WEBVTT - Cities Get Incentives for Working With PE, Carlyle COO Says 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 --> 0:00:31.479 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. We 0:00:31.560 --> 0:00:34.680 are here live from the Bloomberg Invest Conference at Bloomberg's 0:00:34.680 --> 0:00:37.440 New York City headquarters. Coverage of the Bloomberg Invest Conference 0:00:37.640 --> 0:00:40.199 on Bloomberg Radio is brought to you by s e I. 0:00:40.320 --> 0:00:42.440 This is the big week, the week when we're finally 0:00:42.479 --> 0:00:45.440 going to hear some of these details about President Trump's 0:00:45.440 --> 0:00:49.000 infrastructure spending plan and to break down exactly what we 0:00:49.040 --> 0:00:53.240 can expect and what potential opportunities there are for private investors. 0:00:53.560 --> 0:00:56.000 Glenn young Ken is here to make it all makes 0:00:56.040 --> 0:00:58.720 sense for me anyway, President and Chief operating Officer of 0:00:58.760 --> 0:01:01.080 the Carlisle Group, and he joins us here in our 0:01:01.120 --> 0:01:05.479 Bloomberg headquarters. Glenn, let's start with good morning, good morning, 0:01:05.520 --> 0:01:08.200 thank you for joining me. Let's start with the idea 0:01:08.400 --> 0:01:12.319 of this two hundred billion dollars of federal money and 0:01:12.480 --> 0:01:15.959 eight hundred billion dollars of private money that comes in 0:01:16.360 --> 0:01:21.320 because these private investors are promised incentives. What are these incentives? Yeah, 0:01:21.360 --> 0:01:24.360 I actually think, um, the incentives are going to be 0:01:24.480 --> 0:01:28.720 more for the jurisdictions that take on new projects. So 0:01:29.040 --> 0:01:32.640 how's this really going to work? Um, First, the government's 0:01:32.640 --> 0:01:34.679 incentives are going to be are going to be put 0:01:34.720 --> 0:01:39.399 in place so that cities and states could actually earn 0:01:39.959 --> 0:01:43.959 a bonus if they take on public private partnerships for 0:01:44.040 --> 0:01:47.319 critical assets. So, for example, if you're the mayor of 0:01:47.319 --> 0:01:48.800 a city and you have an airport, and you have 0:01:48.920 --> 0:01:51.800 big plans for that airport, and you actually put it 0:01:51.840 --> 0:01:54.880 into a public private partnership process and bring in private 0:01:54.920 --> 0:01:58.000 capital to fund the expansion of that airport, and oh, 0:01:58.000 --> 0:02:01.480 by the way, most likely receive a payment up front. Um, 0:02:01.560 --> 0:02:04.440 the government will in fact provide an incremental incentive on 0:02:04.520 --> 0:02:07.480 top of that for the city. The city then has 0:02:07.720 --> 0:02:11.320 the capital that they liberated from that airport plus incremental 0:02:11.360 --> 0:02:13.960 capital from the government to invest in new things. All right, 0:02:14.040 --> 0:02:16.200 back up, when you say they get this extra incentive, 0:02:16.240 --> 0:02:18.519 they get this extra bonus. That money is coming from somewhere. 0:02:18.520 --> 0:02:20.320 Where does that come from? Does that mean higher tolls. 0:02:20.320 --> 0:02:23.520 Does that mean higher taxes federally? Well, first of all, 0:02:23.560 --> 0:02:26.400 the two hundred billion was in the president's plan that 0:02:26.440 --> 0:02:29.040 they submitted two weeks ago, which was a ten year 0:02:29.120 --> 0:02:32.760 a ten year a budget frame plus a ten year forecast. 0:02:33.120 --> 0:02:35.760 And it's over the ten year period the two billion 0:02:36.280 --> 0:02:39.680 um and they actually hope to liberate more than eight 0:02:39.720 --> 0:02:43.120 hundred billion. They hope to actually attract a billion trillion 0:02:43.160 --> 0:02:44.960 I'm sorry, they hope to attract a trillion into this 0:02:45.760 --> 0:02:48.240 and so, which I actually think they will because the 0:02:48.280 --> 0:02:50.800 asset base that the private sector has a chance to 0:02:50.840 --> 0:02:55.640 invest in is already existing. Very interesting fact, just in 0:02:55.680 --> 0:02:58.400 the airports alone in the United States today, which are 0:02:58.480 --> 0:03:01.720 up and running commercial entities, right They get landing fees, 0:03:01.760 --> 0:03:05.519 they have passenger traffic, they have restaurants and shopping in them. 0:03:05.560 --> 0:03:08.120 There's there's an estimate that that's already a half a 0:03:08.200 --> 0:03:11.840 trillion of value that exists in just airports in the 0:03:11.919 --> 0:03:14.400 United States today. Okay, so I love the idea of 0:03:14.440 --> 0:03:16.960 liberating cash. By the way that my mind is going wild, 0:03:17.040 --> 0:03:20.840 but I'm trying to understand, uh, this idea of attracting 0:03:20.840 --> 0:03:23.680 when trillion dollars in investment capital. It seems like private 0:03:23.680 --> 0:03:27.040 equity firms in particular, which are despot for opportunities in 0:03:27.080 --> 0:03:31.160 this overvalued market, at least ind of some. I'm surprised 0:03:31.200 --> 0:03:35.960 that there haven't already been more investments made in infrastructure. 0:03:35.960 --> 0:03:38.200 And if they're not, are there structural reasons as to 0:03:38.280 --> 0:03:41.240 why not? For example, whether it's certain interests or whether 0:03:41.320 --> 0:03:44.600 it's certain obstacles that are just physical. You can't construct 0:03:44.600 --> 0:03:46.720 a new airport when there's one that needs to operate, 0:03:46.960 --> 0:03:48.760 right at least that's It's a great question, and I 0:03:48.800 --> 0:03:52.040 think there's two primary um factors to make sure we 0:03:52.080 --> 0:03:55.800 look at first. Outside of the United States, this concept 0:03:55.880 --> 0:04:01.360 has flourished so in Europe, in Canada, and particularly in Australia. 0:04:01.760 --> 0:04:06.920 The concept of bringing private investors into infrastructure and have 0:04:07.080 --> 0:04:10.360 them almost recapitalize that infrastructure in a partnership with the 0:04:10.400 --> 0:04:14.200 government has flourished for years and years and years. It 0:04:14.240 --> 0:04:18.479 hasn't happened here because there's been a hesitancy to actually 0:04:18.520 --> 0:04:22.320 take on what is something new, because there's been this 0:04:22.400 --> 0:04:24.920 expectation that the government is just gonna pay for it. 0:04:25.320 --> 0:04:28.039 We'll don't worry, We're just gonna pay for it. And 0:04:28.080 --> 0:04:30.840 the reality today is we can't afford to pay for 0:04:30.880 --> 0:04:34.080 it any longer. There are critical infrastructure needs that the 0:04:34.120 --> 0:04:36.279 government can pay for, but it can't pay for the 0:04:36.400 --> 0:04:41.960 two trillion dollar gap that exists today in our infrastructure requirements. 0:04:41.960 --> 0:04:46.159 And so it is the need to actually uncover this 0:04:46.440 --> 0:04:49.560 new technique for this country. And it's not perfectly new, 0:04:49.560 --> 0:04:52.479 because we've done a few already that in fact will 0:04:52.560 --> 0:04:55.400 will gain some momentum and actually begin to start filling 0:04:55.400 --> 0:04:57.920 that gap. So, Carlisle overseas about a hundred and sixty 0:04:57.920 --> 0:05:01.040 two billion dollars of assets. How much money do you 0:05:01.080 --> 0:05:05.479 expect Carlyle to invest should this plan come to fruition 0:05:05.720 --> 0:05:09.080 in infrastructure. That's that's that's a very nice direct question, 0:05:09.120 --> 0:05:10.479 and so I'm going to dodge it a little bit. 0:05:10.680 --> 0:05:12.920 I imagine that you would find a way. But we 0:05:13.279 --> 0:05:16.520 in fact, we in fact have funds and are raising funds, 0:05:16.800 --> 0:05:20.359 and so in energy and infrastructure today we manage across 0:05:20.400 --> 0:05:24.320 equity and debt capital about twenty eight billion dollars. Infrastructure 0:05:24.360 --> 0:05:28.640 needs extend from energy infrastructure to airports, to toll roads, 0:05:28.839 --> 0:05:32.840 to telecom infrastructure, and so the depth of this market 0:05:33.000 --> 0:05:35.839 is big. It's big, and so what I think what 0:05:35.880 --> 0:05:38.600 we're gonna end up seeing, however, is a few key 0:05:38.640 --> 0:05:43.400 critical projects out front that blaze a trail. Airports. Airports 0:05:43.440 --> 0:05:45.919 particularly because they're commercial entities that are up and running 0:05:46.120 --> 0:05:48.640 there and as a result, people understand them. They've been 0:05:48.640 --> 0:05:51.600 done in other countries, um, and that to me is 0:05:52.000 --> 0:05:54.840 a decision that a mayor can make and the f 0:05:54.839 --> 0:05:57.440 a A can make and they don't really need government 0:05:57.480 --> 0:06:00.200 intervention from the from Washington to do this. And that's 0:06:00.240 --> 0:06:02.320 the great part about A Reports today. This is a 0:06:02.360 --> 0:06:04.880 fascinating conversation. I could speak with you all morning because 0:06:04.880 --> 0:06:07.680 it really highlights a lot of interesting angles such as 0:06:07.800 --> 0:06:10.560 if you do have airports that are successful at pairing 0:06:10.600 --> 0:06:14.720 partner private and public money, then what does this lead 0:06:14.720 --> 0:06:17.200 to next? But unfortunately have to leave their Glenn at Calfkin, 0:06:17.440 --> 0:06:19.440 thank you so much for joining us at President and 0:06:19.520 --> 0:06:22.720 chief operating Officer at the Carlyle Group. It's private equity 0:06:22.760 --> 0:06:25.719 firm that oversees a hundred and sixty two billion dollars 0:06:25.880 --> 0:06:40.400 in Washington, d C. We are broadcasting alive from the 0:06:40.400 --> 0:06:44.320 Bloomberg Invest Conference at Bloomberg's New York City headquarters. Coverage 0:06:44.320 --> 0:06:46.599 of the Bloomberg Invest Conference on Bloomberg Radio is brought 0:06:46.600 --> 0:06:49.680 to you by s EI And of course no investing 0:06:49.880 --> 0:06:54.120 conference or conversation would be complete unless we addressed the 0:06:54.160 --> 0:06:57.080 big elephant in the room, which is passive investing and 0:06:57.120 --> 0:06:59.159 the shift that's been going on. Moody's put out our 0:06:59.160 --> 0:07:02.320 report earlier. This you're saying the passive investing will overtake 0:07:02.360 --> 0:07:06.400 active management by twenty twenty four in the US. From 0:07:06.440 --> 0:07:08.760 more perspective on this, I want to bring in Christie Mitchem. 0:07:08.800 --> 0:07:11.960 She is chief executive officer of Will's Fargo Asset Management, 0:07:11.960 --> 0:07:14.560 which has four hundred and eighty billion dollars of assets 0:07:14.600 --> 0:07:17.040 under management and is based in San Francisco, which has 0:07:17.120 --> 0:07:19.239 much better weather than there is in New York City. 0:07:19.440 --> 0:07:22.160 Yet today and yet here she is and she joins 0:07:22.240 --> 0:07:24.520 us here in New York. Christie, thank you so much. UM. 0:07:24.680 --> 0:07:27.760 You know, we hear so much about this accelerating shift 0:07:27.920 --> 0:07:33.120 to passive management, particularly with respect to equities. Uh is 0:07:33.160 --> 0:07:35.800 now any different? I mean, it's time with such low volatility, 0:07:35.840 --> 0:07:39.320 won't this just absolutely accelerate? You know? I think today 0:07:39.480 --> 0:07:41.120 is different, and I think one of the things that 0:07:41.160 --> 0:07:44.800 investors may be missing that really sits below overall low 0:07:44.880 --> 0:07:47.640 volatility levels is a real c shift in the marketplace, 0:07:47.960 --> 0:07:51.880 and that's a change in the para wise correlation between stocks. 0:07:52.280 --> 0:07:54.920 You know, we saw that correlation actually hit a low 0:07:55.040 --> 0:07:57.800 in January of this year after hitting a high back 0:07:57.800 --> 0:08:00.200 in two thousand twelves. Hold on sec let's just back up. 0:08:00.200 --> 0:08:04.600 In other words, the correlation between stocks, all stocks moving 0:08:04.600 --> 0:08:07.680 in tandem broke down earlier this year reach the lowest 0:08:07.680 --> 0:08:10.320 point ever. It reached the lowest points since two thousand 0:08:10.320 --> 0:08:12.760 eight in the Lehman bankruptcy. So a really big shift 0:08:13.240 --> 0:08:15.640 um and one of the things that's really characterized the 0:08:15.680 --> 0:08:18.720 big market rally that we've seen since the global financial 0:08:18.760 --> 0:08:22.920 crisis has been strong correlations that's changing and that presents 0:08:23.040 --> 0:08:26.200 real opportunities for active managers. Let me just give you 0:08:26.240 --> 0:08:28.360 a playbook from from what we're seeing in terms of 0:08:28.360 --> 0:08:30.920 our own stable of managers. Since the beginning of the year, 0:08:31.040 --> 0:08:34.880 seventy of our active managers are outperforming their respective benchmarks. 0:08:35.120 --> 0:08:37.600 And just to put that in perspective, they're outperforming by 0:08:37.600 --> 0:08:41.800 a lot. On average asset weighted outperforming respective benchmarks by 0:08:41.800 --> 0:08:44.880 over seventy five basis points. Is that including fees or 0:08:44.920 --> 0:08:47.720 not including that is after fees, that is after fees. Okay, 0:08:47.880 --> 0:08:49.800 and this is the biggest out performance in a while 0:08:49.840 --> 0:08:52.400 that you've seen. Absolutely, I mean, two thousand thirteen to 0:08:52.520 --> 0:08:56.280 two thousand sixteen really difficult years for active managers. The 0:08:56.360 --> 0:08:59.800 number of active managers out performing in the large caps 0:09:00.040 --> 0:09:04.480 ace in two thousand sixteen, that's the lowest number since 0:09:04.600 --> 0:09:07.920 n So if investors are looking for a place to 0:09:07.960 --> 0:09:11.400 put money, I think that place today is active managers. 0:09:11.679 --> 0:09:14.760 And active managers also performed better in a downturn, so 0:09:14.800 --> 0:09:17.320 it's a great way to pick up excess return today 0:09:17.360 --> 0:09:20.720 but also put a little insurance cushion inside your portfolio. Okay, 0:09:20.720 --> 0:09:24.200 So you said that seventy of Wells Fargo asset managements 0:09:24.280 --> 0:09:31.400 active fund management have been outperforming their perspective benchmarks. Have 0:09:31.520 --> 0:09:35.160 they seen inflows? Have they seen flows follow that performance? 0:09:35.240 --> 0:09:37.559 Or is is marketing still a really big issue. I 0:09:37.640 --> 0:09:39.520 still think we're a little bit late to see I 0:09:39.520 --> 0:09:41.360 mean we're a little bit early to seeing flows, you 0:09:41.360 --> 0:09:43.920 know where I think people are still really focusing on 0:09:44.040 --> 0:09:47.240 this sort of you know, um phenomena in terms of 0:09:47.240 --> 0:09:49.719 a trend towards passive investing. And that's why I think 0:09:49.760 --> 0:09:53.040 this is really an important story and a potentially important 0:09:53.120 --> 0:09:56.439 inflection point for asset management. So is there a particular 0:09:56.520 --> 0:10:01.439 equity market where you're seeing correlations breakdown even more than others? Well, 0:10:01.480 --> 0:10:05.040 I think, you know, across the board we're seeing correlations breakdown, 0:10:05.040 --> 0:10:07.960 but I think where it's particularly impactful is in the 0:10:08.040 --> 0:10:11.000 sectors where it's been difficult to outperform, and that is 0:10:11.120 --> 0:10:13.680 US large large cap and oh, by the way, that's 0:10:13.679 --> 0:10:15.920 a big part of the investors portfolio in the U 0:10:16.120 --> 0:10:18.240 S so UM. Just to sort of back up, the 0:10:18.280 --> 0:10:22.160 correlations were tightly moving together just simply because of the 0:10:22.200 --> 0:10:24.120 central banks and the fact that the Federal Reserve was 0:10:24.160 --> 0:10:28.559 basically driving all of the risk on sentiment. Now, however, 0:10:28.880 --> 0:10:31.280 it's unclear what's really driving it. And as we talk 0:10:31.360 --> 0:10:34.240 about with Dave Wilson or Bloomberg Soocks editor and calumnist, 0:10:34.520 --> 0:10:37.200 uh here uh you know, every day, you know you 0:10:37.280 --> 0:10:40.360 have big losers and big winners. How long can we 0:10:40.400 --> 0:10:43.280 continue with this type of activity and this type of 0:10:43.280 --> 0:10:46.240 dispersion before something macro kind of gets in the way 0:10:46.320 --> 0:10:48.160 and drives us all, especially with all the noise that 0:10:48.200 --> 0:10:50.600 we're hearing on the geopolitical side. Listen, I do think 0:10:50.600 --> 0:10:53.320 there is tons of noise on the geo political side. Obviously, 0:10:53.360 --> 0:10:55.480 if we just look to tomorrow, there's a lot going on. 0:10:55.559 --> 0:10:58.680 We've got Comely, we've got the ECB, we've got UK elections. 0:10:58.720 --> 0:11:00.960 I mean, there's a ton of focus on. But at 0:11:00.960 --> 0:11:03.600 the end of the day, stock market valuations and performance 0:11:03.640 --> 0:11:06.960 comes down to, you know, how our corporate earnings performing. 0:11:07.280 --> 0:11:09.680 And we've really seen, you know, really strong growth. So 0:11:09.720 --> 0:11:11.800 we look at top line growth, we're looking at numbers 0:11:11.800 --> 0:11:14.920 in the six to seven percent range um bottom line growth, 0:11:15.080 --> 0:11:18.679 you know, similar numbers, so, you know, really outstanding growth 0:11:18.720 --> 0:11:20.920 both in the top line and the bottom line compared 0:11:20.960 --> 0:11:22.839 to last year. And I think that's what's supporting the 0:11:22.920 --> 0:11:25.000 valuations that we see in the marketplace today. So a 0:11:25.000 --> 0:11:26.880 couple of years ago, there was a lot of fear 0:11:26.960 --> 0:11:30.200 among investors about rising rates and about a big sell 0:11:30.280 --> 0:11:34.280 off in markets. And at that time, liquid alternatives and 0:11:34.360 --> 0:11:37.800 other types of unconstrained funds were the rage. People piled 0:11:37.840 --> 0:11:40.400 into these things, saying, please protect me in a downturn. 0:11:41.120 --> 0:11:45.480 Not anymore? Are these things were going to be popular again? Oh? 0:11:45.520 --> 0:11:47.640 I think so. I mean, you know, I think everything 0:11:47.679 --> 0:11:50.640 has its space in the marketplace, and it has its time, 0:11:51.000 --> 0:11:53.240 and I think, you know, those products in particular, did 0:11:53.240 --> 0:11:56.040 not perform well in a market that was really doing, um, 0:11:56.080 --> 0:11:59.280 you know, quite well. Um. So I think we'll continue 0:11:59.320 --> 0:12:02.760 to see people put rainy day strategies in their portfolio portfolios, 0:12:02.760 --> 0:12:04.559 and I think that's a good thing to do. So. Um. 0:12:04.600 --> 0:12:07.800 With respect to Wells Fargo asset management, what area in 0:12:07.880 --> 0:12:11.400 asset management, uh do you see as having the biggest 0:12:11.400 --> 0:12:15.599 opportunity for potential expansion? Well, I think the biggest opportunity 0:12:15.640 --> 0:12:18.760 is undeniably multi asset class solutions. I think as investors, 0:12:18.760 --> 0:12:22.000 individual investors continue to get more sophisticated about what they 0:12:22.040 --> 0:12:24.079 want and what they need, we're going to see a 0:12:24.120 --> 0:12:27.559 world drive towards customization. You're not gonna want the market portfolio. 0:12:27.679 --> 0:12:30.320 You're gonna want a portfolio that that actually matches your 0:12:30.440 --> 0:12:34.360 specific needs, desires, and obviously liabilities, and that's going to 0:12:34.400 --> 0:12:37.280 be a big shift. I think the undeniably the biggest 0:12:37.280 --> 0:12:40.800 opportunity is multiasset class solutions and personalized investment. So what 0:12:41.000 --> 0:12:43.559 will a computer be giving me that? I think it's 0:12:43.600 --> 0:12:46.840 highly likely that a computer will be part of that solution, absolutely, 0:12:47.080 --> 0:12:49.200 and that's not a bad thing. Actually, you know, what 0:12:49.240 --> 0:12:51.719 I think, you know, robo advisory, and you know, as 0:12:51.760 --> 0:12:54.720 we call it, is actually highly enabling, right. It allows 0:12:54.800 --> 0:12:57.160 us to take the kind of insights and strategies that 0:12:57.200 --> 0:13:00.120 have typically been only accessible to the largest institution to 0:13:00.200 --> 0:13:02.680 the world and put them in the hands of individual investors. 0:13:02.679 --> 0:13:05.320 And that's an incredibly important and valuable shift. Do you 0:13:05.320 --> 0:13:07.400 think that there's any area of the market that's going 0:13:07.440 --> 0:13:10.840 to continue to shrink and will eventually become obsolete with 0:13:10.880 --> 0:13:14.280 respect to active asset management, Well, then I think we're 0:13:14.280 --> 0:13:16.680 going to continue to face pressures in the large cap 0:13:17.000 --> 0:13:19.319 marketplace as it relates to active management. I think we 0:13:19.400 --> 0:13:22.720 do see opportunities or at least in more readily available 0:13:22.720 --> 0:13:25.960 opportunities and less efficient spaces, so that small cap stocks, 0:13:26.040 --> 0:13:29.040 mid cap stocks, international stocks, emerging markets. So you know, 0:13:29.080 --> 0:13:30.440 I'm not saying it's we're not going to have to 0:13:30.440 --> 0:13:32.840 fight the good fight in large cap I think we are, 0:13:33.280 --> 0:13:35.080 and I think we'll be able to generate alpha more 0:13:35.120 --> 0:13:37.160 easily in other spaces. But I still think it has 0:13:37.160 --> 0:13:39.480 a real place in the portfolio. Christie Mitchum, thank you 0:13:39.480 --> 0:13:41.079 so much for joining us to really a question to 0:13:41.080 --> 0:13:43.560 speak with you. Christie Mitchum is chief executive officer of 0:13:43.559 --> 0:13:46.800 Wells Fargo Asset Management UH in San Francisco. It overseas 0:13:46.880 --> 0:13:50.400 four hundred and eighty billion dollars in assets and is 0:13:50.400 --> 0:13:55.119 on the forefront of this transition, this changing investment landscape 0:13:55.120 --> 0:14:08.320 that we have talked so much about. One of the 0:14:08.320 --> 0:14:10.760 things that is being talked about is the revolution that 0:14:10.880 --> 0:14:13.960 is going on in consumer lending, in particular the way 0:14:13.960 --> 0:14:17.880 that people UH investors are mining big data to get 0:14:17.880 --> 0:14:20.880 a better sense of what the potential for defaults and 0:14:21.040 --> 0:14:23.680 delinquencies could be. To get more of a sense of 0:14:23.920 --> 0:14:27.360 just where this is in the mortgage market in particular, 0:14:27.360 --> 0:14:30.040 I want to bring Emmanuel Shireff. He is executive vice 0:14:30.040 --> 0:14:33.120 president and a portfolio manager at PIMCO, which is based 0:14:33.160 --> 0:14:36.160 in Newport Beach. Emmanuel, thank you so much for joining us. 0:14:36.400 --> 0:14:38.920 So you know, we hear a lot about the ability 0:14:39.080 --> 0:14:43.120 for online lenders to mind big data and understand people's 0:14:43.120 --> 0:14:46.720 Facebook feeds and whatever else and credit scores to get 0:14:46.760 --> 0:14:49.640 a an accurate sense of whether they will default. What 0:14:49.680 --> 0:14:50.880 do you look at? What do you think is the 0:14:50.920 --> 0:14:54.840 most important online data indicator that is a deciding factor 0:14:54.880 --> 0:14:57.040 for whether somebody will make good on their bills? So 0:14:57.280 --> 0:14:59.120 thank you for having me. First of all, at PIMCO, 0:14:59.160 --> 0:15:00.720 we have been doing machine learn in big data for 0:15:00.760 --> 0:15:03.560 a very long time in the mortgage and real estate space. UM. 0:15:03.680 --> 0:15:06.440 I've been heavily involved in that. And UH We've built 0:15:06.440 --> 0:15:09.240 out a fairly significant infrastructure that allows us to gather 0:15:09.360 --> 0:15:13.160 information on local real estate markets, UM on all the 0:15:13.200 --> 0:15:16.680 mortgage performance, on consumer credits, on local demographics and economics 0:15:16.840 --> 0:15:18.480 and and and all of that, and we use that 0:15:18.480 --> 0:15:21.680 in order to build up our mortgage lending models and 0:15:21.720 --> 0:15:26.120 our mortgage performance models. UM. With with kind of Internet 0:15:26.120 --> 0:15:28.640 related big data, UH, it's worth being a little bit 0:15:28.640 --> 0:15:30.560 skeptical of some of the claims that are that are 0:15:30.600 --> 0:15:33.960 being put out there. UM. Whenever we analyze data, we 0:15:34.000 --> 0:15:37.520 spend a lot of time cleaning data, understanding the provenance 0:15:37.920 --> 0:15:39.880 of of where it comes from, how it was collected, 0:15:40.160 --> 0:15:42.920 adjusting for potential biases and other related issues that may 0:15:42.960 --> 0:15:45.240 arise with the data in order to try and extract 0:15:45.360 --> 0:15:49.000 correct UM signals from it and adjust for whatever biases 0:15:49.040 --> 0:15:52.600 may exist. And and so with a lot of online data, 0:15:53.320 --> 0:15:56.200 the collection methods are a little bit uncertain and subject 0:15:56.240 --> 0:15:58.760 to change at any time. So, for example, if you 0:15:59.200 --> 0:16:01.160 there there's a idea of vendors out there that have 0:16:01.200 --> 0:16:03.080 sprung up over the last few years selling you know, 0:16:03.200 --> 0:16:07.440 Twitter sentiments, location data, you know Facebook feed information and 0:16:07.720 --> 0:16:10.920 all of that, and the populations can change very rapidly, 0:16:11.160 --> 0:16:13.600 the methods of collection can change all the time. There's 0:16:13.640 --> 0:16:15.520 not a whole lot of history for most of these things, 0:16:15.760 --> 0:16:19.239 so it's difficult to calibrate what exactly all this information 0:16:19.280 --> 0:16:22.800 means for future mortgage performance, especially for signals that have 0:16:22.880 --> 0:16:24.880 only been around post crisis, that you have never even 0:16:24.920 --> 0:16:28.800 observed in in a high stress situation. So, um, this 0:16:28.840 --> 0:16:32.120 is fascinating. The amount of time and attention focusing on 0:16:32.440 --> 0:16:35.000 exactly where the data is from, how it's been collected, 0:16:35.040 --> 0:16:38.520 and it's track record of potential biases. I'm wondering, do 0:16:38.560 --> 0:16:42.080 you have a track record with respect to how accurate 0:16:42.320 --> 0:16:46.240 pimco's model is in predicting tolinquencies in the mortgage debt mark. Well, 0:16:46.240 --> 0:16:48.560 when you're working with long term data that has existed 0:16:48.600 --> 0:16:51.480 for some time, it's possible to back test it, to 0:16:51.520 --> 0:16:55.240 build a variety of models surrounding it. Um with with 0:16:55.320 --> 0:16:57.800 bigger data, it's much more challenging to do that, and 0:16:58.120 --> 0:16:59.920 you have to kind of depend on whether or not 0:17:00.240 --> 0:17:04.159 you've um correctly made those those adjustments. And whenever a 0:17:04.200 --> 0:17:06.040 high stress period occurs, such as it is now, you 0:17:06.119 --> 0:17:09.320 start seeing things potentially breaking down or you're forced to 0:17:10.000 --> 0:17:11.960 high stress period of time like now now as a 0:17:12.040 --> 0:17:14.240 high stress period of time, it's it's becoming a little 0:17:14.280 --> 0:17:19.960 bit more stressful. Please explain, um, So, as I think 0:17:19.960 --> 0:17:22.840 you mentioned, some of the online lenders are seeing a 0:17:22.840 --> 0:17:26.359 little bit of increases in the faults and delinquencies. So 0:17:26.359 --> 0:17:30.400 it's never been unexpected and unpleasant surprises in the prospers 0:17:30.400 --> 0:17:32.240 of the world and the lending clubs of the world, 0:17:32.320 --> 0:17:36.160 and there has been a certain wave of cynicism over 0:17:36.200 --> 0:17:38.520 some of these models correct exactly. So, so I think 0:17:38.640 --> 0:17:41.480 now they're seeing a little bit of um, maybe not 0:17:41.480 --> 0:17:43.280 stressed in the world, but stressed to their models that 0:17:43.320 --> 0:17:45.680 they have to make adjustments for. But are you seeing 0:17:45.680 --> 0:17:50.080 stressed to the underlying US mortgage market. Uh, We're still 0:17:50.160 --> 0:17:52.719 very constructive on the mortgage market, on the housing market overall. 0:17:52.840 --> 0:17:54.800 But do we do we want to talk more about 0:17:54.840 --> 0:17:59.159 big data machine learning? All right? Well, I mean with 0:17:59.240 --> 0:18:02.080 big data and machine learning, what are the signs that 0:18:02.160 --> 0:18:04.840 you look for, uh, to sort of lead up to 0:18:05.160 --> 0:18:10.000 a potential deterioration of the market. UM. So we track 0:18:10.320 --> 0:18:13.280 UM a lot of information on the local demographics and economics. 0:18:13.840 --> 0:18:19.840 We track affordability ratios, UM, we track UM. The consumer 0:18:19.840 --> 0:18:22.639 performance overall always tracked credit scores and so on. But 0:18:22.720 --> 0:18:24.600 a lot of this is built into a variety of 0:18:25.480 --> 0:18:27.600 nested models that rely on each other and build upon 0:18:27.600 --> 0:18:29.640 each other to build a complete picture of the consumer 0:18:29.760 --> 0:18:33.440 and projected mortgage performance. So in some cases the signals 0:18:33.440 --> 0:18:36.280 interact in ways that with machine learning you don't always 0:18:36.400 --> 0:18:39.600 entirely understand why a signal is showing what is showing? 0:18:40.000 --> 0:18:42.919 So how much work is done after you get you know, 0:18:42.960 --> 0:18:45.280 you put something into your model and it spits out 0:18:45.520 --> 0:18:47.320 you know six, and you look at the six and 0:18:47.359 --> 0:18:48.399 then what do you do with it? You know? I 0:18:48.400 --> 0:18:51.360 mean do do people basically do portfolio managers take the 0:18:51.160 --> 0:18:54.639 input from the models and just going directly put it 0:18:54.640 --> 0:18:57.119 out there or is there analysis and a discussion about 0:18:57.400 --> 0:18:59.200 what to do with that? The models with with any 0:18:59.240 --> 0:19:01.240 model that we use is UM. The model is just 0:19:01.240 --> 0:19:04.760 an additional tool in our toolbox that is given to 0:19:04.880 --> 0:19:07.320 the portfolio manager and the trader. So the models allow 0:19:07.359 --> 0:19:10.320 us to synthesize a huge amount of information UM in 0:19:10.400 --> 0:19:15.320 order to help us make a better investment decision more quickly. UM. 0:19:15.320 --> 0:19:17.840 But it's not making an investing decision by itself. And 0:19:17.960 --> 0:19:19.840 maybe that's part of the issue that some of the 0:19:19.840 --> 0:19:23.600 consumer lenders you mentioned are are facing. UM, that the 0:19:23.680 --> 0:19:26.880 models are effectively making decisions by themselves without additional human 0:19:26.920 --> 0:19:29.320 input or review. Do you think that social media is 0:19:29.480 --> 0:19:33.760 a viable tool to understand somebody's ability to pay their debts? 0:19:34.720 --> 0:19:36.040 I don't know. I haven't spent a lot of time 0:19:36.040 --> 0:19:39.040 looking into social media effects because on on debt repayment 0:19:39.240 --> 0:19:40.919 and some of some of them would say that, but 0:19:41.040 --> 0:19:45.040 it might also be UM might also be completely unpredicted 0:19:45.080 --> 0:19:47.919 depending on what it is that people post fascinating. I 0:19:47.960 --> 0:19:50.600 honestly this is this is an important area and it's 0:19:50.640 --> 0:19:54.240 one that an increasing number of investors are turning to UM. 0:19:54.320 --> 0:19:57.480 And just real quick, how many people do you have 0:19:57.560 --> 0:20:02.840 at PIMCO who are focusing on maintain these databases? Depending 0:20:02.840 --> 0:20:05.440 on the sector we have UM, I don't actually know 0:20:05.480 --> 0:20:07.119 how many we have in total at PIMCO. We have 0:20:07.720 --> 0:20:10.560 many dozens of people working on these things, and UH, 0:20:10.600 --> 0:20:15.000 depending on depending on the sector, there's more fewer Emmanuel Sharreff, 0:20:15.040 --> 0:20:17.280 Thank you so much for joining. Emmanuel Sharreff is executive 0:20:17.359 --> 0:20:21.119 vice president and portfolio manager at PIMCO, which is based 0:20:21.160 --> 0:20:23.600 in Newport Beach, and we are broadcasting live from the 0:20:23.600 --> 0:20:28.400 Bloomberg invest Conference at Bloomberg Bloomberg's New York City headquarters. 0:20:40.000 --> 0:20:43.119 We had some breaking news this morning. President Donald Trump 0:20:43.240 --> 0:20:46.160 tweeted I will be nominating Christopher A. Ray, a man 0:20:46.200 --> 0:20:49.560 of impeccable credentials, to be the new Director of the FBI. 0:20:49.720 --> 0:20:52.359 Details to follow. We are not going to wait for 0:20:52.440 --> 0:20:54.520 him to give us some details before getting some of 0:20:54.560 --> 0:20:57.600 our own from Larry Liebert, national Security Team editor for 0:20:57.680 --> 0:21:00.679 Bloomberg in Washington, d C. Larry, what do we know 0:21:00.720 --> 0:21:04.720 about Christopher Ray, the nominee for the new director of 0:21:04.840 --> 0:21:07.640 the FBI. Well, he's quite well known. He's a white 0:21:07.680 --> 0:21:10.440 color defense attorney now, but he served at the Justice 0:21:10.440 --> 0:21:15.119 Department for a number of years, including prosecuting the infamous 0:21:15.119 --> 0:21:20.120 in Ron uh financial scandal. UH. The initial response UH, 0:21:20.160 --> 0:21:23.480 including from some critics of President Trump, has been that 0:21:23.560 --> 0:21:27.760 he's a good, solid choice, although he didn't have specific 0:21:27.840 --> 0:21:32.680 experience as some previous FBI directors heading the agency. So UM. 0:21:32.720 --> 0:21:36.440