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 moven news.
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Speaker 3: I would love to be a fly on the wall
Speaker 3: through your weekend because it's no secret that private equity
Speaker 3: interest has been in and around the regional banks. Were
Speaker 3: you interested at all in buying First Republic assets?
Speaker 4: So assets? Yet?
Speaker 5: We're always interested in buying assets, but not in the
Speaker 5: banking business. We like others. We're not banks, we don't
Speaker 5: intend to be banks. We don't buy banks. But if
Speaker 5: we can be supportive of restructuring of the banking system
Speaker 5: through the purchase of assets, absolutely.
Speaker 3: Now I want you to look beyond even just today
Speaker 3: because we have the First Republic sale to JP Morgan.
Speaker 3: But you have Jamie Dimond saying that the banking crisis
Speaker 3: is almost over. Do you see a whole second wave
Speaker 3: of this crisis coming?
Speaker 5: I think part one of the banking crisis is over
Speaker 5: and I would never disagree with Jamie because this is
Speaker 5: his job and he lives it. But if my observation
Speaker 5: is what's happened so far totally predictable, marked to market
Speaker 5: losses and treasury security is well known to everyone, structure
Speaker 5: of deposits above minimum guarantees well known to everyone. Are
Speaker 5: we surprised we shouldn't be. Everyone knew what was happening here.
Speaker 5: Rising rates created the stress. The interesting thing to me
Speaker 5: is not whether these street banks failed, it's what's the
Speaker 5: business of regional banking going forward?
Speaker 4: Think about it.
Speaker 5: Forty two billion left SVB in four hours without a line.
Speaker 4: So you're now the CEO of a big regional bank.
Speaker 5: Your cost of funds is up, your regulatory costs are up.
Speaker 4: Can you lend money?
Speaker 5: Or is your business model going to need to change,
Speaker 5: going to need to evolve. I think that's what's interesting.
Speaker 5: And I think we have a second wave in commercial
Speaker 5: real estate.
Speaker 3: The second wave in commercial real estate. Do you think
Speaker 3: that that wave pertains to the banking system at large
Speaker 3: or a broader set of investors?
Speaker 4: I think it is.
Speaker 5: Look, there are lots of people own real estate across
Speaker 5: the world, across the economy. Investors who own real estate,
Speaker 5: suffer losses. Investors suffer losses all the time growth stocks
Speaker 5: go down, investor suffer losses. That to me is not
Speaker 5: systemic in any way. A banking system which has government
Speaker 5: guarantees where people put their money in a trust relationship,
Speaker 5: if they suffer significant losses, that's what causes concern, and
Speaker 5: that's what we have here. It won't be systemic in
Speaker 5: my view, but it'll be concentrated. Regional banks once again
Speaker 5: are the primary lenders to many of our regional real
Speaker 5: estate issues.
Speaker 3: Now, we just saw this morning the big get bigger,
Speaker 3: JP Morgan buying a massive regional bank. But what happens
Speaker 3: to the banking system moving forward? You mentioned there will
Speaker 3: be changes. What does the new banking system look like
Speaker 3: coming out of these troubles.
Speaker 5: I think it's already changed. We have yet to adjust
Speaker 5: to the changes of two thousand and eight. So if
Speaker 5: you think about two thousand and eight and Dodd Frank,
Speaker 5: ostensibly the legislation was to restrict the exposure of the
Speaker 5: US economy to large, systemically important banks. By the way
Speaker 5: it worked, banks are less than twenty percent of all
Speaker 5: lending in the US. The new banks, by the way,
Speaker 5: are investors. Everyone who's at this conference today, in some
Speaker 5: way or another participates in the banking system. But if
Speaker 5: you ask about banking proper, I do think in the
Speaker 5: short term we're going to see the big get bigger.
Speaker 5: People fly to safety when you have any.
Speaker 4: Sort of crisis.
Speaker 5: JP Morgan is positioned to step into fixed safe first
Speaker 5: Republic should not be surprised. But regional banks are a
Speaker 5: very attractive political entity.
Speaker 4: Everyone has a regional bank.
Speaker 5: It'll be interesting to see how the system deals with
Speaker 5: the fundamental issues facing regional banking.
Speaker 3: Yeah, well, you mentioned banking system has already been our
Speaker 3: only twenty percent of the country's lending here, So what
Speaker 3: does that mean for who will and will not be
Speaker 3: able to have access to credit in the future.
Speaker 5: Look, we are I'll say it at a country level,
Speaker 5: we are fifty percent of the world's capital. We are
Speaker 5: Our businesses benefit, our government benefit, our consumers benefit. We
Speaker 5: already have unrestricted assets to credit. Sometimes it's more expensive,
Speaker 5: sometimes it's less expensive. Go anywhere else in the world.
Speaker 5: We are the envy of the world. No one has
Speaker 5: what we have, So I don't know that it gets
Speaker 5: to who has access to credit. The democratization of credit
Speaker 5: through the investor investment marketplace has already created unparalleled access.
Speaker 3: Now, if you think about the commercial real estate issues
Speaker 3: that we've been talking about, I'm really wondering. I know,
Speaker 3: over at Apollo, you guys look at things security by security,
Speaker 3: sometimes building by building. What are the office vacancies telling
Speaker 3: you about the state of the commercial real estate market.
Speaker 5: It's a bad day to be an office owner in
Speaker 5: San Francisco and Chicago.
Speaker 4: I mean, we could get more.
Speaker 5: Granular than that, but I step back and again try
Speaker 5: to put it in big picture. Every piece of real
Speaker 5: estate everywhere in the world that was purchased pre the
Speaker 5: run up in interest rates as a result of the
Speaker 5: change in interest rates is now worthless.
Speaker 4: We've had such a move in.
Speaker 5: Interest rates and real estate is an interest rate sensitive activity,
Speaker 5: that everything is worthless. It does not mean it won't
Speaker 5: come back, It does not mean it won't ultimately be
Speaker 5: a good investment. But in the short term we have
Speaker 5: significant dislocation. But we also have this change in how
Speaker 5: people use real estate. Office being the most visible, we
Speaker 5: are going to see losses.
Speaker 3: Now I'm sitting here in conversation with Mark Rowan, the
Speaker 3: CEO of Apollop Global Management, now, Mark, you mentioned this
Speaker 3: kind of pain that the office system is still yet
Speaker 3: to see the office buildings and the commercial real estate.
Speaker 3: Now what does that mean not just for investors in
Speaker 3: commercial real estate, but also investors in the regional banks
Speaker 3: as a derivative effect. Do you think the market is
Speaker 3: still under counting how bad things can get?
Speaker 5: I think the market has yet to ask the long
Speaker 5: term question. Right now, the question being asked is is
Speaker 5: the bank safe? Will there be a run on a bank?
Speaker 5: Will it survive?
Speaker 4: Safety?
Speaker 5: I believe has been our primary focus. But we've already
Speaker 5: seen and the government can make this safe with the
Speaker 5: stroke of a pen. I believe the banking system to
Speaker 5: be safe. That is different than what is the business
Speaker 5: of a regional bank going forward? If you don't know
Speaker 5: how sticky your deposits are, if your cost of funds
Speaker 5: is high, your cost of operations is high, what is.
Speaker 4: Your business model going forward?
Speaker 5: Like every other industry that has had to adjust to technology,
Speaker 5: regional banking is going to have to adjust to technology.
Speaker 5: I'll be shocked if five years from now the business
Speaker 5: model of a regional bank looks like what they do today.
Speaker 3: Now, let's take a big step back for a second.
Speaker 3: Because there's this big understanding in the industry that you're
Speaker 3: in that you can't unwind twelve years of easy money
Speaker 3: so easily. And you saw a lot of hiccups already,
Speaker 3: the LDI crisis in the UK now, the regional banking crisis,
Speaker 3: the crypto crash. What else is still yet to break.
Speaker 5: It's hard to be a predictor of what else is
Speaker 5: to break. But I look at places in the world
Speaker 5: where we have mismatches between liquid asset liquid liabilities, like
Speaker 5: a bank borrow short and len long. We have other
Speaker 5: places in the world where that same build up has
Speaker 5: taken place ten years twelve years of easy money forced
Speaker 5: people to do unnatural things to look for yield and
Speaker 5: to look for rate of return. LDI was the first
Speaker 5: time systemically the question was called. LDI was nothing more
Speaker 5: than a misplaced expectation in the part of UK institutions
Speaker 5: that public securities were liquid. They found out they're only
Speaker 5: liquid on the way up, they're not liquid on the
Speaker 5: way down. We have that same in certain open end
Speaker 5: of mutual funds. We've seen it in ETFs in point
Speaker 5: of stress. We've seen it even in some private vehicles
Speaker 5: in point of stress. So this is not a public
Speaker 5: or private issue. This is a mismatch between the underlying
Speaker 5: liquidity of assets and the structure of liabilities.
Speaker 3: Well, speaking of the public markets, there's some question about
Speaker 3: how well the public markets have actually held up in
Speaker 3: the base of some of this. You know, how safe
Speaker 3: can you feel in the fact that you have liquidity.
Speaker 5: Look, I stepped and I think about what's happened in
Speaker 5: the world and the difference between public and private. We
Speaker 5: used to think public was safe and private was risky.
Speaker 5: We now know public can be risky as well. We
Speaker 5: now have found out that private can be both safe
Speaker 5: and risky. What we're talking about is differing degrees of liquidity.
Speaker 5: What we have elected to do in our industry and
Speaker 5: certainly for.
Speaker 4: Apollo, is we focus on private.
Speaker 5: And the reason we focus on private is we don't
Speaker 5: believe there is sustainable alpha excess return in publicly traded markets,
Speaker 5: particularly in publicly traded debt markets. Therefore, if investors come
Speaker 5: to us for excess return, we need to step away
Speaker 5: from daily liquid markets. Fortunately, there's plenty.
Speaker 4: For us to do now.
Speaker 3: Just this morning there was news about arrival of Yours.
Speaker 3: Blackstone facing another wave of redemptions when it comes to
Speaker 3: its semi liquid vehicle. When it comes to the real
Speaker 3: estate market, you know, a lot of big private credit funds,
Speaker 3: big private equity funds are trying to court retail investors.
Speaker 3: When you look at some of the hiccups that some
Speaker 3: of the current funds are facing in the market, here
Speaker 3: some of the challenges when it comes to the investors
Speaker 3: ask for their money back with the for long dated investments.
Speaker 3: You're on the other side. What does this tell you
Speaker 3: about the direction of travel? Is investor confidence in retail
Speaker 3: semi liquid funds becoming dented in disenvironment?
Speaker 5: I don't know about dented. First, I think Blackstone is
Speaker 5: doing exactly the right thing. I think the industry owes
Speaker 5: them a debt of gratitude because they are teaching investors
Speaker 5: that alternatives are not an ATM. Now they're in an
Speaker 5: asset class that is under stressed because people are concerned
Speaker 5: about real estate valuations, and they are redeeming because they
Speaker 5: think valuations are headed down. Blackstone is behaving responsibly and
Speaker 5: doing exactly what they are supposed to do and what
Speaker 5: these vehicles are designed to do. But I look forward
Speaker 5: and I think about the structure of our business. I
Speaker 5: think retail investors high net worth are going to be
Speaker 5: fifty percent allocated to alternatives in the next five years. No, fifty,
Speaker 5: but not alternatives private equity and hedge funds. Alternatives are
Speaker 5: just alternatives to publicly traded.
Speaker 4: Stocks and bonds. They go from double A to equity.
Speaker 3: What do you say to people who criticize the private
Speaker 3: markets the credit markets in particular, is masking some of
Speaker 3: the risks that would be in public credit markets.
Speaker 5: I think the easiest thing to value as a bond
Speaker 5: bonds are cash flows, intrat rate and duration, and bonds
Speaker 5: adjusts quickly. The fact is, better risk reward has been
Speaker 5: available in private markets than in public markets for much
Speaker 5: of the last ten to twelve years. Everyone in our
Speaker 5: industry has picked a different segment. The segment we've picked
Speaker 5: is private investment grade. Private investment grade is something people
Speaker 5: haven't even contemplated. Think about what banks used to do,
Speaker 5: what ge capital used to do. That's the business we've built,
Speaker 5: and at four hundred billion of private credit, mostly investment grade, unfortunately,
Speaker 5: we're not relevant. It sounds like a lot four hundred billion,
Speaker 5: but we're talking about a forty trillion dollar market.
Speaker 4: We have a long way to go.
Speaker 3: Hundred billion, but getting bigger as well. There's a lot
Speaker 3: of discussion in Washington, for example, about regulating non banks.
Speaker 3: Do you think that you will face tighter regulation as
Speaker 3: things to procure?
Speaker 5: I think we all face tighter regulation. That is clearly
Speaker 5: the direction of travel. Ultimately people look for, is the
Speaker 5: information available? Yes, the information is already public. Are we
Speaker 5: mismatched in terms of borrowing short and lending long? No,
Speaker 5: We're actually countercyclical, and the vast majority of institutions countercyclical
Speaker 5: as well.
Speaker 4: Are we levered No? Are we concentrated?
Speaker 6: No?
Speaker 4: Are we a diversifier for the economy? Yes.
Speaker 5: At the end of the day, the US financial system
Speaker 5: is the envy of the world.
Speaker 4: We are fifty percent of all the action everywhere in
Speaker 4: the world, and it's a result of.
Speaker 5: Decisions made along the way to allow investors to be
Speaker 5: suppliers of credit.
Speaker 3: Well, I think that's the other part of the argument here.
Speaker 4: If not you, then who that's the choice?
Speaker 5: The US economy, the world economy will need a certain
Speaker 5: amount of credit, and the choices are you will allow
Speaker 5: it to be supplied exclusively by the banking system, backed
Speaker 5: by government guarantees, as we have in many foreign countries,
Speaker 5: or do we allow investors broadly defined retail investors, high
Speaker 5: net worth investors, pension investors, institutions to participate and get
Speaker 5: diversification and socialization of risk. Investors for the most part,
Speaker 5: are prepared for things that go up and down, things.
Speaker 3: That go up and down. You had mentioned kind of
Speaker 3: the benefits of the private markets in terms of return
Speaker 3: opportunities here in the credit markets. I'm curious about what
Speaker 3: you think about the current state of investment grade when
Speaker 3: you look at the public markets. There has been a
Speaker 3: lot of discussion about how eerily calm that spreads have
Speaker 3: been behaving in the face of what many feel is
Speaker 3: a pending recession. Do you think that there's more risks
Speaker 3: under the surface when you look at public credit.
Speaker 5: I don't think there's more risks under the surface. I
Speaker 5: think that you have a confused market. You have lots
Speaker 5: of talk about recession, and you have a yield curve
Speaker 5: the shape of which is.
Speaker 4: Up and then down.
Speaker 5: So it does not surprise me that investors who are
Speaker 5: being offered yields today of a certain magnitude are active
Speaker 5: in locking them in, especially after a decade of very
Speaker 5: low rates.
Speaker 3: Well, you've mentioned also I've heard you say a few
Speaker 3: times that kind of the era equity is eroding here.
Speaker 3: Does that make a bigger kind of secular push to
Speaker 3: credit in general?
Speaker 4: I think it does.
Speaker 5: I think this is an amazing entry point for credit,
Speaker 5: not just because we're in it, but because of what's transpired.
Speaker 5: Equity we printed eight trillion dollars from two thousand and
Speaker 5: eight until twenty twenty two. Exactly what was supposed to
Speaker 5: happen happened. Now that we've started withdrawing it. Entry point
Speaker 5: for credit is fabulous. Has adjusted very quickly. Liquidity has eroded,
Speaker 5: banking crisis has further roded it. We have a unique
Speaker 5: entry point for credit. It will not always be this good.
Speaker 5: Equity has adjusted somewhat, but not nearly as much as
Speaker 5: credit now.
Speaker 3: Also, I mean we've seen from the banking system that
Speaker 3: what was safe yesterday can be rated as junk tomorrow.
Speaker 3: Do not believe that we would be facing the greater
Speaker 3: wave of downgrades.
Speaker 4: I think all pricement, there's no doubt.
Speaker 5: But if you are concerned about the direction of travel,
Speaker 5: if there's uncertainty, I would almost always rather be top
Speaker 5: of the capital structure, senior secured.
Speaker 4: You tend to get paid back.
Speaker 5: So for our shop, the bet we've made has been
Speaker 5: on private investment grade.
Speaker 4: I like our hand.
Speaker 5: I would rather play our hand than anyone else's hand
Speaker 5: in our industry.
Speaker 3: Now, I'm kind of curious about Apollo's plans throughout the
Speaker 3: rest of this year. You're looking across Wall Street, You're
Speaker 3: seeing a lot of people either slimming back on hiring
Speaker 3: or flat out letting go of thousands of staff. What
Speaker 3: opportunity do you see there? Given Apollo has already tremendously
Speaker 3: added to have headgn in the.
Speaker 4: Last we will continue to grow.
Speaker 5: We've already said our business will be up in the
Speaker 5: asset management side. We've told the street better than twenty
Speaker 5: five percent this year, on the retirement services side, better
Speaker 5: than twenty percent this year. And that's with an overlay
Speaker 5: to our strategy of what we call no new toys.
Speaker 5: And the reason no new toys is not to add
Speaker 5: new things. The upside from simply executing the business plan
Speaker 5: that's in front of us is so high that the
Speaker 5: price of distraction is just very hard to contemplate. So
Speaker 5: I think twenty three for us, we will grow, we
Speaker 5: will add team, but we will do it in the
Speaker 5: context of the envelope of our business that exists and
Speaker 5: no new toys.
Speaker 3: Are you finding it very easy these days to hire
Speaker 3: from the banks or even the technology companies that are
Speaker 3: slums back.
Speaker 4: It's never easy to hire. This is always about culture.
Speaker 4: But we have.
Speaker 5: Grown the team tremendously and in fact is the limitter
Speaker 5: of our growth. At the end of the day, we
Speaker 5: provide our client's judgment, and that judgment comes from people
Speaker 5: being at Apollo for a long time and integrating into
Speaker 5: our culture. We can only grow as fast as we
Speaker 5: can culturally absorb people.
Speaker 4: There's a natural hedge.
Speaker 5: If you will, or a natural limitter to our growth,
Speaker 5: and we watch that balance very very carefully.
Speaker 3: Before I let you go, before Wednesday's big FED day,
Speaker 3: what do you expect in terms of the direction of
Speaker 3: travel when you look at the interest rate trajectory for
Speaker 3: the rest of this year and what it means for
Speaker 3: the state of markets.
Speaker 5: Look, I think there's a there's a push pull. I
Speaker 5: think the direction of travel Wednesday is going to be up.
Speaker 4: It'll all depends about the.
Speaker 5: Language that surrounds it and the activities that take place
Speaker 5: following it. If we have a second leg of this
Speaker 5: banking crisis that I obviously augurs for slower. If we
Speaker 5: don't and we continue to see the wage pressures that
Speaker 5: we just saw, it'll be tougher.
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Speaker 1: Let's bring in Herman Chance, speaking of Bloomberg Intelligence. He
Speaker 1: covers the regional banks here. So Herman, I guess it's done.
Speaker 1: JP Morgan, First Republic. You know, we kind of went
Speaker 1: into Friday thinking something's going to happen. JP Morgan was
Speaker 1: certainly on the list. We kind of wake up Monday morning.
Speaker 2: Here way up there at the time, top of the list. Boom,
Speaker 2: they got it. What a shocker? What did how did
Speaker 2: why did they?
Speaker 4: What did J?
Speaker 3: I guess?
Speaker 4: How did jpmore win?
Speaker 1: What did they do to put them over the top
Speaker 1: to beat out Bank of America and.
Speaker 2: P and C and some others? Yeah?
Speaker 8: Sure, so what Bank of.
Speaker 2: America declined to even participate in the addiction? Okay, so
Speaker 2: did US Bank? And we know that PNC and citizens
Speaker 2: were invited.
Speaker 8: But I'm assuming they probably made a bid, but really
Speaker 8: assumption what really put JP Morgan over the top is
Speaker 8: that they are acquiring all of the assets that are underwater,
Speaker 8: both on the loans and security side, Whereas any potential
Speaker 8: regional bank that would have made a bid probably would
Speaker 8: have just cherry picked the best and most attractive assets
Speaker 8: and left these underwater securities and loans with the FDIC. So,
Speaker 8: in effect, the FDIC made the best choice in limiting
Speaker 8: the losses to the Deposit Insurance Fund by doing the
Speaker 8: deal with JP.
Speaker 1: We don't know, this probably isn't in your remit. But
Speaker 1: the flip side to that is that now we kind
Speaker 1: of set a precedent for a JP Morgan or I
Speaker 1: don't know, somebody else that's of that ILK, that they're really,
Speaker 1: you know, the lender of last resort, that they're really
Speaker 1: the backstop. It may not be the regulators.
Speaker 8: Yeah, we just wrote about a little bit about this
Speaker 8: with respect to PNC, that was in our mind the
Speaker 8: most likely acquire of the First Republic assets and deposits.
Speaker 8: And if the regulators are going to let these systemically
Speaker 8: important banks acquire these failed banks, then it makes the
Speaker 8: region is less likely to be able to absorb these
Speaker 8: these types of deals because the FDIC would most likely
Speaker 8: prefer to deal with the largest banks because they can
Speaker 8: acquire the entirety of these troubled assets onto their own balance.
Speaker 2: Shot, let's parse this out because there's also a lot
Speaker 2: of spin here. There's a lot of politics. The FDIC
Speaker 2: doesn't want to be blamed for bailing out there rich,
Speaker 2: which they did, and they didn't want to take the
Speaker 2: bank into receiver ship, so went to JP Morgan. But
Speaker 2: they had to first take the bank into receivership. Right,
Speaker 2: how much is the FDIC going to have to pay
Speaker 2: initially and how much are they going to have to
Speaker 2: guarantee in terms of insurance to convince Jamie Diamond, who remember,
Speaker 2: wouldn't even take a call for SBB because his board
Speaker 2: wouldn't let him. Now his board's got lenient in just
Speaker 2: six weeks time. How much does the FDIC really have
Speaker 2: to shell out in this big bail out of the rich.
Speaker 8: The FDIC estimated in the press release it's going to
Speaker 8: be a thirteen billion dollar hit to the Deposit Insurance Fund, which,
Speaker 8: in the grand scheme of things, is better versus the
Speaker 8: twenty billion dollar hit they're taking with the SVB failure,
Speaker 8: So dealing with JP Morgan is more is more advantageous
Speaker 8: for the regulators, and the FDFC is offering a lost
Speaker 8: your agreement on the loans for First Republic and their
Speaker 8: offering so financing.
Speaker 2: Lost share agreement. So they had to pay thirteen billion
Speaker 2: upfront and they're going to have to pay the other
Speaker 2: at least nine billion down the line because JP Morgan
Speaker 2: and their slides estimated that the loans they bought are
Speaker 2: worth twenty two billion dollars less than par.
Speaker 8: Right, so they're taking a thirteen percent haircut on the loans,
Speaker 8: which is much larger than what we've seen out the others.
Speaker 8: For example, the other failed bank deal that we found
Speaker 8: from a New York community and signature, they were only
Speaker 8: taking a five percent haircut. So it just reflects the
Speaker 8: underwater nature of the loan book that First Republic had.
Speaker 1: All right, Herman, thank you once again for coming to
Speaker 1: our rescue, bringing it making it all clear here what's
Speaker 1: happening on the regional bank front. Herman Chann from Bloomberg Intelligence.
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Speaker 1: A little preview, what maybe the markets are thinking about
Speaker 1: when we get to that FED day. Let's bring in
Speaker 1: one of our all time faves, and whenever we see
Speaker 1: her running around the Bloomberg HQ, we grab bring her
Speaker 1: down here to the studio. Liz McCormick, Chief correspondent of
Speaker 1: Global macro Markets with Bloomberg News List, Thanks so much
Speaker 1: for joining us here. What are you going to be
Speaker 1: looking for this week? I mean, we've got the Fed
Speaker 1: on Wednesday, We've got economic data. Every time we turn around,
Speaker 1: there's something being released throughout this week. What are you
Speaker 1: looking at? What do you think the markets are looking at?
Speaker 9: Well, yeah, it's like a blockbuster week. We have the
Speaker 9: Fed and also on Wednesday, for the bond walks, there's
Speaker 9: a Treasury refunding, you know, so the Treasury Department weighs
Speaker 9: in on their thoughts about borrowing, and then payrolls on Friday.
Speaker 2: And wait, what is the Treasury refunding, they weigh in,
Speaker 2: they just give commentary.
Speaker 9: No no, no, So they say, hey, this is our
Speaker 9: borrowing plan for the quarter. So you know, dealers are
Speaker 9: always looking are they going to increase auction sizes more
Speaker 9: notes and bonds this time? Given the constraints of the
Speaker 9: debt limit, their kind of hands are tied. They think
Speaker 9: they're going to keep notes in bonds stable, but they're
Speaker 9: looking for insight.
Speaker 2: You know, does every sentence have an asterisk at this
Speaker 2: time or do they say, like, actually, as of now,
Speaker 2: we don't have enough money to borrow at anything at all.
Speaker 2: I mean, well, that's exactly right.
Speaker 9: If you look at Luke crandall from rights and he
Speaker 9: was writing that some of these they give some financing
Speaker 9: estimates today and then the refunding is Wednesday, but that
Speaker 9: Treasury has been assuming each time they do these numbers
Speaker 9: that there is a resolution of the debt ceiling, which
Speaker 9: of course hasn't happened. So it's a lot of asterisks
Speaker 9: and if and only so that's why they're going to
Speaker 9: try to like do nothing with the big kahunas the
Speaker 9: notes and bonds and just give some more guidance because
Speaker 9: there's a lot of people saying, you know, there's going
Speaker 9: to be a wave of new treasury bills after we
Speaker 9: get through the debt limit because they've been kind of
Speaker 9: cutting them back dealing with the extraordinary measures and to
Speaker 9: stay under the debt limit.
Speaker 3: So there's the short end.
Speaker 9: Folks have a lot on their mind. You know, bills
Speaker 9: as you talk about, a lot affect the curve. There's
Speaker 9: pricing of the you know, risk of the debt ceiling.
Speaker 9: Let's not buy the bills in certain areas, so for
Speaker 9: the bond folks, and there's other things that they'll kind
Speaker 9: of communicate about their plans. So but on the FOMC,
Speaker 9: I was listening to you guys chatting with Jess and
Speaker 9: I think she kind of really nailed it. That people
Speaker 9: are saying, well, stocks and things are holding it okay
Speaker 9: because the market is priced for like hike, a pause,
Speaker 9: a pivot, and a cut. That's like Tom s e
Speaker 9: of A seven's report always says that. But if the
Speaker 9: Fed doesn't signal that, or if they you know, hike
Speaker 9: one more time and make it sound like wow, there's
Speaker 9: a chance we have to do more or just really
Speaker 9: try to push back on this surety for cuts, then
Speaker 9: they're talk but yes, yes, might take a hit, you know,
Speaker 9: So that's what people are looking for.
Speaker 1: What does he have to say, Well, that's what they
Speaker 1: I mean. So if that's what they have been saying
Speaker 1: consistently the Federal Reserve, So if they don't say it
Speaker 1: as consistently this time, that in and of itself is news,
Speaker 1: right right.
Speaker 9: In fact, Anna Wong at Bloomberg Economics is calling for
Speaker 9: a hawkish hike, right, you know, But I said, the
Speaker 9: problem is the market doesn't seem to take it that way.
Speaker 2: So I don't know what all has to say.
Speaker 1: You and some other folks, Garfield Reynolds and Red Pickered
Speaker 1: are out with something a note today or I guess
Speaker 1: call it a piece of journalism. I don't know what
Speaker 1: you call it. In research we called research note. Anyway,
Speaker 1: it's good reporting. I think I know stagflation when I
Speaker 1: see it. It's a slowing economy and high inflation. That's stagflation.
Speaker 1: That sounds bad, is it?
Speaker 9: Well, it depends on what you're in, right, You try
Speaker 9: to and I keep saying to people, this is maybe
Speaker 9: not your mother's stagflation. It's like, you know, people are
Speaker 9: calling it stagflation light, so maybe zero to one percent growth,
Speaker 9: inflation staying above the Fed's target, so not the horrific
Speaker 9: horrible seventies, but not great, So you got to kind
Speaker 9: of pick your spot.
Speaker 2: So real stagflation is inflation with contraction.
Speaker 4: Exact.
Speaker 2: Mean, it's pretty basic. And I know everyone's tried to
Speaker 2: make up new definitions over the past couple of years.
Speaker 2: But if you have inflation and if you have a contraction,
Speaker 2: that's stagflation. That's not in the Miller household.
Speaker 1: Yes, that's that's a Midwestern and we have no debt ceiling.
Speaker 9: Yeah, there's just so many things on the radar here,
Speaker 9: you know. And I was joking with a colleague, you know, inflation,
Speaker 9: even though you hear, oh, certain things are getting better,
Speaker 9: I don't know.
Speaker 1: When I go shopping, I'm like, wow, that.
Speaker 2: Those berries are expensive.
Speaker 9: I think I can live on bananas, you know, whatever's cheaper.
Speaker 2: Everything I do is more expense. I had I broke
Speaker 2: my iPhone. I had to buy a new one. I
Speaker 2: don't even want to tell you how much it costs. Well,
Speaker 2: I went to the movies on Saturday. Very expensive. I
Speaker 2: want shopping.
Speaker 1: This week, I went to a factory outlet store for
Speaker 1: the first time in my.
Speaker 2: Life, the first time you've ever been to a factory
Speaker 2: outlet store? Yes, which one? Did you go to? Nike?
Speaker 1: So just just you didn't go to one of the
Speaker 1: factory Alan malls. It was the factory out of malls,
Speaker 1: the Shore Factory out let.
Speaker 2: Mall in fall Es.
Speaker 1: Actually it's got had everything every brand. I didn't know
Speaker 1: that this whole world existed. I saw a movie about
Speaker 1: Nike this weekend.
Speaker 2: I want to see that. I want to air the
Speaker 2: Air Jordan movie. My wife loved it and I thought
Speaker 2: it was pretty good. And Liz ask him how he
Speaker 2: got there. He drove in a Sure, we drove there
Speaker 2: in a white Rolls Royce ghost with red bright red
Speaker 2: leather interior.
Speaker 1: What do you not notice us and see in his
Speaker 1: town that didn't even stand out? It's just like, oh yeah,
Speaker 1: that's just the Miller's all right. Liz McCormick, thanks so
Speaker 1: much for joining us. Lots of echo data, lots of
Speaker 1: fun stuff we'll keep an eye on all week.
Speaker 7: You're listening to the team Ken's Are Live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg dot com,
Speaker 7: the iHeartRadio app, and the Bloomberg Business app or listen
Speaker 7: on demand wherever you get your podcasts.
Speaker 2: I want to talk ETFs. Ye, right now. I love
Speaker 2: talking about ETFs. You have a show TV show by ETF. Yes,
Speaker 2: and it's a you know, it's a more than ten
Speaker 2: trillion dollar industry globally. Forecasts are for the ETF industry
Speaker 2: to double within the next I think five years, so
Speaker 2: right now seven trillion in the US.
Speaker 1: And that's why the young guys are going to the
Speaker 1: ETF business.
Speaker 2: Yes, but there's some old people in ETFs as well.
Speaker 1: Okay, were you with Northern Trust before I was with
Speaker 1: the Trust. I haven't even brought him in, But here's
Speaker 1: the story. Our next guest was with Northern Trust in Chicago.
Speaker 1: The crustiest money you could ever imagine that all the
Speaker 1: money in the Midwest, Northern Trust manages. You go into
Speaker 1: their offices in Chicago, it's like the nineteen thirties, which
Speaker 1: is awesome, which was.
Speaker 2: When Chicago was at its peak.
Speaker 1: Right, And so this young buck a Northern Trust gets
Speaker 1: trained up in the crusty world of pensions and all
Speaker 1: that kind of stuff and he goes to the et business.
Speaker 2: Well, that actuallyins it. I think it's a pretty convincing product.
Speaker 2: He also worked at Invesco, one of the biggest ETF
Speaker 2: issuers in the business. Tim Urbanowitz is in the studio.
Speaker 2: Thank you, Tim for coming to New York and joining
Speaker 2: us here in the in the studio. It's always great
Speaker 2: to have guests live. You are the head of research
Speaker 2: at Innovator ETFs. Now after the experience, we've talked about
Speaker 2: your CV already, and you went to Wheaton College as well,
Speaker 2: so you're all in when it comes to Chicago. Tell
Speaker 2: us first of all about Innovator ETFs and what drew
Speaker 2: you to that firm.
Speaker 6: Yeah, So Innovator ETFs it was actually founded by the
Speaker 6: same two partners that founded the Power Shares ETF franchise
Speaker 6: back in the early two thousands, Bruce Bond, John Southern.
Speaker 6: That business was then sold to Investco, fourth largest ETF
Speaker 6: business in the world. Now, so I had the opportunity
Speaker 6: to work at power Shares for a while, really cut
Speaker 6: my teeth in the ETF business. Learn a little bit
Speaker 6: about it. You saw power Shares grow to the monster
Speaker 6: that it is now and then Innovator. You know, Bruce
Speaker 6: and John founded Innovator back in twenty and seventeen, and
Speaker 6: the idea was really you know, the first time, it
Speaker 6: was how do we take the ETF rapper put a
Speaker 6: more intelligent strategy underneath the hood, and that was how
Speaker 6: smart beta was born. This time around with Innovator, it
Speaker 6: was how do we take some of the interesting payoffs
Speaker 6: that we're seeing in the structured noteworld and make those
Speaker 6: more efficient. How do we use the ETF wrapper to
Speaker 6: provide the tax efficiency, the liquidity, get rid of the
Speaker 6: lock up period, surrender charges, all that stuff that you
Speaker 6: see in the structured noteworld and just make that experience
Speaker 6: much more efficient for investors. And that's really how Innovator
Speaker 6: was birth.
Speaker 2: And this is I mean, the ets we're going to
Speaker 2: talk about now are part of a whole new class.
Speaker 2: You had your playing vanilla atfs. Of course, I think
Speaker 2: now thirty years ago was when they first put out
Speaker 2: the spies, and then you had smart beta ETFs. You know,
Speaker 2: different weighting on stocks and the index for example, is
Speaker 2: one way that people do that. Then you had thematic ETFs,
Speaker 2: which were all the rage last year. And now buffers
Speaker 2: have become Buffers is like a keyword now. But you
Speaker 2: say a barrier APRJ for example, is your innovative innovator
Speaker 2: premium income, thirty percent barrier ETF. What exactly does this
Speaker 2: product do?
Speaker 6: Yeah, so, I mean you look at the category of
Speaker 6: we call it defined outcome investing, and really this is
Speaker 6: when we talk to advisors more than anything else. What
Speaker 6: their clients want to do is to remove as many
Speaker 6: of the unknowns out there as possible, and really a
Speaker 6: buffer and even a barrier. They do that by providing
Speaker 6: a defined or known outcome, so we really remove the
Speaker 6: guesswork altogether. So with a barrier, what we're striving to
Speaker 6: do is provide a defined level of high income with
Speaker 6: built in risk management, so a known barrier against losses
Speaker 6: over the outcome period. So APRJ you have a thirty
Speaker 6: percent barrier against losses over the next twelve months.
Speaker 2: With meaning you can lose up to thirty percent but
Speaker 2: no more.
Speaker 6: Meaning that if the market were to go down on
Speaker 6: a price return basis anywhere from zero to thirty percent
Speaker 6: from a April to April, you would be fully protected
Speaker 6: from those losses.
Speaker 2: Oh sorry, okay, you can. You can avoid losses down
Speaker 2: to thirty percent, but when it's if it loses more
Speaker 2: than thirty percent, which God forbid, right, then you've got
Speaker 2: to start taking a hit exactly.
Speaker 6: So that's when you would see if you break that
Speaker 6: thirty percent barrier, that's when you're down one for one
Speaker 6: with the market the whole way. The difference here is
Speaker 6: that you're always going to get that income, so that
Speaker 6: distribution rate is known and that continues to be paid
Speaker 6: out regardless of if we break the barrier or not.
Speaker 6: So at APRJ, that thirty percent barrier level, just given
Speaker 6: a client's view of the market right now, that is
Speaker 6: one of the most popular strategies that we've seen since
Speaker 6: launching one of the biggest asset gatherers. Just you know,
Speaker 6: if you don't think the market's going to go down
Speaker 6: more than thirty percent, to be able to say, hey,
Speaker 6: I can get you that seven percent rate with no guesswork,
Speaker 6: it's a very powerful conversation for the advisor to hit
Speaker 6: and have with their clients.
Speaker 2: Paul, a thirty percent drop on the S and P
Speaker 2: five hunder it would take us to twenty nine nineteen.
Speaker 1: Oh that's not good, so it's pretty far down. So
Speaker 1: what's in there for you guys? I'm get seven percent,
Speaker 1: I got downside protection. You're not doing this for free.
Speaker 6: So we charge a management fee. Seventy nine basis point
Speaker 6: expense ratio. That's all we get other than that. We're
Speaker 6: setting the options package on day one of the strategy,
Speaker 6: and we set that package. That's how we're able to
Speaker 6: deliver that defined outcome. So there's nothing else other than
Speaker 6: that expense ratio.
Speaker 2: You have another one, PAPR. That's the innovator. You asked
Speaker 2: equity fifteen percent power buffer ETF. I guess this is similar, right,
Speaker 2: what's the difference between the buffer and a barrier.
Speaker 6: It's similar, but there's also a big difference. So similar
Speaker 6: in the sense that you have a defined outcome, so
Speaker 6: we know whatever the market does, we're going to have
Speaker 6: that fifteen percent downside buffer in place. So with a buffer,
Speaker 6: no matter where the market goes, So let's say the
Speaker 6: market goes down fifty percent, you're always going to have
Speaker 6: that fifteen percent downside protection in place. So in that
Speaker 6: scenario the market goes down fifty percent, you would be
Speaker 6: down thirty five percent. On the flip side of that,
Speaker 6: Unlike the barrier, you have upside potential with the buffer ETF,
Speaker 6: So PAPR you're capturing the first fifteen give or take
Speaker 6: fifteen percent of the upside of the sens P five
Speaker 6: hundred ETF's price return with that fifteen percent built in
Speaker 6: buffer against losses.
Speaker 2: So right now, so instead of the seven percent guaranteed return,
Speaker 2: you're allowed to take part in the upside up to
Speaker 2: about fifteen percent exactly.
Speaker 6: You get that upside appreciation. And I think part of
Speaker 6: it is, you know, why you're seeing this defined outcome
Speaker 6: in buffer category one of the fastest growing categories of
Speaker 6: ETFs again this year, is because a lot of clients
Speaker 6: look at the market they say, Okay, is it really
Speaker 6: going to go up more than fifteen percent? All the
Speaker 6: headwinds that we have, restrictive monetary policy, all the impacts
Speaker 6: of the past hikes that we've seen, the chances of
Speaker 6: that A lot of advisors think that's very low. So
Speaker 6: they view this as a very good trade off to
Speaker 6: be able to help hedge some of that recession risk.
Speaker 2: But Paul apr Jam, I mean, you're talking all the
Speaker 2: time about putting money in the two year YEP for
Speaker 2: four point one percent right now, which makes sense. But
Speaker 2: if you don't think the market's going to fall more
Speaker 2: than thirty percent, which is serious crater edge YEP, then
Speaker 2: you're going to get seven percent with apr.
Speaker 1: J, I tell you, these guys selling me right here,
Speaker 1: here's I stand. So who's actually just consistens of that
Speaker 1: flows in into these funds? Yep, So inception the barrier.
Speaker 6: ETFs launched at the beginning of April, and we've already
Speaker 6: seen over sixty million dollars of inflows in just the
Speaker 6: first few weeks, which, if you know about getting ETFs
Speaker 6: off the ground, that's that's there's been a lot of demand.
Speaker 6: I think a lot of that demand has really come
Speaker 6: from a lot of advisors that have seen the benefits
Speaker 6: that come with the defined outcome wrapper and they're just
Speaker 6: translating them over. So they had this on their you know,
Speaker 6: the equity side for the price return. Now they're transferringing
Speaker 6: that over to the income sleeve with their portfolio. So
Speaker 6: how do I replace things like high yield bonds with
Speaker 6: a thirty barrier or you know, even investment grade bond?
Speaker 6: How can we put those in that sleeve?
Speaker 1: How many ETFs are there out there? It seems like
Speaker 1: you guys are coming through the door every week with
Speaker 1: new things that every time I'm like, boy, that's cool,
Speaker 1: that's interesting. How many ETFs are out there? And how
Speaker 1: do you differentiate yourself.
Speaker 6: So we have I don't know what the industry right now,
Speaker 6: it's hard to keep track of.
Speaker 2: I feel like it's growing quickly close.
Speaker 6: Yeah, it is. We have about ninety in our lineup,
Speaker 6: and really, you know, we don't just launch anything, but
Speaker 6: our goal is to really take ideas that clients want
Speaker 6: exposure to. We look at what's going on in the
Speaker 6: structured note world, what are sales like there, what are
Speaker 6: clients gravitating towards, and again taking those payoff profiles that
Speaker 6: have been very successful, whether it be a buffer all.
Speaker 1: The time, Matt, that's kind of what my guys pitch
Speaker 1: me all the time.
Speaker 6: Yeah, and we're taking that. We're doing it for cheaper
Speaker 6: without the bank credit risk, which is obviously becoming more
Speaker 6: and more important, without the lock ups, the surrenders. You know,
Speaker 6: the ETF rapper is just so advantageous and so beneficial
Speaker 6: in so many ways. We're really just taking at and
Speaker 6: gravitating toward ideas that we know advisors already need in
Speaker 6: their portfolio.
Speaker 2: What's the best place to live around Chicago, what's the
Speaker 2: what's the uh Wheaton looks great, right, Lake Forest. I've
Speaker 2: heard a lot about up there.
Speaker 6: What's the Uh, Well, I'm a big fan of Wheaton, Illinois.
Speaker 6: We're calling it basically outside of New York ETF capital
Speaker 6: of the World too.
Speaker 2: Lot of it really is the ETF capital of the world.
Speaker 2: I mean, Eric Beltunas was this just there and did
Speaker 2: like six meetings in that little suburb.
Speaker 6: He was in our office walking just point to point.
Speaker 6: So it's a great, little, great little town.
Speaker 2: Go figure.
Speaker 1: Somebody's got to do it right, all right, Wheaton, Illinois.
Speaker 1: Timber Bannitt's Bandwitz, I'm sorry. Timber Bannowitz, head of research
Speaker 1: at Innovator ETFs. Joinings here in our Bloomberg Interactive Brookers studio.
Speaker 7: You're listening to the tape cans are live program Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 7: You can also listen live on Amazon Alexa from our
Speaker 7: flagship New York station. Just say Alexa play Bloomberg eleven.
Speaker 1: Matt, did you know that AI stands for Artificial intelligence?
Speaker 2: I had heard had heard about that. I think that's
Speaker 2: becoming a thing.
Speaker 1: I think it's something that we need to pay attention
Speaker 1: to I'm not gonna I don't know anything about this thing,
Speaker 1: but our next guest does and that's why.
Speaker 2: We got him in our Bloomberg Interactive Broker studio.
Speaker 1: Krishna Gupta, chairman of Presto Automation, Christian, thanks so much
Speaker 1: for joining us here. Can you tell us what you
Speaker 1: guys do at Presto Automation, which, by the way, publicly
Speaker 1: traded company pr ST is a simpler to put into
Speaker 1: Bloomberg terminal.
Speaker 10: Yeah, so thanks for having me and really excited to
Speaker 10: talk about AI and Presto here. So Presto is quite
Speaker 10: simply an enterprise AI business for the restaurant industry. Restaurants, okay,
Speaker 10: and very simply. What we're looking to do is automate
Speaker 10: every drive through in the country, so using voice AI
Speaker 10: instead of having a human. I mean, I'll just ask
Speaker 10: a simple question. Do you think in three years time
Speaker 10: there's going to be a human taking your order in
Speaker 10: the drive through?
Speaker 2: I guess it depends where we go, right because.
Speaker 1: No, now that you mention it, no, I'll go with
Speaker 1: you on this one. So tell us how it works,
Speaker 1: how you think it's going to evolve? Yeah, well, it
Speaker 1: works very simply can I actually drive up and say
Speaker 1: number two with a coke? Well, when you drive up,
Speaker 1: someone says, hi, what would you like to have?
Speaker 7: Right?
Speaker 10: Right, So that's what our AI will do.
Speaker 11: Hi.
Speaker 10: You know, it's like they ask you what would it
Speaker 10: like to have? Then you might well that we're gonna
Speaker 10: get to that. It's very interesting. So he's gonna say
Speaker 10: number two, or he's gonna say I want whatever, and
Speaker 10: then they'll say, okay, great, would you like fries with that?
Speaker 10: Would you like a drink with that? It's hot outside?
Speaker 10: Would you like an ice drink with that? So you know,
Speaker 10: let's sort of split up what the value proposition is
Speaker 10: for the restaurant. The obvious one is there's some labor
Speaker 10: labor cost savings. And there's a reason why this is
Speaker 10: relevant today. We're a really specific and interesting moment in
Speaker 10: time where labor costs are rising, and so in the past,
Speaker 10: you know, restaurants hadn't adopted much AI or technology because
Speaker 10: labor costs were low. And then the other thing is
Speaker 10: the AI technology has developed. We couldn't do this eighteen
Speaker 10: twenty four months ago, and so the fact that those
Speaker 10: things have converged, so there's clearly a labor automation play.
Speaker 10: But then the other part is, you know, to what
Speaker 10: Matt was talking about is the upsell, and the upsell
Speaker 10: is something I obsess over because the human being, the
Speaker 10: minimum wage employee is not up selling. They're forgetting to upsell.
Speaker 10: They get tired top sell. They are very far from
Speaker 10: an optimal up cell. And we look at our team incentive,
Speaker 10: right and they have no incentive. They have no incentive,
Speaker 10: and so so whereas for us, the AI never gets tired,
Speaker 10: it never forgets, and we are increasingly making it more optimal.
Speaker 10: You know, right now we can we can personalize it
Speaker 10: to some extent by time of day, weather or maybe
Speaker 10: what you ordered. Over time, I'll be able to reach
Speaker 10: your license plate, I'll be able to sink into the
Speaker 10: loyalty system and say, okay, Krishna driving through. You know,
Speaker 10: clearly he's ordered a vegan burger. He probably wants a
Speaker 10: vegan brownie because it's a chocolate addict. And so that level,
Speaker 10: like the perfect upsell, does three things. It makes people,
Speaker 10: you know, move through the sort of drive through is
Speaker 10: still in a very fast way while increasing the check
Speaker 10: size by a few percent. And the other thing it
Speaker 10: does it leads the customers happier, you know, like customers
Speaker 10: walk away feeling like they got something that they didn't
Speaker 10: necessarily know they wanted. So yeah, that's it's it's very
Speaker 10: simple to understand, and that's what we do.
Speaker 2: So what I mean, you founded this business in twenty seventeen,
Speaker 2: but you say you didn't have the technology to do
Speaker 2: what you're doing eighteen twenty four months ago. What changed?
Speaker 2: I mean, what motivated you to found it before you
Speaker 2: had the technology and what changed since you started the company.
Speaker 10: So we actually started the company more than a decade
Speaker 10: ago out of MIT, and the the sort of impetus
Speaker 10: was always engineering school.
Speaker 2: Yeah, I've heard of it. I've heard of it. They're
Speaker 2: pretty good at here.
Speaker 10: Yeah, we're okay, you know. And so so you know,
Speaker 10: we started it initially to do the same thing, which
Speaker 10: is drive labor automation and increased revenue. But initially the
Speaker 10: use case was at the table. So we have tablets
Speaker 10: at the table where you can order, you can play,
Speaker 10: you can pay, and that's that's a business that's out there.
Speaker 10: It's several large chains using that technology. Three four years ago,
Speaker 10: we realized that the same kind of labor automation play,
Speaker 10: especially as we headed into COVID, we realized could be
Speaker 10: applied to the drive through and that's where we started.
Speaker 10: COVID is what forced us to start thinking about it.
Speaker 10: So I would say our current business is a direct
Speaker 10: output of COVID.
Speaker 1: So talk to us about some of the conversations you're having.
Speaker 2: I don't know who you.
Speaker 1: Can discuss disclose with whom, But where are you in
Speaker 1: terms of the discussions here and rolling out the technology
Speaker 1: and how's it going?
Speaker 2: Is it better for bigger chains? For example? I can
Speaker 2: see how this would work really well with a McDonald's.
Speaker 2: Everybody knows that order the menu is pretty simple, and
Speaker 2: it would be more difficult I guess a more customizable,
Speaker 2: smaller fast food restaurant.
Speaker 10: Yeah, so it works for everyone, right, It really does.
Speaker 10: I'm not gonna comment on a specific name, and what
Speaker 10: we have out there publicly is we work with checkers
Speaker 10: in Del Taco. At the end of the day, it
Speaker 10: works for everyone because everyone has the same challenges right
Speaker 10: now in the industry, whether you're a large chain or
Speaker 10: mull chain. Labor is hard to find, it's expensive, and
Speaker 10: then you know you have a menu that's constantly changing.
Speaker 10: You need to figure out a way so there's complexity
Speaker 10: in the technology, and so when we think about how
Speaker 10: we roll it out, we are thinking very actively about
Speaker 10: what the corporate cares about and what the franchisees care about.
Speaker 10: And this is one of the technologies, not every technology
Speaker 10: and hospitality actually it's a few of them are with
Speaker 10: a franchise ease really wanted because they see the value proposition.
Speaker 10: These see the ROI, and then they're going to corporate
Speaker 10: and saying can we have this? And then corporate is
Speaker 10: sort of doing their evaluation and doing what the corporate does.
Speaker 10: But it's been really energizing for us to hear from
Speaker 10: franchisees directly and understand their need. And so when we
Speaker 10: roll out where we sell to corporate, we are actively
Speaker 10: thinking about the franchise e population first and form.
Speaker 2: Is there a legacy problem because the systems, the automated
Speaker 2: voice systems that we already deal with. I was on
Speaker 2: the phone at the horizon for two hours yesterday. They suck.
Speaker 2: They're really bad.
Speaker 10: You know.
Speaker 2: The worst thing that can happen is if I call
Speaker 2: a service department and I get a computer and I
Speaker 2: immediately start saying agent, agent, agent, give me a human.
Speaker 2: Now I can imagine a better use case at a
Speaker 2: drive through, But do you have a difficulty selling it
Speaker 2: because the automated systems the computer voices were used to
Speaker 2: have been so useless.
Speaker 10: It's a great question. And and you know, I would
Speaker 10: say we talk a lot about AI, I mean talk
Speaker 10: a lot about generative AI these days, but you know,
Speaker 10: the drive through actually ends up being one of the
Speaker 10: most immediately actionable and scalable like applications of generative AI
Speaker 10: in the enterprise. The other one would be customer service
Speaker 10: to some extent, but customer service is actually much harder
Speaker 10: because you have to deal with you know, you're on
Speaker 10: the phone with Verizon, and I know that business very well.
Speaker 10: I'm a large share holder of another company that works
Speaker 10: with companies like Verizon, so you know that business. You're
Speaker 10: dealing with an angry customer that can go in all
Speaker 10: kinds of different directions. And you know the baseball game
Speaker 10: this that in the through, you have a relatively confined
Speaker 10: situation where you have only so many different ways it
Speaker 10: can go. Now it can go in different ways, so
Speaker 10: it's not so trivial. You know, you might think, you know, hey,
Speaker 10: I want a chocolate shit. Oh no, actually I want
Speaker 10: a strawberry shake. Oh what about your special? Can I
Speaker 10: get fries with that? Honey? What do you want?
Speaker 4: You know?
Speaker 10: So there is sort of complexity in terms of what
Speaker 10: the voice has to pick up on.
Speaker 2: What's the original frosty they're offering me now, Vanilla or chocolate?
Speaker 2: It's one of frosty. When I was a kid, there
Speaker 2: was only one choice there, you go.
Speaker 10: Well, so now there's gonna be a lot more choices.
Speaker 9: You know.
Speaker 10: I'm very upset still that Starbucks killed the pistachio latte
Speaker 10: from three months ago, but apparently no one else seems
Speaker 10: to like it, so so, you know, I think there
Speaker 10: is there's a real opportunity to the voice qualities. When
Speaker 10: I said this couldn't be done eighteen twenty four months ago,
Speaker 10: it's partially because the quality of the voices and the
Speaker 10: humanness of the voices has improved dramatically too, so it
Speaker 10: is increasingly sounding more conversational, and at the end of
Speaker 10: the day, our goal is just to make it as
Speaker 10: much like a human frankly better than a human, right,
Speaker 10: so that you're getting in and out of their as
Speaker 10: fast as you can and getting what you want.
Speaker 1: All right, interesting stuff, interesting, practical application of artificial intelligence
Speaker 1: in the hospitality business. Christiana Gupta, chairman of Presto Automation
Speaker 1: Trades PRST is the ticker. It went public via a
Speaker 1: spack as a lot of companies will want to do
Speaker 1: back in the day, so I want to keep an
Speaker 1: eye on this one.
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Speaker 7: thirty Man.
Speaker 1: To be perfectly honest with you, I know absolutely nothing
Speaker 1: about insurance, ignorant to the nth degree, and I've tried
Speaker 1: to educate myself, but it just doesn't help. Fortunately, I've
Speaker 1: got some good people.
Speaker 2: Helping me out.
Speaker 1: I think, or maybe they're fleecing me, but I think
Speaker 1: I'm in good shape. But I know I like the
Speaker 1: business and I like talking to Pat Gallagher. He's the
Speaker 1: CEO of Gallagher Insurance and the stock simles a JG.
Speaker 1: You put that in there and then you hit GP
Speaker 1: for to get the graph. The stock is hitting an
Speaker 1: all time high today two d and ten dollars. Not
Speaker 1: too shabby. It's up twelve percent year to date, up
Speaker 1: twenty seven percent over at trailing twelve months. Pat, congratulations
Speaker 1: on the stock price.
Speaker 2: Good for you.
Speaker 1: Why is your stock hitting an all time high?
Speaker 11: Well, thank you guys for having me on. Look. I
Speaker 11: think a couple of things are happening that make a
Speaker 11: lot of sense to me. Number One, we're finding that
Speaker 11: our middle market clients, that Corporate America and the tech
Speaker 11: companies are not necessarily indicative of what's happening in our
Speaker 11: client base. Our clients are healthy, their businesses are growing.
Speaker 11: We are seeing infrastructure spending in construction accounts, et cetera,
Speaker 11: et cetera, and so the recession that has been touted
Speaker 11: in the press for the last twelve months has not
Speaker 11: yet at least hit our major base of where our
Speaker 11: clients are, and they continue to be healthy. Secondly, rates
Speaker 11: in the insurance industry continue to rise, and that's because
Speaker 11: loss costs are up in large part due to inflation
Speaker 11: and nuclear settlements, judgments by juries, which is forcing lost
Speaker 11: costs on insurance companies to rise, and they're covering those
Speaker 11: by raising premiums. And lastly, we have inflation. And when
Speaker 11: you look around the world and try to find an
Speaker 11: industry that does well with inflation, they're few and far behind.
Speaker 11: And the insurance brokerage space does well. When your property
Speaker 11: values rise, your premiums rise, our commissions rise, makes it
Speaker 11: more difficult for us to do the placement for you
Speaker 11: if you're a large portfolio. But nonetheless we get paid
Speaker 11: for it, and I think that's what's happening. We fall
Speaker 11: on a lot of screens. We look very good, we're
Speaker 11: very healthy, and the company's done extremely well over the
Speaker 11: last number of years. So also we're not extraordinarily priced
Speaker 11: at a high multiple. We're at a multiple that fits
Speaker 11: the SMP makes sense in a business that makes sense,
Speaker 11: that is a business that everybody needs, that's growing organically
Speaker 11: and by acquisition everyday, single quarter.
Speaker 2: So first I want to touch on one thing that
Speaker 2: has well. I guess it has a lot to do
Speaker 2: with the business, but not day to day operations. You
Speaker 2: were voted among the world's most ethical companies. I thought
Speaker 2: of that when Paul said he's trusts the guys he
Speaker 2: has advising him, or maybe he's getting fleeced. I'm taking
Speaker 2: it from this award that you don't fleece people.
Speaker 11: Well, you know what, I really appreciate you bringing that
Speaker 11: up because we're extremely proud of that. So thirteenth year
Speaker 11: we've been recognized by the Ethisphere Institute, whose role is
Speaker 11: to promote ethical behavior in the business community on a
Speaker 11: global basis. The only award this to about one hundred
Speaker 11: and thirty five companies. The process by which we go
Speaker 11: to apply for this award is incredibly onerous, and it's
Speaker 11: very important to our culture to continue to emphasize from
Speaker 11: the day that my grandfather started this business in nineteen
Speaker 11: twenty seven, ethical behavior is critical to our success. Never
Speaker 11: ever forget it, and we take that right to the
Speaker 11: mail room, and we're proud of this award recognizes that
Speaker 11: I take it.
Speaker 2: Your grandfather with Arthur J. Gallagher and and how cool
Speaker 2: would it be to have your initials as the ticker? Yeah,
Speaker 2: for the company, AJG is the ticker. And every time
Speaker 2: I point this stock out to somebody, I have been
Speaker 2: pointing it out a lot since we last spoke to you, Pat.
Speaker 2: They're always blown away by the size and the value
Speaker 2: of the company. How do you deal with getting that big?
Speaker 2: Is it hard, you know, because I imagine at this
Speaker 2: size you have to always be hiring more employees.
Speaker 4: With the kind of.
Speaker 2: Regulation that we deal with, you have to have a
Speaker 2: huge compliance department. I mean, the operation must be so
Speaker 2: large that your grandfather might not even recognize it today.
Speaker 11: Well I'm sure you wouldn't recognize it at all, but
Speaker 11: thank you for bringing that up. I mean, first of all,
Speaker 11: I think we've built just an outstanding team, and it's
Speaker 11: a team that over the years, have to each other. Look,
Speaker 11: we've got to build a chassis that can put a
Speaker 11: twenty billion dollar company on top of it.
Speaker 5: Now.
Speaker 11: The other thing, too, is when you talk about all
Speaker 11: the things you just mentioned, people look at us to go, oh,
Speaker 11: Gallagher's on its way to ten billion. But remember, we
Speaker 11: count the revenue that we get as commissioned So if
Speaker 11: we're a manufacturer, in essence, our revenues would be ten
Speaker 11: times because they're counting their gross revenues, we're counting net.
Speaker 11: So it makes the company even bigger. But we've got
Speaker 11: a chassis that deals with that. Our professional back room
Speaker 11: is outstanding. You're correct. We have a significant compliance component
Speaker 11: and we're proud of that. Our people get it and
Speaker 11: I'll tell you what I'm most proud of of anything
Speaker 11: we've accomplished, including our stock price, which is really just
Speaker 11: beginning its run, is that this culture has hung together.
Speaker 11: I started with this company in nineteen seventy two is
Speaker 11: an intern We didn't have one hundred and twenty people,
Speaker 11: and today the culture feels the same as it did
Speaker 11: forty six thousand employees later. And that is the answer
Speaker 11: to our success.
Speaker 1: That is an impressive We have a listener writing in
Speaker 1: pat His name is Matthew Pallazola. He's kind of a
Speaker 1: plant because he's the insurance CENTERLS for Bloomberg Intelligence. He
Speaker 1: asked that your company's been going into the non admitted market,
Speaker 1: so he's suggesting maybe you describe what that market is
Speaker 1: and kind of why you're in the market, what trends
Speaker 1: are you seeing there.
Speaker 11: So not admitted is referred to in the industry as
Speaker 11: excess and surplus and what not admitted does not mean
Speaker 11: that they can't trade. It means that they're not regulated
Speaker 11: by the state to form and rate in the state
Speaker 11: that they're applying their insurance. And you have to tell
Speaker 11: the client that you have to say, look, I am
Speaker 11: not XYZ insurance company who file files their rates and
Speaker 11: has governmental oversight. I can basically sell you the coverage
Speaker 11: I want at the price I want. That's excess and surplus,
Speaker 11: and that market is growing exponentially because of the fact
Speaker 11: that the regulated carriers are having a very hard time
Speaker 11: getting the rates they need, and every one of them
Speaker 11: are putting rates up and having to go to regulators
Speaker 11: to get those approved. And insurance is something that's absolutely necessary.
Speaker 11: So those that trade around those rules appropriately, by the way,
Speaker 11: I don't want to make it sound like they're doing
Speaker 11: anything wrong. Access in surplus is a very very important
Speaker 11: part of the market, especially when you look at things
Speaker 11: like California fire, earthquake, Florida wind, that type of thing,
Speaker 11: And that market has always existed, but now it's growing
Speaker 11: at a much faster pace than normal because losses have
Speaker 11: been so great.
Speaker 1: Well, that kind of goes to my next question.
Speaker 2: Pat.
Speaker 1: It seems like almost every week every month, we see
Speaker 1: some devastation going through the state of Florida, whether it's
Speaker 1: hurricanes or floods or tornadoes. Talk to us about insurance
Speaker 1: in Florida. Can can anybody ensure that area down there?
Speaker 11: Well, there's another factor in Florida that is really difficult,
Speaker 11: and I think the governor's rightfully trying to address it.
Speaker 11: The state has passed and needs to make sure it
Speaker 11: holds to it to tort reform, because Florida has a very,
Speaker 11: very litigious nature. So here it is the darling of
Speaker 11: the business community. You know, what a great place to trade,
Speaker 11: and it is and we low taxes, et cetera, et cetera,
Speaker 11: and a great economy and people are moving down there
Speaker 11: left and right. But there's the tort situation there is
Speaker 11: really really difficult for insurance companies. So add that to
Speaker 11: the fact that you've got floods and surge and wind,
Speaker 11: and you hit right on the reason access and surplus
Speaker 11: is growing so quickly because it is a very difficult
Speaker 11: place to insure. And I'll tell you my friends all
Speaker 11: over the state have called me, can you help me
Speaker 11: on my homeowners? Can you do something about my insurance?
Speaker 11: And I'll say to them one thing, do you have
Speaker 11: a quote?
Speaker 6: Yeah?
Speaker 11: Yeah, yeah, but it's expensive by it yep, So it is.
Speaker 11: You raise a very good point. It's a difficult state
Speaker 11: for insurers to make money in, and the state and
Speaker 11: the governor are trying to address that. And I think appropriately.
Speaker 2: So, Pat, let me just ask you how you've dealt
Speaker 2: with the rate risk that has taken out now four
Speaker 2: banks in six weeks. You know it's easy to fault
Speaker 2: those managers in hindsight, but at the time, you know,
Speaker 2: treasuries seem like a safe bet, mortgages a super rich
Speaker 2: people seem like a safe bet. How have you dealt
Speaker 2: with that risk without having the same problems as these others.
Speaker 11: Well, remember, we're brokers and we're not frankly risk takers.
Speaker 11: So when you look at an insurance company, we're the
Speaker 11: ones who packish your risk. So we're the ones that
Speaker 11: would when we started the conversation, you know you're getting advice.
Speaker 11: We would typically be the ones giving advice and making
Speaker 11: sure that your placement was with a licensed carrier. Then
Speaker 11: when the loss happens in your house burns down, we
Speaker 11: don't pay it. So similarly to the banking industry, we
Speaker 11: aren't the major buyer of those bonds, et cetera. We
Speaker 11: take a dollar, we keep a dime, We send ninety
Speaker 11: cents to an insurance company. So I really don't have
Speaker 11: any commentary about the banking industry because I'm not expert
Speaker 11: in that.
Speaker 1: At all, well, that sounds like a good business you're in.
Speaker 2: Yeah know what I mean.
Speaker 1: That's like an asset asset you know, kind of liability
Speaker 1: light business. And Pat's the only guy that can make
Speaker 1: insurance interesting to me. I don't know how he does it.
Speaker 1: Pat Gallagher, thanks so much for joining us. As always,
Speaker 1: Pack Gallagher the CEO of Gallagher Insurance, formerly known as
Speaker 1: Arthur Gallagher and Company Arthur J. Gallagher, which gives you
Speaker 1: the symbol a J G on your terminy. You punch
Speaker 1: that into your Bloomberg terminal, you'll see a forty five
Speaker 1: billion dollar market at company that's hitting all time highs.
Speaker 1: That's not too shabby.
Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can
Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 2: at Matt Miller nineteen seventy three. And I'm fall Sweeney.
Speaker 1: I'm on Twitter at pt Sweeney. Before the podcast, you
Speaker 1: can always catch us worldwide at Bloomberg Radio