WEBVTT - Jerome Powell’s Necktie Is Too Tight 0:00:13.880 --> 0:00:16.960 Hello, and welcome to What Goes Up, a Bloomberg weekly 0:00:17.000 --> 0:00:20.840 market podcast. I'm Sarah Pantzack, markets reporter on the Cross 0:00:20.840 --> 0:00:23.959 Asset Team, and I'm Mike Reagan, a senior editor on 0:00:24.000 --> 0:00:26.799 the Market team. This week, we'll discuss how the Federal 0:00:26.840 --> 0:00:30.400 Reserve signaled it may be ready to lower interest rates. 0:00:30.600 --> 0:00:32.599 That helps send the SMP five hunted to an inter 0:00:32.720 --> 0:00:36.200 day record, but that doesn't necessarily mean that the risks 0:00:36.240 --> 0:00:39.000 are gone. Rather, the G twenty meeting is next week, 0:00:39.080 --> 0:00:42.159 and now there's actually concerns over a real war with 0:00:42.320 --> 0:00:45.919 Iran after our U S drone was shot down. Meanwhile, 0:00:46.320 --> 0:00:49.600 the March of the Unicorns continues with Slack Technologies making 0:00:49.600 --> 0:00:53.239 its triumphant debut on Wall Street, and our guests will 0:00:53.280 --> 0:00:55.160 help us sort all of that out, and of course 0:00:55.160 --> 0:00:58.520 we'll finish with our tradition the craziest thing I ever 0:00:58.560 --> 0:01:03.520 saw in markets this week, Sarah, I'm assuming you're prepared well. 0:01:03.560 --> 0:01:05.560 Our two guests are today. I don't know if you realize, 0:01:05.680 --> 0:01:08.760 but they both remind me of my days over on 0:01:08.880 --> 0:01:12.160 Bloomberg Opinion. What was called gadfly back then, and this 0:01:12.240 --> 0:01:15.160 is back when I was licensed and accredited to actually 0:01:15.200 --> 0:01:19.559 have opinions in this company, I'm you're no longer allowed 0:01:19.560 --> 0:01:21.520 to have opinions, and I'll tell you have an opinions 0:01:21.600 --> 0:01:23.800 is harder than it sounds. I mean, it's one thing 0:01:23.840 --> 0:01:26.399 to call up someone and get his opinions on the market, 0:01:26.440 --> 0:01:28.400 and then if he's wrong, it's it's his problem and 0:01:28.480 --> 0:01:30.480 you can move on. But when you have to have 0:01:30.560 --> 0:01:34.199 him yourself, it's it's actually pretty incimidating. But our first 0:01:34.240 --> 0:01:38.640 guest here, uh Julian Emmanuel of bt I G, the 0:01:38.720 --> 0:01:42.039 chief Equity and Derivative strategist. Welcome to the show. Joints. 0:01:42.120 --> 0:01:45.080 Great to be here. And Julian, Now, when I used 0:01:45.120 --> 0:01:48.280 to have opinions, I can assure you they were all valid, 0:01:48.360 --> 0:01:51.800 serious opinions, except on Fridays when I went off my meds. 0:01:52.400 --> 0:01:55.120 And one week, one week, the story I wrote about 0:01:55.200 --> 0:01:58.640 was a Bloomberg story about how Jay Crew had widened 0:01:58.720 --> 0:02:01.880 neckties by a quitter. And that made me think, we 0:02:01.920 --> 0:02:04.800 have to do a league table of the best dressmen 0:02:04.840 --> 0:02:06.880 on Wall Street to to find out how why their 0:02:07.000 --> 0:02:10.520 their neckties were. And I did, and I did, and 0:02:10.520 --> 0:02:12.400 I'll tell you some of our friends in Bloomberg did 0:02:12.400 --> 0:02:15.600 not perform well in this league table. John Farrow was 0:02:15.639 --> 0:02:19.480 at the bottom at about two and a quarter. Yeah, 0:02:19.639 --> 0:02:23.600 even Lukawa was near the bottom at two and a quarter. Julian, 0:02:23.639 --> 0:02:25.040 I'm proud to say it was right in the middle, 0:02:25.040 --> 0:02:26.400 which I think is where you want to be in 0:02:26.440 --> 0:02:29.919 this particular league table three and a quarter. I gotta 0:02:29.960 --> 0:02:32.240 call you out on that one, Mike, because basically, a 0:02:32.280 --> 0:02:34.639 couple of years ago I was on with Keen and 0:02:34.720 --> 0:02:39.320 Tom looked at me said that is a beautiful So 0:02:40.360 --> 0:02:43.120 I don't know about that. I'm not even sure if 0:02:43.120 --> 0:02:46.639 you voluntarily participated or if I just hijacked you with 0:02:46.639 --> 0:02:48.560 a ruler after he came off TV or something I 0:02:48.760 --> 0:02:51.520 I can't remember. Yeah, how do you even get I'm 0:02:51.520 --> 0:02:53.720 surprised You've got so many people to participates in the middle, 0:02:53.720 --> 0:02:55.440 and I think that is the sweet spot, right at 0:02:55.440 --> 0:02:57.480 near the national benchmark average. You don't want to be 0:02:57.480 --> 0:02:59.960 in the in the tail of this bell curve at all. 0:02:59.840 --> 0:03:03.600 But also from Bloomberg opinion, my old pal Shira over Day, 0:03:03.639 --> 0:03:07.959 who covers all things technology and whatnot, sure can probably 0:03:08.000 --> 0:03:10.360 explain that maybe that necktie story is why I'm no 0:03:10.400 --> 0:03:15.320 longer allowed to have opinions disagree. We need more necktie 0:03:15.360 --> 0:03:18.560 content on Bloomberg Opinion. I was hoping someone would refresh 0:03:18.560 --> 0:03:21.000 that league table once a year, but no luck. Can 0:03:21.000 --> 0:03:23.440 you imagine if they assigned it to an intern or 0:03:23.600 --> 0:03:26.960 someone new, make sure that they track every single person 0:03:26.960 --> 0:03:28.440 down and measure their necktime. I have to admit that 0:03:28.480 --> 0:03:30.440 I am looking at your necktie right now, Mike, to 0:03:30.520 --> 0:03:35.200 see how wide it is. Little, but anyway, from neckties 0:03:35.240 --> 0:03:37.320 to FED, I don't really know how to make that 0:03:37.560 --> 0:03:41.720 it's truly smooth transition. If everyone has ideas, shout let 0:03:41.720 --> 0:03:43.960 me know. But Julie and I want to come to you, 0:03:44.120 --> 0:03:47.080 because everyone was talking about before the FED meeting on Wednesday, 0:03:47.120 --> 0:03:49.960 the statement that it was going to be so difficult 0:03:50.040 --> 0:03:52.960 for them to truly out of the markets, but it 0:03:53.040 --> 0:03:56.280 seems likely. Did I mean, is that truly what happened here? 0:03:57.240 --> 0:03:59.200 That is definitely part of it. And I have to say, 0:03:59.200 --> 0:04:02.320 I'll give you the trade transition here. Chair Pal's necktie 0:04:02.720 --> 0:04:05.760 at the press conference was about as tight as it 0:04:05.800 --> 0:04:10.360 could possibly have been given the tweets of the previous 0:04:10.400 --> 0:04:14.080 forty eight hours. Um. You know, from from our point 0:04:14.120 --> 0:04:17.280 of view, we actually expected that the FED might disappoint 0:04:17.720 --> 0:04:22.200 given the debvish expectations. But Chair Powell really did come 0:04:22.279 --> 0:04:24.640 through UM, and you can see it in the market 0:04:25.000 --> 0:04:28.680 pricing in a really a hundred percent chance of a 0:04:28.720 --> 0:04:32.200 twenty five basis point cut at the July meeting, and 0:04:32.279 --> 0:04:37.200 actually almost a chance of a fifty basis point cut. Uh. 0:04:37.240 --> 0:04:40.920 So the markets definitely did like it, but importantly the 0:04:40.960 --> 0:04:45.760 Fed like the market's reaction to what it said. Right. 0:04:46.160 --> 0:04:48.600 But last I read from you, you're actually thinking it 0:04:48.920 --> 0:04:51.760 won't come until September, that that first cut and then 0:04:51.760 --> 0:04:54.280 maybe another in December. Is that still you're thinking after 0:04:54.839 --> 0:04:58.920 this week's performance, we're sticking with that, although clearly the 0:04:58.920 --> 0:05:02.200 the odds of skewed of the potential for July. But 0:05:02.320 --> 0:05:05.080 if you think about the sort of quandary that the 0:05:05.160 --> 0:05:09.520 FED chair is in if you wait till September, particularly 0:05:09.560 --> 0:05:13.800 given the markets positive reaction over the last several days 0:05:14.000 --> 0:05:17.520 UM and what we think could be positive news coming 0:05:17.520 --> 0:05:19.920 out of G twenty UH in the next week and 0:05:19.960 --> 0:05:23.720 a half or so UM, the asset markets are perhaps 0:05:23.839 --> 0:05:26.440 giving the Fed the time to wait. And if you 0:05:26.480 --> 0:05:29.000 think about it again, from this challenge of the tight 0:05:29.080 --> 0:05:35.440 necktie with regard to political independence, waiting past July sends 0:05:35.440 --> 0:05:38.880 a message that the FED is independent of of the 0:05:38.920 --> 0:05:43.400 White House number one, and importantly actually is independent of 0:05:43.440 --> 0:05:45.800 what the market is trying to force them to do 0:05:46.279 --> 0:05:49.160 with the knowledge that you could still go in September 0:05:49.279 --> 0:05:52.240 and continue apace. So there are many people who say 0:05:52.279 --> 0:05:54.360 that if we don't get a rate cut now in July, 0:05:54.520 --> 0:05:57.160 because it is so highly expected that we are going 0:05:57.200 --> 0:05:59.919 to see pretty much a fit from the market. Well, 0:06:00.320 --> 0:06:02.359 your guys, price target, I know for your end is 0:06:02.360 --> 0:06:05.080 still around three thousand. How is it that you guys 0:06:05.080 --> 0:06:08.480 see the potential for the FED to not cut in July. 0:06:08.760 --> 0:06:11.880 But stocks are really still hang in there and potentially 0:06:11.880 --> 0:06:15.000 moved much higher. Well, you know, setting a new all 0:06:15.040 --> 0:06:17.480 time high uh this week at least on an intra 0:06:17.600 --> 0:06:20.919 day basis, as we have, um, we're pretty darned close 0:06:20.960 --> 0:06:24.679 to that three uh So, you know, happily so of course, 0:06:25.320 --> 0:06:28.880 But in that respect, it really is a case of 0:06:29.400 --> 0:06:33.359 you know, whether you measure it in terms of financial conditions. 0:06:33.360 --> 0:06:37.000 In the Bloomberg Financial Conditions Index is really a very 0:06:37.080 --> 0:06:41.200 valuable tool, and that is reasonably loose compared to the 0:06:41.279 --> 0:06:43.839 last year and a half or so. UM, the FED 0:06:43.960 --> 0:06:47.559 actually has the leeway and if the market walks back 0:06:48.200 --> 0:06:51.840 its own expectations, particularly if you get good news from 0:06:51.839 --> 0:06:55.440 Trump and G And remember we've also got earning season 0:06:56.320 --> 0:06:59.240 reporting starting in the middle of July, which tends to 0:06:59.240 --> 0:07:02.760 be a tale when for stocks in general you still 0:07:02.800 --> 0:07:05.440 get the three thousand. Now, what does good news at 0:07:05.440 --> 0:07:08.240 the G twenty look like? Is it a handshake and 0:07:08.640 --> 0:07:11.840 a letter to keep talking? Uh? Is it? I mean 0:07:11.840 --> 0:07:16.440 obviously they're not gonna presumably have a deal signed, sealed 0:07:16.440 --> 0:07:18.960 and delivered between the US and China. There what what 0:07:18.960 --> 0:07:21.280 would sort of you know, define good news to you 0:07:21.320 --> 0:07:24.760 at the well? I think it smiles after the steak dinner, 0:07:24.840 --> 0:07:28.840 red wine for G and the diet coke for President Trumps, 0:07:28.920 --> 0:07:31.720 as appears to be the case. But for US, if 0:07:31.760 --> 0:07:34.559 you look at financial markets over the last several years, 0:07:34.640 --> 0:07:39.640 whatever the quandary has been, bregsit, debt, ceiling, China, whatever 0:07:39.680 --> 0:07:42.760 it is, if you're able to successfully call it, kick 0:07:42.920 --> 0:07:46.600 the can down the road and leave markets optimistic that 0:07:46.680 --> 0:07:49.960 you're gonna get an eventual the solution to whatever it is, 0:07:50.320 --> 0:07:52.720 that's gonna be enough. And we think that's the case here, 0:07:53.000 --> 0:07:56.520 particularly since in the last forty eight hours it's very 0:07:56.520 --> 0:07:59.520 clear that North Korea is on the table as well 0:08:00.000 --> 0:08:03.080 when it comes to a trade deal versus a FED cut, 0:08:03.200 --> 0:08:06.720 So you can only get one or another, which is 0:08:06.720 --> 0:08:09.360 actually more valuable for the stock market. I mean, in 0:08:09.400 --> 0:08:12.000 a way, can you make the case that maybe a 0:08:12.080 --> 0:08:14.520 deal of the G twenty or really a positive outcome 0:08:14.560 --> 0:08:17.920 there isn't the greatest outcome because then maybe the FED 0:08:18.000 --> 0:08:21.520 takes that away and they start to see economic data turnaround, 0:08:21.800 --> 0:08:24.560 really start to tighten up, toughen up, and the FED 0:08:24.640 --> 0:08:26.800 decides that they're not going to cut the data doesn't 0:08:26.800 --> 0:08:30.480 imply it well. So we give Chairman Pal a lot 0:08:30.520 --> 0:08:33.040 of credit for pivoting as quickly as he did in 0:08:33.120 --> 0:08:38.280 January from cut from tightening to neutral. But the way 0:08:38.320 --> 0:08:41.760 this week is sorted itself out, we are in easing mode, 0:08:41.800 --> 0:08:45.199 whether we actually get the cuts where they're delayed, and 0:08:45.320 --> 0:08:48.200 so you know, we don't expect a repivot back to 0:08:48.280 --> 0:08:52.360 neutral or tightening in that respect. The trade deal is 0:08:52.480 --> 0:08:55.040 really very important because if you look at the last 0:08:55.120 --> 0:08:58.520 year and the cause of the Fed's concerned, it's been 0:08:58.559 --> 0:09:01.240 inflation being too low. And one of the mistakes the 0:09:01.280 --> 0:09:04.080 FED made last year in tightening what we think they 0:09:04.200 --> 0:09:08.199 overtightened and shouldn't have tightened in December, was in assuming 0:09:08.480 --> 0:09:11.480 that a trade war was going to be inflationary, and 0:09:11.520 --> 0:09:16.040 in fact it's proven to be disinflationary by by leaps 0:09:16.040 --> 0:09:19.439 and bounds. Now, Julian, your business card says chief Equity 0:09:19.440 --> 0:09:21.360 and Derivative Strategists. So I want to I want to 0:09:21.360 --> 0:09:23.199 ask you about the derivatives end a little bit. You know, 0:09:23.200 --> 0:09:26.480 I've noticed the VIX has sort of flattened out here 0:09:26.480 --> 0:09:29.800 at about fifteen or so during June. We're not getting 0:09:29.840 --> 0:09:33.679 back to those single digit readings on implied volatility as 0:09:33.679 --> 0:09:37.000 far as the VIX goes, Um, is there any information 0:09:37.200 --> 0:09:39.120 in that to you? I mean, is it just sort 0:09:39.120 --> 0:09:43.800 of uh embedded nervousness until all these issues are resolved, 0:09:44.120 --> 0:09:46.439 or or what I mean, are those days of single 0:09:46.480 --> 0:09:50.400 digit VIX just just gone forever gone, forget about them. 0:09:50.440 --> 0:09:53.720 That we traded below nine at the end of two 0:09:53.760 --> 0:09:57.000 thousand and seventeen and and when we began our coverage 0:09:57.000 --> 0:09:59.600 would be t i G in January of eighteen, we 0:09:59.760 --> 0:10:02.640 may the point that that was a turning point in 0:10:02.800 --> 0:10:06.600 what we saw as a six year cyclical regime change 0:10:06.760 --> 0:10:10.080 in volatility. And so obviously the spikes that we saw 0:10:10.200 --> 0:10:14.000 throughout two thousand and eighteen and then again in uh 0:10:14.120 --> 0:10:19.199 in early this year. UM to us makes sense. They're logical, 0:10:19.240 --> 0:10:21.240 and when you think about it with respect to the 0:10:21.240 --> 0:10:25.720 political risks that are building as the world really redraws 0:10:25.760 --> 0:10:28.760 itself in terms of trade and relationships and so on, 0:10:29.120 --> 0:10:31.280 it makes a lot of sense. And what it also 0:10:31.320 --> 0:10:36.280 tells you, it's a reminder that while things seem good now, 0:10:36.440 --> 0:10:39.640 and and we do think that there is enough good 0:10:39.640 --> 0:10:42.840 news out there to potentially take carry markets perhaps even 0:10:42.880 --> 0:10:45.760 beyond three thousand, we're still going to have to deal 0:10:45.880 --> 0:10:48.360 with the debt ceiling and a budget battle in the fall, 0:10:48.760 --> 0:10:52.360 and Brexit. The thing, the gift that keeps on giving 0:10:53.520 --> 0:10:57.680 is going to be there waiting for Halloween exactly. What 0:10:57.760 --> 0:11:00.680 about the divergence that we've seen though between volatility in 0:11:00.679 --> 0:11:03.360 the bond market and volatility in the stock market, because 0:11:03.400 --> 0:11:06.160 I know, if you use the move Index from Bank 0:11:06.160 --> 0:11:09.479 of America as a sort of benchmark for bond market volatility, 0:11:09.520 --> 0:11:11.800 we have seen such a spike in recent weeks, and 0:11:11.840 --> 0:11:13.720 now we have the ten year dipping below two percent 0:11:13.840 --> 0:11:16.559 for the first time in yet the VIX is still 0:11:16.679 --> 0:11:19.560 very muted. I mean, do you make the case that 0:11:19.720 --> 0:11:22.080 we will have to see a convergence that two come together. 0:11:22.200 --> 0:11:25.280 And if so, I mean, does the VIX move higher 0:11:25.400 --> 0:11:28.200 or does bond volatility finally start to settle down a little. 0:11:28.559 --> 0:11:31.680 We think there will be a convergence, probably in the 0:11:31.720 --> 0:11:34.760 in the guys of bond market volatility coming in and 0:11:34.760 --> 0:11:39.120 and the VIX rising um. Essentially, a lot of the 0:11:39.200 --> 0:11:42.280 activity and financial markets over the last year has been 0:11:42.280 --> 0:11:45.000 about positioning. So when we got to the end of 0:11:45.080 --> 0:11:50.199 March and German yields first went back to the negative bound, 0:11:50.360 --> 0:11:53.320 which you know, to all of US financial professionals with 0:11:53.360 --> 0:11:58.440 any gray hair, is almost completely inconceivable, there was a 0:11:58.440 --> 0:12:02.200 a an initial panic. But then in in April, as 0:12:02.280 --> 0:12:05.720 markets sort of turned better and yield stabilized, there was 0:12:05.760 --> 0:12:08.280 a thought that you wouldn't have the US ten uere 0:12:08.400 --> 0:12:11.560 yield go back to two percent. Well, that sort of 0:12:11.600 --> 0:12:14.760 went out the window of the last few weeks. I mean, honestly, 0:12:14.880 --> 0:12:18.079 we didn't see yields plunging to this depth, but then 0:12:18.120 --> 0:12:20.800 again we didn't see German yields trading to minus thirty 0:12:20.840 --> 0:12:24.280 basis points, and that caused what we call in the 0:12:24.320 --> 0:12:29.160 options market a short gamma squeeze. Basically people had been 0:12:29.200 --> 0:12:32.959 selling sort of those downside strikes and and really short 0:12:33.040 --> 0:12:36.040 exposure in that area, and once you got to around two, 0:12:37.400 --> 0:12:40.920 the vall started to build. We think ultimately, in fact, 0:12:41.320 --> 0:12:44.960 as the Fed UH loosens policy at the short end 0:12:45.360 --> 0:12:49.319 builds inflation expectations, that you actually have a rise in 0:12:49.400 --> 0:12:53.080 the long end i e. Is steepening yield curve. And 0:12:53.280 --> 0:12:56.400 that's part of the happiness of the last several days 0:12:56.480 --> 0:12:59.960 if you're j Powell, because inflation expectations were the first 0:13:00.080 --> 0:13:04.360 thing to ratchet higher UH post the f o MC conference. Now, 0:13:04.400 --> 0:13:07.000 given what you're expecting some good news at the G 0:13:07.160 --> 0:13:11.320 twenty and eventual monetary easing later in the year. What 0:13:11.400 --> 0:13:14.160 sort of sectors stocks would it be? Your your traditional 0:13:14.200 --> 0:13:18.760 cyclical industrial semiconductors or you know, our tech columnists here, Shara, 0:13:18.840 --> 0:13:22.280 should she uh start writing about utilities instead? What you know? 0:13:22.520 --> 0:13:28.200 How how should we position? Yeah, it's having been doing 0:13:28.240 --> 0:13:30.880 this for quite some time, I never thought I'd use 0:13:31.000 --> 0:13:35.600 the phrase momentum Darling when referring to utilities. I mean, again, 0:13:35.679 --> 0:13:39.040 going back to the nineties and and and trading technology 0:13:39.120 --> 0:13:42.439 on the way up, it's absolutely extraordinary um from our 0:13:42.480 --> 0:13:45.000 point of view, this is the part of the cycle, 0:13:45.080 --> 0:13:48.240 particularly given our view that the yield curve is going 0:13:48.280 --> 0:13:50.960 to steep in um that you want to lean a 0:13:51.040 --> 0:13:54.680 bit more cyclically oriented, and that means financials which have 0:13:54.800 --> 0:13:58.000 been suppressed because again German yields and the yield curve 0:13:58.040 --> 0:14:01.760 being as flat as it's been. Also energy, obviously energy 0:14:02.000 --> 0:14:05.880 is has a geopolitical backstop at this point given the 0:14:05.960 --> 0:14:09.120 tension in Iran, but it's also sunk to less than 0:14:09.280 --> 0:14:12.840 five percent of the way to the SMP. And we 0:14:12.920 --> 0:14:16.840 are true believers in autonomous driving and electric vehicles and 0:14:16.880 --> 0:14:20.440 all that, but energy is still a story that in 0:14:20.800 --> 0:14:23.880 the medium term looks very interesting to us, and it's 0:14:23.880 --> 0:14:41.920 a sector that's poise for consolidation. Cherre, I want to 0:14:41.960 --> 0:14:43.760 come to you because we did have a new I 0:14:43.880 --> 0:14:46.360 p O or direct listing as we could call it, 0:14:46.880 --> 0:14:49.240 this week. But start a little broader on the tech front, 0:14:49.320 --> 0:14:53.760 because software companies are just trading at such high valuations. 0:14:53.800 --> 0:14:56.400 I know software is the best performing industry in the 0:14:56.560 --> 0:14:59.960 SMP five hundred. What is it about this market right 0:15:00.080 --> 0:15:04.520 now that is just making investors so interested in the 0:15:04.600 --> 0:15:09.640 software space. I think it's a particular type of software 0:15:09.680 --> 0:15:12.320 companies that investors are really excited about these sort of 0:15:12.360 --> 0:15:15.880 software as a service or B two B software cloud 0:15:16.000 --> 0:15:18.880 software companies, however you want to describe them. But these 0:15:18.880 --> 0:15:22.760 are companies that investors have fallen in love with, kind 0:15:22.800 --> 0:15:25.880 of to the point of mania. We're talking about companies 0:15:25.920 --> 0:15:31.479 like Workday or Salesforce or Viva Systems, which makes pharmaceutical software. 0:15:31.760 --> 0:15:34.920 And I think the appeal here is these companies sell 0:15:35.320 --> 0:15:39.400 an understood product. They sell software for money to companies 0:15:39.560 --> 0:15:43.040 that have money, and there's kind of a repeat business, right, 0:15:43.040 --> 0:15:46.600 It's a subscription basis. You're the companies are paying you know, 0:15:46.680 --> 0:15:49.640 monthly or on an annual basis, and it's sort of 0:15:49.760 --> 0:15:53.240 fairly easy to model out what the revenue model and 0:15:53.320 --> 0:15:57.040 what the financial model looks like long term once you 0:15:57.080 --> 0:16:01.800 get companies paying kind of a recurring subs dryption for software. 0:16:01.800 --> 0:16:04.360 And so what you've seen is these companies have, you know, 0:16:05.240 --> 0:16:07.080 for the most part, do not have profits, but they 0:16:07.080 --> 0:16:09.800 do have revenue and free cash flow in some cases 0:16:10.040 --> 0:16:13.000 and are trading at very very high multiples to revenue. 0:16:13.040 --> 0:16:16.360 In particular. Now, sure, let's uh, let's pretend I'm not 0:16:16.440 --> 0:16:19.280 the young, hipster, tech savvy guy that I am, because 0:16:19.320 --> 0:16:21.080 we all know you are. Just imagine I don't. I 0:16:21.080 --> 0:16:23.880 don't know. I'm a middle aged dad talking about the 0:16:24.200 --> 0:16:33.720 width of your necktime. Hypothetical hypothetical situation. Let's say hypothetically, 0:16:33.760 --> 0:16:36.320 I've never heard of this Slack Technologies. I'm not quite 0:16:36.360 --> 0:16:38.480 sure what they do, but I do know they lost 0:16:38.560 --> 0:16:41.120 a hundred and thirty nine million dollars last year on 0:16:41.240 --> 0:16:44.600 sales of about four hundred million. Just walk us through 0:16:45.200 --> 0:16:48.480 what Slack is and why investors seem to be excited 0:16:48.520 --> 0:16:50.960 to buy a company that's that's losing more than a 0:16:51.040 --> 0:16:53.280 quarter of their sales. I will tell you that my 0:16:53.560 --> 0:16:56.320 tech journalist brain is now broken. Where I see a 0:16:56.320 --> 0:16:59.200 company that's like, oh, they're only bleeding a hundred million 0:16:59.240 --> 0:17:03.840 dollars in cash everywhere, sounds great. Signed me up. So 0:17:04.560 --> 0:17:09.720 the basic explanation of Slack is it's instant messaging designed 0:17:09.760 --> 0:17:13.600 for the workplace, and I think that under sells it 0:17:13.640 --> 0:17:16.679 a little bit. And Slack, I think has this issue 0:17:16.720 --> 0:17:19.360 where it is a little bit difficult to describe their 0:17:19.400 --> 0:17:24.600 software until you really use it. But again, it's instant messaging, 0:17:24.640 --> 0:17:28.600 and the idea is it kind of collects, You're able 0:17:28.600 --> 0:17:33.239 to kind of organize multiple people's in boxes essentially in 0:17:33.560 --> 0:17:38.240 a semi public way that you can organize groups or teams, 0:17:38.720 --> 0:17:41.920 and then everything that's related to let's say some marketing 0:17:41.960 --> 0:17:44.720 project that a team is working on will go into 0:17:44.840 --> 0:17:48.040 one channel, as Slack calls it, and only the people 0:17:48.080 --> 0:17:50.359 who are on that channel need to see it. So 0:17:50.400 --> 0:17:53.520 it avoids the sort of reply all pain that we 0:17:53.760 --> 0:17:57.119 have sometimes felt inside of companies. And you know, it 0:17:57.160 --> 0:17:59.399 also does a good job of kind of connecting to 0:17:59.440 --> 0:18:03.560 others them. So I know companies, for example, that all 0:18:03.800 --> 0:18:06.840 of the customer service requests or complaints, no matter what 0:18:06.960 --> 0:18:09.640 channel it's coming from. If it's like an angry tweet 0:18:10.200 --> 0:18:13.240 or an instant message that a customer might send through 0:18:13.600 --> 0:18:17.160 a company's website, it all gets sent and and kind 0:18:17.160 --> 0:18:20.600 of distributed through Slack, so that people on the East Coast, 0:18:20.720 --> 0:18:23.359 let's say, we'll see all of the messages no matter 0:18:23.440 --> 0:18:27.000 where it's coming from, customer service complaints from the coast 0:18:27.080 --> 0:18:30.080 that they live on. So it is a clever piece 0:18:30.119 --> 0:18:32.600 of software. I think there are open questions about whether 0:18:32.680 --> 0:18:35.399 it is a kind of nice to have software for 0:18:35.440 --> 0:18:38.440 companies or whether it becomes an essential tool inside of 0:18:38.440 --> 0:18:42.920 a modern office. But definitely it's good software that now 0:18:43.160 --> 0:18:46.760 investors are over the moon about and on that subscription basis. 0:18:46.760 --> 0:18:49.000 On that subscription basis, yes, and they have they say 0:18:49.040 --> 0:18:51.040 they have ten million people who use it on a 0:18:51.119 --> 0:18:55.320 daily basis inside of organizations and something like six kind 0:18:55.320 --> 0:18:58.520 of paying customers, paying organizations. How can you print out 0:18:58.560 --> 0:19:00.199 all these chats and given them a guy like me 0:19:00.240 --> 0:19:05.359 to interesting, I've never noticed. If they're there's probably a 0:19:05.400 --> 0:19:08.359 print option. Um, do not do that. However, do not 0:19:08.440 --> 0:19:11.879 print your slack chats. But so you talk about the 0:19:11.880 --> 0:19:15.800 subscription model, but how are investors actually going about valuing 0:19:16.119 --> 0:19:19.040 a company of this sort, especially if, like you said, 0:19:19.080 --> 0:19:21.160 they are losing money like many of the other tech 0:19:21.200 --> 0:19:23.280 ideas that we've seen lately. I mean, I think the 0:19:23.359 --> 0:19:26.760 metrics that have become important are looking at sort of 0:19:26.800 --> 0:19:30.639 recurring revenue sort of you know, how much money is 0:19:30.760 --> 0:19:34.000 repeatable business, and also looking ahead at at billing so 0:19:34.080 --> 0:19:38.240 basically booked business that is not yet paid. So really 0:19:38.280 --> 0:19:42.119 growth and revenue and kind of retention rates of existing customers. 0:19:42.400 --> 0:19:44.520 Those are the metrics that people look at in the 0:19:44.560 --> 0:19:49.320 absence of you know, conventional gap profits. Another column you 0:19:49.320 --> 0:19:51.480 had that caught my eye. The headline was something like 0:19:51.520 --> 0:19:55.320 who knows what lurks in the emails of tech executives. 0:19:55.359 --> 0:19:58.800 You know, obviously, with the anti trust scrutiny coming up 0:19:58.960 --> 0:20:03.320 on Facebook, Amazon, Google, is this the right time for 0:20:03.400 --> 0:20:07.439 Facebook to be trying to revolutionize the payments system with 0:20:07.480 --> 0:20:09.920 its own cryptocurrency. You're saying this is not a time 0:20:10.160 --> 0:20:14.800 they will want to attract more attention from regulators. Yeah, 0:20:14.800 --> 0:20:17.960 fair enough. Look, I've heard Mark Zuckerberg say a few 0:20:18.000 --> 0:20:20.480 times now in the last couple of years that they 0:20:20.600 --> 0:20:24.240 can't stop running the company and they can't stop coming 0:20:24.240 --> 0:20:27.480 out with new products and ideas because of the scrutiny 0:20:27.520 --> 0:20:31.240 they're under, which I think is true and also not true. Right, 0:20:31.280 --> 0:20:33.800 they obviously want to be a little bit more cautious 0:20:33.840 --> 0:20:36.040 and careful than they would have been prior to two 0:20:36.080 --> 0:20:40.879 thousands six or but they you know, you've got to 0:20:40.960 --> 0:20:43.639 keep innovating. That's the role of a tech company. Julian, 0:20:43.760 --> 0:20:46.480 How do you think about this regulatory risk with a 0:20:46.520 --> 0:20:48.919 group as important as the Fang stocks? I mean, is 0:20:48.960 --> 0:20:51.760 it make you sort of want to look elsewhere in 0:20:51.800 --> 0:20:53.879 the market or these still going to be the stocks 0:20:53.920 --> 0:20:56.960 that that lead us highre Well, when we're looking at 0:20:57.040 --> 0:20:59.920 over the balance of this year and into an election 0:21:00.080 --> 0:21:03.679 year next year. Uh, we're neutral on the group, but 0:21:04.320 --> 0:21:07.000 you know, if you look at the last ten twenty 0:21:07.200 --> 0:21:11.879 thirty years, it's very clear the technology is the bowl market. 0:21:12.080 --> 0:21:14.200 You you you know, we've done a lot of work 0:21:14.240 --> 0:21:18.640 that says markets can continue to go up, but technology 0:21:18.720 --> 0:21:22.560 can only underperformed by a certain amount. So from our 0:21:22.600 --> 0:21:24.919 point of view, it's something we'd like to see it 0:21:25.040 --> 0:21:29.000 get further along in the election cycle. UM valuations are 0:21:29.160 --> 0:21:33.119 reasonable broadly, and I would say, you know, again, when 0:21:33.160 --> 0:21:36.920 you're thinking about software in particular, it's that that phrase 0:21:37.320 --> 0:21:41.080 recurring revenue that is literally music to the streets ears 0:21:41.280 --> 0:21:42.960 And if you think about it like we do from 0:21:42.960 --> 0:21:46.960 an options perspective, if you have a company with recurring revenue, 0:21:47.320 --> 0:21:51.560 you can actually there's like less volatility to its streams, 0:21:51.680 --> 0:21:55.040 so you can in fact pay more for that company. 0:21:55.240 --> 0:21:57.639 What about the I P O market this year? I know, 0:21:57.680 --> 0:21:59.520 if you look at the I P O E T 0:21:59.760 --> 0:22:02.200 F it's having its best first half of the year 0:22:02.240 --> 0:22:06.080 pretty much. Ever, so is this something that you guys 0:22:06.119 --> 0:22:09.240 actually think about participating in or is it just very 0:22:09.320 --> 0:22:11.639 risky and you need to wait until things kind of 0:22:11.840 --> 0:22:14.560 die down? A little well, B T I. G. S. 0:22:14.600 --> 0:22:18.280 Capital Markets at desk has been very, very busy, which 0:22:18.320 --> 0:22:21.880 is a great thing. And and you know, we look 0:22:21.920 --> 0:22:24.880 at that to try and gauge signs of of froth. 0:22:25.280 --> 0:22:29.960 We're nowhere near the excesses that we saw in and 0:22:30.040 --> 0:22:32.439 two thousands. And if you think about it, part of 0:22:32.480 --> 0:22:35.240 the reason that the optics of it over the last 0:22:35.280 --> 0:22:38.760 several months have been as busy as they've been is 0:22:38.800 --> 0:22:41.119 because you actually had a delay for the first several 0:22:41.160 --> 0:22:43.600 months of the year and getting the paperwork through because 0:22:43.640 --> 0:22:46.280 of the government shutdown. So it will be interesting to 0:22:46.320 --> 0:22:49.080 see as we get into the heart of the summer 0:22:49.520 --> 0:22:51.960