Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast sixty portfolio. Many of
Speaker 1: us grew up with that six stocks, fixed income to
Speaker 1: fixing income to maybe you know kind of you know,
Speaker 1: even out maybe some of the risk here give you
Speaker 1: some return. But man, that did not work this year
Speaker 1: or is not working this year. It's stocks down, the
Speaker 1: US aggregate, the Bloomberg u S aggregate fixed income total
Speaker 1: return unhedged down sixteen point eight percent. It is ugly
Speaker 1: out there, folks. What are you doing the fixed income biz?
Speaker 1: Let's check in with George Borie, chief Investment Strategies for
Speaker 1: fixed income at all Spring Global Investments. George, you guys
Speaker 1: in fixed income? I mean, does anybody want to talk
Speaker 1: to you guys? A cocktail parties or is it just
Speaker 1: stay away? What do you do? Yeah, good morning, Paul,
Speaker 1: Thanks very much. Yeah, I think as you highlight um
Speaker 1: you know, bond investors don't really set up or sign up,
Speaker 1: i should say, for for double digit mark to market
Speaker 1: losses UH in their portfolio. So it's it's been a
Speaker 1: very very challenging year for fixed income. What we tell
Speaker 1: clients is sort of two things. Number one, you know,
Speaker 1: the bonds they bought, they they actually are performing as advertised.
Speaker 1: They're paying the coupons that they were assigned to do.
Speaker 1: But obviously, you know, sort of two things have happened.
Speaker 1: Prices have gone up, and central banks have moved to
Speaker 1: become much more hawkish. As a result, bond prices, at
Speaker 1: least on a mark to market basis, has gone down
Speaker 1: quite a bit. That's the bad news. The good news
Speaker 1: is is that the yield level, the amount at which
Speaker 1: we can invest today is actually very attractive relative to
Speaker 1: history and certainly relative to the current kind of basket
Speaker 1: or risks we're looking at today. So a ten year
Speaker 1: treasury yields about four percent from one percent last year,
Speaker 1: a basket of investment grade bonds yields six, and a
Speaker 1: basket of say high yield bonds yields about ten. And
Speaker 1: it's the power of compounding. If you can reinvest your
Speaker 1: money today. At those yields, your forward looking returns are
Speaker 1: gonna look very compelling and they'll help you clawback some
Speaker 1: of those mark to market losses. They're not realized until
Speaker 1: you sell the bonds. Well, George, to your point that
Speaker 1: you know, if you look at a ten year treasury
Speaker 1: right now yielding about four percent, if you look at
Speaker 1: a three month T bill, uh, it's yielding about the same,
Speaker 1: if not more so. In that environment, you just go
Speaker 1: to the shortest thing possible. If the yield lever levels
Speaker 1: are about the same or are you looking at duration here? Well,
Speaker 1: in the short term, uh, you know, going for that
Speaker 1: sort of one year T bill at at roughly four
Speaker 1: to four and a quarter percent, that's not a bad idea.
Speaker 1: It's a good safe place to park money. It will
Speaker 1: sort of generate that yield for the next year. But
Speaker 1: if you're looking a little bit further out, inflation is
Speaker 1: unlikely to stay at these elevated levels. The central banks
Speaker 1: moving aggressively to get inflation down, and and the important
Speaker 1: thing to remember is the FED as very very powerful tools.
Speaker 1: They will get what they want, but it may take
Speaker 1: some time. So if you're looking say five, ten or
Speaker 1: even thirty years out, and some people do look that
Speaker 1: far out. Then that longer duration trade, locking in, say
Speaker 1: ford to four and a quarter percent yield today may
Speaker 1: look very nice five years out, and so we are
Speaker 1: adding some of that duration. We are looking further out
Speaker 1: the curve to lock in those longer term yields because
Speaker 1: we think inflation will come down and yields will start
Speaker 1: to come down as we sort of move beyond this
Speaker 1: this spike in inflation. George, what's your call there and
Speaker 1: all spring about this Federal reserve? It seems like seventy
Speaker 1: five basis points is baked in for the next meeting
Speaker 1: after that? How do you think the Federal Reserve will
Speaker 1: you know, kind of play Yeah, that's that's that's a
Speaker 1: that's a great, great question, Paul. You know, most people,
Speaker 1: many people expect the Fed to raise rates another seventy
Speaker 1: five basis points. Uh. And the real question is it
Speaker 1: sort of where are we at the end of the year.
Speaker 1: They have two more meetings before now in the end
Speaker 1: of the year, and then importantly, most investors are looking
Speaker 1: into next year. The market sort of wants to get
Speaker 1: a sense of where the terminal rate, where will rates peak?
Speaker 1: Right now, our view is that the Fed has been
Speaker 1: very clear they want to get rates up to about
Speaker 1: four and a half percent. They've recently reinforced that message,
Speaker 1: and so you know, some folks in the market we're
Speaker 1: expecting higher than that. We are not. We think we
Speaker 1: get to sort of four and a half percent by
Speaker 1: the end of the year, that would be another seventy
Speaker 1: five in November, but then start to decelerate that pace.
Speaker 1: That should allow them sometime and perhaps a little bit
Speaker 1: of patients to be able to sort of start to
Speaker 1: slow their rate of pace of of of rate, their
Speaker 1: pace of rate tightening. So four and a half percent
Speaker 1: as our target for the end of the year, we
Speaker 1: think they'll likely sit there for an extended period of time.
Speaker 1: That could be six months, nine months, perhaps even a year.
Speaker 1: It really depends on how inflation behaves and how the
Speaker 1: economy behaves. But the expectation for sort of this ongoing
Speaker 1: rapid fire kind of increase, we think it is getting
Speaker 1: a bit overblown, and we think the Fed actually is
Speaker 1: starting to gain some room to sort of slow that pace,
Speaker 1: but then allow markets and allow the economy to adjust
Speaker 1: as those higher rates take hold. All right, George, great stuff.
Speaker 1: Really appreciate getting your informed perspective on all things fixed income. Again,
Speaker 1: a brutal, brutal start to the year two returns like
Speaker 1: the fixed and gum world has never seen, is what
Speaker 1: I have been told. George Borie, chief investment strategist for
Speaker 1: fixed income at Offspring Global Investments. I want to get
Speaker 1: right to our next guest, the Conversation of the Morning.
Speaker 1: James Travitis, retired Admiral U S. Navy is in the
Speaker 1: Navy for like thirty seven years, fifteenth commander of the
Speaker 1: US European Command and NATO's sixteenth Supreme Allied Commander in Europe.
Speaker 1: But I know the highlight of his career is that
Speaker 1: he is a Bloomberg opinion columnist, which means he has
Speaker 1: to speak with us here at Bloomberg Radio. Admiral, thank
Speaker 1: you so much for taking the time out of your
Speaker 1: busy schedule so many places ago. But let's start with Ukraine.
Speaker 1: If I were to war game this out from this point,
Speaker 1: how would it go? I just don't know how the
Speaker 1: same places out there's spent so many mistakes by Mr Poutin,
Speaker 1: I just don't know where he goes from here. Well,
Speaker 1: I'll start with three little words, which are I don't know.
Speaker 1: Nobody does. UM. War is unpredictable, but I'll give you
Speaker 1: my estimate, having watched it closely, having been the NATO commander,
Speaker 1: having visited Ukraine many many times. UM, these are very
Speaker 1: tough people on both sides of that firing line. By
Speaker 1: the way, both Russians and Ukrainians, UM, So don't look
Speaker 1: for any sudden give out of either party here. So
Speaker 1: here's what I think will happen over the coming weeks.
Speaker 1: There is going to be a significant attack on the
Speaker 1: city of Harsan, which is a major uh Ukrainian city.
Speaker 1: It's the gateway to Crimea, and that will be where
Speaker 1: I would focus investors, analysts watch what happens in here soon.
Speaker 1: If the Ukrainians really run the table, push the Russians out,
Speaker 1: they're gonna have strong momentum. On the other hand, if
Speaker 1: the Russians can bob down the Ukrainian advance, that will
Speaker 1: also tell us something. So all of that all will
Speaker 1: play itself out over the next month or so. Then
Speaker 1: we're going to be deep in the guts of winter,
Speaker 1: and hopefully as we come out of winter, both sides
Speaker 1: will have been exhausted and be prepared to at least
Speaker 1: begin a negotiations so we can start to find a
Speaker 1: way out of this situation. Well, in the guts of winter,
Speaker 1: I want to talk about the dollar and sense of
Speaker 1: what war actually costs, because you know, there's a story
Speaker 1: on the terminal today, uh the Ukrainian president saying that
Speaker 1: his government needs seventeen billion dollars in immediate financing. That's immediate,
Speaker 1: Whereas you have the EU on the other side saying
Speaker 1: that the EU is going to develop funding around eighteen
Speaker 1: billion euros just under eighteen billion dollars for next years.
Speaker 1: So there's a real mismatch here. And I'd love to
Speaker 1: hear your thoughts on whether or not you're worried that
Speaker 1: the political will to fund Ukraine might fade as we
Speaker 1: got into those winter months. I think the political will
Speaker 1: will remain, but it's going to be more of a negotiation,
Speaker 1: not a simple Ukraine says we need X, and we
Speaker 1: hand them x. Um. I think it's gonna be more
Speaker 1: a situation of Ukraine says we need X and we're
Speaker 1: gonna say X. Sounds like a lot. How about why
Speaker 1: plus some longer term Z and maybe some additional A,
Speaker 1: B and C in terms of weapons. So you know,
Speaker 1: we talk a lot in private equity. I'm the vice
Speaker 1: chairman of the Carlisle Group. We talk a lot about
Speaker 1: burn rates and on putin side, the burn rate is
Speaker 1: pretty clear. It's the killed in action, the equipment destroyed.
Speaker 1: He is a very high burn rate. The burn rate
Speaker 1: on the Ukrainians is what you just put your finger on, Katie.
Speaker 1: It's the patients, the resources, the dollars, the Euros, the
Speaker 1: weapons of the West. I think that tap is not
Speaker 1: going to be suddenly shut off, but I think it's
Speaker 1: going to be more of a negotiation between the Ukrainians
Speaker 1: and the West. Point forward, add I want to take
Speaker 1: you to the other side of the globe to China.
Speaker 1: They just finish up their party congress and the strengthened
Speaker 1: g and potentially presenting much more risk to the global
Speaker 1: environment here. How do you What are your takeaways from
Speaker 1: what we've learned about China over the last couple of weeks. Well,
Speaker 1: first and foremost, we've seen, as you point out correctly, Paul,
Speaker 1: we've seen the emergence of g as a as a
Speaker 1: pantheon leader in China. He's now up there with Mao
Speaker 1: and Dan, and he is someone who is going to
Speaker 1: be with us for a while. He appears to be
Speaker 1: very healthy's late sixties, early seventies. He is in complete control.
Speaker 1: And if you doubt me at all, go back and
Speaker 1: review the video of the previous leader who Jentao, being
Speaker 1: dragged out. It looks like a scene from George Orwell.
Speaker 1: So clearly she is in full charge of I know.
Speaker 1: I'll give you two things to focus on as investors.
Speaker 1: One is he has remained adamant that he will continue
Speaker 1: this zero COVID policy that has real implications for the
Speaker 1: Chinese economy obviously, which then has a knock on effect globally.
Speaker 1: Watched to see if now that he's installed and is
Speaker 1: in full control, might he be willing to crack open
Speaker 1: that COVID policy a little bit. And secondly, Taiwan. In
Speaker 1: his speeches as part of this twentieth Party Congress where
Speaker 1: he was just appointed, he talked quite aggressively about the
Speaker 1: long term play on Taiwan. But my takeaway is don't
Speaker 1: look for a military move there for the next three
Speaker 1: to five years. He's not ready to go there. He's
Speaker 1: watching the debacle in the Ukraine. He has uncertainties and
Speaker 1: doubts about his own military about the Taiwanese. So I
Speaker 1: think that those two are going to be indicators to
Speaker 1: watch over the next few weeks. I've I want to
Speaker 1: talk about a Bloomberg opinion column you wrote last week,
Speaker 1: the headline of which is NATO's nuclear drills are a
Speaker 1: risk worth taking. Of course, you're talking about the round
Speaker 1: of exercises that started from NATO and Western Europe last week.
Speaker 1: As you point out, it's a pretty fraught time in
Speaker 1: Russian relations, to say the least. But talk me through
Speaker 1: that argument and whether we should expect more of these drills. Sure,
Speaker 1: let's start with the predicate that Russia has been rattling
Speaker 1: the nuclear saber almost continuously since this war began. So
Speaker 1: NATO every year, Katie and I commanded these drills. As
Speaker 1: Supreme Allied Commander, NATO every year exercises its nuclear capabilities.
Speaker 1: It's very routine. Um, it involves half of the NATO nations,
Speaker 1: it's confined hundreds and hundreds of miles from the Russian
Speaker 1: border out in Western Europe. Um. And it's it's a routine,
Speaker 1: business as usual exercise. I fear that if NATO were
Speaker 1: to say, oh, we're really concerned about Russian nuclear threats,
Speaker 1: so we just won't exercise our capability. I think that
Speaker 1: sends exactly the wrong signal to putin. It shows that
Speaker 1: we're going to back down in the face of his threats,
Speaker 1: and he'll begin to think, well, maybe they don't really
Speaker 1: have that kind of capability to counter. So, yes, you're right,
Speaker 1: it's a fraud. Time you've got to think it through.
Speaker 1: But on this one, I come down on this side
Speaker 1: of conducting those exercises, which are in fact in progress
Speaker 1: right now. All right, Ada, Well, thank you so much
Speaker 1: for joining us. We really appreciate your time and your
Speaker 1: informed perspective on these global geopolitical issues facing the world,
Speaker 1: facing markets, facing investors. James Travita's Admiral, United States Navy.
Speaker 1: He was with the Navy for thirty seven years, fifteenth
Speaker 1: Commander of the US European Command and NATO's sixteen Supreme
Speaker 1: Allied Commander. He is a Vice chairman Global Affairs at
Speaker 1: Carlisle Group and he is a Bloomberg opinion columnists, So
Speaker 1: he is a a busy individual. We appreciate getting perspective
Speaker 1: on some of these bigger issues here. On terms of geopolitics,
Speaker 1: We've got Ukraine, we've got China, lots of areas of
Speaker 1: concern out there, still the thick of earning season for
Speaker 1: the global banks. Last week we had a lot of
Speaker 1: the US names. Now we're starting to get some of
Speaker 1: the European names. UBS, for example, which is one of
Speaker 1: the many firms I can say I once worked at
Speaker 1: because they were I used to work at painting weeb
Speaker 1: which is now part of UBS. There's probably not many
Speaker 1: financial institutions that aren't part of where I used to work,
Speaker 1: for whatever that's worth. But UBS beat some some numbers today. Uh,
Speaker 1: stock up a little bit. Alison Williams, she's been covering
Speaker 1: bank stocks for decades on Wall Street. She's actually one
Speaker 1: of the leading voices out there. So Allison, um, what
Speaker 1: are you seeing from some of the European banks? Because
Speaker 1: I guess my theme has just been I'm not sure
Speaker 1: how they compete in the global banking business. But what
Speaker 1: are you seeing with quartally numbers? So for UBS, I
Speaker 1: mean there are a few key positives. I think you know,
Speaker 1: the stock is really reacting to trends in the wealth business. Um,
Speaker 1: so they're more focused on that business. They had nineteen
Speaker 1: excuse me, seventeen billion of wealth inflows a couple of
Speaker 1: billion as well in asset management, and so given UM
Speaker 1: sort of the tough environment in Asia, we think that's
Speaker 1: impressive and we think that is an indicator that their
Speaker 1: their business health is strong going forward despite the fact
Speaker 1: that we have some cyclical pressure in Asia on the
Speaker 1: capital front, capital ratio much bigger than expected UM, so
Speaker 1: investors I think are looking for UM that capital to
Speaker 1: be returned, so that's exciting. They did up upside their
Speaker 1: buy back to five point five billion, but that was
Speaker 1: had been sort of signaled. And then over to UM
Speaker 1: the investment bank that we always like to talk about
Speaker 1: fixed income treading up over sixty so that's a small
Speaker 1: business for them. UM but did very well. They had
Speaker 1: a record quarter and sort of derivatives on UH currencies
Speaker 1: and rates, which is where we're seeing all the strength.
Speaker 1: On the negative side of things, equity trading worse than expected,
Speaker 1: so that's more negative for them because that's a bigger
Speaker 1: part of their business and those fees UM, like we've
Speaker 1: seen at the bank's All quarter week. The one thing
Speaker 1: that the one place where UBS is benefiting and they
Speaker 1: are competing Asia Asia. I p o s have been
Speaker 1: sort of the soul UM Bright spot in the I
Speaker 1: p O market and ubs getting some benefit from that.
Speaker 1: Their fees were stilled down, but they did get some
Speaker 1: benefit there. And so also I want to go back
Speaker 1: to last week and to US bank earnings because this
Speaker 1: isn't a space I follow too closely, but I do
Speaker 1: at least four times a year, and what stuck out
Speaker 1: to me was the fact that net interest income absolutely
Speaker 1: on fire. Bloomberg's Lisa for Home It's had a great
Speaker 1: tweet which really have been thinking about since that if
Speaker 1: you think about the pressure on the big banks to
Speaker 1: pass on the higher interest rates to consumers hasn't really
Speaker 1: amounted it much last week. I know that the big
Speaker 1: banks CEO is one in front of Congress in the
Speaker 1: past month or so and said that they would do that.
Speaker 1: Hasn't seemed to happen yet. When would you expect to
Speaker 1: see that? So they're passing it on in specific products
Speaker 1: and businesses. So, for example, UM, the wealth business is
Speaker 1: an area where they are passing on those increases. UM.
Speaker 1: Other areas include the commercial banking business. So you are
Speaker 1: seeing it UM in some areas. But you know, keep
Speaker 1: in mind there's been a lot of changes, including overdraft
Speaker 1: in the for the US banks UM, where UM they've
Speaker 1: largely eliminated those fees. So in a way that's giving
Speaker 1: the customers some some economics, though not necessarily interest rates. UM.
Speaker 1: But I would say that in general, all the costs
Speaker 1: on those sort of smaller accounts continue to be low.
Speaker 1: Keep in mind, we're coming from like an incredibly low
Speaker 1: interest rate environment UM. And so I think, as you know,
Speaker 1: things are normalizing a bit there. UBS did see some
Speaker 1: benefit from the net interest income line, similar to the
Speaker 1: US banks, where the fourth quarter is going up and
Speaker 1: UM looks to be higher. So also we're gonna hear
Speaker 1: from Deutsche Bank, I guess tomorrow. I mean this is
Speaker 1: way back in a decades ago I wrote a paper saying,
Speaker 1: you know, predicting some of the big big who are
Speaker 1: going to be the leaders and financial services. You know,
Speaker 1: in the twenty one century. Deutsch Bank was one of
Speaker 1: my names, but it hasn't worked out that way. What
Speaker 1: do we do with Deutsche Bank? What does Germany do
Speaker 1: with Deutsche Bank. You have to have a strong Deutsche Bank,
Speaker 1: don't you. They are um executing on their strategy and
Speaker 1: they do have strength in those German markets and in Europe,
Speaker 1: and you know, they're big restructuring which took place, or
Speaker 1: I guess their last restructuring took place, because there were many,
Speaker 1: many years of restructuring. But you know, in nineteen they
Speaker 1: made the tough decision to get out of equities for
Speaker 1: the most part focused on fixed income trading. UM. It
Speaker 1: took a couple of quarters, a couple of years maybe
Speaker 1: even for that business to stabilize, but that business is
Speaker 1: really um what's doing well this year. They also have
Speaker 1: been hurt by the lower interest rates. Um. You know,
Speaker 1: we we've had low interest rates in the US, but UM,
Speaker 1: Europe I think has it's been even tougher. And so
Speaker 1: Deutsche Bank. What you know, the read across are joint
Speaker 1: bank is very positive from the fixed income trading that
Speaker 1: we've seen at these banks. So we're going to expect
Speaker 1: them to get the benefit from that as well as
Speaker 1: from higher rates when they report tomorrow. And Allison, we're
Speaker 1: we've said good bye to the US banks in terms
Speaker 1: of reporting, we're getting through the European banks. What has
Speaker 1: been the biggest stand out to you thus far? I mean,
Speaker 1: the biggest driver has been the net interest income. I mean,
Speaker 1: the growth is just super strong upside to the fourth quarter.
Speaker 1: You know, banks are sort of varied in terms of
Speaker 1: their caution or their optimism with regard to and then
Speaker 1: I also thought that the most interesting data point on
Speaker 1: the credit front because that's I think an area where
Speaker 1: most investors are very uncertain about next year. But Jamie
Speaker 1: diamond saying that five to six unemployment is about you know,
Speaker 1: a couple of quarters of building reserves a six billion,
Speaker 1: So giving that context, because the last cycle we had
Speaker 1: was the pandemic, where it was over twenty billion UM,
Speaker 1: next year's estimate is one billion, so I think kind
Speaker 1: of level setting um the risk there and comparing that
Speaker 1: to the very strong pretexts, pre profit, pre provision profit
Speaker 1: that we're getting at these banks, I think sort of
Speaker 1: help frames a debate that that is a manageable scenario. Alright,
Speaker 1: great stuff. As always the Alison Williams Senior Global Banks
Speaker 1: Analysts for Bloomberg Intelligence. She covers everything around the world
Speaker 1: on the banks, and that's not enough. She's also the
Speaker 1: co director of research for the America's for Bloomberg Intelligence,
Speaker 1: so she does it all. We appreciate getting some of
Speaker 1: her time. Katie. You know, one of the biggest growth
Speaker 1: stories of recent time for me on Wall Street, and
Speaker 1: I've been doing this for thirty five years. Is E
Speaker 1: t S right? You know a thing or two about
Speaker 1: et F? Don't yet? They're the future. And I say
Speaker 1: that as someone who covers E t F for Print
Speaker 1: News and also uh anchor show Me and Matt. He's
Speaker 1: a little bit m I I for the next couple
Speaker 1: of weeks, but the show will go on tomorrow. Unbelievable
Speaker 1: growth story, folks, funds flows. If you want to know
Speaker 1: where the money is going, boy, take a look at
Speaker 1: the E t F. So let's take a couple of
Speaker 1: segments here. Let's do two segments, Katie, We'll do a
Speaker 1: little round table talk et F. See where the money
Speaker 1: is going, where the smart money is going or leaving
Speaker 1: Sylvia Jablonski, she joins in the Bloomberg Interactive Broker Studio.
Speaker 1: She's the c i O at Defiance. They do nothing
Speaker 1: but E t F s. And then when you think
Speaker 1: of E t F S, I think of Eric Baltunus.
Speaker 1: He is the senior et F and also Bloomberg Intelligence.
Speaker 1: He is literally phoning it in from Philadelphia. God forbid.
Speaker 1: He hasn't bedged in since last week. I mean all right, Eric,
Speaker 1: we'll get to you in a second. Sylvia, I asked
Speaker 1: you earlier. All fair, but I love to just get
Speaker 1: your thoughts here. This has been a great growth story
Speaker 1: e t F funds. It just seems like they're just
Speaker 1: coming right out of mutual funds right into e t
Speaker 1: F s. Is there a bare case for the e
Speaker 1: t F industry that this tremendous funds flows you guys
Speaker 1: have have in the industry have experienced. Yeah, great question.
Speaker 1: Great to see you, Paul in person. So what's really
Speaker 1: interesting about e t F flows this year is that
Speaker 1: the flow and pace of people coming into e t
Speaker 1: F s and coming into the market has only increased.
Speaker 1: So we've seen outflows and things like the maddox and
Speaker 1: some of the riskier types of products, just as investors
Speaker 1: have gone risk off. But the good news is that
Speaker 1: you've seen loads of flows. I think it's the second
Speaker 1: or highest, second or third highest year ever um in
Speaker 1: terms of months the last couple of months year over
Speaker 1: your flows into things like value and dividends and utilities.
Speaker 1: So you can see that investors have embraced the product
Speaker 1: itself and they're just looking for kind of the more
Speaker 1: defensive part of e t F themselves. But to your question,
Speaker 1: I think, if anything, it's just going to get bigger
Speaker 1: and bigger and bigger. The mutual fund, the high the
Speaker 1: mutual fund is pretty much dying. Um. The e t
Speaker 1: F good business for so long it was, but it
Speaker 1: was just too expensive and you know, it doesn't trade
Speaker 1: intra day. There's all these like funky things. ETFs are,
Speaker 1: you know, transparent sometimes tax efficient vehicles, and people really
Speaker 1: like them. They trade like stocks, but they're also evolving.
Speaker 1: So now you see these single stock ETFs, you see
Speaker 1: Leberty tfs, you see a specific number of stocks in
Speaker 1: a basket that make up in e t F long short,
Speaker 1: you know, thematic. So I just think that there's so
Speaker 1: many different ideas and they're so easy to trade, and
Speaker 1: they're so cheap um to put in your portfolio. So
Speaker 1: I suspect they continue to grow. Yeah, the rise of
Speaker 1: single stock ETFs raises some existential questions about what exactly
Speaker 1: an e t F is. But I think of defiance,
Speaker 1: you know, as firmly in the thematic box bucket. But
Speaker 1: when you see the big wave of single stock e
Speaker 1: t f s that have launched, is that something that
Speaker 1: tempts you, so you'll see some pretty interesting things coming
Speaker 1: from us. You know, there there are things like quiet
Speaker 1: perias and things like that. But you can take a
Speaker 1: look and see what some of the filings are from
Speaker 1: the different et F fisuers out there. I think what's
Speaker 1: super interesting about that is, you know, first you have
Speaker 1: the classic et F structure and that gives you access
Speaker 1: to you know, whatever it might be. Say say a
Speaker 1: client wants access to electric vehicles and they buy eye
Speaker 1: Drive or one of the e V vehicles. Well, in
Speaker 1: that e t F you have the four or five
Speaker 1: e V companies, and then you have loads of companies
Speaker 1: like IBM, oracle Um, Honeywell and Starbucks that have not
Speaker 1: I kind of making that up, but they have nothing
Speaker 1: to do with e V. So there's a lot of filler.
Speaker 1: And what Single Stocks did is took it to a
Speaker 1: different place and said, well, actually the client only wants
Speaker 1: access to Tesla, so let's just beef up their access
Speaker 1: to Tesla and have a Tesla stock that's levered up.
Speaker 1: And then I can see another world where you can
Speaker 1: get a couple of stocks that give you discrete access
Speaker 1: to the names you actually want and remove the feller
Speaker 1: so you know you have that broad based access and
Speaker 1: you'll be able to really have precise, transparent, pure sector
Speaker 1: access to E t F evolution. Alright, folks, I'll tell you.
Speaker 1: I think the best research out there on the E
Speaker 1: t F industry and the trends is from our good
Speaker 1: friend Eric about tunis. Eric, what are you guys working
Speaker 1: on now? What what's kind of when you talk to
Speaker 1: investors out there, and I know you've got lots of context.
Speaker 1: What's the buzz in the ETF world? Yeah, I mean,
Speaker 1: I think it's what Sylvia said. So all the buzz
Speaker 1: is in the hot sauce lane, which you know, portfolios
Speaker 1: are changing. We find that most people now have say
Speaker 1: eight of their portfolio the core will call it, is
Speaker 1: it boring? Sixty forty cheap Vanguard kind of dish? Then
Speaker 1: they that's pretty boring and it's got to just sit
Speaker 1: there and grow like a tree for thirty years. So
Speaker 1: people are you know, they get itchy. So what they
Speaker 1: want to do is decorate that core with things that
Speaker 1: are completely different. So you know, thematic ETFs leverage, GTFS
Speaker 1: crypto would fit, their arc would fit there. So all
Speaker 1: of the action, interest and press is going to be
Speaker 1: on people trying to satisfy the hot sauce lane. So
Speaker 1: what you're gonna find and Defiance I'll speak for them
Speaker 1: because she can't say it, but they filed for an
Speaker 1: e t F that is leveraged but actually leverages on
Speaker 1: an index that has only a concentrated number of stocks,
Speaker 1: so it's actually purposely increasing the volatility. We just saw
Speaker 1: a cannabis ETF go from like twenty something holdings to
Speaker 1: six and I call that designing for max pop potential.
Speaker 1: So there's going to be this sort of the united
Speaker 1: the fee wars. The fee wars are where of the
Speaker 1: portfolio is. But now we're now we're entering the shiny wars,
Speaker 1: which e t F can be the shiniest and that
Speaker 1: it seems crazy, but it makes sense. And the shiny
Speaker 1: that area, that hot sauce area, that is where active
Speaker 1: is going to exist. Like it or not. I pers
Speaker 1: really think if I'm an active manager, I like it.
Speaker 1: I want to reinvent myself as you know, uh so
Speaker 1: and so's twenty best stocks. That is I think the
Speaker 1: future for active and these trading tool type products that
Speaker 1: Defiance is uh serving up as well as themes and
Speaker 1: all that stuff. So that is probably might be one
Speaker 1: of our top three themes. Yeah, Janice did that a
Speaker 1: while ago, back in Denver, Colorado, years ago. Let's continue
Speaker 1: this discussion on E t F s. It's a thing.
Speaker 1: We have a TV show Monday's one pm. Wall Street Time,
Speaker 1: Katie gray Feld, Matt Miller. That's how big it is.
Speaker 1: Wednesday this week, Wednesday this week? Okay, why not? All right?
Speaker 1: Sylvia Jablonsky, she's the CEO of Defiance. They're in that
Speaker 1: E t F business. She's here in a Bloomberg Interactive
Speaker 1: broker studio. And Eric Caltunas y'all knowman love him, senior
Speaker 1: et F analysts with Bloomberg Intelligence. Eric, I'm gonna start
Speaker 1: with you here. I thought this et F thing was
Speaker 1: a scam when I first started following your work, But
Speaker 1: now you've convinced me it's a real thing. Now I'm
Speaker 1: at the point where do you have an argument? Eric,
Speaker 1: wat the mutual fund will not go out of business.
Speaker 1: I can't think of buying Why anybody would ever buy
Speaker 1: a mutual fund? Yeah? No, I remember you pass them
Speaker 1: by my desk, uh, I'd say once every couple of weeks.
Speaker 1: I'm just saying, yeah, this et f thing is a
Speaker 1: big scam. Uh, I was wrong. I was like some
Speaker 1: workplace harassement exactly. No, he was. He was half kidding. Um,
Speaker 1: so it was like yeah, but anyway, um, look you're
Speaker 1: not alone. People didn't really take this seriously, especially legacy
Speaker 1: asset managers. Last year they took in seven billion or
Speaker 1: somewhere around there eight fifty billion, and so people are
Speaker 1: even them. Holdouts like Morgan Stanley and Capital Group are
Speaker 1: now coming in. So that's a that's a sign that
Speaker 1: they are going to ultimately have a higher market share
Speaker 1: of the mutual funds. Right now, they make up of
Speaker 1: the assets that mutual funds have. I see that getting
Speaker 1: to sixty seventy. I do think mutual funds will will
Speaker 1: have a home. They're good in retirement plans. Et s
Speaker 1: lose a lot of their superpowers when you go into
Speaker 1: the four one k world because you can get the
Speaker 1: institutional share class of mutual phone which is cheap. You
Speaker 1: don't need to trade it in tax efficiency as an
Speaker 1: advantage inside a plan like that because the tack taxes
Speaker 1: are an issue. So I think mutual funds will survive there.
Speaker 1: And I think for bonds there's a couple of areas
Speaker 1: in the bond market where I think mutual funds could
Speaker 1: make an argument that they're better because they can buy
Speaker 1: more liquid bonds um in a way that e t
Speaker 1: s can't because the index has to be pretty liquid
Speaker 1: to crazy TF. So I think those are two two
Speaker 1: places where mutual funds were hanging around. Well, Eric, it's
Speaker 1: interesting that you mentioned that because, as you and I
Speaker 1: talk about constantly, if you look at the flows, the
Speaker 1: magnitude of the flows coming out of bond mutual funds
Speaker 1: going into bond e t s is really staggering. A
Speaker 1: record amount of outflows from bond mutual funds. So I
Speaker 1: feel like that works against your argument there, Yeah, it does,
Speaker 1: but there again, but you have there, Our bond mutual
Speaker 1: funds have five trillion, bond e t f s have
Speaker 1: like one trillion. So we're still so early in this
Speaker 1: I think a lot of if you want treasuries or
Speaker 1: you want like a bond exposure, honestly, e t F
Speaker 1: probably works, but you have to remember bond managers buying
Speaker 1: large outperformed the benchmark at a way higher rates than
Speaker 1: on the equity side, like for example, in high yield
Speaker 1: seventy active bondod managers UM have beaten h y g
Speaker 1: over ten years. On the equity side, that numbers, so
Speaker 1: bond managers, I think will for some smart money will
Speaker 1: will remain popular, but there will be certainly some money
Speaker 1: moving over, especially money that just wants sort of general
Speaker 1: bond exposure. I think the et F will will win
Speaker 1: some of those dollars as they are this year. Okay,
Speaker 1: so we give us a sense of kind of who's
Speaker 1: buying these e t F suh. You know, I think
Speaker 1: back to retail versus institutional. How is that playing out
Speaker 1: these days? How is that changing? Yeah, it's a great question.
Speaker 1: And I think you know, if you looked back about
Speaker 1: five or six years ago and tried to figure this out,
Speaker 1: it's sort of dependent on the products. So if you
Speaker 1: looked at kind of the thematic funds, it was more retail,
Speaker 1: and the leverage funds it was more retail. And you know,
Speaker 1: the classic vanguard black rock types of btfs were more institutional.
Speaker 1: And now I would say, you know both. I mean
Speaker 1: you have everything from hedge fund managers that are looking for,
Speaker 1: you know, a quick sector exposure and don't want to
Speaker 1: go buy the five hundred stocks, are just looking for
Speaker 1: a quick hedge for a couple of days. Might use
Speaker 1: it for ease of use um. You know, some of
Speaker 1: the e t f s represent these niche sort of categories,
Speaker 1: like whether it's defiance or ARC where you're looking at
Speaker 1: like a five G or you know, next generation of
Speaker 1: technology and things like that, and the e t F
Speaker 1: is the quickest way to get exposure to that. But
Speaker 1: it's most certainly you know, retail um post COVID, there's
Speaker 1: just been a massive inflow of funds from millennials and
Speaker 1: beyond into e t f s, particularly for thematic ETFs.
Speaker 1: And now you know, institutions have just figured out that
Speaker 1: they're super cheap and they're super easy to get the
Speaker 1: exposure that you want for your sector rotation model or
Speaker 1: whatever it might be. Set it and forget it, and
Speaker 1: and you know, use that product with great transparency. So
Speaker 1: it's it's sort of everyone across the board. Now you
Speaker 1: have a TV show about a Katie. You know, I
Speaker 1: was just thinking that, all right, real quick, Eric, what
Speaker 1: are you working on? What are we going to see
Speaker 1: from the Bloomberg intelligence on the front? Uh, you know
Speaker 1: that thing I just mentioned back to the Janis twenty.
Speaker 1: I'm writing something about how I think there'll be an
Speaker 1: influx of personalities and old legacy managers coming out with
Speaker 1: a Cathy Wood version of themselves, a concentrated best ideas
Speaker 1: fund that can compliment Vanguard. I'm also writing about a
Speaker 1: bond mutual fund that has lost twenty in a month
Speaker 1: because it has a bunch of ill liquid bonds and outflows,
Speaker 1: and how it's a little bit of a canary in
Speaker 1: the coal mine. If we see something like this happened
Speaker 1: with the Pimco fund, this could spell problems for the
Speaker 1: market and cause chaos. And I think the bond fund
Speaker 1: market is something to watch because it could make the
Speaker 1: FED have to pivot. All right, Eric, good stuff, as always,
Speaker 1: Eric bu Tuna. Somehow he's built a career and quite
Speaker 1: a career doing his et F stuff. Crypto, Crypto, crypto,
Speaker 1: you do something with crypto. Don't you do a lot
Speaker 1: with crypto? You're a crypto person. I mean, all right,
Speaker 1: here's Jamie Diamond until he buys off on crypto. I'm
Speaker 1: not sure I'm buying off on crypto. That's your guy.
Speaker 1: It might be my guide. But Bloomberg Business Week has
Speaker 1: bought off. I mean, they didn't just write a story
Speaker 1: or a number of stories. They did an entire issue
Speaker 1: of Bloomberg Business Week magazine and it's just entitled the
Speaker 1: Crypto Story. So we paid somebody for that title. But
Speaker 1: the guy who actually wrote it is Matt Levine, Bloomberg
Speaker 1: opinion columnists. He joined us here on a Bloomberg Interactive
Speaker 1: Broker studio one of his two days a week. He
Speaker 1: dangns us with his presence. Matt forty thousand words for Crypto.
Speaker 1: What's the takeaway? I mean, I'm not sure I can
Speaker 1: get through words, although I'm getting well. I read part
Speaker 1: of on the train ride in. I'm maybe a third
Speaker 1: of the way through. Finish it up on the way back.
Speaker 1: What's the takeaway here? It's um No, I mean, like
Speaker 1: the takeaway is is is sort of the middle of
Speaker 1: the rara like I find crypto. I think Crypto is
Speaker 1: really interesting. I think it's like building a lot of
Speaker 1: interesting stuff. I think, um it remains flawed and has
Speaker 1: not really kind of proven a like overwhelming and change
Speaker 1: the world case yet, but I think it's changed the
Speaker 1: world in a lot of small ways that are interesting
Speaker 1: and that are worth kind of picking through. I like
Speaker 1: this line I've already told you this. I like this
Speaker 1: line in here that you know, I don't have strong
Speaker 1: feelings either way about the value of crypto. I like finance.
Speaker 1: I think it's interesting if you like finance, crypto is amazing.
Speaker 1: And you and I have talked about how basically it
Speaker 1: feels like crypto is creating this parallel financial system that
Speaker 1: it's ingesting parts of the traditional finance world, and in
Speaker 1: a way, it just feels like this grand market structure
Speaker 1: experiment which doesn't necessarily have a lot of real world impacts.
Speaker 1: Yet that's the way it feels to me. And that's
Speaker 1: that's my own bias, which is that I like market structure.
Speaker 1: But I think if you like market structure, people are
Speaker 1: doing a lot of interesting things in market structure. And
Speaker 1: when you think about, like who likes market structure, it's like,
Speaker 1: you know, headshune people on high frequency traders. And so
Speaker 1: one thing that is that is a real kind of
Speaker 1: achievement of crypto is that it has attracted a lot
Speaker 1: of people from traditional finance to build that they think
Speaker 1: is a better financial system. So a lot of that
Speaker 1: is incremental, but if you build a better way to
Speaker 1: kind of do trading, then maybe one day you use
Speaker 1: it to trade stocks or loans or something else. Decentralized finance.
Speaker 1: What is that? I like, centralized finance like exchanges. Yeah,
Speaker 1: I mean de centralized finances. Basically the idea that you
Speaker 1: have smart contracts, like computer programs that kind of do
Speaker 1: the work of running an exchange or a lending platform
Speaker 1: or whatever, so that instead of setting you know, signing
Speaker 1: a contract and setting up an account, that a broker
Speaker 1: who then sets up an account you know, has a
Speaker 1: membership on an exchange where you can trade stocks. Everything
Speaker 1: is kind of an open protocol where you can just
Speaker 1: kind of like go to your computer and trade stocks,
Speaker 1: and uh, that creates a lot of opportunities for, among
Speaker 1: other things, just like doing stuff with less permission. I
Speaker 1: think that one thing that people in crypto really like
Speaker 1: is that you don't need to like sign up a
Speaker 1: bunch of accounts with big banks to get permission to trade.
Speaker 1: You can just kind of go onto the to the
Speaker 1: open platform and do the same trading as everyone else.
Speaker 1: So it gives a lot of opportunity for kind of
Speaker 1: competition and for innovation. So again, this is a question
Speaker 1: I've already asked you, but to your point that I
Speaker 1: don't know. Maybe crypto is able to build a more
Speaker 1: or add to the efficiency of the existing financial system.
Speaker 1: Maybe it makes it better somehow. Is that a worthy
Speaker 1: enough goal? Who would be disappointed if that was the
Speaker 1: ultimate sort of use case for this entire system that
Speaker 1: has been built. You know, I think some number of
Speaker 1: vcs who think that crypto is changing like the sort
Speaker 1: of like how humans will interact will be disappointed to
Speaker 1: the extent that their bets don't pay off as much
Speaker 1: as they want. But I think that, like I don't know,
Speaker 1: like I've spent my whole career in and around finance,
Speaker 1: Like I think making the financial system better is a
Speaker 1: totally worthy goal. And I mean, in my day job,
Speaker 1: I think making the financial system more fun and interesting
Speaker 1: is a worthy enough goal. So you know, I'm not
Speaker 1: one to criticize that as a goal, but I do
Speaker 1: think that, like there are people who whose view of
Speaker 1: cryptos that it will sort of revolutionize uh society, It'll
Speaker 1: it'll sort of increase human freedom, and that would be
Speaker 1: you know, if you're like the hedgemnes are little bit
Speaker 1: more efficient, that would be a disappointing outcome for people
Speaker 1: who believe in that. I mean I'm just scrolling through this.
Speaker 1: It's forty thousand two or it's awesome. I mean there's everything, awesome, graphics. Literally,
Speaker 1: folks go to a magazine stand if you can find
Speaker 1: a magazine stand and by Bloomberg Business Week. It is
Speaker 1: just ridiculous. They talk, Matt, you cover everything here. I
Speaker 1: don't know. I mean, I guess one of my questions
Speaker 1: is it because I'm gonna walk this over to Jamie Diamond,
Speaker 1: you know he's on Park Avenue. I'll take a copy
Speaker 1: of this Bloomberg Business Week. He'll read it word every word.
Speaker 1: Are you surprised or how do you view the fact
Speaker 1: that main street main street Wall Street financial services industry
Speaker 1: may not hasn't really embraced crypto. Is that a fair
Speaker 1: statement and it's so are you surprised that they have
Speaker 1: not embraced crypto? Um? No, I wouldn't say I'm surprised.
Speaker 1: I mean, look, I think there have been tentative steps
Speaker 1: because you know, it got a lot of attention and
Speaker 1: like you know, until about a year until about this year,
Speaker 1: like crypto kept going up, probably speaking, and so if
Speaker 1: you're an asset manager, like that thing that goes up,
Speaker 1: I want that. So there was some interest. Um, but
Speaker 1: I'm not that surprised that people haven't embraced it, in
Speaker 1: part because you know, there was a Bloomberg story like
Speaker 1: yesterday about how investors WE pulled investors who said that
Speaker 1: more SEC enforcement would make them more interested in crypto
Speaker 1: because basically, like it still feels like the wild West.
Speaker 1: It still feels like you're committing a crime when you
Speaker 1: sort of get on a crypto exchange. And so I
Speaker 1: think if you're a sort of conservative asset manager or
Speaker 1: bank or bank regulator, you don't want to get involved
Speaker 1: in something kind of weird until the regulatory stuff has
Speaker 1: really figured out. And I think we're not at the
Speaker 1: point SEC he's a crypto dude, now, Oh he's not.
Speaker 1: He's like like crypto, he's caught it, taught a course
Speaker 1: at m I T. I think that's the Yeah, he's
Speaker 1: not like a knowledgeab about crypto, but he does seem
Speaker 1: to hate it, which which like those things can easily
Speaker 1: go together. Um, but like, I don't think that he
Speaker 1: is not a booster of cryptoone anyway, and and is
Speaker 1: I think making it difficult for the American crypto industry
Speaker 1: to sort of, you know, do a lot of crypto,
Speaker 1: which I think also UH is an impediment to mainstream
Speaker 1: finance embracing crypto because like your regulators hate it, you know, Okay,
Speaker 1: thirty seconds, what did you learn on your journey? What UH?
Speaker 1: I learned about minor extractable maximum extractable value and UH
Speaker 1: and UH and flashbots and just like the number of
Speaker 1: arbitrages that exist in crypto that are totally different from
Speaker 1: the arbitrages and complicated trading that exists in traditional finance.
Speaker 1: They have like a sort of rhyme with traditional finance
Speaker 1: where you can UH, you know, you're short of like
Speaker 1: exploiting gaps and people's knowledge to make a lot of money.
Speaker 1: But they're they're different in how they actually work in
Speaker 1: ways that are very satisfying to finance nerds who want
Speaker 1: to make a lot of money. That's that's how it
Speaker 1: feels to me. I mean, it feels like the wild
Speaker 1: wild West, but I'm in. I've now come across. I
Speaker 1: think it's an asset class. I think it's real. I
Speaker 1: have no idea, I have very little understanding and I
Speaker 1: have no idea where it goes. And I feel pretty
Speaker 1: good about that. You can't get it in any t
Speaker 1: F yet though, Okay, fair enough. Matt Levine, he's a
Speaker 1: calumnist for Bloomberg Opinion. He's written a couple of words
Speaker 1: on this whole cryptospace. Go out and get your Bloomberg
Speaker 1: Business Week magazine or get it online. It is definitely
Speaker 1: worth it. It is the Bible. Thanks for listening to
Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to
Speaker 1: interviews with Apple Podcasts or whatever podcast platform you prefer.
Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller three.
Speaker 1: Put on false Sweeney. I'm on Twitter at pt Sweeney
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