Speaker 1: This is Bloomberg Business Week. I'm Carol Masser and I'm
Speaker 1: Jason Kelly. We're here every day bringing you the latest
Speaker 1: news from the world's of business and finance, plus technology, politics, economics,
Speaker 1: all harnessing the power of Bloomberg Business Week reporters and editors,
Speaker 1: not to mention our journalists and analysts more than a
Speaker 1: hundred and twenty countries. You can download Bloomberg Business Week
Speaker 1: on iTunes, SoundCloud, or Bloomberg dot Com. You can also
Speaker 1: listen to our radio show weekdays at two pm Eastern
Speaker 1: only on Bloomberg Radio. Let's turn to Scott to vote. Now,
Speaker 1: he's got a great, great scoop on the terminal, moving
Speaker 1: shares and getting people interested all around this potential or
Speaker 1: I guess it actually is a transaction to the extent
Speaker 1: that we've had Elliott Management, well known investor Paul Singers
Speaker 1: Shop going into Twitter pushing for changes, including saying Jack Dorsey,
Speaker 1: maybe he shouldn't be the CEO. Scott's with us in
Speaker 1: our Bloomberg Interactor brokerst here. First of all, congrats, great
Speaker 1: scoop moving the shares, a green b as we call
Speaker 1: it here. In turn, it's a big deal, so what's
Speaker 1: going on. So I think for the longest time people
Speaker 1: were kind of looking at Jack Dorrisey at Twitter and
Speaker 1: wondering how he could divide his time between the Twitter
Speaker 1: and then his other job, which is the CEO of Square.
Speaker 1: They're both, um, you know, thirty five billion dollar company.
Speaker 1: Twitter is a six billion dollar company, and he's also
Speaker 1: came out and said that he was, you know, looking
Speaker 1: to spend about six months of the year working in Africa. Now, um, so,
Speaker 1: I think the alarm bell started going off for a
Speaker 1: lot of investors. And then when that happens, it doesn't
Speaker 1: take too long for somebody like Elliott to show up.
Speaker 1: So how big a holding do they have and what
Speaker 1: are they pushing for? And tell us about this meeting
Speaker 1: where Twitter executives were there but Jack Dorsey was not. Yeah,
Speaker 1: so they own a more than a billion dollar stake
Speaker 1: in the company. Um and on Friday night they had
Speaker 1: a meeting with the chairman and the lead director. Elliott
Speaker 1: did uh to discuss some of their concerns. And I
Speaker 1: mean it's not uncommon that did not have the ce
Speaker 1: OH in the room. If you're going to be talking
Speaker 1: about the CEO and in the future of the CEO.
Speaker 1: So I wasn't too surprised that Dorsey wasn't there, but
Speaker 1: you know, it makes it a lot easier to facilitate
Speaker 1: a conversation about some of your concerns about Dorsey if
Speaker 1: he's not actually there, And so how likely, how feasible
Speaker 1: is it that they'll get something satisfactory out of all this.
Speaker 1: I don't think that it comes as a surprise to
Speaker 1: the board that there are increasing concerns about the level
Speaker 1: of UM involvement Dorsey has in his divided attention. So
Speaker 1: I think this has got to be something that they
Speaker 1: were thinking of already. UM. And I don't know that
Speaker 1: for a fact, but I do know that the conversations
Speaker 1: between Elliott and uh, the chairman and the lead director
Speaker 1: were cordial, uh constructive. They were described to me as
Speaker 1: and that UM, there is some hope that maybe there
Speaker 1: will be some some way, some path forward that they
Speaker 1: can work together. I also want to ask you about
Speaker 1: sort of Elliott right now and policing. I mean, this
Speaker 1: is the second time we've talked to you in in
Speaker 1: as many weeks, I believe, because we were talking to
Speaker 1: you about soft I mean, yeah, this guy's going for it.
Speaker 1: It feels like yeah, I mean, it's a forty billion
Speaker 1: dollar fund now, and it's it's you know, you've got
Speaker 1: to deploy that capital somehow. Um, you've got the clout
Speaker 1: um and there's these targets that are just out there,
Speaker 1: you know, Massa Son's soft Bank. You know, we're all
Speaker 1: talking about all the problems they're having with the Vision
Speaker 1: Fund and not the kingmaker that are the guaranteed kingmaker
Speaker 1: in terms of startups that I think everyone assumed it
Speaker 1: was right. And I think that so as soon as
Speaker 1: that happens in a public realm, there's only a few
Speaker 1: people that have the capital that can go into a
Speaker 1: company like soft Bank or Twitter and say, you know, hey,
Speaker 1: look this isn't right, like this shouldn't be running this way,
Speaker 1: And Eliot's one of those people. I do if I
Speaker 1: can be sorry, I just go back to Twitter for
Speaker 1: a second. Is it is it likely that the Dorsey
Speaker 1: era of Twitter is going to come to an end? Look,
Speaker 1: I'm not good at predicting things. I'm terrible at deciding
Speaker 1: who's going to win an election or a primary or whatever.
Speaker 1: But I would say that the writings on the wall
Speaker 1: if he wants to continue to run both companies and
Speaker 1: moved to Africa for six months of the year. There's
Speaker 1: absolutely no way that somebody running a you know, twenty
Speaker 1: six billion dollar companies should be having those side jobs.
Speaker 1: It's it's a full time job. There's a U S
Speaker 1: election coming up, there's Summer Olympics coming up. There spread
Speaker 1: a coronavirus. That's when all the users start turning to Twitter,
Speaker 1: That's when all the advertisers start turning to Twitter. And
Speaker 1: that requires somebody's full time attention. Well, and there's so
Speaker 1: many big existential questions and we've talked about them on
Speaker 1: this show a lot around you know, Twitter's role in
Speaker 1: the world of politics, in the world of misinformation and
Speaker 1: information and all of those things. And yet, as you
Speaker 1: alluded to Scott, at least so far as it was
Speaker 1: with soft Anchor, as it has been with softing fairly
Speaker 1: friendly at this moment. This isn't sort of storming the gates. Yeah,
Speaker 1: I mean to be clear, Elliott has nominated for directors
Speaker 1: the board. Um, and you know that's just a precaution.
Speaker 1: If things don't go well, then you know they have
Speaker 1: the people there because there was a deadline for nominating.
Speaker 1: They have those directors there. So if things don't go well,
Speaker 1: then they can push for changes in a in a
Speaker 1: proxy fighter. I do feel like the Twitter story, how
Speaker 1: many conversations have we had, you know, I think their
Speaker 1: numbers may have been I have to go back and
Speaker 1: look at the most recent earnings, but I do think
Speaker 1: people wonder about, like kind of what is this business
Speaker 1: going forward? Right? It's well, if you look at the
Speaker 1: numbers since Doris came back in July, the shares are
Speaker 1: down six percent over that same period of time. Facebooks
Speaker 1: are up one um. So you do the math, right, Yeah. Well,
Speaker 1: and just to point out, Twitter shares you know, really
Speaker 1: based on your reporting, up about seven percent today. So
Speaker 1: clearly investors excited about the idea that Mr Singer and
Speaker 1: his cohorts getting in there, and a kind of timeline
Speaker 1: that we can expect that we might start to see
Speaker 1: something happening here. I'm hearing that things are moving fast.
Speaker 1: All right, Well, stay tuned and you might lose another weekend.
Speaker 1: Sorry for just a week, all right, Scott Devote, thank
Speaker 1: you so much. Feel's report of fantastic scoop one of
Speaker 1: the most read on the Blottolberg. People certainly talking about
Speaker 1: this amid a very very busy week in politics and
Speaker 1: global economics and central banks and coronavirus. This is capturing
Speaker 1: a lot of attention. A lot of pet shop boys
Speaker 1: these days. Pet shop boys takes me back. Oh yeah,
Speaker 1: the hund pig. Uh. Nick Parrish is here with us,
Speaker 1: managing director of Crescent Partners based out in Chicago, here
Speaker 1: with us in New York City today talking opportunity zones.
Speaker 1: That's the subject of the story. So tell us what's
Speaker 1: going on out there, because we've heard a lot about
Speaker 1: them sort of in theory, but I feel like less
Speaker 1: in practice. What are you seeing? Yep, So I think
Speaker 1: you know, it's it's a good point, right, this is
Speaker 1: a relatively new piece of legislation. It's fifteen months old
Speaker 1: in practice, a little bit older in legislation, and it
Speaker 1: caught a lot of excitement early on. Right, It's you know,
Speaker 1: if you look at the magnitude of these tax breaks,
Speaker 1: there's a huge opportunity for investors. But it's new, and
Speaker 1: it's been largely untested, and so you know, initially you
Speaker 1: sell a lot of people talking about it, but not
Speaker 1: a lot of activity. And I think now you know,
Speaker 1: you're fifteen months in and you know, while that's only
Speaker 1: the early innings of the program, you know, you're starting
Speaker 1: to see some of that activity, whether it be in
Speaker 1: the fundraising side or actual deployment of capital. Um And
Speaker 1: so now I think there's a you know, there's a
Speaker 1: there's a subset of folks in the market. They're actually
Speaker 1: getting things done, and I think we're you know, we're
Speaker 1: starting to see that that percolate. All right, so you've
Speaker 1: got money, I know. So so give me an idea
Speaker 1: of the types of projects were costing. You know that
Speaker 1: we're talking at Nike that where the money is going
Speaker 1: to go. Because you know that there's a fair amount
Speaker 1: of controversy surrounding opportunity zones. Are they really an opportunity
Speaker 1: zone or is it a zone that's already turning and
Speaker 1: it's just a great opportunity for wealthy investors to kind
Speaker 1: of tap into. Yeah, So so you know, the government
Speaker 1: designated where we could invest. Right, So there's finger point
Speaker 1: I should point at the government. And I don't mean
Speaker 1: to point fingers, but you know it it is, you
Speaker 1: know they and and by the way, you know it's
Speaker 1: not all um necessarily you know, political in terms of
Speaker 1: how those got selected. So one of the biggest disconnects
Speaker 1: in the program. They used UM. They used employment statistics
Speaker 1: and these income levels from the last census. Do you
Speaker 1: remember from your high school Civics class, WEDE a census
Speaker 1: every ten years, and so you had opportunity zones that
Speaker 1: were selected based on income and poverty levels in two
Speaker 1: thousand ten. If you think of really high growth markets
Speaker 1: and especially just coming off the crisis, so those numbers
Speaker 1: are in particular particularly kind of skewed correct. And so
Speaker 1: if you look at where a lot of the capital
Speaker 1: is flowing today, a lot of these are high growth
Speaker 1: markets in places where nine years, ten years makes a
Speaker 1: world of difference. You think about markets like Portland, like Nashville,
Speaker 1: like Denver. You know, there are areas that ten years
Speaker 1: ago might have been very much on the periphery of
Speaker 1: these of these cities that now today are very much
Speaker 1: in the center of that economic development curve UM. And
Speaker 1: so that's where you're seeing a lot of the capital today.
Speaker 1: But you know, I like to remind people we're fifteen
Speaker 1: months into a ten year program. You know, you're only
Speaker 1: starting to see that capital get deployed. What our hope
Speaker 1: is is that it will create a path to progress
Speaker 1: where if you build on the periphery of these areas,
Speaker 1: that will give the next developer a little more license
Speaker 1: to go a little bit further out, and that will
Speaker 1: give capital kind of a natural path to follow. And
Speaker 1: what could get in the way of this? I mean,
Speaker 1: is it macro economic concerned? Is it further legislation? Is
Speaker 1: at local? Like, what do you worry about? I think,
Speaker 1: you know, the further legislation piece that that ebbs and flows.
Speaker 1: And you know, we're in an election cycle, so we're
Speaker 1: is there a presidential election, so we get you know,
Speaker 1: we might fall. I don't want to say fall a
Speaker 1: victim to that. I think that the likelihood that any
Speaker 1: of that changes before the next election is pretty slim
Speaker 1: to knell. You will see some local elections that we
Speaker 1: need to be mindful of, you know, around housing and
Speaker 1: zoning that that I think, uh, you know, by and large,
Speaker 1: a lot of the local municipalities have actually been supportive
Speaker 1: of this because they see this as an opportunity to
Speaker 1: attract capital to the zones located in their cities and
Speaker 1: UH and states. And so we've seen a number of
Speaker 1: of UM political entities get very involved in kind of
Speaker 1: advertising that UM you know, I think macroeconomic fundamentals are
Speaker 1: certainly of note though. That's one of the benefits of
Speaker 1: this program. It's a ten year old so it's very
Speaker 1: much designed for a long term investment horizon, and so
Speaker 1: you don't have to be as mindful of the you know,
Speaker 1: daily and weekly dips in the market. It's much more
Speaker 1: long term. Is it safe to say, um that even
Speaker 1: without the tax breaks, these are areas you would have
Speaker 1: been investing in any way. Yeah, I mean, I think
Speaker 1: that's the real magic or the real challenge in this program,
Speaker 1: right that the way the whole legislation is designed is
Speaker 1: it allows you to own assets for a long period
Speaker 1: of time and then to sell them without capital gains tax.
Speaker 1: That only does you good if you have generated gain. Right,
Speaker 1: So this is not a program where you can go
Speaker 1: out and you get a participant medal for trying. Right,
Speaker 1: you have to make a good investment. But if you
Speaker 1: make a good investment and then layer the benefits on
Speaker 1: top of it, that's when this becomes interesting. So that's
Speaker 1: the real challenges. You have to find opportunities to invest
Speaker 1: that makes sense, that kind of pencil to a normal
Speaker 1: you know, investment return that exists within these defined zones.
Speaker 1: All right, Nick Parish, thank you so much, Managing director
Speaker 1: for Crested Partners based out in Chicago, working on opportunity zones.
Speaker 1: We're forgiving the fact that he is a Marquette guy
Speaker 1: and his basketball team is better than mine. We're just
Speaker 1: going to leave that to the exactly. We're all neutral here,
Speaker 1: especially because we're gonna be the host of the Big
Speaker 1: East Tournament and you know, we'll see what happens then,
Speaker 1: just saying I'm just saying, I'm just saying, all right, Nick,
Speaker 1: thank you so much. All right. So, certainly the big
Speaker 1: players when it comes to the housing mortgage market, we're
Speaker 1: talking about Fannie May and Freddie mac um. These two
Speaker 1: um companies. I don't even know what you call them
Speaker 1: because their government sponsored enterprises. Uh, yes, companies. Well, they're
Speaker 1: publicly traded, you know what I'm saying. They're publicly traded. No, no, no,
Speaker 1: no, no no, come on, you guys aren't being fair. They've
Speaker 1: trade publicly, although they've been taken over by the government,
Speaker 1: but they have a lot of government oversight. Uh and
Speaker 1: their keeper is still the US government. So let's get
Speaker 1: into this story. It's going to be the upcoming issue
Speaker 1: of the magazine. Elizabeth Dexheimer is financial regulation and congressional
Speaker 1: reporter at Bloomberg News. She's on the phone in Washington.
Speaker 1: You have to help me out here, Elizabeth. Also without you,
Speaker 1: you've hit it on the head of these companies are
Speaker 1: two of the weirdest sagas in modern finance. And Freddy
Speaker 1: Mac two very important companies at the heart of the
Speaker 1: mortgage market. They buy mortgages from lenders, they package them
Speaker 1: into securities and sell them to investors. And this whole
Speaker 1: process really makes it possible for the thirty year mortgage
Speaker 1: to exist. It has bearing on everything from mortgage rates
Speaker 1: to home prices. And during the financial crisis, um these
Speaker 1: companies were about to fail, US taxpayers had to step
Speaker 1: in bail them out, and since then they've operated in
Speaker 1: this really weird place where yes, they have shareholders and
Speaker 1: have earnings, they've returned to profitability and otherwise look like
Speaker 1: normal publicly traded companies, But on the other hand, they
Speaker 1: are completely controlled by the government. And where we're at
Speaker 1: now is the Trump administration has promised to fix all
Speaker 1: of this, and uh in more than sort of at
Speaker 1: the core of this, to free them from government control
Speaker 1: and they've promised to do it without help of Congress,
Speaker 1: and so that's really put a lot of eyeballs in
Speaker 1: certain places on Wall Street focused on markla Riot. He
Speaker 1: is the director of the Federal Housing Finance Agency, which
Speaker 1: is their chief regulator. And that's and that's the story. Say,
Speaker 1: the fate of it all largely hines that one man,
Speaker 1: I know, Bloomberg Business we get it or Jil Webber
Speaker 1: also here. So um uh deck Nimer has done a
Speaker 1: great job on this. And I guess the thing that
Speaker 1: I'm really interested in, like the people that come up
Speaker 1: in the article, it's really the hedge fund world, right,
Speaker 1: So how do they factor into all of this? Right?
Speaker 1: So that is one really in a big group on
Speaker 1: on Wall Street right now. The shareholders in these companies themselves,
Speaker 1: which do include some pretty prominent hedge funds UH and
Speaker 1: investors like John Paulson and Bill Ackman. They made a
Speaker 1: big bet on these companies a long time ago and
Speaker 1: they've yet to really see it payoff. And so depending
Speaker 1: on what happens and sort of the details on how
Speaker 1: these companies are freed from US control, there's a lot
Speaker 1: of money riding among shareholders, whether or not they're going
Speaker 1: to be able to see that and sort of how much.
Speaker 1: And quite frankly, I can tell you after spending a
Speaker 1: lot of time with Mark Collabora and it really is unclear. Um.
Speaker 1: He does play a big role in this, as does
Speaker 1: the Treasury Department, but it's really unclear where they're where
Speaker 1: they're going to go on this shareholder question. You can
Speaker 1: just look at the shares of these companies the past
Speaker 1: few months that have been surging on sort of optimism
Speaker 1: that this is going to go their way. But I
Speaker 1: can tell you that it's it's really unclear whether or
Speaker 1: not they are going to see the pay day that
Speaker 1: they're hoping for. And tell us about this guy, I mean,
Speaker 1: because as you point out, I mean, it's all it's
Speaker 1: all to him, like what do we know? Well, right,
Speaker 1: him and the Treasury Secretary and Nuan play a big um.
Speaker 1: But not only is the power in his hands, but
Speaker 1: he's also been making a lot of really ambitious promises
Speaker 1: about how it's not a question of if it's when
Speaker 1: this you know these companies are free, and how quickly
Speaker 1: that's going to happen. I mean, he's saying in my
Speaker 1: interview with him, may Or June of next year, we
Speaker 1: could be seeing a huge I p O of of
Speaker 1: Fannie and Freddie and UM. Yeah, so collabora is is
Speaker 1: is a well known sort of entity here in Washington. Um.
Speaker 1: He was uh Republican staff around the Hill for many years.
Speaker 1: He was at the conservative thing tank Cato Institute, and
Speaker 1: he most recently served as Mike Pence's Jesus economist. UM.
Speaker 1: So he's definitely in a lot of sort of what
Speaker 1: he's done. Um. He has had some controversial views on
Speaker 1: on housing reform in the past, and as he even
Speaker 1: puts it, a lot of what he's done the past
Speaker 1: few months since taking this job is sort of reassuring
Speaker 1: a lot of the different people, um, that have a
Speaker 1: lot of stake in the decisions he makes. That Um,
Speaker 1: you know, his role as a regulator is different from
Speaker 1: that as a conservative writer. What what what was the controversy? Uh, Well,
Speaker 1: he's he's made some comments in the past, including about
Speaker 1: around shareholders, this issue around the hedge funds. Um. He
Speaker 1: believes that the hedge funds should have been wiped out
Speaker 1: or any of the shareholders in Fannie and Freddie when
Speaker 1: they were when the government bailed them out. Um. He
Speaker 1: has said that no circumstances right now would indicate that
Speaker 1: they shareholders should be wiped out again. Um, if they
Speaker 1: were facing another on the brink of failure again, he
Speaker 1: believes the shareholder should be wiped out. So it seems
Speaker 1: like that that um, you know, is part of this
Speaker 1: narrative and trying to understand where he's really going with
Speaker 1: all of this, which, if you're an investor or anybody
Speaker 1: else watching this stuff, it's just like you get this
Speaker 1: kind of cloudy picture that you know, markets don't always
Speaker 1: like um and so what what does all this mean
Speaker 1: for me and my mortgage? Well, that's remains to be seen.
Speaker 1: I think part of the reason why it has taken
Speaker 1: so long to sort of fix this and the and
Speaker 1: the company sort of remain in this weird state that
Speaker 1: they're at is because politically, no politician, Republican or Democrat,
Speaker 1: wants to do anything that would really mess with the
Speaker 1: mortgage market or mess with your ability or anyone's ability
Speaker 1: to buy a home. And uh and quite frankly, there's
Speaker 1: a lot of the housing market is booming right now.
Speaker 1: There's a lot that's working in this system right now,
Speaker 1: and uh so I think that that is sort of
Speaker 1: the biggest question that how do you do all these
Speaker 1: things and not sort of mess with anything that is
Speaker 1: currently going well. And that's where I think urgency there's
Speaker 1: a lot of time. Like the whatever they do UM,
Speaker 1: there's not only an election coming up where the people
Speaker 1: that UM are going to decide this may change with
Speaker 1: a new administration, but it's also if the markets, you know,
Speaker 1: if the public markets UM take a change, at the
Speaker 1: housing market takes a turn for the worst, it's gonna
Speaker 1: be a lot harder to make changes. So I have
Speaker 1: a question, billion dollar question, Elizabeth UM. Has the government
Speaker 1: that was the bail out UM that the government did
Speaker 1: for Fannie and Freddie? Has that been paid back? Yes,
Speaker 1: it's been paid And since then, the terms of the
Speaker 1: bailout agreement were changed a few years ago, and Fanny
Speaker 1: and Freddie have been sending all of their profits to
Speaker 1: the government. Collabora and Secretary Minution made a slight tweak
Speaker 1: to that UM in September, So now Fanny and Freddie
Speaker 1: are retaining more of their profits. Once they reached a
Speaker 1: certain amount, they send the rest to Treasury. So yes,
Speaker 1: treasury has been repaid. Alright, final thought to you, Mr
Speaker 1: Webber well, I think to me, it speaks to like
Speaker 1: how these things get messy? Right? Are they companies? Are
Speaker 1: they not companies? To Carol's exact question at the top,
Speaker 1: that we gave a hard time and who's the person
Speaker 1: behind this? Because ultimately it's he's going to be uniquely
Speaker 1: put in into a position that's going to test him.
Speaker 1: So TBD what comes out of that? But you know,
Speaker 1: I feel like I'm a little better off, thinks Elizabeth.
Speaker 1: It really mapped it out really well. Elizabeth Dexheimer joining
Speaker 1: us from Washington on the phone, financial regulation and congressional reporter.
Speaker 1: Her story on the Bloomberg and on Bloomberg dot com
Speaker 1: right now will be the upcoming issue of Bloomberg this week.
Speaker 1: Our thanks to to the editor of the magazine, Joe Webber.
Speaker 1: Just a reminder that we're not all done with the
Speaker 1: financial crisis, right We keep talking about everything or so
Speaker 1: many things that have made their way back, but we're
Speaker 1: still figuring out Fanny and Freddy, which is why this
Speaker 1: is a really smart story. This is Bloomberg Business Week
Speaker 1: with Carol Messer and Jason Kelly on Bloomberg Radio. First
Speaker 1: of all, we have the U. S HINNA trade war,
Speaker 1: now we've got the coronavirus. Global supply chains, they have
Speaker 1: no doubt about it been attacked and in many ways
Speaker 1: for some stopped, causing many to rethink and reverse the
Speaker 1: great globalization trend from west to east. Andy Brown writes
Speaker 1: about it. He is Bloomberg New Economy Editorial director. He
Speaker 1: joins us you, Bloomberg Interactive Broker Studio. You know, I
Speaker 1: do feel like, right, all of this started with the
Speaker 1: trade war, but it's really picked up some momentum as
Speaker 1: a result of the virus. Andy, can I just bring
Speaker 1: one headline that just across the Bloomberg Pete Blotch, former
Speaker 1: mayor of South Bend, Indiana, to endorse former Vice President
Speaker 1: Joe Biden at a rally tonight. That is according to
Speaker 1: the AP, so not shocking, especially given the phone calls
Speaker 1: that we understand were made last night by the former
Speaker 1: vice president and the former President Obama. So um, some
Speaker 1: interesting momentum building on that side. So watching politics this
Speaker 1: week and obviously watching the virus. So Andy, you write
Speaker 1: about this and you talk about deglobalization in particular how
Speaker 1: it's accelerating. Yeah, you know, I feel I have a
Speaker 1: personal connection to this story because over the last couple
Speaker 1: of years, I spent a lot of time in Donguan,
Speaker 1: a manufacturing hub in southern China, just across the border
Speaker 1: from Hong Kong, and about a decade or fifteen years
Speaker 1: ago something like that. In the in the early mid nineties,
Speaker 1: Donguan was a sleepy, agricultural backwater, rice paddies, village temples,
Speaker 1: clan based government. And then suddenly it started sprouting factories,
Speaker 1: and it goes from a population of you know, hundreds
Speaker 1: of thousands to one of the great cities in the
Speaker 1: world with more than ten million people. And there is
Speaker 1: this huge misconception around the world, particularly in the United States,
Speaker 1: how this process came about. People say China stole American jobs.
Speaker 1: It was nothing of the sort. American industrialists and industrialists
Speaker 1: from all over the world decided to relocate their manufacturing
Speaker 1: to Donguan and places around Donguan for two reasons. One price,
Speaker 1: but far more important in price efficiency, the coronavirus. That's
Speaker 1: really the process of globalization. The coronavirus has really blown
Speaker 1: those calculations out of the water. So that if you
Speaker 1: are now a global CEO and you're asking a question,
Speaker 1: where should I build my next factories, and the only
Speaker 1: question on your mind is am I going to go
Speaker 1: for price? Am I gonna go for efficiency? Is the
Speaker 1: wrong question, or at least it's it's not. There are
Speaker 1: other more important questions to ask, of which the most
Speaker 1: important now is how can I make my business, my
Speaker 1: global business, resilient to shocks coming out of China. And
Speaker 1: so as you sort of take a step back for
Speaker 1: from all of this, I mean, you look at the
Speaker 1: new economy. It's literally your job. So I mean, what
Speaker 1: do you make of this at this point in terms
Speaker 1: of the near term but maybe more importantly the long
Speaker 1: term effectiveness. So it's going to have a profound effect
Speaker 1: on the Chinese economy. So the aggregation of supply chains
Speaker 1: in China was seen as a great strength of the
Speaker 1: global economy, and it's now seen as a liability. So
Speaker 1: you know, I've spoken to uh managers of companies or
Speaker 1: managing or managers who are managing the operation in China.
Speaker 1: They're talking about relocating, not not just about relocating production
Speaker 1: at the margins sort of where am I going to
Speaker 1: build my next factory? But how do I take manufacturing
Speaker 1: capacity that's already in China and move it offshore? We're
Speaker 1: talking about shocks now, trade shocks, uh, US China trade war.
Speaker 1: We're talking about tech shocks. The technology decoupling between the
Speaker 1: United States and China. We've discussed on this show a lot,
Speaker 1: and now we're talking about black swan events. You know,
Speaker 1: of course, most notably right now, coronavirus. How much do
Speaker 1: you think Andy China knew that this? I mean, obviously
Speaker 1: people companies, global companies started to shift some of their
Speaker 1: operations to other lower cost providers, whether it's Vietnam or
Speaker 1: so and so forth. Right, we started to see that trend.
Speaker 1: How much of you know, China seeing this, and that's
Speaker 1: why they've been so much focusing on being more of
Speaker 1: a high tech provider, right, you know, much more sophisticated
Speaker 1: industries and moving They're focused to that because they saw
Speaker 1: kind of the writing on the wall. Well they did
Speaker 1: what What what happened was, I mean exactly the same
Speaker 1: reasons that industry moved from the Massachusetts and Connecticut and
Speaker 1: moved down south and then moved to the you know,
Speaker 1: over to Asia in you know, the nineteen sixties and
Speaker 1: nineteen seventies. Uh, you know, those are the same forces
Speaker 1: that have been at work for the last several days
Speaker 1: in Dongwa, several years in Dongwan, right, So labor intensive
Speaker 1: manufacturing is shipping out. That's very natural. That's a natural,
Speaker 1: normal process of of globalization. So that shipped to Vietnam,
Speaker 1: some of it has gone to Bangladesh, even Ethiopia, parts
Speaker 1: of Africa. What's different now is the driver of this
Speaker 1: what what looks like deglobalization, and it's fear. It's fear
Speaker 1: of over reliance on China. It is amazing. I mean,
Speaker 1: you know, as you say, just sort of synthesizing everything
Speaker 1: that's happened over the past year or so, how much
Speaker 1: the story related to China's change. You think about the protests,
Speaker 1: you think about the trade war, you think about the
Speaker 1: coronavirus dramatic, what a difference. There's a line that you wrote,
Speaker 1: deglobalization is driven by the disc comfitting am I saying
Speaker 1: it right? Discomforting? Discomforting? Oh sorry, maybe there's a type
Speaker 1: of discomforting realization that the entire system now has a
Speaker 1: single point of failure China. That is just like to
Speaker 1: get your head around it, Like so many people have
Speaker 1: placed their bets right in terms of the supply chains
Speaker 1: in China, and um being our workforce for something, right. So,
Speaker 1: and those those bets are not going to have to
Speaker 1: be on Wow. And the question now is where is
Speaker 1: some of this production gonna go? We're gonna go to right,
Speaker 1: I mean, so you know it's going to go to
Speaker 1: countries that actually upper tected because they have the least
Speaker 1: amount of connection to the Chinese economy. They have their
Speaker 1: own supply chains. If you're in if you're a country
Speaker 1: in Eastern Europe, Europe, now you're looking actually to benefit
Speaker 1: from all this. Mexico is in a terrific position right
Speaker 1: now because they take it all up. Yeah, all shifts around. Uh,
Speaker 1: that's why they call it the new economy, all right.
Speaker 1: Uh Andrew Brown, Andy Brown, thank you so much. I'm
Speaker 1: broc a journal But you let me drive. Oh no, no, no, no, honey, please,
Speaker 1: I'll do the riding drivels me. I want to drive,
Speaker 1: Just drive, baby, good questions trying. This is the drive
Speaker 1: to the Globe community. Thanks well, drying us on Bloomberg Radio.
Speaker 1: It is time for the drive to the close on
Speaker 1: this money back with us is Charlie Smith, co founder,
Speaker 1: chief investment officer at Fort Pitt Capital Group. They've got
Speaker 1: three point four billion in assets under management on the
Speaker 1: phone from Pittsburgh, Pennsylvania, and I say this, and Charlie
Speaker 1: Pello just talked about it, because investors are definitely buying
Speaker 1: into the clothes right now. Up four point two on
Speaker 1: the Dow, up one thousand, sixty two points, nastacks up
Speaker 1: almost three point four percent, up two points, and you've
Speaker 1: got the SMP with a percentage gain of roughly three
Speaker 1: point seven up a hundred and nine points. But no
Speaker 1: doubt about it, we're at our best levels of the day.
Speaker 1: Charlie Smith, Um, is this all because everybody expects the
Speaker 1: FED to cut rates? I'm not sure that's the reason.
Speaker 1: I think the the idea that this issue with the
Speaker 1: coronavirus is going to be behind us within the next
Speaker 1: four months, I think is starting to wait. Stop right there,
Speaker 1: that the issue of the coronavirus is going to be
Speaker 1: behind us in four months. We still have four months though,
Speaker 1: to get through. We're talking about you know, more than
Speaker 1: a quarter of well, I mean, that's an impact. Well
Speaker 1: markets are a discounting mechanisms and uh, you know, we
Speaker 1: may have a quarter here in the U S where
Speaker 1: we get a negative print for g d P um
Speaker 1: and the third quarter maybe flat year over year, but uh,
Speaker 1: I think that would imply a pretty strong rebound in
Speaker 1: the fourth quarter, and markets are always looking, you know,
Speaker 1: six to nine months ahead. So UM, I think the
Speaker 1: idea that uh, that this problem is not going to
Speaker 1: be any sort of a permanent one is going to
Speaker 1: take hold of here very quickly and even more importantly,
Speaker 1: potential bownside even if we do get uh, maybe one
Speaker 1: or two quarters of of flat to negative GDP. Uh.
Speaker 1: You know, the the impairment of SMP earnings this year
Speaker 1: might be three or four percent. That would get you
Speaker 1: a two a hundred and fifty eight dollar number for
Speaker 1: SMP earnings for the year. You put an eight team
Speaker 1: multiple on that that gives you a fair value around fifty,
Speaker 1: And we were at fifty on Friday, So I think
Speaker 1: we've pretty much discounted the problem. Wow, that is it?
Speaker 1: I mean, does that surprise you that the the market
Speaker 1: sort of digested this as quickly as it did and
Speaker 1: now is moving on. I mean, this feels fast to me,
Speaker 1: at least well to me, it seems as if the
Speaker 1: entire um presentation of the problem has been overblown. UM.
Speaker 1: You know, I understand that that the number of cases
Speaker 1: is going to rise exponentially in the US. But the
Speaker 1: final outcome of this is going to be what I
Speaker 1: believe to be amounts to a hyper severe flu season.
Speaker 1: Um and the sorts of sort of outcome that if
Speaker 1: we really hadn't been so sort of hyper attuned to
Speaker 1: it due to the way it's been presented in the media,
Speaker 1: we might have missed it. Um. So I I just
Speaker 1: really think that that the markets are smarter than that. So, okay,
Speaker 1: that's interesting. So you think the markets are already discounting
Speaker 1: this even though it might get substantially worse. What might
Speaker 1: change your tunes? Tune on that. What's the outcome of
Speaker 1: the virus that would make you say, all right, wait
Speaker 1: a minute, I und estimated this. Well, let's talk about
Speaker 1: what we see as is going to happen in the
Speaker 1: next three to four months. We could see, uh, you know,
Speaker 1: big public events canceled flat out, you know, just canceled,
Speaker 1: and uh, you know where there's talk here recently of
Speaker 1: potential for the the n c A basketball tournament to
Speaker 1: be played in front of empty gymnasiums. That could certainly happen.
Speaker 1: It could wreck the second quarter for GDP. But uh,
Speaker 1: I think once we get beyond the early summer July,
Speaker 1: we'll be at the point where the problem has begun
Speaker 1: to fade. Now people will begin to worry about the
Speaker 1: return of the flu season for next year. But there
Speaker 1: may be at some point where we've come up with
Speaker 1: some some some drugs that that will be able to
Speaker 1: help lessen the impact. But I think it's gonna work
Speaker 1: its way through the system. It may be, you know,
Speaker 1: the headlines may be awful for the next month and
Speaker 1: a half in terms of the growth in cases, but
Speaker 1: I think the marks are gonna gonna see right through that.
Speaker 1: All right, So talk to us in the midst of
Speaker 1: all this about some names that you because you know,
Speaker 1: this is not an easy market to to get your
Speaker 1: arms around. Uh what are you uh, what are you
Speaker 1: recommending here? Well, we have sort of an eclectic list here.
Speaker 1: We're we've owned Verizon for over a decade. We like
Speaker 1: the strong yield of you know, four point six percent yield.
Speaker 1: Their people are gonna not gonna give up their cell phones.
Speaker 1: They may give up an overseas trip, but they're they're
Speaker 1: never going to give up their cell phones. And uh,
Speaker 1: the the idea that Verizon has a excess cash flow,
Speaker 1: highest quality network in the in the country. We think
Speaker 1: they're a nice conservative play here. We also like Western
Speaker 1: Digital UM, the big player in hard disk drives and
Speaker 1: nan flash memory. Flash memory prices are rebounding pretty aggressively. UM.
Speaker 1: We think they could earn as much as seven dollars
Speaker 1: in their fiscal year ending next September. So they're selling
Speaker 1: it about eight times earnings with a three and a
Speaker 1: half percent yield. So it's a reasonably cheap stock with
Speaker 1: some decent earnings momentum to look forward to. Uh. Finally,
Speaker 1: we like a little firm here in Pittsburgh called to
Speaker 1: six incorporated, the Symbols I I v I. They make
Speaker 1: uh uh equipment for optical switching from both communications and
Speaker 1: industrial uses. Um. The optical switch is a is a
Speaker 1: is a reality, and they make the gear that makes
Speaker 1: those which is work. The Pride of Saxonburg p a
Speaker 1: interesting absolutely about thirty miles from downtown Pittsburgh. There you go, Uh,
Speaker 1: what don't you like in in this market? What are
Speaker 1: you avoiding in a market like this? Well, um, we
Speaker 1: would stay away from the utilities and the the the
Speaker 1: whole household products. Uh. Segment. Really, we think the the
Speaker 1: huge spike we've seen in rates are in yields collapsing
Speaker 1: here in the last six weeks really obviates any real
Speaker 1: attractiveness to the bond market. Uh. And so the household
Speaker 1: names and the and the utilities are ones that we
Speaker 1: would be staying away from right now. I do wonder, um, Charlie,
Speaker 1: if you think that. Okay, so here we are up
Speaker 1: almost five percent of the Dow Jones Industrial ouite, I
Speaker 1: mean there's a bunch of investors chasing these games right now. Um,
Speaker 1: as we head to our highs, we're now about on
Speaker 1: the Dow Jones Industrial average. How much of what we lost, uh,
Speaker 1: in this ten percent correction ten percent more than ten
Speaker 1: percent correction? How much do we get back? Because it's
Speaker 1: safe to say that most folks thought the market was
Speaker 1: overvalued based on the earnings outlook and the fundamentals. Um,
Speaker 1: So how much of it do you think we ultimately
Speaker 1: get back? If, as you say, investors are looking past
Speaker 1: beyond the virus at this point. Yes, So I always
Speaker 1: put it in terms of what we think we might
Speaker 1: earn this year. As I said, if we get a
Speaker 1: negative g D print in the GDP print in the
Speaker 1: second quarter, we get a flat number in the third,
Speaker 1: we could we could get back to a flat earnings
Speaker 1: number for the year UM. So you know, you put
Speaker 1: in eighteen eighteen and a half multiple on that, which
Speaker 1: would be actually slightly up from year end um because
Speaker 1: in straits have fallen so much in the interim. UM,
Speaker 1: you could get to basically back where we were at
Speaker 1: the beginning of the year, maybe up two or three
Speaker 1: percent for the year. Interesting. Alright, great conversation. Thank you
Speaker 1: so much. Charlie Smith, co founder at chief investment officer
Speaker 1: of Fort pitt Capital Group, looking after about three point
Speaker 1: four excuse me billion dollars joining us on the phone
Speaker 1: from Pittsburgh. Thanks for listening to Bloomberg Business Week. You
Speaker 1: can subscribe to the podcast on iTunes, SoundCloud, or Bloomberg
Speaker 1: dot com. You can also listen to our radio show
Speaker 1: every weekday at two pm Eastern only on Bloomberg Radio