expect to do 0:09:18.400 --> 0:09:21.320 well this holiday season coming up and who you don't 0:09:21.640 --> 0:09:25.240 based on who has made an effort at changing with 0:09:25.280 --> 0:09:29.520 the times. Well, the I want to be carefully you 0:09:29.559 --> 0:09:33.280 don't want to extrapolate too much off of uh, you know, 0:09:33.520 --> 0:09:37.040 you know one company that has had let's just say, 0:09:37.040 --> 0:09:38.959 some ups and downs and you know, they've been pretty 0:09:39.040 --> 0:09:40.840 challenged for the last year or two. But again on 0:09:40.880 --> 0:09:44.599 the on the road to recovery, we say, right now, um, 0:09:44.640 --> 0:09:48.720 but if if you look across the spectrum some of 0:09:48.720 --> 0:09:50.800 the players are that have been challenged, you're going to 0:09:50.880 --> 0:09:54.120 continue to be challenged. Irrespect you of course performance and 0:09:54.120 --> 0:09:56.960 I particularly mean the department stress sector there and that 0:09:57.200 --> 0:10:01.240 with the potential exception of nor Them, which is really 0:10:01.320 --> 0:10:05.960 doing fairly well, the sector is very very challenged UM. 0:10:06.040 --> 0:10:10.840 And then you have other sectors such as apparel broadly UM, 0:10:10.840 --> 0:10:14.280 which is doing better than it was earlier in the year, 0:10:15.000 --> 0:10:17.240 but it's still only going to get to maybe two 0:10:17.240 --> 0:10:19.760 percent year of year growth this holiday as a sector. 0:10:20.760 --> 0:10:22.199 And so it's you know, it's a little bit of 0:10:22.240 --> 0:10:25.040 a mixed bag among facts about what we're seeing overall 0:10:25.679 --> 0:10:28.439 is is that if we've done these these we've done 0:10:28.440 --> 0:10:32.240 annual forecasts since the turn of the century, this century, um, 0:10:32.520 --> 0:10:35.040 and we're seeing the sales as being up four point 0:10:35.080 --> 0:10:37.000 three percent year of a year, and that's compared to 0:10:37.000 --> 0:10:40.600 a consensus about three point seven And we think the 0:10:40.679 --> 0:10:43.800 risk to our forecast there's overall retailed. The risk of 0:10:43.840 --> 0:10:46.800 the forecast is not on the downside. The risk is 0:10:46.840 --> 0:10:49.079 actually more likely to be the high side. You know, 0:10:49.120 --> 0:10:52.319 all the signals where our team has been seeing. We've 0:10:52.400 --> 0:10:55.480 issued our forecast last month, but everything we've seen since 0:10:55.520 --> 0:10:58.480 then confirms that this may actually be not just a 0:10:58.480 --> 0:11:01.880 four point three percent, but could even approached towards five percent, 0:11:01.920 --> 0:11:05.240 which will be the best growth in some years. Craig, 0:11:05.400 --> 0:11:07.800 not to to port too much cold water on the 0:11:08.800 --> 0:11:12.560 Michael Course story, but you know, the purchase of Jimmy 0:11:12.679 --> 0:11:15.160 Chew obviously going to add sales to the to the 0:11:15.440 --> 0:11:17.319 to the company. But when you look at the camp 0:11:17.400 --> 0:11:19.959 store sales, the numbers were not that great, right, I 0:11:20.000 --> 0:11:23.880 mean Camp store sales down about two uh A lot 0:11:23.920 --> 0:11:27.760 of this the income had to do with reduction in 0:11:27.760 --> 0:11:32.360 the tax rate, and um, you know, I'm just wondering 0:11:32.440 --> 0:11:36.960 if your flagship label in the same store sales category 0:11:37.240 --> 0:11:39.199 are gonna fall in the high single digits in the 0:11:39.280 --> 0:11:42.360 Christmas quarter and decline the description is by the mid 0:11:42.480 --> 0:11:45.040 single digits in the fiscal year as a whole. How 0:11:45.040 --> 0:11:47.760 does that point to a turnaround? I mean, and maybe 0:11:47.760 --> 0:11:50.640 you can twin that with the concept of tapestry, you know, 0:11:50.679 --> 0:11:53.360 the old coach they're reporting tomorrow, so that you go out, 0:11:53.400 --> 0:11:55.760 you buy Jimmy Chew. You say things are great, but 0:11:56.120 --> 0:12:01.000 if your flagship brand isn't working well, what you have 0:12:01.120 --> 0:12:04.280 to look at is is that here's a company that's 0:12:04.280 --> 0:12:06.720 been so deeply troubled for a good a good couple 0:12:06.720 --> 0:12:09.800 of years. Although the seeds of that difficulty go back 0:12:10.160 --> 0:12:12.800 four or five six years when this when the store 0:12:12.880 --> 0:12:18.080 began to um over expand over distribute um was in 0:12:19.440 --> 0:12:22.600 doors worldwide. It just it was too much. You don't 0:12:22.640 --> 0:12:25.400 need that, and you you do. You can destroy your 0:12:25.480 --> 0:12:30.559 brand that way, and to repair that brand damage when 0:12:30.600 --> 0:12:34.440 you're so over promoted and you're so overdistributed. That doesn't 0:12:34.440 --> 0:12:39.400 happen overnight. So we see the one camp that negative 0:12:39.440 --> 0:12:43.160 that they reported this quarter as being compared to guidance 0:12:43.200 --> 0:12:46.760 of negative mid single digits, and for the last several 0:12:46.800 --> 0:12:51.280 quarters they've been running high single digits, uh negative or 0:12:51.320 --> 0:12:55.280 even a little a little worse. And so one is improvement. 0:12:55.880 --> 0:12:59.640 Now whether how how steady that's going to be going 0:12:59.720 --> 0:13:01.840 full it is a little bit of a little bit 0:13:01.840 --> 0:13:04.200 of an open question. But the first thing they needed 0:13:04.240 --> 0:13:07.000 to do was take the hard medicine of cutting back 0:13:07.040 --> 0:13:10.200 on the promotions and cutting back on the distribution. And 0:13:10.240 --> 0:13:15.160 so the comp numbers may bounce around a little because 0:13:15.200 --> 0:13:18.920 you're comparing numbers versus last year when they were, you know, 0:13:19.040 --> 0:13:23.280 juicing up the the promotional hype. Right well, Craig, you know, 0:13:23.520 --> 0:13:26.520 I just want to get your sense about this upcoming 0:13:26.559 --> 0:13:28.679 holiday season. I mean, it's got to be a make 0:13:28.720 --> 0:13:31.439 it or break it period for a lot of retailers. 0:13:31.480 --> 0:13:36.000 If they cannot at least boost their revenues by hooking 0:13:36.040 --> 0:13:40.520 onto the increase in watches or luxury sales or technology, 0:13:40.679 --> 0:13:43.800 then are they dead? Because we're seeing consumers actually spend 0:13:43.880 --> 0:13:46.320 more and we're seeing the economy doing well. If they 0:13:46.320 --> 0:13:49.240 can't make it now, is this it? Well I'm not 0:13:49.400 --> 0:13:52.000 prepared to say this this is it, but people that 0:13:52.200 --> 0:13:56.000 don't react to way the consumers are behaving now, the 0:13:56.080 --> 0:13:59.839 way they're spinning choices are changing. Um, they are going 0:13:59.840 --> 0:14:03.920 to get crushed. But the smart players, um are are 0:14:03.960 --> 0:14:06.840 reacting like the watches are are are coming back. And 0:14:06.920 --> 0:14:09.040 so you have the you know the Apple series three. 0:14:09.080 --> 0:14:11.080 They they finally got it right, you know on the 0:14:11.160 --> 0:14:15.080 third try. Uh, that's that's that's that's better. You have 0:14:15.120 --> 0:14:19.320 an overall economy that's expanding. Um, you know, disposable income 0:14:19.400 --> 0:14:23.440 is up. There's a wealth effect coming at tourist and returning. 0:14:23.880 --> 0:14:27.200 And clearly, if if you're a retailer and you don't 0:14:27.240 --> 0:14:30.320 do well in this season, when overall reach out growth 0:14:30.400 --> 0:14:32.960 is going to be you know four three four eight, 0:14:33.040 --> 0:14:37.320 somewhere in that neighborhood, Uh, you have some real explaining 0:14:37.400 --> 0:14:41.040 to do. Hey, Craig, can you tell us who is 0:14:41.520 --> 0:14:44.560 on on your blacklist in terms of not going to 0:14:44.680 --> 0:14:46.880 do well the rest of the year and who's doing 0:14:46.960 --> 0:14:49.400 who's knocking the ball out of the park. Well, I 0:14:49.720 --> 0:14:52.520 think the folks that are going to be most challenged 0:14:52.560 --> 0:14:54.880 again are the department stares and you know, it's like 0:14:54.960 --> 0:14:58.000 round up the usual suspect. JCP just had their penny, 0:14:58.120 --> 0:15:01.000 just had their announcement the other day that had you 0:15:01.000 --> 0:15:04.000 know that basically did the inventory liquidation because they were 0:15:04.120 --> 0:15:07.960 way way over inventory. May She's is having challenges, Dillerdence 0:15:08.000 --> 0:15:10.760 is having challenges. Um and those are some of the 0:15:10.760 --> 0:15:13.600 ones that are having the most difficulties. Some of the apparel, 0:15:13.640 --> 0:15:17.600 the women's where players are are challenged. And the people 0:15:17.640 --> 0:15:19.200 that are going to do well. There are people that 0:15:19.280 --> 0:15:22.280 really sell value, and so you think value, you think 0:15:22.360 --> 0:15:25.200 at the very larger and you have companies like Costco 0:15:25.280 --> 0:15:28.280 and Walmart which you're doing great. Target is much improved, 0:15:28.600 --> 0:15:31.760 and then you have the off prices t J's, Burlington 0:15:32.040 --> 0:15:36.760 and Ross which are all very well positioned for holiday. 0:15:37.080 --> 0:15:39.920 Craig Johnson, thank you so much for joining us. Craig Johnson, 0:15:39.960 --> 0:15:57.360 president of Customer Growth Partners, which is based in New Canaan, Connecticut. Well. 0:15:57.440 --> 0:16:00.600 In the past few weeks, CME Group announced its plans 0:16:00.600 --> 0:16:05.200 to offer a bitcoin futures contract this year, and Aaron Brown, 0:16:05.320 --> 0:16:08.360 who is a columnist for Bloomberg Profits as well as 0:16:08.400 --> 0:16:11.440 former managing director and head of financial market Research at 0:16:11.440 --> 0:16:14.240 a q R Capital Management, wrote a really compelling column 0:16:14.480 --> 0:16:16.720 where he said that this is kind of a sort 0:16:16.720 --> 0:16:20.640 of tipping point for the cryptocurrency. He wrote, if regulators 0:16:20.640 --> 0:16:24.520 smile and clearing houses operate without problems, will find out 0:16:24.560 --> 0:16:28.440 what happens when cryptocurrency prices are exposed to real money. 0:16:28.480 --> 0:16:30.760 Aaron Brown joins us. Now, Aaron, thank you so much 0:16:30.760 --> 0:16:33.520 for joining us. The implication here is that bitcoin hasn't 0:16:33.560 --> 0:16:36.200 been exposed to real money yet. Can you explain your 0:16:36.240 --> 0:16:40.160 idea here and what you expect to happen? Sure, Lisa, 0:16:40.200 --> 0:16:44.160 thank you for having me. UM. The cryptocurrency total market 0:16:44.240 --> 0:16:47.680 capitalization if you look across all currents a cryptocurrencies have 0:16:47.800 --> 0:16:50.440 stated at something like a hundred billion or two hundred 0:16:50.440 --> 0:16:53.520 billion dollars, but that really only represents a couple of 0:16:53.560 --> 0:16:56.440 billion real dollars people have put into it, most of 0:16:56.480 --> 0:17:00.280 those bitcoins and most of those cryptocurrencies, and incidentally, coin 0:17:00.440 --> 0:17:02.400 is maybe two thirds of that total. It's it's a 0:17:02.440 --> 0:17:06.480 majority of it. UM either were people who got their 0:17:07.000 --> 0:17:11.720 allocations free through mining or something, or they about relatively 0:17:11.760 --> 0:17:16.280 low prices. So we don't really know if people are 0:17:16.280 --> 0:17:20.160 willing to pay two hundred billion dollars for all those cryptocurrencies, 0:17:20.240 --> 0:17:22.440 or perhaps they're willing to pay five hundred billion, or 0:17:22.480 --> 0:17:24.280 maybe they're only willing to pay ten billion. We don't 0:17:24.280 --> 0:17:28.080 really know, UM, and that's because the exchanges to this 0:17:28.200 --> 0:17:32.280 point have essentially shut out most institutional money, most big holdings. 0:17:32.320 --> 0:17:35.119 You had to be either a PhD in computer science 0:17:35.160 --> 0:17:37.920 or you had to be a very serious UH individual 0:17:38.960 --> 0:17:42.560 to put substantial amount of money to work in cryptocurrencies. 0:17:43.280 --> 0:17:46.240 It seems possible, although we're not sure yet that in 0:17:46.320 --> 0:17:48.320 two or three months that will no longer be true 0:17:48.359 --> 0:17:51.320 and anybody can put as much money to work as 0:17:51.359 --> 0:17:54.800 easily into cryptocurrencies as they can to stocks or bonds, 0:17:55.280 --> 0:17:58.040 and then we'll finally see what these things are really worth. 0:17:59.560 --> 0:18:03.359 You own bitcoin, right, yes, yes, I have investments in 0:18:03.359 --> 0:18:06.199 a number of cryptocurrencies. So what are you looking for 0:18:06.760 --> 0:18:12.520 To determine whether big institutions actually are interested in investing 0:18:12.520 --> 0:18:16.639 in bitcoin and putting their big money to work, well, 0:18:16.840 --> 0:18:20.280 they have to recognize it as an asset class basically, 0:18:20.320 --> 0:18:22.560 so this would mean that you know and and it 0:18:22.600 --> 0:18:25.200 would only be the more innovative pension funds, for example, 0:18:25.280 --> 0:18:27.280 might might consider doing this, but they might say we're 0:18:27.280 --> 0:18:29.280 going to put one percent or two percent of our 0:18:29.320 --> 0:18:34.760 assets UH into cryptocurrencies um. Also, of course, a bitcoin 0:18:34.960 --> 0:18:37.439 or or or any sort of cryptocurrency e t F 0:18:37.480 --> 0:18:41.639 would allow individual investors to get in very easily, and 0:18:41.680 --> 0:18:44.200 some people are predicting that, you know, tons of money 0:18:44.200 --> 0:18:47.439 will flow in and hundreds of billions of dollars in 0:18:47.480 --> 0:18:49.840 the price of cryptocurrencies will sore. But I think it's 0:18:49.840 --> 0:18:52.679 equally likely that we'll find out that while there is 0:18:52.680 --> 0:18:56.879 some institutional appetite and some individual investor appetite, most of 0:18:56.920 --> 0:18:59.520 it is just chasing high returns and people aren't really 0:18:59.520 --> 0:19:02.480 willing to put large amounts of money in, and and 0:19:02.600 --> 0:19:05.520 the price will fall. But whatever the new price is, 0:19:05.560 --> 0:19:07.240 it will be a real price. It will be something 0:19:07.280 --> 0:19:11.840 where you can really buy and sell large quantities. Aaron 0:19:12.240 --> 0:19:17.359 is the increasing level of skepticism by some investors going 0:19:17.400 --> 0:19:20.639 to assure the continued rise in the value of bitcoin. 0:19:21.240 --> 0:19:22.679 You know, it's like the more the more you come 0:19:22.760 --> 0:19:25.639 up with reasons for why it really makes no sense, 0:19:25.960 --> 0:19:29.280 the greater the value of it seems. Uh yeah, that 0:19:29.400 --> 0:19:32.399 that is true. Bitcoin and cryptocurrencies in general are what 0:19:32.440 --> 0:19:36.760 we call in the financial bis, badly anchored assets with 0:19:36.840 --> 0:19:41.600 badly anchored prices. There's really no strong fundamental reason why 0:19:41.600 --> 0:19:44.600 bitcoin should be ten dollars or a million dollars or 0:19:44.680 --> 0:19:48.880 seven thousand dollars whatever it is. Um just whenever everybody 0:19:48.880 --> 0:19:51.080 agrees that's what the price should be that's when it 0:19:51.119 --> 0:19:54.159 becomes valuable. That's how currencies work. Okay, all right, so 0:19:54.200 --> 0:19:56.359 happy dollars should be worth either, all right. So having 0:19:56.400 --> 0:19:59.320 said that, it seems that there's a philosophical thread for 0:19:59.480 --> 0:20:06.399 bitcoin which is get away from the fiat currencies of governments. Correct. Uh, 0:20:06.600 --> 0:20:09.239 that was certainly much of the motivation for inventing it. 0:20:09.280 --> 0:20:11.199 But I think we're moving very far away from that. 0:20:11.359 --> 0:20:13.879 If we have CNY futures trading on our cbo E 0:20:14.000 --> 0:20:17.520 futures trading on bitcoin, uh, then it's not far away 0:20:17.520 --> 0:20:20.639 from the currencies. Well, but I also have to wonder 0:20:20.840 --> 0:20:24.400 erin you know, there hasn't been a way for they 0:20:24.400 --> 0:20:29.080 sayers to short bitcoin, and that has sort of removed 0:20:29.160 --> 0:20:32.359 some of the healthy aspects of a functioning market. How 0:20:32.440 --> 0:20:35.960 much does that concern you. I don't think that's a 0:20:35.960 --> 0:20:38.360 big factor, because you'd have to be a very very 0:20:38.400 --> 0:20:42.000 brave short seller, uh to want a short bitcoin. So 0:20:42.040 --> 0:20:44.440 conceivably we'll see a bunch of people come in and 0:20:44.560 --> 0:20:47.520 and frankly, there is a way to short cryptocurrencies. You 0:20:47.560 --> 0:20:50.880 make your own cryptocurrency and sell it um. So really 0:20:50.920 --> 0:20:54.480 we've seen thousands of people do that UM and it 0:20:54.520 --> 0:20:57.760 hasn't you know, uh, drammatically pushed down the price. I 0:20:57.760 --> 0:20:59.360 don't think short selling is going to have a big 0:20:59.359 --> 0:21:01.760 effect on the price one way or the other. That's 0:21:01.760 --> 0:21:03.919 really fascinating, PIM. I had never thought about it. But 0:21:03.960 --> 0:21:06.960 if you sell your own cryptocurrency, you're basically raising money 0:21:07.240 --> 0:21:09.560 from people who are willing to give it to cryptocurrencies 0:21:09.880 --> 0:21:12.560 without having to actually give as much back to them. 0:21:12.640 --> 0:21:16.240 I suppose that's a big short Yes. Well, having said that, UM, 0:21:16.280 --> 0:21:19.000 I kind of think that creating your own script, I 0:21:19.080 --> 0:21:22.240 think the federal government might have a little comment or 0:21:22.280 --> 0:21:25.679 two about that. Thanks very much, Aaron Brown. He is 0:21:25.680 --> 0:21:28.000 the former managing director in the head of Financial market 0:21:28.040 --> 0:21:31.600 Research at a q R Capital Management, and he is 0:21:31.680 --> 0:21:47.600 also a Bloomberg Prophets contributor. The market has been waiting 0:21:47.800 --> 0:21:50.879 for a tax reform plan out of Washington, d C. 0:21:51.520 --> 0:21:55.080 We got it, and the response has been less than impressed. 0:21:55.080 --> 0:21:57.760 We could see that certainly in the bond market at least, 0:21:57.840 --> 0:22:02.480 yields going lower typically an indication that people are expecting 0:22:02.640 --> 0:22:05.280 slower growth ahead. To talk about this, I want to 0:22:05.280 --> 0:22:09.080 bring in Jim Vogel Interest Rate Strategistic FTN Financial coming 0:22:09.080 --> 0:22:12.080 to us from Memphis, Tennessee. Jim, thank you so much 0:22:12.119 --> 0:22:15.199 for joining us. I'm looking at the yield curve today 0:22:15.280 --> 0:22:17.320 in the U S. I'm looking at the gap between 0:22:17.359 --> 0:22:20.320 ten ure and two year treasury yields. It is now 0:22:20.480 --> 0:22:24.639 at the narrowest since the end of two thousand and seven, 0:22:24.720 --> 0:22:27.280 in the week of the announcement of this tax reform bill. 0:22:27.560 --> 0:22:31.159 What does this tell you? I think the market had 0:22:31.160 --> 0:22:35.399 always been anticipating that the personal taxes would be cut 0:22:35.480 --> 0:22:38.240 more than developed in the plan that we're eventually that 0:22:38.280 --> 0:22:42.000 we're looking at this week. And without those personal tax cuts, 0:22:42.040 --> 0:22:44.359 there's not going to be that sort of sugar rush 0:22:44.560 --> 0:22:48.720 next year as people um spend their share of the 0:22:48.800 --> 0:22:52.680 accumulative one point five trillion dollars and cuts. Jim, can 0:22:52.680 --> 0:22:54.919