WEBVTT - Bond Market Implies U.S. Recession in Late 2018, 2019: Sri Kumar 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.440 Along with my co host Lisa A. Bramowitz. Each day 0:00:11.480 --> 0:00:15.000 we bring you the most important, noteworthy, and useful interviews 0:00:15.040 --> 0:00:17.520 for you and your money, whether you're at the grocery 0:00:17.560 --> 0:00:20.560 store or the trading floor. Find the Bloomberg p m 0:00:20.680 --> 0:00:33.239 L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. 0:00:33.360 --> 0:00:38.640 Very early Saturday morning, Senators Republican Senators passed an overhaul 0:00:39.040 --> 0:00:41.800 of the tax bill that may be the most sweeping 0:00:41.880 --> 0:00:45.240 legislation that we have seen in decades. Here to talk 0:00:45.280 --> 0:00:48.760 about what the economic implications are. As Street Kumar, President 0:00:48.840 --> 0:00:51.960 and founder of three Kumar Global Strategies. He is also 0:00:52.120 --> 0:00:55.880 a Bloomberg prophet and is based in Santa Monica, California, 0:00:55.920 --> 0:00:58.040 but he joins us here in our cold ear than 0:00:58.080 --> 0:01:01.640 Santa Monica, but lovely eleven three our studios three. Thank 0:01:01.680 --> 0:01:03.160 you so much for joining us. I want to start. 0:01:04.400 --> 0:01:06.800 I want to start with all of these stories and 0:01:06.920 --> 0:01:10.679 analyzes that are reading about the implications of this tax plan. 0:01:11.120 --> 0:01:15.480 Has anyone read it? I doubt it when you consider 0:01:15.600 --> 0:01:18.399 that in the last couple of hours as they were 0:01:18.520 --> 0:01:22.320 negotiating and talking, Lisai the more most important thing was 0:01:23.120 --> 0:01:25.880 as a Republican, they all had to go ahead and 0:01:25.959 --> 0:01:29.600 vote for this bill because they wanted a legislative victory 0:01:29.640 --> 0:01:33.000 before the end of the calendar year. So they got it. 0:01:33.480 --> 0:01:37.600 And I think that you hear that parts of it 0:01:37.680 --> 0:01:40.720 were handwritten, and you have seen that on TV, saying 0:01:40.760 --> 0:01:43.200 that they didn't even have time to to type it. 0:01:43.840 --> 0:01:46.440 All of this leads me to believe that people voted 0:01:46.680 --> 0:01:49.640 for a tax bill they had not fully read. All right, 0:01:50.080 --> 0:01:53.360 that said, is there a way to assess in a 0:01:53.400 --> 0:01:57.240 preliminary fashion what the implications are based on sort of 0:01:57.280 --> 0:02:01.480 bare bones assumptions of what is in the bill? Bare 0:02:01.600 --> 0:02:04.800 bones assumption And again, as you will know, there is 0:02:04.840 --> 0:02:07.960 a difference between the Senate approach and the House approach, 0:02:07.960 --> 0:02:11.640 which needs to be reconciled. But that being set aside, 0:02:12.280 --> 0:02:14.639 it doesn't look like it is going to have much 0:02:14.680 --> 0:02:17.919 of an economic impact at all in terms of stimulus. 0:02:18.720 --> 0:02:21.760 I'm not one who believes that just because you have 0:02:21.840 --> 0:02:25.400 a tax cut of some kind it is automatically stimulative. 0:02:25.880 --> 0:02:28.960 It depends on what the tax cuts are, what it 0:02:29.080 --> 0:02:33.000 is oriented to words. For example, you need employment tax 0:02:33.120 --> 0:02:37.160 credit to hire to give stimulus to hiring, and the 0:02:37.160 --> 0:02:40.560 other hand, you cannot do things which are which appeared 0:02:40.560 --> 0:02:44.520 to be done to meet some few powerful interest groups, 0:02:44.560 --> 0:02:46.160 and that's not the way you're going to get the 0:02:46.200 --> 0:02:50.000 benefit out of this tree. Let's talk about an interest 0:02:50.080 --> 0:02:53.640 group that we're fond of. Investors, what investments do you 0:02:53.720 --> 0:02:56.480 believe will prosper as a result of the bill as 0:02:56.520 --> 0:03:00.280 you know it, and what investments would you stay away from? 0:03:00.320 --> 0:03:04.560 I think clearly, overall, PIM, you're seeing that the risk 0:03:04.720 --> 0:03:08.560 on investments are benefiting today, and you are taking more 0:03:08.560 --> 0:03:12.680 of a risk. I think the market is assuming that 0:03:12.760 --> 0:03:15.600 in addition to the yell And put and the Bernankey 0:03:15.680 --> 0:03:18.360 put that they have had in the past, they are 0:03:18.400 --> 0:03:21.239 going to have some form of a Trump put as 0:03:21.280 --> 0:03:24.880 well from the fiscal side, and so they are going 0:03:24.919 --> 0:03:28.960 to have more of speculation building up. So how it ends, 0:03:29.000 --> 0:03:31.560 it's hard to say and when it will end, but 0:03:31.680 --> 0:03:34.880 I think overall, all kinds of risk on strategies are 0:03:34.920 --> 0:03:38.080 going to benefit for a while from both monetary and 0:03:38.200 --> 0:03:42.880 fiscal policy. Suggesting that they are concerned about the stock market, 0:03:43.440 --> 0:03:47.120 the President himself has said several times that the stock 0:03:47.200 --> 0:03:50.120 market going up is a sign of the success of 0:03:50.240 --> 0:03:53.320 his policies, so he's going to do everything he can 0:03:53.400 --> 0:03:55.880 to keep pushing up the equities as well. So to 0:03:55.920 --> 0:03:59.560 you and Grace Sory about the consensus that seems to 0:03:59.600 --> 0:04:05.640 be uh coming together about no recession until late early 0:04:06.400 --> 0:04:09.000 do you agree with that I have actually pulled forward 0:04:09.080 --> 0:04:12.040 my expectation for a recession, Lisa. I used to be 0:04:12.120 --> 0:04:15.880 thinking that you had a late twenty nineteen, but I 0:04:15.920 --> 0:04:19.200 wouldn't be surprised to pull it forward by close to 0:04:19.240 --> 0:04:22.200 a year to late twenty eighteen or early twenty nine. 0:04:23.200 --> 0:04:25.440 Where am I getting my information from? Just to be 0:04:25.480 --> 0:04:28.840 clear that a recession would start the recession to date, 0:04:28.920 --> 0:04:32.839 and here is where I would mention that the two 0:04:32.880 --> 0:04:36.680 to ten year treasury spread is a very important indicator 0:04:36.760 --> 0:04:40.080 to me. And look at what has happened today, with 0:04:40.120 --> 0:04:43.600 all the euphoria in the equity market, the bond market 0:04:43.640 --> 0:04:47.320 has hardly budged. The two to ten years spread remains 0:04:47.360 --> 0:04:51.000 at fifty eight and a half basis points and below 0:04:51.080 --> 0:04:55.279 seventy five basis points. The curve typically inverts about a 0:04:55.360 --> 0:04:59.840 year later. It is going down. It is narrowing at 0:04:59.839 --> 0:05:03.640 a significant rate. From about September we have narrowed quite 0:05:03.640 --> 0:05:07.320 a bit and you if you go back to Christmas, 0:05:08.000 --> 0:05:10.920 you had a hundred and thirty five basis points spread 0:05:10.960 --> 0:05:15.200 between two and ten in about twenty twenty one December 0:05:15.279 --> 0:05:20.279 last year, So you've had a significant narrowing. And I 0:05:20.279 --> 0:05:23.360 wouldn't be surprised to see if in two or three 0:05:23.400 --> 0:05:26.200 months that goes down to a very low of state 0:05:26.240 --> 0:05:29.400 twenty or thirty basis points, down from fifty eight and 0:05:29.440 --> 0:05:33.920 a half. Then you're talking about recession being a year away. 0:05:34.000 --> 0:05:37.120 So let's say maybe not twenty late twenty eighteen, but 0:05:37.160 --> 0:05:41.880 early twenty nine. Is what the bond market is telling me. 0:05:42.000 --> 0:05:44.880 Right now, what is the higher bond market telling you? 0:05:45.600 --> 0:05:49.040 The high bond markets shows me that it has stabilized. 0:05:49.760 --> 0:05:53.960 We had the spread increase in late October early November. 0:05:54.680 --> 0:05:57.080 We went up, went up from about three hundred and 0:05:57.200 --> 0:06:00.360 seventy basis points close to four hundred basis points. There 0:06:00.400 --> 0:06:03.760 was a lot of worry, and my reaction then was 0:06:04.520 --> 0:06:07.160 this is not yet time to worry or to panic 0:06:07.200 --> 0:06:10.719 about the high held bond market. The bubble will indeed 0:06:10.760 --> 0:06:13.320 get bigger. You can play the bubble for a longer 0:06:13.360 --> 0:06:16.760 period of time. And we have then since stabilized and 0:06:16.800 --> 0:06:19.440 we have gone back to seventy and the reason for 0:06:19.480 --> 0:06:23.040 that is the high held market, I believe also looks 0:06:23.080 --> 0:06:25.840 at the two to tents spread on the treasuries and 0:06:25.920 --> 0:06:29.760 says that recession is not imminent. Defaults are not going 0:06:29.800 --> 0:06:32.760 to surge right away, so we have some time to 0:06:32.839 --> 0:06:37.159 enjoy the high returns from high yield. Thank you very 0:06:37.240 --> 0:06:39.719 much for repeating with us. There's pleasure. You're very welcome. 0:06:40.360 --> 0:06:42.719 You don't just just quickly. Do you think there's gonna 0:06:42.720 --> 0:06:45.640 be really any big change in the Tacks overhaul bill 0:06:45.720 --> 0:06:49.880 between the Reconciliation Senate House. I don't believe that it's 0:06:49.880 --> 0:06:52.039 going to be much of a change, Pim. I think 0:06:52.040 --> 0:06:55.200 the Republicans are very happy at the Senate victory they 0:06:55.200 --> 0:06:58.760 had early Saturday morning, and I think this is going 0:06:58.800 --> 0:07:01.680 to be a signific week in legislative victory and the 0:07:01.760 --> 0:07:06.040 only legislative victory in the first year of the presidential administration. 0:07:06.560 --> 0:07:09.400 So I think the House, led by Speaker Paul Ryan, 0:07:09.920 --> 0:07:12.680 he's going to essentially sign off and make sure anything 0:07:12.720 --> 0:07:15.680 gets approved. So I think it's going to happen. Thank 0:07:15.680 --> 0:07:18.320 you very much. Kamar Shri Kamar. He is the president 0:07:18.360 --> 0:07:21.720 and founder of Shri Kamar Global strategies. He is also 0:07:21.760 --> 0:07:24.960 a Bloomberg prophet and he is based in Santa Monica 0:07:25.280 --> 0:07:50.280 and you can follow him on Twitter at shri k Global. Well, 0:07:50.320 --> 0:07:53.360 the pharmacy chained CVS Health we know has agreed to 0:07:53.400 --> 0:07:56.640 buy the health insured ETNA price tag about sixty billion 0:07:56.680 --> 0:08:00.640 dollars in cash and stock. It will retain its current management. 0:08:00.720 --> 0:08:02.920 This will bring together one of the largest providers of 0:08:02.920 --> 0:08:07.800 pharmacy services with the number three US health ensure. Here 0:08:07.840 --> 0:08:11.120 to help us understand this deal more is Tara La Chapelle, 0:08:11.120 --> 0:08:15.080 our deals columnist for Bloomberg Gadfly. You can follow Tara 0:08:15.200 --> 0:08:19.000 on Twitter at Tara l a c H and also 0:08:19.040 --> 0:08:22.520 with us. Michael Ray, founder, Chief Executive RX Saving Solutions, 0:08:22.640 --> 0:08:25.760 based in Overland Park, Kansas. Michael, I just want to 0:08:25.760 --> 0:08:29.960 begin with you. Does this deal give the combined entity 0:08:30.080 --> 0:08:34.480 more power over hospitals and drug makers? Absolutely? I mean 0:08:34.559 --> 0:08:38.280 the bargaining power of this company is going to be tremendous. 0:08:38.320 --> 0:08:41.120 When you look at the setup of the new arrangement, 0:08:41.160 --> 0:08:45.960 you know, CBS goes from owning providers to owning the PBM, 0:08:46.120 --> 0:08:49.720 to the pharmacy and now the payer. So it's a 0:08:49.760 --> 0:08:53.720 tremendous bargaining ship for them Tara. A lot of people 0:08:53.720 --> 0:08:56.240 are talking about this as though it's a done deal. 0:08:56.280 --> 0:08:59.200 It makes a lot of sense with respect to competing 0:08:59.240 --> 0:09:02.839 against Amazon dot Com. You think, perhaps it's going to 0:09:02.920 --> 0:09:04.640 take a really long time, and maybe that's not the 0:09:04.640 --> 0:09:08.360 worst Thingsolutely and the companies are definitely anticipating this. If 0:09:08.360 --> 0:09:10.959 you look at their press release this morning, they really 0:09:11.040 --> 0:09:13.199 played up the consumer aspect that this is going to 0:09:13.280 --> 0:09:16.240 be great for consumers, great for patients and people that 0:09:16.320 --> 0:09:19.440 have end insurance UM. So they're anticipating a long fight 0:09:19.480 --> 0:09:21.560 I think with the government over this. I mean, this 0:09:21.640 --> 0:09:26.400 is the second extremely large vertical merger we're seeing this year. 0:09:26.760 --> 0:09:29.160 UM A T and T. Time Warner of course is 0:09:29.240 --> 0:09:31.840 now UM in a lawsuit against the d o j 0:09:32.440 --> 0:09:34.320 UM trying to get their own deal through, and it's 0:09:34.440 --> 0:09:36.640 very similar. Even though they're different industries, it's similar in 0:09:36.640 --> 0:09:38.760 their respect that they are expanding into a different line 0:09:38.760 --> 0:09:41.320 of business and they're going to consolidate a lot of power. 0:09:41.760 --> 0:09:44.200 But I don't think that this regulatory process is necessarily 0:09:44.200 --> 0:09:46.720 a bad thing, because CBS needs some time to figure 0:09:46.720 --> 0:09:49.360 out how they're going to get their finances in order 0:09:49.400 --> 0:09:51.439 to pay for this right. So before we get into 0:09:51.440 --> 0:09:53.520 the financing, Michael, I just want to get your take 0:09:53.720 --> 0:09:57.400 on something Terris said, which is, the companies are painting 0:09:57.400 --> 0:10:01.520 this as a consumer positive of a fair Do you 0:10:01.559 --> 0:10:06.080 agree that necessarily it is? Uh, that's to be determined. 0:10:06.120 --> 0:10:08.440 I mean, I think that the opportunity for them to 0:10:08.559 --> 0:10:12.000 put tremendous efficiency measures in place and save the system 0:10:12.080 --> 0:10:15.160 a tremendous amount of money is there. Uh. That said, 0:10:15.440 --> 0:10:19.160 these are public companies trying to maximize profit, and this 0:10:19.240 --> 0:10:22.800 type of arrangement also provides them an opportunity to extract 0:10:22.960 --> 0:10:26.800 enormous profit. So I think that, you know, the talking 0:10:26.840 --> 0:10:28.800 points in the action will be something that will be 0:10:28.840 --> 0:10:32.280 really important to follow over time. Well, Michael, in that 0:10:32.480 --> 0:10:36.600 in that same context, if the combination goes through and 0:10:36.679 --> 0:10:41.280 they have more power over hospitals and drug makers, where 0:10:41.320 --> 0:10:43.960 they're going to get the savings from themselves in terms 0:10:44.040 --> 0:10:47.680 of their own efficiencies, or more likely perhaps from the 0:10:47.800 --> 0:10:51.720 very hospitals and the very drug makers which now really 0:10:51.800 --> 0:10:54.959 don't have I mean, it's just one big entity and 0:10:55.000 --> 0:10:56.880 they're not going to have a competitor to play them 0:10:56.880 --> 0:10:59.600 off against or Am I wrong? Right? I think that 0:10:59.600 --> 0:11:01.560 that's what you see as you'll see, just a more 0:11:01.600 --> 0:11:05.199 powerful uh, a more powerful entity from a bargaining standpoint, 0:11:05.440 --> 0:11:07.800 you gotta play ball with them. Um. So if you're 0:11:07.840 --> 0:11:12.280 if you're a hospital or if you're a drug drug maker, UM, 0:11:12.320 --> 0:11:14.920 you know you can't. You can't neglect them or or 0:11:14.960 --> 0:11:16.800 stiff farm them. They're so big that you have to 0:11:17.320 --> 0:11:19.120 you have to try to do something. So that's that's 0:11:19.120 --> 0:11:22.560 where they could extract, you know, deeper discounts. Um. Also 0:11:22.760 --> 0:11:24.800 a place where they've got kind of a captive audience 0:11:24.840 --> 0:11:28.160 where they own the whole paradigm from point of prescribing 0:11:28.200 --> 0:11:32.880 to point of fulfilling a prescription and everything in between. Uh, 0:11:33.200 --> 0:11:35.080 that's where it could be very costly for the consumer 0:11:35.240 --> 0:11:37.839 and the and the companies. At the end of the day, Tara, 0:11:38.320 --> 0:11:41.000 let's get back since we're talking about how expensive it 0:11:41.040 --> 0:11:44.160 could be potentially for consumers, are just at least the 0:11:44.160 --> 0:11:47.000 hospitals up might end up getting stiffed a little bit. 0:11:47.360 --> 0:11:49.160 Um let's talk about paying for this deal you so 0:11:49.280 --> 0:11:52.480 that it might be challenging. Why so, CVS is about 0:11:52.600 --> 0:11:55.000 a seventies six billion dollar company, I think at least 0:11:55.040 --> 0:11:58.320 before today's drop on the deal news. Um, so they 0:11:58.480 --> 0:12:00.360 didn't really have that much cash to be paying for 0:12:00.400 --> 0:12:03.520 this deal and their offer for at and I believe 0:12:03.600 --> 0:12:06.120 forty seven billion dollars of it is in cash, and 0:12:06.160 --> 0:12:08.079 a majority of that most of that is going to 0:12:08.160 --> 0:12:10.440 be through new debt that they're taking on. So at 0:12:10.440 --> 0:12:12.200 the end of the day, they're going to have almost 0:12:12.280 --> 0:12:14.920 quadruple the amount of debt that they have in combined 0:12:15.040 --> 0:12:17.640 Ebada profits from these two businesses, So it's going to 0:12:17.679 --> 0:12:20.000 be very burdensome on their balance sheet. And CBS has 0:12:20.000 --> 0:12:22.280 been a great dealmaker. They bought care Mark about a 0:12:22.280 --> 0:12:24.240 decade ago, and that was another out of the box 0:12:24.280 --> 0:12:26.920 deal that people didn't really completely buy into when it 0:12:26.960 --> 0:12:29.080 was announced. So this could be another case where they 0:12:29.080 --> 0:12:31.400 prove us wrong. But I mean, the numbers involved in 0:12:31.440 --> 0:12:34.200 here are just starring and I'm really interested to see 0:12:34.480 --> 0:12:36.760 how they're going to make it work. The math is 0:12:36.880 --> 0:12:39.880 very tricky here, and they haven't really explained that part 0:12:39.920 --> 0:12:43.200 of it yet. Michael, as the founder and the chief 0:12:43.200 --> 0:12:47.760 executive our X Savings Solutions, maybe just tell us how 0:12:47.840 --> 0:12:51.600 your company would respond to this situation and how that 0:12:51.679 --> 0:12:54.800 will affect your business. Yeah, So, I mean I think 0:12:54.840 --> 0:12:56.920 that you know, we we just completed an eighteen million 0:12:56.920 --> 0:13:00.440 dollar fundraised last week. I think that the the the 0:13:00.520 --> 0:13:04.160 focused on you know, businesses like ours to add transparency 0:13:04.240 --> 0:13:09.040 continues to grow. Um. It also gives you know, the 0:13:09.040 --> 0:13:13.600 the employers that we sell to another kind of viewpoint 0:13:13.720 --> 0:13:16.320 of someone that's that's working on their behalf. So I 0:13:16.360 --> 0:13:20.520 think that anytime there's this combination of power, there's a 0:13:20.600 --> 0:13:23.400 question of you know, okay, the efficiency could save me money, 0:13:23.440 --> 0:13:25.960 but is that what they'll really do? And I think 0:13:26.000 --> 0:13:28.200 that what we see it as is a tremendous opportunity 0:13:28.640 --> 0:13:31.679 uh to work with the market, to to try to 0:13:31.720 --> 0:13:33.560 make sure people know what their choices are from a 0:13:33.600 --> 0:13:36.120 theraceutic standpoint, and then how they can save money and 0:13:36.120 --> 0:13:38.760 where they shop and buy. That is what that pure 0:13:38.840 --> 0:13:42.320 market is what will really drive change and savings in 0:13:42.360 --> 0:13:45.480 prescription drugs. That that has to happen, in my opinion, 0:13:45.840 --> 0:13:49.080 whether it's us for the next guy Sarah pact just 0:13:49.440 --> 0:13:51.840 real quick, why can't they just incurl out of debt? 0:13:51.920 --> 0:13:54.200 Everybody else is doing it, right, I mean, I guess 0:13:54.200 --> 0:13:56.080 that's what they can point to. Everyone's doing that. But 0:13:56.120 --> 0:13:57.760 I mean, I think we're getting to a point where 0:13:57.760 --> 0:14:00.000 it needs a question is are are these decisions. How 0:14:00.000 --> 0:14:02.320 healthy are these mergers going to create value? If this 0:14:02.400 --> 0:14:04.439 deal is going to make them that much more profitable 0:14:04.480 --> 0:14:06.680 and they can pay this down quickly, fine, But I 0:14:06.720 --> 0:14:08.760 think by looking at CVS bond prices today, I mean, 0:14:08.800 --> 0:14:11.400 people are a little bit um bothered by it and 0:14:11.440 --> 0:14:13.600 want to see more language out of the company about 0:14:13.640 --> 0:14:16.080 how this is going to work out. I mean, everyone 0:14:16.120 --> 0:14:19.320 seems to think the strategic rationale makes sense, that they're 0:14:19.360 --> 0:14:21.680 buying into it, but the numbers need to work. So 0:14:21.760 --> 0:14:24.120 I'm still a little bit gubious. The numbers need to work. 0:14:24.480 --> 0:14:26.480 That's a new one. Tara Lesha Fell, thank you so 0:14:26.560 --> 0:14:28.640 much for joining us. Sara Lasha Pell, deals columnist for 0:14:28.800 --> 0:14:31.520 Bloomberg gad Flight. Also Michael Read, thank you so much 0:14:31.560 --> 0:14:34.000 for joining us. He is founder and chief executive officer 0:14:34.040 --> 0:14:39.200 of RX Savings Solutions, which is based in Overland Park, Kansas. Uh. 0:14:39.320 --> 0:14:41.800 Definitely interesting to see whether this deal goes through and 0:14:41.840 --> 0:14:44.920 if it doesn't, what Amazon dot Com will do to 0:14:45.000 --> 0:15:10.600 this entire industry. Now we turn our attention to the 0:15:10.640 --> 0:15:15.720 future of finance, the future of technology, Wall Street, who 0:15:15.720 --> 0:15:17.920 will be the Titan of Wall Street in ten years? 0:15:17.960 --> 0:15:20.880 How good can artificial intelligence get We've got a two 0:15:20.920 --> 0:15:24.000 week series on the future of investing by Bloomberg News reporters. 0:15:24.040 --> 0:15:27.680 Today's feature looks at how long until black Rock and 0:15:27.800 --> 0:15:32.040 Vanguard reached ten trillion dollars in assets? Here to help 0:15:32.080 --> 0:15:34.880 us answer that question is Rachel Evans, our corporate finance 0:15:34.920 --> 0:15:38.240 reporter for Bloomberg. Rachel, thank you very much for being here. 0:15:38.280 --> 0:15:41.200 So how long how long does it take for this 0:15:41.360 --> 0:15:45.080 do wopoly to end up with ten trillion dollars of 0:15:45.120 --> 0:15:48.040 assets under management? And that's ten trillly in a piece. Remember, 0:15:48.080 --> 0:15:50.600 so we're looking at twenty trillion overall. So the moment, 0:15:50.640 --> 0:15:53.320 we've got black Rock, which has six trillion of assets 0:15:53.360 --> 0:15:55.520 under management. They're on path to to get to ten 0:15:55.560 --> 0:15:59.040 trillion by about twenty five. Vanguard, while smaller at the moment, 0:15:59.080 --> 0:16:01.640 could actually get their quicker there on four point seven 0:16:01.640 --> 0:16:04.359 trillion at the moment. They could be there by twenty 0:16:04.480 --> 0:16:07.120 three if their current growth rates are maintained. Why why 0:16:07.160 --> 0:16:09.760 the discrepancy do you believe? I think it has to 0:16:09.760 --> 0:16:12.160 do with kind of how they're the currently position. So 0:16:12.200 --> 0:16:14.760 black Rock already has one point six trillion under management 0:16:14.800 --> 0:16:17.760 within exchange traded funds. Vangard is a little bit smaller. 0:16:17.760 --> 0:16:19.440 They were a little like to the party when it 0:16:19.480 --> 0:16:22.880 came to exchange traded funds coming out after black Rocks 0:16:22.880 --> 0:16:25.560 b D. I um, So when we see kind of 0:16:25.680 --> 0:16:27.480 the growth going forward, I think Vanguard is going to 0:16:27.520 --> 0:16:30.040 continue on that trajectory. Their growth rate has just been 0:16:30.080 --> 0:16:33.920 faster in the last few years. Rachel. Before we get 0:16:34.040 --> 0:16:37.080 into exactly the assumptions that you made in coming up 0:16:37.120 --> 0:16:39.880 with this projection, I want to just zoom out and 0:16:39.960 --> 0:16:44.480 talk about the implications of two asset managers overseeing twenty 0:16:44.600 --> 0:16:47.280 trillion dollars of assets. I mean, on one hand, this 0:16:47.440 --> 0:16:50.040 seems like it could be problematic, and the other a 0:16:50.040 --> 0:16:52.320 lot of this money is going to passive strategies with 0:16:52.360 --> 0:16:56.560 the index is being crafted by other firms. Do people 0:16:56.600 --> 0:16:59.720 talk about this as a potential sort of structural risk. 0:17:00.560 --> 0:17:03.840 So there's two areas that people tend to discuss when 0:17:03.880 --> 0:17:07.159 when worrying about kind of the impact of these you know, 0:17:07.200 --> 0:17:09.879 titans for asset management. The first is kind of a 0:17:10.000 --> 0:17:12.719 market efficiency and the argument there goes, you know, if 0:17:12.760 --> 0:17:16.560 you have so much money impassive strategies, does that warp 0:17:16.680 --> 0:17:20.400 the way in which price discovery happens within the market. Now, 0:17:20.400 --> 0:17:22.560 the evidence on this is still very nascent. I mean, 0:17:22.640 --> 0:17:25.800 if you think about the proportion of passive as part 0:17:25.800 --> 0:17:29.200 of the overall market when you look at active sorry, 0:17:29.200 --> 0:17:31.600 when you look at kind of equity funds in the US, 0:17:31.720 --> 0:17:35.359 about thirty seven percent is passively managed at the moment, 0:17:35.600 --> 0:17:38.760 but that drops to about if you look globally and 0:17:38.840 --> 0:17:42.080 at all different asset classes. So we're still relatively small 0:17:42.119 --> 0:17:44.760 part of the market as as passive goes. So it's 0:17:44.800 --> 0:17:47.760 hard to kind of drawing conclusions there. However, when you 0:17:47.760 --> 0:17:50.520 start looking at the corporate governance implications, I think that's 0:17:50.520 --> 0:17:53.560 a little bit clear at the moment. Jack Bogel himself, 0:17:53.600 --> 0:17:56.879 the founder of Vanguard, actually called Vanguard, black Rock, and 0:17:56.920 --> 0:18:00.800 State Street oligopoly last week, and he was referring really 0:18:00.840 --> 0:18:04.200 to the size of Steak, that these are three asset managers, 0:18:04.240 --> 0:18:07.960 but particularly black Rock and Banguard hold within America's largest companies. 0:18:08.760 --> 0:18:12.760 Are there to be reconciled some problems for small and 0:18:12.800 --> 0:18:17.280 MidCap companies that can't get into an index that are 0:18:17.359 --> 0:18:20.760 then not part of this wave of E t F 0:18:21.000 --> 0:18:23.040 love that we seem to have because we've got more 0:18:23.359 --> 0:18:27.520 exchange traded funds than we have stocks at the moment, right, So, 0:18:27.600 --> 0:18:30.200 the growth of indexing has been incredible like that, the 0:18:30.280 --> 0:18:32.679 number of indexes has really proliferated. A lot of that 0:18:32.720 --> 0:18:36.040 has been driven by exchange traded funds, which typically track 0:18:36.080 --> 0:18:38.480 and index um. So yeah, for for the smaller and 0:18:38.680 --> 0:18:41.840 MidCap companies out there that maybe don't qualify for an 0:18:41.840 --> 0:18:45.560 index because they're too small or they're not liquid enough, 0:18:45.960 --> 0:18:47.920 that can be a real issue. And actually we've seen 0:18:48.119 --> 0:18:50.160 some people suggest that that's one of the reasons we're 0:18:50.200 --> 0:18:54.560 perhaps seeing fewer initial public offerings at the moment. So, Rachel, 0:18:54.640 --> 0:18:56.520 let's get back to the assumptions that you made in 0:18:56.600 --> 0:18:59.240 order to sort of project out the twenty trillion dollar 0:18:59.320 --> 0:19:02.280 number for both black Rock and van Guard. What is 0:19:02.320 --> 0:19:05.119 that based on. So this looks at the annual growth 0:19:05.200 --> 0:19:07.679 rate in assets of those firms and then averages it 0:19:07.800 --> 0:19:10.679 over five years, so that the methodology behind it is 0:19:10.680 --> 0:19:13.359 relatively simplistic, But what it does is it tries to 0:19:13.400 --> 0:19:15.400 give you a sense of kind of how, based on 0:19:15.440 --> 0:19:17.639 our immediate past, the growth that we've been seeing and 0:19:17.680 --> 0:19:20.439 that the recent recent past, how that is going to 0:19:20.480 --> 0:19:22.560 translate when we look into the future. And if you 0:19:22.600 --> 0:19:24.679 look at kind of the components of of where a 0:19:24.680 --> 0:19:27.040 lot of that growth has been coming from. It really 0:19:27.040 --> 0:19:29.600 has been from this passive side. It's been from exchange 0:19:29.600 --> 0:19:32.480 trade of funds, it's been from passive index funds are 0:19:32.520 --> 0:19:35.000 really helping to boost assets of black Rock and Banguard. 0:19:35.760 --> 0:19:37.760 Is there a possibility that this will kind of be 0:19:37.800 --> 0:19:40.400 a dog chasing its own tail because you get people 0:19:40.440 --> 0:19:44.199 who say, all right, indexing makes sense, it's low cost, 0:19:44.440 --> 0:19:47.080 let's get rid of as many people as possible. And 0:19:47.119 --> 0:19:49.480 then of course that just builds on it on itself, 0:19:49.720 --> 0:19:51.359 and it really has nothing to do with the value 0:19:51.359 --> 0:19:54.600 of the underlying companies in the index. So that's definitely 0:19:54.600 --> 0:19:57.359 one of the critiques of passive investing, the sense that 0:19:57.680 --> 0:20:01.280 because everybody kind of piles into, you know, a relatively 0:20:01.359 --> 0:20:04.200 small number of index funds, but that kind of feeds 0:20:04.240 --> 0:20:06.520 on itself, and you have a certain level of momentum 0:20:06.600 --> 0:20:09.080 that kind of comes from from people putting their capital 0:20:09.119 --> 0:20:12.080 into it. The question really have really kind of sort 0:20:12.080 --> 0:20:15.480 stems from what happens when that reverses. If you start 0:20:15.520 --> 0:20:18.160 to see people putting money out of these funds, how 0:20:18.200 --> 0:20:20.360 then do they behave and are there enough active managers 0:20:20.359 --> 0:20:23.040 in the markets give you decent price Discovery. Well, we 0:20:23.080 --> 0:20:25.639 will be counting on your reporting to answer those questions. 0:20:25.720 --> 0:20:27.600 Rachel Evans, thank you so much for joining us. Rachel 0:20:27.640 --> 0:20:31.080 Evans as a corporate dance reporter for Bloomberg News. And 0:20:31.560 --> 0:20:34.240 how long Black Rocket Vantguard will take to reach ten 0:20:34.240 --> 0:20:35.919 trillion dollars in assets? This is going to be a 0:20:35.960 --> 0:20:39.280 series that we rolled out over the months to come. 0:21:03.840 --> 0:21:07.080 Let's talk taxes right now. Jeremy Swan joins us. He 0:21:07.200 --> 0:21:11.320 is managing principle for financial sponsors and financial services industry 0:21:11.560 --> 0:21:14.680 for Cone Resnick in New York City. He just pulled 0:21:14.720 --> 0:21:18.359 his head out of the hundreds of pages of the 0:21:18.680 --> 0:21:22.919 tax plan that the Senate Republicans passed early on Saturday, 0:21:23.000 --> 0:21:25.119 including some of the handwritten notes. He's a little bit 0:21:25.200 --> 0:21:28.920 cross side, but he is here. Nonetheless, Jeremy, what does 0:21:29.000 --> 0:21:32.880 this bill mean for your clients? We're talking about the 0:21:32.920 --> 0:21:37.160 private equity firms and others like them that you cater to. Sure, 0:21:37.200 --> 0:21:39.080 so if you look at the M and A markets, 0:21:39.160 --> 0:21:41.040 you look at the private equity markets, you look at 0:21:41.040 --> 0:21:43.120 the firms and how they're going to be impacted, they're 0:21:43.160 --> 0:21:46.680 really a handful of key areas within the tax policies 0:21:46.680 --> 0:21:49.280 of tax bills that are out there, and you look 0:21:49.320 --> 0:21:52.080 at interest deductibility, that can certainly put a damper on 0:21:52.119 --> 0:21:54.680 the ability to leverage up the businesses. The require you 0:21:54.680 --> 0:21:58.199 can look at carry interest in extending the epic ability 0:21:58.240 --> 0:22:02.119 of that loophole, so to speak, for three years. Um, 0:22:02.160 --> 0:22:05.040 you know, in terms of the broader markets, it's gonna 0:22:05.200 --> 0:22:08.959 challenge for the private equity firms to continue as usual. Um, 0:22:09.160 --> 0:22:11.440 you know, give the challenges the m and A market already. 0:22:11.760 --> 0:22:14.360 So I have a question because that was my assumption. 0:22:14.400 --> 0:22:19.040 But then I looked at KKR shares, Blackstone Shares, Apollo, 0:22:19.320 --> 0:22:21.720 they're all up absolutely. So when you look at the 0:22:21.760 --> 0:22:27.040 broader financial services businesses, so KKR, Apollo, Blackstone, they're really 0:22:27.760 --> 0:22:29.879 more than just private equity. If you look at the 0:22:29.960 --> 0:22:33.280 pure play private equity firms, they make their money investing 0:22:33.280 --> 0:22:36.800