WEBVTT - Digital Currencies Are Entering A Third Phase: CoinShares Chair 0:00:05.800 --> 0:00:08.320 Welcome to the Bloomberg P and L Podcast. I'm Pim 0:00:08.400 --> 0:00:11.200 Fox along with my co host Lisa A. Bramowitz. Each 0:00:11.240 --> 0:00:14.400 day we bring you the most important, noteworthy, and useful 0:00:14.440 --> 0:00:17.079 interviews for you and your money, whether you're at the 0:00:17.079 --> 0:00:20.360 grocery store or the trading floor. Find the Bloomberg P 0:00:20.520 --> 0:00:27.600 M L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. 0:00:27.600 --> 0:00:32.720 The news this week, financial services giant Fidelity is taking 0:00:32.760 --> 0:00:35.760 a huge step into the world of cryptocurrency. It announced 0:00:35.760 --> 0:00:40.560 the launch of a separate company called Fidelity Digital Assets Services. 0:00:40.960 --> 0:00:45.760 It is designed to handle cryptocurrency custody and trade execution 0:00:46.200 --> 0:00:50.879 for institutional investors. And I think there's probably no one 0:00:51.159 --> 0:00:55.440 better to comment on this than Danny Masters. Danny Masters is, 0:00:55.480 --> 0:00:59.520 of course the chairman of coin Shares. He is previously 0:00:59.640 --> 0:01:02.920 the head of JP Morgan's New York energy trading business 0:01:03.200 --> 0:01:05.640 before he set up his own commodity funds. He joins 0:01:05.720 --> 0:01:09.679 us here in our Bloomberg Interact or Broker Studios. Danny, 0:01:09.720 --> 0:01:11.959 thank you very much for coming in. What was your 0:01:11.959 --> 0:01:16.240 reaction when you heard that Fidelity was offering these kinds 0:01:16.240 --> 0:01:21.320 of services? About time? Abby Cohen's been at the forefront 0:01:21.920 --> 0:01:25.640 of distributed ledger technology. For some time, we've interacted with 0:01:25.640 --> 0:01:32.480 Fidelity across multiple vectors, Um Johnson, Abbie Johnson's face parton Johnson, 0:01:32.680 --> 0:01:35.280 You're right and she Um, I think what you know 0:01:35.600 --> 0:01:40.720 in concert with her founding grandfather's view about the finances, Um, 0:01:40.760 --> 0:01:42.600 you know, they think big and they think forward, and 0:01:43.720 --> 0:01:45.679 she sees this as being a new industry in a 0:01:45.680 --> 0:01:48.720 new way to form capital and distribute capital. Um. And 0:01:48.800 --> 0:01:50.480 I think they're going to do very well with that. 0:01:51.280 --> 0:01:54.120 Do you still think, given all the volatility that we've 0:01:54.160 --> 0:01:58.840 seen in cryptocurrencies this year, that this asset class is 0:01:59.040 --> 0:02:01.640 sort of a new commodity of sorts in a new 0:02:01.720 --> 0:02:05.800 store of wealth. I think the narrative change is very 0:02:05.880 --> 0:02:09.880 rapidly in crypto. It is an evolutionary process, for sure, 0:02:09.919 --> 0:02:13.840 maybe a revolutionary process. Uh. And the way I'm currently 0:02:13.880 --> 0:02:16.639 thinking is really in that what is happening now and 0:02:17.000 --> 0:02:20.240 the timely entry of Fidelity and others is really the 0:02:20.480 --> 0:02:23.720 what I call the third wave of the crypto movement. 0:02:24.240 --> 0:02:28.639 First wave Bitcoin arrives, it disrupts golden money. The second 0:02:28.680 --> 0:02:31.600 wave we see ethereum a new blockchain that has the 0:02:31.600 --> 0:02:35.560 ability to form capital. That happens very rapidly in in 0:02:35.600 --> 0:02:39.560 a in a very large way. The SEC don't like that. 0:02:39.720 --> 0:02:42.880 We're talking initial coin offering, initial coin offerings. The SEC 0:02:43.040 --> 0:02:45.200 don't like that for obvious reasons, and that comes to 0:02:45.440 --> 0:02:49.400 essentially a screeching halt. Third wave, in my opinion, will 0:02:49.480 --> 0:02:52.360 be this so called security token. So you cannot do 0:02:52.400 --> 0:02:54.919 an initial coin offering with ease anymore, but you can 0:02:54.960 --> 0:02:58.639 do a security token. What does that mean? That will 0:02:58.680 --> 0:03:01.519 be in the first instance, one of the exemptions from 0:03:01.560 --> 0:03:04.160 the Securities Act, either a reg A and a plus 0:03:04.480 --> 0:03:08.560 reg D reg S, whereby a token will will represent 0:03:08.639 --> 0:03:12.320 equity in a private company and it will exist in 0:03:12.360 --> 0:03:15.920 this space between what has traditionally been private companies and 0:03:16.120 --> 0:03:19.440 public companies, and it will be a hybrid which is 0:03:19.480 --> 0:03:24.440 transparent and liquid and transferable. Why do we need this Well, 0:03:24.639 --> 0:03:28.960 I think you for the average investor um to buy 0:03:29.000 --> 0:03:32.200 into a fully publicly listed company, you know the S 0:03:32.280 --> 0:03:35.360 and P multiple will be around right now. If you 0:03:35.400 --> 0:03:37.560 buy into a private company, you might get the five 0:03:37.600 --> 0:03:40.680 to ten P So there is potentially a tremendous value 0:03:40.720 --> 0:03:43.880 to be a accrued to a smaller investor coming in 0:03:43.920 --> 0:03:45.960 at the lower end of that of that P spread 0:03:46.080 --> 0:03:49.560 because those assets are typically not available to the average person. 0:03:50.560 --> 0:03:52.600 I want to ask you about something having to do 0:03:52.680 --> 0:03:57.800 with access, because if and I know from your website, 0:03:57.840 --> 0:04:01.960 if you have a broker that already does business on 0:04:02.000 --> 0:04:06.960 the NASDAK in Sweden, you already have pretty much access 0:04:07.120 --> 0:04:12.720 to a variety of trackers for cryptocurrencies. There's the Bitcoin 0:04:12.960 --> 0:04:15.880 Tracker one, there's one in Euros. There's also the Ether 0:04:16.320 --> 0:04:20.440 tracker one and one in Euros. What have you learned 0:04:20.440 --> 0:04:24.800 from that experience? It's been a expt provider, has been 0:04:25.279 --> 0:04:28.279 a wonderful journey for us. You know, we we we 0:04:28.360 --> 0:04:30.799 started very small and we got I think we peeked 0:04:30.880 --> 0:04:33.240 around one point seven billion, and the prices were high 0:04:33.279 --> 0:04:37.280 last year and obviously receded with the price drop. Um 0:04:37.320 --> 0:04:41.640 it's been an interesting episode and journey with NASDAC themselves 0:04:42.240 --> 0:04:46.599 because it's a controversial asset class. It has characteristics like 0:04:46.760 --> 0:04:50.560 security of the assets themselves which don't exist in other 0:04:50.600 --> 0:04:54.200 asset classes. I think you've seen NASDAC themselves now starting 0:04:54.240 --> 0:04:57.840 to talk about security token exchanges as well going forward. 0:04:58.240 --> 0:05:00.560 So you know, it was an embry on, it an 0:05:00.680 --> 0:05:03.839 early adoption and it got a lot of traction and 0:05:03.880 --> 0:05:06.120 I think it's going to be the first of not 0:05:06.240 --> 0:05:11.560 only trackers in other markets and other jurisdictions on bitcoin 0:05:11.680 --> 0:05:14.000 and other cryptos, but I think it will be that 0:05:14.200 --> 0:05:17.240 it will prove to be the precursor to the larger exchanges. 0:05:17.279 --> 0:05:21.000 Actually looking at security token markets themselves, So how does 0:05:21.240 --> 0:05:26.040 blockchain fit into these sort of securities token markets because 0:05:26.040 --> 0:05:28.280 it just listening to it, it sounds like it's a 0:05:28.279 --> 0:05:32.279 way to create a token that is outside of the 0:05:32.360 --> 0:05:36.760 public equity regulatory structure. But how does blockchain fit into 0:05:36.800 --> 0:05:40.760 It's not actually outside of the regulatary structure, it's outside 0:05:40.760 --> 0:05:47.080 of the piping and infrastructure of the conventional marketplace. So, um, 0:05:47.560 --> 0:05:50.120 when you look at how the Chicago merk or the 0:05:50.120 --> 0:05:53.560 New York Stock Exchange work, there is a bunch of 0:05:53.600 --> 0:05:56.839 electronic piping that goes around making the transfer and the 0:05:56.880 --> 0:05:59.760 trading of these shares happen. Um, and that is a 0:05:59.760 --> 0:06:03.719 con cerebral infrastructure. And there has been talk about deploying 0:06:03.800 --> 0:06:07.960 distributed ledger technologies to these exchanges in order to get 0:06:07.960 --> 0:06:11.920 the advantages of distributed ledger technology. What are the advantages? 0:06:12.320 --> 0:06:19.240 They are real time settlement, low latency, transferability, portability, ext 0:06:19.320 --> 0:06:24.359 central crisis for b andy melon right exactly. So, so 0:06:24.440 --> 0:06:28.039 those are the advantages. But rather than re engineer the 0:06:28.120 --> 0:06:30.560 CME so that they rip out all their old systems 0:06:30.560 --> 0:06:33.640 and put in distributed ledger databases and so on, what 0:06:33.720 --> 0:06:36.560 you do is you turn securities into cryptos, and you 0:06:36.600 --> 0:06:39.080 turn them you trade them on crypto exchanges. So we're 0:06:39.080 --> 0:06:41.800 seeing this with a bunch of companies out there. They're 0:06:41.800 --> 0:06:45.640 taking as a certain an example before the regg D environment, 0:06:46.000 --> 0:06:48.600 creating a security in a token. We will have an 0:06:48.640 --> 0:06:51.159 ice in, but it will trade in a some sort 0:06:51.160 --> 0:06:53.279 of walled garden that will look like a crypto exchange. 0:06:53.560 --> 0:06:56.480 You've seen coin based do this um. The structure that 0:06:56.520 --> 0:07:01.480 they're putting together is a register broker dealer, a registered 0:07:01.520 --> 0:07:04.760 investment advisor in all fifty states, and an automated and 0:07:04.800 --> 0:07:07.640 alternative trading system. Once you put those three things together, 0:07:07.640 --> 0:07:10.080 plus the twelve and a half million customers, they have 0:07:10.160 --> 0:07:12.960 their own stock market, and once they issue tokens on it. 0:07:13.280 --> 0:07:16.440 This is a competitor's nicely and that step just quickly. 0:07:16.960 --> 0:07:19.360 Should you mine or should you buy? If you're an 0:07:19.400 --> 0:07:25.640 individual to learn about this marketplace, buy, okay, don't go 0:07:25.680 --> 0:07:29.920 into the mining business. I think for coin Shares at least. 0:07:30.400 --> 0:07:33.080 You know, we we we occupy multiple verticals in this 0:07:33.280 --> 0:07:36.240 digital esset space. The one thing we don't do directly 0:07:36.360 --> 0:07:41.160 is mining. It's a very complex calculation in order to 0:07:41.160 --> 0:07:44.120 figure out the economics of mining. It is also something 0:07:44.120 --> 0:07:46.280 of an arms race when it comes to the chips 0:07:46.280 --> 0:07:48.080 and the technology that go with it, and we don't 0:07:48.080 --> 0:07:50.840 really want to play in that space. Danny Masters a pleasure. 0:07:50.840 --> 0:07:52.720 Thank you so much for coming in. We really appreciate it. 0:07:52.800 --> 0:07:55.120 My pleasure, thank you, Thank you guys. Danny Masters is 0:07:55.120 --> 0:07:57.040 a share a bit of coin Shares Group, which oversees 0:07:57.160 --> 0:07:59.080 about a billion dollars or more than a billion dollars 0:07:59.120 --> 0:08:02.000 of crypto. So it's from London, although he joins us 0:08:02.000 --> 0:08:03.760 here in our eleven three oh studios, and of course 0:08:03.800 --> 0:08:05.640 he is a former global head of Energy and Trading 0:08:05.880 --> 0:08:08.920 at the predecessor of JP Morgan and then the JP 0:08:09.000 --> 0:08:16.160 Morgan Unich him. Yesterday, news came out that Uber Technologies 0:08:16.240 --> 0:08:19.960 is increasing the size of its debut bond offering since 0:08:20.000 --> 0:08:22.720 there just is so much demand. They're going from one 0:08:22.760 --> 0:08:25.600 and a half billion to two billion dollars of bonds. 0:08:26.080 --> 0:08:29.200 Joining us now, Kathleen Gaffney co director of Diversified Fixed 0:08:29.200 --> 0:08:32.520 Income and EAT Advance UH and GURU and all things 0:08:32.640 --> 0:08:36.160 fixed income and credit. Kathleen, are you out there buying 0:08:36.200 --> 0:08:40.520 these super bonds? We are not UH as as tantalizing 0:08:40.600 --> 0:08:44.480 as eight percent is. Eight percent comes with a whole 0:08:44.480 --> 0:08:47.440 lot of risk about the future. I tend to be 0:08:47.520 --> 0:08:50.440 very cynical about new issue in general. The bankers have 0:08:50.520 --> 0:08:53.320 a good sense of timing, which is not in the 0:08:53.360 --> 0:08:57.439 favor of investors. Good sense of timing means knows when 0:08:57.440 --> 0:09:00.240 they can get the perfect pricing for the issue you're 0:09:00.480 --> 0:09:04.600 but probably the worst pricing for the investor. But what 0:09:04.640 --> 0:09:06.760 does this tell you that there is so much demand 0:09:06.840 --> 0:09:09.360 for this bond offering from a company that is burning 0:09:09.400 --> 0:09:12.560 cash and UH and has a lot of sort of 0:09:12.679 --> 0:09:19.640 hair around it. It's tough because there aren't a lot 0:09:19.679 --> 0:09:22.360 of options. There isn't a lot of supply, and so 0:09:22.400 --> 0:09:25.920 if you have to be invested in high yield and 0:09:25.960 --> 0:09:30.120 those are the buyers high yield funds in general, you've 0:09:30.160 --> 0:09:33.960 got to buy what's coming to market, and you can 0:09:34.040 --> 0:09:38.640 make the case that it's good relative value. You're getting 0:09:38.640 --> 0:09:43.199 paid quite a bit. But eight percent may not cover 0:09:43.400 --> 0:09:47.040 the risks that we see down the road. If Uber 0:09:47.240 --> 0:09:51.440 isn't able to execute perfectly, I don't know how many 0:09:51.840 --> 0:09:55.679 new young companies have been able to pull off executing 0:09:55.720 --> 0:09:59.440 things perfectly. Even at my old age, I'm not executing 0:09:59.480 --> 0:10:05.120 things per I stop. I want to put a larger 0:10:05.240 --> 0:10:08.400 question to you, which is that the total US debt 0:10:08.480 --> 0:10:15.480 to GDP ratio is currently around three, and if you 0:10:15.520 --> 0:10:23.360 include state local debt contingent liabilities, this goes above five. Oh. Yes, 0:10:24.000 --> 0:10:30.440 adding global debt to GDP has surged. It's over seventy 0:10:30.440 --> 0:10:34.600 trillion dollars was added to global debt total since two 0:10:34.640 --> 0:10:39.760 thousand eight. Why would people be buying an asset that 0:10:39.880 --> 0:10:47.199 has just swamped the market with supply. It isn't rational 0:10:47.440 --> 0:10:50.800 in the long run, but in the short term, And 0:10:50.840 --> 0:10:54.600 if you're only short term oriented, you can make that case. 0:10:55.400 --> 0:10:58.640 That's the trouble that investors are going to get into 0:10:59.040 --> 0:11:02.760 that if you only think about the short term, your 0:11:02.840 --> 0:11:05.920 eight percent is going to be a lot lower in 0:11:06.040 --> 0:11:10.280 terms of your real return down the road. Pay attention 0:11:10.679 --> 0:11:14.079 to where rates are headed long term. It's eight percent, 0:11:14.880 --> 0:11:17.600 you believe Do you believe that institution well could have 0:11:17.640 --> 0:11:22.920 divided institutional investors? Do you believe they recognize the risks 0:11:23.040 --> 0:11:26.000 or do they see that they can get out. I 0:11:26.080 --> 0:11:29.920 think they think they can get out um. But I 0:11:29.960 --> 0:11:34.920 also think they operate in a short term environment where 0:11:34.960 --> 0:11:40.400 their incentives are to make it through this year. They're 0:11:40.400 --> 0:11:43.760 not thinking about what do I ultimately want to be 0:11:43.880 --> 0:11:47.079 able to deliver. We have come so far away from 0:11:47.160 --> 0:11:52.120 what our jobs ultimately are to do uh that we 0:11:52.160 --> 0:11:57.320 work in very narrow uh spaces. Well, but hold on 0:11:57.320 --> 0:11:59.640 a second, because a lot of people have been sort 0:11:59.679 --> 0:12:04.000 of for telling gloom and doom since given how low 0:12:04.080 --> 0:12:06.440 rates were going and short term turned out to be 0:12:06.559 --> 0:12:09.080 five years at least six years, so you know what 0:12:09.240 --> 0:12:11.680 is short term, especially if people don't foresee a downturn. 0:12:12.000 --> 0:12:15.000 That That is a very good point, and I think 0:12:15.000 --> 0:12:18.800 it's part of what keeps people anchored um in the 0:12:18.920 --> 0:12:21.840 old ways and not thinking about how differently the market 0:12:21.840 --> 0:12:26.640 could be. The biggest signal has been the correlation between 0:12:26.679 --> 0:12:29.520 stocks and bonds of late. We saw it in February 0:12:29.600 --> 0:12:33.160 stock sold off, bonds were essentially flat when they should 0:12:33.200 --> 0:12:36.800 have rallied. It happened again in the last few weeks 0:12:36.800 --> 0:12:40.080 when we saw the equity vall pick up significantly, but 0:12:40.640 --> 0:12:44.560 treasury vall and and in fact credit fall picked up 0:12:44.679 --> 0:12:49.240 very little. So it's not the income. The carry isn't 0:12:49.280 --> 0:12:52.520 serving the role that it did, and that anchor to windward, 0:12:52.600 --> 0:12:54.679 that flight to quality is not working the way that 0:12:54.760 --> 0:12:56.920 it did. So what's your best bet right now, given 0:12:56.920 --> 0:13:02.000 the changing environment, It is to look to look abroad, 0:13:02.360 --> 0:13:05.320 to look away from the US, to look at where 0:13:05.360 --> 0:13:10.760 there's real growth and positive fundamentals and positive economic policy. 0:13:11.360 --> 0:13:15.280 So emerging markets. I continue to harp on that, but 0:13:15.400 --> 0:13:19.640 I think that's where you're seeing inflation coming down, reforms 0:13:19.679 --> 0:13:23.960 being put in place. It's not widespread. There are still 0:13:24.559 --> 0:13:28.840 countries that are struggling to become more mainstream, but there 0:13:28.840 --> 0:13:33.360 are areas of the world, particularly Latin America, that look attractive. 0:13:33.679 --> 0:13:36.320 And I think Asia down the road because of the 0:13:37.280 --> 0:13:42.120 um differences, the long term tension that is increasing between 0:13:42.120 --> 0:13:44.920 the US and China, that is going to have some 0:13:45.679 --> 0:13:51.960 significant implications for countries in Asia that aren't China that 0:13:52.000 --> 0:13:58.559 will benefit from our need to keep our tech capabilities 0:13:58.640 --> 0:14:04.679 close to home and China racing for made so lots 0:14:04.679 --> 0:14:09.040 of long term implications that favor emerging markets. We've got 0:14:09.040 --> 0:14:10.920 to leave it there, but we'd love to have you 0:14:10.960 --> 0:14:13.280 back and spend more time. Thank you very much for 0:14:13.320 --> 0:14:18.360 being here. Thanks Pam Kathen Gaffney, co director of Diversified 0:14:18.440 --> 0:14:27.760 Fixed Income at Eaton Vance on the world's fixed income markets. Well, 0:14:27.840 --> 0:14:31.680 Canada is the second country in the world to legalize 0:14:31.840 --> 0:14:36.800 recreational marijuana and just after Uruguay. And here to tell 0:14:36.880 --> 0:14:40.840 us about perhaps some of the beneficiaries is on AA Grana, 0:14:40.920 --> 0:14:44.800 our senior software and I T Services analyst for Bloomberg 0:14:45.000 --> 0:14:51.240 Intelligence on a rag the company Shopify connect Shopify with 0:14:51.360 --> 0:14:57.840 the legalization of recreational pot Hi, Pim, isn't it interesting 0:14:57.840 --> 0:15:02.720 that IBM st and we're talking cannabis. But you know, 0:15:02.880 --> 0:15:07.240 you look at um Shopify, which provides software and an 0:15:07.240 --> 0:15:10.600 e commerce platform for companies to sell whatever they want 0:15:10.600 --> 0:15:13.640 to sell. UM it's a Canadian domicile the company, so 0:15:13.680 --> 0:15:16.640 it was very natural for I believe the Canadian government 0:15:16.680 --> 0:15:18.960 to go out and you know, use them as one 0:15:19.000 --> 0:15:22.880 of the vendors. And given that their software is cloud based, 0:15:23.000 --> 0:15:26.080 and some of the requirements are that you have to 0:15:26.120 --> 0:15:29.400 make sure that you know, you track the entire supply 0:15:29.560 --> 0:15:32.920 chain of cannabis from you know, the seed to supply 0:15:33.120 --> 0:15:36.680 and also you want to know to make sure that 0:15:36.720 --> 0:15:40.800 you have you know, enough data encryption and privacy regulations 0:15:40.800 --> 0:15:43.320 in place so that you know that the customer data 0:15:43.400 --> 0:15:45.960 is not leaked. So because of those two reasons, I think, 0:15:46.000 --> 0:15:49.040 you know, Shopify was the natural choice. All right, let's 0:15:49.160 --> 0:15:51.360 if Tom Keene were speaking, let's rub up the script, 0:15:51.440 --> 0:15:54.400 because you say that IBM you point out that it's 0:15:54.400 --> 0:15:57.880 having its biggest one day to clients, and this comes 0:15:57.920 --> 0:16:00.640 of course off their disappointing earnings a sort of point 0:16:00.640 --> 0:16:04.960 to some issues with their cloud computing and artificial intelligence units. 0:16:05.160 --> 0:16:07.239 Is this a huge deal or is this an overreaction 0:16:07.280 --> 0:16:10.440 by markets? Oh well, we wrote about this even before 0:16:10.520 --> 0:16:13.080 learnings that, you know, the last push that they got 0:16:13.160 --> 0:16:15.200 from some kind of you know, you would say glimmers 0:16:15.240 --> 0:16:17.800 of hope was through their systems division, which is a 0:16:17.800 --> 0:16:21.200 mainframe refresh they get about two to three years. But 0:16:21.400 --> 0:16:24.400 if you peel that off, you know they're they're petting 0:16:24.400 --> 0:16:27.680 the entire company on Watson, an artificial intelligence and a 0:16:27.760 --> 0:16:31.000 large portion of those products are in a division called 0:16:31.400 --> 0:16:34.920 Cognitive Solutions. And I mean that you know, there was 0:16:34.960 --> 0:16:38.080 down five in constant currency. That's a that's a massive 0:16:38.160 --> 0:16:40.280 drop in our you and I think that's what striving 0:16:40.400 --> 0:16:43.440 this particular UM, you know, sell off and we need 0:16:43.480 --> 0:16:45.680 to understand whether they can recover from this or not. 0:16:45.880 --> 0:16:48.280 So do you think that they can. It's going to 0:16:48.320 --> 0:16:51.400 be tough, especially given that you know the market is 0:16:51.400 --> 0:16:54.280 getting very competitive and there are enough you know, cloud 0:16:54.320 --> 0:16:59.320 based software companies out there. Amazon selling it's artificial intelligence tools, 0:16:59.400 --> 0:17:02.880 enterprise art visual intelligence tools, Microsoft is selling it, Google 0:17:02.920 --> 0:17:05.840 is selling it UM. I mean theeed IBM people have 0:17:05.880 --> 0:17:09.000 to do something drastic and something you know completely, I 0:17:09.000 --> 0:17:13.280 would say, um urgently. Otherwise, you know, people not gonna 0:17:13.320 --> 0:17:16.560 like sales, you know, being negative let's say in the 0:17:16.600 --> 0:17:18.600 next couple of years. That's not going to go well 0:17:18.640 --> 0:17:22.560 with them on the rug. How did IBM miss this? 0:17:24.520 --> 0:17:27.600 It's tough him as I've said it for the last 0:17:27.640 --> 0:17:29.840 several years. I mean, this is a company which has 0:17:29.880 --> 0:17:34.240 a fair amount of legacy I T services business and UM. 0:17:34.359 --> 0:17:37.080 Sooner or later, a large portion of data centers are 0:17:37.080 --> 0:17:40.119 being closed down, People are moving workloads to the cloud. 0:17:40.200 --> 0:17:43.800 People are actually sometimes renting somebody else's data. No, I 0:17:43.840 --> 0:17:49.560 know all this, but how did IBM miss this trend? Oh? 0:17:49.760 --> 0:17:51.480 You mean to say from a large I would have 0:17:51.480 --> 0:17:53.760 to go back to Mr Sam Paulisono and ask him 0:17:53.760 --> 0:17:56.560 this thing. This goes way beyond you know, even earlier 0:17:56.600 --> 0:18:00.080 than gineer Maries days, because um, this this move, it 0:18:00.080 --> 0:18:03.000 has been going on for over ten years, and IBM, 0:18:03.080 --> 0:18:05.359 I think, you know, was was a lagged at that point. 0:18:06.040 --> 0:18:08.760 So I'm just looking right now. So IBM is considered 0:18:08.760 --> 0:18:11.920 one of the big giants, the stalwarts of the Czech universe. 0:18:12.040 --> 0:18:15.080 In the United States, hasn't a rating, has a whole 0:18:15.080 --> 0:18:18.200 bunch of debt. Do you see this sort of miss 0:18:18.200 --> 0:18:21.000 and they're missing of the trend to be a permanent 0:18:21.000 --> 0:18:24.320 blemish that going forward they cannot recover from, will end 0:18:24.400 --> 0:18:28.480 up degrading their credit rating and create a downward spiral 0:18:28.560 --> 0:18:31.280 for them. So I'm not sure about the credit rating 0:18:31.320 --> 0:18:32.840 part of it, because at the end of the day, 0:18:32.880 --> 0:18:34.960 you know, one division was down five the other one 0:18:35.040 --> 0:18:37.280 was too. You know, if you're going to be looking 0:18:37.320 --> 0:18:39.760 at zero two percent growth, you mean you're gonna probably 0:18:39.760 --> 0:18:41.639 make the same amount of money next year to the 0:18:41.680 --> 0:18:44.080 year after. But if you're a tech company, you know 0:18:44.520 --> 0:18:47.159 mrs want to see growth at least equity investors do. 0:18:47.680 --> 0:18:49.520 So from that point of view, I think the biggest 0:18:49.600 --> 0:18:52.200 question is can they show positive growth over the next 0:18:52.240 --> 0:18:55.320 couple of years, and yesterday's results puts a big question 0:18:55.359 --> 0:18:57.520 mark to it because you know, as I said, one 0:18:57.520 --> 0:19:01.120 of the most promising divisions, that's the one where the photos. Yeah, 0:19:01.359 --> 0:19:03.439 Annora Grana, thank you so much for being with us. 0:19:03.440 --> 0:19:06.440 Annora Grana, Senior analyst of Software and I T Services 0:19:06.440 --> 0:19:10.240 at Bloomberg Intelligence. And IBM does have more than forty 0:19:10.240 --> 0:19:14.080 one billion dollars of debt um, which you know isn't 0:19:14.160 --> 0:19:17.080 massive compared to their cap market cap compared to say, 0:19:17.119 --> 0:19:19.000 I don't know a Netflix out there or one of 0:19:19.040 --> 0:19:22.359 the others, but definitely interesting and shares are plunging today 0:19:22.400 --> 0:19:28.040 after their disappointing earnings last night. Our guest is Ben Emmons. 0:19:28.080 --> 0:19:31.160 He is the chief economist and head of Credit Portfolio 0:19:31.280 --> 0:19:35.679 Management and Intellectist Partners. He is also a contributor to 0:19:35.760 --> 0:19:39.440 Bloomberg Opinion. He's based in Los Angeles. Ben, thank you 0:19:39.520 --> 0:19:42.119 very much for being with us. Talk if you can 0:19:42.200 --> 0:19:45.200 about the independence of the Federal Reserve and how many 0:19:45.320 --> 0:19:51.679 interest rate increases you see in twenty nineteen after the 0:19:51.720 --> 0:19:55.320 mid term elections. Good morning, Bim, and thanks very much 0:19:55.320 --> 0:19:58.520 for having me. Um. Well, the defend independence is very much. 0:19:58.600 --> 0:20:00.560 Dare I think that that the v in comments by 0:20:00.560 --> 0:20:03.879 bus Stage or even Kaplan have indicated clearly that you know, 0:20:03.960 --> 0:20:06.439 we're staying the course here. Paul will not come out 0:20:06.520 --> 0:20:09.080 himselves maybe saying this, but clearly they're going to stay 0:20:09.119 --> 0:20:12.440 the course. Um. And that's really cement about his labor 0:20:12.480 --> 0:20:15.639 market strength, like for example, Jolt State yesterday shows that 0:20:15.640 --> 0:20:17.760 that you know, they can keep that gradual rate hike 0:20:17.840 --> 0:20:21.760 patients intact, which I think we will see another three 0:20:21.800 --> 0:20:24.879 rate hikes into the middle of twenty nineteen, which will 0:20:24.920 --> 0:20:28.120 bring us closer to that three number on the fat 0:20:28.119 --> 0:20:30.719 fronds rate, which is sort of the long term neutral rate. 0:20:30.800 --> 0:20:33.199 I think that's where they're heading. It does seem like 0:20:33.400 --> 0:20:36.360 that's what is being priced into the market. But I'd 0:20:36.400 --> 0:20:39.200 love to get your opinion. Just on something that happened 0:20:39.280 --> 0:20:42.159 yesterday to not a lot of fanfare. There was the 0:20:42.240 --> 0:20:45.560 first time ever that the Treasury Department sold eight week 0:20:45.800 --> 0:20:49.560 treasury bills two month treasury bills. And I don't know 0:20:49.600 --> 0:20:51.239 if this is wrong to say, but it was not 0:20:51.320 --> 0:20:55.080 a good auction and I've seen sort of some distortions 0:20:55.359 --> 0:20:57.600 in the front end of the treasury market. In a 0:20:57.640 --> 0:21:01.840 response with three month treasury yield climbing at a disproportionate rate. 0:21:02.160 --> 0:21:03.879 Do you think this was a mistake at the Treasury 0:21:03.920 --> 0:21:08.960 Department's part. So it's an interesting dynamic that as you're highlighting, Lisa, 0:21:09.000 --> 0:21:11.440 because you know, this is like a really short term 0:21:11.480 --> 0:21:13.600 gap measure if you think about it, right, you financed 0:21:13.600 --> 0:21:16.399 the deficit really short term, and not all of it 0:21:16.440 --> 0:21:18.760 of course, but like it's one of those measures and 0:21:19.240 --> 0:21:21.959 two months, right, which binks is you know, basically at 0:21:21.960 --> 0:21:24.520 the end of the year. So you know, I think 0:21:24.560 --> 0:21:26.439 what the market is trying to indicate it is like 0:21:26.480 --> 0:21:28.520 all this sort of supply that then needs to be 0:21:28.720 --> 0:21:31.000 rolled over again. It is what I think causes some 0:21:31.080 --> 0:21:34.160 of that distortion. The other part I think is happening 0:21:34.240 --> 0:21:37.200 is that we're going again towards this year and effect 0:21:37.240 --> 0:21:39.520 on bank balance sheets, right, that that tends to be 0:21:39.560 --> 0:21:41.760 the case when they withdraw some of the balance sheet 0:21:41.760 --> 0:21:45.480 to fund other people's balunce sheets, And therefore I think 0:21:45.520 --> 0:21:48.000 you get some distortion and money market rates to which 0:21:48.040 --> 0:21:51.359 includes treasury bills. Why maybe some of his bidding wasn't 0:21:51.400 --> 0:21:54.439 that strong in the in the treasury bill market. That 0:21:54.520 --> 0:21:56.800 being said, though, if you think about treasury bills is 0:21:56.840 --> 0:21:59.719 and safe assets. It's still very much in demand, right, 0:21:59.760 --> 0:22:03.480 So I don't think that the distortionself isn't signal that 0:22:03.560 --> 0:22:06.720 the demand for safe as is a necessarily change. But 0:22:06.920 --> 0:22:09.080 let's go overseas if we can for just a moment. 0:22:09.119 --> 0:22:10.880 I want to get your thoughts on what is happening 0:22:10.880 --> 0:22:16.880 in Italy and the European Union and the Italian government's budget. Yeah, 0:22:16.960 --> 0:22:19.760 so you know, the headlinesing and today are just very 0:22:19.840 --> 0:22:23.080 European bim if you think about that, you have the 0:22:23.119 --> 0:22:25.920 European Commission that wants Italy to stick with the rules, 0:22:26.080 --> 0:22:28.919 and of course Italy proposes a budget that's you know, 0:22:29.040 --> 0:22:31.760 not sticking with the rules. And you see Salvini just 0:22:31.920 --> 0:22:34.439 out now saying let us just do the work. And 0:22:34.480 --> 0:22:38.040 then you have the entaser, you know, chairman coming out like, wow, 0:22:38.160 --> 0:22:40.240 we don't know, we're going to support and the idea 0:22:40.240 --> 0:22:41.879 of rules and we're gonna stick with that. So you 0:22:41.920 --> 0:22:44.840 have this noise, right, and what it does is in 0:22:45.240 --> 0:22:49.040 particularly European bomb markets, gives this perception that there will 0:22:49.080 --> 0:22:52.720 be a standoff idea that just like Shablow with treesa 0:22:53.320 --> 0:22:56.320 trip us in the past and Greece, that that creates 0:22:56.320 --> 0:22:59.040 and widening of spreads, just uncertainty gets priced in there. 0:22:59.520 --> 0:23:02.560 Ultimately Italy will likely go its way and does this 0:23:02.640 --> 0:23:05.280 budget of two point four percent, and then there's a 0:23:05.359 --> 0:23:07.320 question about how they're going to moderate it over the 0:23:07.400 --> 0:23:10.440 over the time that comes after that in terms of 0:23:10.760 --> 0:23:14.239 controlling the deficit, because clearly Italian rates have risen much 0:23:14.280 --> 0:23:16.960 higher with this view that that death load is becoming 0:23:16.960 --> 0:23:20.399 more problematic. From here, how much further do you expect 0:23:20.440 --> 0:23:22.359 the Italian yields to rise though? I mean, are we 0:23:22.440 --> 0:23:24.520 just sort of at the beginning or middle end of 0:23:24.560 --> 0:23:27.280 the widening. So if you think about what happened in 0:23:27.280 --> 0:23:29.880 the in the death crisis a number of years ago, 0:23:30.320 --> 0:23:32.800 when we were at seven percent in the Italian yields, 0:23:32.840 --> 0:23:36.119 that was really pricing Italy essentially being out of the Eurozone, 0:23:36.119 --> 0:23:38.680