Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jaily, we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. This is something
Speaker 1: we take great pride in with the leadership of Michael
Speaker 1: McKee Bloomberg Economics and Policy Directive. Also worst questioner of
Speaker 1: Jerome Paul that we know, and that is they are
Speaker 1: not just FED presidents or FED governors, but they are
Speaker 1: real people with true expertise. Patrick Harker is truly extraordinary
Speaker 1: and a voice for technology at the FED. He is
Speaker 1: definitive and operations research. He holds the youngest endowed professorship
Speaker 1: at Wharton in their history. And all I can say,
Speaker 1: Mike is when the FED needs to understand technology and productivity,
Speaker 1: this is the guy they turned to. Well, let's turn
Speaker 1: to Patrick Harker ourselves, and we should mention that along
Speaker 1: with everything else on your resume there you are a
Speaker 1: voting member of the Open Market Committee as an alternate
Speaker 1: for the vacant Boston seat at the present time. So, uh,
Speaker 1: Tom does have to pay attention to what you have
Speaker 1: to say today. Let me start off. I don't agree
Speaker 1: with him on the question of jay Pal So all right,
Speaker 1: well now I can take it out on you. Mary Daily,
Speaker 1: very firm yesterday. We are not behind the curve, do
Speaker 1: you agree? Look at risk on both sides. I mean,
Speaker 1: let's step back. I think it's worth a step back
Speaker 1: and say, why don't we have inflation running away? It's
Speaker 1: run two things supply demand. Uh, the demand is something
Speaker 1: we can influence through monetary policy. The supply constraints people
Speaker 1: and goods less. So in fact, very little can we
Speaker 1: do about that. Two things are happening at the same time.
Speaker 1: So the question is how quickly, and this has always
Speaker 1: been the question, how quickly are the supply chain constraints
Speaker 1: going to leave us? And it looks right now like
Speaker 1: they're not. They're going to take some time. So slowing
Speaker 1: down some demand, just what monetary policy does? I think
Speaker 1: it's appropriate. I don't think we're behind the curve in
Speaker 1: that sense because we don't affect a big part of
Speaker 1: why there is inflation. That said, I do think we
Speaker 1: need to move now to try to control inflation. That
Speaker 1: is something I firmly believe. Well, move now, but then
Speaker 1: move how often after that and how fast that you
Speaker 1: know the questions out there? The fifty basis points in
Speaker 1: March of the seven rate increases proposed by Bank of America,
Speaker 1: Where do you come down on that? So let me again,
Speaker 1: let me step back from it. So we're going to
Speaker 1: stop the tapering in March. I would be supportive of
Speaker 1: point increase in March. Could we do fifty yeah? Should?
Speaker 1: We am a little less convinced to that right now,
Speaker 1: But we'll see how the data turn out in the
Speaker 1: next couple of weeks, and then when we're sufficiently away
Speaker 1: from zero, we can argue with above zero d five
Speaker 1: basis points under basis points. Then we start normalizing the
Speaker 1: balance she start bringing the balanty down, which of course
Speaker 1: will also reduce accommodation. So truly a two step process here. Yes,
Speaker 1: we want to increase the fed country, which is our
Speaker 1: primary tour of monetary pulse. At the same time we
Speaker 1: want to start removing accommodation by shrinking the balance sheet.
Speaker 1: Both things have to happen in tandem. In my mind,
Speaker 1: Let's step into March and then build on your comments
Speaker 1: on the balance sheet, President Harker on March, tell me
Speaker 1: the data that you are looking at, the data that
Speaker 1: will influence and shape that decision. A lot of people
Speaker 1: de emphasizing Friday's payrolls print. We would all love a
Speaker 1: deeper understanding of whether you will look at that, how
Speaker 1: you would process that information given the omicron scare as well,
Speaker 1: and additionally the data you'd be looking at going into
Speaker 1: the March cool. Yeah, So you know, I heard some
Speaker 1: of the common earlier from some of your colleagues or
Speaker 1: tweet people who have tweeted about maximum employment. I think
Speaker 1: we're there. So really this is an inflation story in
Speaker 1: my mind, and so what we're looking at is the
Speaker 1: signs that inflation, at least the precursors to inflation, like
Speaker 1: the supply chain issues, are starting to mitigate. If I
Speaker 1: don't see that, then I would be for a more
Speaker 1: aggressive policy. Right now, I think four twenty five basis
Speaker 1: point increases this year is appropriate. But there's a lot
Speaker 1: of risk here. There's risk both to the upside of
Speaker 1: inflation that is worse than then I would anticipate, but
Speaker 1: there's also some risks that inflation will start to ease
Speaker 1: faster than we have anticipated. I think that is a
Speaker 1: lesser risk and is a good risk to have. But
Speaker 1: this is where we need to keep flexible with respective policy.
Speaker 1: We can't define a path right now and just stick
Speaker 1: to it. We've got to look at the data, and
Speaker 1: to me, primarily it's the inflation. Can we keep building
Speaker 1: on that? Then? Just on the inflation front, do you
Speaker 1: need to see deceleration into March? It's persistence enough to
Speaker 1: worry if it persisted at this level, with that worry
Speaker 1: you enough? Which one would it be? Sure? I mean,
Speaker 1: I think persistence would worry me, continue to worry me,
Speaker 1: And that's why I'd like to see some signs whether
Speaker 1: it's actually in the inflation numbers themselves. Whereas I said
Speaker 1: in the precursors to inflation that we're starting to see
Speaker 1: some easy of the pressures on wages or the supply
Speaker 1: chain constraints, etcetera. What would you be looking for a
Speaker 1: president hu Harker to possibly go fifty basis points? You
Speaker 1: said that, you know, should we that's less clear? Could
Speaker 1: we sure? Absolutely? What kind of inflation read? I think
Speaker 1: we're looking at a fairly significant spike from where we
Speaker 1: are now in inflation. If inflation stays where it is
Speaker 1: right now and continues to start to come down, I
Speaker 1: don't see a fifty basis weren't increased, But if we
Speaker 1: see a spike, then I think we might have to
Speaker 1: act more aggressively. Are you concerned about the possibility of
Speaker 1: a hard landing being dismissed by a lot of feed
Speaker 1: officials is probably unlikely, and this sort of confidence that
Speaker 1: they can engineer this. Look, it's always a risk. Let's
Speaker 1: be clear, it's always a risk. But I think we
Speaker 1: we actually can do this if we really listen to
Speaker 1: the data and act appropriately. And again, my first step
Speaker 1: in acting approprictly is marked stop the paper, stop the
Speaker 1: balance sheet purchases, and let's start raising rates by twenty
Speaker 1: five basis points. You in two two twenty adopted a
Speaker 1: new framework which made you state dependent in terms of
Speaker 1: moving interest rates. Is that out the window now? Are
Speaker 1: we back to forecast dependence? Since policy works with a lag, well,
Speaker 1: there's always you always have to take that into account.
Speaker 1: But I think in this case, if you just look
Speaker 1: at the states of our dual mandate, we're there, so
Speaker 1: we need to act. I mean, I don't with there's
Speaker 1: back to employment. This is one of my pet peeves. Look,
Speaker 1: we're probably going to have a bad jobs report in
Speaker 1: in the end of this week. I mean, just because
Speaker 1: of Omicron. I mean, it's just simply because of Omicron
Speaker 1: that said, I mean, and the media will saying I'm
Speaker 1: not criticizing the media here, but it'll say the economy
Speaker 1: only created X number of jobs. Now, the economy has
Speaker 1: created millions of jobs. We just can't fill them. It's
Speaker 1: a supply constraint and that is not what monetary policy affects.
Speaker 1: So I think with respect to employment and with respect
Speaker 1: to inflation, we are there at our dual mandate and
Speaker 1: that's why we need to act. Well, let me ask
Speaker 1: you the question I asked Chairman Powell, and that is
Speaker 1: what is your goal in terms of the inflation rate.
Speaker 1: It was understood that you were trying to average two
Speaker 1: percent over time, but he told me you're not trying
Speaker 1: to go below two percent, which you would have to
Speaker 1: do to get an average. Yeah. I mean, at some
Speaker 1: point we'll go below two would be our guests. But
Speaker 1: we don't have to rush it. I mean, if we
Speaker 1: can get it in the ballpark, that's good enough. I mean,
Speaker 1: the measurement are sufficient where if it's slightly above or
Speaker 1: below two two and a half the one and a half,
Speaker 1: I worry less right now where we are it is
Speaker 1: clearly a problem. The President Hunter, I want to try
Speaker 1: and move the dial on the balance sheet conversation because
Speaker 1: we really don't have much clarity, and some banks on
Speaker 1: Wall Street are trying out some pretty big numbers. Mattla Zedlia,
Speaker 1: Deutsche Banks talking about one trillion dollars of reduction next year,
Speaker 1: five sixty billion in the back half. You're about four hikes.
Speaker 1: How does the balance sheet conversation influence that decision? Is
Speaker 1: it separate to your rate high code? Does it complements it?
Speaker 1: How does it fit in? Yeah, that's a really good question.
Speaker 1: So in my mind we have to reassert that the
Speaker 1: Fed Funds rate is the primary tool of buntary policy,
Speaker 1: but recognizing that the balance sheet clearly has an effect
Speaker 1: that ads or removes accommodation. So I would like to
Speaker 1: get the Fed funds rate up and then start a
Speaker 1: process of normalization that is like watching paint dry, that
Speaker 1: has put it in motion, start reducing it. That reduction
Speaker 1: will be faster and steeper than the last time we've
Speaker 1: tried it until of course all this happened, and just
Speaker 1: because the balance sheet is so much larger. But we
Speaker 1: put that in process, we start reducing the size of
Speaker 1: the balance sheet and use the FED funds as the
Speaker 1: tool that we need to adjust if we need to adjust,
Speaker 1: no question about that. Do you think that you will
Speaker 1: need to sell assets to get the balid sheet down,
Speaker 1: particularly on the mortgage side, since the Fed says it
Speaker 1: wants to hold primarily treasuries and you'll be stuck with
Speaker 1: mortgages for thirty years if you don't. Yeah, maybe, I
Speaker 1: mean this is something we're actively looking at right now.
Speaker 1: No decisions have been made on the balance sheet question.
Speaker 1: It is why where we're going to take our time.
Speaker 1: We have some time here right now to think about it,
Speaker 1: to model it. Uh. Could could we sell assets? Possibly,
Speaker 1: but right now I wouldn't commit to any of that.
Speaker 1: Enjoys the analysis. President could just finally from me, do
Speaker 1: you have a number in mind when you think about
Speaker 1: balance sheet reduction on a monthly basis, one that would
Speaker 1: make sense? Can you give us some insights and real
Speaker 1: time thinking about this? Yeah? Yeah, not yet. I mean
Speaker 1: I think we have to let that play out. Like
Speaker 1: I said the analysis, And what matters to me more
Speaker 1: right now is that we're committed to doing it, and
Speaker 1: that we're going to commit to doing this for the
Speaker 1: long run. That is, it's going to take some time
Speaker 1: to get balance sheet back to whatever normal is. And
Speaker 1: I know there's an argument about what normal is, and
Speaker 1: there should be an argument about what normal is because
Speaker 1: we're not the economy we were before we came into
Speaker 1: the pandemic. So I can't put this precise number on it,
Speaker 1: but I think what matters now is that we are committed.
Speaker 1: I can say I am committed to making sure that
Speaker 1: we start this process possibly later this year or early
Speaker 1: in twenty three, and then let it run to get
Speaker 1: back to normal. This is a real time conversation. You
Speaker 1: guys are looking for tons of flexibility, Patrick, How could
Speaker 1: just to find a one from me? You satisfied with
Speaker 1: how the mark it is discounting some of the communication
Speaker 1: coming out of central bank right now? You know the
Speaker 1: markets will will interpret what we say how they want
Speaker 1: to interpret it, and I think we can be as
Speaker 1: clear as we can be. At least I'm trying to
Speaker 1: be as clear as I could be where I think
Speaker 1: Powerlson should go and I think it's really important that
Speaker 1: the market participants are seeing the same data we're saying.
Speaker 1: We're not seeing anything different than what they're saying. It's
Speaker 1: all question of interpretation and that we can we can
Speaker 1: disagree on, but at this point we need to let
Speaker 1: the data play out. President Haka of the Philadelphia FETE,
Speaker 1: fantastic to catch up with you, say thank you very
Speaker 1: much for being with us alongside Michael McKay, Tom Kane,
Speaker 1: Lisa Bramison, Jonathan Pharaoh, Alicia Levine with this head of
Speaker 1: equity's capital market advisory at B and Y Melon Wealth Management, Alicia,
Speaker 1: what do you see in the corporate space that will
Speaker 1: inform the FETE of the tough decisions they have to make. Look,
Speaker 1: the really interesting thing about earning season so far is
Speaker 1: that with all the concern about margins and inflationary pressures,
Speaker 1: actually margins have held up very well in the face
Speaker 1: of of input costs going higher and employee costs going higher.
Speaker 1: So that's an important thing because that's what the markets
Speaker 1: focused on, which is is the inflation out of control?
Speaker 1: And what will earnings be? Can we project earnings with
Speaker 1: inflation is high? And the answer so far is yes.
Speaker 1: And I think that's why you've seen some stabilization in
Speaker 1: the market, because the fundamentals are actually coming in better
Speaker 1: than feared two and three weeks ago. So Corporate America
Speaker 1: is telling you it's still okay. Um. I was shocked
Speaker 1: to see the margin number and the aggregate and the
Speaker 1: company's already reported. So that's that's what's stabilizing here. And
Speaker 1: the other thing is, let me pay. It's an interesting
Speaker 1: scenario for you. So we're all concerned about Russia, Ukraine
Speaker 1: and oil prices and have have being a hundred twenty
Speaker 1: dollar oil sort of destabilized markets. Well, what if it's
Speaker 1: done right? What if we what if the West says,
Speaker 1: you know what, we're not going to bring Ukraine in
Speaker 1: to NATO. Putin gets what he wants without, you know, uh,
Speaker 1: blood and treasure being wasted and oiled all of a
Speaker 1: sudden has a different kind of a price. And that's
Speaker 1: the case that I think the big shock worry to
Speaker 1: the market is over. And I think that's a very
Speaker 1: realistic scenario. I'm just going through your sector right down.
Speaker 1: Some of the style calls just a thematic calls as
Speaker 1: well by business capital spending coatious on the consumer by
Speaker 1: Profitable Tank, by industrials, by haalth care, by financials. Where's
Speaker 1: the energy pace in all this than, Alicia? So we
Speaker 1: like energy here. We just think that there's been a
Speaker 1: huge price shift upwards so far, and with the calls
Speaker 1: in the market for a hundred and twenty to even
Speaker 1: a hundred and fifty dollar oil price, I think I
Speaker 1: think that given the scenario, it may not happen, and
Speaker 1: we may be close to high as we're not there yet.
Speaker 1: There's still upward pressure on oil prices here, but I
Speaker 1: think many of the many of much of the move
Speaker 1: is already done. We like energy, we're strong energy. But
Speaker 1: if we're talking about adding new capital today, I wouldn't
Speaker 1: add new capital today simply because the move is over
Speaker 1: and this expectations for World War three in Europe are
Speaker 1: probably not going to happen. Alicia. The scenario that you're
Speaker 1: portraying isn't that optimistic. The idea that we're going to
Speaker 1: have lower long term run raids in terms of yields,
Speaker 1: that we have the priced in fed, that we have
Speaker 1: oil prices that are gonna come back down, and the
Speaker 1: margin story remaining intact even as you see wage inflation
Speaker 1: really raging. I wonder how much cost cutting, how much
Speaker 1: were This really indicates a later cycle type of stage
Speaker 1: rather than something that is a resurgent economy. So look,
Speaker 1: we do think we're mid cycle here, and as you've
Speaker 1: been talking about all morning, this is dancing on the
Speaker 1: head of a pin for the FED. It's a dynamic economy.
Speaker 1: It's not linear. These are not linear decision ends. But
Speaker 1: I think the yield curve has told us a lot
Speaker 1: in the last few weeks, which is, as rate expectations
Speaker 1: go higher for the FED funds rate and that two
Speaker 1: year moves higher, the ten year softens, and so we're
Speaker 1: now in a position where essentially, if the FED moved
Speaker 1: fifty basis points in March, which is not our base
Speaker 1: case scenario, you're going to destabilize rate pricing in the market.
Speaker 1: And that's the last thing the FED needs to do
Speaker 1: right now because it limits their hands on the on
Speaker 1: the out meetings. So we do think you'll get Fed
Speaker 1: hikes uh March, May, in June, and then we have
Speaker 1: the FED will have to reassess where we are in
Speaker 1: the real economy. I think the FED issue here is
Speaker 1: not so much slow in the economy. It's job is
Speaker 1: to slow the economy right now because we're frying in oil.
Speaker 1: It cannot do anything about the supply chain. It can
Speaker 1: do something about demands. So that is its job right
Speaker 1: now to soften the inflation picture because that's its mandate.
Speaker 1: And if it fails at that, at the mandate, that
Speaker 1: tends that's not going to be good for the institution.
Speaker 1: They be looking at a plas want to squeeze this
Speaker 1: in what is that leaf? The banks tride? So look,
Speaker 1: we we like financials. We prefer the insurance companies here
Speaker 1: because the insurance companies will do very well. Again, financials
Speaker 1: have moved strongly. We've seen some of the pricing issues.
Speaker 1: We think this is the year for be selective. I
Speaker 1: think it's very difficult to play the sectors. You have
Speaker 1: to play cash flow, you have to play earnings, and
Speaker 1: you can't just buy. I think the year of buying
Speaker 1: an index or buying a sector call is going to
Speaker 1: be very difficult. You have to buy individual companies here
Speaker 1: with dividends, cash flow, and earnings power. It's a very
Speaker 1: complicated year. Yes, we're still bullish, and we do think
Speaker 1: the Fed cannot go seven times this year, just like
Speaker 1: the OL curve is telling them that Alicia f B
Speaker 1: and y Melon Wealth Management. Alicia, thank you. This is
Speaker 1: a joy. We begin a two hour conversation with Douglas
Speaker 1: Cass of Sea Breeze here or automby Doug. Let me
Speaker 1: start out with trading. How was your January? Sea Breeze,
Speaker 1: which we just started, actually had a modestly up January,
Speaker 1: which I could pretty well differentiates us. So your your
Speaker 1: your note this morning is fascinating and basically a lot
Speaker 1: of it's about being courageous when the fear is out there?
Speaker 1: How do you judge the when of that when to
Speaker 1: be courageous given present fear. I tend to look um
Speaker 1: at um measures of sentiment, um um a AII investor survey,
Speaker 1: oversold over what that sort of thing. Doug, late last year,
Speaker 1: mid to late last year on this program, you were
Speaker 1: notably notably cautious slash barish um. And this is the
Speaker 1: beginning of this year, certainly, you know kind of I
Speaker 1: think kind of brought that to the four year Is
Speaker 1: it time to get more constructive on this equity markets?
Speaker 1: From your perspective, we got a little more constructive, um,
Speaker 1: I would say about two weeks ago. Since then, the
Speaker 1: SMP has rallied by roughly UM two d and twenty
Speaker 1: SMP points. I know it sounds astonishing, and UM, we're
Speaker 1: sort of doing it about face now, we're taking advantage
Speaker 1: of that trading tradeable trading opportunity, which I called it,
Speaker 1: and I question whether we're in a bear market rally.
Speaker 1: Investors face a number of dilemmas UH. As mentioned in
Speaker 1: the previous segment, rates are being raised into a slowing
Speaker 1: economy multiples UH compression, stag slug flation, sluggish growth, stained inflation,
Speaker 1: and hot and heightened volatility seems to lie ahead. And
Speaker 1: I think the strike on the Fed put as much
Speaker 1: lower than many believe. So UH it's my view that
Speaker 1: the odds favor that the rally over the last three
Speaker 1: days of January and into today may have been a
Speaker 1: bear market rally UM, but not likely the basis for
Speaker 1: a new bowl market leg UM. Yesterday I sent M
Speaker 1: Paul Tom Lisa John Um an important chart that I
Speaker 1: published on Real Money pro where I've been doing a
Speaker 1: block for twenty four years, and it's the NASTAC index.
Speaker 1: It has cut through the downside of the fifty two
Speaker 1: hundred day moving averages and even with the remarkable two
Speaker 1: day rally is only back approaching the resistance of the
Speaker 1: two hundred day. So unfortunately I suspect januaries. UH. Market
Speaker 1: weakness was the first shot across the bow. In is
Speaker 1: going to be a down year? Frequities? How deep is?
Speaker 1: It's obviously uncertain. What are you doing with with your capital?
Speaker 1: You mentioned your your hedge fund. What are you doing
Speaker 1: with your capital? Are there places to be uh in
Speaker 1: this mark in a rising interest rate environment, in any
Speaker 1: slowing economy. We have basically moved from in that long position. UM.
Speaker 1: And I didn't expect to do it this quickly, Paul,
Speaker 1: But UM, we take what the market gives us. UM.
Speaker 1: A walk is as good as a hit, Tom and Um,
Speaker 1: by the way, thirteen days too, pictures and catchers and
Speaker 1: the majesty and grace to show up. Yeah, that's a
Speaker 1: very good question. So there are pockets of opportunity of
Speaker 1: a large position in the cannabis stocks. UM. Most of
Speaker 1: our stocks that were long our bottom up stocks UM.
Speaker 1: Based upon the bottom up analysis, companies like City Group,
Speaker 1: Federal Express, an interesting biotech company, fiber Gen, etcetera. But
Speaker 1: on on the whole, UM, I think that the winds
Speaker 1: of change are growing stronger, and um that that there
Speaker 1: are problems. I think that the FETE is clearly committed
Speaker 1: a fighting inflation. I was listening to the interesting Fed
Speaker 1: worser president interview you had, Um, and we're moving into
Speaker 1: tighter financial conditions, and I don't believe many, especially the
Speaker 1: bullish cabal Cabal believe that the power will be very hawkish,
Speaker 1: and I disagree. I'm convinced he's going to stick to
Speaker 1: his mandates. Um. You know, the FED and its chairman
Speaker 1: have become very politicized, and Pal is now effectively part
Speaker 1: of a liberal administration which is justifiably concerned with social
Speaker 1: well being for citizens. He listened to any interview that
Speaker 1: Secretary Yelling gives. You see that clearly, Um, they've continually
Speaker 1: emphasized recently the pain that the lower classes is going
Speaker 1: through today and over the last couple of years. So
Speaker 1: he must be inflation at any cost, and that political
Speaker 1: viewpoint will likely be matched or more harkish policy. And
Speaker 1: I don't think this is being understood by many investors do.
Speaker 1: I want to talk about the charm of Douglas cast
Speaker 1: Trading and also writing consistently about big tech is a
Speaker 1: long term vehicle and you've led that with I believe
Speaker 1: a discussion on Amazon as well. Amazon, we saw Microsoft deliver,
Speaker 1: we saw Apple deliver Jim Suva's twenty pages on Apple
Speaker 1: three or four days ago. Is it whether you believe
Speaker 1: it or not? As a tour to force of looking
Speaker 1: out five years, how do you treat for fortress or
Speaker 1: moat tech is Ben Laylor calls it, how do you
Speaker 1: treat him out five years? When the Montreal Canadians finally
Speaker 1: get good again. It's really tough because the risk free
Speaker 1: rate of return because of tightening, um, you know, because
Speaker 1: of the Federal reserve tightening, uh produces a lower value
Speaker 1: to present value of their earnings. So the opportunity short
Speaker 1: term becomes a little bit mooded. But you asked about
Speaker 1: the long term, and it is remarkable to also use
Speaker 1: Warren buffets term of a mote their competitive modes of Amazon, Google,
Speaker 1: will Microsoft and Apple simply get deeper and deeper and
Speaker 1: are not penetrable anymore? UM. I used to be concerned
Speaker 1: UH Paul and Tom about the existential threat of regulation,
Speaker 1: but frankly, any regulation would benefit them because none of
Speaker 1: the smaller companies or uh, you know, medium sized companies
Speaker 1: can afford the regulation. Doug, We're gonna have Google report
Speaker 1: earnings after the close. How do you think about some
Speaker 1: of those boy those Mega tex stocks, the Amazons, the Apples,
Speaker 1: the Googles the world that have been so such good
Speaker 1: performers for so many investors for such a long period
Speaker 1: of time. How do anything about those over the next
Speaker 1: couple of years. You know, you mentioned the moat issue,
Speaker 1: and you certainly hear people talk about motes when they
Speaker 1: talk about those names. What I try to do is
Speaker 1: identify which which companies um UM are attractive on a
Speaker 1: longer term basis, create a core position, and then UM
Speaker 1: try to successfully and unsuccessfully trade around the core position.
Speaker 1: That's what I do. UM. Now is not the time
Speaker 1: at the margin to buy the stocks. I am long
Speaker 1: Amazon and Google, and I booked them well and I
Speaker 1: sold Amazon especially well. UM. But you know, the Federal Reserve,
Speaker 1: as I said, is dancing on the head of a
Speaker 1: pin and titans and it's tightening into the lattest stage
Speaker 1: of an economic recovery. And you guys have been talking
Speaker 1: about cost savings. UM. A lot of companies are going
Speaker 1: to continue to cut costs, but we're gonna have a
Speaker 1: steady drum of goods and wage inflation um exacerbated I
Speaker 1: think by persistent and sustained supplied change disruptions, and it's
Speaker 1: going to eat into corporate revenues and profits for for
Speaker 1: what I call the nifty seven you know, um fang
Speaker 1: plus um uh Navidia, etcetera, and um. So, I think
Speaker 1: we're in a problematic environment. It's funny how Guy's price
Speaker 1: changes sent him at four days ago everyone was besides
Speaker 1: himself negative raising cash, and now the SMP has risen
Speaker 1: by two forty points and they're getting a bullion. And
Speaker 1: I think that optimism is as misplaced as a pandemism
Speaker 1: was a week ago. And I think that also conclude
Speaker 1: by saying there are bad habits on the parts of
Speaker 1: many retail and institutional investors over the last couple of years,
Speaker 1: and I think they're going to continue to be challenged
Speaker 1: and rapidly replaced by wisdom, a sense of his history,
Speaker 1: and common sense traits that have lost their relevance but
Speaker 1: likely to regain popularity in the months ahead. So I
Speaker 1: see a trying environment, Doug, we got to leave it.
Speaker 1: There are out of time, Doug cass with us with
Speaker 1: sea breeze. This is a joy. Semestian Maloby is a collective,
Speaker 1: to say the least, with the consulant Foreign Relations, a
Speaker 1: senior fellow. You know him from work on Mr Greenspan,
Speaker 1: work on the hedge fund industry, and now he's tackled
Speaker 1: in a mustard book for this summer. If you're part
Speaker 1: of Global Wall Street and you feel as ignorant as
Speaker 1: I do, then you must address Sebastian Maloby and the
Speaker 1: new and important the Power Law with a beautiful yellow cover.
Speaker 1: You can't miss this Amazon or at your local bookstore.
Speaker 1: On venture capital and the making of our new future. Sebastian,
Speaker 1: congratulations again, are providing clarity on something mysterious when you
Speaker 1: started this project. What was the biggest mystery for you
Speaker 1: of this strange phrase venture capital? The biggest mystery tone
Speaker 1: was how do you even begin to allocate capital when
Speaker 1: you are dealing with startups? There are no quantitative guiding guidelines.
Speaker 1: You can't like, discount the future cash flow because there's
Speaker 1: no cash flow. You can't do book to value because
Speaker 1: there's no book value. What do you have is two
Speaker 1: legged mammals walking into your office with a dream and
Speaker 1: so just that share lack of guide post intellectual blank sheet.
Speaker 1: That's what drew me into the subject. What if I'm
Speaker 1: fascinating is from the beginnings and you cover so well Kliner,
Speaker 1: Perkins and all of it in the stereotypes we all
Speaker 1: hold out to the present day and say soft Bank,
Speaker 1: and you touch on that later in the book as well.
Speaker 1: His venture capital then even remotely the same as venture
Speaker 1: capital now is represented by soft Bank. Well, soft Bank
Speaker 1: is a special special case, and so is a special
Speaker 1: special person, right, I mean he has such a willingness
Speaker 1: to take crazy risk. Now he blew himself up in
Speaker 1: the Nasdak collapse. But at the same time he'd just
Speaker 1: taken that position in Ali Baba, which went from twenty
Speaker 1: million in two thousand to eight billion fourteen years later.
Speaker 1: So I think he said of a case unto himself.
Speaker 1: Maybe the question is like Tiger Global, Right, that kind
Speaker 1: of growth equity investing, which didn't exist maybe fifteen years ago,
Speaker 1: has now become front and center, and that is a
Speaker 1: new departure for venture capital. Sebastion. It seems like a
Speaker 1: lot of money has been flooding inter venture capital with
Speaker 1: the promise that you outline that even if a lot
Speaker 1: of the investments that you make are does there will
Speaker 1: be a couple real shining stars that absolutely are torpedo
Speaker 1: to the top. Is it different now to find those?
Speaker 1: Is it harder to find those at a time when
Speaker 1: the beheemoths of the world I'm thinking the Google's, the
Speaker 1: the facebooks, etcetera. Are buying up so many startups before
Speaker 1: they even get off the ground. Well, one of the
Speaker 1: cool things about this space is that when you're doing
Speaker 1: the really early stuff and you're writing a check for
Speaker 1: five million, ten million, um, you're not going to get
Speaker 1: the big growth players involved in that that it just
Speaker 1: doesn't move the needle for them on their huge portfolios.
Speaker 1: So if you're doing the early stage staff, you have
Speaker 1: a kind of timeline in your mind of five to
Speaker 1: seven years before your exit. Whether the stock market is
Speaker 1: up or down or sideways, what you know, whatever it
Speaker 1: happened to get interest rates, who the president might be,
Speaker 1: it doesn't matter m So you can just basically look
Speaker 1: for what you think is going to be transformative technology. Yes,
Speaker 1: you will get it wrong most of the time because
Speaker 1: that's the nature of the business. It is a power
Speaker 1: law business. Since my title, um, but you know, you
Speaker 1: hope that you will get one or two bets out
Speaker 1: of ten will be exponentially right, and that will more
Speaker 1: than make up your whole portfolios. A lot of people
Speaker 1: are talking about the productivity gap in the United States
Speaker 1: and in the modern world, and basically we are not
Speaker 1: seeing a huge productivity boom, and they say, well, this
Speaker 1: could potentially change if there's some massive technological shift. Based
Speaker 1: on your conversations with venture capitalists, you see that possibility
Speaker 1: percolating right now. Yeah, I mean, I think that you know,
Speaker 1: the stuff about productivity being down is partially a measurement issue.
Speaker 1: When good surprise at zero, as they are with Google Search,
Speaker 1: for example, it doesn't show up in the of activity
Speaker 1: numbers um And I think that you know, if you
Speaker 1: just turn the question around and say, how much do
Speaker 1: you think your life has changed in the last twenty years,
Speaker 1: How do you collect information, how do you think? How
Speaker 1: do you arrive at quiet epiphanies? All these things are
Speaker 1: fundamentally different. So I have a hard time sallowing this
Speaker 1: idea that there's been no innovation to speak of in
Speaker 1: the last couple of decades. I think I think there
Speaker 1: really has been. At the end of the book, Sebastian,
Speaker 1: you have Josh learner of HBS and he's talking about
Speaker 1: a boulevard of broken dreams. And the huge modern question
Speaker 1: is it was a small group of people associated with
Speaker 1: San Francisco and Stanford and it's expanded out to where
Speaker 1: we want retail individuals and others to take part in
Speaker 1: venture capital. I don't understand how the little guy takes
Speaker 1: advantage of the power law. How do they? I think
Speaker 1: they don't, is the honest answer. One of the troubling
Speaker 1: things about the private investing world is that it's it's
Speaker 1: a game for people who are hands on. They're on
Speaker 1: the board of the company. They are super involved. They're
Speaker 1: pretty expert. They understand what the company is making. They
Speaker 1: have an engineering degree. This is not for amateurs um
Speaker 1: and I think this private, hands on venture capital type
Speaker 1: of investment is key to the the progress of the
Speaker 1: you know, an economy where you have a lot of
Speaker 1: intangible capital. We used to have capital goods that you
Speaker 1: could drop on your foot. Now it's services, it's I mean,
Speaker 1: it's it's knowledge, it's software, it's intangible. We need the
Speaker 1: venture capital, but unfortunately the little guy can participate. I'm
Speaker 1: gonna tend more questions. We don't have enough time Sebastian
Speaker 1: Malby comes on foreign relations. The book is the power
Speaker 1: law of venture capital, the making of the new future.
Speaker 1: And what's important is even and there's a lot of notes.
Speaker 1: It's not that intimidating folks on radio. It's a little
Speaker 1: bit thicker than normal. But all I can say is
Speaker 1: this will be the definitive Wall Street read this summer.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
Speaker 1: us live weekdays from seven to ten a m. Eastern
Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from
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Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on
Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg