WEBVTT - Bloomberg Businessweek Weekend - February 15th, 2020 0:00:02.560 --> 0:00:06.360 This is Bloomberg Business Week from Bloomberg Radio. Hi, I'm 0:00:06.440 --> 0:00:09.800 Jason Kelly. Welcome to the weekend edition of Bloomberg Business Week. 0:00:09.880 --> 0:00:12.640 My co host Carol Master is off this week. Over 0:00:12.680 --> 0:00:14.680 the next couple of hours, we're going to bring you 0:00:14.760 --> 0:00:17.400 news of the week, insights from the magazine, and a 0:00:17.440 --> 0:00:20.319 lot more. Well. The big story this week continues to 0:00:20.440 --> 0:00:23.360 be the coronavirus. Later on in the show, we'll hear 0:00:23.400 --> 0:00:25.840 about the impact of virus is having on Chinese factories 0:00:26.200 --> 0:00:30.160 and about a Norwegian based coalition working on a vaccine. 0:00:30.560 --> 0:00:34.000 Also in the show, an in depth, provocative conversation with 0:00:34.080 --> 0:00:37.839 the former chairman of Lehman Brothers, Michael Ainsley. He was 0:00:38.000 --> 0:00:41.400 in the room where it happened, as they say, that 0:00:41.560 --> 0:00:45.479 fateful decision to declare bankruptcy. And this hour we'll take 0:00:45.520 --> 0:00:48.199 a look at why Vanguard Group is moving into private 0:00:48.200 --> 0:00:50.960 equity along with it seems like the rest of the 0:00:51.000 --> 0:00:54.920 world plus subdued inflation, has some investors worried about global 0:00:54.960 --> 0:00:58.640 central bank policy, whether there are any arrows left in 0:00:58.680 --> 0:01:02.640 the quiver, and a little bit of complacency. But first, 0:01:02.720 --> 0:01:06.800 Bernie Sanders rise and Joe Biden's fall. Tyler Pager is 0:01:06.840 --> 0:01:10.319 here for the latest from the campaign trail, Tyler, what 0:01:10.480 --> 0:01:13.600 went on in New Hampshire. Yeah, so the big story 0:01:13.600 --> 0:01:16.800 obviously is Bernie Sanders wins again. He won in sixteen 0:01:16.840 --> 0:01:19.039 and he continued that track record. He won by a 0:01:19.080 --> 0:01:22.160 smaller margin though, and I think the big story behind 0:01:22.160 --> 0:01:24.160 that is people jug and Amy clob which are kind 0:01:24.160 --> 0:01:27.440 of fighting to be that moderate alternative to Bernie Sanders. 0:01:27.520 --> 0:01:31.120 And then again Joe Biden's collapsed finishing fifth in a distant, 0:01:31.400 --> 0:01:34.440 distant fifth, not getting any delegates from that contest right 0:01:34.480 --> 0:01:38.400 and and basically like say in peace Out before the 0:01:38.520 --> 0:01:42.240 numbers were even tallied, heading to South Carolina, That's where 0:01:42.280 --> 0:01:44.000 it all hangs in the balance for him. At sais 0:01:44.040 --> 0:01:45.800 they saw the writing on the wall and decided it's 0:01:45.840 --> 0:01:47.680 better to try to save face, go to where his 0:01:47.720 --> 0:01:50.400 stronghold is supposed to be in South Carolina, and start 0:01:50.520 --> 0:01:52.960 to build up the campaign there and kind of relaunch 0:01:53.040 --> 0:01:55.280 it as they prepare for that primary at the end 0:01:55.320 --> 0:01:58.040 of the month. That is his firewall, and it shows 0:01:58.080 --> 0:02:00.440 some cracks, but we'll see if he's able to maintain 0:02:00.560 --> 0:02:03.280 that lead and and catapult him him out of South 0:02:03.280 --> 0:02:05.680 Carolina into Super Tuesday was the mood on the ground, 0:02:05.720 --> 0:02:08.160 How did people feel, what did they say was new 0:02:08.280 --> 0:02:12.000 or different here in than from sixteen or even going 0:02:12.000 --> 0:02:14.000 back to two eight. I mean, the biggest difference is 0:02:14.040 --> 0:02:16.400 just how big the field is and how big it remains. 0:02:16.480 --> 0:02:19.160 You think, Iowa New Hampshire are kind of these winnowing 0:02:19.200 --> 0:02:22.160 contests where people start to drop out. After that, we 0:02:22.200 --> 0:02:24.560 saw a few people in the single digit chop out, 0:02:24.600 --> 0:02:26.680 but we still have a pretty large field heading onto 0:02:26.720 --> 0:02:29.320 these next two states of Nevada and South Carolina and 0:02:29.360 --> 0:02:31.639 then into Super Tuesday. So I think obviously the biggest 0:02:31.639 --> 0:02:34.200 difference is it wasn't a binary contest between Hillary Clinton 0:02:34.240 --> 0:02:36.560 and Bernie Sanders. There are a lot of choices across 0:02:36.639 --> 0:02:40.040 the spectrum, both moderates and progressives that that voters could 0:02:40.080 --> 0:02:42.960 choose from. And life for Amy Klobuchar exactly, she is 0:02:43.040 --> 0:02:45.800 gets out of New Hampshire um with with some momentum. 0:02:46.040 --> 0:02:48.200 She's going to struggle a little bit because it's shown 0:02:48.240 --> 0:02:50.399 that she's not pulling as well with voters of color, 0:02:50.440 --> 0:02:53.079 and she needs to build an organization that can capture 0:02:53.080 --> 0:02:55.520 this momentum. She gets out of New Hampshire, but but 0:02:55.680 --> 0:02:58.680 she gets life in and and and live stifout another day. 0:02:58.760 --> 0:03:01.320 And meanwhile the press that sort of feasting on a 0:03:01.320 --> 0:03:03.880 lot of this discord. Yeah, this is exactly what the 0:03:03.919 --> 0:03:06.880 president wants. There's no one clear front runner at this 0:03:06.919 --> 0:03:10.160 moment that the Democrats can rally behind and unite behind Um. 0:03:10.200 --> 0:03:12.640 And Donald Trump is excited about the prospect of facing 0:03:12.639 --> 0:03:15.720 Bernie Sanders. His campaign thinks that's the best person for him. 0:03:15.760 --> 0:03:17.880 He can paint him as a as a democratic socialist, 0:03:17.919 --> 0:03:20.520 which is what he identifies as in and really harness 0:03:20.800 --> 0:03:24.600 um that energy against that kind of mindset and bring 0:03:24.600 --> 0:03:27.160 in moderates and independence into the folds. All right, Tyler 0:03:27.160 --> 0:03:29.200 Pager headed back to d C. We know you'll be 0:03:29.200 --> 0:03:31.360 on the campaign trail a lot more to come. Thank you. 0:03:31.560 --> 0:03:34.920 We turned out to Tracy Alloway via Skype. She's got 0:03:34.920 --> 0:03:39.760 the cover story. It's all about fragile China. Tracy, thank 0:03:39.840 --> 0:03:43.400 you so much for joining me. So you understand the 0:03:43.440 --> 0:03:47.320 economics in the markets so incredibly well here you know 0:03:47.400 --> 0:03:50.600 the history and there is a sense, to the point 0:03:50.600 --> 0:03:54.360 of the cover that China is fragile in a way 0:03:54.400 --> 0:03:59.360 that maybe none of us fully understand. Help us understand it, well, 0:03:59.400 --> 0:04:02.960 this is always been the big existential question about China 0:04:03.080 --> 0:04:05.760 and its role not just in the world economy, but 0:04:05.840 --> 0:04:08.800 also in global financial markets. You know, people like the 0:04:08.800 --> 0:04:13.120 Trump administration, they tend to portray China as this big 0:04:13.320 --> 0:04:16.760 threat to the American economy, to the American worker. But 0:04:16.839 --> 0:04:19.000 there's also a line of thought that China is much 0:04:19.160 --> 0:04:24.520 weaker than many people actually think. And one area of 0:04:24.560 --> 0:04:28.160 weakness in particular has been the notion of debt and 0:04:28.320 --> 0:04:31.440 leverage in its financial system. We've heard people talk about 0:04:31.440 --> 0:04:34.600 this for years and years and years now. China's financial 0:04:34.640 --> 0:04:38.840 system relies heavily on debt fueled growth. It's what they 0:04:38.920 --> 0:04:42.320 reach for whatever they have a slowdown in the economy, 0:04:42.360 --> 0:04:43.960 Like back in two thousand and eight, we saw a 0:04:43.960 --> 0:04:47.360 lot of infrastructure spending. That's what they reach for, really 0:04:47.480 --> 0:04:50.719 to develop their economy and get the standard of living 0:04:51.279 --> 0:04:53.040 up to where they want it to be in order 0:04:53.080 --> 0:04:57.000 to solidify the CCPs power. And of course, when you 0:04:57.120 --> 0:05:00.600 have growth that is driven by debt and by leverage, 0:05:00.680 --> 0:05:02.760 there is always a chance that it could take a 0:05:02.839 --> 0:05:05.960 hint and the whole edifice could come falling down. And 0:05:06.000 --> 0:05:09.440 so in Hong Kong, we're not just talking about the 0:05:09.440 --> 0:05:13.239 financial system we're talking about protests, and obviously we're talking 0:05:13.279 --> 0:05:17.200 more and more about the coronavirus. Tie it all together 0:05:17.320 --> 0:05:20.560 for me, How worried are people that this could be 0:05:21.000 --> 0:05:24.960 the thing that starts to pull this apart. Yeah. So, 0:05:25.000 --> 0:05:27.320 one of the really interesting things about being here on 0:05:27.360 --> 0:05:29.400 the ground in Hong Kong is that you are seeing 0:05:29.440 --> 0:05:32.880 this variety of opinion. At the moment, Hong Kong is 0:05:32.920 --> 0:05:36.000 Asia's biggest financial center. We have a lot of people 0:05:36.080 --> 0:05:39.839 here who have basically tied their careers, their money, their 0:05:40.000 --> 0:05:44.479 lives to the growth of China and its integration into 0:05:44.480 --> 0:05:48.080 the world economy and financial markets. Now there seems to 0:05:48.080 --> 0:05:50.640 be a little bit of doubt creeping in as to 0:05:50.800 --> 0:05:55.039 whether that might happen to the extent or at the 0:05:55.200 --> 0:05:57.840 pace that a lot of people had expected or hoped 0:05:58.240 --> 0:06:04.000 that it would. The Corona Una virus outbreak really, uh, 0:06:04.040 --> 0:06:08.120 I should say, the coronavirus outbreak really puts a question 0:06:08.120 --> 0:06:11.200 mark over the Chinese growth story. Now, what we're seeing 0:06:11.200 --> 0:06:14.440 from some fund managers is their positioning for a big 0:06:14.480 --> 0:06:18.720 stimulus effort from the Chinese government. They're buying things like 0:06:18.839 --> 0:06:22.680 cement stocks, property stocks on the expectation that that's going 0:06:22.720 --> 0:06:25.440 to come. But some other people are getting pretty wary 0:06:25.560 --> 0:06:28.840 at this point. They think if China unleushas stimulus, they're 0:06:28.880 --> 0:06:31.560 not going to be able to do infrastructure spending like 0:06:31.600 --> 0:06:33.840 they did before. They're probably not going to be able 0:06:33.880 --> 0:06:36.160 to lower rates as much as they would have hoped 0:06:36.160 --> 0:06:39.200 because rates are already low. And again you get back 0:06:39.200 --> 0:06:41.680 to that question of whether or not you can keep 0:06:41.880 --> 0:06:46.320 prompting additional economic growth through the use of additional leverage. 0:06:46.440 --> 0:06:49.520 And that's Bloomberg Tracy Allaway with this week's cover story. 0:06:50.240 --> 0:06:51.520 So if you want to get one of the most 0:06:51.560 --> 0:06:55.000 read stories, most talked about stories on the Bloomberg, just 0:06:55.279 --> 0:06:57.760 call up a well known investor and say, what do 0:06:57.760 --> 0:07:00.560 you think about China. You think it's in trouble. We've 0:07:00.560 --> 0:07:05.200 seen it time and time again, and yet crash hasn't happened, 0:07:05.560 --> 0:07:07.880 and yet the worries still seem to be out there. 0:07:08.240 --> 0:07:11.200 Pat Regnier and his team dug into that in this 0:07:11.400 --> 0:07:15.680 week's edition. Tell us what you found, So, I mean, 0:07:15.720 --> 0:07:17.520 what we really found was a system that just looks 0:07:17.520 --> 0:07:20.840 really fragile. Um It's it's a system where you know, 0:07:20.960 --> 0:07:23.160 debt has been piling up. You know, the Chinese economy 0:07:23.200 --> 0:07:25.360 went through this kind of extraordinary transformation. I mean, if 0:07:25.360 --> 0:07:28.720 you remember a decade ago we talked about China sort 0:07:28.760 --> 0:07:32.240 of doing vendor financing for consumers in the US. Well, 0:07:32.240 --> 0:07:33.840 what have they had over the last decade. But they've 0:07:33.840 --> 0:07:36.840 had a consumer boom. It's been a partly a debt 0:07:36.840 --> 0:07:40.000 finance consumer boom. You've seen uh, you know, a real 0:07:40.160 --> 0:07:44.440 estate boom there. Uh, you know, huge levels of you know, 0:07:44.720 --> 0:07:48.920 peer to peer internet finance, kinds of debt, lots of 0:07:48.960 --> 0:07:51.840 corporate debt, lots of defaults. And through it all you've 0:07:51.880 --> 0:07:56.160 had a central government that has been managing it and 0:07:56.280 --> 0:07:58.640 many ways they have more tools to manage the economy 0:07:58.680 --> 0:08:01.160 and to fine tune it. And uh then in some 0:08:01.200 --> 0:08:04.280 other countries, and the question is always will they you know, 0:08:04.760 --> 0:08:07.760 get this kind of you know, lumbering economy across the 0:08:07.800 --> 0:08:10.920 tight rope so to speak, uh, you know, to safety. 0:08:11.040 --> 0:08:13.800 Can they let the air out of this uh slowly? 0:08:14.120 --> 0:08:17.840 Or is there you know, the possibility of some kind 0:08:17.880 --> 0:08:20.160 of crack up along the way. All right, So let's 0:08:20.160 --> 0:08:22.040 go down a level, because there are a lot of 0:08:22.080 --> 0:08:25.600 different components to this. One is the consumer economy that, 0:08:25.680 --> 0:08:30.080 as you say, has just i mean blossomed boomed, exploded. 0:08:30.200 --> 0:08:34.640 You know in so many aspects. What are the concerns there? Well, 0:08:34.679 --> 0:08:37.320 one is just that you know again uh, you know, 0:08:37.600 --> 0:08:40.320 high levels of household indebtedness. I mean that was just 0:08:40.360 --> 0:08:43.480 something that China didn't used to have UM and and 0:08:43.559 --> 0:08:46.080 now it does. And you know, some of that has 0:08:46.120 --> 0:08:48.319 come from the kinds of lenders that if we had 0:08:48.320 --> 0:08:50.160 them here, we'd say, like, you know, that looks like 0:08:50.280 --> 0:08:53.360 you know, possibly you know, a predatory lender. Uh, you know, 0:08:53.559 --> 0:08:55.400 some of it has maybe come from lenders that weren't 0:08:55.800 --> 0:08:59.040 particularly well financed themselves. So you know, there there's worries 0:08:59.080 --> 0:09:01.240 on that side. So you have you have that UM. 0:09:01.320 --> 0:09:05.160 You have really you know, high um price to income 0:09:05.280 --> 0:09:09.800 ratios for housing in the major cities. You know, these 0:09:09.840 --> 0:09:13.280 are unaffordable cities that they've had to apply these kinds 0:09:13.320 --> 0:09:15.720 of cooling measures to things again that you you couldn't 0:09:15.720 --> 0:09:18.640 do here, you know, caps on how many units a 0:09:18.679 --> 0:09:21.400 family can own. And when people you start to think 0:09:21.440 --> 0:09:23.640 maybe people are trying to get around that by like 0:09:23.720 --> 0:09:26.080 you know, somebody divorcing. Well, one of the things that 0:09:26.080 --> 0:09:27.800 can happen in China is they can say, well, you know, 0:09:27.800 --> 0:09:31.520 we're gonna put restrictions on borrowing. Uh you know, if 0:09:31.640 --> 0:09:33.719 if you're divorcing, so that you're not trying to get 0:09:33.760 --> 0:09:36.959 around those caps. So the government's local governments have been 0:09:36.960 --> 0:09:38.720 really sort of trying to like keep a lid on 0:09:38.840 --> 0:09:42.200 things that you know, in other places, uh, you know 0:09:42.320 --> 0:09:44.960 might run wild. But even there, you've just you know, 0:09:45.000 --> 0:09:47.240 you've had over you know, a series of just a 0:09:47.240 --> 0:09:52.800 few years, you know, price increases well and the government's 0:09:52.920 --> 0:09:55.760 role excuse me, and in all of this is a 0:09:55.800 --> 0:09:59.319 really important one to to understand, and it is complicated 0:09:59.559 --> 0:10:01.920 in many you mentioned sort of the tools that the 0:10:01.960 --> 0:10:06.120 government has. The entire system is one of command and control. 0:10:06.720 --> 0:10:10.960 But control only goes so far. It's clear right right, 0:10:11.000 --> 0:10:13.360 and you know, as as we're sitting here talking right 0:10:13.360 --> 0:10:16.480 now with uh, you know, the coronavirus, I mean, we're 0:10:16.520 --> 0:10:18.760 beginning to see, like you know, when you look to 0:10:19.080 --> 0:10:21.959 one institution to control everything, I mean right now, they 0:10:21.960 --> 0:10:25.320 are having you know, you know, huge issues containing you know, 0:10:25.760 --> 0:10:28.880 a difficult outbreak, um, and all of those things get 0:10:28.960 --> 0:10:31.800 kind of you know tied up together. Uh you know, 0:10:31.920 --> 0:10:34.680 are they if you know, are they managing that competently? 0:10:34.760 --> 0:10:37.319 And if they're managing that competently or not. How does 0:10:37.520 --> 0:10:40.880 how do we how do we take that for how 0:10:40.920 --> 0:10:43.840 they're going to be able to manage and finding the economy? Right? Yeah, 0:10:43.880 --> 0:10:46.720 So let's talk about that because you know, we've talked 0:10:46.760 --> 0:10:49.720 about the debt side. You mentioned the virus. What do 0:10:49.800 --> 0:10:54.000 we know so far in terms of the economic management, 0:10:54.080 --> 0:10:56.680 the financial management, sort of the social management that that 0:10:56.760 --> 0:11:00.120 the government has employed as you look at this a 0:11:00.160 --> 0:11:02.480 financial lens, Well, I think for a lot of people, 0:11:02.679 --> 0:11:05.600 you know, what what's interesting and what you know? We 0:11:05.640 --> 0:11:09.560 asked um our writers in Hong Kong Tracy Alloway to 0:11:09.559 --> 0:11:12.960 to ask, is are people, um, you know, blurring these 0:11:12.960 --> 0:11:15.959 two things together or are they compartmentalizing it like there's 0:11:15.960 --> 0:11:18.960 an economic management over here and there's virus management over here? 0:11:19.200 --> 0:11:21.080 And you know, I mean I think you're actually beginning 0:11:21.080 --> 0:11:24.280 to see some of that, some of that blurring together, 0:11:24.679 --> 0:11:26.839 um you know. And yet you know here here in 0:11:26.880 --> 0:11:29.439 the U s. If you look at how markets are responding, 0:11:29.480 --> 0:11:32.280 even with all this stuff happening in the world second 0:11:32.320 --> 0:11:35.800 largest economy, people still seem to not be quite ready 0:11:35.840 --> 0:11:38.160 to like look at this as an economic crisis. Yeah. 0:11:38.240 --> 0:11:40.520 Does that surprise you as someone who's looked at the 0:11:40.559 --> 0:11:44.000 world through that economic and financial lens for a long time. 0:11:44.360 --> 0:11:46.920 Well you know, as we've said, people have been called 0:11:47.040 --> 0:11:50.480 calling a crisis in China for a decade. I mean 0:11:50.520 --> 0:11:54.400 I so in a sense, it doesn't surprise me in that, 0:11:54.559 --> 0:11:56.400 you know, it's always very hard to call the top 0:11:56.440 --> 0:11:59.480 of something. And I think you know, most people in uh, 0:11:59.559 --> 0:12:02.360 you know, in the United States and Europe are still 0:12:02.400 --> 0:12:05.120 like working to kind of get their heads around like all, 0:12:05.320 --> 0:12:08.400 you know, the size and the pace, the pace of 0:12:08.480 --> 0:12:11.160 change and showing right, well, and we shouldn't forget you know, 0:12:11.200 --> 0:12:13.280 one of the elements that brought this to the for 0:12:13.960 --> 0:12:16.680 two things actually, one is the trade war, you know 0:12:16.760 --> 0:12:19.840 that obviously sort of put the Chinese economy in a 0:12:19.880 --> 0:12:26.080 different light. And then something as seemingly separate but important, 0:12:26.160 --> 0:12:29.400 especially to our financial audience, as the protests in Hong Kong. 0:12:29.679 --> 0:12:32.000 But all of this sort of starts to play into 0:12:32.040 --> 0:12:35.040 this stu in a way. It's it's all happening at once. 0:12:35.080 --> 0:12:36.679 And again, now that's something that I think a lot 0:12:36.720 --> 0:12:38.960 of people in the United States or the UK may 0:12:39.080 --> 0:12:41.440 may may experience to like suddenly all the news is 0:12:41.480 --> 0:12:43.200 happening at once, and it seems like we're all kind 0:12:43.240 --> 0:12:47.360 of caught in these cycles of you know, of of 0:12:47.400 --> 0:12:49.600 all this and and and look at look at all 0:12:49.640 --> 0:12:51.400 those places in the the US, US and Europe. I mean, 0:12:51.640 --> 0:12:54.920 the the markets have kind of trondled along right exactly well, 0:12:54.960 --> 0:12:56.800 and the and the Hong Kong. When I think, you know, 0:12:56.840 --> 0:12:58.080 I think about some of the work you and I 0:12:58.080 --> 0:13:00.600 have done together around the financials US in the big 0:13:00.600 --> 0:13:06.040 financial firms, and wrestling with how to understand Hong Kong 0:13:06.080 --> 0:13:09.240 and its role in the in the broader financial world, 0:13:09.600 --> 0:13:11.199 which brings me to to one thing I wanted to 0:13:11.200 --> 0:13:12.840 make sure we talked about, which is the role of 0:13:12.840 --> 0:13:15.920 the banking system and the government's role in all of 0:13:15.960 --> 0:13:20.000 that state control lack of state control. Where does the 0:13:20.000 --> 0:13:22.719 banking system fit into all of this? Well, I mean 0:13:22.760 --> 0:13:24.839 this is this is one of the key levers that 0:13:24.920 --> 0:13:27.400 you know that Chinese authorities have to pull. They can 0:13:27.440 --> 0:13:31.040 they can control you know, interest rates, they can control 0:13:31.880 --> 0:13:34.679 lending um. They particularly have to think about the rise 0:13:34.679 --> 0:13:37.840 of shadow banking UM that that's such an important factor 0:13:38.320 --> 0:13:41.840 in China, the rise of these financial institutions that are 0:13:41.880 --> 0:13:45.439 outside of the traditional UM lending system. And when we 0:13:45.440 --> 0:13:47.960 were talking about P two p UM you know, just 0:13:48.040 --> 0:13:50.400 the rise in the amount of dead outstanding in peer 0:13:50.480 --> 0:13:52.240 to peer lending a few years ago, and then how 0:13:52.320 --> 0:13:55.240 quickly you know that that was brought down? I mean 0:13:55.280 --> 0:13:58.280 you you you don't. You don't see changes of that 0:13:58.360 --> 0:14:03.199 scale without a crisis happening, um uh in in most 0:14:03.360 --> 0:14:05.640 in most other countries. You know, we did an interesting story, 0:14:05.840 --> 0:14:10.360 um not too long ago about default about bad loans 0:14:10.400 --> 0:14:12.360 and defaults in China, and they're rising and rising and 0:14:12.480 --> 0:14:14.520 rising and um. At some point I asked, you know, 0:14:14.520 --> 0:14:16.960 it's like, we keep doing these stories about record record 0:14:17.000 --> 0:14:19.720 defaults in China. If we kept having headlines like this, 0:14:20.240 --> 0:14:23.160 um here, we'd be talking about a crisis. And one 0:14:23.160 --> 0:14:24.640 of the things that one of the reporters explained to me, 0:14:24.640 --> 0:14:26.040 it's like, you know, this isn't a crisis. This was 0:14:26.040 --> 0:14:29.280 a plan, right, You know that that that the Chinese 0:14:29.280 --> 0:14:34.160 government has a policy now of sort of encouraging companies 0:14:34.200 --> 0:14:37.680 to instead of extend and pretend to start to default. 0:14:37.680 --> 0:14:39.800 And so that so that investors who are coming in 0:14:40.280 --> 0:14:43.760 as as money from around the world is beginning to 0:14:43.880 --> 0:14:46.920 be invested in the domestic Chinese bond market, are will 0:14:46.960 --> 0:14:49.840 begin to have expectations that when you lend to a 0:14:49.920 --> 0:14:53.240 Chinese company they could default. And that's editor Pat Regnar. 0:14:53.720 --> 0:14:56.680 So this is a story we've been following very closely. 0:14:57.200 --> 0:14:59.920 It's about the mutual fund business, but it's also a 0:15:00.000 --> 0:15:03.840 about the increasing power of the big three Vanguards. Certainly 0:15:03.880 --> 0:15:06.880 one of them, any Massa has been falling this so closely. 0:15:06.920 --> 0:15:10.240 She's got a story in this week's edition in the 0:15:10.280 --> 0:15:14.120 finance section. Tell me what's going on with Vanguard? Not 0:15:14.240 --> 0:15:18.920 just for index and passive investing anymore. Yeah, Vanguard announced 0:15:18.960 --> 0:15:23.160 plans to make its first real foray into private equity 0:15:23.200 --> 0:15:25.440 with a fund that's going to be managed by an 0:15:25.440 --> 0:15:28.920 outside firm called Harbor Vest Partners. All Right, this feels 0:15:28.960 --> 0:15:31.200 like a big deal. Uh, it feels like this is 0:15:31.200 --> 0:15:33.320 one of the holy grails on all sides of this, 0:15:33.480 --> 0:15:38.000 which is more people getting into what his largely been 0:15:38.040 --> 0:15:41.080 a pretty exclusive club. Why do they want in? Holy grill? 0:15:41.200 --> 0:15:43.440 Is exactly the right way of describing it. I would say, 0:15:43.720 --> 0:15:46.760 I think if you're a Vanguard, you see that there's 0:15:47.040 --> 0:15:51.880 so much more focus on private markets recently. Fewer companies 0:15:51.920 --> 0:15:55.520 are going public now and you can frankly earn higher 0:15:55.600 --> 0:15:58.960 fees in that area. Um So if you're Vanguard, and 0:15:59.040 --> 0:16:02.200 you're a big index fund provider, I mean, a giant 0:16:02.200 --> 0:16:05.040 of index and truly the world's second largest asset manager, 0:16:05.480 --> 0:16:09.880 and you typically compete on costs. Um they see a 0:16:09.920 --> 0:16:12.640 window where they can compete on costs for PE funds 0:16:12.640 --> 0:16:15.400 while still earning higher fees on those funds than they 0:16:15.400 --> 0:16:18.080 would on cheap index Alright, let's talk about that, because 0:16:18.120 --> 0:16:20.520 the fees you start to get into one of the 0:16:20.560 --> 0:16:23.800 most interesting aspects of all of this at a time. 0:16:24.360 --> 0:16:26.520 And you know this better than anyone. Where fees are 0:16:26.520 --> 0:16:29.880 going down, down, down, all the way to free, we're 0:16:29.920 --> 0:16:34.080 talking about an industry where the fees are by most accounts, 0:16:34.400 --> 0:16:37.560 pretty extraordinary. Two and twenty is the way that private 0:16:37.600 --> 0:16:40.760 equity funds, as you well know, charge two percent annual 0:16:40.760 --> 0:16:45.360 fees of profits. That seems like mind blowing in the 0:16:45.360 --> 0:16:49.080 world of low fees. How do they square all that? Yeah, 0:16:49.120 --> 0:16:52.560 compare that too in twenty two a cheap SMP five 0:16:52.960 --> 0:16:56.120 tracking fund that might just charge three basis points and 0:16:56.160 --> 0:16:59.320 that's it. So, I mean, there's obvious appeal on the 0:16:59.360 --> 0:17:02.960 fee side. Uh for a firm like Vanguard. They will 0:17:03.040 --> 0:17:06.159 first of all, only offer this to institutions in the 0:17:06.240 --> 0:17:10.879 beginning phases smaller institutions like endowments and nonprofit foundations. But 0:17:10.920 --> 0:17:13.520 their aspirations are clear to bring to bring this to 0:17:13.600 --> 0:17:16.400 a wider audience, and they might be able to do 0:17:16.440 --> 0:17:20.760 that through their advisor channels. They've got UM a growing 0:17:20.880 --> 0:17:24.879 network and a huge network of advisors UM who could eventually, 0:17:25.000 --> 0:17:29.320 if UM it were allowed, UM bring these kinds of 0:17:29.359 --> 0:17:32.760 investments to their clients. And so this isn't the first 0:17:32.800 --> 0:17:34.840 time that a big money manager has sort of flirted 0:17:34.880 --> 0:17:37.760 with this idea, right, remind us of the history here? Yeah, Actually, 0:17:37.840 --> 0:17:40.760 I mean going back to UM. Around two thousand and one, 0:17:40.880 --> 0:17:44.560 Vanguard itself tried to make a push into private equity, UM, 0:17:44.560 --> 0:17:48.400 bringing in Hamilton Lane for a fund of funds, and 0:17:48.480 --> 0:17:51.359 in the fallout from the dot com bust, they just 0:17:51.480 --> 0:17:54.160 abandoned that effort and they said that they couldn't raise 0:17:54.280 --> 0:17:57.560 enough assets for it. UM. But you've also seen black 0:17:57.680 --> 0:18:01.560 Rock again world's biggest asset. Man. You're seven trillion in assets. 0:18:01.560 --> 0:18:05.560 Two threads of that comes from UM its index product suite. UM. 0:18:05.600 --> 0:18:08.879 They've also made a bigger push into alternatives and private equity, 0:18:08.920 --> 0:18:12.119 specifically UM. They launched this fund called Long Term Private 0:18:12.160 --> 0:18:16.520 Capital that takes stakes in private companies about two years ago. 0:18:17.040 --> 0:18:19.639 Now that could be seen as a cautionary tale in 0:18:19.680 --> 0:18:22.680 some ways because it hasn't progressed as quickly as they 0:18:22.680 --> 0:18:25.720 initially said it would. So that shows some of the 0:18:25.760 --> 0:18:30.520 struggle for an outsider um trying to get into private equity, 0:18:30.640 --> 0:18:33.840 such a relationships based kind of arena, right right. You 0:18:33.920 --> 0:18:36.400 fast forward to now, the private equity industry you point 0:18:36.440 --> 0:18:38.720 this out in your story, has a trillion and a 0:18:38.760 --> 0:18:42.320 half dollars or so just in dry powder, three four 0:18:42.400 --> 0:18:46.000 trillion dollars in total assets under management, names like black 0:18:46.040 --> 0:18:50.560 Stone and KKR and Carlisle. At the same time those names, 0:18:50.640 --> 0:18:53.119 the Blackstones and the Carlisles, they're trying to get to 0:18:53.200 --> 0:18:56.320 some of these same investors. How is that going in 0:18:56.440 --> 0:18:59.719 terms of getting to the retail Holy growl, that's right 0:18:59.760 --> 0:19:02.159 sore seeing this real convergence. At the same time that 0:19:02.240 --> 0:19:05.280 Vanguard is trying to sneak into private equity, the Blackstones 0:19:05.320 --> 0:19:07.280 and Kkrs are trying to see how they could get 0:19:07.280 --> 0:19:10.280 their private equity vehicles into the hands of more investors, 0:19:10.440 --> 0:19:14.680 more retail investors. Even traditionally private equity is walled off 0:19:14.760 --> 0:19:17.919 from all but the institutions and the high net worth individuals, 0:19:17.960 --> 0:19:20.320 accredited investors. You've got to be accredited to get in 0:19:20.440 --> 0:19:23.720 right exactly, and what Blackstone would like to see, what 0:19:23.800 --> 0:19:27.000 the private equity giants would like to see. Um are 0:19:27.080 --> 0:19:30.439 some of those restrictions being loosened. And they've made that 0:19:30.520 --> 0:19:32.919 case in front of the SEC, and the SEC is 0:19:33.040 --> 0:19:35.400 looking at it and assessing whether it would make sense 0:19:35.440 --> 0:19:39.040 to ever open up private equity style investments to a 0:19:39.119 --> 0:19:42.000 larger audience, because I think that they fear that an 0:19:42.000 --> 0:19:46.440 average investor could be missing out on those returns um 0:19:46.480 --> 0:19:50.920 if you know, if they're increasingly walled off from that realm. Right. 0:19:51.400 --> 0:19:54.200 Critics and skeptics look at that and say, well, maybe 0:19:54.200 --> 0:19:56.680 there's a reason that retail investors aren't in there. It's 0:19:57.000 --> 0:20:01.520 much less liquid in many ways, it's much more opaque. 0:20:01.560 --> 0:20:04.720 The transparency just isn't there. What do you make of 0:20:04.760 --> 0:20:07.320 those arguments as you talk to people? That's exactly right. 0:20:07.400 --> 0:20:10.840 So investor advocates say, wait a minute, this is really 0:20:10.880 --> 0:20:13.560 a sales push on the private equity side. It can 0:20:13.600 --> 0:20:16.960 be hard enough for an average investor to just sort 0:20:17.000 --> 0:20:19.399 out the right mix of stocks and bonds and a 0:20:19.480 --> 0:20:23.560 portfolio without getting in cash without getting involved in something 0:20:23.600 --> 0:20:27.280 as opaque as private equity and something where they might 0:20:27.280 --> 0:20:31.080 not understand the complexities, might not be as happy with 0:20:31.160 --> 0:20:35.840 the longer lock up periods um So, there is definitely 0:20:35.880 --> 0:20:38.800 a vocal piece of the market that's saying that private 0:20:38.800 --> 0:20:42.040 equity style investments are not right for your average retail investor. 0:20:42.240 --> 0:20:46.200 And that's reporter Annie Massa. So, first came the trade war, 0:20:46.440 --> 0:20:50.840 now the virus, all of this playing into the Chinese economy, 0:20:50.920 --> 0:20:54.359 especially when it comes to manufacturers. Here with more on 0:20:54.400 --> 0:20:57.080 the impact as the virus spreads not just in that 0:20:57.119 --> 0:21:01.440 country but potentially globally, is the editor of the Economic section, 0:21:01.520 --> 0:21:05.280 Christina limp lad high Hi. Alright, so we spend so 0:21:05.320 --> 0:21:07.560 much time talking about is this going to spread? What's 0:21:07.560 --> 0:21:11.359 going to happen? Meanwhile, back in this one province where 0:21:11.359 --> 0:21:16.080