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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jaily, we bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,

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Speaker 1: and of course on the Bloomberg terminal. This is something

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Speaker 1: we take great pride in with the leadership of Michael

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Speaker 1: McKee Bloomberg Economics and Policy Directive. Also worst questioner of

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Speaker 1: Jerome Paul that we know, and that is they are

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Speaker 1: not just FED presidents or FED governors, but they are

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Speaker 1: real people with true expertise. Patrick Harker is truly extraordinary

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Speaker 1: and a voice for technology at the FED. He is

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Speaker 1: definitive and operations research. He holds the youngest endowed professorship

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Speaker 1: at Wharton in their history. And all I can say,

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Speaker 1: Mike is when the FED needs to understand technology and productivity,

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Speaker 1: this is the guy they turned to. Well, let's turn

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Speaker 1: to Patrick Harker ourselves, and we should mention that along

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Speaker 1: with everything else on your resume there you are a

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Speaker 1: voting member of the Open Market Committee as an alternate

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Speaker 1: for the vacant Boston seat at the present time. So, uh,

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Speaker 1: Tom does have to pay attention to what you have

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Speaker 1: to say today. Let me start off. I don't agree

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Speaker 1: with him on the question of jay Pal So all right,

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Speaker 1: well now I can take it out on you. Mary Daily,

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Speaker 1: very firm yesterday. We are not behind the curve, do

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Speaker 1: you agree? Look at risk on both sides. I mean,

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Speaker 1: let's step back. I think it's worth a step back

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Speaker 1: and say, why don't we have inflation running away? It's

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Speaker 1: run two things supply demand. Uh, the demand is something

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Speaker 1: we can influence through monetary policy. The supply constraints people

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Speaker 1: and goods less. So in fact, very little can we

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Speaker 1: do about that. Two things are happening at the same time.

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Speaker 1: So the question is how quickly, and this has always

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Speaker 1: been the question, how quickly are the supply chain constraints

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Speaker 1: going to leave us? And it looks right now like

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Speaker 1: they're not. They're going to take some time. So slowing

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Speaker 1: down some demand, just what monetary policy does? I think

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Speaker 1: it's appropriate. I don't think we're behind the curve in

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Speaker 1: that sense because we don't affect a big part of

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Speaker 1: why there is inflation. That said, I do think we

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Speaker 1: need to move now to try to control inflation. That

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Speaker 1: is something I firmly believe. Well, move now, but then

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Speaker 1: move how often after that and how fast that you

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Speaker 1: know the questions out there? The fifty basis points in

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Speaker 1: March of the seven rate increases proposed by Bank of America,

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Speaker 1: Where do you come down on that? So let me again,

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Speaker 1: let me step back from it. So we're going to

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Speaker 1: stop the tapering in March. I would be supportive of

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Speaker 1: point increase in March. Could we do fifty yeah? Should?

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Speaker 1: We am a little less convinced to that right now,

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Speaker 1: But we'll see how the data turn out in the

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Speaker 1: next couple of weeks, and then when we're sufficiently away

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Speaker 1: from zero, we can argue with above zero d five

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Speaker 1: basis points under basis points. Then we start normalizing the

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Speaker 1: balance she start bringing the balanty down, which of course

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Speaker 1: will also reduce accommodation. So truly a two step process here. Yes,

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Speaker 1: we want to increase the fed country, which is our

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Speaker 1: primary tour of monetary pulse. At the same time we

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Speaker 1: want to start removing accommodation by shrinking the balance sheet.

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Speaker 1: Both things have to happen in tandem. In my mind,

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Speaker 1: Let's step into March and then build on your comments

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Speaker 1: on the balance sheet, President Harker on March, tell me

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Speaker 1: the data that you are looking at, the data that

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Speaker 1: will influence and shape that decision. A lot of people

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Speaker 1: de emphasizing Friday's payrolls print. We would all love a

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Speaker 1: deeper understanding of whether you will look at that, how

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Speaker 1: you would process that information given the omicron scare as well,

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Speaker 1: and additionally the data you'd be looking at going into

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Speaker 1: the March cool. Yeah, So you know, I heard some

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Speaker 1: of the common earlier from some of your colleagues or

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Speaker 1: tweet people who have tweeted about maximum employment. I think

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Speaker 1: we're there. So really this is an inflation story in

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Speaker 1: my mind, and so what we're looking at is the

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Speaker 1: signs that inflation, at least the precursors to inflation, like

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Speaker 1: the supply chain issues, are starting to mitigate. If I

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Speaker 1: don't see that, then I would be for a more

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Speaker 1: aggressive policy. Right now, I think four twenty five basis

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Speaker 1: point increases this year is appropriate. But there's a lot

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Speaker 1: of risk here. There's risk both to the upside of

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Speaker 1: inflation that is worse than then I would anticipate, but

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Speaker 1: there's also some risks that inflation will start to ease

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Speaker 1: faster than we have anticipated. I think that is a

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Speaker 1: lesser risk and is a good risk to have. But

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Speaker 1: this is where we need to keep flexible with respective policy.

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Speaker 1: We can't define a path right now and just stick

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Speaker 1: to it. We've got to look at the data, and

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Speaker 1: to me, primarily it's the inflation. Can we keep building

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Speaker 1: on that? Then? Just on the inflation front, do you

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Speaker 1: need to see deceleration into March? It's persistence enough to

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Speaker 1: worry if it persisted at this level, with that worry

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Speaker 1: you enough? Which one would it be? Sure? I mean,

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Speaker 1: I think persistence would worry me, continue to worry me,

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Speaker 1: And that's why I'd like to see some signs whether

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Speaker 1: it's actually in the inflation numbers themselves. Whereas I said

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Speaker 1: in the precursors to inflation that we're starting to see

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Speaker 1: some easy of the pressures on wages or the supply

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Speaker 1: chain constraints, etcetera. What would you be looking for a

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Speaker 1: president hu Harker to possibly go fifty basis points? You

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Speaker 1: said that, you know, should we that's less clear? Could

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Speaker 1: we sure? Absolutely? What kind of inflation read? I think

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Speaker 1: we're looking at a fairly significant spike from where we

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Speaker 1: are now in inflation. If inflation stays where it is

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Speaker 1: right now and continues to start to come down, I

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Speaker 1: don't see a fifty basis weren't increased, But if we

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Speaker 1: see a spike, then I think we might have to

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Speaker 1: act more aggressively. Are you concerned about the possibility of

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Speaker 1: a hard landing being dismissed by a lot of feed

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Speaker 1: officials is probably unlikely, and this sort of confidence that

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Speaker 1: they can engineer this. Look, it's always a risk. Let's

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Speaker 1: be clear, it's always a risk. But I think we

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Speaker 1: we actually can do this if we really listen to

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Speaker 1: the data and act appropriately. And again, my first step

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Speaker 1: in acting approprictly is marked stop the paper, stop the

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Speaker 1: balance sheet purchases, and let's start raising rates by twenty

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Speaker 1: five basis points. You in two two twenty adopted a

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Speaker 1: new framework which made you state dependent in terms of

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Speaker 1: moving interest rates. Is that out the window now? Are

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Speaker 1: we back to forecast dependence? Since policy works with a lag, well,

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Speaker 1: there's always you always have to take that into account.

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Speaker 1: But I think in this case, if you just look

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Speaker 1: at the states of our dual mandate, we're there, so

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Speaker 1: we need to act. I mean, I don't with there's

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Speaker 1: back to employment. This is one of my pet peeves. Look,

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Speaker 1: we're probably going to have a bad jobs report in

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Speaker 1: in the end of this week. I mean, just because

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Speaker 1: of Omicron. I mean, it's just simply because of Omicron

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Speaker 1: that said, I mean, and the media will saying I'm

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Speaker 1: not criticizing the media here, but it'll say the economy

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Speaker 1: only created X number of jobs. Now, the economy has

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Speaker 1: created millions of jobs. We just can't fill them. It's

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Speaker 1: a supply constraint and that is not what monetary policy affects.

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Speaker 1: So I think with respect to employment and with respect

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Speaker 1: to inflation, we are there at our dual mandate and

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Speaker 1: that's why we need to act. Well, let me ask

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Speaker 1: you the question I asked Chairman Powell, and that is

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Speaker 1: what is your goal in terms of the inflation rate.

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Speaker 1: It was understood that you were trying to average two

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Speaker 1: percent over time, but he told me you're not trying

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Speaker 1: to go below two percent, which you would have to

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Speaker 1: do to get an average. Yeah. I mean, at some

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Speaker 1: point we'll go below two would be our guests. But

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Speaker 1: we don't have to rush it. I mean, if we

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Speaker 1: can get it in the ballpark, that's good enough. I mean,

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Speaker 1: the measurement are sufficient where if it's slightly above or

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Speaker 1: below two two and a half the one and a half,

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Speaker 1: I worry less right now where we are it is

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Speaker 1: clearly a problem. The President Hunter, I want to try

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Speaker 1: and move the dial on the balance sheet conversation because

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Speaker 1: we really don't have much clarity, and some banks on

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Speaker 1: Wall Street are trying out some pretty big numbers. Mattla Zedlia,

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Speaker 1: Deutsche Banks talking about one trillion dollars of reduction next year,

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Speaker 1: five sixty billion in the back half. You're about four hikes.

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Speaker 1: How does the balance sheet conversation influence that decision? Is

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Speaker 1: it separate to your rate high code? Does it complements it?

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Speaker 1: How does it fit in? Yeah, that's a really good question.

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Speaker 1: So in my mind we have to reassert that the

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Speaker 1: Fed Funds rate is the primary tool of buntary policy,

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Speaker 1: but recognizing that the balance sheet clearly has an effect

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Speaker 1: that ads or removes accommodation. So I would like to

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Speaker 1: get the Fed funds rate up and then start a

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Speaker 1: process of normalization that is like watching paint dry, that

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Speaker 1: has put it in motion, start reducing it. That reduction

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Speaker 1: will be faster and steeper than the last time we've

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Speaker 1: tried it until of course all this happened, and just

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Speaker 1: because the balance sheet is so much larger. But we

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Speaker 1: put that in process, we start reducing the size of

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Speaker 1: the balance sheet and use the FED funds as the

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Speaker 1: tool that we need to adjust if we need to adjust,

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Speaker 1: no question about that. Do you think that you will

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Speaker 1: need to sell assets to get the balid sheet down,

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Speaker 1: particularly on the mortgage side, since the Fed says it

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Speaker 1: wants to hold primarily treasuries and you'll be stuck with

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Speaker 1: mortgages for thirty years if you don't. Yeah, maybe, I

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Speaker 1: mean this is something we're actively looking at right now.

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Speaker 1: No decisions have been made on the balance sheet question.

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Speaker 1: It is why where we're going to take our time.

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Speaker 1: We have some time here right now to think about it,

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Speaker 1: to model it. Uh. Could could we sell assets? Possibly,

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Speaker 1: but right now I wouldn't commit to any of that.

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Speaker 1: Enjoys the analysis. President could just finally from me, do

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Speaker 1: you have a number in mind when you think about

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Speaker 1: balance sheet reduction on a monthly basis, one that would

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Speaker 1: make sense? Can you give us some insights and real

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Speaker 1: time thinking about this? Yeah? Yeah, not yet. I mean

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Speaker 1: I think we have to let that play out. Like

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Speaker 1: I said the analysis, And what matters to me more

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Speaker 1: right now is that we're committed to doing it, and

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Speaker 1: that we're going to commit to doing this for the

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Speaker 1: long run. That is, it's going to take some time

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Speaker 1: to get balance sheet back to whatever normal is. And

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Speaker 1: I know there's an argument about what normal is, and

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Speaker 1: there should be an argument about what normal is because

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Speaker 1: we're not the economy we were before we came into

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Speaker 1: the pandemic. So I can't put this precise number on it,

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Speaker 1: but I think what matters now is that we are committed.

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Speaker 1: I can say I am committed to making sure that

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Speaker 1: we start this process possibly later this year or early

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Speaker 1: in twenty three, and then let it run to get

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Speaker 1: back to normal. This is a real time conversation. You

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Speaker 1: guys are looking for tons of flexibility, Patrick, How could

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Speaker 1: just to find a one from me? You satisfied with

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Speaker 1: how the mark it is discounting some of the communication

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Speaker 1: coming out of central bank right now? You know the

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Speaker 1: markets will will interpret what we say how they want

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Speaker 1: to interpret it, and I think we can be as

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Speaker 1: clear as we can be. At least I'm trying to

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Speaker 1: be as clear as I could be where I think

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Speaker 1: Powerlson should go and I think it's really important that

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Speaker 1: the market participants are seeing the same data we're saying.

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Speaker 1: We're not seeing anything different than what they're saying. It's

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Speaker 1: all question of interpretation and that we can we can

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Speaker 1: disagree on, but at this point we need to let

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Speaker 1: the data play out. President Haka of the Philadelphia FETE,

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Speaker 1: fantastic to catch up with you, say thank you very

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Speaker 1: much for being with us alongside Michael McKay, Tom Kane,

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Speaker 1: Lisa Bramison, Jonathan Pharaoh, Alicia Levine with this head of

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Speaker 1: equity's capital market advisory at B and Y Melon Wealth Management, Alicia,

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Speaker 1: what do you see in the corporate space that will

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Speaker 1: inform the FETE of the tough decisions they have to make. Look,

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Speaker 1: the really interesting thing about earning season so far is

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Speaker 1: that with all the concern about margins and inflationary pressures,

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Speaker 1: actually margins have held up very well in the face

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Speaker 1: of of input costs going higher and employee costs going higher.

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Speaker 1: So that's an important thing because that's what the markets

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Speaker 1: focused on, which is is the inflation out of control?

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Speaker 1: And what will earnings be? Can we project earnings with

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Speaker 1: inflation is high? And the answer so far is yes.

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Speaker 1: And I think that's why you've seen some stabilization in

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Speaker 1: the market, because the fundamentals are actually coming in better

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Speaker 1: than feared two and three weeks ago. So Corporate America

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Speaker 1: is telling you it's still okay. Um. I was shocked

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Speaker 1: to see the margin number and the aggregate and the

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Speaker 1: company's already reported. So that's that's what's stabilizing here. And

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Speaker 1: the other thing is, let me pay. It's an interesting

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Speaker 1: scenario for you. So we're all concerned about Russia, Ukraine

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Speaker 1: and oil prices and have have being a hundred twenty

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Speaker 1: dollar oil sort of destabilized markets. Well, what if it's

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Speaker 1: done right? What if we what if the West says,

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Speaker 1: you know what, we're not going to bring Ukraine in

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Speaker 1: to NATO. Putin gets what he wants without, you know, uh,

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Speaker 1: blood and treasure being wasted and oiled all of a

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Speaker 1: sudden has a different kind of a price. And that's

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Speaker 1: the case that I think the big shock worry to

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Speaker 1: the market is over. And I think that's a very

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Speaker 1: realistic scenario. I'm just going through your sector right down.

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Speaker 1: Some of the style calls just a thematic calls as

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Speaker 1: well by business capital spending coatious on the consumer by

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Speaker 1: Profitable Tank, by industrials, by haalth care, by financials. Where's

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Speaker 1: the energy pace in all this than, Alicia? So we

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Speaker 1: like energy here. We just think that there's been a

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Speaker 1: huge price shift upwards so far, and with the calls

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Speaker 1: in the market for a hundred and twenty to even

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Speaker 1: a hundred and fifty dollar oil price, I think I

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Speaker 1: think that given the scenario, it may not happen, and

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Speaker 1: we may be close to high as we're not there yet.

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Speaker 1: There's still upward pressure on oil prices here, but I

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Speaker 1: think many of the many of much of the move

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Speaker 1: is already done. We like energy, we're strong energy. But

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Speaker 1: if we're talking about adding new capital today, I wouldn't

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Speaker 1: add new capital today simply because the move is over

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Speaker 1: and this expectations for World War three in Europe are

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Speaker 1: probably not going to happen. Alicia. The scenario that you're

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Speaker 1: portraying isn't that optimistic. The idea that we're going to

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Speaker 1: have lower long term run raids in terms of yields,

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Speaker 1: that we have the priced in fed, that we have

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Speaker 1: oil prices that are gonna come back down, and the

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Speaker 1: margin story remaining intact even as you see wage inflation

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Speaker 1: really raging. I wonder how much cost cutting, how much

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Speaker 1: were This really indicates a later cycle type of stage

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Speaker 1: rather than something that is a resurgent economy. So look,

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Speaker 1: we do think we're mid cycle here, and as you've

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Speaker 1: been talking about all morning, this is dancing on the

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Speaker 1: head of a pin for the FED. It's a dynamic economy.

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Speaker 1: It's not linear. These are not linear decision ends. But

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Speaker 1: I think the yield curve has told us a lot

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Speaker 1: in the last few weeks, which is, as rate expectations

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Speaker 1: go higher for the FED funds rate and that two

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Speaker 1: year moves higher, the ten year softens, and so we're

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Speaker 1: now in a position where essentially, if the FED moved

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Speaker 1: fifty basis points in March, which is not our base

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Speaker 1: case scenario, you're going to destabilize rate pricing in the market.

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Speaker 1: And that's the last thing the FED needs to do

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Speaker 1: right now because it limits their hands on the on

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Speaker 1: the out meetings. So we do think you'll get Fed

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Speaker 1: hikes uh March, May, in June, and then we have

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Speaker 1: the FED will have to reassess where we are in

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Speaker 1: the real economy. I think the FED issue here is

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Speaker 1: not so much slow in the economy. It's job is

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Speaker 1: to slow the economy right now because we're frying in oil.

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Speaker 1: It cannot do anything about the supply chain. It can

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Speaker 1: do something about demands. So that is its job right

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Speaker 1: now to soften the inflation picture because that's its mandate.

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Speaker 1: And if it fails at that, at the mandate, that

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Speaker 1: tends that's not going to be good for the institution.

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Speaker 1: They be looking at a plas want to squeeze this

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Speaker 1: in what is that leaf? The banks tride? So look,

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Speaker 1: we we like financials. We prefer the insurance companies here

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Speaker 1: because the insurance companies will do very well. Again, financials

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Speaker 1: have moved strongly. We've seen some of the pricing issues.

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Speaker 1: We think this is the year for be selective. I

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Speaker 1: think it's very difficult to play the sectors. You have

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Speaker 1: to play cash flow, you have to play earnings, and

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Speaker 1: you can't just buy. I think the year of buying

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Speaker 1: an index or buying a sector call is going to

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Speaker 1: be very difficult. You have to buy individual companies here

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Speaker 1: with dividends, cash flow, and earnings power. It's a very

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Speaker 1: complicated year. Yes, we're still bullish, and we do think

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Speaker 1: the Fed cannot go seven times this year, just like

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Speaker 1: the OL curve is telling them that Alicia f B

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Speaker 1: and y Melon Wealth Management. Alicia, thank you. This is

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Speaker 1: a joy. We begin a two hour conversation with Douglas

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Speaker 1: Cass of Sea Breeze here or automby Doug. Let me

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Speaker 1: start out with trading. How was your January? Sea Breeze,

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Speaker 1: which we just started, actually had a modestly up January,

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Speaker 1: which I could pretty well differentiates us. So your your

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Speaker 1: your note this morning is fascinating and basically a lot

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Speaker 1: of it's about being courageous when the fear is out there?

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Speaker 1: How do you judge the when of that when to

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Speaker 1: be courageous given present fear. I tend to look um

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Speaker 1: at um measures of sentiment, um um a AII investor survey,

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Speaker 1: oversold over what that sort of thing. Doug, late last year,

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Speaker 1: mid to late last year on this program, you were

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Speaker 1: notably notably cautious slash barish um. And this is the

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Speaker 1: beginning of this year, certainly, you know kind of I

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Speaker 1: think kind of brought that to the four year Is

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Speaker 1: it time to get more constructive on this equity markets?

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Speaker 1: From your perspective, we got a little more constructive, um,

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Speaker 1: I would say about two weeks ago. Since then, the

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Speaker 1: SMP has rallied by roughly UM two d and twenty

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Speaker 1: SMP points. I know it sounds astonishing, and UM, we're

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Speaker 1: sort of doing it about face now, we're taking advantage

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Speaker 1: of that trading tradeable trading opportunity, which I called it,

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Speaker 1: and I question whether we're in a bear market rally.

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Speaker 1: Investors face a number of dilemmas UH. As mentioned in

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Speaker 1: the previous segment, rates are being raised into a slowing

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Speaker 1: economy multiples UH compression, stag slug flation, sluggish growth, stained inflation,

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Speaker 1: and hot and heightened volatility seems to lie ahead. And

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Speaker 1: I think the strike on the Fed put as much

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Speaker 1: lower than many believe. So UH it's my view that

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Speaker 1: the odds favor that the rally over the last three

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Speaker 1: days of January and into today may have been a

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Speaker 1: bear market rally UM, but not likely the basis for

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Speaker 1: a new bowl market leg UM. Yesterday I sent M

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Speaker 1: Paul Tom Lisa John Um an important chart that I

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Speaker 1: published on Real Money pro where I've been doing a

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Speaker 1: block for twenty four years, and it's the NASTAC index.

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Speaker 1: It has cut through the downside of the fifty two

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Speaker 1: hundred day moving averages and even with the remarkable two

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Speaker 1: day rally is only back approaching the resistance of the

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Speaker 1: two hundred day. So unfortunately I suspect januaries. UH. Market

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Speaker 1: weakness was the first shot across the bow. In is

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Speaker 1: going to be a down year? Frequities? How deep is?

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Speaker 1: It's obviously uncertain. What are you doing with with your capital?

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Speaker 1: You mentioned your your hedge fund. What are you doing

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Speaker 1: with your capital? Are there places to be uh in

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Speaker 1: this mark in a rising interest rate environment, in any

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Speaker 1: slowing economy. We have basically moved from in that long position. UM.

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Speaker 1: And I didn't expect to do it this quickly, Paul,

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Speaker 1: But UM, we take what the market gives us. UM.

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Speaker 1: A walk is as good as a hit, Tom and Um,

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Speaker 1: by the way, thirteen days too, pictures and catchers and

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Speaker 1: the majesty and grace to show up. Yeah, that's a

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Speaker 1: very good question. So there are pockets of opportunity of

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Speaker 1: a large position in the cannabis stocks. UM. Most of

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Speaker 1: our stocks that were long our bottom up stocks UM.

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Speaker 1: Based upon the bottom up analysis, companies like City Group,

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Speaker 1: Federal Express, an interesting biotech company, fiber Gen, etcetera. But

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Speaker 1: on on the whole, UM, I think that the winds

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Speaker 1: of change are growing stronger, and um that that there

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Speaker 1: are problems. I think that the FETE is clearly committed

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Speaker 1: a fighting inflation. I was listening to the interesting Fed

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Speaker 1: worser president interview you had, Um, and we're moving into

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Speaker 1: tighter financial conditions, and I don't believe many, especially the

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Speaker 1: bullish cabal Cabal believe that the power will be very hawkish,

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Speaker 1: and I disagree. I'm convinced he's going to stick to

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Speaker 1: his mandates. Um. You know, the FED and its chairman

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Speaker 1: have become very politicized, and Pal is now effectively part

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Speaker 1: of a liberal administration which is justifiably concerned with social

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Speaker 1: well being for citizens. He listened to any interview that

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Speaker 1: Secretary Yelling gives. You see that clearly, Um, they've continually

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Speaker 1: emphasized recently the pain that the lower classes is going

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Speaker 1: through today and over the last couple of years. So

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Speaker 1: he must be inflation at any cost, and that political

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Speaker 1: viewpoint will likely be matched or more harkish policy. And

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Speaker 1: I don't think this is being understood by many investors do.

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Speaker 1: I want to talk about the charm of Douglas cast

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Speaker 1: Trading and also writing consistently about big tech is a

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Speaker 1: long term vehicle and you've led that with I believe

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Speaker 1: a discussion on Amazon as well. Amazon, we saw Microsoft deliver,

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Speaker 1: we saw Apple deliver Jim Suva's twenty pages on Apple

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Speaker 1: three or four days ago. Is it whether you believe

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Speaker 1: it or not? As a tour to force of looking

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Speaker 1: out five years, how do you treat for fortress or

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Speaker 1: moat tech is Ben Laylor calls it, how do you

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Speaker 1: treat him out five years? When the Montreal Canadians finally

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Speaker 1: get good again. It's really tough because the risk free

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Speaker 1: rate of return because of tightening, um, you know, because

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Speaker 1: of the Federal reserve tightening, uh produces a lower value

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Speaker 1: to present value of their earnings. So the opportunity short

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Speaker 1: term becomes a little bit mooded. But you asked about

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Speaker 1: the long term, and it is remarkable to also use

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Speaker 1: Warren buffets term of a mote their competitive modes of Amazon, Google,

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Speaker 1: will Microsoft and Apple simply get deeper and deeper and

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Speaker 1: are not penetrable anymore? UM. I used to be concerned

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Speaker 1: UH Paul and Tom about the existential threat of regulation,

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Speaker 1: but frankly, any regulation would benefit them because none of

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Speaker 1: the smaller companies or uh, you know, medium sized companies

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Speaker 1: can afford the regulation. Doug, We're gonna have Google report

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Speaker 1: earnings after the close. How do you think about some

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Speaker 1: of those boy those Mega tex stocks, the Amazons, the Apples,

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Speaker 1: the Googles the world that have been so such good

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Speaker 1: performers for so many investors for such a long period

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Speaker 1: of time. How do anything about those over the next

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Speaker 1: couple of years. You know, you mentioned the moat issue,

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Speaker 1: and you certainly hear people talk about motes when they

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Speaker 1: talk about those names. What I try to do is

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Speaker 1: identify which which companies um UM are attractive on a

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Speaker 1: longer term basis, create a core position, and then UM

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Speaker 1: try to successfully and unsuccessfully trade around the core position.

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Speaker 1: That's what I do. UM. Now is not the time

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Speaker 1: at the margin to buy the stocks. I am long

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Speaker 1: Amazon and Google, and I booked them well and I

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Speaker 1: sold Amazon especially well. UM. But you know, the Federal Reserve,

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Speaker 1: as I said, is dancing on the head of a

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Speaker 1: pin and titans and it's tightening into the lattest stage

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Speaker 1: of an economic recovery. And you guys have been talking

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Speaker 1: about cost savings. UM. A lot of companies are going

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Speaker 1: to continue to cut costs, but we're gonna have a

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Speaker 1: steady drum of goods and wage inflation um exacerbated I

429
00:24:37,840 --> 00:24:42,840
Speaker 1: think by persistent and sustained supplied change disruptions, and it's

430
00:24:42,880 --> 00:24:45,800
Speaker 1: going to eat into corporate revenues and profits for for

431
00:24:46,040 --> 00:24:48,920
Speaker 1: what I call the nifty seven you know, um fang

432
00:24:49,000 --> 00:24:55,000
Speaker 1: plus um uh Navidia, etcetera, and um. So, I think

433
00:24:55,000 --> 00:24:59,280
Speaker 1: we're in a problematic environment. It's funny how Guy's price

434
00:24:59,400 --> 00:25:03,560
Speaker 1: changes sent him at four days ago everyone was besides

435
00:25:03,720 --> 00:25:07,639
Speaker 1: himself negative raising cash, and now the SMP has risen

436
00:25:07,640 --> 00:25:10,600
Speaker 1: by two forty points and they're getting a bullion. And

437
00:25:10,640 --> 00:25:14,200
Speaker 1: I think that optimism is as misplaced as a pandemism

438
00:25:14,280 --> 00:25:17,200
Speaker 1: was a week ago. And I think that also conclude

439
00:25:17,200 --> 00:25:21,399
Speaker 1: by saying there are bad habits on the parts of

440
00:25:21,480 --> 00:25:24,919
Speaker 1: many retail and institutional investors over the last couple of years,

441
00:25:25,359 --> 00:25:27,560
Speaker 1: and I think they're going to continue to be challenged

442
00:25:28,160 --> 00:25:31,840
Speaker 1: and rapidly replaced by wisdom, a sense of his history,

443
00:25:31,880 --> 00:25:34,919
Speaker 1: and common sense traits that have lost their relevance but

444
00:25:35,359 --> 00:25:38,520
Speaker 1: likely to regain popularity in the months ahead. So I

445
00:25:38,520 --> 00:25:40,800
Speaker 1: see a trying environment, Doug, we got to leave it.

446
00:25:40,800 --> 00:25:42,679
Speaker 1: There are out of time, Doug cass with us with

447
00:25:42,760 --> 00:25:51,800
Speaker 1: sea breeze. This is a joy. Semestian Maloby is a collective,

448
00:25:51,840 --> 00:25:54,119
Speaker 1: to say the least, with the consulant Foreign Relations, a

449
00:25:54,200 --> 00:25:57,600
Speaker 1: senior fellow. You know him from work on Mr Greenspan,

450
00:25:58,200 --> 00:26:02,480
Speaker 1: work on the hedge fund industry, and now he's tackled

451
00:26:02,960 --> 00:26:05,520
Speaker 1: in a mustard book for this summer. If you're part

452
00:26:05,520 --> 00:26:08,360
Speaker 1: of Global Wall Street and you feel as ignorant as

453
00:26:08,400 --> 00:26:12,280
Speaker 1: I do, then you must address Sebastian Maloby and the

454
00:26:12,359 --> 00:26:15,960
Speaker 1: new and important the Power Law with a beautiful yellow cover.

455
00:26:16,040 --> 00:26:19,800
Speaker 1: You can't miss this Amazon or at your local bookstore.

456
00:26:20,240 --> 00:26:24,080
Speaker 1: On venture capital and the making of our new future. Sebastian,

457
00:26:24,119 --> 00:26:29,639
Speaker 1: congratulations again, are providing clarity on something mysterious when you

458
00:26:29,680 --> 00:26:33,000
Speaker 1: started this project. What was the biggest mystery for you

459
00:26:33,440 --> 00:26:38,600
Speaker 1: of this strange phrase venture capital? The biggest mystery tone

460
00:26:38,680 --> 00:26:42,160
Speaker 1: was how do you even begin to allocate capital when

461
00:26:42,160 --> 00:26:46,000
Speaker 1: you are dealing with startups? There are no quantitative guiding guidelines.

462
00:26:46,040 --> 00:26:49,520
Speaker 1: You can't like, discount the future cash flow because there's

463
00:26:49,560 --> 00:26:52,120
Speaker 1: no cash flow. You can't do book to value because

464
00:26:52,119 --> 00:26:55,120
Speaker 1: there's no book value. What do you have is two

465
00:26:55,200 --> 00:26:58,720
Speaker 1: legged mammals walking into your office with a dream and

466
00:26:59,119 --> 00:27:04,280
Speaker 1: so just that share lack of guide post intellectual blank sheet.

467
00:27:04,359 --> 00:27:06,760
Speaker 1: That's what drew me into the subject. What if I'm

468
00:27:06,840 --> 00:27:10,320
Speaker 1: fascinating is from the beginnings and you cover so well Kliner,

469
00:27:10,400 --> 00:27:12,960
Speaker 1: Perkins and all of it in the stereotypes we all

470
00:27:13,000 --> 00:27:16,879
Speaker 1: hold out to the present day and say soft Bank,

471
00:27:17,000 --> 00:27:19,879
Speaker 1: and you touch on that later in the book as well.

472
00:27:20,320 --> 00:27:25,040
Speaker 1: His venture capital then even remotely the same as venture

473
00:27:25,080 --> 00:27:30,640
Speaker 1: capital now is represented by soft Bank. Well, soft Bank

474
00:27:30,720 --> 00:27:33,960
Speaker 1: is a special special case, and so is a special

475
00:27:34,000 --> 00:27:38,600
Speaker 1: special person, right, I mean he has such a willingness

476
00:27:38,680 --> 00:27:41,359
Speaker 1: to take crazy risk. Now he blew himself up in

477
00:27:41,400 --> 00:27:44,439
Speaker 1: the Nasdak collapse. But at the same time he'd just

478
00:27:44,520 --> 00:27:47,440
Speaker 1: taken that position in Ali Baba, which went from twenty

479
00:27:47,480 --> 00:27:53,720
Speaker 1: million in two thousand to eight billion fourteen years later.

480
00:27:54,200 --> 00:27:56,720
Speaker 1: So I think he said of a case unto himself.

481
00:27:56,800 --> 00:28:00,200
Speaker 1: Maybe the question is like Tiger Global, Right, that kind

482
00:28:00,240 --> 00:28:06,120
Speaker 1: of growth equity investing, which didn't exist maybe fifteen years ago,

483
00:28:06,560 --> 00:28:09,080
Speaker 1: has now become front and center, and that is a

484
00:28:09,080 --> 00:28:12,040
Speaker 1: new departure for venture capital. Sebastion. It seems like a

485
00:28:12,119 --> 00:28:15,280
Speaker 1: lot of money has been flooding inter venture capital with

486
00:28:15,320 --> 00:28:17,640
Speaker 1: the promise that you outline that even if a lot

487
00:28:17,640 --> 00:28:19,640
Speaker 1: of the investments that you make are does there will

488
00:28:19,680 --> 00:28:23,280
Speaker 1: be a couple real shining stars that absolutely are torpedo

489
00:28:23,359 --> 00:28:26,440
Speaker 1: to the top. Is it different now to find those?

490
00:28:26,520 --> 00:28:29,000
Speaker 1: Is it harder to find those at a time when

491
00:28:29,040 --> 00:28:31,840
Speaker 1: the beheemoths of the world I'm thinking the Google's, the

492
00:28:31,840 --> 00:28:35,639
Speaker 1: the facebooks, etcetera. Are buying up so many startups before

493
00:28:35,640 --> 00:28:38,560
Speaker 1: they even get off the ground. Well, one of the

494
00:28:38,560 --> 00:28:40,920
Speaker 1: cool things about this space is that when you're doing

495
00:28:40,960 --> 00:28:43,600
Speaker 1: the really early stuff and you're writing a check for

496
00:28:43,680 --> 00:28:46,680
Speaker 1: five million, ten million, um, you're not going to get

497
00:28:47,000 --> 00:28:49,520
Speaker 1: the big growth players involved in that that it just

498
00:28:49,560 --> 00:28:52,640
Speaker 1: doesn't move the needle for them on their huge portfolios.

499
00:28:53,160 --> 00:28:55,600
Speaker 1: So if you're doing the early stage staff, you have

500
00:28:55,680 --> 00:28:58,080
Speaker 1: a kind of timeline in your mind of five to

501
00:28:58,120 --> 00:29:01,600
Speaker 1: seven years before your exit. Whether the stock market is

502
00:29:01,720 --> 00:29:04,000
Speaker 1: up or down or sideways, what you know, whatever it

503
00:29:04,000 --> 00:29:06,480
Speaker 1: happened to get interest rates, who the president might be,

504
00:29:06,480 --> 00:29:09,040
Speaker 1: it doesn't matter m So you can just basically look

505
00:29:09,040 --> 00:29:11,720
Speaker 1: for what you think is going to be transformative technology. Yes,

506
00:29:12,080 --> 00:29:14,320
Speaker 1: you will get it wrong most of the time because

507
00:29:14,360 --> 00:29:16,600
Speaker 1: that's the nature of the business. It is a power

508
00:29:16,680 --> 00:29:19,680
Speaker 1: law business. Since my title, um, but you know, you

509
00:29:19,720 --> 00:29:22,040
Speaker 1: hope that you will get one or two bets out

510
00:29:22,120 --> 00:29:25,880
Speaker 1: of ten will be exponentially right, and that will more

511
00:29:25,880 --> 00:29:29,560
Speaker 1: than make up your whole portfolios. A lot of people

512
00:29:29,560 --> 00:29:32,479
Speaker 1: are talking about the productivity gap in the United States

513
00:29:32,480 --> 00:29:34,560
Speaker 1: and in the modern world, and basically we are not

514
00:29:34,680 --> 00:29:37,440
Speaker 1: seeing a huge productivity boom, and they say, well, this

515
00:29:37,480 --> 00:29:41,720
Speaker 1: could potentially change if there's some massive technological shift. Based

516
00:29:41,720 --> 00:29:45,160
Speaker 1: on your conversations with venture capitalists, you see that possibility

517
00:29:45,240 --> 00:29:49,080
Speaker 1: percolating right now. Yeah, I mean, I think that you know,

518
00:29:49,320 --> 00:29:54,680
Speaker 1: the stuff about productivity being down is partially a measurement issue.

519
00:29:54,680 --> 00:29:57,800
Speaker 1: When good surprise at zero, as they are with Google Search,

520
00:29:57,840 --> 00:30:00,560
Speaker 1: for example, it doesn't show up in the of activity

521
00:30:00,640 --> 00:30:03,680
Speaker 1: numbers um And I think that you know, if you

522
00:30:03,800 --> 00:30:06,400
Speaker 1: just turn the question around and say, how much do

523
00:30:06,400 --> 00:30:08,360
Speaker 1: you think your life has changed in the last twenty years,

524
00:30:08,640 --> 00:30:10,760
Speaker 1: How do you collect information, how do you think? How

525
00:30:10,760 --> 00:30:13,520
Speaker 1: do you arrive at quiet epiphanies? All these things are

526
00:30:13,520 --> 00:30:16,600
Speaker 1: fundamentally different. So I have a hard time sallowing this

527
00:30:16,680 --> 00:30:19,440
Speaker 1: idea that there's been no innovation to speak of in

528
00:30:19,480 --> 00:30:21,240
Speaker 1: the last couple of decades. I think I think there

529
00:30:21,240 --> 00:30:23,440
Speaker 1: really has been. At the end of the book, Sebastian,

530
00:30:23,480 --> 00:30:26,480
Speaker 1: you have Josh learner of HBS and he's talking about

531
00:30:26,480 --> 00:30:30,400
Speaker 1: a boulevard of broken dreams. And the huge modern question

532
00:30:31,000 --> 00:30:33,600
Speaker 1: is it was a small group of people associated with

533
00:30:33,640 --> 00:30:37,880
Speaker 1: San Francisco and Stanford and it's expanded out to where

534
00:30:37,920 --> 00:30:41,920
Speaker 1: we want retail individuals and others to take part in

535
00:30:42,080 --> 00:30:46,320
Speaker 1: venture capital. I don't understand how the little guy takes

536
00:30:46,360 --> 00:30:50,440
Speaker 1: advantage of the power law. How do they? I think

537
00:30:50,480 --> 00:30:52,640
Speaker 1: they don't, is the honest answer. One of the troubling

538
00:30:52,680 --> 00:30:56,840
Speaker 1: things about the private investing world is that it's it's

539
00:30:56,880 --> 00:30:59,600
Speaker 1: a game for people who are hands on. They're on

540
00:30:59,600 --> 00:31:01,880
Speaker 1: the board of the company. They are super involved. They're

541
00:31:01,880 --> 00:31:04,200
Speaker 1: pretty expert. They understand what the company is making. They

542
00:31:04,200 --> 00:31:08,640
Speaker 1: have an engineering degree. This is not for amateurs um

543
00:31:08,680 --> 00:31:12,200
Speaker 1: and I think this private, hands on venture capital type

544
00:31:12,200 --> 00:31:16,880
Speaker 1: of investment is key to the the progress of the

545
00:31:17,360 --> 00:31:18,880
Speaker 1: you know, an economy where you have a lot of

546
00:31:18,880 --> 00:31:22,320
Speaker 1: intangible capital. We used to have capital goods that you

547
00:31:22,320 --> 00:31:25,600
Speaker 1: could drop on your foot. Now it's services, it's I mean,

548
00:31:25,640 --> 00:31:29,720
Speaker 1: it's it's knowledge, it's software, it's intangible. We need the

549
00:31:29,800 --> 00:31:33,160
Speaker 1: venture capital, but unfortunately the little guy can participate. I'm

550
00:31:33,200 --> 00:31:35,680
Speaker 1: gonna tend more questions. We don't have enough time Sebastian

551
00:31:35,680 --> 00:31:38,560
Speaker 1: Malby comes on foreign relations. The book is the power

552
00:31:38,640 --> 00:31:42,640
Speaker 1: law of venture capital, the making of the new future.

553
00:31:42,680 --> 00:31:45,400
Speaker 1: And what's important is even and there's a lot of notes.

554
00:31:45,480 --> 00:31:48,360
Speaker 1: It's not that intimidating folks on radio. It's a little

555
00:31:48,360 --> 00:31:50,760
Speaker 1: bit thicker than normal. But all I can say is

556
00:31:50,800 --> 00:31:53,240
Speaker 1: this will be the definitive Wall Street read this summer.

557
00:31:53,800 --> 00:31:57,560
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

558
00:31:57,680 --> 00:32:00,720
Speaker 1: us live weekdays from seven to ten a m. Eastern

559
00:32:00,960 --> 00:32:05,000
Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from

560
00:32:05,040 --> 00:32:10,320
Speaker 1: six to nine am for insight from the best in economics, finance, investment,

561
00:32:10,440 --> 00:32:15,480
Speaker 1: and international relations. And subscribe to the Surveillance podcast on

562
00:32:15,560 --> 00:32:19,360
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on

563
00:32:19,480 --> 00:32:23,680
Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg