WEBVTT - The Hot New Thing in Tax Avoidance 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:32.720 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Right now, 0:00:32.760 --> 0:00:36.279 we know that investors are hoping for returns that are 0:00:36.320 --> 0:00:39.839 often bigger than what a lot of institutional managers will 0:00:39.840 --> 0:00:42.479 say that they can get, and they don't want extra 0:00:42.600 --> 0:00:46.720 taxes cutting into that. And there's a new popular way 0:00:46.760 --> 0:00:50.919 to avoid taxes that has um name that's less than exciting, 0:00:51.000 --> 0:00:54.120 insurance dedicated funds. Here to tell us a little bit 0:00:54.120 --> 0:00:55.720 more about these and why they're a little bit more 0:00:55.760 --> 0:00:58.640 exciting than they sound, Tom Metcalf, who is able to 0:00:58.680 --> 0:01:02.000 produce reporter in choices in our Brick eleven three our studios, Tom, 0:01:02.200 --> 0:01:08.480 what exactly our insurance dedicated funds? So they're pretty complicated product. Basically, 0:01:08.520 --> 0:01:11.440 they're a way for very wealthy investors to invest in 0:01:11.480 --> 0:01:14.000 hedge funds and without have to pay any sort of 0:01:14.080 --> 0:01:17.600 tax on those gains. So there's two types a life 0:01:17.600 --> 0:01:20.720 insurance product and an annuity product. But basically what you 0:01:20.760 --> 0:01:23.560 do as an investor, you effectly buy a life insurance 0:01:23.600 --> 0:01:27.280 product and then that insurer will invest for you into 0:01:27.319 --> 0:01:30.399 a hedge fund and then there is absolutely zero tax 0:01:30.400 --> 0:01:32.119 on that. Do you have a sense of how big 0:01:32.319 --> 0:01:35.880 the idea for the insurance dedicated fund industry has become? 0:01:36.440 --> 0:01:38.720 So it's pretty hard to get like official statistics. One 0:01:38.760 --> 0:01:40.480 guy said, you know, people are trying to keep this 0:01:40.560 --> 0:01:43.760 relatively quiet just because it's so successful. They don't want 0:01:43.760 --> 0:01:45.600 everyone else to know how well it's going. But one 0:01:45.680 --> 0:01:47.480 one guy sort of estimated for us it was at 0:01:47.520 --> 0:01:50.960 least fifteen and perhaps eighteen billion in terms of total assets, 0:01:51.040 --> 0:01:53.360 and that's tripled over the last ten years or so. 0:01:54.000 --> 0:01:55.920 Let me just get a handle on this, because it's 0:01:55.960 --> 0:02:00.480 not necessarily new that insurance policies are used for things 0:02:00.520 --> 0:02:03.600 like a state planning purposes. Right, if you have a 0:02:03.680 --> 0:02:08.120 projected tax bill because of your estate, many times what 0:02:08.160 --> 0:02:10.520 you'll do is you, if you can afford it, you 0:02:10.600 --> 0:02:14.919 will pay the premium for an insurance policy whose payoff 0:02:15.160 --> 0:02:18.760 value to the beneficiaries is equal to whatever the tax 0:02:18.840 --> 0:02:21.520 liability is. So in other words, you're getting a tax 0:02:21.520 --> 0:02:24.720 free distribution from your insurance policy and you use that 0:02:24.800 --> 0:02:28.919 money to go and pay your estate taxes. That's already 0:02:29.360 --> 0:02:33.639 well known and I mean, I mean it's pretty widely widespread, correct, Yeah, 0:02:33.639 --> 0:02:35.920 And this is sort of, I guess, even more grander 0:02:35.960 --> 0:02:38.960 than that. So it's become a more popular because what 0:02:38.960 --> 0:02:41.359 we're seeing is obviously family officers that have exploded, So 0:02:41.360 --> 0:02:43.560 you're getting so many more investors out there you can 0:02:43.840 --> 0:02:47.519 afford to leave their money locked away effectively for decades. 0:02:47.960 --> 0:02:52.160 And also the difference here is effectively you can with 0:02:52.240 --> 0:02:55.360 this structure effectively avoid any sort of tax on that 0:02:55.400 --> 0:02:58.640 death benefit if it's structured correctly. Well, So, just to 0:02:58.680 --> 0:03:01.360 give us a sense of how this differs from a 0:03:01.480 --> 0:03:05.640 typical annuity, just in terms of the promised yields. What 0:03:05.800 --> 0:03:09.880 kind of returns on their investments have some of these 0:03:09.919 --> 0:03:13.679 wealthy individuals been expecting to receive. So in some of 0:03:13.720 --> 0:03:16.960 the marketing documents it's basically, over say a forty year period, 0:03:17.160 --> 0:03:20.000 you can under a normal structure, get about fifty million 0:03:20.200 --> 0:03:22.400 in terms of a total you investment two I think 0:03:22.440 --> 0:03:24.079 it's two and a half million over four years, and 0:03:24.120 --> 0:03:27.040 then leave it there, you know, making returns for forty 0:03:27.040 --> 0:03:29.320 odd years, and that would be fifty million under a 0:03:29.400 --> 0:03:32.200 normal structure, and in this sort of totally tax restructure 0:03:32.200 --> 0:03:34.720 that rises to about hundred and twenty million. Holy cow. 0:03:35.520 --> 0:03:38.520 Well that's because of the tax, the tax status something 0:03:38.520 --> 0:03:41.040 of the investment, right, because it's growing status. This is 0:03:41.120 --> 0:03:43.920 because they're investing in huge funds. They're not investing in 0:03:44.040 --> 0:03:47.880 just sort of income producing securities. Right. Um, it's both basically, 0:03:47.920 --> 0:03:52.720 So it's effectively in terms of that hundred twenty million. Basically, 0:03:52.760 --> 0:03:55.400 if you are the beneficiary rather than ensured, that hundred 0:03:55.440 --> 0:03:58.440 twenty million will landing your bank account for all effect 0:03:58.480 --> 0:04:02.000 without any tax at all. Right, because it's an insurance payout. Yeah, 0:04:02.000 --> 0:04:04.440 because it's a life insurance payout, right, and when meeting 0:04:04.480 --> 0:04:06.600 life insurance meaning you're not going to get it, the 0:04:06.600 --> 0:04:09.120 beneficiary is going to get I said, well, I could 0:04:09.640 --> 0:04:12.960 buy the policy for and insure someone else, so I 0:04:13.000 --> 0:04:15.080 could be the beneficiary. So you know, let's say I 0:04:15.080 --> 0:04:18.880 have a nice elderly relative. Perhaps that might be a 0:04:18.960 --> 0:04:20.720 thing I could do if I had to spare. You know, 0:04:20.760 --> 0:04:22.520 people say about you need seven to eight million. But 0:04:22.560 --> 0:04:25.599 that also used to be a very popular investment product. 0:04:25.640 --> 0:04:29.120 Which is banks companies. I mean they were viadical settlements. 0:04:29.120 --> 0:04:31.440 In other words, you would ensure someone else and when 0:04:31.480 --> 0:04:35.039 they passed away that the benefit of that policy would 0:04:35.080 --> 0:04:38.880 accrue to you because you paid the premiers for that person. Yeah, exactly. 0:04:38.880 --> 0:04:42.000 And the guess the twist here is the involvement hedge 0:04:42.040 --> 0:04:44.800 runs that you get to select because technically you don't 0:04:44.800 --> 0:04:49.120 get to select what the insurance company invests in. But 0:04:49.200 --> 0:04:52.080 now you're saying that you can do this by selecting 0:04:52.120 --> 0:04:56.000 these specific kinds of products, these idefs. Yeah, you've got 0:04:56.000 --> 0:04:58.080 to be very careful. So the I r S looks 0:04:58.200 --> 0:05:00.720 very closely at this in terms of you can't show 0:05:00.720 --> 0:05:03.360 what they term investor control. But basically, and this is 0:05:03.400 --> 0:05:05.599 another reason why it's becoming more popular, is what you 0:05:05.640 --> 0:05:07.440 can do is move from fund to fund. So let's 0:05:07.440 --> 0:05:09.200 say you're invested in one hedge fund and you go, 0:05:10.320 --> 0:05:11.919 I can't tell them what to invest in, but I 0:05:11.920 --> 0:05:14.719 don't like their performance. You can move to another. They 0:05:14.760 --> 0:05:18.440 are called insurance dedicated funds without any sort of kind 0:05:18.440 --> 0:05:20.880 of implications and tax works or anything. This is such 0:05:20.920 --> 0:05:23.039 an interesting story. And one thing that you talk about 0:05:23.080 --> 0:05:26.280 is that these vehicles have become so mainstream that you've 0:05:26.320 --> 0:05:29.040 got banks like JPMorgan and Goldman Sachs offering them, as 0:05:29.080 --> 0:05:33.240 well as hedge funds like Paulson and Company and Millennium Partners. 0:05:33.400 --> 0:05:36.600 And it was interesting and somewhat telling that no one 0:05:36.640 --> 0:05:39.599 wanted to comment for your story whatsoever. And you know, 0:05:39.680 --> 0:05:43.039 do you do you think that, um that there is 0:05:43.080 --> 0:05:45.680 some concern that regulators could kind of home in and 0:05:45.680 --> 0:05:50.240 try to remove the loophole that's kind of being exploded here. Yeah, 0:05:50.240 --> 0:05:52.400 we were asking the various people spect to the story 0:05:52.440 --> 0:05:54.880 about that. And what has happened originally is the RS 0:05:54.960 --> 0:05:58.600 is constantly raised, a few lawsuits and stuff. I think 0:05:58.600 --> 0:06:00.760 at the moment there's a feeling which is again, popularities 0:06:00.760 --> 0:06:02.960 increase and as long as you're very clear and can 0:06:03.000 --> 0:06:05.320 make this case for invest in control that you're not involved, 0:06:05.600 --> 0:06:07.560 that they're quite secure. And I think part of the 0:06:07.560 --> 0:06:09.960 reason they're not commenting as well is you know that 0:06:10.120 --> 0:06:12.279 it's a private placement, so they don't they're not really 0:06:12.279 --> 0:06:14.320 allowed to talk about sort of client issues like that. 0:06:14.640 --> 0:06:17.880 That's what they told their compliance department would probably you know, 0:06:18.279 --> 0:06:23.040 a brain uh melt down just just quickly. Insurance payouts 0:06:23.120 --> 0:06:25.320 are in a sense guaranteed. Right, you buy a life 0:06:25.320 --> 0:06:27.520 insurance policy for a million dollars, it pays out a 0:06:27.520 --> 0:06:30.240 million dollars. In this case, you buy a life insurance 0:06:30.279 --> 0:06:33.560 policied invested in hedge funds? Is there any guarantee? Um? 0:06:33.600 --> 0:06:35.599 I mean it's variable. And in fact it was a 0:06:35.680 --> 0:06:39.200 case where a guy who invest in these is a 0:06:39.279 --> 0:06:42.200 rich head from guy and invested as in a I 0:06:42.360 --> 0:06:44.160 d F and then try to sue them because they 0:06:44.160 --> 0:06:46.880 didn't get the returns he wanted. So there is definitely 0:06:46.880 --> 0:06:49.600 that risk level. But when you take out tax, as 0:06:49.640 --> 0:06:51.320 long as you're not going for a super super high 0:06:51.440 --> 0:06:54.080 risk fund, then it's just easy returns. On that level 0:06:54.120 --> 0:06:56.560 at least, it's almost like having an additional IRA A right, 0:06:56.600 --> 0:06:59.159 I mean the money grows tax free. Although the IRA 0:06:59.279 --> 0:07:01.760 case you actually attacks when you pull the money out, 0:07:02.040 --> 0:07:06.039 in this case you could potentially not pay anything. Thanks 0:07:06.120 --> 0:07:10.600 very much, Tom Metcalf, always a pleasure talking about i dfs. 0:07:10.760 --> 0:07:14.800 We're talking about insurance dedicated funds. Check it out Bloomberg 0:07:15.040 --> 0:07:30.360 dot com. Well, companies all across the world are still 0:07:30.480 --> 0:07:33.120 grappling with a cyber attack that's similar to the want 0:07:33.120 --> 0:07:35.920 to cry attack that we saw a couple of months ago. Um, 0:07:35.920 --> 0:07:39.480 it's reached parts of Asia after hitting Europe, US, South America, 0:07:39.760 --> 0:07:42.280 and who is really to blame? I want to bring 0:07:42.280 --> 0:07:45.040 in Robert Knapp's chief executive officer and co founder of 0:07:45.120 --> 0:07:49.480 cyber Ghost, which is based in Bucharest, Romania. Robert, thank 0:07:49.480 --> 0:07:53.320 you so much for joining us. In previous news articles, 0:07:53.360 --> 0:07:57.160 you've been quoted saying that, frankly, governments are in large 0:07:57.200 --> 0:08:00.560 part to blame for some of these cyber attacks because 0:08:00.960 --> 0:08:03.240 there you know, for example, the U. S N s A, 0:08:04.280 --> 0:08:07.920 We'll find some of these loopholes and problems with programs 0:08:07.960 --> 0:08:10.480 widely is programs, and they won't report them because they 0:08:10.480 --> 0:08:12.920 want to be able to access people's information. Can you 0:08:12.920 --> 0:08:17.920 talk a little bit about that exactly. I mean I 0:08:18.040 --> 0:08:20.480 was talking a couple of years now about the fact 0:08:21.040 --> 0:08:24.680 that we have to decide in the future how we 0:08:25.400 --> 0:08:30.920 wanna move forward with online security. One of the big 0:08:30.920 --> 0:08:34.319 problems we see now and these attack shows it, um 0:08:34.360 --> 0:08:37.520 and leave me. We are just now before the next 0:08:37.600 --> 0:08:41.480 attack because all these attacks we see, how we saw 0:08:41.520 --> 0:08:46.840 in the last years, are using so called backdoors means 0:08:47.360 --> 0:08:53.440 um loopholes in in normally secure systems that are either 0:08:53.840 --> 0:09:00.600 implemented by um national security organizations or detect a financial 0:09:00.640 --> 0:09:06.280 security agencies and not reported to the developers, because these 0:09:06.320 --> 0:09:11.880 agencies use them to spire on people, which weakens the 0:09:12.040 --> 0:09:15.240 security for all of us. And I think we need 0:09:15.320 --> 0:09:18.840 to make a decision um as a as a society 0:09:19.360 --> 0:09:23.800 about how we want to proceed in future with putting 0:09:24.000 --> 0:09:28.560 our whole life on the internet. Robert, would this would 0:09:28.720 --> 0:09:31.400 would an analogy be that, you know, in in some 0:09:31.480 --> 0:09:34.960 science fiction movies, you know, you've got the scientist who's trying, 0:09:34.960 --> 0:09:40.200 you know, creating some crazy chemical, you know, to rule 0:09:40.280 --> 0:09:43.520 the world. But it gets loose, right, it gets loose 0:09:43.559 --> 0:09:46.719 and someone else takes it and does bad things with it. 0:09:46.760 --> 0:09:51.679 Is this what's happening right now? I know, not exactly. 0:09:51.760 --> 0:09:54.880 I I know a better analogy. It's like, you know, 0:09:55.480 --> 0:09:59.160 it is like we live in a neighborhood and we 0:09:59.400 --> 0:10:05.360 implement now in our houses absolutely safe doors so nobody 0:10:05.360 --> 0:10:09.600 could break into the house. But the police has the idea, 0:10:09.920 --> 0:10:12.959 let it make even more safe. Leave all of us, 0:10:13.080 --> 0:10:17.480 give us a key, so so we could prevent the 0:10:17.520 --> 0:10:19.520 bad guys entering the door. Okay, but here's what I 0:10:19.520 --> 0:10:22.679 don't understand, Robert. But here's here's what I don't understand, 0:10:22.679 --> 0:10:26.880 because if the government is to blame for not reporting 0:10:27.080 --> 0:10:31.040 some of these back doors and loopholes, wouldn't the technology 0:10:31.080 --> 0:10:34.320 companies hire some people If these hacks aren't that difficult 0:10:34.320 --> 0:10:36.160 to do, wouldn't they just hire a team of people 0:10:36.200 --> 0:10:39.640 to try to break in and go through every back 0:10:39.679 --> 0:10:46.520 door and find every vulnerability and fix it. Um. I 0:10:46.640 --> 0:10:49.480 disagree that the point is that would that would mean 0:10:49.559 --> 0:10:52.840 that we believe that it's possible to build one hundre 0:10:52.920 --> 0:10:57.199 the centature systems, so and that is simply not possible. Um. 0:10:57.240 --> 0:11:01.200 We're speaking here about highly complex systems with sometimes hundreds 0:11:01.200 --> 0:11:03.920 of thousands and millions of lines of codes. So the 0:11:04.000 --> 0:11:08.599 problem is, first of all, we cannot build safe systems 0:11:09.120 --> 0:11:13.360 once we detect the vulnerability. We need to have laws 0:11:13.400 --> 0:11:19.240 that prevents anyone from using these vulnerabilities and to report 0:11:19.280 --> 0:11:22.480 these vulnerability So that means we need a common effort 0:11:22.600 --> 0:11:26.560 into into making the web more secure and not making 0:11:26.559 --> 0:11:31.280 the web more unsecure. And you know, having state organizations 0:11:31.400 --> 0:11:34.719 having these keys are not giving them back to the 0:11:34.840 --> 0:11:38.800 rightful owners of the doors. That doesn't make sense and 0:11:39.000 --> 0:11:43.319 the reality shows that, UM, this is not the way 0:11:43.360 --> 0:11:45.439 to go for the future because we're gonna see now 0:11:45.559 --> 0:11:48.360 more and more of these kind of attacks that all 0:11:48.600 --> 0:11:53.200 used vulnerabilities in normally secure systems. Well, given the current 0:11:53.240 --> 0:11:56.000 political environment, it seems unlikely that there's going to be 0:11:56.040 --> 0:12:00.400 a consensus about very much, specifically about cyber attack accent 0:12:00.520 --> 0:12:03.880 trying to put forth some kind of legislation. I'm wondering 0:12:03.920 --> 0:12:08.480 if you could offer businesses and individuals any advice on 0:12:08.520 --> 0:12:12.160 how to prepare or deal with the current cyber attack 0:12:12.559 --> 0:12:18.160 and future attacks. What should people and businesses be doing. Look, 0:12:18.360 --> 0:12:23.000 the weapon of the twenty one century is encryption technology. 0:12:23.600 --> 0:12:29.240 So the answer exists. The solution exists. We have it. 0:12:29.240 --> 0:12:33.040 It's pure mathematics, and it's called encryption. So that means 0:12:33.880 --> 0:12:38.240 protect yourself with tools like our cyberablest hand that is 0:12:38.280 --> 0:12:41.960 an entrypted come into the internet, use PGP for your email, 0:12:42.440 --> 0:12:46.839 use encrypted check systems, and do a pack up of 0:12:47.000 --> 0:12:50.000 your data. So the problem that we see right now 0:12:50.120 --> 0:12:52.120 we want to try to take over these kind of 0:12:52.120 --> 0:12:55.960 a kick is that these people lock your data. That 0:12:56.120 --> 0:12:59.080 means the only way to protect yourself from that is 0:12:59.160 --> 0:13:01.480 to back up, but to pick ups keys in a 0:13:01.520 --> 0:13:04.640 way that you would encrypt your data in the cloud. 0:13:04.720 --> 0:13:07.760 So don't pick ups in the clouds a pickups in 0:13:07.760 --> 0:13:10.800 your own networkeding on and try and trypt your data. 0:13:11.400 --> 0:13:16.840 And as long as we don't have bactors and encrypted solutions, 0:13:17.320 --> 0:13:20.440 these solutions are really safe. I want to thank you 0:13:20.559 --> 0:13:22.600 very much for joining us. Robert Napp is the chief 0:13:22.600 --> 0:13:40.440 executive and the co founder of cybergost joining us from Bucharest, Romania. Well, 0:13:40.480 --> 0:13:44.000 he is here to continue the saga of Puerto Rico. 0:13:44.160 --> 0:13:48.000 Joe Masac is our editor for Bloomberg Briefs Municipal Market 0:13:48.080 --> 0:13:50.600 Brief and he joins us in studio. Joe, you know, 0:13:50.720 --> 0:13:53.320 I'm I guess this is what chapter. I don't even 0:13:53.320 --> 0:13:55.600 know what chapter this is in the long saga and 0:13:55.679 --> 0:13:59.240 story of Puerto Rico. But the Puerto Rico Board has 0:13:59.320 --> 0:14:03.440 some checked in the power utilities debt restructuring. Bring us 0:14:03.520 --> 0:14:06.360 up to date on what's going on. Oh man, the 0:14:06.400 --> 0:14:09.839 board last night and executive meeting said that the Prepper deal, 0:14:10.720 --> 0:14:16.360 which promised to give creditors but cents on the dollar 0:14:16.679 --> 0:14:18.520 and was the only deal that they came to pre 0:14:18.600 --> 0:14:25.560 bankruptcy only deal right, Uh, that that no longer was 0:14:25.800 --> 0:14:29.080 alive and that they should go back and uh it 0:14:29.120 --> 0:14:31.040 looks like, now it's going to happen. If Prepper is 0:14:31.080 --> 0:14:33.320 gonna wind up into some you know that they're gonna 0:14:33.320 --> 0:14:38.280 wind up in Title three bankruptcy along with the you know, 0:14:38.320 --> 0:14:42.160 the Commonwealth, the GEO holders and Cofino holders are slugging 0:14:42.160 --> 0:14:44.520 it out. So now you're gonna have Preppa in the 0:14:44.560 --> 0:14:48.280 same boat. And uh, the board not only did that, 0:14:48.360 --> 0:14:52.000 the Board also threwout the budget last night that was 0:14:52.040 --> 0:14:55.400 passed by the legislature and said, no, you know what, 0:14:55.440 --> 0:14:58.120 you have to take another three million dollars out of 0:14:58.120 --> 0:15:00.760 this budget and the budgets about nine and six billion. 0:15:01.000 --> 0:15:03.680 So they were very busy last night. The board is 0:15:04.560 --> 0:15:09.960 asserting their power. Yeah. Well they also Puerto Rico also 0:15:09.960 --> 0:15:14.520 said that their fiduciary duty was not too bondholders, it 0:15:14.600 --> 0:15:17.640 was to residents of the island, which is a stark 0:15:17.680 --> 0:15:22.680 departure from typical bankruptcies where the company's fiduciary duty really 0:15:22.760 --> 0:15:27.480 is two creditors first and foremost. Right, Well, you know 0:15:27.600 --> 0:15:31.360 the Yeah, they're arguing that today in court. And uh, 0:15:31.760 --> 0:15:36.400 you know, actually, the the adversarial relationship there, we saw 0:15:36.600 --> 0:15:42.800 glimpses of it in nine the Orange County bankruptcy, and 0:15:42.840 --> 0:15:48.120 then it really came back in Detroit, where the city said, well, 0:15:48.280 --> 0:15:50.360 guess what, GEO bond holders are going to have to 0:15:50.400 --> 0:15:53.720 take a haircut, and they did. Uh So, the the 0:15:53.800 --> 0:15:57.480 adversarial nature is something that we have seen in the 0:15:57.600 --> 0:16:00.120 muni market, the business about well, we don't really of 0:16:00.120 --> 0:16:02.960 a fiduciary duty and guess what, we have to take 0:16:02.960 --> 0:16:04.960 care of the people on the island first. Okay, So 0:16:05.000 --> 0:16:07.840 if that's the case, why why is anyone surprised? Why 0:16:07.880 --> 0:16:13.120 is anyone anyone surprised that the Fiduciary Board is throwing 0:16:13.160 --> 0:16:16.160 out these agreements, reducing the amount of money in the budget, 0:16:16.400 --> 0:16:19.080 basically doing everything that it can to protect the island 0:16:19.080 --> 0:16:22.480 and its people rather than creditors. Well, no, actually the 0:16:22.520 --> 0:16:27.640 board went throughout the budget is really saying, you know, 0:16:27.720 --> 0:16:29.960 on the one hand, yes, on the PREPA deal, they're saying, 0:16:30.320 --> 0:16:32.080 it looks like bond holders are gonna have to take 0:16:32.120 --> 0:16:35.240 more of a haircut than fifteen cents on the dollar. 0:16:35.720 --> 0:16:38.640 But with throwing out the entire budget, they're saying, you 0:16:38.680 --> 0:16:41.320 haven't made enough cuts. There are going to have to 0:16:41.400 --> 0:16:44.400 either be employee furloughs or we might have to cut 0:16:44.400 --> 0:16:49.000 back those Christmas bonuses to government employees on the island. Uh. 0:16:49.200 --> 0:16:54.040 So the board is being how should I put it there, 0:16:54.040 --> 0:16:58.040 being very hard right now, and they should be no cash. 0:16:58.080 --> 0:16:59.360 I mean there was a story in the Wall Street 0:16:59.400 --> 0:17:01.480 Journal this week about how Puerto Rico is looking to 0:17:01.520 --> 0:17:05.040 sell itself off in pieces to raise money. Oh sure, yeah, 0:17:05.040 --> 0:17:07.080 and I suspect that the board is going to have 0:17:07.119 --> 0:17:09.840 a very um uh you know, they'll have something to 0:17:09.840 --> 0:17:13.000 say about that now. Whether they, you know, approve those 0:17:13.040 --> 0:17:16.560 sorts of sales or not, we'll see. But I would 0:17:16.560 --> 0:17:19.960 say it's almost good, you know, from a I don't 0:17:19.960 --> 0:17:22.879 know from a public finance point of view, that somebody 0:17:22.920 --> 0:17:26.920 on the island is is sitting down and taking things 0:17:27.119 --> 0:17:30.200 very very seriously as opposed to what's sort of gone 0:17:30.200 --> 0:17:32.879 on before here. Well, let's can you just put this 0:17:32.920 --> 0:17:35.119 into some kind of perspective. I think you mentioned what 0:17:35.160 --> 0:17:38.160 the total budget that was passed was nine point nine 0:17:38.160 --> 0:17:41.919 point six nine point six billion, just to give that comparison, 0:17:41.960 --> 0:17:44.200 you know, the budget of the City of New York 0:17:44.359 --> 0:17:47.840 is eight five billion. Uh. State of Rhode Island I 0:17:47.840 --> 0:17:51.440 think about nine point two billion. Why is I mean 0:17:51.480 --> 0:17:56.240 these are they are large sums, but the havoc that 0:17:56.280 --> 0:17:59.600 they are going to wreck on the economy is gonna 0:17:59.680 --> 0:18:02.640 last a much longer time than just a one year budget. 0:18:03.760 --> 0:18:07.040 Is there a cohesive plan or is anybody thinking about 0:18:07.080 --> 0:18:09.159 what life in Puerto Rico is going to be like 0:18:09.280 --> 0:18:14.000 for businesses and people after this happens? Or presumably the 0:18:14.000 --> 0:18:19.280 the Federal Oversight Board is and they they seem to 0:18:19.400 --> 0:18:23.560 have taken or are taking the long term. Look. You 0:18:23.640 --> 0:18:26.960 mentioned that the haddock that this is going to a reek. Uh, 0:18:27.080 --> 0:18:29.480 you know, recall back to the nineteen seventy five in 0:18:29.520 --> 0:18:33.439 New York City, which did not go into Chapter nine bankruptcy, 0:18:33.480 --> 0:18:38.760 but entered a period of austerity that took perhaps ten years. Uh. 0:18:38.800 --> 0:18:43.199 In many ways, a lot of the the infrastructure problems 0:18:43.200 --> 0:18:45.960 we're seeing in New York City today or you know, 0:18:46.000 --> 0:18:49.560 could almost be traced back to nineteen and that extended 0:18:49.640 --> 0:18:52.919 period of austerity. So who knows how long it's going 0:18:52.920 --> 0:18:55.719 to take for Puerto Rico to you know, turn the corner. 0:18:56.000 --> 0:18:58.080 You know, Joe, I have to wonder as we talk 0:18:58.200 --> 0:19:01.199 and focus on Puerto Rico's differ cultis I have to 0:19:01.280 --> 0:19:05.040 wonder what precedent it sets for Illinois, which is teetering 0:19:05.080 --> 0:19:08.800 close to junk status with respect to its credit rating 0:19:09.040 --> 0:19:13.080 and is facing a whole host of problems. I mean, 0:19:13.359 --> 0:19:16.879 is there anything that debt holders are taking. Are they 0:19:17.119 --> 0:19:20.840 selling more aggressively because they know that they could get um, 0:19:20.880 --> 0:19:24.439 they could get shafted in a future reorganization. Actually, uh, 0:19:24.600 --> 0:19:29.840 you know, the banks I've read several analytical comments in 0:19:29.840 --> 0:19:32.240 the last couple of weeks saying, hey, you know what, 0:19:32.960 --> 0:19:37.639 Illinois actually represents a value right now because it's trading 0:19:38.119 --> 0:19:41.320 so far out of line, almost three basis points over 0:19:41.359 --> 0:19:45.320 the triple A scale. So Illinois gus. They're talking New 0:19:45.400 --> 0:19:50.680 Jersey appropriation back debt. Uh. The banks are saying that, 0:19:51.359 --> 0:19:56.320 you know, these are recommended because the U States, unlike 0:19:56.359 --> 0:19:59.920 Puerto Rico, uh you know, A, they don't have bank 0:20:00.000 --> 0:20:04.600 criptsy right now, but be the States are still very 0:20:04.680 --> 0:20:08.760 strong and have a lot of flexibility. So it's sound 0:20:08.880 --> 0:20:12.919 you know it always it always sounds apocalyptic and now 0:20:13.480 --> 0:20:16.200 all right risk on stale for at least across the 0:20:16.280 --> 0:20:18.560 Wall Street analytic desks. Joe Mysak, thank you so much 0:20:18.560 --> 0:20:21.000 for joining us. Joe Mysak is the editor of the 0:20:21.080 --> 0:20:24.360 Bloomberg Brief that's focused on the municipal market. Talking all 0:20:24.440 --> 0:20:42.280 things this moment of the muni, stock buybacks and free 0:20:42.280 --> 0:20:44.840 cash flow. How do you use them as a strategy 0:20:44.960 --> 0:20:47.520 in order to make money? Well. Charles Biederman is the 0:20:47.560 --> 0:20:50.800 chairman of trim Tab's asset management and he joins us 0:20:50.800 --> 0:20:53.520 now to tell us more. Charles, always a pleasure, Thanks 0:20:53.560 --> 0:20:55.879 for being here in our studio. Maybe you could just 0:20:55.920 --> 0:20:58.560 give a little bit of a description as to how 0:20:58.640 --> 0:21:02.320 you came to formula this strategy and the experience that 0:21:02.359 --> 0:21:05.879 you have in implementing it. Well, all there is in 0:21:05.960 --> 0:21:09.000 stock market of shares of stock and money, and so 0:21:09.040 --> 0:21:12.760 if companies are growing cash and using a portion of 0:21:12.800 --> 0:21:16.040 it to reduce the share count, the price of the 0:21:16.080 --> 0:21:19.560 remaining shares should go up by the percentage of the 0:21:19.560 --> 0:21:23.920 share count reduction, everything else being equal, particularly since they 0:21:25.000 --> 0:21:29.000 generate using cash that they're generating. Now there's a difference 0:21:29.040 --> 0:21:32.600 if they use cash that they're borrowing, because that increase 0:21:32.720 --> 0:21:35.760 increases risk and it means they don't have the cash 0:21:35.800 --> 0:21:39.200 to do it. So you want to buy shares in 0:21:39.359 --> 0:21:43.320 stock first. Companies are growing cash, and if they're using 0:21:43.320 --> 0:21:46.040 a portion to reduce the share a count and they're 0:21:46.080 --> 0:21:51.280 not borrowing to buy that's our strategy for trim tabs. 0:21:50.880 --> 0:21:55.040 Uh Flow drink et F which we launched in October, 0:21:55.119 --> 0:21:57.720 and as you know, we've done quite well since. I've 0:21:57.720 --> 0:21:59.760 been on the show many times with you in the 0:21:59.760 --> 0:22:03.239 past us talking about it, Charles, I'm wondering there are 0:22:03.240 --> 0:22:07.000 so many people who are launching exchange treated funds right now. 0:22:07.359 --> 0:22:09.760 Does it matter whether you have a good idea or 0:22:09.960 --> 0:22:13.160 is there something else that works with respect to marketing 0:22:13.160 --> 0:22:17.080 and e TF Well, I think performance works, always hasn't 0:22:17.080 --> 0:22:21.000 always will. In essence, we're a hedge fund at a 0:22:21.040 --> 0:22:26.119 fifty nine speak basis point price. In other words, we 0:22:26.160 --> 0:22:28.320 have a formula and no one else does. Now. We 0:22:28.440 --> 0:22:32.560 just launched today trim tabs International Free cash Flow uh 0:22:32.600 --> 0:22:34.920 t t A I is the ticker symbol. It's gonna 0:22:34.960 --> 0:22:38.760 do exactly what t t FS does in the US 0:22:38.880 --> 0:22:40.800 to non U S stocks. It's going to be about 0:22:40.800 --> 0:22:49.200 eighty five stocks UM Developed countries, Asia, Canada, UM, Europe, etcetera. 0:22:49.440 --> 0:22:52.840 And uh it's companies growing free cash flow, reducing the 0:22:52.920 --> 0:22:57.520 share count and maintaining a strong balance sheet. So it's 0:22:57.560 --> 0:23:00.240 a global compliment. So the U S one is work. 0:23:00.320 --> 0:23:04.240 We've outperformed in the past of the Numbers Show, Morning Star. 0:23:04.280 --> 0:23:08.200 Whatever we've outperformed by several hundred basis points over the 0:23:08.280 --> 0:23:14.280 Russell three thousand, and we're hoping to count. You know, 0:23:14.320 --> 0:23:18.040 the design purpose of business is to grow cash, unless, 0:23:18.040 --> 0:23:22.119 of course, you're Musk or or Netflix, which is design 0:23:22.160 --> 0:23:25.639 purposes to grow your stock price. But most companies, if 0:23:25.680 --> 0:23:28.600 they're growing their cash and they use a portion of 0:23:28.600 --> 0:23:31.680 it to reduce the share count, everybody wins. I want 0:23:31.680 --> 0:23:34.760 to ask about this idea of stock buy backs, because 0:23:34.880 --> 0:23:39.159 what happens when a company buy backs buys back the 0:23:39.280 --> 0:23:43.560 stock but doesn't actually retire the shares. In other words, 0:23:43.560 --> 0:23:47.080 they just sit there in the corporate treasury for use 0:23:47.200 --> 0:23:51.240 later on. Perhaps does that matter? Yes, we we don't 0:23:51.280 --> 0:23:54.960 look at bibe. We look at share count. How many 0:23:54.960 --> 0:23:57.880 shares are outstanding, what they do, how they got there 0:23:58.400 --> 0:24:00.840 is not really relevant. As long as they have more 0:24:00.920 --> 0:24:04.320 cash than they started at the beginning of the period 0:24:04.359 --> 0:24:07.119 and their debt asset ratio didn't go up. You know, 0:24:07.160 --> 0:24:12.439 it's it's companies, uh or if they're doing well, the 0:24:12.560 --> 0:24:15.639