Speaker 1: Welcome to the Bloomberg pim L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Abramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p and L
Speaker 1: Podcast on Apple Podcasts, SoundCloud and Bloomberg dot com. What
Speaker 1: does what does India's Prime Minister Narendra Modi have in
Speaker 1: common with the President of the Philippines, Rodrigo du Terte,
Speaker 1: as well as the Scottish National Party, an alternative for
Speaker 1: Germany another party that is based in Germany. Well, here
Speaker 1: to tell us is Vernon Silver Projects, an investigations reporter
Speaker 1: for Bloomberg. He joins us from Rome, Vernon, I'm gonna
Speaker 1: let you tell people what do what do all four
Speaker 1: of these different political connections have in common? They've all
Speaker 1: gotten advice in elections from Facebook, from a special unit
Speaker 1: within the company that focuses on politics and governments and
Speaker 1: has apparently increasingly participated in helping in electioneering. This is
Speaker 1: an amazing story. I highly recommend everyone read it. This
Speaker 1: Facebook team helps regimes that reach out and cracked down um, Vernon,
Speaker 1: do we have a sense of the financials here of
Speaker 1: how much Facebook earns from helping these campaigns to disseminate
Speaker 1: their message as widely as possible on social media. What's
Speaker 1: what's interesting about this is how small the direct numbers are.
Speaker 1: You know, in some of these campaigns. Uh, they were
Speaker 1: only spending hundreds of thousands of dollars on these campaigns.
Speaker 1: But as Facebook has learned through the last few election cycles, UM,
Speaker 1: these are big events. Elections are big events that rank
Speaker 1: alongside the Super Bowl in the Olympics in terms of
Speaker 1: drawing black block blockbuster ad dollars from elsewhere, you know,
Speaker 1: stuff that other participants are bringing into the conversation and
Speaker 1: more importantly, boost engagement, which is sort of the key
Speaker 1: metric at Facebook. That includes you know, how many people
Speaker 1: are clicking how many times and sharing how many times?
Speaker 1: And so if you get a party in Germany or
Speaker 1: the Philippines that's spending hundreds of thousands, um, you might
Speaker 1: end up seeing a multiplier effect, and that's what they've
Speaker 1: really tuned into. So Vernon, can you give us some
Speaker 1: details about what encouraging engagement means, What does it mean
Speaker 1: to help these campaigns, what did this unit actually do well?
Speaker 1: It started out, this unit started in Europe servicing the
Speaker 1: Middle East after the Arab Spring, talking to new leaders
Speaker 1: transitional governments, trying to let them know what this new
Speaker 1: tool was Facebook. I mean, this is just a few
Speaker 1: years ago. Facebook did not have the two billion users
Speaker 1: that it had. And then a few years ago they
Speaker 1: started staffing up in Washington, and they did so with
Speaker 1: people who came from political campaign backgrounds. And what they
Speaker 1: started doing was taking the traditional pitch, like you know, hey,
Speaker 1: campaign X and Y, because they were helping everybody in
Speaker 1: every race that they went to deal with UM in
Speaker 1: addition to verifying you as an authentic Facebook user, helping
Speaker 1: you figure out how to use the basic tools and
Speaker 1: leaving you the campaign to do it. They started getting
Speaker 1: more engaged to the point where in the last election
Speaker 1: in the US there were Facebook employees embedded with the
Speaker 1: Trump campaign and you know, even in local elections, we
Speaker 1: saw that some in the US were being offered collaboration
Speaker 1: on testing different video formats with Facebook. So the collaborative
Speaker 1: nature grew. And that's what the issue is that some
Speaker 1: of the critics are having. Can you explain or maybe
Speaker 1: just give a little uh sort of story about Katie
Speaker 1: Harbath and Elizabeth Linder who are these two individuals. There's
Speaker 1: interesting Elizabeth Linder Um started the unit. She was based
Speaker 1: in London for Facebook. She was very early Facebook employee
Speaker 1: and she started sort of as an ambassadorial figure making
Speaker 1: the rounds in Europe and the Middle East and Africa,
Speaker 1: helping introduce people to the tools, and she would just
Speaker 1: sort of leave them there with them and she would
Speaker 1: make a presentation to the candidates on the right and
Speaker 1: the candidates on the left, and that was it. But
Speaker 1: then a few years in UM Katie Harbath is hired
Speaker 1: and she's a former Republican strategist who worked at Rudy
Speaker 1: Giuliani's two thousand and eight presidential campaign. And things started changing.
Speaker 1: Among other things, that Katie became the the global leader
Speaker 1: of this politics and government unit within Facebook, which is
Speaker 1: a small unit at most, you know, maybe a hundred
Speaker 1: or something people during a pea collection time. And according
Speaker 1: to what Elizabeth Linder, who is no longer with Facebook,
Speaker 1: she left because of a different opinion about the direction
Speaker 1: they were going. UM they started tailoring the advice that
Speaker 1: they had to each of the parties that were involved
Speaker 1: in getting more and more involved. So it went from
Speaker 1: sort of a think tanking NGO vibe to one where like,
Speaker 1: we will bring in democrats to work with the democratic
Speaker 1: side and Republican support with the work with the other side,
Speaker 1: and you know, we're going to help you use as
Speaker 1: many of the Facebook tools as possible to know, in
Speaker 1: the end boosting engagement and controversy also is really great
Speaker 1: for for boosting engagement during election time. And you know,
Speaker 1: in all these countries, whether it's Poland or Germany or
Speaker 1: the Philippines, are India, which is essentially, in a lot
Speaker 1: of measures, the biggest market for the company right vernon,
Speaker 1: A lot of people will read this story and think, wow,
Speaker 1: how can Facebook allow this? It basically is helping fuel
Speaker 1: the rise of some misinformation or certainly higherly or more
Speaker 1: highly politicized types of rhetoric. At the same time, Facebook
Speaker 1: isn't doing anything wrong, is it, I mean, is it
Speaker 1: disseminating bad information on purpose? Or you know, some people
Speaker 1: could say, well, it's just doing its job. It's helping
Speaker 1: clients use the platform as well as they possibly can. Yeah,
Speaker 1: I mean, that's a really interesting question because what you
Speaker 1: have is and let's say, a face like a place
Speaker 1: like the Philippines where they came in and they offered
Speaker 1: their services to all the candidates. UM. But there was
Speaker 1: one candidate who really embraced the technology and once he
Speaker 1: was in power, um, Facebook again helped, you know, sort
Speaker 1: of writing the cotails into the presidential palace, so to speak. UM.
Speaker 1: And they started broadcasting through Facebook channels official events and
Speaker 1: in a lot of countries. And we see this in
Speaker 1: India also. The campaign work then becomes this door into
Speaker 1: being part of the power structure in the country. And
Speaker 1: what this is really a contrast to what Mark Zuckerberg
Speaker 1: has said in saying that the company is agnostic politically. Yeah,
Speaker 1: we we're gonna have to leave it. They're fascinating a story.
Speaker 1: Thank you so much for joining us. Vernon Silver Projects
Speaker 1: and Investigations reporter for Bloomberg News. Facebook team helps regimes
Speaker 1: that reach out in cracktown. This is Bluemberg. Will Big
Speaker 1: Tech keep on rallying to the degree that they did
Speaker 1: this year? That is the question and the answer, according
Speaker 1: to John Patritis, is no. He is managing director and
Speaker 1: portfolio manager for Point View Wealth Management in Summit, New Jersey,
Speaker 1: and he joins US now. John, thanks so much for
Speaker 1: being with us. So what's going on here? Why do
Speaker 1: you think that the fang stacks, the Facebook, Amazon, Netflix,
Speaker 1: and Google shares are not going to have such a
Speaker 1: great year next year? Well, thanks for having me on.
Speaker 1: I think that investors love to rally around us store
Speaker 1: worry stock. You know, in the late sixties, early seventies,
Speaker 1: it was the fifty fifty, and the eighties it was
Speaker 1: the Go Go Stox, and then nineties it was dot com. Uh.
Speaker 1: In the early part of the turn of the century,
Speaker 1: it was the brick stocks, you know, the International StockX
Speaker 1: and now you know fangs all our age. I mean,
Speaker 1: is there anything else we've spoken about more this year
Speaker 1: outside of bitcoin than the fang Stox. So I think
Speaker 1: investors have piled into these, uh, these companies, and I
Speaker 1: think valuations are starting to get stretched, and I don't
Speaker 1: think the downside risks are priced into the stocks at all. Well, John,
Speaker 1: I'm looking at you know, their sales annual sales for
Speaker 1: Facebook thirty six and a half billion, and they got
Speaker 1: net income of fifteen billion. You know any other company
Speaker 1: that does that kind of business? Right? Maybe Amazon? How
Speaker 1: about still look at some of the other fangs dots.
Speaker 1: How about Amazon does so the uh no, no, no,
Speaker 1: no no, but Amazon doesn't. I mean you're talking a
Speaker 1: company does thirty six and a half billion in sales
Speaker 1: and puts fifteen of it in their pocket. Said and done, right,
Speaker 1: So let me clarify all five of the FANG stocks
Speaker 1: and if you want to add Microsoft into that as well,
Speaker 1: they don't fit nice into the acronym. But Microsoft has
Speaker 1: boosted the tech sector as well. Are fantastic companies. What
Speaker 1: I'm saying is I think the market is pricing these
Speaker 1: companies that they could do no wrong. And that's where
Speaker 1: investors have to be careful of because every great investment
Speaker 1: is always a function of the price you pay for it.
Speaker 1: So I think Facebook and Google can be under significant
Speaker 1: regulatory pressure in two thousand eighteen. I think the whole
Speaker 1: Russian interference with Facebook is a big red flag. And
Speaker 1: I don't think any political risk or regulatory risk or
Speaker 1: price into those stocks at all. So the companies are fantastic,
Speaker 1: but I think you could see discounts priced into the
Speaker 1: stocks because of regulatory issues. You know, everyone is excited
Speaker 1: about Apple because of the new iPhone, but Apple is
Speaker 1: now a hundred, eight hundred and fifty billion dollar company.
Speaker 1: You know, if you want a dent return on Apple
Speaker 1: from here, you're gonna have a one point six trillion
Speaker 1: dollar company. They have to sell a lot of iPhones
Speaker 1: to do that, right, So you're getting up, but you're
Speaker 1: pushing up against law of large numbers. Some people do
Speaker 1: think that it will be a trillion dollar country company.
Speaker 1: Actually almost said country pretty soon. But but John, you know,
Speaker 1: I want to talk specifically about the regulatory issues you
Speaker 1: pinpointed Amazon and Google in particular. Uh, can you just
Speaker 1: play out what some of those regulatory pressures would look
Speaker 1: like that would cause a stock swoon because we hear
Speaker 1: a lot about it, but I don't hear of any
Speaker 1: regulatory efforts that are currently being discussed in concrete terms
Speaker 1: on the hill, And I'm not sure what would do
Speaker 1: it to these two. So yeah, I think so the
Speaker 1: regular issues I think you for Facebook and Google specifically
Speaker 1: because of the massive amount of data that they have
Speaker 1: on all of their users. And I think the fact
Speaker 1: that it was disposed that Russia was buying uh ads
Speaker 1: on Facebook and using that uh along with it too
Speaker 1: many pilate to a degree the uh the election results
Speaker 1: I think is um uh you know, could within the
Speaker 1: argument can we make within Congress to that as a
Speaker 1: national security issue? So I think that if that's the case,
Speaker 1: what that does is it forces Google and Facebook to
Speaker 1: go back to the drawing board and tighten up UH
Speaker 1: their own practices, which will add to their own to
Speaker 1: their expenses and their costs. So my point behind all
Speaker 1: that is, I don't think that Google and Facebook go
Speaker 1: out of business. All I'm saying is that I think
Speaker 1: their stocks are overvalued at current levels and they're not
Speaker 1: pricing in any potential downside risk, And I think investors
Speaker 1: fall in love with stocks like that. Who's chart what's fantastic?
Speaker 1: If you're looking backward, UH could become a risky place
Speaker 1: in two thousand eighteen, all right, So where is their
Speaker 1: value to be had? So I still like the financials
Speaker 1: despite the fact, again looking backward over the last eighteen months,
Speaker 1: the banks have done a fantastic job from a performance standpoint.
Speaker 1: You nowhere near valuation stamp valuation levels of where we
Speaker 1: were in two thousand five, six seven during the apex
Speaker 1: of the dot com bubble, and the fundamentals of the
Speaker 1: financials are fantastic. Right. Interest rates continue to creep higher.
Speaker 1: You're in a government to a regulatory situation where there's
Speaker 1: deregulation going on. The bank's balance sheets are as healthy
Speaker 1: as they've been so um since World War Two. So
Speaker 1: you know, I still still think there's room to run
Speaker 1: on the financial sector. I also think, you know, the
Speaker 1: selloff and healthcare that we saw in October and September
Speaker 1: and even a little bit in November provides an opportunity
Speaker 1: healthcare insurers, how medical devices, pharmacy. I like big farmer
Speaker 1: um particularly. Uh So if you look at where you know,
Speaker 1: globally again thinking long term, where investors not traders, so
Speaker 1: we're not thinking about next quarter. You know, as the
Speaker 1: global population grows and ages, the utilization of the healthcare
Speaker 1: system was only going to increase. So big farmer companies
Speaker 1: are sitting with a ton of cash um. They have
Speaker 1: the ability to reinvest in their pipeline and or do
Speaker 1: acquisitions to bolster their own pipeline. They usually pay at
Speaker 1: a big dividend and they buyback spots do so I
Speaker 1: think it's a long term story out there that is
Speaker 1: being overly discounted by investors because this fear of regulation
Speaker 1: or drug prices. We're gonna have to leave it there
Speaker 1: but thanks very much for enlightening us. John Patries is
Speaker 1: Managing director portfolio manager for point View Wealth Management. They
Speaker 1: are based in some New Jersey, and he was making
Speaker 1: the bear case for those fang stocks. He watches all
Speaker 1: of the information, whether it's the average private work week,
Speaker 1: whether it's wage growth or even the conference board leading
Speaker 1: indicators which we receive today, but he also follows Christmas trees.
Speaker 1: Phil Orlando is the chief equity market strategist and head
Speaker 1: of client portfolio Management at Federated. He thought you were
Speaker 1: joking when you said we were going to talk about
Speaker 1: Christmas trees. I'm not gonna choking. It's a big business.
Speaker 1: It is a big business. And and thank you for
Speaker 1: having me back on again. Merry Christmas, Happy Honkkah, and
Speaker 1: and let's talk Christmas trees. Then that's my point. I
Speaker 1: wanted to ask you about Christmas trees because I know
Speaker 1: I heard about the shortage, because this has to do
Speaker 1: with the economy in two thousand seven and eight. But
Speaker 1: you've done some work, so let me So. I've got
Speaker 1: to give props to my buddies at ever Core I
Speaker 1: s I. Oscar slaughter Back is the guy that runs
Speaker 1: this regular survey for them for the last fifteen years.
Speaker 1: And the issue. The problem here is that it takes
Speaker 1: about eight to ten years for a seedling to sort
Speaker 1: of grow into a mature tree. But think about ten
Speaker 1: years ago, we were starting, we were growing into the
Speaker 1: Great Recession. So a lot of these smaller independent tree
Speaker 1: farms around the country Canada whatever, they said, we don't
Speaker 1: have the money were we were, we cut back our planning,
Speaker 1: we went out of business. And so now ten years later,
Speaker 1: we've got a shortage of trees. So uh, when I
Speaker 1: s I put out the you know, they do this
Speaker 1: survey over the four weeks of Christmas, the numbers, frankly
Speaker 1: on a year of year basis, didn't look particularly good.
Speaker 1: Yet we've got a very bullish forecast for Christmas. So
Speaker 1: in my mind, I'm trying to say, okay, wait a second,
Speaker 1: one of the key things we look at not working
Speaker 1: yet I think Christmas is gonna be really good. And
Speaker 1: then I sort of stumbled upon this, this this Great
Speaker 1: Recession thing that I think that the shortage of trees
Speaker 1: and the fact that prices have gone up, I think
Speaker 1: people are either doing without or they're they're shifting over
Speaker 1: artificial Now I s I survey doesn't capture artificial sales,
Speaker 1: so we don't know how much of that mix shift occurred.
Speaker 1: So I'm still sticking in my forecast that we're gonna
Speaker 1: have a great Christmas. You know, based upon some of
Speaker 1: the indicators we're looking at, this could be the best
Speaker 1: Christmas since eleven when year of your Christmas sales were
Speaker 1: up like six percent. So we're we're you know, we're
Speaker 1: gonna have I think a pretty good year. Three hundred
Speaker 1: and fifty million real Christmas trees currently growing on Christmas
Speaker 1: tree farms in the US alone, so this isn't a
Speaker 1: tiny business. This is. But again, because it takes about
Speaker 1: ten years that million, you're going to chop down maybe
Speaker 1: thirty million of them in a given year, al right,
Speaker 1: So as people chop down their trees and get ready
Speaker 1: for for the holidays, I'm just wondering. You know, we
Speaker 1: talked to a lot of people. There seems to be
Speaker 1: some consensus forming, not as much as going into going
Speaker 1: into this year, but the consensus seems to be growth
Speaker 1: is pretty good. We're going to get a modest boost
Speaker 1: from the tax plan, not anything to write home about.
Speaker 1: The dollar will remain range bound, possibly go down. Uh,
Speaker 1: Stocks in the US will continue to do well, maybe
Speaker 1: not as well as this year, but we'll continue to
Speaker 1: do well, and bonds might sell off, but it won't
Speaker 1: be a disorderedly unwind. What's wrong about those consensus ideas.
Speaker 1: There's nothing wrong with them. I mean, basically your point
Speaker 1: painting by and large, a goldilocks kind of an environment
Speaker 1: where we think treasure yields will sort of grind up
Speaker 1: to three percent over the next year year and a half,
Speaker 1: stocks will grind up to three thousand over the course
Speaker 1: of the next year or so. Uh GDP growth is
Speaker 1: you know, we've been at a three percent run right
Speaker 1: the last couple of quarters. We've got a three point
Speaker 1: two percent estimate for the fourth quarter, We've got a
Speaker 1: three percent estimate for next year. We're sort of back
Speaker 1: to trendline. It's all good as far as we can tell. Okay,
Speaker 1: So given that backdrop, what do you tell your clients
Speaker 1: with respect to active management, Because this goldilocks scenario is
Speaker 1: great for indexing well, not necessarily, because there are aspects
Speaker 1: of this market that active management will be able to
Speaker 1: do a better job. For example, UM, I'm going to
Speaker 1: disagree with one of the elements of your analysis, which
Speaker 1: was the dollar. If the economy, which was growing at
Speaker 1: one and a half percent last year and is now
Speaker 1: sort of at a three percent run right now, continues
Speaker 1: at that pace, and that's our call, uh, and the
Speaker 1: transition from from yelling at Powell is successful, and and
Speaker 1: the Fed continues to gradually remove accommodation. UH. That combination
Speaker 1: of better economic growth, better corporate earnings growth, UH, tighter
Speaker 1: monetary policy out of the Fed should result in a
Speaker 1: stronger dollar over time. So we went from dollar euro
Speaker 1: I think we were one oh three or so at
Speaker 1: the beginning of the year, topped down at about one two.
Speaker 1: We started to strengthen down about one s eighteen. We
Speaker 1: seem to be temporarily going back the other way. I
Speaker 1: think we're gonna we're gonna catch a bid here, uh,
Speaker 1: and we're gonna get the dollar euro back into that
Speaker 1: you know, one one fifteen neighborhood over the course of
Speaker 1: the next year. In that scenario, small cap stocks UM,
Speaker 1: stronger economic growth, UH, the tax cuts, Remember small cap
Speaker 1: companies pay very high taxes. UH, stronger dollar, So that
Speaker 1: benefits UH more of the domestic oriented smaller cap companies
Speaker 1: as opposed to the international companies. Small cap stocks ought
Speaker 1: to do well in that environment. That's an environment that
Speaker 1: active management really has an advantage in the indexers not
Speaker 1: so much. Also, growth stocks, Remember large cap growth did
Speaker 1: much better than large cap value and the first part
Speaker 1: of the year we've rotated right around Labor Day to
Speaker 1: a value trade. So we think the financials, the energies,
Speaker 1: the industrials, et cetera. Those companies ought to catch a
Speaker 1: bid relative to some of the growth stocks that did
Speaker 1: really well of the first seven or eight months of
Speaker 1: the year. So there are parts of the market that
Speaker 1: that ought to do well here given the environment we've
Speaker 1: laid out that that in our view, should benefit active
Speaker 1: management rather than passive management. Phil, I would imagine you've
Speaker 1: racked up a number of miles this year, traveling all
Speaker 1: over the country talking to various investor groups. Has the
Speaker 1: investor changed in the last decade we've talked about Christmas Trees.
Speaker 1: Has investors mature to the point where they better understand
Speaker 1: the investing environment that you're in today. I thought you
Speaker 1: were going to say that they're gonna be chopped out.
Speaker 1: I don't think so. I travel You're right, I travel
Speaker 1: around the country talking to client groups all over the place,
Speaker 1: and people are still scared to death because they they uh,
Speaker 1: they're they're they're furious with the nonsense that's going on
Speaker 1: in Washington, the stupidity in Washington. I think the single
Speaker 1: biggest mistake a lot of investors have made over the
Speaker 1: last year is allowing their political biases to influence their
Speaker 1: investment judgment. I mean, that's a huge deal. And then
Speaker 1: you know, you flip on the TV and and you've
Speaker 1: got any number of of theoretically credible people saying Trump's
Speaker 1: an idiot, This tax plans a disaster, it's not gonna work. Uh,
Speaker 1: the stock markets are overvalued. You know, we're going to
Speaker 1: hell in a handbasket. The average person doesn't know that
Speaker 1: that's bad information and and that that we're in pretty
Speaker 1: good shape right now. Is Lisa just articulated a moment
Speaker 1: ago beautifully and that we're grinding up towards the three
Speaker 1: thousand SMP over the next year or so, so we
Speaker 1: think you gotta stick with it. That's a tough message
Speaker 1: to get across, phil Or And oh, thank you so
Speaker 1: much for being with us, and good luck with your Christmas.
Speaker 1: Tree Business Analytics and Merry Christmas too, Merry Christmas. Tick
Speaker 1: to Fill Orlando, chief equity markets strategist and head of
Speaker 1: client portfolio management for Federated Investors. We always love having
Speaker 1: him and UH, you know, I never realized that it
Speaker 1: was that big of a business, to be honest, the
Speaker 1: whole Christmas Tree business. UH. Here to help us understand
Speaker 1: a little bit about the risks that perhaps are in
Speaker 1: the financial world is Mike Bodson. He is the chief
Speaker 1: executive of the Depository Trust and Clearing Corporation. Mike, thank
Speaker 1: you very much for being with us. Tell people what
Speaker 1: does the d t c C do and then explain
Speaker 1: what is your systemic risk barometer? Thank you, good morning. UH.
Speaker 1: Dt c C is basically the central counterparty for the
Speaker 1: US cash securities market, and we're also the central securities
Speaker 1: the depository for cast security markets. So in a nutshell,
Speaker 1: we process every cast trade done in the United States,
Speaker 1: every bond, stock, treasury security, mortgage backed security. So we
Speaker 1: do about a hundred million transactions to day. We do
Speaker 1: about one point five quadrillion dollars a year flows through us.
Speaker 1: So we're basically the uh, the processors of all transactions
Speaker 1: in the US markets as well as some other ancillary businesses.
Speaker 1: Our Systemic Risk Barometer is just something we started a
Speaker 1: few years ago where we go out and survey our
Speaker 1: membership primarily US but internationally as well, UH to get
Speaker 1: a gauge of where people are focused on from a
Speaker 1: systemic risk basis, where the leading issues, and from there
Speaker 1: we build the thought leadership pieces. We've done thought leaderships
Speaker 1: on fintech, on cloud, on interconnectedness, risk, and things along
Speaker 1: that deadline. I found it interesting that an emerging worry
Speaker 1: among the people who you spoke with and with respect
Speaker 1: to financial stability with fintech financial technology in particular, it's
Speaker 1: lack of regulation with this idea that advancements have outpaced governance.
Speaker 1: Please explain, Yeah, I think, um, you know, obviously, fintech
Speaker 1: is something that's gotten a lot of focus on in
Speaker 1: the last few years as a disruptive technology and competitive
Speaker 1: force to financial market participants. But as the competitive threat
Speaker 1: and competitive risk has been better understood, I think people
Speaker 1: now are focused on, well, what does it mean to
Speaker 1: the system itself and what type of risk doesn't introduce
Speaker 1: and that will vary from fragmentation and changing the basic
Speaker 1: economic model to things like cyber security, having you know,
Speaker 1: small fintech companies who may not have the rigor UH
Speaker 1: in terms of cyber over their product that you know,
Speaker 1: the more established players may have that could bring obviously
Speaker 1: a major risk if they're connected to the ecosystem. So
Speaker 1: I think, you know, there's a variety of different ways
Speaker 1: to look at it. But I think people have gotten
Speaker 1: comfortable with the thought of fintech can be a real
Speaker 1: positive force and don't want to stop innovation, but they
Speaker 1: don't want to open up the system too unknown or
Speaker 1: anticipated risk that could bring down the entirety of the
Speaker 1: the financial markets. Mike, I'd be remiss if I didn't
Speaker 1: use the word blockchain and just about every conversation, but
Speaker 1: you are using the blockchain system for derivatives processing. Explain this. Sure,
Speaker 1: we have a prototype being built. We hope to go
Speaker 1: live with it UH next year where we're working with
Speaker 1: IBM x only and R three UH to re platform
Speaker 1: a product onto a distributed ledger to TO TO platform or
Speaker 1: something called the trade Information warehouse. It is a central
Speaker 1: repository of information primarily about credit to false swaps UH.
Speaker 1: It's used by regulators to monitor the market. It's used
Speaker 1: by market participants for payments and reconciliation purposes. But it's
Speaker 1: built on mainframe technology. Uh. Give in the nature of
Speaker 1: distributed ledger blockchain uh and its ability to have one
Speaker 1: version of the truth that shared amongst all participants, that
Speaker 1: seem to be a natural uh usage for blockchain. So
Speaker 1: we started this project this year and as I said,
Speaker 1: we hope to roll it out sometime next year. It's
Speaker 1: very exciting to see an actual application on a wide
Speaker 1: scale basis. Uh. We you know, it'll be pretty much
Speaker 1: the first one in the US securities market. Mike, how
Speaker 1: concerned are you about the blockchain or just in general
Speaker 1: about increases in financial technology and frankly a potential issuance
Speaker 1: of digital currency undermining the dt c c S business
Speaker 1: model as a processor. Yeah. You know. Look, and when
Speaker 1: the blockchain first became widely under steward or widely discussed,
Speaker 1: we read a lot about how, you know, all of
Speaker 1: a sudden, we would go to a blockchain based settlement
Speaker 1: system and uh, there will be no need for clearing
Speaker 1: and settlement. Then the biggest clear and settler in the
Speaker 1: world is dtc C and we would disappear, And you know,
Speaker 1: we kind of said, look, our business model will always
Speaker 1: evolve and even using blockchain, there still is a role
Speaker 1: to be played by somebody who's gonna be the central authority.
Speaker 1: They're not gonna be open systems, they'll be closed systems. Uh.
Speaker 1: You still have governance needs and processing needs over things
Speaker 1: like smart contracts and nodes. How do you change uh,
Speaker 1: the programs, etcetera. So you know, we're not immune to competition,
Speaker 1: we're not immune to the world moving on. But rather
Speaker 1: than you know, being scared of it, we've embraced it
Speaker 1: and become where we believe our thought leaders in the space.
Speaker 1: And you know, it'll take a while for blockchain to
Speaker 1: be able to handle the volume as we do. Um.
Speaker 1: You know, one of the things that we manage, as
Speaker 1: I said, we do a hundred million transactions a day
Speaker 1: come in from the stock exchanges, for instance. We net
Speaker 1: that down to three million net movements of securities in cash,
Speaker 1: which is highly efficient and saves a lot of money
Speaker 1: and operational risk. Alston, if you went back to a
Speaker 1: process where a hundred million cash movements would happen to
Speaker 1: every day, that would not be anywhere near as efficient
Speaker 1: and be a lot risk here. So I think as
Speaker 1: the hype has the simmered down and people understand the
Speaker 1: benefits of blockchain, but also the costs. You know, you're
Speaker 1: having much more rational discussions as to you know, how
Speaker 1: does it, how is it going to roll out, how
Speaker 1: is it going to impact the market, and what benefits
Speaker 1: will to bring Mike, we also have heard a lot
Speaker 1: about the cleared derivatives and how essentially cleared derivatives have
Speaker 1: eliminated a lot of the risk to the financial system.
Speaker 1: Did your survey touch on that at all? And have
Speaker 1: risks migrated to the central clearing houses themselves? The survey
Speaker 1: didn't touch on that per se. I mean, I think
Speaker 1: we we looked at things like interconnectedness risk UH and
Speaker 1: failure market participant um. I mean, and the risk hasn't disappeared.
Speaker 1: I mean what happens with a CCP as you're concentrating
Speaker 1: the risk and managing it at a central point. So
Speaker 1: it's not like the risk of disappeared. But it went
Speaker 1: from a very bilateral basis I firm may exposed the
Speaker 1: firm b uh and in some ways very opaid because
Speaker 1: there was not transparency over those positions before two now
Speaker 1: through both the cleared o tcs as well as the
Speaker 1: business we do in terms of a trade repository which
Speaker 1: gathers all the information about these transactions. You know, the
Speaker 1: transparencies increase the concentration, and therefore the central management of
Speaker 1: the risk has increased, and you know, it's made the
Speaker 1: system that much stronger. Mike Bodson, thank you so much
Speaker 1: for joining us a truly fascinating discussion. Mike Bodson, Chief
Speaker 1: Executive Officer of the Depository Trust and Clearing Corp DTCC.
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
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Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
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Speaker 1: worldwide on Bloomberg Radio.