Speaker 1: This is Bloomberg Business Week Inside from the reporters and
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Speaker 1: global business, finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebec from Bloomberg Radio.
Speaker 1: You know the story SPB Silicon Valley Bank collapsing into
Speaker 1: FDIC receivership earlier today, We were just talking about it
Speaker 1: with our TV colleagues. We also had an earlier in
Speaker 1: the week a crypto connected bank also coming undone, So
Speaker 1: let's get to it. We're talking about Silvergate earlier in
Speaker 1: the bank earlier in the week with US. Right now
Speaker 1: is Anton Schutz, who's president and chief investment officer at
Speaker 1: mendon Kapital Advisors. He joins us via zoom in Florida,
Speaker 1: who I should remind everybody is investing largely in that
Speaker 1: regional bank sector also with US as Herman Chan, he's
Speaker 1: senior ALICE for US regional banks with our Bloomberg Intelligence team.
Speaker 1: He is here in our Bloomberg Interactive Broker's studios. Listening
Speaker 1: to him this morning, I'm like, we gotta have them on.
Speaker 1: We gotta have them on. So glad to have both
Speaker 1: of you here, So Herman, let's start with you, though,
Speaker 1: what is of note right now in terms of where
Speaker 1: we are and what we know about Silicon Valley and
Speaker 1: potentially impact on the rest of the banking sector or
Speaker 1: not impact on the rest of the banking sector. Sure,
Speaker 1: So when I think about what happened with SBB, it
Speaker 1: really is a classic bank run wrapped inside a technology
Speaker 1: bubble that we have seen start to pop with rates
Speaker 1: where they are today. So it's a very unique bank
Speaker 1: that catered specifically to a client demographic startup in Silicon
Speaker 1: Valley and across the US and internationally, and their venture
Speaker 1: capital partners, and with what's going on with the startups
Speaker 1: today with burning cash and not raising additional funds via
Speaker 1: vcs or i pos, you've seen that those deposits really outflow,
Speaker 1: and that's really was the chief concern with SBB, followed
Speaker 1: by the fact that SBB invested a lot of securities
Speaker 1: during the prior zero rate environment and with rates worthy
Speaker 1: are today, those securities were underwater, so they were sitting
Speaker 1: on on a lot of paper losses, which was a
Speaker 1: big red flag for the investment community. So it's just
Speaker 1: a matter of time before they started to happen as
Speaker 1: long as we stayed in this rate environment. As long
Speaker 1: as we stayed in this rate environment. And frankly, the
Speaker 1: management surprised the street with the equity offering and also
Speaker 1: the sale of their investment, the available for sale investment
Speaker 1: securities portfolio. That surprised the streets and it brought on
Speaker 1: board a lot of questions of the viability of the
Speaker 1: big Can you walk us through actually the last couple
Speaker 1: of days and really how this is transpired and just
Speaker 1: spiraled out of control. Yeah, it's really kind of crazy
Speaker 1: how it all happened. It really is the fact that
Speaker 1: they came out with this news about selling their securities
Speaker 1: and issuing equity. The market was surprised. You have the
Speaker 1: fact that silver Gate closed down the same day, and
Speaker 1: the market was very taken aback by the issue. You
Speaker 1: saw the stock trading down sixty percent yesterday, and it
Speaker 1: brought on board questions of the viability of the bank,
Speaker 1: with VC folks telling their their startup companies to pull
Speaker 1: money out of the bank. So it was a classic
Speaker 1: bank run that just happened in the blink of an eye. Yeah,
Speaker 1: everybody started getting nervous and just wanted to run for
Speaker 1: the Hills. All right, let's bring in the investor and
Speaker 1: the investors side of this story. Anton's so good to
Speaker 1: have you back with us. How do you see what's
Speaker 1: happening and how we got here? Well, first of all,
Speaker 1: I'm really angry because there's a law in the books
Speaker 1: in this country about creating a bank run. So you know,
Speaker 1: all the social media out there, all the big institutions
Speaker 1: that publicly went out and told everybody pull your money
Speaker 1: out of there, because at the end of the day,
Speaker 1: it was a liquidity situation. It was a bank run, right,
Speaker 1: It was poorly run bond portfolio, was a botched offering,
Speaker 1: and they should have wall crossed everybody. But creating a
Speaker 1: bank run really getting on you know, social media and
Speaker 1: telling everybody get out of the bank, I mean, that
Speaker 1: is actually illegal. So unless they want to change the law,
Speaker 1: they should think about potentially going after people to create
Speaker 1: a run. You know, this is a liquidity situation. There
Speaker 1: was a badly run portfolio of bonds, right, they took
Speaker 1: a lot of risk. That's you know, that's where the
Speaker 1: risk is, right, It's not credit silver gate, same thing, right,
Speaker 1: they had a run on the bank. They had a
Speaker 1: securities portfolios too long in duration, they couldn't liquidated. And
Speaker 1: by the way, at the end of the day, the
Speaker 1: FED was going to break something raising rates. And they've
Speaker 1: broken a couple of banks here. And the banks are
Speaker 1: culpable too because they didn't run their balance sheet well.
Speaker 1: But creating runs on banks is still legal in this
Speaker 1: country and is wrong. And by the way, from a
Speaker 1: contagion perspective, this bank was really unique. I mean the
Speaker 1: risks they took where their portfolio was unique. The deposits
Speaker 1: they had. We're really relying on venture capital, right, really big, big,
Speaker 1: chunky deposits, so a very small part of the deposits
Speaker 1: are under that two hundred and fifty thousand amounts. So
Speaker 1: when when people started to take money out, it became
Speaker 1: so serious that the regulars had to step in. And
Speaker 1: it's really sad because if they had, you know, wall
Speaker 1: crossed a bunch of big institutions raised the money, come
Speaker 1: out and said, hey, we're really strong, we have lots
Speaker 1: of lots of capital, rather than you know, publicly go
Speaker 1: out and oh, yeah we're gonna a capitalizing. We have
Speaker 1: bad news for you. Right, they could have wall crossed
Speaker 1: a bunch of big institutions Anton. But because of this news,
Speaker 1: what are you doing in your own fun and looking
Speaker 1: at some of the fun the names that you do, right,
Speaker 1: you're into the regional banks. What are you doing to
Speaker 1: kind of check out the exposure that might be similar,
Speaker 1: maybe on a different scale to SVB. Yeah, there is
Speaker 1: There is nothing like SVB. There's a couple of other
Speaker 1: banks out there that that that do a fair bit
Speaker 1: of venture lending. We don't have exposure to them. I'm
Speaker 1: actually not going to name them because I don't want
Speaker 1: to be part of creating a run on these companies.
Speaker 1: But nobody has that type of exposure right to that
Speaker 1: extent um. You know. I do expect that some of
Speaker 1: those other companies may seek partners, They may get smart
Speaker 1: about it, or raise capital over the weekend and do
Speaker 1: exactly what I said, which is to a wall cross
Speaker 1: and go okay, let's shore up the balance sheet in
Speaker 1: case the money does want to run out or is nervous.
Speaker 1: But but this is a This is not regional banks, right,
Speaker 1: These are These are institutions that are very focused on
Speaker 1: this niche and there's not many of them. You know.
Speaker 1: My my core investment are are companies that are based
Speaker 1: in smaller geographies that have great core deposits that lend money.
Speaker 1: You know that that really have very sticky deposits, and
Speaker 1: that's important. It's not chunky either, right. You know, First
Speaker 1: Republic came out today and made a statement, I don't
Speaker 1: own First Republic, so it would be very clear. But
Speaker 1: you know, they talked about the granularity of their depositors
Speaker 1: and it's very granular. Yes, they have some venture but
Speaker 1: again very very small percentage relative you know to what
Speaker 1: Silicon Valley did. So again, I think this is localized.
Speaker 1: There are very small banks in this country that have
Speaker 1: huge deposits that you know, went out in bought bond portfolios.
Speaker 1: Those will eventually become owned by by slightly bigger banks. Herman,
Speaker 1: come on in and feel free to ask Anton a question.
Speaker 1: Do you agree that it's localized? Yeah, s MEB is
Speaker 1: a very unique animal where their entire business model was
Speaker 1: focused on the startup and venture capital community. There's no
Speaker 1: other bank that that's public today that really does that
Speaker 1: of SBB size. SBB was the top twenty bank in
Speaker 1: the US, even though most folks listening today probably never
Speaker 1: heard of a BIT a week ago, but it was
Speaker 1: a it's a very big deal, and it's a unique
Speaker 1: bank that all of the venture capital and start community trusted.
Speaker 1: Until yesterday, I have to say that I didn't know
Speaker 1: who this bank was and then did a milk in
Speaker 1: event a year ago that was all about kind of
Speaker 1: innovation and disruption. I believe it was in wellness and
Speaker 1: they because of their investments that they make and you know,
Speaker 1: talked with the head of the company. So it was
Speaker 1: certainly and I've been doing this a long time too,
Speaker 1: it was not on my radar. Yeah, I mean, what
Speaker 1: exactly lies ahead now in the midst of all of this,
Speaker 1: because this is a big, kind of dramatic week just
Speaker 1: in general in the market's heading into next week with
Speaker 1: that critical CPI reading. So how does this really lead
Speaker 1: for the banking sector moving forward when you're looking more
Speaker 1: toward these regional banks. Yeah, So the focus is on
Speaker 1: deposits and how stable deposits will be for the banking industry.
Speaker 1: And second, it's going to be focused on how much
Speaker 1: losses that the banks have in their securities port follow
Speaker 1: Those were the two crux critical issues for SBB that
Speaker 1: didn't pass muster, and I agree with Anton saying that
Speaker 1: some of these banks that are feelings a bit of
Speaker 1: this contagion risk maybe need to bite the bullet and
Speaker 1: raise some capital over the weekend with some big name
Speaker 1: investors to really assuage some of the fears that's in
Speaker 1: the marketplace today. So Anton are you. I'm looking at
Speaker 1: your first bank shares that's a top holding by you.
Speaker 1: It's down four percent. Do you buy on some of
Speaker 1: these dives that we're seeing in some of the names. Well, I,
Speaker 1: you know, as a mutual fund manager, I can't tell
Speaker 1: you exactly what I'm gonna do, but I will tell
Speaker 1: you that that I'm very confident in these companies. I'm
Speaker 1: confident in their business models, their deposits, their lending structure,
Speaker 1: and their capital. Right. I think that you also had
Speaker 1: a really big anomaly. Right, you had a very violent
Speaker 1: move up in rates over the last week, and by
Speaker 1: the way, violent moved down in rates today. So could
Speaker 1: Silicon Valley have been saved where they even tried to
Speaker 1: raise capital had they been at today's rates versus yesterday's Right,
Speaker 1: it's a really big mark on the portfolio, given given
Speaker 1: how many securities they had, so a really really big change.
Speaker 1: You know, I think the Fed, you know, is getting
Speaker 1: a signal here, right, they've broken something, and you know,
Speaker 1: perhaps they should stop shrinking their balance sheet and allow
Speaker 1: liquidity be out there, and perhaps they ought to wait
Speaker 1: and see. We all have to remember we're coming off
Speaker 1: a lot of money slashing around for a long time,
Speaker 1: and even more so post pandem A Kermanja fifteen seconds.
Speaker 1: What would make you a little bit more nervous? What
Speaker 1: has to happen quickly? Yeah, What really makes me nervous
Speaker 1: is if we see more deposited outflow as system in
Speaker 1: general or general. So that's something that we're going to
Speaker 1: have to keep an eye on. Bank runs. Who would
Speaker 1: have thought? Thank you both, Anton Schutz, President and Chief
Speaker 1: Investment Officer, Men and Kapital Advisors via zoom from Florida.
Speaker 1: Herman Chan. He's our senior Alice for US regional banks
Speaker 1: at Bloomberg Intelligence. Joining us here at her Bloomberg Interactive
Speaker 1: Broker's studio. You're listening to the Bloomberg Business Week podcast.
Speaker 1: Catch us live weekdays from two to five pm Easter
Speaker 1: on Bloomberg Radio, The Bloomberg Business a Band You two.
Speaker 1: You can also listen live to our flagship New York station,
Speaker 1: Just say Alexa play Bloomberg elve and Dirty. All right, folks,
Speaker 1: you know you have a big headline today. US pay
Speaker 1: rolls up in February by more than expected, while a
Speaker 1: broad measure of monthly wheat growth slowed, offering a mixed
Speaker 1: picture as the Fed consider whether to step up the
Speaker 1: pace of interest rate hike. So many questions. All right,
Speaker 1: with what she is seeing, Let's bring in Amy Hunter Glazer,
Speaker 1: senior vice president at the Global Staffing, an HR services
Speaker 1: company at Deco. She's with us via zoom in Florida.
Speaker 1: And then here for our jobs round table, Bloomberg News
Speaker 1: Economics editor Molly Smith. She's here in our Bloomberg Interactive
Speaker 1: Broker studio. All right, So Molly lay it out for us.
Speaker 1: It was a mixed batch of data right from the
Speaker 1: government totally, which is why I hesitate to take a
Speaker 1: side here. So I'm going to lay out the good
Speaker 1: and the bad. So on the good side, we have
Speaker 1: this headline number of payrolls growing by more than three
Speaker 1: hundred thousand last month. That's succeeding almost every estimate in
Speaker 1: the Bloomberg survey and continuing this streak that economists have
Speaker 1: now gotten it wrong for eleven straight months. To the downside,
Speaker 1: so we are still growing far more than what most
Speaker 1: forecasters would expect. You may have seen the unemployment rate
Speaker 1: rosebook actually for a quote good reason. It's because more
Speaker 1: people actually came into the workforce, so the participation rate rows,
Speaker 1: and also the share of those people who are employed
Speaker 1: also ros so it's not just that they are looking
Speaker 1: for work, they actually have jobs. So those are all
Speaker 1: good things. Another thing where there maybe needs to be
Speaker 1: a little caveat is that we're hearing that a measure
Speaker 1: of wage growth slowed, which it did for average hourly
Speaker 1: earnings for all employees. But if we look at a
Speaker 1: smaller subset that is just looking at what's called non
Speaker 1: supervisory workers, as in the majority of us who are
Speaker 1: not in management positions, right, those wages actually rose a lot.
Speaker 1: So that let's just lay it leave it there for
Speaker 1: this is the start of the mixed picture. Amy, I
Speaker 1: wanted to bring you in the conversation and chat about
Speaker 1: what you're seeing when it comes to US staffing demand
Speaker 1: and those data points right now. Yeah, so, frankly, it
Speaker 1: wasn't a surprise. On the ground. We're still seeing almost
Speaker 1: two openings for every single employee out there seeking employment.
Speaker 1: So the market's still hot. Jobs are still out there,
Speaker 1: Employers are still fighting for top talent. Well, it's interesting
Speaker 1: you heard, you know, Molly lay it all out, so
Speaker 1: you it sounds like tight labor market still. But I
Speaker 1: am also curious about as we dig a little bit deeper,
Speaker 1: what about the wages that are being offered our companies
Speaker 1: able to dial that back a little bit and not
Speaker 1: have to compete so much when it comes to wages.
Speaker 1: I still think we're seeing the most success and employers
Speaker 1: who are paying up in that seventy fifth percentile range,
Speaker 1: especially as it relates to the kind of that non
Speaker 1: desk workforce. What we are seeing a little bit of
Speaker 1: a slow What does that mean is that like the hospitality, leisure, yea,
Speaker 1: our warehouse transportation those folks, what we are seeing is
Speaker 1: a slowdown on workers that are transitioning from one job
Speaker 1: to another getting those great wage gains that they have
Speaker 1: seen for the past twelve months. So signing bonuses starting
Speaker 1: to stall, just a little bit, retention bonuses we're kind
Speaker 1: of going by the wayside. So we're seeing some of
Speaker 1: those other financial incentives really shift, But that base wage
Speaker 1: hourly rate, we're still seeing the candidates are taking advantage
Speaker 1: up Molly. I was curious about what kind of impact
Speaker 1: this report will have on FED policy because we didn't
Speaker 1: see a big revision downward for those January numbers. And
Speaker 1: still even though we saw a bit of cooling, I mean,
Speaker 1: this wasn't seem like I'm still pretty strong, solid report, right, Yeah.
Speaker 1: And I'm laughing here because I wish I could give
Speaker 1: you the answer, and I think that's what we all
Speaker 1: want to know, and you know, I don't want to
Speaker 1: see a Carol's thunder here. But she had alluded to
Speaker 1: a survey that she did on Twitter and what this
Speaker 1: means we're in the FED? Oh yeah, it is? It
Speaker 1: being twenty five fifty year depends on CPI, I said,
Speaker 1: Fed's next move twenty fifty Most people said fifty bases
Speaker 1: points really over sixty twenty three percent to twenty five
Speaker 1: bases points and then I set up to CPI fifteen percent. Okay, well,
Speaker 1: I'm gonna go with the last one to give myself
Speaker 1: the most weagle room here. I think that's the most
Speaker 1: prety thing to do. And just given like what I
Speaker 1: was saying before all of these caveats that it's really
Speaker 1: just tough to take this at the face value because
Speaker 1: on the one hand, the Fed's going to see these
Speaker 1: two as you mentioned, Jess, back to back months of
Speaker 1: really strong job gains excuse me. But then on the
Speaker 1: other hand, they see moderating wage growth, which is great,
Speaker 1: but there's the subset of the population where they're still
Speaker 1: experiencing really strong wage gains, and it's in the service
Speaker 1: sector where the FEED is most concerned about wage pressures.
Speaker 1: All right, that's but Mike made the point too, and
Speaker 1: this speaks to something you know, I feel like Amy
Speaker 1: that you were talking about. Mike McKee earlier said that
Speaker 1: where the growth was was hospitality, right, I think food services,
Speaker 1: things like that, and that tends to be lower wages
Speaker 1: versus manufacturing, which saw some declines, which tend to be
Speaker 1: higher wages that actually, you know provides That's actually a
Speaker 1: good point, Kyle, because we did break out and some
Speaker 1: of like where this was a mixed bag the good
Speaker 1: and the bad. That what we look at, and what's
Speaker 1: called the diffusion index. It tracks like the breadth of
Speaker 1: jobs gains and how wides read the employment growth is
Speaker 1: across industries. It's actually pretty narrow right now. It fell
Speaker 1: the last month to the lowest level since the onset
Speaker 1: of the pandemic. So that shows you that the job
Speaker 1: grains were really just concentrated in a few industries like
Speaker 1: leisure as well as retail and healthcare. Amy, I was
Speaker 1: curious about what are you seeing when it comes to
Speaker 1: the type of benefits that talent is trying to seek
Speaker 1: in these new type of roles. When we are debating
Speaker 1: a lot about what the picture looks like when it
Speaker 1: comes to the FED and what that means for them,
Speaker 1: it's all about flexibility. So they're looking for employers that
Speaker 1: really allow them that opportunity to focus not only on
Speaker 1: their financial wellbeing, but their mental wellbeing and health wellbeing
Speaker 1: as well. So we're seeing flexible schedules, paid time off,
Speaker 1: any additional perks having to do with physical activity, yoga classes,
Speaker 1: things of that nature. So wage continues to be number one,
Speaker 1: but a solid number two behind that is how that
Speaker 1: financial peace gets balanced truly with your helped them well being.
Speaker 1: I mean that sounds like that's so it's challenging, right,
Speaker 1: That's still be challenging for them. It's dynamic. I want
Speaker 1: to bring up one more question for you as well.
Speaker 1: If that's Okay, there was one thing that we saw
Speaker 1: that the average work week was shorter in February and
Speaker 1: not a ton But normally this is what we can
Speaker 1: see is a potentially worrisome sign because employers tend to
Speaker 1: cut hours before they cut staff when demand wayne. So
Speaker 1: I just want to know in your work if that's
Speaker 1: seeing you're seeing any of the impacts of that come up.
Speaker 1: We're really not seeing that much of an impact as
Speaker 1: it relates to hours worked. Maybe a slight reduction in overtime,
Speaker 1: but I actually attribute that to we've seen some relief
Speaker 1: in a couple of different areas on supply chain issues,
Speaker 1: so I think it's more of a rebalance where we've
Speaker 1: just had for the past this heightened sense of we've
Speaker 1: got to get product out the door, and we've had
Speaker 1: a lot of overtime that we're just balancing back to
Speaker 1: a new normal. Hey, I do wonder Amy, I didn't
Speaker 1: tell me if this is right. Guys, FED swaps were
Speaker 1: price in a FED cut now again later this year,
Speaker 1: all right, so they are still Amy, so are the
Speaker 1: companies that you're working with or hearing from anybody though
Speaker 1: talking about the potential for a recession that could be
Speaker 1: problematic or slowdown next year. Yeah, what I'm hearing from
Speaker 1: most employers is they're cautiously optimistic that, you know, this
Speaker 1: may be a tiny slowdown, but that it will rebound
Speaker 1: very quickly. So I really am seeing a lot of
Speaker 1: companies hold on to their labor and an effort to
Speaker 1: avoid even if there's, you know, a little bit of disruption.
Speaker 1: They don't want to be faced with a talent shortage
Speaker 1: in the future. So I think lessons learn from the
Speaker 1: pandemic or at play again today is they're kind of
Speaker 1: stockpiling their workforce on the back end, all right, so
Speaker 1: we need to look forward. CPI, that's our next stop. Molly,
Speaker 1: let me get your thoughts first. Yeah, CPI the next
Speaker 1: big one. Next week. We also have PPI, which is
Speaker 1: Producer price Index of wholesale inflation as well as retail sales.
Speaker 1: So yeah, these are really the next big data points,
Speaker 1: the last ones that the FED will have before they're
Speaker 1: meeting the following week. I think, taken together, all of
Speaker 1: this probably and of course, in the context of SBB,
Speaker 1: really can't ignore that at this point is probably still
Speaker 1: tilting in favor of the twenty five basis point hike.
Speaker 1: As opposed to fifty. So it almost in a way
Speaker 1: seems like what Pal was talking about earlier this week,
Speaker 1: opening the door to fifty is somewhat okay, it's very
Speaker 1: much old news at this point. I mean, I don't know.
Speaker 1: To me, that just seems like that would just really
Speaker 1: cause more problems than do good. Amy saved to fifteen
Speaker 1: twenty seconds. Any thoughts in terms of wage inflation and
Speaker 1: what we might get. I think we'll wait and see.
Speaker 1: I think we'll continue to see just some modest growth
Speaker 1: over the next couple of months, but I don't anticipate
Speaker 1: any huge surprises. All right, Gonna leave it on that note.
Speaker 1: Our thanks to both of you. Amy Glazer, Senior VP
Speaker 1: of a Deca via Zoom out there in Florida, and
Speaker 1: Molly Smith right here in our Bloomberg Interactive broke her studio.
Speaker 1: She's economics editor at Bloomberg News. I also asked the
Speaker 1: Twitter world, what would you lead with today? I said, cooling,
Speaker 1: wage inflation, bank contagion or other. Overwhelmingly, they said bank
Speaker 1: contaction at seventy seven almost seventy eight percent. This is
Speaker 1: Bloomberg Business Week inside from the reporters and editors who
Speaker 1: bring you America's most trusted business magazine, plus global business
Speaker 1: finance and tech news. The Bloomberg Business Week Podcast with
Speaker 1: Carol Messer and Tim Stenebec from Bloomberg Radio. Want talk
Speaker 1: a little about the crypto space if we made because bitcoin,
Speaker 1: I believe it's had its worst week since November due
Speaker 1: to the equity sell off, fear of a higher rates,
Speaker 1: and really an escalating US regulatory crackdown on crypto combining
Speaker 1: to hurt investors sentiment again. So we kind of continue
Speaker 1: to see this planet out. I'm just playing up Bitcoin
Speaker 1: for the week. It looks like it was down I
Speaker 1: think about four and a half percent here, right, Carol,
Speaker 1: really getting under pressure, and especially when you're looking at
Speaker 1: just more broadly with this overall selloff in the equity
Speaker 1: market and really as far as I mean cryptocurrencies, especially
Speaker 1: in recent months, I mean, it's been really hard, and
Speaker 1: so when you're seeing those segments of the market, especially
Speaker 1: those banks that have that exposure towards crypto, especially getting
Speaker 1: hit this week. Carol, all right, so let's talk a
Speaker 1: little bit in our weekly crypto segment. Back with us
Speaker 1: is Mike Belshi. He's co founder and CEO Bicco, which,
Speaker 1: as the company notes on its website, is a digital
Speaker 1: asset security, custody and liquidity company provides the operational backbone
Speaker 1: for more than fifteen hundred institutional clients in over fifty
Speaker 1: countries on institutions storing digital assets securely. He joins us
Speaker 1: via zoom from Washington, DC. Especially appropriate since we want
Speaker 1: to talk a bit about regulatory Mike, good to have
Speaker 1: you back. Welcome again. Simply put, remind our world, our
Speaker 1: audience about your role, your company's role in the crypto world. Sure,
Speaker 1: Sobiko has been focused on custody most recently, which is
Speaker 1: a regulated custody. So we're regulated both in New York
Speaker 1: under the New York DFS as well as in South Dakota. Abroad,
Speaker 1: we're regulated under BOFEN in Germany, in Switzerland and also
Speaker 1: coming soon in a couple of other countries. So we've
Speaker 1: taken a highly regulated approach. We're trying to build market
Speaker 1: structure so we can build safe access to digital assets.
Speaker 1: Something I was curious about is, from your advantage point,
Speaker 1: how is the recent volatility impacting the digital asset world
Speaker 1: right now? Well, look, we're in a macro recession. You know.
Speaker 1: Sometimes we hear a lot of focus, like just a
Speaker 1: few moments ago, about how the crypto industry is hit
Speaker 1: so hard, you know, in the last month, and it's
Speaker 1: true it has been, but you know, it's a high
Speaker 1: vall asset inside of a broader market which has also
Speaker 1: been hit incredibly hard in the last six to twelve months.
Speaker 1: You know, we're all experiencing it doesn't matter whether you're
Speaker 1: crypto or otherwise, pretty tough time as we try to
Speaker 1: recover from the ups of downs of first having had
Speaker 1: massive money prints a couple of years ago, and then
Speaker 1: now having massive inflation I'm sorry fed rates increase, and
Speaker 1: then also facing inflation fears. So in terms of what
Speaker 1: you got, what you've been seeing specifically, whether through operations,
Speaker 1: conversations with clients, or what they're telling you, I mean,
Speaker 1: are you seeing investors more hesitant when it comes to crypto?
Speaker 1: Give us a little bit more color if you will.
Speaker 1: You know, actually we don't see a lot of that.
Speaker 1: People are always wondering what's happening with the market, that's true,
Speaker 1: But there's a couple of different types of people that
Speaker 1: are invested into bitcoin digital assets. There's those that are
Speaker 1: investing because they're speculative about potentially making a quick buck
Speaker 1: and those those that are here and Bicco and myself
Speaker 1: personally are in this group. We're here because we actually
Speaker 1: do believe that we are building a better financial system. Look,
Speaker 1: technology has not had the opportunity to really change the
Speaker 1: financial structure that we have, the market structure that we have.
Speaker 1: There's a lot of middlemen, there's a lot of participants,
Speaker 1: there's a lot of folks on Wall Street getting very
Speaker 1: wealthy on the existing system. We have an opportunity to
Speaker 1: change that make it more transparent and less risk. Now.
Speaker 1: I know it doesn't seem like that given the volatility
Speaker 1: that you see on a daily basis in crypto, but
Speaker 1: there are some shining lights that are coming through and
Speaker 1: that's what we're here fighting for. It's not a two
Speaker 1: month effort, it's a multi year effort. It's a multi
Speaker 1: decade effort, and that's where you're fighting for. In general,
Speaker 1: we see a lot of investors they're excited about that promise.
Speaker 1: When you're talking about that transparency, what specifically is that,
Speaker 1: how do you make it more transparent? Well, look, everything's
Speaker 1: on a blockchain, and that means every transaction through the
Speaker 1: dawn of time is recorded in a public way where
Speaker 1: you can always go back and see it. So we've
Speaker 1: already had the largest financial crimes ever found and investigated
Speaker 1: have been off of the blockchain, where what happens is
Speaker 1: some malfeasance happened in the past, and it may take
Speaker 1: a month, it may take a year, but you can
Speaker 1: watch what's happening, and as soon as a bad guy
Speaker 1: perpetrates tries to exploit his past ill gotten gains, you
Speaker 1: can see it and you can catch them. And that's transparency.
Speaker 1: On the balance sheet side, you can see exactly what
Speaker 1: assets people have. We have a product called grap Bitcoin
Speaker 1: and you can go to a website and you can
Speaker 1: see in real time, twenty four hours a day, seven
Speaker 1: days a week, exactly what the finances of that that
Speaker 1: that particular product are. So you don't have to wait
Speaker 1: until the quarter and get ninety day out of date audits.
Speaker 1: We can give it to you every day in real time.
Speaker 1: That's transparency. So how do we make the crypto world work?
Speaker 1: Which I feel like and I hate I just said
Speaker 1: to Jess, I hate that we kind of say crypto
Speaker 1: world because there's a lot in there and I feel
Speaker 1: like it's not apples to apples. You know, we throw
Speaker 1: blockchain in there, and that's related obviously, but it just
Speaker 1: doesn't all kind of mesh always in terms of comparison.
Speaker 1: But I do wonder, you know, Mike, the whole idea
Speaker 1: of digital currencies was to be kind of away from
Speaker 1: the traditional infrastructure, with kind of less fingers in the pot.
Speaker 1: How does the regulatory environment come in there and kind
Speaker 1: of keep it pure the way it was meant to be. Well, look,
Speaker 1: we do need some amount of market structure, checks and balances,
Speaker 1: elimination of single points of failure. A lot of the
Speaker 1: basic principles of security overlap with like how do you
Speaker 1: have sound money? So the idea that you give your
Speaker 1: assets or your cash to a single party and he
Speaker 1: manages it entirely without any oversight is a bad idea.
Speaker 1: Bernie made Off made it very claric. He said publicly,
Speaker 1: if his clients had required him to use a third party,
Speaker 1: independent custodian, he could not have perpetrated his crime. So
Speaker 1: we know some of the basics of how to solve this.
Speaker 1: I recognize that in recent months there's been a number
Speaker 1: of failures, and in general it's not because bitcoin is
Speaker 1: off and inherently rogue. Right, it's because bitcoin has not
Speaker 1: been included in the financial system. And you know, we
Speaker 1: could talk about silver Get Bank, where the entire burden
Speaker 1: of a trillion dollar asset classes banking was basically laid
Speaker 1: to rest on the shoulders of silver Gate Bank. Now,
Speaker 1: what we should have had instead of a single bank
Speaker 1: with eighty five percent exposure to crypto and a major
Speaker 1: concentration risk, we should have had a hundred banks with
Speaker 1: two percent exposure to crypto, and this bank run never
Speaker 1: could have happened. So what we need quickly is for
Speaker 1: the US regulators to get comfortable with crypto, to start
Speaker 1: welcoming it instead of shunning it and pushing it away
Speaker 1: and making a robust market. That's what we need. And
Speaker 1: I'm glad you brought this up because we had this
Speaker 1: week with SVB, the biggest bank failure since two thousand
Speaker 1: and eight. When you're looking at what's happening in Silicon Value.
Speaker 1: But to back up and think about what we've been
Speaker 1: chatting in recent months FTX and that collapse leading into this.
Speaker 1: So what do you think was the big takeaway of
Speaker 1: what we should have learned from ftx's collapse as far
Speaker 1: as how this moves forward. Were you ever asked to
Speaker 1: be a custodian for them? So we were not a
Speaker 1: custodian for FTX prior to their bankruptcy. We actually are
Speaker 1: the custodian under the new management. So John Ray has
Speaker 1: taken over as CEO at FTX. The first thing that
Speaker 1: he did was he installed a custodian to take care
Speaker 1: of the assets. Prior to that, the assets were held
Speaker 1: by the internal people working at you know, FTX, and
Speaker 1: of course it allowed them to perpetrate crimes that we
Speaker 1: only learn about about later. Look, the thing to learn
Speaker 1: about FTX is simple, and again we should point out,
Speaker 1: as we've been doing on Bloombergers, they're still figuring it
Speaker 1: all out in terms of what actually happened and what
Speaker 1: criminal charges are accurate. So we just want to put
Speaker 1: that out. Go ahead, Mike. Look, the basic thing we
Speaker 1: need is we need checks and balance and marketstructure. You know,
Speaker 1: FTX had two roles. It owned a company called Alameda Research,
Speaker 1: which was a prop trading firm. Some people call it
Speaker 1: a hedge fund. At the end of the day, that's
Speaker 1: proprietary money, it's investor money, it's high networth people like
Speaker 1: they can do what they want. They can take crazy risks.
Speaker 1: They want to lose all their money, no problem. The
Speaker 1: second part of FTX, of course, was the exchange. The
Speaker 1: exchange is part of market infrastructure. So when it comes
Speaker 1: to market infrastru were you're talking about the CFTC and derivatives,
Speaker 1: or whether you're talking about the equities world, you will
Speaker 1: see a series of companies exchanges, broker dealers, clearing houses,
Speaker 1: transfer agents, custodians and banks, and these come together to
Speaker 1: provide checks and balances and robustness which prevent the types
Speaker 1: of failures that we had at FTX right. Unfortunately, without
Speaker 1: those in place, Sam bankman Fried took the money out
Speaker 1: of the exchange, which was supposed to be known quantified risks,
Speaker 1: you know, infrastructure, and he took it and he put
Speaker 1: in his prop trading firm. Again, they're just figuring out
Speaker 1: all the details. But I hear you. I hear you,
Speaker 1: Mic We've run out of time, but I know we'll
Speaker 1: continue this conversation again in the future. Good to check
Speaker 1: in with you again. Mike Balci, He's chief executive officer Bitco.
Speaker 1: He's also co founder. I should point out a Bitco
Speaker 1: joining SVA zoom from Washington, DC. You're listening to the
Speaker 1: Bloomberg Business Week podcast. Catch us live weekdays from two
Speaker 1: to five pm Eastern on Bloomberg Radio. The Bloomberg Business
Speaker 1: a band you Doo. You can also listen Love. I'm
Speaker 1: to our flagship New York station. Just say Alexa, play
Speaker 1: Bloomberg e Love and Dirty Journal. Now about you. Let
Speaker 1: me drive? No, no, no, no, who's going home? Honey? Please?
Speaker 1: I'll do the riding gravels. I want to try. It's
Speaker 1: good question. Drive. This is the drive to the clothes.
Speaker 1: TIMU thank well, Brier up down on Bloomberg Radio to
Speaker 1: do a double two. All right, everybody, About seventeen minutes
Speaker 1: left in today's trading session. I think Jess was just
Speaker 1: saying double take, because there's some numbers that are being
Speaker 1: thrown at us when it comes to the markets that
Speaker 1: kind of get you like, wait what Carol Master alonger
Speaker 1: Jess met and you know Tim is on leave and
Speaker 1: as we said, we're counting down to the closing bell here.
Speaker 1: We got a lot going on, so let's get to
Speaker 1: it with Christopher Zook. He's founder, chairman and chief investment
Speaker 1: officer at KAZ Investments, joining us on the phone from Houston, Christopher,
Speaker 1: good to have you here with us. We've had quite
Speaker 1: a market reset, I think it's safe to say, over
Speaker 1: the last couple of weeks. So we've had a bank failure.
Speaker 1: We've actually had two this week in terms of regional banks.
Speaker 1: We've got fed swaps fully pricing in a quarter point
Speaker 1: rate cut by year end that happened today. We've got
Speaker 1: lots of volume amid the volatility and downward swings that
Speaker 1: we're seeing on equity. So how do you describe the
Speaker 1: market environment right now and how confident do you feel
Speaker 1: about predicting where we are three months from now, six
Speaker 1: months from now? Well, thank you for having man. What
Speaker 1: I'll tell you is that anybody who was bored, they're
Speaker 1: now wide away. It has become a quite interesting market environment,
Speaker 1: and just in the last twenty four or forty eight hours,
Speaker 1: it is shifted quite a bit. More So, to answer
Speaker 1: your question specifically, you know, it is very difficult to
Speaker 1: focus out three to six months, just because there's so
Speaker 1: much noise. We have a saying as a firm, which
Speaker 1: is the careful not to look too much at the trees,
Speaker 1: but try to look at the forest above. Here's what
Speaker 1: the forest is right now, the Fed is in a box.
Speaker 1: They're going to have to raise rates more, They're going
Speaker 1: to have to do it probably longer, and so as
Speaker 1: a result, it's going to make it much more difficult
Speaker 1: for investors to just ignore that. And what I will
Speaker 1: say is that there's two types of recessions. There's episodic
Speaker 1: recessions caused by events like COVID, and there are manufactured
Speaker 1: recessions where the Federal Reserve simply says we got to
Speaker 1: put the country in a recession to tamp down inflation.
Speaker 1: We haven't seen that since nineteen eighty two, and most
Speaker 1: of the people picking stocks in nineteen eighty two or
Speaker 1: picking bonds in nineteen eighty two aren't in the business anymore.
Speaker 1: And so as a result, nobody knows the playbook really
Speaker 1: to use in this environment. And that's what's really going
Speaker 1: to set the tone is how most does the market
Speaker 1: begin to anticipate twenty four or do they really just
Speaker 1: truly not understand what twenty three is going to look
Speaker 1: like for the rest of the year. I know your
Speaker 1: firm provides private credit investors, and that's something that's really important.
Speaker 1: What are you seeing there? What is that telling us
Speaker 1: right now. You know, it's interesting because in the private
Speaker 1: credit world versus the public credit world, there's actually a
Speaker 1: fairly significant amount of stability compared to what might be
Speaker 1: expected at this time in the economic cycle. So we
Speaker 1: invest in a lot of different areas of private credit,
Speaker 1: and so you really do need to dig into the
Speaker 1: details of a specific segment or specific sector. But overall,
Speaker 1: we're not seeing distressed because more or less companies have
Speaker 1: had better balanced chiefs as they've gone into this procession,
Speaker 1: they've had better liquidity position. But and this is the
Speaker 1: big butt, is that we have a wall of maturities
Speaker 1: that is going to happen between twenty four and twenty six,
Speaker 1: and now interest rates are much higher, margins are getting compressed,
Speaker 1: and so we do think there's going to be some
Speaker 1: fantastic opportunities in the distressed debt landscape coming in over
Speaker 1: the next eighteen to twenty four months as that reset
Speaker 1: does occur. So we're building a war chest to take
Speaker 1: advantage of that. What are those opportunities specifically, Well, I mean,
Speaker 1: as you see spreads blow out. The interesting thing about
Speaker 1: this cycle, going back back to my point about different playbooks,
Speaker 1: you know, when you think about COVID spreads blew out
Speaker 1: immediately high old spreads went from whatever it was five
Speaker 1: hundred basis points to you know, fifteen hundred basis points
Speaker 1: just round numbers. And so what you saw is this
Speaker 1: immediate reaction of years of contagion and how this was
Speaker 1: going to drive you know, businesses out of business effectively,
Speaker 1: which of course it did in many cases. And in
Speaker 1: a manufactured recession it's much more gradual, and so you
Speaker 1: have a little bit more of depth by a thousand
Speaker 1: paper cuts as opposed to just a meat clearer being taken,
Speaker 1: you know, to use a not agreeing analogy there, but
Speaker 1: but a lot of paper cuts can add up to
Speaker 1: some serious pain. So I am wondering, you know, just
Speaker 1: to push a little bit further. I mean, in terms
Speaker 1: of where the distress credit opportunities might be. You know,
Speaker 1: what kind of are there certain industries that you think
Speaker 1: are particularly Absolutely we do, and we think that anything
Speaker 1: in the industrial or anything that doesn't have material pricing power.
Speaker 1: When you look at a stagflation environment, which is what
Speaker 1: we believe we're in and going to be in for
Speaker 1: a little while, it's those companies that have the ability
Speaker 1: to pass on price increases to their customers that are
Speaker 1: going to be able to be more resilient. So if
Speaker 1: you see spreads blowout in I'm going to just use
Speaker 1: industrials because they've already said it. If you see that
Speaker 1: blowouts where you're getting a thousand or twelve hundred basis
Speaker 1: points on top of a fat funds rate of five
Speaker 1: or five and a half or six, now you start
Speaker 1: talking about really, really good return. And that's before you
Speaker 1: apply any leverage whatsoever to your own investment strategy. So
Speaker 1: we see those kinds of opportunities playing out as well
Speaker 1: as in the venture capital lending space. You know, obviously
Speaker 1: forget the whole SFB SBB story today. Just before today,
Speaker 1: you had this enormous gap between what companies are willing
Speaker 1: to raise money for and what their needs for capital
Speaker 1: are going to be over the next eighteen to twenty
Speaker 1: four months. Well, if they don't want to do a
Speaker 1: big down round, then they're going to have to go
Speaker 1: out and get the money somewhere. And that provides an
Speaker 1: opportunity for lenders to fill that gap and get very
Speaker 1: high rates of return as well as usually warrants or
Speaker 1: some form of equity. We see that as a great
Speaker 1: opportunity over the next twenty four months. And you also
Speaker 1: were speaking about the margins, and obviously that's an important
Speaker 1: point there. Where are you seeing the companies that are
Speaker 1: still able to sustain that in those work Because obviously
Speaker 1: there's the ones you would think with fits more consumer
Speaker 1: focused and things like that. But to your margins point,
Speaker 1: where are you seeing sort of that pressure and then
Speaker 1: other corners that can withstand that at this point, so
Speaker 1: the pressure is everywhere. When we talk to companies all
Speaker 1: over the world, the one thing that they all say
Speaker 1: in common is that margins are under pressure because their
Speaker 1: cost of inputs and their labor costs are all rising,
Speaker 1: in many cases at a faster rate than that can
Speaker 1: pass those along to their consumer. So in pretty much
Speaker 1: every sector, with the exception of maybe chocolate or coffee
Speaker 1: or areas like that where they just don't really care
Speaker 1: if you raise the price by another nickel or another dime,
Speaker 1: in those particular areas you have left margin compression. But
Speaker 1: in every other area you have margin compression, which means
Speaker 1: that as you see that happen, the market is just
Speaker 1: completely been wishing. And there's the old saying, hope is
Speaker 1: not investment strategy. The market has been hoping that learnings
Speaker 1: are not wanted to decline as much as they typically
Speaker 1: do under recession. This is actually potentially worse because you
Speaker 1: have this big increase in cost inputs. Then you also
Speaker 1: overlay a slowdown in demand, which is inevitable when you
Speaker 1: have credit card rates at nineteen percent and you have
Speaker 1: subprime auto loans that are obviously at very high rate
Speaker 1: now because they're floating rate right right right, and people
Speaker 1: are handing back the keys. But you do wonder I
Speaker 1: think about the auto sector, corporate are you know, company
Speaker 1: and real estate, like there's just things percolating out there.
Speaker 1: Christopher Zuck, Yeah, it feels that way. Christophers Duck, thank
Speaker 1: you so much, Founder, chairman, and chief investment officer at
Speaker 1: KAS Investment. On the phone from Houston. This is the
Speaker 1: Bloomberg Business Week podcast, available on Apple, Spotify, and anywhere
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