1 00:00:05,800 --> 00:00:08,320 Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim 2 00:00:08,400 --> 00:00:11,200 Speaker 1: Fox along with my co host Lisa A. Bramowitz. Each 3 00:00:11,240 --> 00:00:14,400 Speaker 1: day we bring you the most important, noteworthy, and useful 4 00:00:14,440 --> 00:00:17,079 Speaker 1: interviews for you and your money, whether you're at the 5 00:00:17,079 --> 00:00:20,360 Speaker 1: grocery store or the trading floor. Find the Bloomberg P 6 00:00:20,520 --> 00:00:27,600 Speaker 1: M L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. 7 00:00:27,600 --> 00:00:32,720 Speaker 1: The news this week, financial services giant Fidelity is taking 8 00:00:32,760 --> 00:00:35,760 Speaker 1: a huge step into the world of cryptocurrency. It announced 9 00:00:35,760 --> 00:00:40,560 Speaker 1: the launch of a separate company called Fidelity Digital Assets Services. 10 00:00:40,960 --> 00:00:45,760 Speaker 1: It is designed to handle cryptocurrency custody and trade execution 11 00:00:46,200 --> 00:00:50,879 Speaker 1: for institutional investors. And I think there's probably no one 12 00:00:51,159 --> 00:00:55,440 Speaker 1: better to comment on this than Danny Masters. Danny Masters is, 13 00:00:55,480 --> 00:00:59,520 Speaker 1: of course the chairman of coin Shares. He is previously 14 00:00:59,640 --> 00:01:02,920 Speaker 1: the head of JP Morgan's New York energy trading business 15 00:01:03,200 --> 00:01:05,640 Speaker 1: before he set up his own commodity funds. He joins 16 00:01:05,720 --> 00:01:09,679 Speaker 1: us here in our Bloomberg Interact or Broker Studios. Danny, 17 00:01:09,720 --> 00:01:11,959 Speaker 1: thank you very much for coming in. What was your 18 00:01:11,959 --> 00:01:16,240 Speaker 1: reaction when you heard that Fidelity was offering these kinds 19 00:01:16,240 --> 00:01:21,320 Speaker 1: of services? About time? Abby Cohen's been at the forefront 20 00:01:21,920 --> 00:01:25,640 Speaker 1: of distributed ledger technology. For some time, we've interacted with 21 00:01:25,640 --> 00:01:32,480 Speaker 1: Fidelity across multiple vectors, Um Johnson, Abbie Johnson's face parton Johnson, 22 00:01:32,680 --> 00:01:35,280 Speaker 1: You're right and she Um, I think what you know 23 00:01:35,600 --> 00:01:40,720 Speaker 1: in concert with her founding grandfather's view about the finances, Um, 24 00:01:40,760 --> 00:01:42,600 Speaker 1: you know, they think big and they think forward, and 25 00:01:43,720 --> 00:01:45,679 Speaker 1: she sees this as being a new industry in a 26 00:01:45,680 --> 00:01:48,720 Speaker 1: new way to form capital and distribute capital. Um. And 27 00:01:48,800 --> 00:01:50,480 Speaker 1: I think they're going to do very well with that. 28 00:01:51,280 --> 00:01:54,120 Speaker 1: Do you still think, given all the volatility that we've 29 00:01:54,160 --> 00:01:58,840 Speaker 1: seen in cryptocurrencies this year, that this asset class is 30 00:01:59,040 --> 00:02:01,640 Speaker 1: sort of a new commodity of sorts in a new 31 00:02:01,720 --> 00:02:05,800 Speaker 1: store of wealth. I think the narrative change is very 32 00:02:05,880 --> 00:02:09,880 Speaker 1: rapidly in crypto. It is an evolutionary process, for sure, 33 00:02:09,919 --> 00:02:13,840 Speaker 1: maybe a revolutionary process. Uh. And the way I'm currently 34 00:02:13,880 --> 00:02:16,639 Speaker 1: thinking is really in that what is happening now and 35 00:02:17,000 --> 00:02:20,240 Speaker 1: the timely entry of Fidelity and others is really the 36 00:02:20,480 --> 00:02:23,720 Speaker 1: what I call the third wave of the crypto movement. 37 00:02:24,240 --> 00:02:28,639 Speaker 1: First wave Bitcoin arrives, it disrupts golden money. The second 38 00:02:28,680 --> 00:02:31,600 Speaker 1: wave we see ethereum a new blockchain that has the 39 00:02:31,600 --> 00:02:35,560 Speaker 1: ability to form capital. That happens very rapidly in in 40 00:02:35,600 --> 00:02:39,560 Speaker 1: a in a very large way. The SEC don't like that. 41 00:02:39,720 --> 00:02:42,880 Speaker 1: We're talking initial coin offering, initial coin offerings. The SEC 42 00:02:43,040 --> 00:02:45,200 Speaker 1: don't like that for obvious reasons, and that comes to 43 00:02:45,440 --> 00:02:49,400 Speaker 1: essentially a screeching halt. Third wave, in my opinion, will 44 00:02:49,480 --> 00:02:52,360 Speaker 1: be this so called security token. So you cannot do 45 00:02:52,400 --> 00:02:54,919 Speaker 1: an initial coin offering with ease anymore, but you can 46 00:02:54,960 --> 00:02:58,639 Speaker 1: do a security token. What does that mean? That will 47 00:02:58,680 --> 00:03:01,519 Speaker 1: be in the first instance, one of the exemptions from 48 00:03:01,560 --> 00:03:04,160 Speaker 1: the Securities Act, either a reg A and a plus 49 00:03:04,480 --> 00:03:08,560 Speaker 1: reg D reg S, whereby a token will will represent 50 00:03:08,639 --> 00:03:12,320 Speaker 1: equity in a private company and it will exist in 51 00:03:12,360 --> 00:03:15,920 Speaker 1: this space between what has traditionally been private companies and 52 00:03:16,120 --> 00:03:19,440 Speaker 1: public companies, and it will be a hybrid which is 53 00:03:19,480 --> 00:03:24,440 Speaker 1: transparent and liquid and transferable. Why do we need this Well, 54 00:03:24,639 --> 00:03:28,960 Speaker 1: I think you for the average investor um to buy 55 00:03:29,000 --> 00:03:32,200 Speaker 1: into a fully publicly listed company, you know the S 56 00:03:32,280 --> 00:03:35,360 Speaker 1: and P multiple will be around right now. If you 57 00:03:35,400 --> 00:03:37,560 Speaker 1: buy into a private company, you might get the five 58 00:03:37,600 --> 00:03:40,680 Speaker 1: to ten P So there is potentially a tremendous value 59 00:03:40,720 --> 00:03:43,880 Speaker 1: to be a accrued to a smaller investor coming in 60 00:03:43,920 --> 00:03:45,960 Speaker 1: at the lower end of that of that P spread 61 00:03:46,080 --> 00:03:49,560 Speaker 1: because those assets are typically not available to the average person. 62 00:03:50,560 --> 00:03:52,600 Speaker 1: I want to ask you about something having to do 63 00:03:52,680 --> 00:03:57,800 Speaker 1: with access, because if and I know from your website, 64 00:03:57,840 --> 00:04:01,960 Speaker 1: if you have a broker that already does business on 65 00:04:02,000 --> 00:04:06,960 Speaker 1: the NASDAK in Sweden, you already have pretty much access 66 00:04:07,120 --> 00:04:12,720 Speaker 1: to a variety of trackers for cryptocurrencies. There's the Bitcoin 67 00:04:12,960 --> 00:04:15,880 Speaker 1: Tracker one, there's one in Euros. There's also the Ether 68 00:04:16,320 --> 00:04:20,440 Speaker 1: tracker one and one in Euros. What have you learned 69 00:04:20,440 --> 00:04:24,800 Speaker 1: from that experience? It's been a expt provider, has been 70 00:04:25,279 --> 00:04:28,279 Speaker 1: a wonderful journey for us. You know, we we we 71 00:04:28,360 --> 00:04:30,799 Speaker 1: started very small and we got I think we peeked 72 00:04:30,880 --> 00:04:33,240 Speaker 1: around one point seven billion, and the prices were high 73 00:04:33,279 --> 00:04:37,280 Speaker 1: last year and obviously receded with the price drop. Um 74 00:04:37,320 --> 00:04:41,640 Speaker 1: it's been an interesting episode and journey with NASDAC themselves 75 00:04:42,240 --> 00:04:46,599 Speaker 1: because it's a controversial asset class. It has characteristics like 76 00:04:46,760 --> 00:04:50,560 Speaker 1: security of the assets themselves which don't exist in other 77 00:04:50,600 --> 00:04:54,200 Speaker 1: asset classes. I think you've seen NASDAC themselves now starting 78 00:04:54,240 --> 00:04:57,840 Speaker 1: to talk about security token exchanges as well going forward. 79 00:04:58,240 --> 00:05:00,560 Speaker 1: So you know, it was an embry on, it an 80 00:05:00,680 --> 00:05:03,839 Speaker 1: early adoption and it got a lot of traction and 81 00:05:03,880 --> 00:05:06,120 Speaker 1: I think it's going to be the first of not 82 00:05:06,240 --> 00:05:11,560 Speaker 1: only trackers in other markets and other jurisdictions on bitcoin 83 00:05:11,680 --> 00:05:14,000 Speaker 1: and other cryptos, but I think it will be that 84 00:05:14,200 --> 00:05:17,240 Speaker 1: it will prove to be the precursor to the larger exchanges. 85 00:05:17,279 --> 00:05:21,000 Speaker 1: Actually looking at security token markets themselves, So how does 86 00:05:21,240 --> 00:05:26,040 Speaker 1: blockchain fit into these sort of securities token markets because 87 00:05:26,040 --> 00:05:28,280 Speaker 1: it just listening to it, it sounds like it's a 88 00:05:28,279 --> 00:05:32,279 Speaker 1: way to create a token that is outside of the 89 00:05:32,360 --> 00:05:36,760 Speaker 1: public equity regulatory structure. But how does blockchain fit into 90 00:05:36,800 --> 00:05:40,760 Speaker 1: It's not actually outside of the regulatary structure, it's outside 91 00:05:40,760 --> 00:05:47,080 Speaker 1: of the piping and infrastructure of the conventional marketplace. So, um, 92 00:05:47,560 --> 00:05:50,120 Speaker 1: when you look at how the Chicago merk or the 93 00:05:50,120 --> 00:05:53,560 Speaker 1: New York Stock Exchange work, there is a bunch of 94 00:05:53,600 --> 00:05:56,839 Speaker 1: electronic piping that goes around making the transfer and the 95 00:05:56,880 --> 00:05:59,760 Speaker 1: trading of these shares happen. Um, and that is a 96 00:05:59,760 --> 00:06:03,719 Speaker 1: con cerebral infrastructure. And there has been talk about deploying 97 00:06:03,800 --> 00:06:07,960 Speaker 1: distributed ledger technologies to these exchanges in order to get 98 00:06:07,960 --> 00:06:11,920 Speaker 1: the advantages of distributed ledger technology. What are the advantages? 99 00:06:12,320 --> 00:06:19,240 Speaker 1: They are real time settlement, low latency, transferability, portability, ext 100 00:06:19,320 --> 00:06:24,359 Speaker 1: central crisis for b andy melon right exactly. So, so 101 00:06:24,440 --> 00:06:28,039 Speaker 1: those are the advantages. But rather than re engineer the 102 00:06:28,120 --> 00:06:30,560 Speaker 1: CME so that they rip out all their old systems 103 00:06:30,560 --> 00:06:33,640 Speaker 1: and put in distributed ledger databases and so on, what 104 00:06:33,720 --> 00:06:36,560 Speaker 1: you do is you turn securities into cryptos, and you 105 00:06:36,600 --> 00:06:39,080 Speaker 1: turn them you trade them on crypto exchanges. So we're 106 00:06:39,080 --> 00:06:41,800 Speaker 1: seeing this with a bunch of companies out there. They're 107 00:06:41,800 --> 00:06:45,640 Speaker 1: taking as a certain an example before the regg D environment, 108 00:06:46,000 --> 00:06:48,600 Speaker 1: creating a security in a token. We will have an 109 00:06:48,640 --> 00:06:51,159 Speaker 1: ice in, but it will trade in a some sort 110 00:06:51,160 --> 00:06:53,279 Speaker 1: of walled garden that will look like a crypto exchange. 111 00:06:53,560 --> 00:06:56,480 Speaker 1: You've seen coin based do this um. The structure that 112 00:06:56,520 --> 00:07:01,480 Speaker 1: they're putting together is a register broker dealer, a registered 113 00:07:01,520 --> 00:07:04,760 Speaker 1: investment advisor in all fifty states, and an automated and 114 00:07:04,800 --> 00:07:07,640 Speaker 1: alternative trading system. Once you put those three things together, 115 00:07:07,640 --> 00:07:10,080 Speaker 1: plus the twelve and a half million customers, they have 116 00:07:10,160 --> 00:07:12,960 Speaker 1: their own stock market, and once they issue tokens on it. 117 00:07:13,280 --> 00:07:16,440 Speaker 1: This is a competitor's nicely and that step just quickly. 118 00:07:16,960 --> 00:07:19,360 Speaker 1: Should you mine or should you buy? If you're an 119 00:07:19,400 --> 00:07:25,640 Speaker 1: individual to learn about this marketplace, buy, okay, don't go 120 00:07:25,680 --> 00:07:29,920 Speaker 1: into the mining business. I think for coin Shares at least. 121 00:07:30,400 --> 00:07:33,080 Speaker 1: You know, we we we occupy multiple verticals in this 122 00:07:33,280 --> 00:07:36,240 Speaker 1: digital esset space. The one thing we don't do directly 123 00:07:36,360 --> 00:07:41,160 Speaker 1: is mining. It's a very complex calculation in order to 124 00:07:41,160 --> 00:07:44,120 Speaker 1: figure out the economics of mining. It is also something 125 00:07:44,120 --> 00:07:46,280 Speaker 1: of an arms race when it comes to the chips 126 00:07:46,280 --> 00:07:48,080 Speaker 1: and the technology that go with it, and we don't 127 00:07:48,080 --> 00:07:50,840 Speaker 1: really want to play in that space. Danny Masters a pleasure. 128 00:07:50,840 --> 00:07:52,720 Speaker 1: Thank you so much for coming in. We really appreciate it. 129 00:07:52,800 --> 00:07:55,120 Speaker 1: My pleasure, thank you, Thank you guys. Danny Masters is 130 00:07:55,120 --> 00:07:57,040 Speaker 1: a share a bit of coin Shares Group, which oversees 131 00:07:57,160 --> 00:07:59,080 Speaker 1: about a billion dollars or more than a billion dollars 132 00:07:59,120 --> 00:08:02,000 Speaker 1: of crypto. So it's from London, although he joins us 133 00:08:02,000 --> 00:08:03,760 Speaker 1: here in our eleven three oh studios, and of course 134 00:08:03,800 --> 00:08:05,640 Speaker 1: he is a former global head of Energy and Trading 135 00:08:05,880 --> 00:08:08,920 Speaker 1: at the predecessor of JP Morgan and then the JP 136 00:08:09,000 --> 00:08:16,160 Speaker 1: Morgan Unich him. Yesterday, news came out that Uber Technologies 137 00:08:16,240 --> 00:08:19,960 Speaker 1: is increasing the size of its debut bond offering since 138 00:08:20,000 --> 00:08:22,720 Speaker 1: there just is so much demand. They're going from one 139 00:08:22,760 --> 00:08:25,600 Speaker 1: and a half billion to two billion dollars of bonds. 140 00:08:26,080 --> 00:08:29,200 Speaker 1: Joining us now, Kathleen Gaffney co director of Diversified Fixed 141 00:08:29,200 --> 00:08:32,520 Speaker 1: Income and EAT Advance UH and GURU and all things 142 00:08:32,640 --> 00:08:36,160 Speaker 1: fixed income and credit. Kathleen, are you out there buying 143 00:08:36,200 --> 00:08:40,520 Speaker 1: these super bonds? We are not UH as as tantalizing 144 00:08:40,600 --> 00:08:44,480 Speaker 1: as eight percent is. Eight percent comes with a whole 145 00:08:44,480 --> 00:08:47,440 Speaker 1: lot of risk about the future. I tend to be 146 00:08:47,520 --> 00:08:50,440 Speaker 1: very cynical about new issue in general. The bankers have 147 00:08:50,520 --> 00:08:53,320 Speaker 1: a good sense of timing, which is not in the 148 00:08:53,360 --> 00:08:57,439 Speaker 1: favor of investors. Good sense of timing means knows when 149 00:08:57,440 --> 00:09:00,240 Speaker 1: they can get the perfect pricing for the issue you're 150 00:09:00,480 --> 00:09:04,600 Speaker 1: but probably the worst pricing for the investor. But what 151 00:09:04,640 --> 00:09:06,760 Speaker 1: does this tell you that there is so much demand 152 00:09:06,840 --> 00:09:09,360 Speaker 1: for this bond offering from a company that is burning 153 00:09:09,400 --> 00:09:12,560 Speaker 1: cash and UH and has a lot of sort of 154 00:09:12,679 --> 00:09:19,640 Speaker 1: hair around it. It's tough because there aren't a lot 155 00:09:19,679 --> 00:09:22,360 Speaker 1: of options. There isn't a lot of supply, and so 156 00:09:22,400 --> 00:09:25,920 Speaker 1: if you have to be invested in high yield and 157 00:09:25,960 --> 00:09:30,120 Speaker 1: those are the buyers high yield funds in general, you've 158 00:09:30,160 --> 00:09:33,960 Speaker 1: got to buy what's coming to market, and you can 159 00:09:34,040 --> 00:09:38,640 Speaker 1: make the case that it's good relative value. You're getting 160 00:09:38,640 --> 00:09:43,199 Speaker 1: paid quite a bit. But eight percent may not cover 161 00:09:43,400 --> 00:09:47,040 Speaker 1: the risks that we see down the road. If Uber 162 00:09:47,240 --> 00:09:51,440 Speaker 1: isn't able to execute perfectly, I don't know how many 163 00:09:51,840 --> 00:09:55,679 Speaker 1: new young companies have been able to pull off executing 164 00:09:55,720 --> 00:09:59,440 Speaker 1: things perfectly. Even at my old age, I'm not executing 165 00:09:59,480 --> 00:10:05,120 Speaker 1: things per I stop. I want to put a larger 166 00:10:05,240 --> 00:10:08,400 Speaker 1: question to you, which is that the total US debt 167 00:10:08,480 --> 00:10:15,480 Speaker 1: to GDP ratio is currently around three, and if you 168 00:10:15,520 --> 00:10:23,360 Speaker 1: include state local debt contingent liabilities, this goes above five. Oh. Yes, 169 00:10:24,000 --> 00:10:30,440 Speaker 1: adding global debt to GDP has surged. It's over seventy 170 00:10:30,440 --> 00:10:34,600 Speaker 1: trillion dollars was added to global debt total since two 171 00:10:34,640 --> 00:10:39,760 Speaker 1: thousand eight. Why would people be buying an asset that 172 00:10:39,880 --> 00:10:47,199 Speaker 1: has just swamped the market with supply. It isn't rational 173 00:10:47,440 --> 00:10:50,800 Speaker 1: in the long run, but in the short term, And 174 00:10:50,840 --> 00:10:54,600 Speaker 1: if you're only short term oriented, you can make that case. 175 00:10:55,400 --> 00:10:58,640 Speaker 1: That's the trouble that investors are going to get into 176 00:10:59,040 --> 00:11:02,760 Speaker 1: that if you only think about the short term, your 177 00:11:02,840 --> 00:11:05,920 Speaker 1: eight percent is going to be a lot lower in 178 00:11:06,040 --> 00:11:10,280 Speaker 1: terms of your real return down the road. Pay attention 179 00:11:10,679 --> 00:11:14,079 Speaker 1: to where rates are headed long term. It's eight percent, 180 00:11:14,880 --> 00:11:17,600 Speaker 1: you believe Do you believe that institution well could have 181 00:11:17,640 --> 00:11:22,920 Speaker 1: divided institutional investors? Do you believe they recognize the risks 182 00:11:23,040 --> 00:11:26,000 Speaker 1: or do they see that they can get out. I 183 00:11:26,080 --> 00:11:29,920 Speaker 1: think they think they can get out um. But I 184 00:11:29,960 --> 00:11:34,920 Speaker 1: also think they operate in a short term environment where 185 00:11:34,960 --> 00:11:40,400 Speaker 1: their incentives are to make it through this year. They're 186 00:11:40,400 --> 00:11:43,760 Speaker 1: not thinking about what do I ultimately want to be 187 00:11:43,880 --> 00:11:47,079 Speaker 1: able to deliver. We have come so far away from 188 00:11:47,160 --> 00:11:52,120 Speaker 1: what our jobs ultimately are to do uh that we 189 00:11:52,160 --> 00:11:57,320 Speaker 1: work in very narrow uh spaces. Well, but hold on 190 00:11:57,320 --> 00:11:59,640 Speaker 1: a second, because a lot of people have been sort 191 00:11:59,679 --> 00:12:04,000 Speaker 1: of for telling gloom and doom since given how low 192 00:12:04,080 --> 00:12:06,440 Speaker 1: rates were going and short term turned out to be 193 00:12:06,559 --> 00:12:09,080 Speaker 1: five years at least six years, so you know what 194 00:12:09,240 --> 00:12:11,680 Speaker 1: is short term, especially if people don't foresee a downturn. 195 00:12:12,000 --> 00:12:15,000 Speaker 1: That That is a very good point, and I think 196 00:12:15,000 --> 00:12:18,800 Speaker 1: it's part of what keeps people anchored um in the 197 00:12:18,920 --> 00:12:21,840 Speaker 1: old ways and not thinking about how differently the market 198 00:12:21,840 --> 00:12:26,640 Speaker 1: could be. The biggest signal has been the correlation between 199 00:12:26,679 --> 00:12:29,520 Speaker 1: stocks and bonds of late. We saw it in February 200 00:12:29,600 --> 00:12:33,160 Speaker 1: stock sold off, bonds were essentially flat when they should 201 00:12:33,200 --> 00:12:36,800 Speaker 1: have rallied. It happened again in the last few weeks 202 00:12:36,800 --> 00:12:40,080 Speaker 1: when we saw the equity vall pick up significantly, but 203 00:12:40,640 --> 00:12:44,560 Speaker 1: treasury vall and and in fact credit fall picked up 204 00:12:44,679 --> 00:12:49,240 Speaker 1: very little. So it's not the income. The carry isn't 205 00:12:49,280 --> 00:12:52,520 Speaker 1: serving the role that it did, and that anchor to windward, 206 00:12:52,600 --> 00:12:54,679 Speaker 1: that flight to quality is not working the way that 207 00:12:54,760 --> 00:12:56,920 Speaker 1: it did. So what's your best bet right now, given 208 00:12:56,920 --> 00:13:02,000 Speaker 1: the changing environment, It is to look to look abroad, 209 00:13:02,360 --> 00:13:05,320 Speaker 1: to look away from the US, to look at where 210 00:13:05,360 --> 00:13:10,760 Speaker 1: there's real growth and positive fundamentals and positive economic policy. 211 00:13:11,360 --> 00:13:15,280 Speaker 1: So emerging markets. I continue to harp on that, but 212 00:13:15,400 --> 00:13:19,640 Speaker 1: I think that's where you're seeing inflation coming down, reforms 213 00:13:19,679 --> 00:13:23,960 Speaker 1: being put in place. It's not widespread. There are still 214 00:13:24,559 --> 00:13:28,840 Speaker 1: countries that are struggling to become more mainstream, but there 215 00:13:28,840 --> 00:13:33,360 Speaker 1: are areas of the world, particularly Latin America, that look attractive. 216 00:13:33,679 --> 00:13:36,320 Speaker 1: And I think Asia down the road because of the 217 00:13:37,280 --> 00:13:42,120 Speaker 1: um differences, the long term tension that is increasing between 218 00:13:42,120 --> 00:13:44,920 Speaker 1: the US and China, that is going to have some 219 00:13:45,679 --> 00:13:51,960 Speaker 1: significant implications for countries in Asia that aren't China that 220 00:13:52,000 --> 00:13:58,559 Speaker 1: will benefit from our need to keep our tech capabilities 221 00:13:58,640 --> 00:14:04,679 Speaker 1: close to home and China racing for made so lots 222 00:14:04,679 --> 00:14:09,040 Speaker 1: of long term implications that favor emerging markets. We've got 223 00:14:09,040 --> 00:14:10,920 Speaker 1: to leave it there, but we'd love to have you 224 00:14:10,960 --> 00:14:13,280 Speaker 1: back and spend more time. Thank you very much for 225 00:14:13,320 --> 00:14:18,360 Speaker 1: being here. Thanks Pam Kathen Gaffney, co director of Diversified 226 00:14:18,440 --> 00:14:27,760 Speaker 1: Fixed Income at Eaton Vance on the world's fixed income markets. Well, 227 00:14:27,840 --> 00:14:31,680 Speaker 1: Canada is the second country in the world to legalize 228 00:14:31,840 --> 00:14:36,800 Speaker 1: recreational marijuana and just after Uruguay. And here to tell 229 00:14:36,880 --> 00:14:40,840 Speaker 1: us about perhaps some of the beneficiaries is on AA Grana, 230 00:14:40,920 --> 00:14:44,800 Speaker 1: our senior software and I T Services analyst for Bloomberg 231 00:14:45,000 --> 00:14:51,240 Speaker 1: Intelligence on a rag the company Shopify connect Shopify with 232 00:14:51,360 --> 00:14:57,840 Speaker 1: the legalization of recreational pot Hi, Pim, isn't it interesting 233 00:14:57,840 --> 00:15:02,720 Speaker 1: that IBM st and we're talking cannabis. But you know, 234 00:15:02,880 --> 00:15:07,240 Speaker 1: you look at um Shopify, which provides software and an 235 00:15:07,240 --> 00:15:10,600 Speaker 1: e commerce platform for companies to sell whatever they want 236 00:15:10,600 --> 00:15:13,640 Speaker 1: to sell. UM it's a Canadian domicile the company, so 237 00:15:13,680 --> 00:15:16,640 Speaker 1: it was very natural for I believe the Canadian government 238 00:15:16,680 --> 00:15:18,960 Speaker 1: to go out and you know, use them as one 239 00:15:19,000 --> 00:15:22,880 Speaker 1: of the vendors. And given that their software is cloud based, 240 00:15:23,000 --> 00:15:26,080 Speaker 1: and some of the requirements are that you have to 241 00:15:26,120 --> 00:15:29,400 Speaker 1: make sure that you know, you track the entire supply 242 00:15:29,560 --> 00:15:32,920 Speaker 1: chain of cannabis from you know, the seed to supply 243 00:15:33,120 --> 00:15:36,680 Speaker 1: and also you want to know to make sure that 244 00:15:36,720 --> 00:15:40,800 Speaker 1: you have you know, enough data encryption and privacy regulations 245 00:15:40,800 --> 00:15:43,320 Speaker 1: in place so that you know that the customer data 246 00:15:43,400 --> 00:15:45,960 Speaker 1: is not leaked. So because of those two reasons, I think, 247 00:15:46,000 --> 00:15:49,040 Speaker 1: you know, Shopify was the natural choice. All right, let's 248 00:15:49,160 --> 00:15:51,360 Speaker 1: if Tom Keene were speaking, let's rub up the script, 249 00:15:51,440 --> 00:15:54,400 Speaker 1: because you say that IBM you point out that it's 250 00:15:54,400 --> 00:15:57,880 Speaker 1: having its biggest one day to clients, and this comes 251 00:15:57,920 --> 00:16:00,640 Speaker 1: of course off their disappointing earnings a sort of point 252 00:16:00,640 --> 00:16:04,960 Speaker 1: to some issues with their cloud computing and artificial intelligence units. 253 00:16:05,160 --> 00:16:07,239 Speaker 1: Is this a huge deal or is this an overreaction 254 00:16:07,280 --> 00:16:10,440 Speaker 1: by markets? Oh well, we wrote about this even before 255 00:16:10,520 --> 00:16:13,080 Speaker 1: learnings that, you know, the last push that they got 256 00:16:13,160 --> 00:16:15,200 Speaker 1: from some kind of you know, you would say glimmers 257 00:16:15,240 --> 00:16:17,800 Speaker 1: of hope was through their systems division, which is a 258 00:16:17,800 --> 00:16:21,200 Speaker 1: mainframe refresh they get about two to three years. But 259 00:16:21,400 --> 00:16:24,400 Speaker 1: if you peel that off, you know they're they're petting 260 00:16:24,400 --> 00:16:27,680 Speaker 1: the entire company on Watson, an artificial intelligence and a 261 00:16:27,760 --> 00:16:31,000 Speaker 1: large portion of those products are in a division called 262 00:16:31,400 --> 00:16:34,920 Speaker 1: Cognitive Solutions. And I mean that you know, there was 263 00:16:34,960 --> 00:16:38,080 Speaker 1: down five in constant currency. That's a that's a massive 264 00:16:38,160 --> 00:16:40,280 Speaker 1: drop in our you and I think that's what striving 265 00:16:40,400 --> 00:16:43,440 Speaker 1: this particular UM, you know, sell off and we need 266 00:16:43,480 --> 00:16:45,680 Speaker 1: to understand whether they can recover from this or not. 267 00:16:45,880 --> 00:16:48,280 Speaker 1: So do you think that they can. It's going to 268 00:16:48,320 --> 00:16:51,400 Speaker 1: be tough, especially given that you know the market is 269 00:16:51,400 --> 00:16:54,280 Speaker 1: getting very competitive and there are enough you know, cloud 270 00:16:54,320 --> 00:16:59,320 Speaker 1: based software companies out there. Amazon selling it's artificial intelligence tools, 271 00:16:59,400 --> 00:17:02,880 Speaker 1: enterprise art visual intelligence tools, Microsoft is selling it, Google 272 00:17:02,920 --> 00:17:05,840 Speaker 1: is selling it UM. I mean theeed IBM people have 273 00:17:05,880 --> 00:17:09,000 Speaker 1: to do something drastic and something you know completely, I 274 00:17:09,000 --> 00:17:13,280 Speaker 1: would say, um urgently. Otherwise, you know, people not gonna 275 00:17:13,320 --> 00:17:16,560 Speaker 1: like sales, you know, being negative let's say in the 276 00:17:16,600 --> 00:17:18,600 Speaker 1: next couple of years. That's not going to go well 277 00:17:18,640 --> 00:17:22,560 Speaker 1: with them on the rug. How did IBM miss this? 278 00:17:24,520 --> 00:17:27,600 Speaker 1: It's tough him as I've said it for the last 279 00:17:27,640 --> 00:17:29,840 Speaker 1: several years. I mean, this is a company which has 280 00:17:29,880 --> 00:17:34,240 Speaker 1: a fair amount of legacy I T services business and UM. 281 00:17:34,359 --> 00:17:37,080 Speaker 1: Sooner or later, a large portion of data centers are 282 00:17:37,080 --> 00:17:40,119 Speaker 1: being closed down, People are moving workloads to the cloud. 283 00:17:40,200 --> 00:17:43,800 Speaker 1: People are actually sometimes renting somebody else's data. No, I 284 00:17:43,840 --> 00:17:49,560 Speaker 1: know all this, but how did IBM miss this trend? Oh? 285 00:17:49,760 --> 00:17:51,480 Speaker 1: You mean to say from a large I would have 286 00:17:51,480 --> 00:17:53,760 Speaker 1: to go back to Mr Sam Paulisono and ask him 287 00:17:53,760 --> 00:17:56,560 Speaker 1: this thing. This goes way beyond you know, even earlier 288 00:17:56,600 --> 00:18:00,080 Speaker 1: than gineer Maries days, because um, this this move, it 289 00:18:00,080 --> 00:18:03,000 Speaker 1: has been going on for over ten years, and IBM, 290 00:18:03,080 --> 00:18:05,359 Speaker 1: I think, you know, was was a lagged at that point. 291 00:18:06,040 --> 00:18:08,760 Speaker 1: So I'm just looking right now. So IBM is considered 292 00:18:08,760 --> 00:18:11,920 Speaker 1: one of the big giants, the stalwarts of the Czech universe. 293 00:18:12,040 --> 00:18:15,080 Speaker 1: In the United States, hasn't a rating, has a whole 294 00:18:15,080 --> 00:18:18,200 Speaker 1: bunch of debt. Do you see this sort of miss 295 00:18:18,200 --> 00:18:21,000 Speaker 1: and they're missing of the trend to be a permanent 296 00:18:21,000 --> 00:18:24,320 Speaker 1: blemish that going forward they cannot recover from, will end 297 00:18:24,400 --> 00:18:28,480 Speaker 1: up degrading their credit rating and create a downward spiral 298 00:18:28,560 --> 00:18:31,280 Speaker 1: for them. So I'm not sure about the credit rating 299 00:18:31,320 --> 00:18:32,840 Speaker 1: part of it, because at the end of the day, 300 00:18:32,880 --> 00:18:34,960 Speaker 1: you know, one division was down five the other one 301 00:18:35,040 --> 00:18:37,280 Speaker 1: was too. You know, if you're going to be looking 302 00:18:37,320 --> 00:18:39,760 Speaker 1: at zero two percent growth, you mean you're gonna probably 303 00:18:39,760 --> 00:18:41,639 Speaker 1: make the same amount of money next year to the 304 00:18:41,680 --> 00:18:44,080 Speaker 1: year after. But if you're a tech company, you know 305 00:18:44,520 --> 00:18:47,159 Speaker 1: mrs want to see growth at least equity investors do. 306 00:18:47,680 --> 00:18:49,520 Speaker 1: So from that point of view, I think the biggest 307 00:18:49,600 --> 00:18:52,200 Speaker 1: question is can they show positive growth over the next 308 00:18:52,240 --> 00:18:55,320 Speaker 1: couple of years, and yesterday's results puts a big question 309 00:18:55,359 --> 00:18:57,520 Speaker 1: mark to it because you know, as I said, one 310 00:18:57,520 --> 00:19:01,120 Speaker 1: of the most promising divisions, that's the one where the photos. Yeah, 311 00:19:01,359 --> 00:19:03,439 Speaker 1: Annora Grana, thank you so much for being with us. 312 00:19:03,440 --> 00:19:06,440 Speaker 1: Annora Grana, Senior analyst of Software and I T Services 313 00:19:06,440 --> 00:19:10,240 Speaker 1: at Bloomberg Intelligence. And IBM does have more than forty 314 00:19:10,240 --> 00:19:14,080 Speaker 1: one billion dollars of debt um, which you know isn't 315 00:19:14,160 --> 00:19:17,080 Speaker 1: massive compared to their cap market cap compared to say, 316 00:19:17,119 --> 00:19:19,000 Speaker 1: I don't know a Netflix out there or one of 317 00:19:19,040 --> 00:19:22,359 Speaker 1: the others, but definitely interesting and shares are plunging today 318 00:19:22,400 --> 00:19:28,040 Speaker 1: after their disappointing earnings last night. Our guest is Ben Emmons. 319 00:19:28,080 --> 00:19:31,160 Speaker 1: He is the chief economist and head of Credit Portfolio 320 00:19:31,280 --> 00:19:35,679 Speaker 1: Management and Intellectist Partners. He is also a contributor to 321 00:19:35,760 --> 00:19:39,440 Speaker 1: Bloomberg Opinion. He's based in Los Angeles. Ben, thank you 322 00:19:39,520 --> 00:19:42,119 Speaker 1: very much for being with us. Talk if you can 323 00:19:42,200 --> 00:19:45,200 Speaker 1: about the independence of the Federal Reserve and how many 324 00:19:45,320 --> 00:19:51,679 Speaker 1: interest rate increases you see in twenty nineteen after the 325 00:19:51,720 --> 00:19:55,320 Speaker 1: mid term elections. Good morning, Bim, and thanks very much 326 00:19:55,320 --> 00:19:58,520 Speaker 1: for having me. Um. Well, the defend independence is very much. 327 00:19:58,600 --> 00:20:00,560 Speaker 1: Dare I think that that the v in comments by 328 00:20:00,560 --> 00:20:03,879 Speaker 1: bus Stage or even Kaplan have indicated clearly that you know, 329 00:20:03,960 --> 00:20:06,439 Speaker 1: we're staying the course here. Paul will not come out 330 00:20:06,520 --> 00:20:09,080 Speaker 1: himselves maybe saying this, but clearly they're going to stay 331 00:20:09,119 --> 00:20:12,440 Speaker 1: the course. Um. And that's really cement about his labor 332 00:20:12,480 --> 00:20:15,639 Speaker 1: market strength, like for example, Jolt State yesterday shows that 333 00:20:15,640 --> 00:20:17,760 Speaker 1: that you know, they can keep that gradual rate hike 334 00:20:17,840 --> 00:20:21,760 Speaker 1: patients intact, which I think we will see another three 335 00:20:21,800 --> 00:20:24,879 Speaker 1: rate hikes into the middle of twenty nineteen, which will 336 00:20:24,920 --> 00:20:28,120 Speaker 1: bring us closer to that three number on the fat 337 00:20:28,119 --> 00:20:30,719 Speaker 1: fronds rate, which is sort of the long term neutral rate. 338 00:20:30,800 --> 00:20:33,199 Speaker 1: I think that's where they're heading. It does seem like 339 00:20:33,400 --> 00:20:36,360 Speaker 1: that's what is being priced into the market. But I'd 340 00:20:36,400 --> 00:20:39,200 Speaker 1: love to get your opinion. Just on something that happened 341 00:20:39,280 --> 00:20:42,159 Speaker 1: yesterday to not a lot of fanfare. There was the 342 00:20:42,240 --> 00:20:45,560 Speaker 1: first time ever that the Treasury Department sold eight week 343 00:20:45,800 --> 00:20:49,560 Speaker 1: treasury bills two month treasury bills. And I don't know 344 00:20:49,600 --> 00:20:51,239 Speaker 1: if this is wrong to say, but it was not 345 00:20:51,320 --> 00:20:55,080 Speaker 1: a good auction and I've seen sort of some distortions 346 00:20:55,359 --> 00:20:57,600 Speaker 1: in the front end of the treasury market. In a 347 00:20:57,640 --> 00:21:01,840 Speaker 1: response with three month treasury yield climbing at a disproportionate rate. 348 00:21:02,160 --> 00:21:03,879 Speaker 1: Do you think this was a mistake at the Treasury 349 00:21:03,920 --> 00:21:08,960 Speaker 1: Department's part. So it's an interesting dynamic that as you're highlighting, Lisa, 350 00:21:09,000 --> 00:21:11,440 Speaker 1: because you know, this is like a really short term 351 00:21:11,480 --> 00:21:13,600 Speaker 1: gap measure if you think about it, right, you financed 352 00:21:13,600 --> 00:21:16,399 Speaker 1: the deficit really short term, and not all of it 353 00:21:16,440 --> 00:21:18,760 Speaker 1: of course, but like it's one of those measures and 354 00:21:19,240 --> 00:21:21,959 Speaker 1: two months, right, which binks is you know, basically at 355 00:21:21,960 --> 00:21:24,520 Speaker 1: the end of the year. So you know, I think 356 00:21:24,560 --> 00:21:26,439 Speaker 1: what the market is trying to indicate it is like 357 00:21:26,480 --> 00:21:28,520 Speaker 1: all this sort of supply that then needs to be 358 00:21:28,720 --> 00:21:31,000 Speaker 1: rolled over again. It is what I think causes some 359 00:21:31,080 --> 00:21:34,160 Speaker 1: of that distortion. The other part I think is happening 360 00:21:34,240 --> 00:21:37,200 Speaker 1: is that we're going again towards this year and effect 361 00:21:37,240 --> 00:21:39,520 Speaker 1: on bank balance sheets, right, that that tends to be 362 00:21:39,560 --> 00:21:41,760 Speaker 1: the case when they withdraw some of the balance sheet 363 00:21:41,760 --> 00:21:45,480 Speaker 1: to fund other people's balunce sheets, And therefore I think 364 00:21:45,520 --> 00:21:48,000 Speaker 1: you get some distortion and money market rates to which 365 00:21:48,040 --> 00:21:51,359 Speaker 1: includes treasury bills. Why maybe some of his bidding wasn't 366 00:21:51,400 --> 00:21:54,439 Speaker 1: that strong in the in the treasury bill market. That 367 00:21:54,520 --> 00:21:56,800 Speaker 1: being said, though, if you think about treasury bills is 368 00:21:56,840 --> 00:21:59,719 Speaker 1: and safe assets. It's still very much in demand, right, 369 00:21:59,760 --> 00:22:03,480 Speaker 1: So I don't think that the distortionself isn't signal that 370 00:22:03,560 --> 00:22:06,720 Speaker 1: the demand for safe as is a necessarily change. But 371 00:22:06,920 --> 00:22:09,080 Speaker 1: let's go overseas if we can for just a moment. 372 00:22:09,119 --> 00:22:10,880 Speaker 1: I want to get your thoughts on what is happening 373 00:22:10,880 --> 00:22:16,880 Speaker 1: in Italy and the European Union and the Italian government's budget. Yeah, 374 00:22:16,960 --> 00:22:19,760 Speaker 1: so you know, the headlinesing and today are just very 375 00:22:19,840 --> 00:22:23,080 Speaker 1: European bim if you think about that, you have the 376 00:22:23,119 --> 00:22:25,920 Speaker 1: European Commission that wants Italy to stick with the rules, 377 00:22:26,080 --> 00:22:28,919 Speaker 1: and of course Italy proposes a budget that's you know, 378 00:22:29,040 --> 00:22:31,760 Speaker 1: not sticking with the rules. And you see Salvini just 379 00:22:31,920 --> 00:22:34,439 Speaker 1: out now saying let us just do the work. And 380 00:22:34,480 --> 00:22:38,040 Speaker 1: then you have the entaser, you know, chairman coming out like, wow, 381 00:22:38,160 --> 00:22:40,240 Speaker 1: we don't know, we're going to support and the idea 382 00:22:40,240 --> 00:22:41,879 Speaker 1: of rules and we're gonna stick with that. So you 383 00:22:41,920 --> 00:22:44,840 Speaker 1: have this noise, right, and what it does is in 384 00:22:45,240 --> 00:22:49,040 Speaker 1: particularly European bomb markets, gives this perception that there will 385 00:22:49,080 --> 00:22:52,720 Speaker 1: be a standoff idea that just like Shablow with treesa 386 00:22:53,320 --> 00:22:56,320 Speaker 1: trip us in the past and Greece, that that creates 387 00:22:56,320 --> 00:22:59,040 Speaker 1: and widening of spreads, just uncertainty gets priced in there. 388 00:22:59,520 --> 00:23:02,560 Speaker 1: Ultimately Italy will likely go its way and does this 389 00:23:02,640 --> 00:23:05,280 Speaker 1: budget of two point four percent, and then there's a 390 00:23:05,359 --> 00:23:07,320 Speaker 1: question about how they're going to moderate it over the 391 00:23:07,400 --> 00:23:10,440 Speaker 1: over the time that comes after that in terms of 392 00:23:10,760 --> 00:23:14,239 Speaker 1: controlling the deficit, because clearly Italian rates have risen much 393 00:23:14,280 --> 00:23:16,960 Speaker 1: higher with this view that that death load is becoming 394 00:23:16,960 --> 00:23:20,399 Speaker 1: more problematic. From here, how much further do you expect 395 00:23:20,440 --> 00:23:22,359 Speaker 1: the Italian yields to rise though? I mean, are we 396 00:23:22,440 --> 00:23:24,520 Speaker 1: just sort of at the beginning or middle end of 397 00:23:24,560 --> 00:23:27,280 Speaker 1: the widening. So if you think about what happened in 398 00:23:27,280 --> 00:23:29,880 Speaker 1: the in the death crisis a number of years ago, 399 00:23:30,320 --> 00:23:32,800 Speaker 1: when we were at seven percent in the Italian yields, 400 00:23:32,840 --> 00:23:36,119 Speaker 1: that was really pricing Italy essentially being out of the Eurozone, 401 00:23:36,119 --> 00:23:38,680 Speaker 1: out of the monetary Union. And so I don't think 402 00:23:38,680 --> 00:23:41,520 Speaker 1: we'll go to death directions as yet. This three and 403 00:23:41,520 --> 00:23:43,720 Speaker 1: a half percent seems to me more like what markets 404 00:23:43,760 --> 00:23:47,119 Speaker 1: are indicating that in order to run the deficits like 405 00:23:47,119 --> 00:23:50,080 Speaker 1: like two point four percent and the debt GDP rates 406 00:23:50,080 --> 00:23:53,320 Speaker 1: you're well over hunters in order to stabilize the death 407 00:23:53,400 --> 00:23:56,239 Speaker 1: GDP ratio, that needs to be higher risk beaming right 408 00:23:56,280 --> 00:23:58,720 Speaker 1: in order to to compensate for that. I think this 409 00:23:58,800 --> 00:24:00,680 Speaker 1: is why three and a half percent the ten years 410 00:24:00,800 --> 00:24:03,240 Speaker 1: sort of reflecting, and we could go up a little 411 00:24:03,240 --> 00:24:06,840 Speaker 1: bit more from here, because if this uncertainty remains about, 412 00:24:07,160 --> 00:24:10,480 Speaker 1: you know, approving this budget, markets will price and uncertainty 413 00:24:10,520 --> 00:24:13,119 Speaker 1: into the higher yields. So, since we're in Europe and 414 00:24:13,160 --> 00:24:15,920 Speaker 1: we're overseas, I want to get your thoughts on Turkey, 415 00:24:16,080 --> 00:24:19,280 Speaker 1: which has been dealing with a currency crisis and then decides, 416 00:24:19,320 --> 00:24:22,359 Speaker 1: well it's ebbed a little bit. We've released that pastor uh, 417 00:24:22,560 --> 00:24:25,600 Speaker 1: we're gonna now sell dollar bonds two billion dollars of them. 418 00:24:25,640 --> 00:24:29,200 Speaker 1: Would you be a buyer of Turkish dollar bonds right now? So? 419 00:24:29,320 --> 00:24:31,960 Speaker 1: I think that that greatly depends upon the stability of 420 00:24:31,960 --> 00:24:35,399 Speaker 1: the Turkish layer itself. That the central bank has responded, 421 00:24:35,480 --> 00:24:38,280 Speaker 1: and there's been some you know, if you think about 422 00:24:38,320 --> 00:24:41,280 Speaker 1: the debate about central bank independence, which clearly was at 423 00:24:41,320 --> 00:24:43,919 Speaker 1: stake it in Turkey, given the relationship with Oregon and 424 00:24:43,960 --> 00:24:46,960 Speaker 1: the central bank, I would be very cautious about dollar 425 00:24:47,000 --> 00:24:49,920 Speaker 1: bonds as yet for Turkey because I'm not so sure 426 00:24:49,960 --> 00:24:52,239 Speaker 1: if the central bank will follow on with more rate 427 00:24:52,320 --> 00:24:55,240 Speaker 1: high measures to control the inflation, which is really spiring 428 00:24:55,359 --> 00:24:58,200 Speaker 1: right now, and so the Turkish layer has been temporarily 429 00:24:58,200 --> 00:25:01,639 Speaker 1: I think stabilized that stage very weak right. It hasn't 430 00:25:01,720 --> 00:25:05,199 Speaker 1: really rallied any further from here, So I would not 431 00:25:05,280 --> 00:25:07,520 Speaker 1: be necessarily and investor in dollar bones in Turkey at 432 00:25:07,520 --> 00:25:09,560 Speaker 1: there's a moment. Ben Emmon's, thank you so much for 433 00:25:09,600 --> 00:25:12,080 Speaker 1: being with us. Van Emmon's is chief economist and head 434 00:25:12,080 --> 00:25:15,879 Speaker 1: of a credit portfolio management and Intellectus Partners LLC in 435 00:25:16,160 --> 00:25:21,240 Speaker 1: Los Angeles. He's also a contributor to Bloomberg Opinion. Thanks 436 00:25:21,280 --> 00:25:23,879 Speaker 1: for listening to the Bloomberg P and L podcast. You 437 00:25:23,920 --> 00:25:27,719 Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud, 438 00:25:27,840 --> 00:25:31,280 Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm 439 00:25:31,320 --> 00:25:35,320 Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. 440 00:25:35,440 --> 00:25:38,040 Speaker 1: It's one before the podcast. You can always catch us 441 00:25:38,080 --> 00:25:39,680 Speaker 1: worldwide on Bloomberg Radio.