Speaker 1: This is Bloomberg Business Wait inside from the reporters and
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Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: All right, everybody, we are just going to go right
Speaker 2: to it, because we do have the star in the studio,
Speaker 2: Lizkapla McCormick. She's here and we have all been obsessing
Speaker 2: about your story. So our conversation continues, and she is,
Speaker 2: of course Bloomberg News Chief correspondent for Global macro Markets
Speaker 2: here in our Bloomberg Interactive Brokers studio. Liz, I do
Speaker 2: mean it sincerely that like when we read through a
Speaker 2: story like yours, it's not superficial. I learn more and
Speaker 2: more about kind of how the FED works, how kind
Speaker 2: of our financial system works when it comes to stresses
Speaker 2: or lack there up. So really appreciate it. So talk
Speaker 2: to us a little bit more.
Speaker 3: I learned more and more about what I don't know
Speaker 3: and I don't understand.
Speaker 2: It is so true. It's like, oh my god, this
Speaker 2: has explained something else that's going on. So talk to
Speaker 2: us about your story. And the FED balance sheet was
Speaker 2: so important in terms of assessing it and also understanding
Speaker 2: about as chair Palell tries to roll it off a
Speaker 2: little bit.
Speaker 4: Right, Yeah, well, thank you for those kind words. I
Speaker 4: feel like that's what I try to do, take the
Speaker 4: weird wonky stuff and make it beatable.
Speaker 5: Yeah.
Speaker 4: A lot of good colleagues and good editors. But yeah.
Speaker 4: So it's interesting because you probably heard Chairman Pal and
Speaker 4: his recent congressional testimony. A lot of politicians they just
Speaker 4: hate the big balance sheet. So they were saying, are
Speaker 4: you going to get it down faster? Or why can't we?
Speaker 4: We don't like that you do Q so fast and
Speaker 4: QT takes so long. And I had been looking at
Speaker 4: this story for a while, the balance sheet roll off,
Speaker 4: and he was saying, which is very smart of him,
Speaker 4: like basically there's a lot involved, Like, yes, we want
Speaker 4: to get the balance sheet down, we know that's our goal,
Speaker 4: but we don't want another twenty nineteen Rebo crisis, which
Speaker 4: happened when they were doing QT and things got too
Speaker 4: restrictive in the banking system. Let's just say simply, so,
Speaker 4: as they roll dead off their balance sheet, you know
Speaker 4: that money has to be pulled out of the system,
Speaker 4: and if it comes from bank reserves, then we could
Speaker 4: get more tightening and liquidity. And I think, Matt, I
Speaker 4: heard you talking earlier even about you know, treasury bill
Speaker 4: issuance coming. That's you know, as they build up their
Speaker 4: cash balance again after that nightmare of the debt ceiling.
Speaker 4: We had that going on. So now we've got the
Speaker 4: FED who's trying to get that balance sheet down. Their
Speaker 4: pace is about a trillion a year.
Speaker 2: It sounds like a lot, it's a lot, but the balance.
Speaker 4: Heat is darn big, right, you know, But that they
Speaker 4: don't want reserves in the banking system to get too restrictively.
Speaker 3: It looks like they're moving pretty quickly already. Like if
Speaker 3: I type up FED space bow on the Bloomberg terminal,
Speaker 3: I can see that we were over eight and a
Speaker 3: half trillion and we're pretty quickly approaching seven and a
Speaker 3: half trillion, you know, within the span of just about
Speaker 3: one year. So what's the problem with this? When they
Speaker 3: when they reduce their balance sheet, essentially they let the
Speaker 3: bonds mature, right, and they don't use that money need
Speaker 3: to go out and buy new bonds. How does that
Speaker 3: suck liquidity out of the system. Well, it can come
Speaker 3: in a couple of ways.
Speaker 4: That's why. To be honest, it's made this a little
Speaker 4: more precarious because the Fed uh normally think about assets
Speaker 4: and liabilities on a balance sheet. The bonds are assets liabilities,
Speaker 4: you know things that if nothing else changes, assets go down,
Speaker 4: liabilities have to go down. So like a key liability
Speaker 4: is bank reserves because if bank want their money, Fed
Speaker 4: has to get it back to them. So one way
Speaker 4: is the assets go down and bank reserves would go
Speaker 4: down as people like treasury selling depth people buy this stuff.
Speaker 4: But now we have this other thing called the Fed's
Speaker 4: Reverse Repo facility, another place that a lot of money
Speaker 4: market funds like they put their money there so they.
Speaker 3: Can buy some of this. So that's on the liability side.
Speaker 4: Yes, both the r rps and the reserves are on
Speaker 4: the liability side.
Speaker 3: So and that got huge up to almost two trillions, amazing.
Speaker 4: Remember when they first came out with this, you know,
Speaker 4: it was back when Bill Dudley was at the New
Speaker 4: York FED and he was like, we don't want this
Speaker 4: to be too big, and it's really big. I mean,
Speaker 4: it's working, it's how them money market funds really love it.
Speaker 3: But so you know, the.
Speaker 4: More comes out of our RP as the FED you know,
Speaker 4: winds down the balance sheet, the less bank reserves go down.
Speaker 4: But we and we've seen that move pretty fast now.
Speaker 4: But people were warning, you know, money market funds might
Speaker 4: like keeping their cash in bank reserves and the bill body.
Speaker 2: And that's helped with the Fed's balance sheet liquidity, right.
Speaker 4: Yes, because it's like one of those liabilities has to move.
Speaker 4: So if our rps go down, then reserves don't have
Speaker 4: to go down as much. It's just kind of like
Speaker 4: the math and the way it works. So, like Chairman
Speaker 4: Powell was saying on Congress, like so far this is
Speaker 4: what we see. And I feel like he was very
Speaker 4: humble in a good way, and he said, but I
Speaker 4: mean I remember writing it down.
Speaker 2: He really said that.
Speaker 4: Like he said, we didn't see it coming in twenty nineteen,
Speaker 4: you know, like we thought we were doing okay. So
Speaker 4: he was like saying, it's it's not easy. We're trying
Speaker 4: to be careful. We want a buffer of bank reserves
Speaker 4: in the system. And of course, like you guys have
Speaker 4: been talking, we got so much else going on, right
Speaker 4: We got the FED who raised rates over you know,
Speaker 4: five hundred basis points over a year, we've got all
Speaker 4: these other dimensions and we really don't need a REPO crisis,
Speaker 4: you know, so, and the FED wants QT to keep
Speaker 4: winding down. So I mean, like I said, we tried
Speaker 4: to be very common fair. There's a lot of people
Speaker 4: saying it's going well now FED, could you know they
Speaker 4: want this QT to just run in the back?
Speaker 2: Can I ask you something? The FED is always doing
Speaker 2: this right, This is the management of the Fed's balance
Speaker 2: sheet well scale, but well that's what I'm gonna say.
Speaker 2: What's different is it because of the scale and the
Speaker 2: size of the balance sheet that makes it more difficult?
Speaker 4: Well, you know, so they're not always doing QT in
Speaker 4: a sense. They're either doing q E stability because sometimes
Speaker 4: they left the balance sheet stable for a while, or
Speaker 4: they're doing QT making it smaller.
Speaker 3: But again it's.
Speaker 4: Not at this magnitude, right because in the old days,
Speaker 4: when they didn't have the system they have now, there
Speaker 4: was not even trillions on the balance sheet. But now
Speaker 4: they're working in a different schema, so they're allowed to
Speaker 4: have a big balance sheet, but it's gotten bigger and bigger.
Speaker 4: But so it's the magnitude and that I think We're
Speaker 4: just such a precarious time the FED, but it also
Speaker 4: doesn't want their tools going in opposite directions. They're tightening
Speaker 4: with rates so far, you know, they haven't stopped. They
Speaker 4: said it's not a pause, it was a skip in June.
Speaker 4: People think more is coming and they have this QT tightening.
Speaker 4: They want in the background not.
Speaker 2: To create it slow it down at any point. Right, No,
Speaker 2: they haven't, but they could.
Speaker 4: That's another thing they could do. Say they start seeing,
Speaker 4: you know, kind of creaks in the system that bank
Speaker 4: reserves are getting tight. Some people have said the FED
Speaker 4: could say we're going to slow down the roll off.
Speaker 4: We're going to roll off maybe half of what we're doing.
Speaker 4: So there are maneuvers that the FED can do. I
Speaker 4: think Pal and Lori Logan from the Dallas FED spoke
Speaker 4: recently and said, for now, we think things are working well,
Speaker 4: you know, kind of plowing along. But I think a
Speaker 4: lot on the street are saying, just got to kind
Speaker 4: of keep head on the list of all.
Speaker 3: The things we're worrying about. So, but now that treasuries
Speaker 3: are actually yielding something, it's got to be so much
Speaker 3: more attractive for money market funds to move out of
Speaker 3: the reverse repo facility and buy them for a return.
Speaker 1: Right.
Speaker 4: Well, yeah, now that there's more bills because remember what
Speaker 4: the debt ceiling, there wasn't enough to buy it. Seems
Speaker 4: like the government is so big. But the money market
Speaker 4: funds have nearly six trillion in assets now, so they
Speaker 4: had a lot. So you're right, Matt, you know, the
Speaker 4: bill rates were more attractive. But somebody was saying, what also,
Speaker 4: I feel like there's so many variables here. What also
Speaker 4: is like unsure is money market funds are doing what
Speaker 4: they call extending their maturity. Right, they're buying bills. Reverse
Speaker 4: repos are overnight money. They keep rolling it over. But
Speaker 4: people say, you know, hey, if you think the Fed's
Speaker 4: going to raise three more times, why would a money
Speaker 4: market fund want to lock up right now when in
Speaker 4: three months they could get a better rate. So that's
Speaker 4: why some people are warning maybe they'll stop buying as
Speaker 4: much and keep their money in rope, kind of like
Speaker 4: we were saying, keeping cash on hand, because hey, if
Speaker 4: the FED goes to six percent, I'd rather buy three
Speaker 4: month T bills at six percent. So that's why I
Speaker 4: feel like there's a lot of uncertainty and the Fed's
Speaker 4: being very cautious to watch and look at the market
Speaker 4: metrics and not have a blow up.
Speaker 2: I love this quote in the story, saying everything is
Speaker 2: okay is like calling the game after the first quarter. So,
Speaker 2: I mean, I always think about somebody listening who maybe
Speaker 2: isn't s savvy or just kind of understanding why this
Speaker 2: should matter.
Speaker 3: As we are.
Speaker 2: Actually every time, I you're right, every time I reasoned realism,
Speaker 2: like I know nothing. I know nothing, I mean, but
Speaker 2: so help somebody who's sitting in the car and just
Speaker 2: like pulled over because they'm like, help me, I don't
Speaker 2: understand this. So what is it that they have to
Speaker 2: understand about the importance of something like this and what
Speaker 2: you write about?
Speaker 4: Right? Well? I always think of my father, who's in
Speaker 4: his late eighties and a G. E.
Speaker 2: Stock guy.
Speaker 4: He always says, I love what you do.
Speaker 3: I don't know what any of it means.
Speaker 2: But it's good stuff.
Speaker 4: But I try to explain to him Dad, like things
Speaker 4: like this mean if the banks get under pressure, right,
Speaker 4: and it's more costly for them to borrow, they don't
Speaker 4: have enough cash buffer, you know, bad things could happen, right,
Speaker 4: you know, there's less liquidity, the financial system could be
Speaker 4: more on a vulnerable like that to me is the
Speaker 4: broad thing because remember in twenty nineteen, the FED didn't
Speaker 4: want to have to plow money into the system like
Speaker 4: they did when repos blew up, so they kind of
Speaker 4: had to go counter It creates volatility uncertainty, especially now
Speaker 4: inflation is still a huge problem, right, So the Fed
Speaker 4: definitely doesn't want to have to kind of come in and.
Speaker 3: Rush and jet.
Speaker 4: I mean they did it during the regional banking crisis.
Speaker 4: They will do what they have to do. They kind
Speaker 4: of back, you know, they are not that resort they
Speaker 4: are they did that.
Speaker 2: Is there something in the big banks when they report
Speaker 2: then in regards to this and just got about forty
Speaker 2: five seconds that you're going to be like listening out
Speaker 2: for that might give you some clues.
Speaker 4: Well, yeah, I mean they'll talk about reserve levels. Is
Speaker 4: there I don't think we're there yet. You know, there's
Speaker 4: still like three chillion in reserves.
Speaker 3: But if they're talking about.
Speaker 4: A little bit reserve scarcity or that they want more
Speaker 4: cushion because they're concerned about the outlook, you know, that'll
Speaker 4: be things that my kind of hint at, you know,
Speaker 4: or is the financial and tighter lending standards, all that
Speaker 4: kind of stuff. We'll be watching.
Speaker 3: That's what I watch for tighter land standards, I know,
Speaker 3: and I still want to buy more cars.
Speaker 2: They're cheaper now, right.
Speaker 6: I don't have any.
Speaker 3: Money, so I have to borrow to do that.
Speaker 2: Leverage, leverage, leverage. I hope it doesn't cost a lot. Truly,
Speaker 2: we mean it. It's we all get smarter when we
Speaker 2: read your stories. This is Kapa McCormick. She's Bloomberg News
Speaker 2: Chief correspondent for Global Macro Markets. Her story, by the way,
Speaker 2: it is among the most read on the Bloomberg has
Speaker 2: been there all day and it really says a lot
Speaker 2: about kind of the environment we are. And just to
Speaker 2: remind you of some other pressures that are out there, matt.
Speaker 3: Yeah, absolutely. I mean this is nothing to you. I
Speaker 3: think tightening financial conditions, which is what the FED wants
Speaker 3: to do, right, yes, type up f con go and
Speaker 3: they still have ways to go.
Speaker 2: Slow down, everybody, slow down, all right, Carol Masser along
Speaker 2: with Matthew Miller and for Tim Stenevick, you're listening and
Speaker 2: watching Bloomberg Business Week on this Monday on radio, on
Speaker 2: YouTube on Bloomberg Originals. This is Bloomberg.
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Speaker 2: She don't know, all right, Everybody, we mentioned earlier about
Speaker 2: the FEDS top banking regulator moving app cap requirements, especially
Speaker 2: for the big banks. This as we get ready for
Speaker 2: those big banks to report. This is what we were
Speaker 2: all just talking about. So we wanted to get kind
Speaker 2: of a check on the overall environment. Matt, get ready
Speaker 2: for that your earning season.
Speaker 3: Yeah, very much, looking forward, although it doesn't happen till Friday, right, Yeah,
Speaker 3: we are. We gonna be looking forward to Friday every
Speaker 3: day this week. We just started. It's only Monday.
Speaker 2: Hey guys, rewind, rewind, repeat, rewind repeat. That's how this
Speaker 2: week is going to be, all right. So let's see
Speaker 2: what our guest has to say. Robertogoss is Senior Managing Director,
Speaker 2: head of the bank, loan and clo Platform at Pretium,
Speaker 2: which I think will be very interesting to see what
Speaker 2: she has to say. It's a specialized investment firm with
Speaker 2: approximately fifty billion in assets under management. They focus on
Speaker 2: US residential real estate, residential credit, and corporate credit. In December,
Speaker 2: she was named one of the most Notable Women on
Speaker 2: Wall Street by Crane's New York Business. She joins us
Speaker 2: on Zoom in New York City. ROBERTA, nice to have
Speaker 2: you here with Matt and myself. Welcome, Welcome, How do
Speaker 2: you see the environment from your vantage point? And remind
Speaker 2: us exactly what you see and what you do at Pretium?
Speaker 7: Sure, so, Hi, Carol and Matt, thank you for having
Speaker 7: me this afternoon. So my group invests in leverage loans,
Speaker 7: so predominantly instruments that make up LBOs and leverage credit.
Speaker 6: Very diverse group of.
Speaker 7: Industries, but I think very impacted by, as you said,
Speaker 7: the earnings cycles so far this year that's been above expectations.
Speaker 7: I think most companies have exceeded expectations. And I also
Speaker 7: think the regional bank crisis and the health of banks
Speaker 7: has been a big impact over the course of this
Speaker 7: year and pricing in the loan market more generally.
Speaker 3: So, how have leverage loans been doing, especially as everybody's
Speaker 3: so freaked out about commercial real estate, you know, and
Speaker 3: a lot of those loans, I guess were floating rates,
Speaker 3: so borrowers got in near zero and now they're looking
Speaker 3: at not near zero, yes.
Speaker 6: At zero. Yeah.
Speaker 7: So leverage loans this year have actually performed quite well
Speaker 7: through the first half of the year, the leverage loan
Speaker 7: index close to seven percent, six and three quarter percent,
Speaker 7: but that was with some degree of volatility. So as
Speaker 7: we went through the region bank crisis in March, the
Speaker 7: loan market went from a high of ninety four to
Speaker 7: a low of ninety two and have largely recovered back
Speaker 7: to the highs of February. That has been almost entirely
Speaker 7: driven by corporate earnings as we went through Q four
Speaker 7: and Q one. But I would expect a little more
Speaker 7: volatility as we go through the back half of this year,
Speaker 7: but I don't believe it will be as noted as
Speaker 7: we saw in March.
Speaker 3: Really is that because companies were doing so well that
Speaker 3: they're able to continue to meet their you know, to
Speaker 3: make payments. Because if you borrowed money FIRS say four percent,
Speaker 3: and now you're paying twelve.
Speaker 2: That's that's problematic, painful, right.
Speaker 7: It is what is really driving the sort of exceeding
Speaker 7: expectations over the course of this year, is that we
Speaker 7: already experienced a lot of volatility through twenty twenty one
Speaker 7: and twenty twenty two. And I've talked about this in
Speaker 7: the past, which is this is largely a function of
Speaker 7: corporate margins, which were dramatically compressed over the last really
Speaker 7: twenty four months. We're starting to see as inflation starts
Speaker 7: to ease, that's helping on the margin side, even as
Speaker 7: we're seeing the top line start to decelerate. On the
Speaker 7: interest rate impact, yes, we've seen libor effectively go from
Speaker 7: zero to mid five and a half percent over the
Speaker 7: last year. And most I would say fifty to sixty
Speaker 7: percent of most companies total loans outstanding in the loan
Speaker 7: market are hedged. That being said, there's some companies that
Speaker 7: are completely unhedged, but most leverage companies raise liquidity well
Speaker 7: ahead of expectations and need.
Speaker 2: So, in other words, a lot we're already doing that.
Speaker 7: Yes, so we've seen companies, as a result of the
Speaker 7: inflation pressures, really try to raise cash out of working capital,
Speaker 7: so raise liquidity, raise liquidity in the loan market, and
Speaker 7: I think the majority of businesses are well positioned even
Speaker 7: with sort of continued rate hike expectations over the balance
Speaker 7: of this year.
Speaker 2: So I am curious, what's the demand, what's the default
Speaker 2: rate that you are seeing, give us an idea and
Speaker 2: what it tells you about, maybe more broadly, the hell
Speaker 2: of maybe the corporate market.
Speaker 1: Yeah.
Speaker 7: So I think one of the indicators that we look at,
Speaker 7: or one of the stats we look at every day,
Speaker 7: is the number or the percentage of loans that are
Speaker 7: trading below ninety so ninety being a level where stress
Speaker 7: starts to become a concern for a company. In the
Speaker 7: mid sort of lows of March when we were in
Speaker 7: the midst of the banking crisis, that percentage reached over
Speaker 7: twenty percent since then, and as of this week that
Speaker 7: number has reduced to thirteen percent. So we still think
Speaker 7: that defaults are on the rise. We're calling for three
Speaker 7: and a half percent this year, so effectively a doubling
Speaker 7: from when we are where we are mid year, and
Speaker 7: then accelerating next year to four and a half percent.
Speaker 7: And I think one of the key differentiators this year
Speaker 7: is going to be what's the expectation on the recovery
Speaker 7: from those defaults, which we believe will be substantially lower
Speaker 7: than the historic average.
Speaker 2: We're calling not great, right, not great, not.
Speaker 7: Great, but we think that uh, you know, uh, earnings
Speaker 7: will continue to drive the market. We've seen very little
Speaker 7: primary supply. I think the one big announcement last week
Speaker 7: and this goes to your commentary around banks or banks
Speaker 7: prepared to lend the large money center banks underwrote or
Speaker 7: was it was announced a very large lb O, the
Speaker 7: first we've seen over the last couple of years, UH
Speaker 7: to be announced with the acquisition of World Pay out
Speaker 7: of Fidelity National Information Systems, with the expectation that that
Speaker 7: will bring somewhere on the order of nine billion dollars
Speaker 7: of new debt to our markets.
Speaker 3: Do you think that's going to continue? Is that going
Speaker 3: to be Is that the beginning of a new trend?
Speaker 7: I believe it could be.
Speaker 3: Yes.
Speaker 7: So this is a deal that's slated for after Labor Day,
Speaker 7: and I think that this could be a signal for
Speaker 7: more new transactions to come.
Speaker 6: Yes.
Speaker 2: Cooret, Well, something to mark our calendars. Keep an eye on.
Speaker 5: Roberta.
Speaker 2: Thank you so much, Come back soon, ROBERTA.
Speaker 1: Goss.
Speaker 2: She's senior managing director, head of the bank, Loan and
Speaker 2: coll platform at Predium, joining us on Zoom from New
Speaker 2: York City. I love things like that because it just
Speaker 2: gives me another view, right, unlike the health of how
Speaker 2: things are, yeah, or how things are.
Speaker 3: Out there, especially considering how interested in private credit you are.
Speaker 2: I am an investor. Can they solve everything? Matt?
Speaker 3: No, definitely.
Speaker 2: Can we have a clearer picture of what they're trying
Speaker 2: to do? Apparently not.
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Speaker 2: Well, talk about a pretty successful launch, Matt. It's been
Speaker 2: confirmed on meta platform rocketing to one hundred million users
Speaker 2: in less than a week. The threads threads, threads sorry
Speaker 2: answer to Twitter Yeah, threads Yeah.
Speaker 3: I you know, I've been thinking about for the last
Speaker 3: few days companies getting to one hundred million users because
Speaker 3: somebody told me it took uber like years to get
Speaker 3: to one hundred million users, and then chat gpt did
Speaker 3: it in two months, And that was someone was telling
Speaker 3: me the stats to show me how quickly chat GPT
Speaker 3: has grown, but then Threads did it in five days.
Speaker 3: Pretty remarkable, and it is pretty remarkable. It's understandable because
Speaker 3: all you need to do is kind of click one
Speaker 3: button from your Instagram account.
Speaker 2: It's still early on. We've got a great roundtable to
Speaker 2: kind of get into it because Evercore I saw coming
Speaker 2: out Mark Mahaney part of that team and saying that
Speaker 2: it could generate over about eight billion in annual revenue
Speaker 2: over the next two years. So let's get to it
Speaker 2: with us. Is Mark Mahaney. He is senior Managing Director,
Speaker 2: head of Internet Research at Evercore II on the phone
Speaker 2: in San Francisco, also with us as our own Bloomberg
Speaker 2: Intelligence senior technology analyst man deep seeing with us in
Speaker 2: our studio. Mark, let me start with you talk to
Speaker 2: us about this call because you are thinking, you in
Speaker 2: the team that Threads will reach close to two hundred
Speaker 2: million daily active users and generate that eight billion in
Speaker 2: two weeks. Talk to us about this call.
Speaker 8: Well, we'll see. But it is impressive how quickly it's
Speaker 8: ramped up. And there's some at least two major advantages
Speaker 8: that Meta has in terms of rolling out a public
Speaker 8: marketplace real time news and commentary app kind of like Twitter.
Speaker 8: The two major event The one is that they start
Speaker 8: with a huge installed base just on Instagram of one
Speaker 8: and a half billion, roughly daily average users. And the
Speaker 8: second thing is this is a company that's very good
Speaker 8: at monetizing online engagement or online usage, a certainly relative
Speaker 8: to Twitter. I mean, I think their average revenue per
Speaker 8: user is two to three x that of Twitter, at
Speaker 8: least last disclosed by Twitter. And that's because they're just
Speaker 8: they put more effort into it. They've got more data
Speaker 8: scientists working on creating ads, targeting ads, and finding audiences
Speaker 8: against which the ads are most effective and most relevant.
Speaker 8: And so those are two big structural advantages that Meta has. Now,
Speaker 8: whether one hundred million people who've signed up so far
Speaker 8: really becomes two hundred million daily average users, that's a
Speaker 8: big gap. Still, you can get to two hundred million,
Speaker 8: but the question is people who've signed up. But but
Speaker 8: how many of those are actually using on a daily basis.
Speaker 8: I mean, they're about two hundred and fifty million people
Speaker 8: that use Twitter on a daily basis, so that that's
Speaker 8: really kind of TBD, and I think for that to
Speaker 8: really happen, we're going to need to see much more
Speaker 8: than what Threads is offered so far. I mean, it's
Speaker 8: it's nice, good functionality, but it needs to be better
Speaker 8: than what Twitter offers.
Speaker 3: Man, deep, let me get your take on this. I
Speaker 3: signed up right away just because Instagram made it so easy.
Speaker 3: But then I realized it's exactly like Twitter. I don't
Speaker 3: know how that's legal, and it was just as like
Speaker 3: dull to me and annoying as Twitter. So I deactivated
Speaker 3: my account already.
Speaker 2: It Almost everybody else is routing they're rooting for, you know,
Speaker 2: an alternative platform here.
Speaker 5: And part of the reason is Twitter has changed its
Speaker 5: algorithm so much to the point that they have alienated
Speaker 5: their creator base. Like the creator base had a certain
Speaker 5: fo following, and right now if I go to my feed,
Speaker 5: I don't see the people I follow. It's totally random algorithm.
Speaker 5: And that algorithm has changed so much that every creator
Speaker 5: is like, why am I on this platform? And that's
Speaker 5: where there's a real risk that if the creators are
Speaker 5: able to build their followers quickly on Threads, I think
Speaker 5: it will be hard for Twitter to bring that traffic back.
Speaker 2: They also change tweet deck, which I'm really ticked off about.
Speaker 2: But Mark, I mean just because they write. I mean
Speaker 2: this is part of that.
Speaker 3: I think, no tweet dich for threads.
Speaker 2: No, not yet, okay, but Mark, I mean the point is,
Speaker 2: and I think this is what we're getting to. Just
Speaker 2: because they attract doesn't necessarily mean everybody's going to be
Speaker 2: really productive users or you know, active, active users. Correct,
Speaker 2: we just don't know. Time will tell.
Speaker 8: Yeah, no, that's right. And again you know there's interesting
Speaker 8: features and functionality. I guess one thing I'm trying to
Speaker 8: do is figure out, like who are the biggest followers
Speaker 8: on Twitter, and there'd be some tipping points. And amongst
Speaker 8: those top five followers, I think, are you know, former
Speaker 8: President Obama Justin Bieber. If you to see Bieber go
Speaker 8: over to threads, that would be an eye opener. I mean,
Speaker 8: now the number one person on Twitter with the most
Speaker 8: followers is a guy who I know is not going
Speaker 8: to go to threads. That's Elon Musk. But then there
Speaker 8: are other these celebrities like Rihanna and Cristiana I think
Speaker 8: is a soccer player, and so you just want to
Speaker 8: see like people people are going to fight. If major
Speaker 8: influencers move to threads, people will follow them. And so
Speaker 8: that's where we're kind of watching. You know, we have
Speaker 8: some interesting people on on Threads so far, influential people
Speaker 8: like Kim Kardashian. But you really you need to see
Speaker 8: how those follower bases build and to see more people
Speaker 8: go over. And then you want to see the forms
Speaker 8: and features and functionality improve And I think Zuckerberg and
Speaker 8: you know has been upfront that this is still kind
Speaker 8: of an early stage product. So let's see a lot
Speaker 8: of improvements, a lot of product improvements. And then also
Speaker 8: the one thing that they can do to materially distance
Speaker 8: themselves from Twitter is really trying to improve the civility
Speaker 8: of the platform. Leave this politics aside. You know, it's
Speaker 8: not a political statement. It's that there was just a
Speaker 8: lot of uncivil content that drove people away, some people
Speaker 8: away from Twitter. So if Threads can figure out a
Speaker 8: way to do that, that's a hard thing to do,
Speaker 8: But if they can figure out a way to do that,
Speaker 8: that could be a real nice competitive advantage.
Speaker 5: I mean, Mark, but when you think about, you know,
Speaker 5: what Meta was trying to do with reels, you know,
Speaker 5: pivot to videos. Why haven't they integrated videos to begin with?
Speaker 5: Like why the focus on tech based platform right now?
Speaker 8: Well, you actually do have there are pictures, and now
Speaker 8: you stumped me. I can't remember if because I've posted
Speaker 8: pictures on threads so far. So that's good, and there's
Speaker 8: always was a limit. I agree inherently with the idea
Speaker 8: that there's a limit to techt based app. I can't
Speaker 8: remember yet. I got experiment. I'll do this right after
Speaker 8: this segment. I'll just see whether I can upload video
Speaker 8: on there to the extent that I as easy as
Speaker 8: I could on Twitter. There's also some some limits on
Speaker 8: Twitter that you don't yet have on threads, or at
Speaker 8: least so you get more space to to to to
Speaker 8: to type out your thoughts to issue your thoughts on
Speaker 8: on threads so far. But we'll see how this changes
Speaker 8: over time, the canation, how quickly it's ramped up.
Speaker 5: You don't see any kindibalzation risk for Instagram or for
Speaker 5: the core Blue app as a result of Meta launching threads.
Speaker 8: No, that absolutely could happen. So that'll be another thing
Speaker 8: on two ways, both on the user side and on
Speaker 8: the advertiser side. But I want to step back. This
Speaker 8: is what I call an easy extension for Meta. We're
Speaker 8: not trying to convince people to put on goggles and
Speaker 8: you know, follow us into the metaverse. We're just saying, hey,
Speaker 8: you're on Instagram, would you like another way, a different
Speaker 8: way to publicly you know, follow interact with other people
Speaker 8: on social issues and doesn't have to be your circle
Speaker 8: of friends either. It can be broader than that, and
Speaker 8: so far it looks like there's a pretty strong interest
Speaker 8: in doing that. It's a win for it, it's a
Speaker 8: low risk win for meta so far.
Speaker 2: Yeah, I'm kind of watching too. I mean, I have
Speaker 2: got on it.
Speaker 3: But what it seems like it's evolving, Threads is very
Speaker 3: much still evolving. Someone told me this morning that they
Speaker 3: don't have hashtags yet, but that that's coming. So I
Speaker 3: know that Joe Wisenthal was and he wanted a tweet
Speaker 3: deck kind of thing so that he could use it
Speaker 3: from his desktop, and apparently that's coming. So a lot
Speaker 3: of things they're sort of sort of still rolling out. Yes,
Speaker 3: I am, but have you threaded?
Speaker 6: That's the thing.
Speaker 5: It's still not intuitive enough for me to change my habits.
Speaker 5: It will happen, but hasn't happened yet.
Speaker 2: All right, Man Deeps saying a Bloomberg intelligence Mark Mahaney,
Speaker 2: of course, have ever core I s I guys, thank
Speaker 2: you so much, so appreciate it.
Speaker 5: This is Bloomberg than.
Speaker 1: Bromco a journal.
Speaker 3: How about you let me drive? No, no, no, who's going.
Speaker 1: Hory please?
Speaker 3: I want to drive.
Speaker 6: It's a good question.
Speaker 1: This is the drive to the clothes.
Speaker 6: Think well.
Speaker 1: On Bloomberg Radio.
Speaker 2: All right, everybody, just under eighteen minutes left in today's
Speaker 2: trading session. Carol Master along with Matt Miller. Matt, of
Speaker 2: course in for Tim. Let's get to it and our
Speaker 2: drive to the closed guest. Abbe Desbonde back with us,
Speaker 2: founder and chief investment officer at the registered investment advisor
Speaker 2: center Stone Investors. Abbe, you might recall a global value
Speaker 2: investor and he's back with us on zoom in New
Speaker 2: York City. Abbe, nice to have you here on this Monday.
Speaker 2: How are you doing very well?
Speaker 6: Thanks for having me.
Speaker 2: Well, yes, this market environment. Is it tough for you
Speaker 2: to find opportunity right now as a value person?
Speaker 6: Not really.
Speaker 9: I mean we're global investors at center Stone, and as
Speaker 9: you mentioned, we're value investors, so we're price conscious, and
Speaker 9: I mean in the international world anyway, there's still plenty
Speaker 9: of stuff that's out there, plenty of parts of the
Speaker 9: world that has kind of been disappointed by the the
Speaker 9: rather slow reopening kind of trade that that people have
Speaker 9: been pricing in the beginning of the year, which means
Speaker 9: a lot of disappointment. Still, so whenever there's disappointment, that
Speaker 9: means there's a price stock prices, which may be kind
Speaker 9: of looking focusing too much on short term kind of
Speaker 9: things and miss missing a larger trend. So we're we're
Speaker 9: able to find plenty to do right now. That said,
Speaker 9: we're not, you know, we're long term investors. When I
Speaker 9: say plenty, I mean you can find something new every
Speaker 9: mouth or so.
Speaker 6: That's why.
Speaker 3: So one of the things you like is Riley Automotive.
Speaker 3: And you know, somebody was talking this morning about how
Speaker 3: used car prices have fallen recently, but I note that
Speaker 3: most of the used cars I look at still costs
Speaker 3: more than the new model, the exact same one, because
Speaker 3: the market's held up. So well, why do you like a'riiley?
Speaker 6: So O'Riley?
Speaker 9: It's I mean, it has a very passing kind of
Speaker 9: correlation to use car prices, but it's it's very indirectly
Speaker 9: related to that, mostly more directly related to the to
Speaker 9: the well, let me back up. They sell auto parts
Speaker 9: to do it yourself kind of tinkerers.
Speaker 6: And also two mechanics who are going to fix your
Speaker 6: car for you.
Speaker 9: And generally speaking, the longer, the longer the age of
Speaker 9: the vehicle on the road, the more likely it is
Speaker 9: to need parts.
Speaker 3: And that number continues to grow. What are we at
Speaker 3: right now, twelve twelve years?
Speaker 6: Yeah, like ten and a.
Speaker 9: Half eleven years, you know, the last I looked, I
Speaker 9: think is a loan point two or something. So it's
Speaker 9: it's it's extended. I mean, it's well beyond the seven
Speaker 9: years that it used to be you know, maybe a
Speaker 9: decade ago. So that you know that is related to
Speaker 9: the price of used cars, right like the more expensive
Speaker 9: they are, it's harder for people to come turn their
Speaker 9: cars in. And beyond that, the just the financing for
Speaker 9: for new vehicles is it's it's tougher and tougher to qualify.
Speaker 9: So you know, on balance, those two one kind of
Speaker 9: a longer trend that's been a place for some time.
Speaker 9: It's extending the age of the fleet. But at the
Speaker 9: same time, the difficulty and just turnover in the in
Speaker 9: the in the car market makes it makes that that
Speaker 9: that tailwind more sticky.
Speaker 3: I mean, I get why more people. I mean, I
Speaker 3: get why O'Reilly's attractive. And you know, as cars are
Speaker 3: now so expensive and getting qualified to take a loan
Speaker 3: to buy a new one is harder and harder, you're
Speaker 3: going to work on fixing up the car you have.
Speaker 3: The thing is, I've been hearing people say this for
Speaker 3: a long time about O'Reilly and the stock has done
Speaker 3: really well. Is it. It's not a value stock, is it.
Speaker 3: I'm looking at a chart right now, coming from a
Speaker 3: year ago at six point fifty now it's trading at
Speaker 3: nine to sixty one.
Speaker 6: Yeah, I mean, it's clearly it's not what it used
Speaker 6: to be.
Speaker 9: It was thirteen or fourteen times earnings when we bought it,
Speaker 9: I think it's seven years ago or something. And at
Speaker 9: that time there was there was you know, the I
Speaker 9: was more on the potential inroads that Amazon was going
Speaker 9: to make into their core business and that ended up
Speaker 9: being a kind of a non event, but it was
Speaker 9: enough concern to drive the stock down the thirteen times earnings,
Speaker 9: where you know, people just ignored the longer term, you know,
Speaker 9: these trends that we've been talking about, but.
Speaker 6: Also in the space of auto parts.
Speaker 9: Retailing O'Reilly to us anyway appears to be the vice quality.
Speaker 9: I mean, they've got the shortest time to market. It's
Speaker 9: built to supply the industry mechanics who need parts and
Speaker 9: turn you know, within an hour. Like it's the only
Speaker 9: a company that can consistently do that. So they just
Speaker 9: continue to gain market share. And what they've done is
Speaker 9: I think shown people that their business model makes this
Speaker 9: more of a much more of a franchise that it
Speaker 9: does like AIG what you would maybe associate with the
Speaker 9: out parts, which is like a more cyclical business.
Speaker 6: That's a lot of the multiple to expand.
Speaker 9: So it's tough, as you said, though, Matt, I mean
Speaker 9: it's tough to say at twenty six times earnings.
Speaker 6: That this is like the cheapest stock in the world.
Speaker 9: But it's a high quality franch eyes and I think
Speaker 9: it still deserves the multiple what it has.
Speaker 2: Does it freak you out though a little bit? When
Speaker 2: Advanced Auto came out and they had some disappointment and
Speaker 2: dragged the whole sector down, does that potentially bode well
Speaker 2: or bode poorly?
Speaker 7: Rather?
Speaker 2: Also for O'Reilly, Well, we did you know that?
Speaker 9: Did there was a moment there where like, oh, what
Speaker 9: do this? Is there something going on that we didn't see.
Speaker 9: But you know, we've we're familiar with all of the
Speaker 9: companies in this space, and AP has had had its
Speaker 9: own kind of issues. I mean, they're very internal to
Speaker 9: the company and they I don't think it seems it
Speaker 9: just seems to not reflect on the overall state of
Speaker 9: the market and maybe more so on on their they're
Speaker 9: just internal upheaval.
Speaker 2: Sought for one. I want to go there because it's
Speaker 2: not a company that I was that familiar with. Swiss
Speaker 2: based company. It services, but it sounds like that there's
Speaker 2: a specific news event that has got you thinking about
Speaker 2: this one are interesting and we're talking about this unsolicited
Speaker 2: offer from being Capital.
Speaker 9: Yeah, so we purchased it before that. I mean, the
Speaker 9: stock has run up a lot since we bought it,
Speaker 9: But originally when we bought it was another one of
Speaker 9: these things where we think where we thought that there
Speaker 9: is an underlying like a good franchise underlying it. There's
Speaker 9: this sort of software as a service kind of business
Speaker 9: that they're they're involved in, but at the time it
Speaker 9: was being overshadowed by the very slobby financial management of
Speaker 9: the company. They're growing very rapidly, but their expenses were
Speaker 9: growing way too far ahead of their actual sales growth,
Speaker 9: and so that margins were always underwhelming.
Speaker 6: People couldn't quite figure it out.
Speaker 9: Then they got a new management team that that you know,
Speaker 9: pointed out the very obvious problem, which is a gross
Speaker 9: margin problem with expenses that they needed to manage kind
Speaker 9: of you know, sort of third grade financial management really,
Speaker 9: and he very quickly that new management team, new chairman
Speaker 9: sort of settle things and put the company on the
Speaker 9: right road.
Speaker 6: And the stock's been recovering.
Speaker 9: And that came to the notice of Bain, who put
Speaker 9: in a think, uh, what's broadly agreed to be.
Speaker 6: A low ball offer.
Speaker 9: I don't think they're way off the mark, but you know,
Speaker 9: if they want a chance of success of acquiring this business,
Speaker 9: you have to bump that up. If not, we're perfectly happy.
Speaker 9: And they're they're just starting the whole you know, financial
Speaker 9: management process, you know, to write the to write the ship.
Speaker 9: So there's plenty of upsides still even if Bain doesn't happen.
Speaker 2: All right, we're gonna leave it on that note. I
Speaker 2: always good to get into some specific names. Abby, Thanks
Speaker 2: so much. Abbi Desponde, founder and chief investment officer at
Speaker 2: Centerstone Investors, joining us on Zoom from New York City,
Speaker 2: New York City or City. I have a car that's
Speaker 2: ten years old. We just do plan money into it.
Speaker 3: That's what people do with old cars. It's kind of
Speaker 3: but it's very part of the phone.
Speaker 2: Our garage is like, when you go to sell it,
Speaker 2: sell it to us, We're like, I bet Carl Master, Matt.
Speaker 2: You're listening to Bloomberg Radio.
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