1 00:00:04,760 --> 00:00:08,080 Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 2 00:00:08,119 --> 00:00:11,159 Speaker 1: Along with my co host Lisa Abramowitz. Each day we 3 00:00:11,280 --> 00:00:14,480 Speaker 1: bring you the most important, noteworthy, and useful interviews for 4 00:00:14,520 --> 00:00:16,880 Speaker 1: you and your money, whether at the grocery store or 5 00:00:16,920 --> 00:00:19,960 Speaker 1: the trading floor. Find the Bloomberg P and L Podcast 6 00:00:20,000 --> 00:00:29,480 Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. Well recently, 7 00:00:29,760 --> 00:00:34,800 Speaker 1: David Einhorn, who is well respected hedge fund manager frequently 8 00:00:34,840 --> 00:00:39,600 Speaker 1: gets calls right, suggested that General Motors should divide its 9 00:00:39,640 --> 00:00:43,159 Speaker 1: shares into two classes, one that would be for capital 10 00:00:43,159 --> 00:00:46,479 Speaker 1: appreciation and the other which would be for its hefty dividend. 11 00:00:46,560 --> 00:00:51,600 Speaker 1: His goal to unlock value in these shares. This raised 12 00:00:51,600 --> 00:00:53,440 Speaker 1: a lot of questions for Nick Cholas, who joins us 13 00:00:53,560 --> 00:00:56,440 Speaker 1: right now. He's chief market strategistic converge x UH and 14 00:00:56,480 --> 00:00:59,680 Speaker 1: wrote a fascinating piece about how this highlights some of 15 00:00:59,720 --> 00:01:04,720 Speaker 1: the broken aspects of the public equity market. Nick, Yeah, 16 00:01:04,959 --> 00:01:07,720 Speaker 1: that's exactly right, because as I started thinking about iron 17 00:01:07,720 --> 00:01:10,520 Speaker 1: Horn's proposal, I realized that it's really part of a continuum, 18 00:01:10,760 --> 00:01:13,120 Speaker 1: and that you've seen other kind of little chips away 19 00:01:13,160 --> 00:01:16,360 Speaker 1: at the classical equity market structure over the past decade 20 00:01:16,480 --> 00:01:18,560 Speaker 1: or so. So you look at Snap with its recent 21 00:01:18,600 --> 00:01:21,440 Speaker 1: I p O not offering voting shares, You see dual 22 00:01:21,440 --> 00:01:23,880 Speaker 1: classes of stock, and a lot of the most successful 23 00:01:23,920 --> 00:01:26,839 Speaker 1: tech companies Google, Facebook and so forth, and you begin 24 00:01:26,880 --> 00:01:29,280 Speaker 1: to realize that there's something going on much bigger than 25 00:01:29,360 --> 00:01:32,120 Speaker 1: just GM iron horning in one company and a debate 26 00:01:32,120 --> 00:01:34,840 Speaker 1: about cyclical companies and valuations. Right, and you point to 27 00:01:34,880 --> 00:01:38,280 Speaker 1: also initial public offerings and how much uh, the total 28 00:01:38,400 --> 00:01:40,479 Speaker 1: volume of i p O s in any given year 29 00:01:40,640 --> 00:01:43,480 Speaker 1: has gone down dramatically over the past a few decades. 30 00:01:43,600 --> 00:01:45,240 Speaker 1: And this is also an issue that Jay Clayton, who 31 00:01:45,240 --> 00:01:48,480 Speaker 1: has been nominated to be SEC chair, raised in front 32 00:01:48,520 --> 00:01:51,000 Speaker 1: of Congress when he testified, saying that this is one 33 00:01:51,040 --> 00:01:53,760 Speaker 1: area that he wants to address. Why do you think 34 00:01:54,080 --> 00:01:57,200 Speaker 1: that there is a sort of structural flaw that is 35 00:01:57,360 --> 00:02:00,600 Speaker 1: increasingly prevalent in public equity markets? Yeah, this is the 36 00:02:00,680 --> 00:02:03,760 Speaker 1: single most important question nobody really talks about very much, 37 00:02:03,760 --> 00:02:07,480 Speaker 1: because the key issue is that public equity shareholders must 38 00:02:07,520 --> 00:02:10,520 Speaker 1: have access to the very best companies that a society 39 00:02:10,600 --> 00:02:13,079 Speaker 1: can create. The reason is if they don't have access 40 00:02:13,080 --> 00:02:15,440 Speaker 1: to that, they're just stuck with the losing companies because 41 00:02:15,440 --> 00:02:17,960 Speaker 1: the nature of disruption is such that the new companies 42 00:02:18,000 --> 00:02:21,480 Speaker 1: started out in California go on to grow and really 43 00:02:21,520 --> 00:02:23,920 Speaker 1: impinge on the growth of other companies that are publicly 44 00:02:23,960 --> 00:02:25,799 Speaker 1: held currently. So you have to be able to buy 45 00:02:25,840 --> 00:02:29,120 Speaker 1: the new ones to basically benefit from society's innovation. If 46 00:02:29,120 --> 00:02:31,600 Speaker 1: you don't have access to them, then over time investors 47 00:02:31,639 --> 00:02:33,679 Speaker 1: and take their money and go away because they don't 48 00:02:33,680 --> 00:02:35,040 Speaker 1: want to own just the losers, they want to own 49 00:02:35,040 --> 00:02:37,799 Speaker 1: the winners as well. Matt Levin and Bloomberg view columnists 50 00:02:37,800 --> 00:02:40,480 Speaker 1: here and I were talking about this extensively last week, 51 00:02:40,639 --> 00:02:43,239 Speaker 1: and we were talking about, you know, how the public 52 00:02:43,280 --> 00:02:46,920 Speaker 1: equity markets have been part of the American dream of 53 00:02:47,000 --> 00:02:50,440 Speaker 1: you know, sharing in dynamism and getting a part of 54 00:02:50,480 --> 00:02:54,200 Speaker 1: the fastest growing companies. But you know, I would argue, 55 00:02:54,400 --> 00:02:57,440 Speaker 1: couldn't you say that public equity markets haven't gotten worse 56 00:02:57,919 --> 00:03:00,920 Speaker 1: but that private debt mark it's have just gotten so 57 00:03:01,000 --> 00:03:04,000 Speaker 1: much better private debt and equity, and you know, you 58 00:03:04,080 --> 00:03:07,200 Speaker 1: have this incredible ground swell in the amount of debt 59 00:03:07,600 --> 00:03:10,840 Speaker 1: that has been issued, You have cheaper rates thanks to 60 00:03:10,880 --> 00:03:16,760 Speaker 1: the Fed and Frank's thanks to also changing dynamic in demographics. Um, 61 00:03:16,919 --> 00:03:20,480 Speaker 1: couldn't investors just participate through the debt markets. Um, they 62 00:03:20,520 --> 00:03:23,079 Speaker 1: could do it degree, but ultimately the way you get 63 00:03:23,120 --> 00:03:25,400 Speaker 1: upside an investment is owning the equity piece of the 64 00:03:25,400 --> 00:03:27,920 Speaker 1: balance sheet, because that's why all the residual cash flows go. 65 00:03:28,360 --> 00:03:30,120 Speaker 1: I think you raised the right points, though, and that 66 00:03:30,280 --> 00:03:32,400 Speaker 1: VC has gotten a lot bigger, a lot deeper, and 67 00:03:32,440 --> 00:03:34,680 Speaker 1: a lot better. And there's a lot of really smart 68 00:03:34,760 --> 00:03:37,880 Speaker 1: investors out there in VC land that's just do venture 69 00:03:37,920 --> 00:03:41,720 Speaker 1: capital investment. Additionally, we're going through this big macro stage 70 00:03:41,720 --> 00:03:44,440 Speaker 1: in the economy where there's a lot of disruption. Disruption 71 00:03:44,480 --> 00:03:46,600 Speaker 1: takes a long time to invest in and see the 72 00:03:46,600 --> 00:03:48,800 Speaker 1: benefits of that. And I think one other reason why 73 00:03:48,800 --> 00:03:50,440 Speaker 1: there's not a lot of I p o S is 74 00:03:50,520 --> 00:03:53,520 Speaker 1: venture capital is reluctant to give voting control or even 75 00:03:53,600 --> 00:03:57,760 Speaker 1: voting input to public equity investors for projects that might 76 00:03:57,760 --> 00:04:00,440 Speaker 1: be still five or ten years down the road, and 77 00:04:00,480 --> 00:04:02,520 Speaker 1: so they keep them private instead of taking them public. 78 00:04:02,800 --> 00:04:04,200 Speaker 1: And just to give some numbers behind that, as you 79 00:04:04,280 --> 00:04:07,640 Speaker 1: highlighted in your recent report, in a late ninety nineties, 80 00:04:07,680 --> 00:04:10,960 Speaker 1: there were often thirty eight i p o s per month. 81 00:04:11,280 --> 00:04:14,600 Speaker 1: Now that number is more like ten to twenty time 82 00:04:14,920 --> 00:04:17,160 Speaker 1: twenty I p O s per month. So, Nick, you 83 00:04:17,240 --> 00:04:21,200 Speaker 1: raise a good, quite good point with voting rights. Do 84 00:04:21,240 --> 00:04:24,479 Speaker 1: you think that we're going to see more companies stripping 85 00:04:24,480 --> 00:04:26,800 Speaker 1: away voting rights in their I p o s and 86 00:04:27,040 --> 00:04:31,000 Speaker 1: frankly stock buyers being okay with that? Yeah, absolutely, I 87 00:04:31,000 --> 00:04:33,479 Speaker 1: think that's definitely the way of the future, because ultimately 88 00:04:33,680 --> 00:04:35,479 Speaker 1: the goal is to get these companies out into the 89 00:04:35,480 --> 00:04:38,960 Speaker 1: public domain. Let investors investors they want, or if they don't, 90 00:04:39,000 --> 00:04:41,560 Speaker 1: then they don't have to. But whatever it takes to 91 00:04:41,640 --> 00:04:45,159 Speaker 1: connect the public equity investor to this tremendous growth engine 92 00:04:45,200 --> 00:04:47,960 Speaker 1: that's going on in Silicon Valley and in sand Hill 93 00:04:48,080 --> 00:04:50,320 Speaker 1: Road an adventure capital around the world, that's the most 94 00:04:50,360 --> 00:04:52,560 Speaker 1: critical thing that can happen for equity markets in the 95 00:04:52,560 --> 00:04:54,400 Speaker 1: next five to ten years. How much of mom and 96 00:04:54,400 --> 00:04:57,640 Speaker 1: pop investors lost out by not being able to participate 97 00:04:57,720 --> 00:05:00,880 Speaker 1: in these early stages of these Silicon val companies. Well, 98 00:05:00,960 --> 00:05:03,800 Speaker 1: let's think about Ubert, for example, still private worth by 99 00:05:03,839 --> 00:05:07,360 Speaker 1: any estimate sixty seventy billion dollars. It would have been 100 00:05:07,400 --> 00:05:10,279 Speaker 1: great if public equity investors could have bought that company. 101 00:05:10,440 --> 00:05:12,960 Speaker 1: Was when it was twenty or five billion dollars, still 102 00:05:12,960 --> 00:05:16,240 Speaker 1: a very viable market cap for a public company something 103 00:05:16,279 --> 00:05:19,040 Speaker 1: they could have done and benefited from that. So that's 104 00:05:19,080 --> 00:05:21,159 Speaker 1: just one example. I'm sure there's many others. Yeah, but 105 00:05:21,160 --> 00:05:23,800 Speaker 1: couldn't somebody argue that there also were a lot of 106 00:05:23,839 --> 00:05:27,560 Speaker 1: flops that managed to go bankrupt and squander a lot 107 00:05:27,560 --> 00:05:33,000 Speaker 1: of money that public equity investors were saved from. Yeah, 108 00:05:33,000 --> 00:05:35,599 Speaker 1: there's two ancillary points that. The first is that you 109 00:05:35,600 --> 00:05:39,280 Speaker 1: still need all the right disclosures, financial disclosures, risk disclosures, 110 00:05:39,520 --> 00:05:42,360 Speaker 1: good investment banking, due diligence, the whole nine yards on that. 111 00:05:42,920 --> 00:05:45,440 Speaker 1: But on top of that, you do ultimately have to 112 00:05:45,480 --> 00:05:47,480 Speaker 1: take some risk in order to make a return, and 113 00:05:47,520 --> 00:05:50,359 Speaker 1: that includes potentially buying some flops along the way, And 114 00:05:50,440 --> 00:05:53,600 Speaker 1: that's okay as long as you're invested in broadly diversified portfolio. 115 00:05:54,120 --> 00:05:58,760 Speaker 1: How much do the sort of regulatory burdens that Jake 116 00:05:58,800 --> 00:06:01,880 Speaker 1: Clayton highlighted as being owners for a lot of companies, 117 00:06:02,040 --> 00:06:06,920 Speaker 1: how much does that factor into corporations decision to or 118 00:06:07,000 --> 00:06:09,400 Speaker 1: not to have an I p O. You know, ultimately 119 00:06:09,440 --> 00:06:12,600 Speaker 1: there is definitely some issue with all the regulations, our 120 00:06:12,680 --> 00:06:15,320 Speaker 1: bins Oxley and disclosures and what happens if you get 121 00:06:15,360 --> 00:06:19,080 Speaker 1: it wrong and having corporate officers signed off on on statements, 122 00:06:19,080 --> 00:06:22,200 Speaker 1: all of which are kind of post crisis developments, But 123 00:06:22,279 --> 00:06:25,000 Speaker 1: the overwhelming issue seems to be that venture capital is 124 00:06:25,040 --> 00:06:27,320 Speaker 1: really reluctant to let go of their babies. They think 125 00:06:27,360 --> 00:06:29,599 Speaker 1: they have really figured out the next week of disruption, 126 00:06:30,040 --> 00:06:31,839 Speaker 1: and they don't want to have a lot of outside 127 00:06:31,839 --> 00:06:35,719 Speaker 1: investors having to vote on who the new CEO is 128 00:06:35,839 --> 00:06:37,799 Speaker 1: or if this company is going to emerge earlier or later. 129 00:06:37,960 --> 00:06:39,919 Speaker 1: They want to maintain that control because they feel they 130 00:06:40,000 --> 00:06:43,120 Speaker 1: understand the landscape better. So, worst case scenario, if this 131 00:06:43,200 --> 00:06:47,000 Speaker 1: trend continues of only the losers remaining in the public 132 00:06:47,000 --> 00:06:50,520 Speaker 1: equity market, what do you think will happen? You know, ultimately, 133 00:06:50,720 --> 00:06:53,960 Speaker 1: in the worst case scenario, people start to invest less. So, 134 00:06:54,040 --> 00:06:57,240 Speaker 1: for example, we all know Amazon has really killed it 135 00:06:57,560 --> 00:06:59,680 Speaker 1: and driven a lot of bricks and mortar companies and 136 00:06:59,800 --> 00:07:02,640 Speaker 1: the tubes. What if Amazon had never gone public, we 137 00:07:02,680 --> 00:07:05,240 Speaker 1: wouldn't have access to that company, it wouldn't have grown 138 00:07:05,240 --> 00:07:07,440 Speaker 1: as it has, and more importantly, would only be stuck 139 00:07:07,440 --> 00:07:10,720 Speaker 1: owning the department stores, which are now really struggling against 140 00:07:10,720 --> 00:07:13,200 Speaker 1: the Amazon threat. So it's super critical to have the 141 00:07:13,200 --> 00:07:15,320 Speaker 1: winners in the market as well as the losers so 142 00:07:16,480 --> 00:07:18,920 Speaker 1: you know, it's interesting to me. I find that often 143 00:07:19,040 --> 00:07:22,120 Speaker 1: when markets are entering a kind of boring state or 144 00:07:22,160 --> 00:07:25,520 Speaker 1: one that is neither one of incredible upside or downside, 145 00:07:25,600 --> 00:07:27,880 Speaker 1: is a time when people get deeply philosophical about the 146 00:07:27,880 --> 00:07:30,120 Speaker 1: meaning of of these markets. I mean, it's part of 147 00:07:30,160 --> 00:07:33,520 Speaker 1: the reason why we're seeing some of these existential questions emerged, 148 00:07:33,560 --> 00:07:37,120 Speaker 1: because the FED is kind of managing things well and 149 00:07:37,160 --> 00:07:39,600 Speaker 1: everything is just kind of chugging along, and nobody can 150 00:07:39,640 --> 00:07:41,920 Speaker 1: really make a much more of a dramatic statement than that. 151 00:07:42,280 --> 00:07:43,640 Speaker 1: I think there's a piece of it, but I think 152 00:07:43,680 --> 00:07:45,240 Speaker 1: we're also I think there's a lot of people, I'm 153 00:07:45,280 --> 00:07:48,560 Speaker 1: sure everybody in this building deeply intrigued by artificial intelligence, 154 00:07:48,840 --> 00:07:53,760 Speaker 1: autonomous driving, new technologies generally, and I think everybody understands 155 00:07:53,760 --> 00:07:56,760 Speaker 1: it's important that investors have access to those technologies as 156 00:07:56,760 --> 00:07:59,880 Speaker 1: they go through development and become public companies, because other 157 00:08:00,000 --> 00:08:02,800 Speaker 1: wise you could have a situation where venture capital continues 158 00:08:02,840 --> 00:08:05,760 Speaker 1: to own all the disruption and what gets disrupted is 159 00:08:05,800 --> 00:08:07,720 Speaker 1: still in the public markets, and you don't want to 160 00:08:07,720 --> 00:08:10,000 Speaker 1: see that happen because capital will stop circulating as well 161 00:08:10,000 --> 00:08:11,920 Speaker 1: as it has before. Nikki used to work in the 162 00:08:11,960 --> 00:08:15,200 Speaker 1: auto industry. Right, So have you talked with anyone about 163 00:08:16,240 --> 00:08:18,880 Speaker 1: David Idhorn's proposal. Yeah. I spent ten years covering the 164 00:08:18,920 --> 00:08:21,800 Speaker 1: autos at the old First Boston Credit Suites, and I 165 00:08:21,840 --> 00:08:26,880 Speaker 1: have been in contact with several former CEO s CFOs treasurers. 166 00:08:26,920 --> 00:08:29,800 Speaker 1: To a person, they don't like the idea very much, 167 00:08:29,920 --> 00:08:31,840 Speaker 1: but I will tell you that they also understand the 168 00:08:31,920 --> 00:08:35,080 Speaker 1: frustration because they've all lived through multiple cycles of this 169 00:08:35,120 --> 00:08:39,120 Speaker 1: group never outperforming from cyclotrough to CycL trough. Several lived 170 00:08:39,160 --> 00:08:42,200 Speaker 1: through the bankruptcies during the financial crisis, and they get 171 00:08:42,240 --> 00:08:44,720 Speaker 1: that there's a problem. They're just reluctant to try to 172 00:08:44,880 --> 00:08:47,240 Speaker 1: fix it aggressively at this point in the cycle. Well, 173 00:08:47,280 --> 00:08:50,200 Speaker 1: how could they fix it? You know, on horse proposals 174 00:08:50,200 --> 00:08:52,920 Speaker 1: and intriguing one because at least addresses the issue of who, 175 00:08:53,000 --> 00:08:56,280 Speaker 1: you know, maintaining a shareholder base that is explicitly loyal 176 00:08:56,320 --> 00:08:58,959 Speaker 1: to your financial structure. So if you're a dividend investor, 177 00:08:59,240 --> 00:09:00,920 Speaker 1: you buy the dividends stock if you just want the 178 00:09:00,920 --> 00:09:03,160 Speaker 1: bio back by the buy back stock. So it's an 179 00:09:03,160 --> 00:09:05,640 Speaker 1: attempt to answer answering that question, but I think it's 180 00:09:05,720 --> 00:09:09,680 Speaker 1: not the final word. Just to sort of dovetail into 181 00:09:09,720 --> 00:09:12,319 Speaker 1: the FED. I mean, do you think that a FED, 182 00:09:13,280 --> 00:09:16,239 Speaker 1: a few more FED rate hikes or a possible announcement 183 00:09:16,240 --> 00:09:19,320 Speaker 1: of the unwinding of its four point five trillion dollar 184 00:09:19,360 --> 00:09:23,600 Speaker 1: balance sheet will upend stocks in any way, or that 185 00:09:23,640 --> 00:09:26,440 Speaker 1: you know, this will become a major disruption that is 186 00:09:26,440 --> 00:09:28,600 Speaker 1: not on the radar right now. Yeah, And the context 187 00:09:28,640 --> 00:09:30,160 Speaker 1: of the market that we see right now, in the 188 00:09:30,200 --> 00:09:32,080 Speaker 1: economy that we see right now, the answer is no. 189 00:09:32,320 --> 00:09:34,960 Speaker 1: I think everybody has a fairly good feeling that we're 190 00:09:34,960 --> 00:09:37,120 Speaker 1: going to grow one and a half to two two 191 00:09:37,160 --> 00:09:39,040 Speaker 1: and a half percent this year in terms of GDP, 192 00:09:39,480 --> 00:09:41,440 Speaker 1: that inflation is going to get back to two percent 193 00:09:41,559 --> 00:09:43,480 Speaker 1: and kind of stay there, and the FED is going 194 00:09:43,559 --> 00:09:46,800 Speaker 1: to raise twice more. And that's the playbook everybody's using. 195 00:09:46,800 --> 00:09:48,280 Speaker 1: And so as long as we sort of follow that 196 00:09:48,280 --> 00:09:51,840 Speaker 1: playbook and everything else, the two rate increases is probably fine. 197 00:09:52,400 --> 00:09:55,120 Speaker 1: The unwinding of the balance sheets a more complex issue, 198 00:09:55,160 --> 00:09:57,800 Speaker 1: and it's much about how the FED chooses to do 199 00:09:57,840 --> 00:09:59,880 Speaker 1: that and at what pace and how they give guidance 200 00:09:59,880 --> 00:10:01,880 Speaker 1: of about it. And I doubt they'll do that until 201 00:10:01,880 --> 00:10:03,560 Speaker 1: the back half of the year. So we have a 202 00:10:03,559 --> 00:10:05,800 Speaker 1: few more months of just thinking about June as an 203 00:10:05,800 --> 00:10:07,960 Speaker 1: ax creating increase, and then I think they'll start talking 204 00:10:08,000 --> 00:10:10,640 Speaker 1: about not just the pace of the unwind, but the 205 00:10:10,640 --> 00:10:13,360 Speaker 1: mechanics of the unwind. What do you make between the 206 00:10:13,480 --> 00:10:19,440 Speaker 1: divergence between soft economic data and hard economic data? Boy, 207 00:10:19,520 --> 00:10:22,920 Speaker 1: you know it's it's it's it's like a viral cat video. 208 00:10:23,080 --> 00:10:26,760 Speaker 1: You know, it's it's sometimes it's not that exciting. Actually, 209 00:10:27,720 --> 00:10:29,559 Speaker 1: it's one of those themes that just feels like it 210 00:10:29,679 --> 00:10:31,680 Speaker 1: exploded out of nowhere and it will be gone again 211 00:10:31,720 --> 00:10:34,480 Speaker 1: in two days. I think it's an important notion, but 212 00:10:34,520 --> 00:10:36,760 Speaker 1: I think it speaks to your point that people don't 213 00:10:36,760 --> 00:10:39,320 Speaker 1: have much else to talk about at the moment, and 214 00:10:39,400 --> 00:10:41,720 Speaker 1: as a result, trying to parse the data even more 215 00:10:41,760 --> 00:10:44,280 Speaker 1: finally than before. The bottom line is are we growing 216 00:10:44,360 --> 00:10:47,079 Speaker 1: or not growing? The answers, yes, we're growing. Are we overheating? No, 217 00:10:47,200 --> 00:10:50,360 Speaker 1: we're not overheating. I love that, By the way, I 218 00:10:50,440 --> 00:10:52,800 Speaker 1: love the idea of the difference between soft and hard 219 00:10:52,880 --> 00:10:57,199 Speaker 1: data being a viral cat video. Anything that we should 220 00:10:57,200 --> 00:11:00,360 Speaker 1: be talking about real quick that we aren't. No, that's definitely. 221 00:11:00,600 --> 00:11:02,600 Speaker 1: This to me was like the most important topic that 222 00:11:02,640 --> 00:11:04,480 Speaker 1: I could come up with was what is actually what 223 00:11:04,559 --> 00:11:06,439 Speaker 1: is a vote? Of what is a share supposed to 224 00:11:06,480 --> 00:11:08,720 Speaker 1: do not only for the investor, but for society as 225 00:11:08,720 --> 00:11:12,199 Speaker 1: a whole. Honestly, a super important topic and a very 226 00:11:12,280 --> 00:11:14,400 Speaker 1: very good report that you did, Nicholas, thank you so 227 00:11:14,480 --> 00:11:17,480 Speaker 1: much for joining us. Nic Cholas his chief markets I 228 00:11:17,600 --> 00:11:22,120 Speaker 1: just at converge x talking about why public equity markets 229 00:11:22,160 --> 00:11:25,359 Speaker 1: are deeply flawed right now and how this could potentially 230 00:11:26,120 --> 00:11:29,960 Speaker 1: really badly affect the future of where people put their 231 00:11:29,960 --> 00:11:44,360 Speaker 1: money and how much they invest. Thanks so much, Nick, Well, 232 00:11:44,600 --> 00:11:48,360 Speaker 1: I want to turn the attention to marijuana. Actually, um, 233 00:11:48,600 --> 00:11:52,320 Speaker 1: not the actual plant, but real estate that is involved 234 00:11:52,400 --> 00:11:55,680 Speaker 1: with the cannabis industry. And here to speak about that 235 00:11:55,760 --> 00:11:59,520 Speaker 1: is down is don Sandoval. She's chief operating officer of 236 00:11:59,640 --> 00:12:03,120 Speaker 1: kal X Development Incorporated, which is based in New York City. 237 00:12:03,440 --> 00:12:05,839 Speaker 1: And Donn I was reading about your background. You were 238 00:12:06,000 --> 00:12:08,400 Speaker 1: on Wall Street for a long time, You're a graduate 239 00:12:08,480 --> 00:12:11,920 Speaker 1: of Wharton. Uh, how did you find yourself in the 240 00:12:11,960 --> 00:12:16,600 Speaker 1: cannabis industry. Well, at LESTA, the cannabis industry and my 241 00:12:16,679 --> 00:12:19,920 Speaker 1: interests there really began about seven years ago. Uh as 242 00:12:20,520 --> 00:12:24,640 Speaker 1: developments began in Colorado and we're continuing develop in California. 243 00:12:25,120 --> 00:12:28,079 Speaker 1: And it was quite clear to me that the efficacy 244 00:12:28,200 --> 00:12:30,520 Speaker 1: of the plant and all the various uses that have 245 00:12:30,600 --> 00:12:35,280 Speaker 1: really just garnered increased exposure as research has increasingly better 246 00:12:35,280 --> 00:12:38,400 Speaker 1: research has come online was a trend in my opinion, 247 00:12:38,400 --> 00:12:42,000 Speaker 1: that was going to continue. And so as I started 248 00:12:42,000 --> 00:12:45,680 Speaker 1: to look at various verticals in the cannabis space, it 249 00:12:45,760 --> 00:12:48,760 Speaker 1: was quite clear to me that real estate was a 250 00:12:48,800 --> 00:12:52,920 Speaker 1: sector that was both scalable and somewhat protective in the 251 00:12:52,960 --> 00:12:56,080 Speaker 1: sense that you have bricks and mortar assets as well 252 00:12:56,120 --> 00:12:59,400 Speaker 1: as an opportunity for diversification across the country that could 253 00:12:59,400 --> 00:13:03,240 Speaker 1: provide us strong buffer should the cannabis experiment across the 254 00:13:03,280 --> 00:13:08,040 Speaker 1: country be repealed or simply rolled back in a particular jurisdiction. 255 00:13:08,240 --> 00:13:11,120 Speaker 1: With the cannabis experiment, I like that way of describing it. 256 00:13:11,160 --> 00:13:15,880 Speaker 1: Can that can you dovetail that into present day dynamics 257 00:13:15,880 --> 00:13:18,200 Speaker 1: and sort of the political rhetoric that we hear uh 258 00:13:18,280 --> 00:13:22,760 Speaker 1: from Jeff's sessions about potentially cracking down on marijuana and 259 00:13:23,920 --> 00:13:26,920 Speaker 1: rebuffing attempts to make it legal. I mean, has this 260 00:13:27,000 --> 00:13:30,679 Speaker 1: resulted in a plateau ing of opportunities for your business 261 00:13:30,679 --> 00:13:33,520 Speaker 1: and for cannabis in general in the US? I would say, 262 00:13:33,559 --> 00:13:37,280 Speaker 1: to date, Uh, the comments out of Jeff's sessions as 263 00:13:37,320 --> 00:13:40,679 Speaker 1: well as Sean Spicer on behalf of the administration. UH 264 00:13:40,840 --> 00:13:44,960 Speaker 1: is really saber rattling and certainly a far cry from 265 00:13:45,000 --> 00:13:49,679 Speaker 1: any legislative action. And we know frankly behind closed doors 266 00:13:49,720 --> 00:13:55,880 Speaker 1: that Jeff has has made some of his lieutenants in 267 00:13:55,920 --> 00:13:59,679 Speaker 1: the Republican Party somewhat more comfortable that we know immediate 268 00:13:59,720 --> 00:14:03,240 Speaker 1: act and in terms of greater federal enforcement as it 269 00:14:03,360 --> 00:14:07,480 Speaker 1: results as it relates to recreational cannabis. So in terms 270 00:14:07,520 --> 00:14:11,680 Speaker 1: of the opportunity set for Kalx and the cannabis industry 271 00:14:11,679 --> 00:14:15,280 Speaker 1: in general, I would say the opportunity set is is 272 00:14:15,400 --> 00:14:19,200 Speaker 1: unimpacted at this stage. How big is the cannabis real 273 00:14:19,320 --> 00:14:25,120 Speaker 1: estate market? Well, it's a difficult question because it's such 274 00:14:25,160 --> 00:14:29,240 Speaker 1: a fractured industry and as you move from state to state, 275 00:14:30,400 --> 00:14:35,640 Speaker 1: their local and regional jurisdictions that have very very high 276 00:14:35,680 --> 00:14:41,040 Speaker 1: degree of differentiation between zoning laws and licensing practices, such 277 00:14:41,080 --> 00:14:45,200 Speaker 1: at the actual building count on a per state basis, 278 00:14:45,520 --> 00:14:48,960 Speaker 1: depending on how you want to divvy up those zoning 279 00:14:49,000 --> 00:14:53,080 Speaker 1: requirements can vary quite substantially. Well, how big is Calex 280 00:14:53,680 --> 00:14:59,080 Speaker 1: Calyx is currently nine properties, we manage over six fifty 281 00:14:59,160 --> 00:15:03,080 Speaker 1: thousand square feet. Our buildings are spread across four states, 282 00:15:03,120 --> 00:15:09,160 Speaker 1: primarily out West Colorado, Washington, Oregon, and Arizona, and we 283 00:15:09,400 --> 00:15:12,880 Speaker 1: currently house twenty one tenants. So what's the difference between 284 00:15:12,880 --> 00:15:16,680 Speaker 1: a cannabis related building and a regular building? So a 285 00:15:16,840 --> 00:15:21,880 Speaker 1: cannabis building is subject to very strict guidelines with respect 286 00:15:21,880 --> 00:15:25,920 Speaker 1: to zoning and sighting, as well as it has very 287 00:15:25,960 --> 00:15:33,760 Speaker 1: specific infrastructure requirements power, water, lighting, UH. And it is 288 00:15:33,800 --> 00:15:37,880 Speaker 1: exactly these types of unique characteristics, both from a regulatory 289 00:15:37,920 --> 00:15:42,640 Speaker 1: perspective and a facilities perspective, that create what we like 290 00:15:42,760 --> 00:15:46,000 Speaker 1: to call it Calyx, a new vertical within the commercial 291 00:15:46,040 --> 00:15:48,320 Speaker 1: real estate space. Has it been harder for you to 292 00:15:48,400 --> 00:15:51,920 Speaker 1: drum up interest with investors just because of UH, some 293 00:15:51,960 --> 00:15:55,880 Speaker 1: of Jeff's Sessions comments and Sean Spicer's comments, even if 294 00:15:56,160 --> 00:15:59,120 Speaker 1: in back room conversations they're sort of poo pooing any 295 00:15:59,160 --> 00:16:03,160 Speaker 1: potential imminent and repeal of some of the local UH 296 00:16:03,440 --> 00:16:08,240 Speaker 1: legalization legalization of marijuana. I think with certainty the new 297 00:16:08,280 --> 00:16:11,080 Speaker 1: administration and the comments that we have had out of 298 00:16:11,120 --> 00:16:14,280 Speaker 1: it as well as it comments from Jeff Sessions in particular, 299 00:16:14,520 --> 00:16:19,080 Speaker 1: have given investors pause to a certain extent um but again, 300 00:16:19,600 --> 00:16:24,400 Speaker 1: it is clear that the administration, whether it's tax reform, immigration, 301 00:16:24,800 --> 00:16:29,120 Speaker 1: or healthcare, has much larger issues, UH it intends to 302 00:16:29,160 --> 00:16:32,920 Speaker 1: deal with before I believe getting to cannabis. Well, I 303 00:16:32,920 --> 00:16:35,440 Speaker 1: guess we'll see, right, Um, what about up north? Do 304 00:16:35,480 --> 00:16:38,280 Speaker 1: you look in Canada at all? We do watch what's 305 00:16:38,280 --> 00:16:40,400 Speaker 1: going on in the Canadian markets, for sure, we don't 306 00:16:40,400 --> 00:16:44,080 Speaker 1: own any property there, but it's certainly tremendous growth and 307 00:16:44,120 --> 00:16:50,040 Speaker 1: the capital markets there have really experienced some exponential growth 308 00:16:50,080 --> 00:16:52,560 Speaker 1: with respect to cannabis companies of late. Well, yeah, and 309 00:16:52,560 --> 00:16:55,960 Speaker 1: in the past couple of weeks, didn't Um, wasn't there 310 00:16:56,040 --> 00:16:58,840 Speaker 1: some legislation that was signed that would sort of expand 311 00:16:58,880 --> 00:17:01,520 Speaker 1: the legalization of maria on a in Canada and it 312 00:17:01,600 --> 00:17:04,600 Speaker 1: led to some kind of complete boom and share is 313 00:17:04,640 --> 00:17:10,040 Speaker 1: tied to that industry. Right. There is expected legislation later 314 00:17:10,080 --> 00:17:13,760 Speaker 1: this month to be brought to the floor whereby UH 315 00:17:13,920 --> 00:17:19,400 Speaker 1: continued expansion of marijuana in Canada on a legalized basis 316 00:17:19,960 --> 00:17:24,080 Speaker 1: could have a much more developed framework as early as 317 00:17:24,200 --> 00:17:26,800 Speaker 1: July of next year. So what's the biggest opportunity for 318 00:17:26,840 --> 00:17:29,439 Speaker 1: you going forward in the next year. So, the biggest 319 00:17:29,440 --> 00:17:33,840 Speaker 1: opportunity for calxes to continue to build its real estate platform. 320 00:17:34,200 --> 00:17:38,080 Speaker 1: We're looking quite aggressively at new opportunities more towards the 321 00:17:38,080 --> 00:17:44,280 Speaker 1: East Coast. We're looking at acquisitions in Florida, Maryland, Massachusetts. 322 00:17:44,320 --> 00:17:47,439 Speaker 1: To be to be clear, real quick, what are your 323 00:17:47,440 --> 00:17:50,280 Speaker 1: conversations like with your colleagues, your former colleagues on Well Street. 324 00:17:52,320 --> 00:17:55,040 Speaker 1: It's interesting. Everyone wants to know if the green rush 325 00:17:55,280 --> 00:17:58,720 Speaker 1: is for real, and what I say is, uh, it's 326 00:17:58,720 --> 00:18:03,040 Speaker 1: a nascent industry ripe with risk, but a lot of opportunity. 327 00:18:03,080 --> 00:18:04,920 Speaker 1: If you're willing to spend the time and do the work, 328 00:18:05,000 --> 00:18:07,360 Speaker 1: I'm sure you have a lot of fascinating conversations. Thank 329 00:18:07,400 --> 00:18:09,480 Speaker 1: you so much for keeping us up to date and 330 00:18:09,520 --> 00:18:13,160 Speaker 1: what's going on in the cannabis real estate industry. Don 331 00:18:13,280 --> 00:18:17,280 Speaker 1: Sandoval's cheap chief operating officer, I can't speak today. It's Friday, 332 00:18:17,400 --> 00:18:21,120 Speaker 1: chief operating officer at Klex Development Incorporated in New York City, 333 00:18:21,160 --> 00:18:37,560 Speaker 1: talking about all the opportunities for cannabis related properties. I 334 00:18:37,560 --> 00:18:40,320 Speaker 1: want to turn to energy, uh, and not just the 335 00:18:40,359 --> 00:18:45,359 Speaker 1: production of energy, but using waste from energy production to 336 00:18:45,560 --> 00:18:48,800 Speaker 1: create more energy. I want to bring in Steven Jones, 337 00:18:48,840 --> 00:18:52,640 Speaker 1: President and Chief executive Officer of Covanta Holding Corporation, which 338 00:18:52,680 --> 00:18:55,679 Speaker 1: is based in New Jersey. Uh, Steven, I want to 339 00:18:55,680 --> 00:18:59,600 Speaker 1: start first with the business model here. What is waste 340 00:18:59,640 --> 00:19:02,240 Speaker 1: to enter g Yeah, high Lisa, thanks for having me 341 00:19:02,280 --> 00:19:06,280 Speaker 1: on for first starters. Uh. Waste energy is basically taking 342 00:19:06,840 --> 00:19:12,600 Speaker 1: waste um from either people's homes or special waste from corporations, uh, 343 00:19:12,680 --> 00:19:15,720 Speaker 1: and putting through a combustion process in order to reclaim 344 00:19:16,400 --> 00:19:19,560 Speaker 1: or capture the b two us that are that are 345 00:19:19,560 --> 00:19:22,280 Speaker 1: still contained in that waste and and based on that 346 00:19:22,440 --> 00:19:26,320 Speaker 1: recapturing or combustion to produce energy. And you can produce 347 00:19:26,359 --> 00:19:30,600 Speaker 1: steam um and or power um from the from the steam. 348 00:19:30,720 --> 00:19:33,639 Speaker 1: So is this a no waste process or is this 349 00:19:33,760 --> 00:19:37,240 Speaker 1: just sort of trying to strip out anything that's left 350 00:19:37,359 --> 00:19:41,679 Speaker 1: over in a less efficient energy production process, uh, and 351 00:19:41,840 --> 00:19:44,639 Speaker 1: using it again. Yeah, so it's it's the latter. So effectively, 352 00:19:44,720 --> 00:19:47,399 Speaker 1: what you want to do, and we're certainly in favor 353 00:19:47,400 --> 00:19:49,880 Speaker 1: of this, is go through the recycling process. And after 354 00:19:49,920 --> 00:19:53,280 Speaker 1: the recycling process, there's still waste that's left over and 355 00:19:53,320 --> 00:19:55,400 Speaker 1: it has be to you value to it. And so 356 00:19:55,520 --> 00:19:58,399 Speaker 1: rather than uh putting it in the your surface, so 357 00:19:58,480 --> 00:20:01,400 Speaker 1: putting it into a landfill, the alternative is to put 358 00:20:01,440 --> 00:20:04,680 Speaker 1: it through a combustion process and reclaim that energy. Can 359 00:20:04,760 --> 00:20:06,879 Speaker 1: you just give me a visual here, I mean, do 360 00:20:06,920 --> 00:20:10,520 Speaker 1: you go to landfills and just uh pick up big 361 00:20:10,600 --> 00:20:13,879 Speaker 1: portions of garbage and feed it through a machine. I 362 00:20:13,920 --> 00:20:16,560 Speaker 1: feel like it's like a Doctor Seuss book where you 363 00:20:16,600 --> 00:20:17,960 Speaker 1: sort of put it in a machine and it comes 364 00:20:18,000 --> 00:20:20,600 Speaker 1: out in a box and you have some more energy. Yeah. 365 00:20:20,680 --> 00:20:23,560 Speaker 1: We actually we actually run forty two energy from waste 366 00:20:23,600 --> 00:20:27,320 Speaker 1: facilities around the US and also internationally. So we have 367 00:20:27,320 --> 00:20:30,440 Speaker 1: a big project we're building in downtown Dublin right now. 368 00:20:31,000 --> 00:20:34,359 Speaker 1: So these facilities actually are in and around population centers, 369 00:20:34,359 --> 00:20:38,360 Speaker 1: so their critical infrastructure to population centers. And actually, um, 370 00:20:38,359 --> 00:20:41,200 Speaker 1: we don't pick up waste. Uh. There's companies out there 371 00:20:41,280 --> 00:20:43,399 Speaker 1: that that you know, that go and pick the waste 372 00:20:43,440 --> 00:20:45,760 Speaker 1: up from the curb from from your house. Uh. And 373 00:20:45,760 --> 00:20:48,520 Speaker 1: then they're alternatives are either take it to a landfill 374 00:20:48,600 --> 00:20:52,040 Speaker 1: to uh to dump it or tip it or take 375 00:20:52,080 --> 00:20:54,520 Speaker 1: it to one of our facilities. And again, um, when 376 00:20:54,560 --> 00:20:57,800 Speaker 1: they take it to a landfill, uh, it decomposes over 377 00:20:57,840 --> 00:21:01,280 Speaker 1: about a fifty year period and produces methane and methanes 378 00:21:01,480 --> 00:21:04,520 Speaker 1: um about eighty times worse than than C O two 379 00:21:04,640 --> 00:21:07,080 Speaker 1: is a greenhouse gas. So UM, there's a lot of 380 00:21:07,080 --> 00:21:08,919 Speaker 1: people and then particularly a lot of companies in the 381 00:21:09,000 --> 00:21:11,080 Speaker 1: US who don't really want to take their waste to 382 00:21:11,119 --> 00:21:12,960 Speaker 1: landfills any longer, and we would rather have to go 383 00:21:13,040 --> 00:21:15,879 Speaker 1: through what's a more sustainable process, which is an energy 384 00:21:15,880 --> 00:21:19,640 Speaker 1: from waste plant. So how many waste energy facilities does 385 00:21:19,720 --> 00:21:22,840 Speaker 1: Covanta have, So we own or operate forty two. So 386 00:21:22,880 --> 00:21:26,160 Speaker 1: we're the largest in the world. Our next closest competitors 387 00:21:26,160 --> 00:21:30,560 Speaker 1: about half the size of US UH and UH. Generally 388 00:21:30,720 --> 00:21:34,200 Speaker 1: we UH we process about twenty million tons a year 389 00:21:34,280 --> 00:21:37,000 Speaker 1: of waste and that's about five percent of the waste 390 00:21:37,000 --> 00:21:38,720 Speaker 1: in the US. The US still has a lot of 391 00:21:38,800 --> 00:21:42,320 Speaker 1: landfills that that we that that are utilized for waste disposal. 392 00:21:42,680 --> 00:21:46,280 Speaker 1: It's enough we produce enough electricity to power one million homes. 393 00:21:46,359 --> 00:21:49,360 Speaker 1: And the other interesting thing is that we also reclaim 394 00:21:49,440 --> 00:21:51,840 Speaker 1: metal from the waste. There's an enormous amount of metal 395 00:21:51,920 --> 00:21:54,639 Speaker 1: that goes through the through the waste stream, and so 396 00:21:54,680 --> 00:21:59,200 Speaker 1: we reclaim or recycle approximately five thousand tons of metal 397 00:21:59,440 --> 00:22:02,760 Speaker 1: metal annually and that's enough to build five Golden Gate 398 00:22:02,800 --> 00:22:05,320 Speaker 1: bridges a year, which a lot of people find UH 399 00:22:05,400 --> 00:22:08,520 Speaker 1: find interesting. A lot of metal in there. I'm just 400 00:22:08,720 --> 00:22:11,080 Speaker 1: sitting here, sitting here trying to think about the economics 401 00:22:11,080 --> 00:22:13,399 Speaker 1: of this, how this works, because I would guess that 402 00:22:13,480 --> 00:22:16,640 Speaker 1: it's fairly expensive to build the equipment to sift through 403 00:22:16,920 --> 00:22:20,240 Speaker 1: mountains and mountains mountains of garbage. Yeah. So again, the 404 00:22:20,240 --> 00:22:22,520 Speaker 1: waste comes to us, just like it would so we 405 00:22:22,560 --> 00:22:26,600 Speaker 1: don't either. Yeah, but even processing it. Yes, so we 406 00:22:26,640 --> 00:22:29,400 Speaker 1: get paid for the waste. Um. From from an economic 407 00:22:29,400 --> 00:22:30,920 Speaker 1: stan point you to think about it, we get paid 408 00:22:31,200 --> 00:22:33,439 Speaker 1: for the waste that we take in um, just like 409 00:22:33,480 --> 00:22:36,000 Speaker 1: we just like a landfill, gets paid for that. But 410 00:22:36,000 --> 00:22:37,960 Speaker 1: then we're able to put it through the combustion process 411 00:22:38,000 --> 00:22:40,119 Speaker 1: and produce energy, and then we get paid for the 412 00:22:40,240 --> 00:22:43,760 Speaker 1: energy and also for the metals that we recycle. So um, 413 00:22:43,960 --> 00:22:46,480 Speaker 1: it's a system that's got a number of inputs and 414 00:22:46,480 --> 00:22:49,000 Speaker 1: outputs and we get paid for all those. It's very 415 00:22:49,040 --> 00:22:53,040 Speaker 1: attractive underlying economics. We have high adjusted a bit on 416 00:22:53,160 --> 00:22:57,440 Speaker 1: margins greater than and our free cashual conversions in about 417 00:22:57,119 --> 00:23:00,880 Speaker 1: the range. So uh, these these plants have a high 418 00:23:00,960 --> 00:23:03,440 Speaker 1: degree of free cash flow conversion. Do you deal a 419 00:23:03,480 --> 00:23:06,960 Speaker 1: lot with nimby with people not wanting to have these uh? Not? 420 00:23:07,040 --> 00:23:10,400 Speaker 1: In my backyard, not not wanting your plants near them. Yeah, 421 00:23:10,400 --> 00:23:13,000 Speaker 1: it's interesting. In the US, there's there's a lot of nimby. 422 00:23:13,080 --> 00:23:17,280 Speaker 1: I would tell you new plant, new plant. UH developments 423 00:23:17,320 --> 00:23:21,000 Speaker 1: in the US are few and far between, UM because 424 00:23:21,000 --> 00:23:23,520 Speaker 1: the US has a lot of landfills and so UH 425 00:23:23,560 --> 00:23:26,919 Speaker 1: that tends to be the route that waste goes. But 426 00:23:26,960 --> 00:23:32,080 Speaker 1: if you go UH to any other international jurisdiction, So 427 00:23:32,160 --> 00:23:35,639 Speaker 1: so they think about the EU, UM Ireland for example, 428 00:23:35,680 --> 00:23:37,480 Speaker 1: where we're building a big plant. Even a lot of 429 00:23:37,480 --> 00:23:40,600 Speaker 1: places in Asia, there's a lot more acceptance of energy 430 00:23:40,640 --> 00:23:44,520 Speaker 1: from waste. I think the citizens there have UH and 431 00:23:44,560 --> 00:23:48,840 Speaker 1: the governments there have become um more UH inclined to 432 00:23:49,040 --> 00:23:50,919 Speaker 1: not put their waste in the landfill and have the 433 00:23:50,960 --> 00:23:54,159 Speaker 1: greenhouse gas impact occur. They'd rather have a go to 434 00:23:54,200 --> 00:23:56,879 Speaker 1: an energy from waste plant. And then in the energy 435 00:23:56,920 --> 00:24:00,119 Speaker 1: from waste plant, there's a controlled combustion process. So if 436 00:24:00,160 --> 00:24:02,840 Speaker 1: you think about the capital we spend on these plants around, 437 00:24:03,520 --> 00:24:06,240 Speaker 1: the capital goes into the air pollution control systems on 438 00:24:06,320 --> 00:24:08,720 Speaker 1: the back end, so it's a much more controlled process 439 00:24:09,080 --> 00:24:12,200 Speaker 1: rather than a landfill where the where the waste decomposes 440 00:24:12,280 --> 00:24:15,360 Speaker 1: over you know, roughly fifty year period. This is so 441 00:24:15,400 --> 00:24:18,760 Speaker 1: fascinating to me. Steven Jones, President and Chief executive Officer 442 00:24:18,760 --> 00:24:22,479 Speaker 1: of Covanta Hold Incorporation, Thank you so much. One thing 443 00:24:22,520 --> 00:24:24,560 Speaker 1: that this just raises in my mind as the US 444 00:24:24,600 --> 00:24:27,199 Speaker 1: has so much more land and empty land than a 445 00:24:27,200 --> 00:24:29,840 Speaker 1: place like the European Union, where there needs to be 446 00:24:29,880 --> 00:24:33,359 Speaker 1: more of a premium put on consolidating space and making 447 00:24:33,400 --> 00:24:37,280 Speaker 1: sure that it is all used efficiently. Fascinating topic energy 448 00:24:37,480 --> 00:24:51,640 Speaker 1: waste energy. I want to turn to a story that's 449 00:24:51,640 --> 00:24:54,840 Speaker 1: getting a lot of attention today by Bloomberg's Laura Keller, 450 00:24:54,960 --> 00:24:59,080 Speaker 1: financial news reporter here at Bloomberg, and it's about how 451 00:24:59,320 --> 00:25:03,359 Speaker 1: traders are shifting the way they try to communicate out 452 00:25:03,400 --> 00:25:07,280 Speaker 1: of the eyes of their employers. Laura joins us here 453 00:25:07,280 --> 00:25:09,560 Speaker 1: in our Bloomberg eleven three oh studio. Laura, can you 454 00:25:09,560 --> 00:25:12,080 Speaker 1: just tell us a little bit about what you're finding 455 00:25:12,160 --> 00:25:15,359 Speaker 1: about how traders are communicating with each other. Yes, so, Lisa, 456 00:25:15,400 --> 00:25:18,080 Speaker 1: we talked with I think probably a half to two 457 00:25:18,119 --> 00:25:20,560 Speaker 1: dozen different people about this and more over the years 458 00:25:20,560 --> 00:25:23,879 Speaker 1: and really just looking at why they're turning to these things. 459 00:25:24,119 --> 00:25:26,960 Speaker 1: So it's these things being WhatsApp and other types of 460 00:25:27,040 --> 00:25:31,880 Speaker 1: encrypted uh sort of chat vehicles exactly, and I message 461 00:25:31,880 --> 00:25:34,200 Speaker 1: apples I Message counts as well because that does have 462 00:25:34,240 --> 00:25:37,840 Speaker 1: some encryption as well. UM. So essentially using these different 463 00:25:37,840 --> 00:25:41,840 Speaker 1: communication devices, these text based messaging services to talk about work, 464 00:25:41,880 --> 00:25:44,439 Speaker 1: to talk about things they don't want anyone to see. 465 00:25:44,680 --> 00:25:46,760 Speaker 1: So we kind of found a range. You know. It's 466 00:25:46,840 --> 00:25:49,560 Speaker 1: some things just sort of jokes, things that you would share, 467 00:25:49,720 --> 00:25:52,960 Speaker 1: you know, like email chains used to be. Other things 468 00:25:53,040 --> 00:25:55,320 Speaker 1: are a little bit more you know, maybe it's a 469 00:25:55,359 --> 00:25:57,399 Speaker 1: work thing that's happening that you don't really want any 470 00:25:57,440 --> 00:25:59,720 Speaker 1: much to know about, complaining about work. But it also 471 00:26:00,040 --> 00:26:03,200 Speaker 1: is us to this level of legally dubious information, which 472 00:26:03,240 --> 00:26:06,760 Speaker 1: is you know, talking about client positions. UM. And we 473 00:26:06,800 --> 00:26:09,440 Speaker 1: also even you know, have some examples too of actual 474 00:26:09,600 --> 00:26:12,800 Speaker 1: bribery and securities fraud being talked about UM on these 475 00:26:12,800 --> 00:26:15,040 Speaker 1: different apps. Okay, so just to be clear, the reason, 476 00:26:15,240 --> 00:26:17,800 Speaker 1: one reason why this is so front and center for 477 00:26:17,840 --> 00:26:20,000 Speaker 1: so many people is that just this week a former 478 00:26:20,040 --> 00:26:23,400 Speaker 1: Jeffreys banker was fined in the UK for sharing confidential 479 00:26:23,440 --> 00:26:26,639 Speaker 1: data on WhatsApp. UM. This sort of brings to for 480 00:26:26,880 --> 00:26:29,399 Speaker 1: the issue. But banks are trying to crack down on this. 481 00:26:29,440 --> 00:26:31,040 Speaker 1: I mean, this has been going on for a while. 482 00:26:31,560 --> 00:26:35,480 Speaker 1: Banks have certainly cracked down on mobile phone usage and texting. Um, 483 00:26:35,600 --> 00:26:38,560 Speaker 1: what are they doing to combat this? Right? So, banks, 484 00:26:38,600 --> 00:26:40,440 Speaker 1: as you say, you know, each and every time there's 485 00:26:40,440 --> 00:26:43,080 Speaker 1: a new place that people are going offline to talk, 486 00:26:43,160 --> 00:26:45,080 Speaker 1: they've It's like cat and mouse. They always find a way. 487 00:26:45,160 --> 00:26:47,920 Speaker 1: Emails used to be something that we didn't have ingested 488 00:26:47,920 --> 00:26:51,200 Speaker 1: into these big bank compliance forms, and now we do. 489 00:26:51,600 --> 00:26:54,080 Speaker 1: So the banks are trying, I mean they know that 490 00:26:54,119 --> 00:26:56,120 Speaker 1: this is happening, but a lot of them have these 491 00:26:56,119 --> 00:26:59,000 Speaker 1: bands on text messages. Period. You know, you can't bring 492 00:26:59,040 --> 00:27:01,560 Speaker 1: your your cell phone to the trading floor. You're not 493 00:27:01,600 --> 00:27:04,840 Speaker 1: supposed to be conducting work. There's also different agreements that 494 00:27:04,880 --> 00:27:07,760 Speaker 1: you sign when you're employed with the bank, saying yes, 495 00:27:07,840 --> 00:27:10,639 Speaker 1: I attest that I will not conduct any business on 496 00:27:10,680 --> 00:27:13,440 Speaker 1: any form of communication that you don't already monitor. You know, 497 00:27:13,880 --> 00:27:15,680 Speaker 1: you know what I'm struck by as as I as 498 00:27:15,720 --> 00:27:17,880 Speaker 1: I read your article and as I hear you talk 499 00:27:17,920 --> 00:27:21,200 Speaker 1: about it, Why are people doing this? I mean traders 500 00:27:21,200 --> 00:27:23,000 Speaker 1: could just meet in person, right, I mean, yes, this 501 00:27:23,080 --> 00:27:25,479 Speaker 1: is an encryption method and so people could go to this, 502 00:27:25,520 --> 00:27:28,320 Speaker 1: But I mean it comes down to why are why 503 00:27:28,359 --> 00:27:31,000 Speaker 1: are traders still trying to do this if they know 504 00:27:31,119 --> 00:27:34,960 Speaker 1: it's illegal, and their use of these uh encrypted apps 505 00:27:35,040 --> 00:27:37,760 Speaker 1: just sort of highlights their knowledge of the fact that 506 00:27:38,119 --> 00:27:40,320 Speaker 1: they're illegal. So I mean, do people talk about that. 507 00:27:40,359 --> 00:27:42,040 Speaker 1: I mean people could just be meeting in person. It's 508 00:27:42,080 --> 00:27:44,240 Speaker 1: just highlight how frequent it is that this type of 509 00:27:44,240 --> 00:27:47,120 Speaker 1: activity goes on, Right, So people do meet in person, 510 00:27:47,160 --> 00:27:49,000 Speaker 1: they do talk about these things then, or they pick 511 00:27:49,080 --> 00:27:50,800 Speaker 1: up the phone and they talk about it. They're usually 512 00:27:50,840 --> 00:27:53,280 Speaker 1: they prefer cell phones obviously rather than a line of work. 513 00:27:53,359 --> 00:27:55,199 Speaker 1: If used to have personal cell phones, which would go 514 00:27:55,240 --> 00:27:57,960 Speaker 1: out of the range of their banks, right, But those 515 00:27:58,000 --> 00:28:00,560 Speaker 1: things can still be subpoenats. So if there's ever any 516 00:28:00,640 --> 00:28:03,680 Speaker 1: question that could actually be under the purview of some 517 00:28:03,760 --> 00:28:06,520 Speaker 1: kind of prosecutor, if you have WhatsApp or a signal 518 00:28:06,560 --> 00:28:09,679 Speaker 1: that deletes and nobody ever is able to subpoena those records, 519 00:28:09,960 --> 00:28:12,040 Speaker 1: that's better. And I think you're seeing a lot of 520 00:28:12,040 --> 00:28:15,080 Speaker 1: people in the political space to using confide using signal 521 00:28:15,119 --> 00:28:18,240 Speaker 1: because they don't want to ever be monitored under any circumstance, 522 00:28:18,440 --> 00:28:21,480 Speaker 1: even if they're not saying anything that would be a problematic. 523 00:28:21,600 --> 00:28:26,159 Speaker 1: But is this type of encrypted app preferable even to 524 00:28:26,560 --> 00:28:29,320 Speaker 1: an in person meeting. I don't think it's preferable. I 525 00:28:29,359 --> 00:28:32,760 Speaker 1: think it's when more of a convenience standard. So if 526 00:28:32,840 --> 00:28:35,159 Speaker 1: you are in your same morning sales meeting at the 527 00:28:35,160 --> 00:28:37,800 Speaker 1: bank floor, you can't really pick up the phone because 528 00:28:37,880 --> 00:28:39,960 Speaker 1: you're literally in that meeting. You can't go meet someone 529 00:28:40,000 --> 00:28:42,120 Speaker 1: because you're at work. But if you have something to 530 00:28:42,120 --> 00:28:44,880 Speaker 1: say to someone about work, um, we we have some 531 00:28:44,920 --> 00:28:47,280 Speaker 1: examples in here about people talking about you know, the 532 00:28:47,320 --> 00:28:51,120 Speaker 1: trading desk buys and sells that's happening in text form 533 00:28:51,200 --> 00:28:53,800 Speaker 1: in these sales meetings when it should probably be happening 534 00:28:54,320 --> 00:28:57,680 Speaker 1: on you know, Bloomberg, IB on message whatever it is. 535 00:28:58,040 --> 00:29:00,320 Speaker 1: You know. I have to wonder how often people use 536 00:29:00,400 --> 00:29:03,400 Speaker 1: these apps more for conversations that might be a little 537 00:29:03,400 --> 00:29:06,640 Speaker 1: bit racier than compliance would like, less so for the 538 00:29:06,720 --> 00:29:10,360 Speaker 1: illegal issues, and more for uh, say, you know, cracks 539 00:29:10,400 --> 00:29:14,320 Speaker 1: about I don't know, pick you're not safe for work topic. Um. 540 00:29:14,360 --> 00:29:16,640 Speaker 1: But you know, if I imagine, it's more that than 541 00:29:16,680 --> 00:29:19,160 Speaker 1: it is the other exactly. And I don't want to 542 00:29:19,200 --> 00:29:21,680 Speaker 1: overstress that there are these sort of you know, dubious 543 00:29:21,720 --> 00:29:24,480 Speaker 1: things happening all the time, but we certainly found those examples. 544 00:29:24,480 --> 00:29:26,280 Speaker 1: But you're right, it is a lot of things where 545 00:29:26,360 --> 00:29:28,840 Speaker 1: I would rather not have my boss look at this. 546 00:29:29,120 --> 00:29:31,040 Speaker 1: You know it's a complain about work, it's a complain 547 00:29:31,040 --> 00:29:33,520 Speaker 1: about your boss, or maybe it's also something you know, 548 00:29:34,200 --> 00:29:37,320 Speaker 1: we don't mean I want to swear on my text. 549 00:29:37,560 --> 00:29:40,280 Speaker 1: We have so many complaints of banks. Um compliance officers 550 00:29:40,280 --> 00:29:42,880 Speaker 1: have been so stringent on that that you actually get 551 00:29:42,880 --> 00:29:45,400 Speaker 1: flagged right away if you use any kind of swear 552 00:29:45,400 --> 00:29:48,000 Speaker 1: word or tone. Tone is important. So what'sapp is a 553 00:29:48,040 --> 00:29:50,280 Speaker 1: is a swearing platform. Laura Keyle Keller, thank you so 554 00:29:50,320 --> 00:29:52,640 Speaker 1: much for joining us. Laura Keller is a financial reporter 555 00:29:52,680 --> 00:30:01,840 Speaker 1: here at Bloomberg News. Thanks for listening to the Bloomberg 556 00:30:01,920 --> 00:30:05,320 Speaker 1: pien L podcast. You can subscribe and listen to interviews 557 00:30:05,320 --> 00:30:10,520 Speaker 1: at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm 558 00:30:10,560 --> 00:30:13,600 Speaker 1: pim Fox. I'm out there on Twitter at pim Fox. 559 00:30:13,880 --> 00:30:16,560 Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one 560 00:30:16,840 --> 00:30:19,600 Speaker 1: before the podcast. You can always catch us worldwide on 561 00:30:19,640 --> 00:30:20,440 Speaker 1: Bloomberg Radio.