00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. 00:00:36 Speaker 3: Julian Emanuel of Evercore writing, even as the long term trajectory of stocks remains higher, a boom market will happen. 00:00:42 Speaker 1: Ai does not negate the cycle. 00:00:44 Speaker 3: It has intensified and potentially elongated the upside. Julian joins us now for more. Julian, great to see you, Thank you for being here. So let's start there. There is this feeling even among bulls that this is as good as it gets. That's what we heard from Nikolai Tangin of the Norwegian Sovereign Wealth Fund. 00:01:03 Speaker 1: It sounds like you're kind of in that camp. 00:01:05 Speaker 4: So I think this is one of these times where given the rally that we've had, given the fact that the AI bull market is about to turn four years old, you have to just sort of step back and understand that these things have timeframes. 00:01:20 Speaker 5: Right. 00:01:20 Speaker 4: If we've talked about the comparisons with the late nineteen nineties very often, and in the year nineteen ninety nine, prior to the top in Y two k you had one hundred percent higher in the Nasdaq, but four separate ten percent pullbacks at the same time. If you think about this year, we've had this constant push and pull between ai jitters. We just got through ai jitters in July, and then prior to that, you know, concern about geopolitics, and from our point of view, we think that the market you set it at the top of the show that financial conditions are as the loosest that they've. 00:01:59 Speaker 5: Been this entire century. 00:02:02 Speaker 4: We're a little bit concerned about that bit of complacency. 00:02:05 Speaker 3: There's a different tone to this market. 00:02:07 Speaker 1: Also. 00:02:07 Speaker 3: I was looking at this report from Bespoke Investment Group last night talking about how the S and P five hundred has gone the longest stretch of time without an all or nothing type of rally, sort of in everything going in one direction type of rally or so off, which is for the longest period of time in twenty five years. It seems like the sort of pistons firing at different speeds have created a highly unusual market. Is that bound to break down to something more traditional or is this the new normal? 00:02:35 Speaker 4: So incredibly unusual, so unusual that you actually have this enormous cohort of stocks trading inversely to the S and P five hundred on a day to day basis, we coined the phrase negative beta. It's the highest name count in the index now it's actually over one hundred since two. 00:02:53 Speaker 5: Thousand and one. 00:02:55 Speaker 4: But in our mind, when you look at how this type of bull market progress is structural tech driven bowl markets, what you do get is in the final stages an all rise conditioned to your point. 00:03:09 Speaker 5: And if you look at. 00:03:10 Speaker 4: At these couple of weeks off of the situational awareness trough, you did have mag seven, Software and Semi's all rising together. 00:03:21 Speaker 5: That has stopped in the last few. 00:03:23 Speaker 4: Days, which is part of why we're a bit more cautious coming into September, which is always challenging, but we do think you will get all rise before this cycle is over. 00:03:34 Speaker 6: So if you're concerned, what do you do with that? 00:03:36 Speaker 1: How do you hedge against this? 00:03:37 Speaker 5: So there's sort of three choices here. 00:03:42 Speaker 4: You know, essentially, you can let your cash position build that damp is a portfolio. 00:03:47 Speaker 5: You can own optionality. The vis well, where are we. 00:03:51 Speaker 4: Now fourteen and fourteen and. 00:03:53 Speaker 5: Change is unbelievably low. 00:03:56 Speaker 1: It is under the hood, it's not. 00:03:58 Speaker 5: It's not under the hood. 00:03:59 Speaker 4: It's not because you have this negative beta effect, and you've had, you know, just like enormous moves in individual stocks, both up and down and up and down essentially in the same couple of months. And so for us, you know, index protection is very inexpensive. 00:04:18 Speaker 5: Here. 00:04:18 Speaker 4: You get the Fed, you get the midterms, you get Iran, and frankly, you get given the fact that a lot of people are viewing this earning seasons as good as. 00:04:32 Speaker 5: It gets, and we wouldn't argue with that. 00:04:34 Speaker 4: The thought might be that that would prompt a correction. Studies show the work that we've done shows that it prompts more volatility. It doesn't prompt the end of the bowl, but it does prompt this concern. And then the last thing is I would say this negative beta it's just it's remarkable and it's worked well, and there's energy in it, and there's utilities in it, healthcare, which has made new highs in recent weeks also in it. It really dampens portfolio volatility. 00:05:06 Speaker 6: Do you agree with the consensus that the data this week has been so good enough let's say, not so good, but good enough that the FED can stay on hold through September. 00:05:16 Speaker 4: Well to be fair, and again, this is one of these perceptions and which is going to make Jackson Hole very interesting. 00:05:23 Speaker 5: I don't know who's going to next get, but there you go. 00:05:27 Speaker 4: This will be interesting because you know, our call is that they actually will stay on hold in September. 00:05:34 Speaker 5: But it's not clear to me that what the. 00:05:37 Speaker 4: Market is pricing right now is the story that worsh wants the market to take into the FOMC meeting. As in, there's a little bit too much call it complacency around the definitive idea that they're not going to hike. So, you know, prediction markets whatever, the Bloomberg will show that. I think we're at about a thirty percent chance now. I think we think that's going to nudge higher between now and September sixteenth and that's one of the things that might unsettle markets. 00:06:08 Speaker 3: As well, the game theory of wanting price and hikes without having to do them and hoping that the market can do the work for you. I do wonder about the idea of rate hikes and why they might be necessary. Beth Hammick has been talking about how they need to act now, and arguably based on some of the complacency that you're talking about with the Financial Conditions Index and the leverage that we've seen build up, some people seem to be getting worried that there is this effervescence in markets that needs to be curtailed. The wings of some of the optimism need to be clipped. Do you see excess leverage starting to build at a time where people haven't had the volatility to sort of naturally wash it out. 00:06:45 Speaker 4: Well, again, this has been one of these sort of narratives that the market has been able to digest to this point. You know, record issuance, okay, against the backdrop of government bond you is rising, which is causing the price of the record issuance to have to rise as well. And this cycle is even more unusual. And I know, as a watcher of the credit markets in particular. What's fascinating is that high yield credit is much tighter than investment grade is because we know where all the issuance is coming from. So you know our concern if there was one, in particular, it would be if the tenure yield started nudging through four and three quarters towards five percent, as the thirty year yield has made new cycle highs. If you look back on this bull market, that's when stocks do face a bit more of a challenge. 00:07:40 Speaker 3: Just quickly, have you actually reduced your exposure to US equities? 00:07:43 Speaker 1: No? 00:07:44 Speaker 4: So well no, but think about it, right, And this is the problem that long term investors make constantly. There's a difference between selling and hedging. Okay, and look, we have been overweight the technology the entirety of this bull market, and it didn't feel very good in March and at sure as heck, didn't feel very good until July the twenty ninth. But part of that is that because it's a higher beta concept and the returns have been outsized, you should spend a little bit of your money hedging when the market seems complacent. 00:08:20 Speaker 1: Stay with us. 00:08:21 Speaker 6: More Bloomberg surveillance coming up after. 00:08:24 Speaker 3: This, Michael Halen of Bloomberg Intelligence joins us, Now, we've seen some companies go bankrupt, We've seen the likes of Sweet Green try to emphasize their cooked foods. Just how problematic is this and what kind of length do you expect this to have in terms of a staying power for the story. 00:08:50 Speaker 4: Yeah. 00:08:50 Speaker 7: On the Clippy, he called it a mass panic, historic hysteria. 00:08:55 Speaker 5: You know, I'd temper that a little bit. 00:08:57 Speaker 1: I would say fears were overblown. 00:09:00 Speaker 7: People are cutting back at restaurants that don't even serve iceberg lettuce. You know, because this is not a food safety issue, because because the pathogen and then we also saw salmonella and jalapeno peppers in the last couple of weeks, right, because the pathogen and the bacteria weren't due to food safety handling issues and they were foundings of the supply chain. You know, we think it's going to be relatively short and that's what we've seen. I mean, you know, Taco Bell talked about a minus two percent comp for the month of July and they were closely linked to cyclospora. Chipotle, before the salmonella impacted halopaenos had talked about about a down two percent comp here in the third I'm sorry, about two hundred basis points of impact to their comp in the third quarter. Pava saw some impacts at the beginning of July, but it's steadily increased and now their TOMPs are up mid single digits. So we expected to be really short lived. 00:10:02 Speaker 3: This is what a lot of people are hoping who are solid lovers and love the multi texture of a salad along with the moo mommy. This is according to Reddit Michael halet if lower Intelligence. Thank you so much for taking the time. Nick Setch, you if Mizuho writing salid centric concepts and We're Lettuce is heavily used an impact on traffic, I'd be surprised if the impact is not gone by September. 00:10:22 Speaker 1: Nick joins us now. 00:10:23 Speaker 3: Seems to agree with what we're just hearing from Mike Kalin. Nick, what makes you think that people are going to move on from this given the real version of frankly the bankruptcy of a number of salad based chains. 00:10:36 Speaker 8: Sure, I mean we have historical precedents. You know McDonald's. Just a year and a half ago, I went through a similar scenario. It took essentially a quarter to get past it. You know, we've had again similar incidents across the many restaurants across different categories historically, so we more or less know how long it takes for the impact to wing. 00:11:00 Speaker 6: What do you think in terms of the restaurants in terms of who is faring better in terms of dealing with this crisis, whether it's inside the chain as well as the PR campaigns around it. 00:11:13 Speaker 8: Well, the chains that are directly impacted, are you have the biggest burden and Taco Bell, you know, along with historically McDonald's, they have the sort of know how to deal with these these outbreaks, which again I mean they actually happen a lot more frequently. It's just that the media catches on less frequently, so they definitely have to know how to deal with that, both in terms of internally supply, chain wise and PR wives. 00:11:44 Speaker 6: Nick, you put in your note that Taco Bell itself so traffic down almost thirty percent if the news broke out, and likely it's about twenty percent range. This can't all be down to the media. People are probably genuinely nervous. 00:11:56 Speaker 8: No they are, but I think you know once the I mean that's early early days, right, so I mean again, as as we get past early July et cetera, we know that the impact is more or less low single digits. So, you know, the first few days, first week, I mean, it was thirty percent. But as people kind of digest information and realize that, you know, realize that it's not really as bad as potentially the early reaction, they tend to return to to you know, to consumption. 00:12:32 Speaker 3: When do you take a step Backnick, we are going to get retail sales at eight thirty am Eastern, And we've seen a real mixed picture when it comes to some of the vast casual restaurants. On one hand, McDonald's flagging some of their lower income consumers and the potential reluctance to traffic frequently. On the other hands, you've seen Kava outperform, You've seen Starbucks outperform. How do you understand who's winning and who's losing and how much that really hinges on which cohort, which economic cohort they seem to target. 00:13:02 Speaker 8: Well, look, the lower income demographic has been the pressure for almost two years now. That pressure is continuing. I think on top of the income or layer issues we have, you know, immigration et cetera playing into. 00:13:15 Speaker 5: It as well. 00:13:17 Speaker 8: Uh, and the middle and higher income consumers have continued to spend a pace. So if anything, we've actually seen income and all strengthening, and those categories like QSR that have exposure to the lower income have been underperforming categories like casual dining, which are higher income. In fact, we've seen the divergence accelerate, you know, for example and the Court Core Court three to day July August today, the casual diners have actually seen a step up from those single dig just almost mid single digits, while the QSRs have taken a step down. So uh that that trend definitely continues. 00:14:00 Speaker 1: So right now, who do you think is going to win? 00:14:01 Speaker 3: I mean this is also potentially a matter of which type of cuisine In other words, sort of Mexican is out and Middle Eastern is in. 00:14:13 Speaker 8: I'm not so sure it's about sort of which type of cuisine. I mean, definitely you know, exploited to lower income resigner income demographics and pricing decisions, right, I mean, ultimately, QSR fast food has taken cumulative almost fifty percent pricing you know, since pre COVID twenty nineteen, and this year they're taking another three to five percent to cover beef inflation, labor inflation, and so on, whereas casual dining in fast casual are much more in line with grocery and not low thirty percent rangees. So we're seeing that play out as traffic share is trending towards casual dining and fast casual you know, so casual dying, Chili's, you know, cheesecake factory, BJ's, r Us rossets throw a house. That's where we see the winners today. 00:15:04 Speaker 6: Stay with us more Bloomberg surveillance coming up after this. 00:15:17 Speaker 3: Multiple states, including New York, suing Caushi, alleging the company is running an illegal gambling operation. This as New York City launches a separate investigation into the company and several competitors over advertising and marketing practices. This, according to The Wall Street Journal, Calshi, writing in response, obligations under federal law conflict with state enforcement. This is the exact problem with states attempting to override federal preemption and why it exists in the first place, Calshie, Head of Enforcement, Robert Deanlt. Joins us now for more. Robert, great to see you, Thank you so much for being here. 00:15:49 Speaker 1: Thanks for having me. 00:15:49 Speaker 3: So I want to start just broadening out and this idea that an increasing number of states have gotten concerned about allegations of insider trading stock or manipulation of prediction markets with maybe fake videos highlighting someone who's hot in a particular name or idea. What's your response to the idea that there is war manipulation and fraud that happens in prediction markets than broader markets. 00:16:12 Speaker 9: So take your second point first and address that that's a different platform and not something that cay She's ever been accused of doing, but generally broader concerns about insider trading and prediction markets I think fit well within the regulatory framework that we operate under. So CFTC regulation requires any registered and licensed prediction market here in the United States to have both real time surveillance and look back surveillance, where we have teams of people who monitor markets twenty four to seven to look at individuals who might have insider information or the ability to manipulate the outcome and benefit from that. We've seen examples where Kyle she She has caught individuals, investigated that activity and referred it to our regulator. The CFTC, which has just started bringing formal enforcement cases. I'd note that typically this takes a long time. Enforcement at the federal level can sometimes take years, but the CFTC is acting fast, and I think part of that is to show that they can and are the right regulator to put police manipulation and insider trading that can happen in a regulated marketplace. 00:17:09 Speaker 3: At the same time, a lot of people would argue this feels a lot like sports betting. Say it feels a lot like just gambling, because you can say I think so and so is good to win and then put money on it much more simply, it doesn't have the same kind of business use case that say, hedging lumber futures does, or trying to set certain prices for key other commodities. 00:17:30 Speaker 1: What's your response to that. 00:17:32 Speaker 9: So different business models are regulated differently even when they touch on the same topics, right, So, insurance and banks and broker dealers are regulated differently, even though they all take money from customers and spend it in a certain way that a customer has a reasonable right to expect aligns with their interests. 00:17:49 Speaker 1: I think sports specifically, this is. 00:17:52 Speaker 9: About offering a model that a customer wants access to the exchange model operates differently than a sportsbook model. A sportsbook profits every time somebody walks in and puts up money. If they lose, the sports book wins all that money. An exchange model is fundamentally different. What you're doing is pairing users who are setting the price amongst each other in an order book that is open, impartial, and fair and available nationwide, and operating an exchange that fits that framework requires federal regulation. Every exchange in the United States that operates here in New York, nasack NIC and CME in Chicago, they are all under the oversight of federal regulators. And there's a reason for that piecemeal regulation in different states. Especially the types of regulations that oversee sports books are more designed to regulate a casino that offers alcohol at the bar and chases customer losses. Regulations that govern exchanges are about ensuring fair and impartial access, running markets whose price is accurately reflected to users, setting limit orders, market orders, etc. And so the product might touch on a similar topic, but that doesn't mean that the business model should be regulated the same line. 00:19:02 Speaker 6: How does your surveillance teams actually catch some of this, it's a great question. 00:19:06 Speaker 9: We have round the clock surveillance that's operating twenty four to seven at the exchange, some of which we use through vendors. We have several vendors who are running twenty four to seven surveillance on insider trading, market manipulation like spoofing, front running, etc. And then we have a secondary team in the exchange that does look back reviews for every single market. We recently, just earlier this week or last week, announced our partnership with NASDAK to enable their surveillance tool to also work on call SHEHE data, and that service is going to be offered to institutional clients and regulators that are interested in getting access to that data. 00:19:39 Speaker 1: And so essentially, when we. 00:19:41 Speaker 9: See flags in markets, the team that we have at Kush works to either clear those alerts as false positives or escalate them to enforcement attorneys or investigators like myself who pursue those leads. 00:19:52 Speaker 1: And we're able to do so because we know all the customers on the exchange. 00:19:55 Speaker 6: Can you give us a sense of what the report like internally has been on I'm sure you've seen and that the President's prompter who made over one hundred thousand dollars betting on specific words the President was going to say that obviously that individual had access to So I can't. 00:20:10 Speaker 9: Say much because it's still an ongoing investigation. But what I can say is that our surveillance system and our surveillance team identified a nominalist trading behavior in the mentioned markets that that individual was trading in, and because they identified it, they were able to flag the behavior, conduct an investigation, and refer the evidence to our regular at the CFTC. 00:20:29 Speaker 1: And so I am. 00:20:30 Speaker 9: Aware that there is news out there that they're pursuing a matter with him, but I can't comment any further. 00:20:35 Speaker 6: But as an executive at CALSHI, do you think that this hurts the credibility of prediction markets because it looks like people inside, whether or not they're within the government or close. 00:20:46 Speaker 1: To individual and government. 00:20:47 Speaker 6: Have an edge higher have an edge on everyday Americans. 00:20:51 Speaker 9: I think this is true for every single financial market in the United States. Right We're not the first financial market where insider trading poses a risk to the fairness of other people. 00:21:00 Speaker 1: Operating in that market. 00:21:02 Speaker 9: And in fact, I would say the quick action that the CFTC has taken and that we take as an exchange because we are also able to discipline our members directly. 00:21:12 Speaker 1: Is different than what we've seen at. 00:21:13 Speaker 9: Sportsbooks or even the stock exchanges, where it sometimes takes years to unspool much larger insider trading rings, price fixing scandals in certain leagues, and we've seen that take six, seven, eight years for it to come out. What I think we see at Kalshi is a strong, concerted effort to police markets and refer cases quickly and then act on them as an exchange, even if the regulator says, we don't think that rises to the level being something illegal. 00:21:40 Speaker 3: Another reason why local municipalities are getting a little concerned is because sometimes elections are not that big, not that popular, they're not that liquid, and so an individual can put a pretty big wager that they're going to do X, Y and z, and then they're going to go do X, Y and z and they can profit off of it. How do you avoid that type of behavior taking place? 00:21:59 Speaker 9: So there's two ways I think that people should understand how prediction markets are calibrating elections. Election markets, according to several academic studies on our exchange specifically show that our election markets are accurate almost one hundred percent of the time about three months out from an election, and I think that's something sorely needed by most people. 00:22:19 Speaker 1: We live in an age of information. 00:22:21 Speaker 9: Bias and inaccurate polling and social media misinformation, and I think these forecasts do offer meaningful insight into elections. Now, in the specific cases of individuals who want to come to a market and exercise some sort of distortion or influence because they have an ulterior motive, it may not always necessarily be illegal. At KUSHI, we prohibit candidates or people who work on campaigns from trading on elections, and we do that both proactively by investigating markets, but also by screening them from placing trades. So we take FEC data or other data to screen candidates and other individuals that have onboarded from even placing trades in these markets where we can. But I think apart from that, there is of course market correction, and we saw this in the LA mayor's race. There was an individual who came in and placed a very large trade on Spencer Pratt. And you know, I can't prognosticate about what this person's motive was for placing that trade, but it was over a million dollars, and it was within a single afternoon, and so their motive may have been to try to move his odds up higher and skew them from. 00:23:22 Speaker 1: What reality actually was. 00:23:24 Speaker 9: And the truth is the market corrected that price point within nine seconds. And so where there's an opportunity for other traders to come in and make money off someone whose motive might be not price related, that is an opportunity to profit in a prediction market context, if it. 00:23:39 Speaker 3: Is so well regulated and similarly regulated to other markets that are common in financial markets. Why do you think there's such a version coming not just from the political space, but also from the rank and file on Wall Street. 00:23:53 Speaker 9: I think you touched on one of those reasons. I think people are scared of competition, to be honest, at least on Wall Street. And frankly, many of the Wall Street players have got into event contracts, and so we started to see them explore this in the same regulated way that we do at the federal level. By and large, I think what we're seeing is very reminiscent, as a lawyer of what we saw with companies like Uber, where you launch something new and if you go back in time, the headlines about uber kind of look very scary. It's like, what is this thing? Do we even know whose cars we're getting into? And of course now that's not how we think of where we think of it as a very safe alternative actually to many other options that existed. And also it didn't quite displace the tech community the way that initially people had thought that they would. I think we're in that same phase with prediction markets, where people can recognize and are starting to recognize that products can touch on the same topic but be regulated differently. And the answer of why we do that is customer choice, and that's something that's tried and true over many American industries throughout history. I think this is just a natural evolution in this space. 00:24:55 Speaker 2: This is the Bloomberg's Events podcast, bringing you the best in market, economic, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.