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Speaker 1: Member s I p C. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and
Speaker 1: of course on the Bloomberg I'll leg it to my
Speaker 1: Morning mus Street is an entree to Steve Case on
Speaker 1: technology and the people we need to make America about it.
Speaker 1: This is from the wonderful Noah Feldment of Harvard, one
Speaker 1: of my favorite favorite people on law and constitution. As
Speaker 1: they argued in a column I wrote at three am
Speaker 1: after the election, it's all about the Constitution now, the
Speaker 1: protection of sanctuary cities and these example of how the
Speaker 1: Constitution protects minority rights, in this case, the rights of
Speaker 1: cities that dissent on immigration policy with US. Is Steve Case,
Speaker 1: a o L co founder and author of The Third Wave.
Speaker 1: I can't say enough about the accessibility of his book,
Speaker 1: and I would suggest out of Punaho that you grew
Speaker 1: up in the sanctuary state. Hawaii is the absolutely crucible,
Speaker 1: almost almost a test tube if you will, of these
Speaker 1: these these emotions that are buffeting America right now. If
Speaker 1: Hawaii was a sanctuary state for so many, particularly out
Speaker 1: of Asia. Tell us about your thoughts on sanctuary cities
Speaker 1: and what we do if we build walls around them. Well,
Speaker 1: I did have the opportunity to grow up in Hawaii,
Speaker 1: which is sort of a melting pot. There are a
Speaker 1: lot of different people, a lot of different countries, and
Speaker 1: even as a as a young Caucasian guy, was actually
Speaker 1: in the minority. They're not the not the majority. So
Speaker 1: I had a sense of what was possible when you
Speaker 1: brought different people, had different perspectives, different backgrounds, different outlooks together.
Speaker 1: I think that's with what's made not just Hawaii great,
Speaker 1: but American great. We've always been a great immigrant nation.
Speaker 1: Now we need to figure out how to strike the
Speaker 1: right balance in terms of enforcing the rules of of
Speaker 1: the road while also still being welcoming. Uh. I'm a
Speaker 1: little concern that the applications to the schools are particularly
Speaker 1: PhD s things like that from other countries are are down,
Speaker 1: you know, requests for visas are down. We need to
Speaker 1: make sure we are welcoming to people while still for
Speaker 1: enforcing our laws. And that's particularly important in the technology
Speaker 1: sect of the innovation sector. That's where a lot of
Speaker 1: a lot of of the fortunate companies were started by immigrants.
Speaker 1: Almost of Silicon Valley companies were started by immigrants. So
Speaker 1: we need to figure out how to strike this this
Speaker 1: this balance. I hope that will be more of a
Speaker 1: focus going forward. Steve Case, of course, the co founder
Speaker 1: of a Well Enough, chairman and CEO of Revolution, the
Speaker 1: author of the Third Wave, an entrepreneur's vision of the future.
Speaker 1: And I should also add someone who's advised Person Obama
Speaker 1: on innovation and entrepreneurship, a member of the former President's
Speaker 1: counsel on Jobs and Competitiveness. He joins us here in
Speaker 1: our Bloomberg eleven three oh studio. Is great to see you,
Speaker 1: Good morning, New York. Let me start with with the
Speaker 1: government angle. Here. We talk a lot about how to
Speaker 1: catalyze or encourage innovation entrepreneurship. As you've been thinking about this,
Speaker 1: has been dealing with it. What role should the government play,
Speaker 1: What can the government do well to to kick start innovation. Well,
Speaker 1: one thing it could do and hopefully we'll do this
Speaker 1: year is sort of level of playing field in terms
Speaker 1: of access to capital. Right now, if you're in a
Speaker 1: place like New York City or Boston or San Francisco
Speaker 1: and the whole Silicon Valley area, you do pretty well
Speaker 1: and the entrepreneurs there can raise the capital and need.
Speaker 1: But most of the country, most entrepreneurs can't. Last year,
Speaker 1: the data is pretty sobering that seventy eight percent of
Speaker 1: venture capital went to just three states California, New York,
Speaker 1: and Massachusetts. The other forty seven states got So we
Speaker 1: need to what we we're focused on what we call
Speaker 1: the Rise of the rest to help those entrepreneurs in
Speaker 1: those places. The other is to in this third wave
Speaker 1: it's just to be merging now, which will be the
Speaker 1: next evolution of the Internet and really disrupt you know,
Speaker 1: some sectors like education, healthcare, transportation, food, agg culture. Getting
Speaker 1: the regulations right will be critical. How do you keep
Speaker 1: bad things from happening and make sure that the food
Speaker 1: your kids eat at school and make them sick or
Speaker 1: you know, driver list cars don't create havoc, but have
Speaker 1: a bias towards enabling good things to happen and and
Speaker 1: unleashing that innovation. Actually, the government did that pretty well
Speaker 1: with the Internet when they kind of, you know, put
Speaker 1: the money in to build the basic research that made
Speaker 1: the Internet possible and then commercialized the Internet and had
Speaker 1: had a light touch approach to regulation in those early
Speaker 1: days thirty plus years ago. Hopefully that will be the
Speaker 1: case in some of these new emerging sectors as well,
Speaker 1: because that will enable the United States to remain the
Speaker 1: most entrepreneurnation. You've got a new partner revolution. That's J. D.
Speaker 1: Vans author I Field Bill LG. I think a lot
Speaker 1: of us have read the book and know of his
Speaker 1: his work. He's setting out to look for innovation new
Speaker 1: companies outside of California, New York, and Massachusetts. How's it
Speaker 1: gonna go about doing that? How do you do that
Speaker 1: at the firm? How do you look for for pockets
Speaker 1: of innovation outside of those three states? Well, there's two parts.
Speaker 1: We started an initiative about three years ago called Rise
Speaker 1: of the Rest, and I've traveled by bus six thousand
Speaker 1: miles visit at ease and plays like Detroit, Pittsburgh, Atlanta, Phoenix, Salbuquerque, Madison, Minneapolis,
Speaker 1: you know, Des Moines, St. Louis, really all over the country,
Speaker 1: trying to understand what's happening in each of the cities
Speaker 1: and trying to champion the the entrepreneurs in each of
Speaker 1: the cities, tell their stories, attract more capital to their
Speaker 1: to their companies into their their cities. So that's what
Speaker 1: we're doing at the Revolution. And jd. Vance just joined
Speaker 1: just recently. We announced that last month. He of course,
Speaker 1: when he wrote the book Killed Billy Elogy, it was
Speaker 1: a huge bestseller. I think it's sold a million copies
Speaker 1: already and really told the story of a lot of
Speaker 1: people in this country that do feel kind of left
Speaker 1: out and left behind by technology, by digitization, by by globalization.
Speaker 1: And and he was at the only time there was
Speaker 1: writing the book. He actually was in Silicon Valley working
Speaker 1: for Peter til focused on UH and venture capital investments.
Speaker 1: But when I met him last fall, he said he
Speaker 1: was planning to leave Silicon Valley move home to Ohio,
Speaker 1: which is where he was born and raised, because he
Speaker 1: wanted to not just defind the problem as he did
Speaker 1: in the book Hell Bill the Elergy, but be part
Speaker 1: of the solution, and one part of that solution. The
Speaker 1: others as well is trying to level the play feel,
Speaker 1: get more capital, going to more entrepreneurs in Ohio and
Speaker 1: other places. So he'll be moving back and forth between
Speaker 1: Ohio where he'll be based, in Washington See where where
Speaker 1: we'll be based, but spending a lot of time on
Speaker 1: the road talking about his book and talking about the
Speaker 1: rise of the rest and championing these entrepreneurs that really
Speaker 1: have the opportunity to build the next great iconic companies
Speaker 1: if we pay attention and if we fund them. Do
Speaker 1: you associate uh in Ohio the same pixie dust that
Speaker 1: I see in San Francisco, which is top flight academics.
Speaker 1: Ohio happens to have that. Yeah, it's an advantage that
Speaker 1: they've got a case Western Reserve and the and the
Speaker 1: rest of the good people and the great expertise in
Speaker 1: sectors where Cincinnati. My first job actually out of college
Speaker 1: was Procter and Gamble in Cincinnati. A lot of consumer technic.
Speaker 1: What do you do for proctoring? Game? Brand management? What
Speaker 1: what the hell is brand man? It was basically when
Speaker 1: I was twenty one years old that I was still
Speaker 1: learning what was basically they assign you to work on
Speaker 1: a particular product I was there at the same time
Speaker 1: that you sold toothpaste. I worked with called it at
Speaker 1: the time, the toilet goods division they had that they
Speaker 1: they because they're a good market if they renamed it
Speaker 1: beauty here after a while, but it was like, you're
Speaker 1: too taste in shampoo. And I worked on a hair
Speaker 1: permanent product that failed in test market, and I also
Speaker 1: worked on a couple other other kind of hair care products.
Speaker 1: But I learned a lot of particularly about market. Even
Speaker 1: the people used to tease when all was kind of
Speaker 1: in the nine ninies really rapidly expanding. We were giving
Speaker 1: out free trial disc all the time, UH, and that
Speaker 1: was sort of a lesson we learned from PG. They're
Speaker 1: great at getting people to try their product for free sample.
Speaker 1: So essentially Well got got big because of the pmber
Speaker 1: My experience. But going back to your question, Ohio has
Speaker 1: great uh talent there, but historically there's been a brain drain.
Speaker 1: People grew up there, went to school there, but felt
Speaker 1: like they had to move to California or New York
Speaker 1: for some other place to to, you know, kind of
Speaker 1: find their opportunity. Now they're realizing they don't have to
Speaker 1: leave because of the innovation is really now happening everywhere.
Speaker 1: Just so you understand, David, and you're way too young
Speaker 1: to understand this. We used to use Steve's ale well
Speaker 1: dis that you get in the mail. Those would be
Speaker 1: beer coasters for Jenny Crema. You could you could just say,
Speaker 1: look that we got. We got a whole brace of it.
Speaker 1: We have like six or twelve of them for for
Speaker 1: all Reduce for users. They're the great coaster FORTI case
Speaker 1: with some Bloomrick surveillance. We talk about geography here. If
Speaker 1: I'm starting a company, um am, I looking for a
Speaker 1: place to put it, do I say, oh, look it's
Speaker 1: it's less expensive to do it in Detroit. I'm being
Speaker 1: encouraged to do it in Detroit. I'll go there, or
Speaker 1: I might go to d C, or might go to
Speaker 1: Silk How how does that calculus work? How does somebody
Speaker 1: decide where to start a company in the r teth
Speaker 1: I think the big the biggest driver in this next
Speaker 1: ten fifteen, twenty years, what I've called in the book
Speaker 1: the third wave, will be domain expertise. If you're really
Speaker 1: trying to disrupt healthcare, for example, being in Cleveland near
Speaker 1: the Cleveland Clinic or in Baltimore near Johns Hopkins, or
Speaker 1: near United Health in Minneapolis. When partnership has become more important,
Speaker 1: being closer to those partners will become important. We're seeing
Speaker 1: this in cities now like Pittsburgh that is known as
Speaker 1: the sort of the steel capital help power the whole
Speaker 1: Industrial revolution because of Carnegie mal and their expertise and
Speaker 1: robotics and their history of making things. There's a lot
Speaker 1: innovation there. Even Uber, kind of a prototypical Silicon Valley
Speaker 1: company is focusing its innovation around dry West Cars and
Speaker 1: in Pittsburgh. So you're starting to see the agriculture what
Speaker 1: some people call agg tech. Uh, there's innovation happening in
Speaker 1: Silicon Valley, but there's also innovation in place like Louisville
Speaker 1: and Lincoln, even St. Louis which ra Monsanto's based. There's
Speaker 1: a lot of engineers and understand a lot about farming.
Speaker 1: In your book, the last and then you're you're brilliant
Speaker 1: on this. You've got like ten pages of photographs and
Speaker 1: the last three pages is kids in Pittsburgh, kids in Ohio, etcetera, etcetera.
Speaker 1: Aren't they there because they can actually afford to get
Speaker 1: to the end of the month paycheck that this is
Speaker 1: like a huge deal. That's a big part. Now, some
Speaker 1: of them are there just because they happen to be
Speaker 1: there and they're starting companies, but some of them are
Speaker 1: there because they believe they can build companies there and
Speaker 1: at the cost of living is much lower. And I've
Speaker 1: seen this also if we travel around. The winner of
Speaker 1: our Rise of the Rest Pitch competition in Detroit actually
Speaker 1: started company in San Francisco but moved to Detroit, partly
Speaker 1: for cost of living it was going to be less
Speaker 1: than half a aust for rent and salaries and and
Speaker 1: so forth, partly because he was from there and wanted
Speaker 1: to go back there and raise his family there, and
Speaker 1: probably because he wanted to be part of the renaissance,
Speaker 1: the rebuilding, the reimagining of of of Detroit. We're starting
Speaker 1: to see that all over the country what had been
Speaker 1: a brain drain at that brain drain now slowing, and
Speaker 1: even we're beginning to see a very early signs of
Speaker 1: a boomerang of talent where people who felt they had
Speaker 1: to go to the coast now are beginning to realize that,
Speaker 1: you know, this regional entrepreneurship is beginning to accelerate and
Speaker 1: and they can really start a company anywhere. How is
Speaker 1: the the environment for we're starting a company and growing
Speaker 1: a company chain since you started all and when when
Speaker 1: we got started, venture capital was was still uh, relatively
Speaker 1: early days. It's a relatively recent phenomena. When we started
Speaker 1: in the Washington, d C. Area, it was not very
Speaker 1: start up friendly. It was, you know, kind of a
Speaker 1: big company town, kind of a government town. So for
Speaker 1: all our venture capital came from other places, Boston, Chicago,
Speaker 1: San Francisco. None of it came from the the DC area. Uh.
Speaker 1: And even when I graduate from college, I talked about
Speaker 1: this in the in the book. I had read a
Speaker 1: book called The Third Wave by Alvin Toffler when I
Speaker 1: was in college, and it talked about essentially the Internet, uh,
Speaker 1: And I was mesmerized by it. I wanted to do it.
Speaker 1: But when I graduate night there was no Internet companies
Speaker 1: to go do and there was no startup culture, so
Speaker 1: I couldn't really do my own thing. So it's really
Speaker 1: changed quite dramatically in the last few decades. What's amazing
Speaker 1: about this, David, is you read Elvin Toffler, you read
Speaker 1: The Third Wave, and you had your Karmen Gia. You
Speaker 1: know you had a Karmen Gee. And if you're a
Speaker 1: rich kid, you had a SOB and you put your talk.
Speaker 1: You could pick up girls just by putting your third
Speaker 1: wave on the back, you know, the back of the
Speaker 1: four seat car. They think you were sensitive. Gearshifter was
Speaker 1: on the dash right, Yeah, well, yeah, well that was
Speaker 1: a SOB. My first car was the exploding Pinto I
Speaker 1: got I got from four box. I didn't tell my
Speaker 1: parents about it because they've probably have been scared. A
Speaker 1: fine engineered vehicle that Pinto. Mike Michael Barr still drives one.
Speaker 1: I think I had two of them. You had two
Speaker 1: pints at one point. Uh, talk about energy. That was terrible.
Speaker 1: David Garrett and Tom Keene in New York with us
Speaker 1: THEEF Case of Revolution here in our Bloomberg eleven three
Speaker 1: oh studios and Steve I wanted to ask you about
Speaker 1: um sort of the conversation about manufacturing that we're having
Speaker 1: right now. The present talks an awful lot about bringing
Speaker 1: jobs back, and we don't hear a whole lot about
Speaker 1: the future manufacturing. We're about technological advancement, tour automation. Are
Speaker 1: we are we missing out? On some component of that
Speaker 1: conversation by not talking about those issues. Yeah, I think so.
Speaker 1: I think it's great for the president were trying to
Speaker 1: keep as many jobs in the country or you know,
Speaker 1: from moving off shore. But I think we have to
Speaker 1: not just kind of think about what was there thirty
Speaker 1: or forty years ago, but what's going to be there
Speaker 1: thirty or fourty years from now, and make the investments
Speaker 1: in the industries of the future. Now, advanced manufacturing is
Speaker 1: starting to show some momentum, and they're actually because of robotics.
Speaker 1: It's an odd dynamic, but because of some of the
Speaker 1: automation technologies, manufacturing that was moved off shore twenty years
Speaker 1: ago is now beginning to come back because there is
Speaker 1: less of a labor costs. So the bad news is
Speaker 1: there's fewer jobs. The good news is some of the
Speaker 1: jobs that were going away are are are coming back.
Speaker 1: So that's an example where there's sort of a kind
Speaker 1: of surprises emerged. But I think the real opportunity is
Speaker 1: in this third wave is to figure out where things
Speaker 1: are going and figure out what partnerships are necessary to
Speaker 1: lead the way. I think there's a broader social discussion
Speaker 1: around artificial intelligence and robotics and driverless cars, and how
Speaker 1: do you deal with the fact that a lot of
Speaker 1: jobs will be displaced. A lot of jobs will be
Speaker 1: lost because of those innovations. I think the only way
Speaker 1: to deal with that is to try to make sure
Speaker 1: you're offsetting that by backing entrepreneurs in these emerging Rise
Speaker 1: of the rest cities. So it's not just about job destruction,
Speaker 1: it's also about job creation. Startups are the big job creator.
Speaker 1: We just can't just focus on backing the startups in
Speaker 1: place like Silicon Valley and not in places like Detroit.
Speaker 1: As it's like to be a founder of a big
Speaker 1: We had Tim Armstrong here a couple of weeks back,
Speaker 1: and there was a rebranding and talking about oath and
Speaker 1: all of all of that stuff. But when when you
Speaker 1: when you found a company, how far out are you looking?
Speaker 1: Could you have envisioned what a o L is today?
Speaker 1: How many iterations it's been through, where it's headed now?
Speaker 1: How How forward looking are you when you're starting a
Speaker 1: company like well, you have to be pretty forward looking.
Speaker 1: And again, when we when we started at thirty two
Speaker 1: years ago, it was early days. Only three percent of
Speaker 1: people were online at all at the time, and they're
Speaker 1: only online about an hour a week. And so when
Speaker 1: we said we wanted to get America online, get the
Speaker 1: world online, we knew it was gonna be a tough task.
Speaker 1: But the surprise to me, frankly, it was it took
Speaker 1: longer to get going than I thought. It was really
Speaker 1: a decade before we finally It was just just it
Speaker 1: struck me as an obvious idea, but the reality is
Speaker 1: most people didn't think it was something most people wanted
Speaker 1: to bother with, So I just took a long, long
Speaker 1: term view. I think the challenge is to have that vision,
Speaker 1: have that that focus on long term, but couple that
Speaker 1: with with execution, and that Thomas Edison said, this is
Speaker 1: inentrigo vision without execution as hallucinations. And how you strike
Speaker 1: the balance between having the big idea, having a big vision,
Speaker 1: but also executing and having the patience and perseverance I
Speaker 1: think will become more important again in the third way.
Speaker 1: The second way, there are a lot of overnight successive snapchat, facebooks, cetera. Uh,
Speaker 1: and the third wave it's gonna be more like the
Speaker 1: first wave. It's going to take more like ten years
Speaker 1: in the making before you had that overnight six let
Speaker 1: me ask the question. And I'm doing this folks. I
Speaker 1: got my iPhone out of my fancy brown case. He's
Speaker 1: got his iPhone out and his tasteful black case. You
Speaker 1: got your iPad? On page two forty two of the
Speaker 1: Third Wave? What's your advice? For the third wave of
Speaker 1: the manufacturing shop known as Apple Computer? What do they
Speaker 1: do well? I think they're doing a great job. Did
Speaker 1: you have a Lisa? I did not own one. I
Speaker 1: certainly saw it when it got launched and was and
Speaker 1: then you saw that was the dog it was. It
Speaker 1: was the sort of an enterprise office of computer based
Speaker 1: on some of the Xerox parktect How do they avoid
Speaker 1: a Lisa? What's your What's your advice? And they have
Speaker 1: You have to keep pushing, you have to keep trying
Speaker 1: you can, and they have to open up some new markets.
Speaker 1: I've said for some time that Apple, even though their
Speaker 1: focus has been on sort of horizontal markets, has to
Speaker 1: start focusing on some vertical mark healthcare being one. I
Speaker 1: saw just over the weekend that there's some rumors that
Speaker 1: they're working on some technologies around diabetes, other kind of things.
Speaker 1: I think figure out how they take the expertise they
Speaker 1: have around interface and simplicity and and and accessibility and
Speaker 1: apply that to other other sectors. So I think it's
Speaker 1: not just about the horizontal heating platforms, whether it be
Speaker 1: a phone or iPad or computers themselves, about how you
Speaker 1: take that expertise into more vertical markets like like health care.
Speaker 1: It's one sixth of our economy. Everybody agrees it's broken.
Speaker 1: Innovation is necessary. Company like Apple could be a great innovator.
Speaker 1: There is that the rich You've mentioned healthy here a
Speaker 1: few times. That is that the richest vein now for
Speaker 1: for innovation to use. I think so just because it
Speaker 1: is such a big part of the economy and it's
Speaker 1: so broken, and there are clearly a ways to use
Speaker 1: technology to make you care more convenient uh and or accessible,
Speaker 1: more more affordable, and more personalized. That this one scary
Speaker 1: thing I talked about in the book is MD Anderson,
Speaker 1: one of the great cancer hospitals. When people come there
Speaker 1: for second opinions, twenty five percent of the time they
Speaker 1: reverse the first opinion. That a lot of people go, yeah.
Speaker 1: But now some of it's because there's some regional hospital
Speaker 1: that doesn't have the expertise in that. But some of
Speaker 1: it's because that the technology hasn't been embraced to really
Speaker 1: be much more specific around pathways and identifying what the
Speaker 1: problem is there for, what the diagnosis, what the what
Speaker 1: the solution, the therapy should be. So clearly there's a
Speaker 1: role for technology to play. The same time, one of
Speaker 1: the key lessons I talk about is that it's not
Speaker 1: just about the technology, is not just about the software.
Speaker 1: It's got to be people. It's got to be culture,
Speaker 1: and that, you know, the revolution healthcare will be getting
Speaker 1: doctors and hospitals to think differently. The revolution education will
Speaker 1: be getting you know, teachers and professors to think differently,
Speaker 1: not just getting the engineers to write I got I
Speaker 1: got forty seconds left? Is all on Steve Case in
Speaker 1: third wave? How do you manage your email? It's your fault?
Speaker 1: How I must have met? There are mornings I wake
Speaker 1: up and say, this is a stupid ideas. Who got
Speaker 1: this thing started? Now? I I have multiple accounts for starters,
Speaker 1: multiple accounts. I've been stealing newsletters things like that. I
Speaker 1: have go to one I want to account. Uh, And
Speaker 1: so it's one way to kind of, you know, when
Speaker 1: I have time in today, I'll kind of look at
Speaker 1: that and I also just try to afford to other
Speaker 1: people that somebody else kind of deal with it with much.
Speaker 1: But it's a great it's a great resource, but sometimes
Speaker 1: it can be a source of frustration for all of us.
Speaker 1: It's your fault, So hush. It is a fabulous book, folks,
Speaker 1: with a new epilogue that really brings it up to
Speaker 1: date with all that's going on in Washington. The Third
Speaker 1: Wave Steve Case and Entrepreneur's Vision. I'll change the title
Speaker 1: of what to Do with this Nation? Steve Case. The
Speaker 1: Third Wave, very important effort brought you by Bank of
Speaker 1: America Mary Lynch, dedicated to bringing our clients insights and
Speaker 1: solutions to meet the challenges of a transforming world. That's
Speaker 1: the power of global connections, Mary Lynch. Pierce Federan Smith Incorporated,
Speaker 1: Member s i PC, joining us now from the Union
Speaker 1: Bank of Switzerland. He's run six marathons, Julian Emmanuel, you've
Speaker 1: run six marathons? Are you one of those slugs that
Speaker 1: comes in at five pm staggering away? Tell me how
Speaker 1: you do this? Back of the packers they get uh,
Speaker 1: you know, basically it is all preparation and psychology. You
Speaker 1: get in there, you decide you're gonna do it. You
Speaker 1: put in your miles before the event, and you do it,
Speaker 1: and then the pain comes and you keep going. How
Speaker 1: do your ankles hold up? O wise one, These ankles
Speaker 1: need plenty of support. It's it's a challenge. Uh, you know,
Speaker 1: there's a lot of pain, but it's just it's a
Speaker 1: great experience. Going across the Arizona Bridge must be just extraordinary. Well,
Speaker 1: the first time I did it, and the field the
Speaker 1: bridge actually sway. It was it was a little it
Speaker 1: was a little bit unsettling, but you get you said, okay,
Speaker 1: we're sixteen Washington Street, sways up in Boston as well,
Speaker 1: Julian Emmanuel with us with U B. S as we
Speaker 1: talked to Marathon and on this special Monday for New
Speaker 1: England and really a special market as well. When you
Speaker 1: construct your research notes, now, seriously, do you could you
Speaker 1: construct them around a gauze of a rash exuberance or
Speaker 1: is there a sanity to where these equity valuations are well,
Speaker 1: so when you think about investing, you basically put forth
Speaker 1: a thesis and then you wait for it to develop. Obviously,
Speaker 1: if it develops, you perhaps increase your exposure to the
Speaker 1: thesis and if it doesn't, you peel it back a
Speaker 1: little bit. Investors after the election took on the thesis
Speaker 1: that the economy was going to grow stronger than had
Speaker 1: been the case for the last many years, and that's
Speaker 1: what engendered the confidence. So the confidence readings seem very high.
Speaker 1: You might use the irrational zuberance simply because we haven't
Speaker 1: seen the confirmation either through the economy itself or through policy. However,
Speaker 1: the pent up investment psychology of getting rid of zero
Speaker 1: interest rates really has a long way to go, and
Speaker 1: we think that this thesis is going to have to
Speaker 1: play out over a number of quarters. It isn't just
Speaker 1: the first hundred days. Um, So you know, it's it's
Speaker 1: really a wait and see mode for markets right now.
Speaker 1: So you give me a sense of your optimism for
Speaker 1: something getting done in Washington. You're reevaluating the timetable here
Speaker 1: or we have a pessimistic are you? I guess we've
Speaker 1: been We've been realistic all along and and and basically,
Speaker 1: you know, the world never repeats itself. But the simple
Speaker 1: fact is is that Ronald Reagan came to office in
Speaker 1: night doubtless intending to do tax reform straight away, and
Speaker 1: he did it, but not until nine six. So you know,
Speaker 1: given the fact that there are divisions within the Republican Party,
Speaker 1: we need to be patient. We need to let things
Speaker 1: play out. And obviously, well what do you do? I mean, okay,
Speaker 1: that's great, and I get the idea I need to
Speaker 1: be patient, But am I going to be patient and
Speaker 1: enjoy a correction or a true bear market on the
Speaker 1: way to being patient? I mean what I learned? And David,
Speaker 1: I was away for a week. I don't know if
Speaker 1: you noticed. People are baffled. People are baffled about like
Speaker 1: what to do. They're not getting a lot of what
Speaker 1: to do. What is your prescription? Now? Given where valuations
Speaker 1: are so so very often, the best thing to do
Speaker 1: in investing, and I think it's it's a lot more
Speaker 1: of the time than people actually give it credit to
Speaker 1: is to do nothing. Okay, So in our view, you're
Speaker 1: likely started a correction in the beginning of March. The
Speaker 1: market's gone sort of sideways as opposed to selling off
Speaker 1: more vigorously. We think that if the macro breaks a
Speaker 1: certain way over the next several weeks, and there are
Speaker 1: a lot of events coming up, including the potential closure
Speaker 1: of the government on April, the market pulls back more,
Speaker 1: and that's the sort of situation where you need to
Speaker 1: be prepared to buy very quickly. This happened to be
Speaker 1: the you know, David, do you have women at your
Speaker 1: house that they go to drug stores and just acquire stuff?
Speaker 1: You know, the occasion. So today, looking down, it's something
Speaker 1: from a famous toothpaste company, Like, why the hell did
Speaker 1: we buy this? That toothpaste company? Is trade to get
Speaker 1: a blended twenty seven times earnings pe ratio. Which budget
Speaker 1: is the price or the earnings? Uh, the price budget
Speaker 1: is in the near ternament our view. And that's why
Speaker 1: when we look at the consumer sector and when we
Speaker 1: look at the market as a whole, you've got to
Speaker 1: be selective at these valuations. And and where there is
Speaker 1: value right now is technology, healthcare and financials. We still
Speaker 1: like the financial story, despite the fact that the yield
Speaker 1: curve flattening over the last Do you see share by
Speaker 1: back and dividend growth just continuing as a blended concept. Well,
Speaker 1: it's it's it's been a part of this entire bowl market.
Speaker 1: We continue to see it. And and look, if there's repatriation,
Speaker 1: you're certainly going to see a lot more of it.
Speaker 1: I'm gonna give you the highest marks for staying in
Speaker 1: this market. We've gotta go to cash. The world's going
Speaker 1: to die as we know it. And UBS has had
Speaker 1: the courage saying, no, you've got to be in this
Speaker 1: market and uh and participate. We do that. At twenty
Speaker 1: tho four fifty three, we're rocky in equities with Julian
Speaker 1: Emmanuel of UBS, a serious discussion about valuations right now.
Speaker 1: One of the themes through all the surveillance this morning, Julian,
Speaker 1: has been the lack of volatility. The VIX has gone
Speaker 1: from twelve to sixteen. Is that a normal vix right now?
Speaker 1: To see it the historical normals twenty? Ugly'st forty. We're
Speaker 1: not ugly. We're actually pretty complacent. But it's a sixteen
Speaker 1: of sixteen on the vix. No, it's not at all.
Speaker 1: Uh well because again going back to post election, people
Speaker 1: played their thesis. They they got positioned the way they
Speaker 1: wanted and now they're waiting um. And in fact, if
Speaker 1: you look at the flows year to date, the public
Speaker 1: really has been the incremental buyer. But another thing has happened.
Speaker 1: Stocks don't move uh similarly to each other on a
Speaker 1: day to day day basis the way they did, and
Speaker 1: this lack of correlation is also driving volatility lower. But
Speaker 1: net net, when you look at the risks, the VIX
Speaker 1: should be higher, and we think it does go higher.
Speaker 1: It's earning season. Now we had some financial supporting last
Speaker 1: a couple more later this week is a theme shaping
Speaker 1: up to the to the quarter earning season. Yeah, well,
Speaker 1: we think that basically because you're at the valuation paradigms
Speaker 1: that that you're at UM that not only are you
Speaker 1: going to have to report good earnings, you're going to
Speaker 1: have to beat the number UM, which most companies do
Speaker 1: quarter in, quarter out, but that number is going to
Speaker 1: have to be good to begin with, and you're going
Speaker 1: to have to be a reasonably valued company because there's
Speaker 1: just at almost twenty times trailer earnings across the broad market.
Speaker 1: There's less room for error given this macro overhang. Let's
Speaker 1: talk about that macro overhang. There there is so much happening.
Speaker 1: How do you separate out the real risks from those
Speaker 1: that are distractions? Uh, it's it's definitely challenged, there's no
Speaker 1: question about it. And and we're seeing things that we
Speaker 1: haven't seen before. UM, particularly you know, unfolding in geopolitical
Speaker 1: theaters across the world, and frankly, you're in a situation
Speaker 1: where events could go in any number of directions. And
Speaker 1: so for us again, uh, you're seeing the vix actually
Speaker 1: start to pick up the last week or two in
Speaker 1: recognition of that fact, even as people don't make the
Speaker 1: stock market itself more volatile. But there's definitely hedgen going on,
Speaker 1: so you have to be mindful of that. Is there
Speaker 1: the impulse to hunker down and look purely at fundamentals
Speaker 1: or is that something you'd caution against it At this point,
Speaker 1: I think this is a very rare time. We haven't
Speaker 1: seen it that often over the course of the last
Speaker 1: thirty or forty years. Politics really does move the fundamentals.
Speaker 1: And if you you look it back at politics moving
Speaker 1: the confidence numbers higher, We've seen times throughout history where
Speaker 1: confidence actually causes the economy and a self fulfilling prophecy
Speaker 1: to strengthen. We haven't seen that yet. We're not sure
Speaker 1: it's going to happen, but we do expect incremental strength
Speaker 1: to this debate on the soft data versus hard data,
Speaker 1: and what the soft data you're saying you're not seeing it.
Speaker 1: You're you're not seeing the leading value of the this
Speaker 1: off date at this point, it's not there yet. You're
Speaker 1: a hard day to gug. We we like to see
Speaker 1: the facts and and the facts are that the first
Speaker 1: quarter was was quite weak. But on the other hand,
Speaker 1: when you look at the FED commentary over the last
Speaker 1: several weeks, the FED doesn't seem to be terribly concerned. Well,
Speaker 1: I mean, I got all sorts of opinions on this.
Speaker 1: Macroeconomic advisors to St. Louis readjust second quarter call to
Speaker 1: three point six percent? How do you gyrate from zero
Speaker 1: point six or zero point eight whatever the number comes
Speaker 1: in out to three point six percent? I mean, when
Speaker 1: does the switch? Have you noticed, David, where the switch
Speaker 1: got turned on? Or you know, it's like one of
Speaker 1: those big theater toggle switches, the sparks go off when
Speaker 1: you turn the lights. Part of the where's the toggle switch?
Speaker 1: Part of it is is is the difficulty in measuring
Speaker 1: g d P um And a former colleague of ours
Speaker 1: really made the point that GDP is a very noisy
Speaker 1: indicator and that if you want to get a good
Speaker 1: look at how the economy is moving in a more
Speaker 1: clean basis, there are three things to look at. Bank lending,
Speaker 1: which has been weak as of late, uh I, s
Speaker 1: M S, which really is you know, is something that's
Speaker 1: been quite strong, Yes or no? Our conditions going to
Speaker 1: get that hard data that that's that's hard data HARDA. Yes,
Speaker 1: we we consider that to be hard day, even though
Speaker 1: there's an opinion aspect, but it tells you what the
Speaker 1: people on the ground are seeing. And the last piece
Speaker 1: of hard data that's very important is the weekly job
Speaker 1: hard The hard data right now is the Yankees are
Speaker 1: killing it, killing it in April. That's the hard data.
Speaker 1: I'm a Mets fan, Tom, The Yankees are killing it.
Speaker 1: They no one expected. Come on, no one expected the
Speaker 1: Yankees are killed. I mean Michael Barr helped me here.
Speaker 1: The Yankees are you kidding me? They want seven in
Speaker 1: a row in April. That's hard data. Meanwhile, Tiger fans
Speaker 1: over here, Miggy's hurt. It's a mess. No one cares
Speaker 1: about the Tigers. Someone get a memo to Michael Barton.
Speaker 1: No one cares at all about the Detroit Good morning, Detroit.
Speaker 1: Glad you're listening on Serious Sex Empt Channel one night.
Speaker 1: Julian Emmanuel, thank you so much. You know full. You know,
Speaker 1: not that I would editorialize, but I'm in the Julian
Speaker 1: Emmanuel camp on hard I'm like, when did the Vogue?
Speaker 1: Where did I ever read about soft data? Hard data? No?
Speaker 1: Let mean, come on, it's it's the function of the times.
Speaker 1: Things are more difficult to measure the Internet. Julian Emmanuel
Speaker 1: with Hubius, thank you so much. They're now joining us
Speaker 1: at studying at the University of Maine. He went to
Speaker 1: Delaware and then to San Francisco to lose his main accent.
Speaker 1: Michael Mayo independent bank Analysts, one of the few that
Speaker 1: we have on I want to go back to governor incident.
Speaker 1: Of course, you made a real splash the Bank of America.
Speaker 1: While back thinking about the Minutia, you have a jaw
Speaker 1: dropping fact Toyd in the Michael Mayo research, and that
Speaker 1: is City Group has a peer group different than the
Speaker 1: other major banks. A guy like me was thunderstruck by that.
Speaker 1: I mean, we compare them, and they compare them to
Speaker 1: the same banks, and yet City Group, is this true,
Speaker 1: compares itself to the European banks. Am I right? Let
Speaker 1: let's take a step back here, so um, you know,
Speaker 1: I focus a lot on governance as you mentioned, and
Speaker 1: when you look at the large US banks, banks have
Speaker 1: been hardwired for safety, they have not been hardwired for
Speaker 1: better governance. To Regulators did their job, they did it
Speaker 1: well to make sure banks are safe, but investors need
Speaker 1: to make sure that banks have proper governance. So that
Speaker 1: brings up City Group and City Groups annual meeting is
Speaker 1: a week from tomorrow. I'm going to the meeting. It's
Speaker 1: that in the East Village of New York City at
Speaker 1: the Cooper Union, and I have ten questions that I
Speaker 1: intend to but you're up in the cheap seats under
Speaker 1: the dunkin donut sign right. Well, I'll line up early
Speaker 1: to ask my questions that you will. And certainly one
Speaker 1: one question relates to compensation. And the peer group that
Speaker 1: City Group uses for compensation is different than the peer
Speaker 1: group they use for their financial comparisons, and less than
Speaker 1: one and ten companies the United States, you know, uses
Speaker 1: that sort of technique, and City Group is the only
Speaker 1: large bank to do so. So certainly one question is
Speaker 1: on compensation and peer groups. But the more Germaine question
Speaker 1: is why does the CEO letter of City Groups say
Speaker 1: that you know they have so much right? They say
Speaker 1: they're the right model, the right strategy, the right customers,
Speaker 1: the right clients, the right people in the right places.
Speaker 1: But then they still have worsting class returns, worst in
Speaker 1: class stock valuation. They missed their prior targets. They push
Speaker 1: their new targets four years out. So that that's my
Speaker 1: most important Mr Corbett attending one of the Trump the
Speaker 1: President Trump festivities in Washington. Their chairman is someone everybody
Speaker 1: young Blue Bolas respects Mr Michael O'Neill's legendary within the business.
Speaker 1: If any chairman can write a ship I would respectfully
Speaker 1: suggest it's Mr O'Neill. Explain to us what a chairman
Speaker 1: does at a big bank. Well, not every bank has
Speaker 1: the chairman roles separated from the CEO. In the case
Speaker 1: the City Group, though, chairman Mike O'Neill he's you know,
Speaker 1: he's been a rockstar and banking for decades, so he's
Speaker 1: the right guy at the top of the company. You know.
Speaker 1: One question not explicitly asked, though, is is he being
Speaker 1: too soft on management? So the job of a chairman
Speaker 1: is to make sure that um, the board is overseeing
Speaker 1: management properly, to ensure that they have the right strategy
Speaker 1: and ensure that they're being held accountable to executing on
Speaker 1: that strategy. Also, risk control banks is always huge. I
Speaker 1: remember you agitating for more separation of those roles within
Speaker 1: within banks. Is that does that continue to continue to
Speaker 1: push for that? Is? Is it likely to happen at
Speaker 1: other at other banks? Well, one size doesn't fit all.
Speaker 1: Going back to SIT group, I was on your show
Speaker 1: when they had um you know, Dick Parsons of Vicram,
Speaker 1: pad It FOT, I said their names. I didn't like
Speaker 1: that combination. It was separated. On the other hand, you know,
Speaker 1: Jamie Diamond has gotten the job done at JP Morrigan,
Speaker 1: you know, for over a decade now. So I think
Speaker 1: if you execute well, you have double digit returns of
Speaker 1: return on equity, and you're controlling your risk properly, then
Speaker 1: maybe it's okay. But I think it's situational. You mentioned James.
Speaker 1: Let's talk about JP Morgan. They reported last week. Get
Speaker 1: your reaction to to the earnings that we saw from them.
Speaker 1: The respeculation ahead of time here that we wouldn't see
Speaker 1: great growth in in uh the equities trading side of things.
Speaker 1: It seemed like they performed better than expected. Well. JP Morrigan.
Speaker 1: I still consider them the Lebron James of banking. And
Speaker 1: that's because like Lebron James, they have both offense and defense.
Speaker 1: And when it comes to JP Morgan, in the first quarter,
Speaker 1: they certainly had the offense. They had strong capital markets growth,
Speaker 1: that's underwriting and trading and that did really well, and
Speaker 1: they also had some of the best net interest margin improvement.
Speaker 1: Yet on the other hand, the defense side, you know,
Speaker 1: credit costs are still good, but they went up, and
Speaker 1: also their expense control wasn't quite as good. A better
Speaker 1: offense this quarter from Jake Morgan the defense. What size
Speaker 1: of a moon shot was co America for? You don't
Speaker 1: tell me, you said, load the boat a share? Where
Speaker 1: did you get into America and say this is going
Speaker 1: to be a turnaround of turnarounds? Um? Well, you know
Speaker 1: I upgraded America for the first time in over two
Speaker 1: decades the stock almost that was early last year. Um
Speaker 1: and and so that. But the reason Camerica is so
Speaker 1: important to me because it shows when you, you know,
Speaker 1: spend energy on this governance and these oversight issues. You know,
Speaker 1: I went to the America annual meeting, so did ten
Speaker 1: other investors, most of whom stood up and said you
Speaker 1: need to do a better job. One month later, America
Speaker 1: announced restructuring. America was the best performing of the thirty
Speaker 1: largest banks last year. So when someone says you're checking
Speaker 1: a box, you're doing these annual media things for no
Speaker 1: reason wrong, it helps investors. Everybody's we have spent too
Speaker 1: much money in chocolate this weekend. Help me here with
Speaker 1: how where's the next America? We spend all our time,
Speaker 1: David and I are is guilty of this as anybody
Speaker 1: talking about four or five big banks. The Comerica is
Speaker 1: under their those twenty five or thirty regional kind of
Speaker 1: big banks. Where's the next America? Well, my thought is
Speaker 1: there's always under performers. There's always banks in the bottom
Speaker 1: half of the bottom quartile. Those are potentially the next America.
Speaker 1: So you know, as stocks trade from day to day
Speaker 1: and we get the more earnings reports from big banks,
Speaker 1: so you don't have an identified stock you can share
Speaker 1: with us this morning, it's going to be the next America.
Speaker 1: I you know, I can't tell you first, Tom, but
Speaker 1: I can maybe me tell you after I tell a
Speaker 1: few others. You see how we got around there. But
Speaker 1: having said that, let me and you want to stock
Speaker 1: here at least I figured I have to come on
Speaker 1: the show and give you a stock and so you
Speaker 1: know what I do over the weekend. You know, if
Speaker 1: you do this job long enough is you know I
Speaker 1: read annual reports. The marriage is great, folks. You know
Speaker 1: the bar is high for a bank. Yellow staff fun um.
Speaker 1: But I reread Goldman Sacks and report last night, and
Speaker 1: to say one time to pound your chest. Hey, you
Speaker 1: told us to downsize, but we didn't. At least three
Speaker 1: times in the CEO letter of Goldman Sacks they advertised
Speaker 1: the fact that, you know, we're one of the few
Speaker 1: firms that have remained committed to serving clients a lot
Speaker 1: of areas. Then they go, we did not extrapolate the
Speaker 1: bad conditions. And then they in the last section the
Speaker 1: follow up by Lloyd Blank found and the CEO LETTERY goes,
Speaker 1: in the past decade or so, some of our industry
Speaker 1: pulled back from sales and trading businesses, as to say,
Speaker 1: but we didn't. And then they repeat, and then they
Speaker 1: repeat in the report that like the fourth quarterbacklog was
Speaker 1: good to the story of bank earnings. So far as
Speaker 1: Wall Streets doing well, Main Street is not doing well.
Speaker 1: So I want to own a Wall Street bank like
Speaker 1: Goldman Sack before the report earnings tomorrow. Okay, very good.
Speaker 1: I got twenty seconds left. That's all. Does Gary Cone
Speaker 1: working for the Trump Bank down in Washington want to
Speaker 1: get rid of Glass? Uh? We bring back glass Eagle?
Speaker 1: Will that help Mr blankfind? You know what? Look at
Speaker 1: first quarter results? Okay, lending, traditional corporate lending and overall
Speaker 1: learning is the worst in six years. On the other hand,
Speaker 1: debt underwriting, raising, debt and capital markets good. From the
Speaker 1: customer standpoint, Glass de Eagle has been good, evidenced by
Speaker 1: this quarter. Okay, We've run out of time. Never enough
Speaker 1: time with Michael Mayo on the banks as well. He'll
Speaker 1: be at the City. Maybe we'll get him on after
Speaker 1: City banks. See how that goes. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm out on Twitter
Speaker 1: at Tom Keene. David Gura is at David Gura. Before
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