Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
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Speaker 3: So what's the state of the mysterious world of crypto
Speaker 3: now that you can jump in with an ETF? Sandy
Speaker 3: call is head of Digital asset in Investor Advisory Services
Speaker 3: at Franklin Templeton. Our next guest. You know, Gary Gensler
Speaker 3: kind of made it clear of the regulatory approval of
Speaker 3: bitcoin ETFs. That's no sort of implicit endorsement by the regulators,
Speaker 3: I imagine though that hasn't dampened any of the enthusiasm,
Speaker 3: has it?
Speaker 4: No, definitely has not. A record launch for an ETF
Speaker 4: over three billion and that new inflows into the products
Speaker 4: over the last just week.
Speaker 5: And how do you view some of those inflows? Though,
Speaker 5: I'm looking at Bloomberg Data, black Rock and Fidelity dominating
Speaker 5: in terms of flows, both north of a billion. I'm
Speaker 5: looking at least according to the terminal Franklin Templeton closure
Speaker 5: to fifty million. So how does that play out?
Speaker 4: Yeah, I think that it depends who your audience is.
Speaker 4: Out of the gate right now, you're seeing a lot
Speaker 4: of the direct self directed investors coming in and accessing
Speaker 4: this for their own personal portfolios. Moving these new products
Speaker 4: on to the wealth advisory platforms is going to take
Speaker 4: a few months as they do their due diligence see
Speaker 4: how the new product works, and so there will be
Speaker 4: a slower buildup of assets in the discretionarily managed and
Speaker 4: in the professionally managed accounts. And I think you will
Speaker 4: see this continue to grow throughout the coming year, so
Speaker 4: kind of an out of the gate with the self
Speaker 4: directed and then over time you will start to see
Speaker 4: more of the advised assets having an allocation to Bitcoin
Speaker 4: in many of these portfolios.
Speaker 3: What are your fees? Is there a fee war?
Speaker 4: Well, our fees right now are zero, So I don't
Speaker 4: think you can beat that.
Speaker 3: You actually could, but I won't go into that.
Speaker 4: Well, we believe that, you know, we want these early
Speaker 4: investors who come alongside us in our new etf offering
Speaker 4: to really get the one hundred percent full benefit of
Speaker 4: movements in bitcoin. We think we're coming up to an
Speaker 4: important period fundamentally in the bitcoin market, with the upcoming
Speaker 4: having event where the supply is going to tighten systematically.
Speaker 4: This happens through an algorithm, and it's coming right at
Speaker 4: a point where these new ETFs are creating demand in
Speaker 4: the marketplace, and we think it's going to be an
Speaker 4: exciting period for bitcoin. So we want our investors to
Speaker 4: get the full benefit of any price movements that might result,
Speaker 4: and we're not taking any fee. We believe in the
Speaker 4: long term nature of this opportunity and we're willing to
Speaker 4: be in it for the long haul, so we're going
Speaker 4: to wait and take our fees later down the road
Speaker 4: as the product becomes more established.
Speaker 3: I have a host of like wacky questions. You guys
Speaker 3: have ESG offerings. I would imagine, right, okay, so how
Speaker 3: does this conflict with that? Because in order to generate
Speaker 3: this stuff you have to run computers which take gazillions
Speaker 3: of tons of electricity or gigawatts or whatever. That's sort
Speaker 3: of indirect conflict I would imagine with the environmental goals
Speaker 3: of the company.
Speaker 4: You know, intuitively, it would seem to be but what's
Speaker 4: been kind of very exciting about this is that a
Speaker 4: lot of clean energy launches have been held off because
Speaker 4: there has not been a clear use case for them.
Speaker 4: And what we're seeing is a lot of these bitcoin
Speaker 4: miners that have relocated from Russia or from China are
Speaker 4: relocating into areas and they are using clean energy incentives
Speaker 4: that are being offered by the government to build their
Speaker 4: mining facilities. So actually it turns out that bitcoin mining
Speaker 4: is starting to be a use case for introducing clean
Speaker 4: energy technology. And of course not all bitcoin miners are
Speaker 4: at that point, but we're seeing a very positive trend
Speaker 4: in this movement towards cleaner, cleaner users of energy for
Speaker 4: bitcoin mining, which we think is a great thing to see.
Speaker 5: And Sandy you mentioned kind of taking the long term view.
Speaker 5: Eric Balchunis are Bloomberg Intelligence analysts coined it the Cooinentucky Derby.
Speaker 3: Which I'm a big fan of.
Speaker 5: I enjoy betting on horses.
Speaker 3: JT.
Speaker 5: I don't know about you, now, A little pun for you.
Speaker 3: Well, I'll go back to my wacky questions. But it's
Speaker 3: just like I go to the barber shop. That's topic
Speaker 3: dujoure of people who can't afford to lose money and
Speaker 3: who don't know what they're talking about. I don't even
Speaker 3: know this what a bitcoin is. I can't explain it.
Speaker 5: Well, Ceady, I'm guessing I'm just wondering Coinentucky Derby, use
Speaker 5: your punt, whatever pun you want. There are nine new
Speaker 5: spot bitcoin ETFs. How does the race for money impact
Speaker 5: kind of success and whether or not people are going
Speaker 5: to be pulling out of it?
Speaker 4: Yeah, so I look at it this way. There's two
Speaker 4: sets of offerings that are coming to market through these nine.
Speaker 4: I think it's even eleven. One set is coming from
Speaker 4: firms that have been digital natives and have kind of
Speaker 4: grown up in the crypto space. One set is coming
Speaker 4: from traditional asset management firms. I think Franklin Templeton is
Speaker 4: a little unique in that we're actually both right. We
Speaker 4: have been active and operating in the digital crypto native
Speaker 4: space since twenty seventeen. We operating across five different public blockchains.
Speaker 4: We do our own node verification, We really understand and
Speaker 4: are a part of the ecosystem, create our own research
Speaker 4: on individual coins, including bitcoin, and put together portfolios of
Speaker 4: multi cooin portfolios through separately managed accounts that we can
Speaker 4: work with investors to access. So we've been in this
Speaker 4: space for a long time and really understand it. Yet
Speaker 4: we are also a seventy five year old asset manager
Speaker 4: who is trusted and who has been there for clients
Speaker 4: through many market regimes. So I think it's the coming
Speaker 4: together of the crypt natives and the traditional financial services,
Speaker 4: really epitomized by Franklin Templeton, that I think is creating
Speaker 4: the excitement about what's going to happen. And I don't
Speaker 4: know if it's going to be a derby and some
Speaker 4: aren't going to finish the race. I just think it's
Speaker 4: going to be a long race. Right. It's a new
Speaker 4: asset class. Some of your questions are showing people have
Speaker 4: yet to kind of start to understand it. But once
Speaker 4: they do, I think it's hard not to get excited.
Speaker 4: I saw that in my own career when I had
Speaker 4: my AHA moment. It's like my eyes opened and I
Speaker 4: really saw this new opportunity and potential.
Speaker 5: Sandy, this may be a dumb question. Bitcoin trades twenty
Speaker 5: four to seven. If the token crashes on Saturday and Sunday,
Speaker 5: do I wake up Monday morning with a huge loss
Speaker 5: on my TF?
Speaker 4: Well, the good news for you is if the token
Speaker 4: crashes on a Saturday or Sunday. We've got portfolio managers
Speaker 4: and traders trading it on a Saturday and Sunday and
Speaker 4: working to keep the spread between the Bitcoin index and
Speaker 4: what's happening in the ETF in line. So we operate
Speaker 4: twenty four to seven in these markets just like the
Speaker 4: markets operate. So it would be like any market. You know,
Speaker 4: if there's a move over the weekend, you'll see that
Speaker 4: move reflected. But the fact that the ETF is closed
Speaker 4: and the market is open isn't going to be a
Speaker 4: problem in this case because we're running a twenty four
Speaker 4: to seven trading desk around this.
Speaker 3: You you mentioned the next big step that includes derivatives
Speaker 3: with respect to bitcoin.
Speaker 4: That's a lot of people are looking already at derivatives.
Speaker 4: I think that, you know, building the education and understanding
Speaker 4: of the opportunity is more important as the next step
Speaker 4: than really thinking about the next product evolution. I think
Speaker 4: a lot of people have yet to really internalize. We've
Speaker 4: been in a period where we're used to platforms being
Speaker 4: the way of the economy. Network effects are built around
Speaker 4: platforms like Amazon or Uber or airbn be and now
Speaker 4: what we're seeing in the crypto domain is that we're
Speaker 4: seeing protocol based networks right where anyone peer to peer
Speaker 4: can access it. Just like when you type HTTP into
Speaker 4: your browser, that's a protocol. Everyone in the world can
Speaker 4: use that to access the Internet. And these networks that
Speaker 4: are being built like Bitcoin, are protocols that anyone in
Speaker 4: the world can use and everyone can participate in. So
Speaker 4: it's different than a company owning the platform. This is
Speaker 4: all of us collectively owning these new networks, and this
Speaker 4: is a new way to access that ownership. So it's
Speaker 4: an education process and I think that that's where the
Speaker 4: focus should be to really help investors understand why this
Speaker 4: can be an important opportunity for their portfolio.
Speaker 5: Sandy, I got to ask about the Franklin Templeton x profile.
Speaker 5: You've got laser eyes on Ben Franklin.
Speaker 3: I would say, there's not in the marketing department. I
Speaker 3: just make it clear.
Speaker 5: I just want to like some of them's weird third
Speaker 5: tweets that I've seen, even in tweet saying the lawyers
Speaker 5: won't let us respond to comments, but we hear you
Speaker 5: posting about the sixty to forty plus bitcoin. What what
Speaker 5: is the marketing plant like, what's going on.
Speaker 4: Well, this is really you know, as I said, we
Speaker 4: really are part of the crypto made and ecosystem as
Speaker 4: well as being a traditional asset manager, and our analysts,
Speaker 4: interns employees that are in the digital asset unit really
Speaker 4: understand what matters to people in that community, and the
Speaker 4: laser eyes was an important signal to them that we
Speaker 4: stand with them in believing in the future of bitcoin.
Speaker 3: All right, Sandy, thanks for something. I appreciate it. Sandy
Speaker 3: Call had a digital asset in investor advisory Services at
Speaker 3: Franklin Temple. Did I sound too skeptical? It's too harsh.
Speaker 5: Talking to the youth.
Speaker 6: You're listening to the team Kens Live program Bloomberg Markets
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Speaker 3: Well, let's make a deal. What's the outlook for M
Speaker 3: and A in twenty twenty four, Bailey Our next guest
Speaker 3: Mitch Berlin. He's vice chair of America's Strategy and Transactions
Speaker 3: with Ernst and Young, and I gotta say I think
Speaker 3: he wins the prize for the coolest looking office on
Speaker 3: zoom today. Are you looking at question? What are all
Speaker 3: the ribbons in the background.
Speaker 7: They're actually dog show ribbons.
Speaker 5: Oh don't shool, I mean you're interested, right, we've just changed.
Speaker 3: We've just changed the topic. So you're gonna get.
Speaker 7: More accomplished than I am. So you know what kind
Speaker 7: of dogs?
Speaker 3: What are the dogs?
Speaker 7: Portuguese water dogs?
Speaker 3: Oh beautiful, Yeah, those are the ones that are like hypoallergenic.
Speaker 3: They don't show right at his office anyway. Okay, so
Speaker 3: we'll get back on topic. Is this an environment right
Speaker 3: now in twenty twenty four that's conducive to deal making
Speaker 3: and kind of what's driving it?
Speaker 7: It will be?
Speaker 8: So twenty twenty three was a reset to the pre
Speaker 8: pandemic deal volume. So if you look at major deals,
Speaker 8: those are those deals that are above one hundred million.
Speaker 8: There are approximately twelve hundred and fifty in twenty nineteen
Speaker 8: and twelve hundred and fifty in twenty twenty three. So
Speaker 8: we were trying to understand what does M and A
Speaker 8: look like going from there now that we've reset to
Speaker 8: pre pandemic levels. And so we looked at the last
Speaker 8: thirty five years of M and A and we correlated
Speaker 8: that to information such as GDP growth, inflation, corporate profits,
Speaker 8: the bond spreads and such, and we did see a correlation.
Speaker 8: And so if the predictions for those same metrics hold
Speaker 8: true going forward for twenty twenty four, we should see
Speaker 8: about a twelve to thirteen increase in M and A
Speaker 8: over the twenty twenty three numbers.
Speaker 5: Does the feeling I spend most of my day job
Speaker 5: Mitch covering the IPO market, and the main sense is
Speaker 5: that something's got to give? Is that kind of your sense?
Speaker 5: We have a need for deals, We have cash on
Speaker 5: the sidelines, We have companies who are kind of nearing
Speaker 5: the end of their maturity in one sense or another.
Speaker 7: That's exactly right.
Speaker 8: I think that we're at a point now where people
Speaker 8: have been sitting on the sidelines for two years. There
Speaker 8: are a lot of private companies or portfolios or private
Speaker 8: equity that are coming to maturity on their debt to refinance,
Speaker 8: we put them in a very different position from an
Speaker 8: ROI than they are today. So they have to do
Speaker 8: the math and figure out should we monetize now or
Speaker 8: do we take the risk of refinancing hoping that we
Speaker 8: can get a lower rate soon enough that it doesn't
Speaker 8: impact our ROI calculations.
Speaker 3: Okay, so who's coming together in twenty twenty four. You
Speaker 3: don't have to name names, but like, well that would
Speaker 3: be nice, but industries, I.
Speaker 7: Can name that.
Speaker 8: The industry sectors, the sectors that we're going to see
Speaker 8: the most activity are the ones where the deal multiples
Speaker 8: have gone down. Because in a time where you have
Speaker 8: a very high cost of capital and high multiples, it's
Speaker 8: unlikely that you're going to see a significant amount of
Speaker 8: M and A activity. But if you look at the
Speaker 8: sectors where the deal multiples have gone down, that includes
Speaker 8: life sciences and technology, those deal multiples have gone down
Speaker 8: down about eight points each. And if you look at energy,
Speaker 8: those deal multiples have gone down about four points here
Speaker 8: over year.
Speaker 7: Those are the areas where I thought energy it.
Speaker 3: Was pretty much exhausted, like in twenty twenty three with
Speaker 3: all those deals.
Speaker 7: Well there's still and it may not be the major players,
Speaker 7: but there's still players out there, and they're cost of
Speaker 7: the constant capitals high, but the multiples are going down,
Speaker 7: so they can be attractive targets.
Speaker 5: When you're talking life sciences, we saw a number of
Speaker 5: deals coming out of JP Morgan a few weeks ago
Speaker 5: is that biotech. Are we seeing smaller Bolton deals? Are
Speaker 5: we going to see potentially a return of.
Speaker 9: Major M and A.
Speaker 7: You're going to see both.
Speaker 8: I think the when you look at major M and A,
Speaker 8: there's still patent cliffs looming and they'll need to buy
Speaker 8: an R and D pipeline to continue to turn the
Speaker 8: profits that they want to turn. So I think you'll
Speaker 8: see it on both on both sides and some of
Speaker 8: the smaller biotech deals as well.
Speaker 5: What's up with the FTC and some of this antitrust though?
Speaker 5: Is that something that's it feels like every deal has
Speaker 5: some kind of a tie up. I don't.
Speaker 7: Yeah, stuper with that, Yeah, I know.
Speaker 8: It's a good quest. So the new guidelines came out.
Speaker 8: It's been thirteen years or so since they've come up
Speaker 8: with since they've revised the guidelines. The clients that we're
Speaker 8: speaking to understand that it's going to make things a
Speaker 8: little bit more difficult and take longer, but they're not
Speaker 8: shying away from deal making because of many choices. They
Speaker 8: really in many cases, they really don't have a choice,
Speaker 8: and so more will come under the radar because the
Speaker 8: threshold of what they consider to be a movement in
Speaker 8: the consolidation index has tightened, so more will come under
Speaker 8: the radar. They're going to require more information, so the
Speaker 8: timeline to get a deal done is going to take longer,
Speaker 8: so more is going to come under their scrutiny. But
Speaker 8: we are working with clients every day to come up
Speaker 8: with multiple scenarios that they can look at around reshifting
Speaker 8: the portfolio of the combined entity into something that would
Speaker 8: be more appealing to the FTC and DJ Okay.
Speaker 3: You want to weigh in on spirit, I mean, what
Speaker 3: happened there, it's maybe you take not specifically, maybe a
Speaker 3: broader view.
Speaker 8: Well, my guess is that the way that they shift
Speaker 8: to the portfolio of the routes may have not been
Speaker 8: exactly what the FTC is looking for. But it sounds
Speaker 8: like they're going back to the drawing board from the
Speaker 8: From what we're reading in the paper, it sounds like
Speaker 8: they're they're going to go back for another try at it.
Speaker 8: So I imagine they're going to have to reshift their portfolio
Speaker 8: into something that's more appealing.
Speaker 5: Well, looking at I robot that's coming from Europe, are
Speaker 5: they more stringent typically, like what's to read from one
Speaker 5: of the biggest technology companies not being able to buy
Speaker 5: the maker of a robotic vacuum.
Speaker 8: Yeah, so I can't speak on behalf of the FDC.
Speaker 8: By are the European regulators on that one? I think
Speaker 8: the concern was around having a market dominance and being
Speaker 8: able to shut other players out because you know, the
Speaker 8: buyer of that has such a significant marketplace that they
Speaker 8: can control who's competing with their own products.
Speaker 7: And I think that there's some sensitivity around that.
Speaker 3: Okay, So twenty twenty four overall, you think is going
Speaker 3: to be a pretty hot year for M and A,
Speaker 3: Can we say that?
Speaker 7: We do?
Speaker 8: We think again, you know, twelve to thirty percent increase,
Speaker 8: which would be nice because the last over the last
Speaker 8: two years, M and A has gone down thirty to
Speaker 8: forty percent depending on what sector you're looking at.
Speaker 3: And M and A is not just for the big guys.
Speaker 3: You can have much smaller, even businesses you've never heard of,
Speaker 3: right right, and we would And I mean, how does
Speaker 3: that work? How is that different in terms of funding
Speaker 3: or whatever than the big deals.
Speaker 8: Well, the smaller deals are easy to get fund and
Speaker 8: sometimes you can fund them off balance sheet, but you
Speaker 8: probably will see a pickup in some of those smaller
Speaker 8: deals because quite frankly, they're also coming up with maturities
Speaker 8: on their debt that they're trying to figure out how
Speaker 8: to refinance. And often again it's the constant capital is
Speaker 8: too expensive for them. Now they struck these deals five
Speaker 8: years ago, when you know the cost of capital is
Speaker 8: almost free, and now they're paying five six percent.
Speaker 7: That's a very different economic scenario for them.
Speaker 3: Is that is that one of the bigger drivers behind
Speaker 3: these some of these deals that you know, we got
Speaker 3: a big debt coming up, but whatever, and this is
Speaker 3: the way we can fund that.
Speaker 7: It will be for sure.
Speaker 8: They need to exit, they need to get they need
Speaker 8: to refinance that debt, and to to increase that interest
Speaker 8: rate by four or five percent is significant.
Speaker 5: What's going on with private equity?
Speaker 7: Equity?
Speaker 3: Do we call it private equity anymore?
Speaker 6: Though?
Speaker 7: Pe?
Speaker 3: Do we still call it that because it's morphed into
Speaker 3: something else.
Speaker 8: If we change the name, we'd have to change a
Speaker 8: lot of thought leadership. So we'll continue to call it
Speaker 8: private equity. But they're they're in a in a difficult
Speaker 8: position right now because again, their deals are leveraged. There
Speaker 8: were you know, those that were struck five years ago.
Speaker 8: They were probably hoping to monetize by now. But they're
Speaker 8: coming up with the same maturity cliffs, and so they
Speaker 8: have to do the math to say, shouldn't you know,
Speaker 8: should we lower our valuations and try to sell these
Speaker 8: port codes now? Should we refinanced hope that we can
Speaker 8: get refinanced for a lower cost of capital and a
Speaker 8: year or two and keep the valuations high. You have
Speaker 8: to go, you know, you have to go port code
Speaker 8: by port cone, really do the math to see what
Speaker 8: makes sense whether you move now or hold on it.
Speaker 3: Okay, the question everybody's been waiting for, how many dogs
Speaker 3: and what are their names? Games?
Speaker 7: No, so I have five dogs.
Speaker 3: Oh my gosh they are.
Speaker 7: So we got Loot, Tiki, Greta, Berta, and Irma.
Speaker 8: Yes, all right, so if you want a dog, I
Speaker 8: can ship one over to you right away because I
Speaker 8: have too many.
Speaker 5: I will take any and all that I googled. I
Speaker 5: didn't know we have a snowshovel yet, dogging dogside.
Speaker 3: All right, I will leave it there. Mitch Berle and
Speaker 3: Vice chair of America's Strategy and Transactions with Rinstin Young.
Speaker 3: I don't think he's ever going to come back with
Speaker 3: us for that.
Speaker 5: The real question is would you rather have a dog
Speaker 5: or a shovel I'd rather have talk.
Speaker 3: How about you get a dog that you trained to
Speaker 3: shovel you out or something like that.
Speaker 6: You're listening to the tape catch are live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
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Speaker 6: flagship New York station, Just say Alexa Bloomberg eleven.
Speaker 3: Let's take a deeper dive into these risk assets, Skyler
Speaker 3: winand is CIO at Reagan Capital. Let's stretch you off
Speaker 3: with the bubble question. Does this feel like a bubble
Speaker 3: to you?
Speaker 9: It sure does.
Speaker 10: With stocks back to all time highs, short end rates
Speaker 10: up five hundred basis points in the last two years,
Speaker 10: long end rates up two hundred and fifty basis points.
Speaker 10: You do the math on where stocks should be given
Speaker 10: that rise in rates, stocks theoretically should be down all
Speaker 10: boards of forty percent over the last two years.
Speaker 3: Wow, so you just took Bailey's breath.
Speaker 5: Yeah, No, so what breaks than Skyler?
Speaker 9: I'm just looking.
Speaker 5: You know, we've got the for the swaps pricing in
Speaker 5: just under six rate cuts next year or this year.
Speaker 5: We've got a lot of analysts and strategies talking up
Speaker 5: twenty twenty four earnings and looking into twenty twenty five.
Speaker 9: What happens.
Speaker 10: You have to look at leverage first, and the most
Speaker 10: levered players out there are going to break first. We've
Speaker 10: already seen that in banks. Then it goes to private
Speaker 10: equity and very leveraged companies.
Speaker 9: The last folks to lose will be the least.
Speaker 10: Leveraged companies, companies that are using a half a turn
Speaker 10: or maybe over only eternal leverage. So I think the
Speaker 10: market's going to be really bifurcated. You hear a lot
Speaker 10: of folks talk about let's stick to high quality. I
Speaker 10: like that, but look to leverage to break before anything else.
Speaker 5: All right, two questions then, off as Skyler, going back
Speaker 5: to your initial point, are you shorting the market? And
Speaker 5: then are you shorting some of these levered stocks?
Speaker 7: How are you playing that?
Speaker 10: I think you know we're not stock guys, but but
Speaker 10: in my stock investments, I think you know it's it's
Speaker 10: one of two things. A sometimes the only way to
Speaker 10: win is not to play and to wait it out
Speaker 10: and maybe stick in mid to high single digit inc plays,
Speaker 10: but b own the entire market as well, where I
Speaker 10: don't know when the next in Nvidia or Tesla or
Speaker 10: Monster beverage is it going to come along?
Speaker 9: So I want to own them all.
Speaker 3: Who's who's most overleveraged? Is that the right phraseology?
Speaker 7: Definitely?
Speaker 9: Banks?
Speaker 10: You know, banks are are are government sponsored hedge funds
Speaker 10: so to speak, allowed up to twelve x leverage. Now,
Speaker 10: what's happened over the last.
Speaker 3: Time you're talking the majors or regionals or what or
Speaker 3: just the entire.
Speaker 10: Allowed the same leverage. But regionals and community banks got
Speaker 10: a ton of cash in post COVID, post PPP, Right,
Speaker 10: So folks got all this cash, they parked it at
Speaker 10: the banks.
Speaker 9: Banks sat there for eight months. What are we going
Speaker 9: to do?
Speaker 10: Okay, let's go out and start buying treasuries and mortgage bonds.
Speaker 10: What's happened is a lot of those down upwards of
Speaker 10: twenty points, right, And so if you were levering that
Speaker 10: up ten times twelve times, your effective equity now went
Speaker 10: from ten percent down to about four percent, So you're
Speaker 10: upwards of twenty five x leveraged. So what you have
Speaker 10: to look at is you have to look at tangible
Speaker 10: book value, tangible equity, right, and if that percentage is
Speaker 10: at only four or five percent, divide four into one
Speaker 10: hundred that's twenty five x, so you're twenty five x levered.
Speaker 10: So moves like we've seen since the start of the year,
Speaker 10: the bond markets down a point point in a quarter.
Speaker 10: Multiply that times twenty for a regional bank or a
Speaker 10: community bank that owns treasuries and mortgage bonds.
Speaker 3: So who's who's least leverage? Then, on the opposite end
Speaker 3: of the.
Speaker 10: Spectrum, JP Moore, the big guys, the big guys who
Speaker 10: had a lot of money, they took it in. They
Speaker 10: focused on on fee paying product product like credit cards.
Speaker 10: They weren't immediately incentivized to go out and buy really
Speaker 10: really long duration paper and so on the flip side
Speaker 10: of the large guys, Via of Alcy has huge amounts
Speaker 10: of unrealized loss of sitting on their balance sheet. JP
Speaker 10: Morgan looks like a genius because they didn't really go
Speaker 10: and invest in all that all of that money into
Speaker 10: you know, Fanny to Fanny two point five qpon paying mortgages,
Speaker 10: which two years ago the market thought everybody was going
Speaker 10: to refinance, and something like seventy percent.
Speaker 9: Of all of all mortgages.
Speaker 10: Have been issued in the last two years, So now
Speaker 10: the market thinks nobody's ever going to refinance again, nobody's
Speaker 10: ever gonna move. Everybody's stuck in these two and a
Speaker 10: half percent qpon mortgages.
Speaker 9: So it's who owns that stuff and who doesn't?
Speaker 10: And JP Morgan stuck really short duration, and now they
Speaker 10: you know, they're they're coming out ahead of everybody. You know,
Speaker 10: the time to own money markets and T bills, honestly
Speaker 10: was when rates were zero, not when rates are at
Speaker 10: five and a quarter five and a half.
Speaker 5: Well, sky that we've talked a lot about what you
Speaker 5: don't like, what do you like?
Speaker 10: So now there's two sides of the coin, in terms
Speaker 10: of equities and in terms of real estate. Most things,
Speaker 10: it's do you want to be the equity holder or
Speaker 10: the lender? Now is a great time to be a lender, okay,
Speaker 10: And you can be a lender on real estate.
Speaker 9: You can be a lender to.
Speaker 10: Equities i e. Bonds that can you can be a
Speaker 10: lender to municipalities. So now is as good of a
Speaker 10: time as ever to lend. The market's been hoping. Savers
Speaker 10: have been waiting for five plus percent yields on high
Speaker 10: quality fixed income for what sixteen years now, and it's
Speaker 10: here we should be jumping into this like Scrooge mcd up.
Speaker 3: Okay, I've always been told you don't fight the fad,
Speaker 3: but certainly the bond market has been fighting the FED,
Speaker 3: or so it would seem your impression. Get a been
Speaker 3: a minute left.
Speaker 10: Yeah, the market, the FED has been saying for the
Speaker 10: last two years now, but we have been There's going
Speaker 10: to be a lot of pain, right, and we've seen pain.
Speaker 10: Bonb market was down thirteen percent last year, came back
Speaker 10: the last two months of or I'm sorry twenty twenty two,
Speaker 10: came back the last two months of twenty twenty three
Speaker 10: to make it a positive year. And the Fed is
Speaker 10: still saying rates are only going to drop two to
Speaker 10: three times this year. Yet the market has priced in
Speaker 10: six drops this year, in eight drops over the next
Speaker 10: eighteen months.
Speaker 9: So it's a really good time to sit.
Speaker 10: In floating rate paper that'll hugely benefit from the FED.
Speaker 10: What's the FED saying happening versus what the market is saying.
Speaker 10: If you're in fixed rate paper right now, what you're
Speaker 10: along is rates drop being seven, eight, nine times over
Speaker 10: the next eighteen months.
Speaker 3: We'll a letle bit there. Skyler, weinmand the CIO at
Speaker 3: Reagan Capital.
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Speaker 3: They always told me don't fight the Fed, but it
Speaker 3: looks like somebody's fighting the Fed. At least the bond
Speaker 3: market is with the markets, and the FED interact with
Speaker 3: how they're going to interact. In twenty twenty four, Hans
Speaker 3: Olsen is CIO at Fiduciary Trust Company, joining us now
Speaker 3: I think from Boston to discuss so the market, as
Speaker 3: I said, the bond market at least is fighting the FED.
Speaker 3: This has set us up for some kind of disaster.
Speaker 11: Now, you know, I do think that this market is
Speaker 11: certainly overbought and overconfident, and I think you see it
Speaker 11: bought a view when you look at sort of the
Speaker 11: the S and p's RSI right, the relative strength. It
Speaker 11: has had one heck of a run and it's corrected
Speaker 11: a bit from that, but now it looks like it's
Speaker 11: making another run to a real overbought position, and the
Speaker 11: overconfident bit is really clean, clearly seeing when you look
Speaker 11: at the difference between what the market expects for rate
Speaker 11: cuts and what the FED is telegraphing, and so far
Speaker 11: the economy is suggesting that perhaps the Fed is more
Speaker 11: right than than is the market.
Speaker 5: We were talking about it this morning. What do you
Speaker 5: make of the University of Michigan sentiment data and how
Speaker 5: does that kind of impact your view on the path
Speaker 5: forward for markets and also the Fed.
Speaker 11: Yeah, that's that's a good question. I tend to focus
Speaker 11: on what people do versus what they say, and especially
Speaker 11: in markets, right, you follow the money and without a doubt,
Speaker 11: I mean it was it was a good read. I
Speaker 11: look back at what happened in with retail sales in
Speaker 11: December and that was pretty good. If you look at
Speaker 11: what's happening at with excuse me, with employment, that's also
Speaker 11: quite good. So people I think are in pretty good
Speaker 11: rude economic health. At the moment, housing looks like it
Speaker 11: is going to be just fine exception of today's numbers.
Speaker 11: But I think if you look forward permits in the like,
Speaker 11: that all suggests that the economy is and rude health.
Speaker 11: So if that is the case, then one has to
Speaker 11: rethink sort of the timing and the extent of the
Speaker 11: interest rate cuts. And as you know, that's sixteen percent
Speaker 11: run toward in the end of twenty twenty three was
Speaker 11: powered in large part by expectations around rates. It wasn't
Speaker 11: powered by earnings.
Speaker 3: So we are headed for soft landing, no landing, hard landing,
Speaker 3: And which one of those scenarios do you think it's
Speaker 3: going to be and what is that going to mean
Speaker 3: for risk assets?
Speaker 11: Man, John, That's an interesting question because if I had
Speaker 11: told you last year at this time that we would
Speaker 11: have interest rates where they were without some sort of
Speaker 11: resetting of economic activity or certainly in the marketing thought
Speaker 11: it'd be back barking mad. But that's exactly what happened.
Speaker 11: So last year in many respects, was a year of
Speaker 11: no landing because we didn't hit the FEDCE target and
Speaker 11: market was fine and the economy was fine. I think
Speaker 11: in many respects there's a good chance that this year
Speaker 11: is going to be a year of either a softish
Speaker 11: landing or indeed possibly no landing, maybe a go round
Speaker 11: right where we don't hit that FED target. The economy
Speaker 11: is actually stronger than people are giving it credit for
Speaker 11: right now, and the markets can do pretty well with that.
Speaker 11: I think, though, the way that you make money in
Speaker 11: that environment is different than the way that you made
Speaker 11: it last year. Returns last year, we're all driven by
Speaker 11: a multiple expansion, and it really happened in Q four
Speaker 11: on the belief of rape cut. So really that powered,
Speaker 11: but it was not powered, was not assisted at all
Speaker 11: by earnings. This year, I think it has to be
Speaker 11: assisted by earnings, so and it's I'm not sure that
Speaker 11: we can expect much on the multiple expansion front. So
Speaker 11: this is the year where I think stock picking really
Speaker 11: starts to matter. A focus on profits is probably the.
Speaker 12: Way to go here, so you get away from necessarily
Speaker 12: incredibly high valuations but more high quality profitable companies being
Speaker 12: the prominent feature that people should be emphasizing in their
Speaker 12: equity portfolioers this year.
Speaker 5: Yeah, Hans, let's stick on that note in terms of
Speaker 5: what areas you do, Like you mentioned profitability, maybe lower multiples.
Speaker 5: What areas, industries or sectors are you liking for twenty
Speaker 5: twenty four when it comes to the equity market.
Speaker 11: Yeah, I think it's important because it'd be easy to
Speaker 11: talk sectors, but even within each sector, there are companies
Speaker 11: that have these features of what you would want this year.
Speaker 11: So even some of the the higher valued sectors, you
Speaker 11: would find companies that are incredibly profitable, really good allocation
Speaker 11: of capital uh and which will drive some nice returns.
Speaker 11: I think from a sector standpoint at this juncture, you know, software, banks,
Speaker 11: oil and gas computers, those would be areas that we
Speaker 11: can see companies living in that have the features that
Speaker 11: we want. And you can see that if you drill
Speaker 11: down into companies like an Exxon Mobile of Berkshire, UH
Speaker 11: and Nvidia and the like. These are these are companies
Speaker 11: that you know they should have the wind at their
Speaker 11: back because the earnings are there and they're likely to grow.
Speaker 11: So so I think that's how I would come at it, rather.
Speaker 12: Than just sort of do a you know, the the
Speaker 12: passive s and P five hundred exposure.
Speaker 3: If we agree we're in a disinflationary environment, what does
Speaker 3: that do to earnings and sales.
Speaker 11: Yeah, that's that's an interesting question because it's disinflationary to
Speaker 11: what right, So if we went from nine to three,
Speaker 11: I think we've seen that largely play out. If it
Speaker 11: goes from you know, three down to where it had
Speaker 11: been for the last five or six years, I'd be
Speaker 11: in another case. But I don't think that that's going
Speaker 11: to happen. I think it's really going to be now
Speaker 11: about margins and earnings growth. And to the extent that
Speaker 11: your cost of goods sold has some mixture of fixed
Speaker 11: in it versus floating, right, so you're not as susceptible
Speaker 11: to your input costs rising as much. If you've hedged
Speaker 11: some of your inputs and the like, you can actually
Speaker 11: interestingly see your earnings rise in an environment where there's
Speaker 11: a bit higher inflation. So the details will matter in
Speaker 11: an environment like this.
Speaker 3: Thanks a lot. I appreciate it. I was gonna say,
Speaker 3: snowy Boston, but not yet. It's not its way Hans
Speaker 3: I bet he has a shovel cio fiduciary trust company
Speaker 3: joining us from Boston. Right now, you're listening to the tape.
Speaker 6: Can's our live program Bloomberg Markets weekdays at ten am
Speaker 6: Eastern on Bloomberg Radio, the tune It app, Bloomberg dot Com,
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Speaker 6: say Alexa play Bloomberg eleven thirty.
Speaker 3: Bubble or no bubble. That's kind of the question that
Speaker 3: raises for me. Brian veddig Is, the president at MJP, advises.
Speaker 3: He joins us, Now, from where are you Connecticut, Westborth, Connecticut. Job, what'spury?
Speaker 3: Oh lovely to discuss the outlook for the market. So
Speaker 3: what's say you when I say, oh, my gosh, maybe
Speaker 3: a bubble, Well.
Speaker 13: I don't think that's necessarily true, John, when considering all
Speaker 13: parts of the market. I mean, we look back at
Speaker 13: last year. We know that the majority of the games
Speaker 13: came from megacap tech, and we did see a broadening
Speaker 13: out in the market in the fourth quarter. But really,
Speaker 13: when you look at areas like small cap stocks, some
Speaker 13: value oriented sectors like healthcare and industrials, I really think
Speaker 13: there's some other parts of the market that again, you know,
Speaker 13: to the points that you and barely mentioned about, you know,
Speaker 13: earnings growth, you know, in twenty four I think the
Speaker 13: market's going to come back to fundamentals, and we're looking
Speaker 13: at some earnings numbers over the balance of the year
Speaker 13: that can help those areas quit a little bit of
Speaker 13: catch up. While at the same point in time, I
Speaker 13: still think there's that longer term trend with AI innovation
Speaker 13: that that is going to play out in aspects of
Speaker 13: the technology sector.
Speaker 5: Yeah, I wanted to ask talking about the ketchup trade
Speaker 5: has been something I feel like has been top of
Speaker 5: mind since really the October bottom second best performer in
Speaker 5: the SP five hundred is in Vidia, up seventeen percent.
Speaker 5: Obviously that coming after the TSM number. So when you
Speaker 5: look at that broadening, what areas are going to are
Speaker 5: we going to see strength broadening out to and what
Speaker 5: does that mean for the likes of an Invidia, which
Speaker 5: still seems to be red hot.
Speaker 13: That's a great point, Bailey, I think on the video
Speaker 13: side of the house, I'll just address that first. I mean,
Speaker 13: it's that expectation of growth moving forward. So when you
Speaker 13: look at the forward pe for Navidia, as much as
Speaker 13: the share price has had a nice run, the forward
Speaker 13: price to earnings ratio is actually quite reasonable, you know,
Speaker 13: with a twenty handle or so. But when we talk
Speaker 13: about the other areas of the market, let's just be
Speaker 13: fair when we take a look at that disparity of return,
Speaker 13: going back to the S and P versus let's say
Speaker 13: the even weight SMP for example, we know that a
Speaker 13: market cap S and P forty percent is in those
Speaker 13: those magnificent seven names or so, and when we look
Speaker 13: at an even weight and we really strip that out,
Speaker 13: we see that the forward price to earnings ratio of
Speaker 13: the market is actually quite reasonable in some sectors under
Speaker 13: their historical average, so healthcare, small caps, mid cap stocks,
Speaker 13: looking at some areas in the industrial complex. I mean,
Speaker 13: these are things that we know that there's some some
Speaker 13: breath and some trends there and the outlooks for growth
Speaker 13: are actually looking quite promising.
Speaker 3: Okay, since you guys brought up AI got to ask
Speaker 3: when does it start to jail in terms of the sales. Well,
Speaker 3: we've already seen that you mentioned in video. But along
Speaker 3: with the productivity gains that are promised by this new technology,
Speaker 3: when does it all come together?
Speaker 13: Yeah, no, I think it's all that's a great question.
Speaker 13: It's almost like when does it come together where we
Speaker 13: start to see, you know, market expectations on rate cuts
Speaker 13: line up with reality from the FED, right, So there's
Speaker 13: so I think that the AI trend is a five
Speaker 13: to seven year trend. I mean there's a there's a
Speaker 13: high multiple of sales that's being put on a lot
Speaker 13: of these companies right now, which we are a little
Speaker 13: wary of, and you have to be selective. I think
Speaker 13: it's looking at it from that productivity point, which is
Speaker 13: why we like areas in technology that are focusing on
Speaker 13: workflow management, data management, thinking about how AI might create
Speaker 13: more productive outcomes when you think about cybersecurity, you.
Speaker 7: Know, things of that nature.
Speaker 13: Then just saying hey, we're going to invest in you know,
Speaker 13: a certain aspect of hardware that's probably going to be
Speaker 13: used because you know AI is going to be coming,
Speaker 13: I think. I think it's a longer term trend. So
Speaker 13: will there be volatility in the space, Will there be
Speaker 13: the natural winners and losers kind of play out over
Speaker 13: the next five to seven years. Yeah, we think so.
Speaker 13: But don't forget that again, This is the point I'm
Speaker 13: trying to make, going back to Bailey's questions, don't forget
Speaker 13: about some of those other areas that have stable balance,
Speaker 13: these predictable cash flow margins, that look strong and they're
Speaker 13: still innovation. And that's why I want to remind people
Speaker 13: about healthcare, because healthcare did not perform well last year,
Speaker 13: But it's one of those those areas of the market
Speaker 13: where you're concerned about economic expansion. This year can be defensive,
Speaker 13: but we know there's a lot of innovation coming from
Speaker 13: healthcare companies as well that could be supportive for growth
Speaker 13: moving forward.
Speaker 5: But where in healthcare do you particularly like Are we
Speaker 5: talking biotech, medtech that seems to be where innovation would
Speaker 5: be versus something like managed care.
Speaker 13: A great point I think to be selective in healthcare,
Speaker 13: we are looking at areas of some of the biotech,
Speaker 13: some of the big pharma space areas because the big
Speaker 13: pharma companies they're building out, they're going out and acquiring
Speaker 13: other companies right now and building out their pipeline for
Speaker 13: new therapies and drugs. And I think as rates change,
Speaker 13: we might see a little bit more in that m
Speaker 13: and A space from healthcare. And I also think at
Speaker 13: the same point in time, we have a demographic shift
Speaker 13: that we know that is going to continue to play
Speaker 13: out in the United States. The baby boomers, they're not
Speaker 13: getting any younger they're still demand for services and care
Speaker 13: that's out there. So even looking at some of the
Speaker 13: larger healthcare networks, healthcare providers, insurance providers, I know they've
Speaker 13: had a rough week this week when considering concerns around
Speaker 13: Medicare costs. But those that can execute and move through that,
Speaker 13: I think also are areas of healthcare that makes a
Speaker 13: lot of sense A bailable.
Speaker 3: Yeah, and I got to I'm not a brown nose,
Speaker 3: but I got to point out the bosses. The big
Speaker 3: boss is editorial today. The healthcare system, he writes, is
Speaker 3: more short staff than ever, even as it faces its
Speaker 3: next big shock and aging population. So tackle that one
Speaker 3: from an investment perspective, since you brought up the healthcare industry.
Speaker 7: Yeah, definitely.
Speaker 13: I mean, I think there is a concern around let's
Speaker 13: say investing and let's say hospitals that are trying to
Speaker 13: run their staffs at certain margin. But we have a
Speaker 13: labor shortage, and we also have issues in quality of
Speaker 13: care which might suffer, which that then causes demand shifts
Speaker 13: around that space. I'm focusing more on the ways to
Speaker 13: deliver the care and helping them to support productivity, whether
Speaker 13: that might be software and technology in the healthcare space again,
Speaker 13: the insurance providers, you know, helping to provide a wider
Speaker 13: network or better products or policies that people can take
Speaker 13: advantage of. So I'm not focused so much on the
Speaker 13: labor side. I'm looking more at the solution side to
Speaker 13: try to get through some of these problems.
Speaker 3: John, all right, Brian, thanks a lot. We'll leave it there.
Speaker 3: President at MJP Advisors from Lovely Westport, Can I think
Speaker 3: that's isn't that where Martha Stewart lives? Head on Sport.
Speaker 3: You're not that demographic. I'm not going to you're from California.
Speaker 3: I'm in California.
Speaker 7: Kids.
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