1 00:00:00,080 --> 00:00:13,160 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Champ Keene. 2 00:00:13,240 --> 00:00:17,440 Speaker 1: Always with Michael McKee Jailey. We bring you insight from 3 00:00:17,480 --> 00:00:22,279 Speaker 1: the best in economics, finance, investment, and international relations. Find 4 00:00:22,280 --> 00:00:26,880 Speaker 1: Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of 5 00:00:26,920 --> 00:00:35,400 Speaker 1: course I'm the Bloomberg Helicopter money. Um would it work 6 00:00:35,440 --> 00:00:40,160 Speaker 1: better than Kiwie well Terman Bernankee has dedicated his whole 7 00:00:40,159 --> 00:00:44,800 Speaker 1: academic career in discussing that. In reality, if you're a 8 00:00:44,840 --> 00:00:47,480 Speaker 1: central bank and you want to find ways of signaling 9 00:00:47,479 --> 00:00:51,160 Speaker 1: that you're going to raise inflation and guide inflation expectations higher, 10 00:00:51,440 --> 00:00:55,080 Speaker 1: there are several avenues, and the more dogs you come across, 11 00:00:55,160 --> 00:00:57,920 Speaker 1: the more reckless if you want, you come across in 12 00:00:58,080 --> 00:01:01,320 Speaker 1: theory that has a bigger impact than play expectations in 13 00:01:01,400 --> 00:01:03,600 Speaker 1: many ways, what we have seen over the last couple 14 00:01:03,600 --> 00:01:07,800 Speaker 1: of years is central banks not doing enough to stimulate 15 00:01:08,120 --> 00:01:11,160 Speaker 1: inflation expectations lists I mean not doing enough. I'm not 16 00:01:11,160 --> 00:01:12,840 Speaker 1: sure what they can do. If you think about it's 17 00:01:12,840 --> 00:01:16,400 Speaker 1: been seven years, we're near zero almost every major economy. 18 00:01:16,440 --> 00:01:20,399 Speaker 1: They've done so much, and that's not forcing politicians to 19 00:01:20,400 --> 00:01:23,399 Speaker 1: do more. Well, think of Japan the prime example, right 20 00:01:23,800 --> 00:01:26,040 Speaker 1: two thousand fifteen has been a year of major fiscal 21 00:01:26,080 --> 00:01:31,440 Speaker 1: consolidation right than fiscal expansion around twenty fifteen. Just when 22 00:01:31,440 --> 00:01:34,240 Speaker 1: the whole market was thinking that easing would come after 23 00:01:34,280 --> 00:01:37,800 Speaker 1: easy guiding the yen higher and higher, you're in weaker 24 00:01:37,800 --> 00:01:40,399 Speaker 1: and weaker and weaker against the dollar. Instead, what you 25 00:01:40,440 --> 00:01:44,200 Speaker 1: have seen has been a loopwarm response with central bankers 26 00:01:44,280 --> 00:01:48,200 Speaker 1: not you know, meeting expectations for the markets, and that 27 00:01:48,280 --> 00:01:50,920 Speaker 1: has driven the yen stronger, so they has actually worked 28 00:01:50,920 --> 00:01:54,680 Speaker 1: against it. Think of the FED. The FED, in sight 29 00:01:54,960 --> 00:01:58,080 Speaker 1: of the potential that labor markets may eventually lead to 30 00:01:58,160 --> 00:02:01,280 Speaker 1: some signs of inflation, has war about rate highs already 31 00:02:01,280 --> 00:02:05,000 Speaker 1: by September, and it's partly responsible for the market while 32 00:02:05,040 --> 00:02:08,400 Speaker 1: atili that we have around January. Seam also want to 33 00:02:08,440 --> 00:02:11,320 Speaker 1: congratulate you and Ubs and your rock Montero on the 34 00:02:11,400 --> 00:02:14,720 Speaker 1: single best page I've seen on helicopter money. Uh. Yet 35 00:02:14,919 --> 00:02:18,200 Speaker 1: you go through the Mundel Fleming structure and I s 36 00:02:18,360 --> 00:02:22,400 Speaker 1: LM Euclidean geometry and you talk about the need for 37 00:02:22,560 --> 00:02:26,440 Speaker 1: monetary easing. Bring up the end chart right now? Why 38 00:02:26,480 --> 00:02:30,480 Speaker 1: is the end stronger? And Ubs beautifully walks through this 39 00:02:30,880 --> 00:02:34,160 Speaker 1: so you get tightening and you get a stronger yen. 40 00:02:34,280 --> 00:02:37,920 Speaker 1: I get that, and the requirement is monetary easing on 41 00:02:37,960 --> 00:02:43,120 Speaker 1: the back side, almost a sterilization of the policy. Are 42 00:02:43,160 --> 00:02:46,760 Speaker 1: we going to see that. Well, when you're delivering fiscal 43 00:02:46,919 --> 00:02:49,200 Speaker 1: easing about one to one and a half percent of 44 00:02:49,240 --> 00:02:52,240 Speaker 1: GDP in an economy where trend growth is around zero 45 00:02:52,240 --> 00:02:54,760 Speaker 1: point five, it's a significant amount of easing, and the 46 00:02:54,840 --> 00:02:57,280 Speaker 1: market comes to expect that there may be a point 47 00:02:57,480 --> 00:03:00,239 Speaker 1: that if you take that further out, it may lead 48 00:03:00,280 --> 00:03:02,880 Speaker 1: to some level of higher real rates. In a typical 49 00:03:02,960 --> 00:03:07,519 Speaker 1: sort of right standard economic approach, real rates go higher. 50 00:03:07,560 --> 00:03:10,880 Speaker 1: We have seen that since the last Bank of Japan 51 00:03:11,840 --> 00:03:14,280 Speaker 1: said that, and the young strengthens on the back of 52 00:03:14,360 --> 00:03:17,119 Speaker 1: higher real rates. Uh And in order to have said that, 53 00:03:17,200 --> 00:03:19,640 Speaker 1: you need a central bank that convinces us that no 54 00:03:19,680 --> 00:03:24,160 Speaker 1: matter what the effects of physical easing our on growth 55 00:03:24,560 --> 00:03:26,839 Speaker 1: or inflation, they will keep on doing more and more 56 00:03:27,040 --> 00:03:30,920 Speaker 1: if you really want to push inflation expectations higher and 57 00:03:31,080 --> 00:03:34,360 Speaker 1: offset that increase in real rates. Well, but this is critical, 58 00:03:34,480 --> 00:03:37,440 Speaker 1: this is absolutely critical. Are we going to see that 59 00:03:37,880 --> 00:03:40,320 Speaker 1: in females? You know what this is about. This is 60 00:03:40,360 --> 00:03:44,760 Speaker 1: about courage and will do you detect that courage from 61 00:03:44,760 --> 00:03:48,760 Speaker 1: the Bank of Japan. Well, we have hoped they would 62 00:03:49,440 --> 00:03:54,480 Speaker 1: demonstrate that kind of easing resolve since late twenty fIF 63 00:03:55,080 --> 00:03:58,360 Speaker 1: their behavior over the last nine months has been much 64 00:03:58,400 --> 00:04:01,920 Speaker 1: more close to soul searching rather than some kind of 65 00:04:01,920 --> 00:04:06,240 Speaker 1: determination to push the needle. So the overall policy mix 66 00:04:06,760 --> 00:04:10,520 Speaker 1: has shifted from a very easy monitory environment to a 67 00:04:10,520 --> 00:04:13,720 Speaker 1: place where the market has been expecting helicopter money, and 68 00:04:13,760 --> 00:04:16,400 Speaker 1: more recently, over the last couple of weeks, helicopter has 69 00:04:16,440 --> 00:04:22,000 Speaker 1: become something closer to a submarine. Olgar thoughts, well, the 70 00:04:22,040 --> 00:04:23,919 Speaker 1: standard thought on Japan is, of course they have for 71 00:04:23,960 --> 00:04:26,480 Speaker 1: the last twenty five years done a lot with fiscal 72 00:04:26,520 --> 00:04:30,440 Speaker 1: and monetary policy to stimulate growth, and there's never worked 73 00:04:30,440 --> 00:04:33,200 Speaker 1: for long. We all know what Japan really needs is 74 00:04:33,320 --> 00:04:36,240 Speaker 1: the structure reforms to raise the trend rate of growth. 75 00:04:36,560 --> 00:04:40,400 Speaker 1: Of course, with helicopter money or anything dramatic, they could 76 00:04:40,480 --> 00:04:43,839 Speaker 1: probably if they're really aggressive, weaken the currency for a while. 77 00:04:44,160 --> 00:04:47,480 Speaker 1: They might that way through important inflation, even get inflation 78 00:04:47,680 --> 00:04:51,560 Speaker 1: and inflation expectations up, but after a year or so 79 00:04:51,800 --> 00:04:54,120 Speaker 1: it would be over again and they'd be back to 80 00:04:54,200 --> 00:04:57,479 Speaker 1: their own trend growth rate. For me, the Japanese debate 81 00:04:57,520 --> 00:05:00,440 Speaker 1: should be about very different things than helicop the money. 82 00:05:00,480 --> 00:05:02,320 Speaker 1: I mean, some of the thing is that helicopter money 83 00:05:02,800 --> 00:05:05,760 Speaker 1: is you know what it is, um, which is why 84 00:05:05,800 --> 00:05:08,320 Speaker 1: the health the image of a helicopter distributing money is 85 00:05:08,320 --> 00:05:11,719 Speaker 1: so appealing. But you could argue that QUEI and ultimately 86 00:05:11,839 --> 00:05:14,800 Speaker 1: low interest rates gives you that extra money in your pockets, 87 00:05:15,040 --> 00:05:17,359 Speaker 1: right because you don't have the inflation that you're fighting 88 00:05:17,360 --> 00:05:19,960 Speaker 1: with your wage growth, and that's extra money. And if 89 00:05:19,960 --> 00:05:22,120 Speaker 1: people aren't spending that, then why would they go and 90 00:05:22,160 --> 00:05:25,720 Speaker 1: spend helicopter money. There's there's a beautiful questions and very 91 00:05:25,760 --> 00:05:29,520 Speaker 1: deep in economic intuition. The main problem in many finite 92 00:05:29,600 --> 00:05:34,039 Speaker 1: posting answer crisis environments is that the transmission mechanism between 93 00:05:34,680 --> 00:05:38,720 Speaker 1: what policymakers do and what ends up being the ultimate 94 00:05:38,760 --> 00:05:42,080 Speaker 1: result in the economy tends to be quite broken down, 95 00:05:42,320 --> 00:05:45,159 Speaker 1: and therefore policy makers are called to find different ways 96 00:05:45,200 --> 00:05:49,320 Speaker 1: of distributing money. QUEI has been all about inflating assets 97 00:05:49,320 --> 00:05:53,360 Speaker 1: and giving people more disposable income, and helicopter money is 98 00:05:53,360 --> 00:05:56,240 Speaker 1: a different way of forcing people to spend. Conceptually, again, 99 00:05:56,279 --> 00:06:00,039 Speaker 1: in Ben Bernanke is sort of like academic work. I 100 00:06:00,120 --> 00:06:02,880 Speaker 1: would like to disagree though on one quick thing or 101 00:06:02,960 --> 00:06:06,000 Speaker 1: due respect. Uh, since two thousand and twelve, you say 102 00:06:06,120 --> 00:06:10,320 Speaker 1: clear breakthrough in Japan. Inflation expectations between two thousand and 103 00:06:10,320 --> 00:06:13,400 Speaker 1: twelve thousand fifteen have increased from zero to one and 104 00:06:13,440 --> 00:06:16,200 Speaker 1: a half percent, and that has been meaningful progress. And 105 00:06:16,240 --> 00:06:19,240 Speaker 1: all the progress from economics has been unwhound within six 106 00:06:19,279 --> 00:06:22,000 Speaker 1: months of the Bank of Japan sending the wrong signal. 107 00:06:22,320 --> 00:06:25,240 Speaker 1: So although we can discuss the last thirty years of growth, 108 00:06:25,920 --> 00:06:28,919 Speaker 1: an experiment that was quite promising was interrupted in a 109 00:06:28,960 --> 00:06:32,920 Speaker 1: way odd flash. I would say, just getting inflation expectations 110 00:06:33,080 --> 00:06:36,200 Speaker 1: up is not the purpose of any economic policy. That 111 00:06:36,560 --> 00:06:40,400 Speaker 1: allow me to disagree. The biggest, this single biggest driver 112 00:06:40,480 --> 00:06:43,000 Speaker 1: inflation is not the labor market. It's not growth, it's 113 00:06:43,040 --> 00:06:49,160 Speaker 1: inflation expectations. And Japan's problem is not deflation. Japan's problem 114 00:06:49,520 --> 00:06:53,400 Speaker 1: is a very low rate of trend growth, which is 115 00:06:53,480 --> 00:06:57,119 Speaker 1: where the third era of economics, the structural reform, should 116 00:06:57,120 --> 00:06:59,920 Speaker 1: have come in, but never came in. That the basic face, 117 00:07:00,400 --> 00:07:03,360 Speaker 1: I would say Japan has like many problems, including instructural 118 00:07:03,400 --> 00:07:06,360 Speaker 1: because of demographics, they don't have enough immigration, they certainly 119 00:07:06,400 --> 00:07:10,520 Speaker 1: done enough women labor participation. Deflation is probably only a 120 00:07:10,600 --> 00:07:13,560 Speaker 1: part of growth, and that it's not a key thing. 121 00:07:13,960 --> 00:07:17,760 Speaker 1: Switzerland has been living happily with an inflation rate roughly 122 00:07:17,800 --> 00:07:20,560 Speaker 1: the same as Japan for a long time. The difference 123 00:07:20,800 --> 00:07:25,000 Speaker 1: is Switzerland has sound structural Let me ask you, would 124 00:07:25,040 --> 00:07:28,760 Speaker 1: you be worried. Would you be worried if Europe became Japan? 125 00:07:29,360 --> 00:07:32,600 Speaker 1: Would you not be worried about the economic concoction that 126 00:07:32,680 --> 00:07:34,720 Speaker 1: the central bank would have to deal with. I would 127 00:07:34,760 --> 00:07:38,320 Speaker 1: not be worried about Europe having an inflation rate like 128 00:07:38,440 --> 00:07:42,600 Speaker 1: Japan very much. I'd be worried about any country having 129 00:07:42,760 --> 00:07:46,880 Speaker 1: the no immigration of Japan, having the structural rigidities of 130 00:07:47,040 --> 00:07:50,360 Speaker 1: Japan Japan. And actually, if you look across Europe, the 131 00:07:50,400 --> 00:07:54,760 Speaker 1: difference between economies is not zero inflation Spain growing three percent, 132 00:07:55,360 --> 00:08:01,720 Speaker 1: zero inflations in session. The difference is structural pro great policy. 133 00:08:01,840 --> 00:08:05,040 Speaker 1: I want to no, it's it's very important. I want 134 00:08:05,040 --> 00:08:08,680 Speaker 1: to dovetail this wonderful debate. Famous. When I think of 135 00:08:08,760 --> 00:08:13,040 Speaker 1: structural rigidity, ees, I think within your fabulous work of 136 00:08:13,080 --> 00:08:16,840 Speaker 1: the rigidities of the real economy. If I look at 137 00:08:16,840 --> 00:08:20,480 Speaker 1: the so called elasticity of the real economy, the i 138 00:08:20,800 --> 00:08:24,120 Speaker 1: S curve within your analysis does the Bank of Japan 139 00:08:24,840 --> 00:08:30,360 Speaker 1: have the tools to affect a real economic outcome for Japan. 140 00:08:30,600 --> 00:08:33,720 Speaker 1: I'm not convinced they do well when it comes to 141 00:08:33,800 --> 00:08:37,520 Speaker 1: real interest rates or even nominal interest rates. Uh. You know, 142 00:08:37,840 --> 00:08:40,560 Speaker 1: the Bank of Japan can affect the ELM curve in 143 00:08:40,600 --> 00:08:43,439 Speaker 1: many different ways, and in fact, real rates have moved 144 00:08:43,520 --> 00:08:47,160 Speaker 1: so much over the last three years, which stands as 145 00:08:47,200 --> 00:08:51,079 Speaker 1: proof that we're not in a space where monetary policy 146 00:08:51,120 --> 00:08:55,800 Speaker 1: shifts have no effect on real interest rate or inflation expectations, 147 00:08:56,120 --> 00:09:01,280 Speaker 1: as standard arguments about liquidity trap with our you Uh, 148 00:09:01,520 --> 00:09:03,600 Speaker 1: you know, the Bank of Japan has a lot of tools. 149 00:09:04,200 --> 00:09:08,360 Speaker 1: I just think that inflation rates are highly misunderstood at 150 00:09:08,400 --> 00:09:13,400 Speaker 1: this point. This inflation is very global phenomenon. It requires 151 00:09:13,400 --> 00:09:18,240 Speaker 1: some vague global attempts to raise inflation expectations, and policy 152 00:09:18,280 --> 00:09:21,760 Speaker 1: makers have actually not done enough to foster Actually, in 153 00:09:21,840 --> 00:09:24,880 Speaker 1: terms of structural items, I would like to highlight that 154 00:09:24,960 --> 00:09:27,880 Speaker 1: GDP per capital in Japan and the last thirty to 155 00:09:28,000 --> 00:09:31,320 Speaker 1: forty years has actually grown not that far from what 156 00:09:31,400 --> 00:09:33,760 Speaker 1: the U S Or Europe has right as they have 157 00:09:33,840 --> 00:09:36,440 Speaker 1: low population growth, But that doesn't mean that not agreed. 158 00:09:36,520 --> 00:09:38,800 Speaker 1: I take your point in Holgar, Do you have any 159 00:09:38,880 --> 00:09:43,000 Speaker 1: confidence that the dynamics of the money system within Japan 160 00:09:43,520 --> 00:09:47,080 Speaker 1: is signified by the l M curve, can move over 161 00:09:47,200 --> 00:09:51,160 Speaker 1: to the real economy and help Mr Abbey with his voters. 162 00:09:51,559 --> 00:09:55,520 Speaker 1: Can can can they shift all this monetary mumbo jumbo 163 00:09:56,000 --> 00:10:01,560 Speaker 1: over to a really economic good outcome for Japan. First 164 00:10:01,600 --> 00:10:04,800 Speaker 1: of all, I do agree monetary policy still works to 165 00:10:04,880 --> 00:10:08,600 Speaker 1: some extent. The transmission mechanism is impaired but not fully 166 00:10:08,800 --> 00:10:12,080 Speaker 1: broken across the Western world. That also, to some extent, 167 00:10:12,160 --> 00:10:15,720 Speaker 1: still holds for Japan. My point is more that with 168 00:10:15,880 --> 00:10:21,320 Speaker 1: monetary policy you could only buy a modest short term 169 00:10:21,480 --> 00:10:24,840 Speaker 1: boost to demand, but you could not fix the longer 170 00:10:24,960 --> 00:10:28,920 Speaker 1: term problems of any economy, including Japan. So yes, a 171 00:10:29,040 --> 00:10:32,600 Speaker 1: significantly more aggressive Bank of Japan would be able to 172 00:10:32,640 --> 00:10:36,160 Speaker 1: do something about the short term sychnical outlook for Japan, 173 00:10:36,559 --> 00:10:39,000 Speaker 1: but a year later we'd be back to where we were. 174 00:10:39,160 --> 00:10:43,240 Speaker 1: Insufficient trend growth in the economy, which is paying for 175 00:10:43,320 --> 00:10:47,000 Speaker 1: its current adventures and recent adventures, was piling up too 176 00:10:47,080 --> 00:11:01,719 Speaker 1: much debt with us from Florida. Douglas Cast of Breeze Partners, 177 00:11:01,840 --> 00:11:04,439 Speaker 1: who has been a short on the market, and he's 178 00:11:04,480 --> 00:11:07,200 Speaker 1: been watching the market walk away. Let's i want to 179 00:11:07,240 --> 00:11:10,520 Speaker 1: talk first about the rules of the game. You write 180 00:11:10,600 --> 00:11:14,440 Speaker 1: beautifully on a musical event of a few years ago. 181 00:11:14,520 --> 00:11:18,920 Speaker 1: That would be Woodstock, which I believe you attended and survived. 182 00:11:19,160 --> 00:11:21,520 Speaker 1: I put a photo out of you four rows and 183 00:11:21,640 --> 00:11:24,880 Speaker 1: three rows back from this girl, black and white photo 184 00:11:24,920 --> 00:11:28,719 Speaker 1: from Woodstock vintage nine. I think it was. Are the 185 00:11:28,800 --> 00:11:31,479 Speaker 1: rules the same as when you were partying at Woodstock? 186 00:11:33,400 --> 00:11:36,280 Speaker 1: That's the hardest question I've ever been asked. On the 187 00:11:36,280 --> 00:11:38,959 Speaker 1: investor rules the same? I think the investment rules are 188 00:11:38,960 --> 00:11:43,360 Speaker 1: always the same. Um again, Uh, price is what you pay, 189 00:11:43,480 --> 00:11:45,720 Speaker 1: value is what you get. Everything to me is reward 190 00:11:45,840 --> 00:11:49,600 Speaker 1: versus risk, upside versus downside, whether it's a market, whether 191 00:11:49,640 --> 00:11:52,880 Speaker 1: it's a sector of the market, or individual security. When 192 00:11:52,960 --> 00:11:56,280 Speaker 1: you look at this, you look at people that are 193 00:11:56,440 --> 00:12:01,000 Speaker 1: nervous about pricing. They want to participate in, they want 194 00:12:01,000 --> 00:12:04,520 Speaker 1: to be short like you, and yet it walks away. 195 00:12:04,640 --> 00:12:08,760 Speaker 1: How do you handle that? Look? I personally believe Tina, 196 00:12:09,040 --> 00:12:13,080 Speaker 1: there is no alternative and fomo fear of missing out, 197 00:12:13,200 --> 00:12:18,240 Speaker 1: which is a hackneyed Kim Kardashian phrase. I think there, 198 00:12:18,280 --> 00:12:21,120 Speaker 1: I think there bs. I think sit sit us see. 199 00:12:21,160 --> 00:12:25,240 Speaker 1: I t a cash is the alternative of the securities 200 00:12:25,280 --> 00:12:29,480 Speaker 1: trading above the two day moving average, with a central 201 00:12:29,520 --> 00:12:33,680 Speaker 1: banking infused specultive bubble and equities around the world and 202 00:12:33,720 --> 00:12:37,000 Speaker 1: the biggest bubble of a market. How do you respond 203 00:12:37,080 --> 00:12:40,120 Speaker 1: dot cast to Martin's wives iconic phrase, A trend is 204 00:12:40,120 --> 00:12:43,400 Speaker 1: your friend. You gotta get on board dan Her, Cold Gate. 205 00:12:43,440 --> 00:12:46,000 Speaker 1: I don't know in those and other blue chip stocks 206 00:12:46,080 --> 00:12:49,360 Speaker 1: because there is no alternative. As Dennis Gartman would say, 207 00:12:49,679 --> 00:12:52,320 Speaker 1: it's interesting. Side note. I was on the board of 208 00:12:52,360 --> 00:12:55,959 Speaker 1: directors of Dana Her and the chairman of the executive 209 00:12:55,960 --> 00:13:01,240 Speaker 1: committee when we took over. Dana Hers predecessor firm was 210 00:13:01,280 --> 00:13:05,000 Speaker 1: Diversified Mortgage Group, which to date myself was the old 211 00:13:05,120 --> 00:13:08,199 Speaker 1: I D. S Realty in Minneapolis, which had a large 212 00:13:08,240 --> 00:13:10,760 Speaker 1: tax lust carry forwardness on the edge of bankruptcy, and 213 00:13:10,760 --> 00:13:12,920 Speaker 1: I ended up selling the firm to the Rails Brothers 214 00:13:13,000 --> 00:13:15,880 Speaker 1: who changed the name to Danaher. Look, if you're a 215 00:13:15,880 --> 00:13:19,240 Speaker 1: short seller like myself and you see the glasses half empty, 216 00:13:19,320 --> 00:13:21,800 Speaker 1: not half full, you have to figure out how to 217 00:13:21,880 --> 00:13:25,440 Speaker 1: structure your short book, how to how to create defined 218 00:13:25,640 --> 00:13:28,720 Speaker 1: risk so you know exactly what your risks are in 219 00:13:28,760 --> 00:13:31,600 Speaker 1: the market that seems to elevate every month. So I 220 00:13:31,679 --> 00:13:34,959 Speaker 1: used that I do that through put synthetic shorts, shorting 221 00:13:35,000 --> 00:13:37,600 Speaker 1: stock buying out of the money calls. I defined my risk. 222 00:13:37,920 --> 00:13:42,000 Speaker 1: It's almost as important as the specific stock you're shorting. Right, 223 00:13:42,040 --> 00:13:44,719 Speaker 1: you had the Shenanigans long ago and far away of 224 00:13:44,800 --> 00:13:48,360 Speaker 1: Bernie Cornfeld, we had the Shenanigans win an Academy award 225 00:13:48,720 --> 00:13:52,360 Speaker 1: with the big short. What are the Shenanigans now that 226 00:13:52,679 --> 00:13:56,800 Speaker 1: disrupt the market? Well, I would say that two areas 227 00:13:56,840 --> 00:14:01,120 Speaker 1: of my concern that so called Shenanigans would be in China, 228 00:14:01,360 --> 00:14:03,920 Speaker 1: where there is a lack of transparency and accounting is 229 00:14:03,960 --> 00:14:09,520 Speaker 1: opaque and so are the operations. And secondly the Europe 230 00:14:09,520 --> 00:14:14,400 Speaker 1: European banking institutions. I'm an old banking analyst. I wrote 231 00:14:14,400 --> 00:14:16,560 Speaker 1: a book with Ralph Nadia cult City Bank back in 232 00:14:18,240 --> 00:14:22,240 Speaker 1: um and their portfolios are. First of all, the companies, 233 00:14:22,400 --> 00:14:26,160 Speaker 1: the banking institutions in Europe are very leveraged. Banking is 234 00:14:26,200 --> 00:14:28,680 Speaker 1: an important part of commerce, four or five times more 235 00:14:28,720 --> 00:14:31,240 Speaker 1: important than the role of the banking community in the 236 00:14:31,280 --> 00:14:35,720 Speaker 1: United States. And they're filled with toxic assets and artificially 237 00:14:35,760 --> 00:14:39,840 Speaker 1: low bonds, you know, low yielding bonds which could you know, 238 00:14:40,000 --> 00:14:44,400 Speaker 1: turn in a nanosecond. But the critical distinction is corporate 239 00:14:44,480 --> 00:14:50,040 Speaker 1: officers removing themselves from those fears by focusing on revenues, 240 00:14:50,080 --> 00:14:54,280 Speaker 1: bringing it down the income statement, generating free cash flow 241 00:14:54,720 --> 00:14:58,760 Speaker 1: through expense control. Granted, sometimes just negative things they're doing, 242 00:14:59,320 --> 00:15:05,040 Speaker 1: but they can conget. They can generate persistent free cash flow. Yes, yes, 243 00:15:05,120 --> 00:15:07,280 Speaker 1: the cost of capital is very low and the low 244 00:15:07,360 --> 00:15:11,400 Speaker 1: rate environment by definition free cash flow is exceedingly high. 245 00:15:11,480 --> 00:15:14,480 Speaker 1: But as I mentioned off camera, I'm sure at Disney, 246 00:15:14,680 --> 00:15:17,760 Speaker 1: because I believe in peak sports viewership and that this 247 00:15:18,320 --> 00:15:22,600 Speaker 1: this hemorrhaging of ESPN subscribers will continue. They cost the 248 00:15:22,640 --> 00:15:27,200 Speaker 1: capitalists one and a half percentage. Greenfield Beach on yesterday, 249 00:15:27,280 --> 00:15:30,080 Speaker 1: Thank you for listening, Doug cast, our forty second listener 250 00:15:30,120 --> 00:15:34,960 Speaker 1: here on Bloomberg Surveillance. But if Greenfield in Cast feel 251 00:15:35,000 --> 00:15:39,080 Speaker 1: that way, my thesis is mr Iger will adapt and 252 00:15:39,280 --> 00:15:42,840 Speaker 1: adjust to a better Disney. Do you see that corporate 253 00:15:42,840 --> 00:15:47,520 Speaker 1: will in America as it relates to Disney. What can 254 00:15:47,560 --> 00:15:50,240 Speaker 1: you do? He's like Apple, a victim of his successes. 255 00:15:50,760 --> 00:15:56,240 Speaker 1: The cash cow responsible for operating profits is the media segment, 256 00:15:56,320 --> 00:15:58,800 Speaker 1: the media line at DISN. There's nothing you can do about. 257 00:15:58,800 --> 00:16:00,640 Speaker 1: It's in a secular decline. And that's what a short 258 00:16:00,640 --> 00:16:04,960 Speaker 1: seller looks for, changing business landscape, structural changes in business landscape. 259 00:16:05,680 --> 00:16:08,480 Speaker 1: In terms of the entire market, if we look to 260 00:16:08,560 --> 00:16:11,120 Speaker 1: follow up on a question you had before, if we 261 00:16:11,200 --> 00:16:15,120 Speaker 1: look at gap profit margins, they're at the lowest level 262 00:16:15,160 --> 00:16:17,280 Speaker 1: since two thousand and six, at a point in time 263 00:16:17,600 --> 00:16:21,320 Speaker 1: where the SMP was seven hundred points lower. So there's 264 00:16:21,440 --> 00:16:24,960 Speaker 1: there's so much you can do in terms of financial engineering. 265 00:16:25,320 --> 00:16:27,320 Speaker 1: You have to look at your revenue on your top 266 00:16:27,360 --> 00:16:29,200 Speaker 1: line and the compression in margin. I want to rip 267 00:16:29,280 --> 00:16:31,440 Speaker 1: up the scripture and go back to shorting one on one. 268 00:16:31,480 --> 00:16:34,480 Speaker 1: The cardinal rule is shorting, whether you're Jim Chainos or 269 00:16:34,560 --> 00:16:37,400 Speaker 1: Doug cast or mom and pop at home, is you've 270 00:16:37,440 --> 00:16:40,240 Speaker 1: got to have a lousy stock in a lousy sector, 271 00:16:40,280 --> 00:16:43,040 Speaker 1: in a lousy market. You don't have all that right now, 272 00:16:43,080 --> 00:16:46,160 Speaker 1: do you know? And never ever a short valuation. Yeah, 273 00:16:46,960 --> 00:16:50,240 Speaker 1: But the bottom line is, do you wait with a 274 00:16:50,400 --> 00:16:55,200 Speaker 1: short view to get that short lousy stock, short sector, 275 00:16:55,360 --> 00:16:58,280 Speaker 1: you know, weak sector rather and finally get a market 276 00:16:58,320 --> 00:17:00,560 Speaker 1: that rolls over. We don't have that set up. You 277 00:17:00,600 --> 00:17:02,560 Speaker 1: tend not to show it the market and you tend 278 00:17:02,560 --> 00:17:06,400 Speaker 1: to show it individual stocks whether it's Disney, Apple, Nordstrom's, 279 00:17:06,480 --> 00:17:10,160 Speaker 1: foot Locker, UH and Nike. The life insurance companies. Let's 280 00:17:10,160 --> 00:17:12,960 Speaker 1: look at the life insurance companies really quickly. Who are 281 00:17:12,960 --> 00:17:19,320 Speaker 1: the anti beneficiaries of the central banks large sce if 282 00:17:19,320 --> 00:17:23,600 Speaker 1: they have reduced reinvestment opportunities. So you look at Lincoln National, 283 00:17:23,720 --> 00:17:26,399 Speaker 1: you look at Metropolitan Life. These stocks are down in 284 00:17:26,600 --> 00:17:28,200 Speaker 1: in the last year and a half in a wild 285 00:17:28,200 --> 00:17:30,600 Speaker 1: bowl market. So you have to really focus on individual 286 00:17:30,960 --> 00:17:32,600 Speaker 1: and why you to judge. And I say this with 287 00:17:32,680 --> 00:17:35,320 Speaker 1: great respect for both you and Mr Ackman. Bill Actman 288 00:17:35,359 --> 00:17:38,320 Speaker 1: has been a pinata and part of the pinionda is 289 00:17:38,359 --> 00:17:44,120 Speaker 1: his visibility um almost a notoriety of justifying his positions. 290 00:17:44,200 --> 00:17:48,600 Speaker 1: In all that is the work of Bill Ackman just 291 00:17:48,800 --> 00:17:52,119 Speaker 1: falling in love with a story and sticking with it. 292 00:17:52,200 --> 00:17:56,040 Speaker 1: How do you judge Mr Ackman's performance? I think he's 293 00:17:56,040 --> 00:18:01,640 Speaker 1: been too vocal um. There are only a handful, if that, 294 00:18:02,440 --> 00:18:07,320 Speaker 1: of investors that have delivered superior investment returns by investing 295 00:18:07,320 --> 00:18:11,840 Speaker 1: in a concentrated manner. Obviously, Warren Buffett is the iconic figure, 296 00:18:11,880 --> 00:18:15,840 Speaker 1: but even under stumbled with Sequoia, Blue, with Valiant and 297 00:18:16,240 --> 00:18:20,040 Speaker 1: other securities. So you have to be damn right on 298 00:18:20,119 --> 00:18:22,639 Speaker 1: the timing and the price you pay value is that 299 00:18:22,800 --> 00:18:25,359 Speaker 1: you get prices. What exposure do you take? Typically like 300 00:18:25,400 --> 00:18:27,480 Speaker 1: you're you're doom and gloom and Apple? Do you take 301 00:18:27,520 --> 00:18:31,159 Speaker 1: a or twelve? Now, when I am a very conservative 302 00:18:31,200 --> 00:18:33,800 Speaker 1: short seller, um, you know, I've made money in the 303 00:18:34,040 --> 00:18:37,280 Speaker 1: in an advancing market in the last two years. Um. 304 00:18:37,359 --> 00:18:41,240 Speaker 1: And as a result, I'm highly diversified. I try to 305 00:18:41,240 --> 00:18:46,280 Speaker 1: find risk defined products like puts or sythetic shorts that 306 00:18:46,320 --> 00:18:48,480 Speaker 1: short of stock by out of the money calls to 307 00:18:48,600 --> 00:18:52,480 Speaker 1: define my aggregate, my individual risk and aggregate portfolio risk. 308 00:18:52,760 --> 00:18:55,840 Speaker 1: So in terms of percentages, my lungs are never more 309 00:18:55,880 --> 00:18:57,600 Speaker 1: than three or four percent, and my shorts are never 310 00:18:57,680 --> 00:19:00,639 Speaker 1: more than two. I want to translate what Mr Cash 311 00:19:00,720 --> 00:19:02,119 Speaker 1: just said as a pro and I'm not going to 312 00:19:02,160 --> 00:19:07,280 Speaker 1: get into option theory right now. The mathematics of concentration, Folks, 313 00:19:07,960 --> 00:19:11,520 Speaker 1: is brutal. And the question is where's the tip point? 314 00:19:12,000 --> 00:19:14,200 Speaker 1: And I would say, Doug, with all my research and 315 00:19:14,280 --> 00:19:16,720 Speaker 1: math on this, it's about three percent exposure. I think 316 00:19:16,840 --> 00:19:19,960 Speaker 1: you get out over three and the proverbial phrases you're 317 00:19:21,400 --> 00:19:23,879 Speaker 1: I mean you're out over your skis and and maybe 318 00:19:23,880 --> 00:19:27,080 Speaker 1: with a great respect for Mr Ackman, those people that 319 00:19:27,200 --> 00:19:32,160 Speaker 1: are concentrated, your geniuses until you get that one that stumbles. 320 00:19:32,160 --> 00:19:35,480 Speaker 1: A great philosopher, May west One said too much of 321 00:19:35,520 --> 00:19:38,119 Speaker 1: a good thing at me wonderful and I am the anti. 322 00:19:38,280 --> 00:19:42,160 Speaker 1: Is this appropriate for radio? I don't know. I believe 323 00:19:42,160 --> 00:19:46,119 Speaker 1: in diversification, especially as a short seller, because of course 324 00:19:46,359 --> 00:19:49,040 Speaker 1: risk and reward is asymmetric. You can lose an infinite 325 00:19:49,119 --> 00:19:51,359 Speaker 1: map to the upside, and you can only make if 326 00:19:51,359 --> 00:19:53,960 Speaker 1: you find a bank tadcast with the serious partners. Barry 327 00:19:54,080 --> 00:19:57,640 Speaker 1: Ridholtz has been it's a hat trick of excitement, Barry. 328 00:19:57,760 --> 00:19:59,879 Speaker 1: Three days in a row. Now you don't work for 329 00:20:00,200 --> 00:20:03,520 Speaker 1: days twelve months of the year, right, no on on 330 00:20:03,600 --> 00:20:07,040 Speaker 1: the summer. During the summer, which is from February to 331 00:20:07,520 --> 00:20:10,920 Speaker 1: Memorial Data Labor Day, I will work remotely from an 332 00:20:11,000 --> 00:20:13,560 Speaker 1: undisclosed location. That's what I do. I do that every 333 00:20:13,600 --> 00:20:15,840 Speaker 1: day of the week. Very read also this, why don't 334 00:20:15,840 --> 00:20:18,560 Speaker 1: you jump in with your good friend so so, Doug. 335 00:20:18,600 --> 00:20:22,040 Speaker 1: I know that you've been really um not impressed with 336 00:20:22,119 --> 00:20:25,840 Speaker 1: the underlying fundamentals of this market, and I've heard you 337 00:20:25,920 --> 00:20:29,000 Speaker 1: discuss um fear of missing out, and there is no 338 00:20:29,080 --> 00:20:34,399 Speaker 1: alternative but how much of what's going on is also 339 00:20:34,440 --> 00:20:39,200 Speaker 1: a function of the unrelenting bid, As my colleague Josh 340 00:20:39,280 --> 00:20:43,000 Speaker 1: Brown calls it, the relentless flow of money into four 341 00:20:43,040 --> 00:20:46,879 Speaker 1: on one case, into iras where big shops like Van Garden, 342 00:20:46,920 --> 00:20:49,800 Speaker 1: Fidelity and Black Rock have to put this money to work. 343 00:20:50,600 --> 00:20:54,199 Speaker 1: What what is the alternative that is a constant that 344 00:20:54,600 --> 00:21:00,600 Speaker 1: inflow of money's institutional retail money into these products. There's 345 00:21:00,640 --> 00:21:04,760 Speaker 1: not much material change over time, But what is new 346 00:21:05,680 --> 00:21:12,400 Speaker 1: in today's horizon is the dominance of quand strategies, volatility, trending, 347 00:21:12,520 --> 00:21:16,280 Speaker 1: ris parity strategies, all these strategies which are key to 348 00:21:16,480 --> 00:21:20,800 Speaker 1: price and risk and are agnostic to income statements and 349 00:21:20,840 --> 00:21:25,600 Speaker 1: balance sheets when coupled with the other dominant fire being 350 00:21:25,920 --> 00:21:32,439 Speaker 1: um corporations repurchasing this dock and arguably indifferent towards price 351 00:21:33,600 --> 00:21:36,840 Speaker 1: or at least really poorly poorly time case in point, 352 00:21:36,880 --> 00:21:40,080 Speaker 1: Caterpillar over the last two years, Cisco ge over the 353 00:21:40,160 --> 00:21:48,600 Speaker 1: last fifteen years, standard standard beara for poor capital allocation strategy. 354 00:21:49,119 --> 00:21:53,359 Speaker 1: So UM, so the so called dominant investor has changed. 355 00:21:53,800 --> 00:21:56,040 Speaker 1: We go back. We went back in the prior segment 356 00:21:56,080 --> 00:22:00,600 Speaker 1: talking about the bank trust departments which created the early seventies, 357 00:22:00,840 --> 00:22:03,720 Speaker 1: then of course you had the proliferation of mutual funds, 358 00:22:04,320 --> 00:22:08,280 Speaker 1: and then you had UM the onset of a huge 359 00:22:08,320 --> 00:22:13,680 Speaker 1: hedge fund industry. So but today it's corporations and quant strategies. 360 00:22:13,960 --> 00:22:18,960 Speaker 1: When will end? Anyone knows? So, given this underlying bid 361 00:22:19,880 --> 00:22:22,399 Speaker 1: that you obviously don't like, and if whether it's quants 362 00:22:22,520 --> 00:22:25,840 Speaker 1: or corporations and buy backs or what have you, is 363 00:22:25,880 --> 00:22:29,240 Speaker 1: there really an alternative to fighting the tape? I mean, 364 00:22:29,960 --> 00:22:33,720 Speaker 1: it seems like most people with a long term horizon 365 00:22:34,359 --> 00:22:37,680 Speaker 1: have no choice but to participate in the equity markets 366 00:22:37,840 --> 00:22:40,399 Speaker 1: and the bond If you are an individual investor with 367 00:22:40,480 --> 00:22:44,040 Speaker 1: a normal risk appetite and profile, and the time frame 368 00:22:44,080 --> 00:22:47,680 Speaker 1: which is measured in a decade or more rather than 369 00:22:47,880 --> 00:22:50,600 Speaker 1: months or a year, the answer is yes, you're probably 370 00:22:50,680 --> 00:22:54,880 Speaker 1: best situation situated with a good money manager like yourself 371 00:22:55,160 --> 00:22:58,520 Speaker 1: or a passive investment fund like the Spiders, which are 372 00:22:58,640 --> 00:23:04,720 Speaker 1: tax efficient, low transaction course costs, and and very liquid um. 373 00:23:04,760 --> 00:23:07,640 Speaker 1: But for some of us who have time frames under 374 00:23:07,680 --> 00:23:11,280 Speaker 1: two or three years, that's a different story. So you know, 375 00:23:11,320 --> 00:23:13,919 Speaker 1: I see the as you said, I see the glass 376 00:23:13,920 --> 00:23:19,080 Speaker 1: half empty. So you mentioned hedge funds UM along with corpets. 377 00:23:19,119 --> 00:23:22,320 Speaker 1: But you you've run a hedge fund for a long time. Uh, 378 00:23:22,560 --> 00:23:24,760 Speaker 1: let's let's talk a little bit about the pressures of that. 379 00:23:24,840 --> 00:23:29,400 Speaker 1: Because I speak to people who are either familiar with 380 00:23:29,720 --> 00:23:33,240 Speaker 1: the various well known hedge fund managers or have money 381 00:23:33,240 --> 00:23:36,280 Speaker 1: with hedge funds, and I get the sense that they 382 00:23:36,280 --> 00:23:40,560 Speaker 1: don't have any idea that the pressures aren't even in 383 00:23:41,480 --> 00:23:44,280 Speaker 1: years or quarters, it's it's months and weeks. I mean, 384 00:23:44,280 --> 00:23:46,639 Speaker 1: as a hedge fund manager, do you look at the 385 00:23:46,720 --> 00:23:49,040 Speaker 1: clothes every day and one should it be different? If 386 00:23:49,080 --> 00:23:52,040 Speaker 1: you're charging two percent fixed and profits, that's the way 387 00:23:52,040 --> 00:23:54,679 Speaker 1: it should be. In other words, there's a huge demand 388 00:23:54,800 --> 00:23:59,760 Speaker 1: to deliver superior investment returns over date over a relatively 389 00:23:59,800 --> 00:24:03,680 Speaker 1: short period of time. It depends what your hedge hedgehogger, 390 00:24:03,720 --> 00:24:06,600 Speaker 1: your hedge fund manager. Has he earned the stripes over 391 00:24:06,680 --> 00:24:09,720 Speaker 1: a period of time. This is critical. The epsilon in 392 00:24:09,760 --> 00:24:12,080 Speaker 1: the background of the right hand side of the equation, folks, 393 00:24:12,080 --> 00:24:15,240 Speaker 1: there's always this Greek letter epsilon. Is the epsilon so 394 00:24:15,320 --> 00:24:18,760 Speaker 1: messed up right now, so screwed up that basically, hedge 395 00:24:18,760 --> 00:24:23,159 Speaker 1: funds can't create alpha unless it's luck. Yes, is the 396 00:24:23,200 --> 00:24:25,200 Speaker 1: short answer. I mean I mean, Barry, I think this 397 00:24:25,280 --> 00:24:27,920 Speaker 1: is the heart of the matter. Is is the systemic 398 00:24:28,000 --> 00:24:31,119 Speaker 1: risk out there is so odd because of this great distortion. 399 00:24:31,720 --> 00:24:35,880 Speaker 1: I'm not sure how you predict how you create predictive alpha. 400 00:24:36,320 --> 00:24:39,919 Speaker 1: I would modify that and say the great managers and 401 00:24:40,000 --> 00:24:43,000 Speaker 1: I include Lee Cooperman and Howard Marks. We could throw 402 00:24:43,080 --> 00:24:45,000 Speaker 1: Dug into the mix as one of the world's great 403 00:24:45,040 --> 00:24:48,520 Speaker 1: short sellers and Jim Chanouse. There alpha has been created 404 00:24:48,560 --> 00:24:51,919 Speaker 1: over years. Is it unreasonable for clients to say, what 405 00:24:52,040 --> 00:24:54,800 Speaker 1: have you done for me today? I don't think it's 406 00:24:54,880 --> 00:24:57,400 Speaker 1: unreasonable to ask what have you done for me over 407 00:24:57,400 --> 00:25:00,320 Speaker 1: the last six months or twelve months, given given the 408 00:25:00,560 --> 00:25:03,520 Speaker 1: given the given the cost structure of a hedgehunt two 409 00:25:03,520 --> 00:25:06,000 Speaker 1: and twenty. Don't be a stranger. I mean, try to 410 00:25:06,000 --> 00:25:08,080 Speaker 1: work a longer week than very ridh holds. That's a 411 00:25:08,119 --> 00:25:23,880 Speaker 1: good start. Doug cast with us, very ridholds with this Today, Barry, 412 00:25:23,920 --> 00:25:27,399 Speaker 1: I want to talk about another idea that you highlighted, 413 00:25:27,520 --> 00:25:31,800 Speaker 1: and this is Noah Smiths fabulous op ed on the 414 00:25:31,880 --> 00:25:36,280 Speaker 1: mathiness of economics, where he has a primal scream, I'm sorry, 415 00:25:36,320 --> 00:25:38,679 Speaker 1: you need some math? Do we need some math in 416 00:25:38,720 --> 00:25:43,280 Speaker 1: our investment? Sure? We we absolutely do using using data, 417 00:25:43,359 --> 00:25:48,240 Speaker 1: using numbers to figure out quantitatively, and Doug kind of 418 00:25:48,320 --> 00:25:53,639 Speaker 1: railed about that earlier. But understanding what works mathematically, understanding 419 00:25:53,720 --> 00:25:58,400 Speaker 1: mean reversion, understanding valuation, you can't do this without math. 420 00:25:58,720 --> 00:26:03,080 Speaker 1: The problem with economic it went from a social science 421 00:26:03,119 --> 00:26:07,919 Speaker 1: with zero math to what some people have called physics envy. 422 00:26:08,000 --> 00:26:12,240 Speaker 1: And that's the PG rated version of it um physics envy, 423 00:26:12,280 --> 00:26:16,600 Speaker 1: where it's all math, and that doesn't work. Humans are 424 00:26:16,680 --> 00:26:19,480 Speaker 1: in the middle of economics, and so you need a 425 00:26:19,480 --> 00:26:23,120 Speaker 1: little Bob Schiller mixed up with your Cliff ast nous 426 00:26:23,200 --> 00:26:25,359 Speaker 1: and and this is I like that, Cliff as I 427 00:26:25,440 --> 00:26:28,720 Speaker 1: got a great respect from Mr assass work Olivia Blanchard 428 00:26:28,760 --> 00:26:34,080 Speaker 1: publishing literally yesterday on this for Adam Posen's Peterson Institute. 429 00:26:34,400 --> 00:26:38,480 Speaker 1: Excuse me on D S G E, which is the 430 00:26:38,600 --> 00:26:44,240 Speaker 1: underlying theory of modern macro thinking, Richard Clarda, among others, 431 00:26:44,760 --> 00:26:48,639 Speaker 1: really providing leadership on this. Barry, would you suggest the 432 00:26:48,720 --> 00:26:52,840 Speaker 1: old economic math of the last twenty years doesn't work anymore? Well? 433 00:26:53,400 --> 00:26:57,560 Speaker 1: I think yes and no, yes with a little asterisk 434 00:26:58,000 --> 00:27:00,760 Speaker 1: when when you leave out the fact that at homo 435 00:27:00,840 --> 00:27:06,640 Speaker 1: economists doesn't exist, humans aren't perfectly rational humans aren't profit maximizing. 436 00:27:07,040 --> 00:27:09,920 Speaker 1: Humans often do what they think is in their best 437 00:27:09,960 --> 00:27:13,880 Speaker 1: interest at that moment, but we know isn't in their 438 00:27:13,920 --> 00:27:17,919 Speaker 1: long term interest. That's why reliance on models, reliance on 439 00:27:18,040 --> 00:27:22,040 Speaker 1: math has to be taken with a dose of what 440 00:27:22,200 --> 00:27:26,040 Speaker 1: about the random human factor amongst all of this. So 441 00:27:26,600 --> 00:27:29,520 Speaker 1: it's not that the math is wrong. The math math 442 00:27:29,640 --> 00:27:32,680 Speaker 1: is fine, and one day, when a robot robot overlords 443 00:27:33,080 --> 00:27:36,120 Speaker 1: replace us, I think economics will be far more accurate. 444 00:27:36,320 --> 00:27:41,040 Speaker 1: But as long as you have squishy, irrational, random humans 445 00:27:41,160 --> 00:27:45,199 Speaker 1: making uh irrational decisions, the math is going to be 446 00:27:45,600 --> 00:27:49,399 Speaker 1: far from perfect. Yeah, I just think it's incredibly important debate. 447 00:27:49,440 --> 00:27:51,400 Speaker 1: And I mean, I've got my own opinion. I don't 448 00:27:51,400 --> 00:27:54,920 Speaker 1: think anybody cares what I think. But even Richard Clarida, 449 00:27:55,520 --> 00:27:59,919 Speaker 1: who helped with Girdler, helped really codify this dialogue of 450 00:28:00,119 --> 00:28:04,760 Speaker 1: optimal strategies and the use of differential equations to to 451 00:28:04,920 --> 00:28:09,919 Speaker 1: lead to a complex dynamic system, even he says it 452 00:28:10,000 --> 00:28:12,560 Speaker 1: needs to be amended with a little bit of the 453 00:28:12,640 --> 00:28:18,680 Speaker 1: human condition. We are not profit maximizing rational beings. We 454 00:28:18,760 --> 00:28:22,920 Speaker 1: are Rara laden Um. The interview I did with Danny 455 00:28:22,960 --> 00:28:26,240 Speaker 1: Knaman just shows how our cognitive sides are just so 456 00:28:26,320 --> 00:28:29,360 Speaker 1: subject to failure. Barry, I want to dive into the 457 00:28:29,560 --> 00:28:33,080 Speaker 1: argument of the week, and you are on one side. 458 00:28:33,480 --> 00:28:39,240 Speaker 1: You don't trust the accountability of America's efficiency, America's productivity. 459 00:28:39,440 --> 00:28:41,280 Speaker 1: You think we're doing a lot better than the number 460 00:28:41,360 --> 00:28:45,560 Speaker 1: show that that's right. You know the George Boxes famous 461 00:28:45,640 --> 00:28:49,320 Speaker 1: aphorism or was all models are wrong, but some are useful. 462 00:28:49,360 --> 00:28:53,880 Speaker 1: And I'm slowly coming around too, um the recognition that 463 00:28:53,920 --> 00:28:56,640 Speaker 1: not only is the productivity model wrong, it may not 464 00:28:56,800 --> 00:29:00,720 Speaker 1: even be useful. I think we're measuring the wrong and 465 00:29:00,840 --> 00:29:05,080 Speaker 1: measuring it incorrectly. We have numbers coming up. Barry will 466 00:29:05,120 --> 00:29:07,720 Speaker 1: be great at giving us perspective and this as well. 467 00:29:08,200 --> 00:29:12,040 Speaker 1: When when a store comes out of retail store, I'm like, yeah, yeah, yeah, fine, 468 00:29:12,400 --> 00:29:17,160 Speaker 1: except retail now is flat on its back, which means 469 00:29:17,200 --> 00:29:23,280 Speaker 1: everybody pays attention to Mr Londgren's shop. Macy's is out. 470 00:29:23,800 --> 00:29:27,320 Speaker 1: They got a revenue beat that looks good. But boy 471 00:29:27,600 --> 00:29:32,080 Speaker 1: is Lundgren who's retiring and his new management are they adapting. 472 00:29:32,120 --> 00:29:38,160 Speaker 1: They will close one Macy's full line stores. They have 473 00:29:38,320 --> 00:29:44,440 Speaker 1: plans to recreate the physical store Presidents Burry, this comes 474 00:29:44,480 --> 00:29:49,080 Speaker 1: off the bombshell yesterday, the two designers, Michael Cores and 475 00:29:49,120 --> 00:29:55,080 Speaker 1: I believe Coach, basically went to Macy's and said, we're done. 476 00:29:55,640 --> 00:29:58,160 Speaker 1: We're done with the formula, We're done with the game. 477 00:29:58,440 --> 00:30:01,120 Speaker 1: And in the case of Michael Core, they pulled away 478 00:30:01,160 --> 00:30:04,840 Speaker 1: a huge part of their creativity from Maces. And you 479 00:30:05,000 --> 00:30:07,560 Speaker 1: assume all other department stores, yeah, there are. There are 480 00:30:07,560 --> 00:30:12,720 Speaker 1: a number of big secular cycles, big secular trends affecting 481 00:30:12,720 --> 00:30:15,840 Speaker 1: what we're seeing in retail, not the least of which 482 00:30:16,640 --> 00:30:19,800 Speaker 1: is Amazon. But now add to that. You know, the 483 00:30:19,880 --> 00:30:24,480 Speaker 1: baby boomers used to call it shopping, therapy, sports shopping. 484 00:30:24,800 --> 00:30:28,320 Speaker 1: There's a whole number of different phrases. We could all 485 00:30:28,400 --> 00:30:32,640 Speaker 1: lump it under the phrase materialism. The millennials, the group 486 00:30:32,720 --> 00:30:36,440 Speaker 1: of of kids out there, they're not car buyers, their sharers, 487 00:30:36,600 --> 00:30:43,040 Speaker 1: they're not material acquirers. Their experience, experiential um vacations and 488 00:30:43,120 --> 00:30:47,760 Speaker 1: things like that. This shift is affecting the entire retails. 489 00:30:47,920 --> 00:30:50,720 Speaker 1: I would agree with that, but I think as much 490 00:30:51,000 --> 00:30:54,200 Speaker 1: dynamic is how we forget and Bary, you're great at this. 491 00:30:54,880 --> 00:30:57,920 Speaker 1: We forget that the top line of any business operation 492 00:30:58,600 --> 00:31:03,800 Speaker 1: is about unit dynamic and about price dynamics, and with 493 00:31:03,960 --> 00:31:08,360 Speaker 1: great respect to the many lives of Terry, London. The 494 00:31:08,480 --> 00:31:14,200 Speaker 1: price dynamics now are brutally efficient because of digital technology, 495 00:31:14,240 --> 00:31:18,080 Speaker 1: because of savness, and because maybe over capacity. There's just 496 00:31:18,200 --> 00:31:22,160 Speaker 1: too much stuff out there. I continue to be fascinated. 497 00:31:22,600 --> 00:31:26,160 Speaker 1: So so you're a retailer, you're a good manufacturer, and 498 00:31:26,240 --> 00:31:28,200 Speaker 1: you want to sell into different markets, and you have 499 00:31:28,280 --> 00:31:30,960 Speaker 1: to figure out a way how to sell this same 500 00:31:31,000 --> 00:31:37,000 Speaker 1: widget or the same address, or this same product into 501 00:31:37,200 --> 00:31:41,560 Speaker 1: five different markets. So the early adopters are gonna pay 502 00:31:41,600 --> 00:31:46,120 Speaker 1: full price even before the season starts. Then it goes 503 00:31:46,200 --> 00:31:49,320 Speaker 1: with your normal Okay, what's back to school? Barry help 504 00:31:49,400 --> 00:31:52,360 Speaker 1: me here? Uh? That seems to start sometime around when 505 00:31:52,400 --> 00:31:55,640 Speaker 1: school ends August. Were already late into the here we 506 00:31:55,640 --> 00:31:59,320 Speaker 1: are it's August, uh eleventh with late into back to school? 507 00:31:59,320 --> 00:32:01,120 Speaker 1: I mean one of these folks that want to look 508 00:32:01,160 --> 00:32:02,760 Speaker 1: at it, you know, many of you know. I spent 509 00:32:02,840 --> 00:32:04,840 Speaker 1: a lot of time looking at the fashion industry. It's 510 00:32:04,880 --> 00:32:08,200 Speaker 1: from my family from years ago. Is the girl magazines 511 00:32:08,280 --> 00:32:11,400 Speaker 1: in September are the size of the Manhattan phone book? 512 00:32:12,000 --> 00:32:13,840 Speaker 1: Is this the year where they're not? I don't know. 513 00:32:13,880 --> 00:32:18,760 Speaker 1: I gotta see what looks like Vogue, Glamor going down 514 00:32:18,840 --> 00:32:25,000 Speaker 1: the list, Uh Conde nest losses are everybody else online 515 00:32:25,280 --> 00:32:37,600 Speaker 1: game joining us now and it is a perfect, perfect, 516 00:32:37,840 --> 00:32:44,160 Speaker 1: perfect time to speak to Stephen Ratner will advisors, but 517 00:32:44,960 --> 00:32:48,760 Speaker 1: a number of jobs. I've often said this. He walked 518 00:32:48,760 --> 00:32:50,920 Speaker 1: by me in the Renaissance Building when he was Czar 519 00:32:51,080 --> 00:32:54,280 Speaker 1: da car a few years ago with a governmental scowl 520 00:32:54,360 --> 00:32:56,680 Speaker 1: on his face. It was not a scholar he had 521 00:32:56,720 --> 00:33:00,200 Speaker 1: at Brown in economics a few years ago. How did 522 00:33:00,240 --> 00:33:02,840 Speaker 1: it take you to recover from being the cars are? 523 00:33:02,960 --> 00:33:06,080 Speaker 1: Was it like two weekends in the Hampton's to take 524 00:33:06,160 --> 00:33:09,959 Speaker 1: like three years to recover? I didn't need to recover 525 00:33:10,040 --> 00:33:13,160 Speaker 1: because it was a fantastic experience and I was really 526 00:33:13,200 --> 00:33:16,960 Speaker 1: so glad to serve and that was the experience of 527 00:33:16,960 --> 00:33:19,480 Speaker 1: a lifetime. I want to talk to you with the 528 00:33:19,520 --> 00:33:22,440 Speaker 1: Macy's news today. Macy's down fifty one percent. They get 529 00:33:22,480 --> 00:33:25,800 Speaker 1: a bounce here, folks off the better than good earnings. 530 00:33:26,360 --> 00:33:29,760 Speaker 1: About the strange thing called buy and hold. You're a 531 00:33:29,800 --> 00:33:33,400 Speaker 1: money guy, you manage your money. Full disclosure for Mr Bloomberg. 532 00:33:33,520 --> 00:33:36,520 Speaker 1: Michael Bloomberg is UH majority owner of Bloomberg LP and 533 00:33:36,520 --> 00:33:39,880 Speaker 1: of course at this radio station. How does Steve Rattner 534 00:33:40,720 --> 00:33:44,080 Speaker 1: defined buy and hold, and how do you deal with 535 00:33:44,120 --> 00:33:48,080 Speaker 1: the realities of buy and hold when structurally something like 536 00:33:48,200 --> 00:33:51,960 Speaker 1: Macy's Crater's I mean in terms of whether you should 537 00:33:52,000 --> 00:33:56,880 Speaker 1: sell your stock or yeah, you should sell your stock. Look, yeah, 538 00:33:56,920 --> 00:34:00,120 Speaker 1: but when if you we have a long term stratedgy G, 539 00:34:00,920 --> 00:34:04,160 Speaker 1: it gets harder to know when to sell that stock. Well, 540 00:34:04,200 --> 00:34:06,760 Speaker 1: as John Maynard Keynes was said to have said, but 541 00:34:06,840 --> 00:34:09,839 Speaker 1: didn't actually say, when the facts change, I changed my mind. 542 00:34:09,840 --> 00:34:12,760 Speaker 1: What do you do? So you make an investment decision? 543 00:34:13,000 --> 00:34:16,400 Speaker 1: And yes, virtually every investment decision we make is with 544 00:34:16,440 --> 00:34:20,280 Speaker 1: the idea of a long, long term hold. But if 545 00:34:20,360 --> 00:34:23,280 Speaker 1: if the world changes, if the company changes, if things change, 546 00:34:23,440 --> 00:34:26,480 Speaker 1: then you change your mind and you move on. So 547 00:34:26,560 --> 00:34:32,840 Speaker 1: let's ask a broader question. When you're buying equities generally, 548 00:34:33,080 --> 00:34:37,239 Speaker 1: are you selecting individual stocks, are you buying broader indices? 549 00:34:37,640 --> 00:34:40,919 Speaker 1: What sort of approach do you think makes sense if 550 00:34:41,000 --> 00:34:43,680 Speaker 1: you have that long term perspective. Well, first of all, 551 00:34:43,760 --> 00:34:46,359 Speaker 1: I'm not a stock picker. I'm a private equity guy. 552 00:34:46,440 --> 00:34:49,759 Speaker 1: So we employ stock pickers both inside the firm as 553 00:34:49,800 --> 00:34:53,600 Speaker 1: well as outside money managers. And let's let's just these 554 00:34:53,600 --> 00:34:56,040 Speaker 1: are basic things. You guys know much better than I do. 555 00:34:56,360 --> 00:35:00,279 Speaker 1: The US equity markets are highly efficient. The probability that 556 00:35:00,360 --> 00:35:02,840 Speaker 1: any investor is going to be able to outperform the 557 00:35:02,920 --> 00:35:06,279 Speaker 1: US equity markets, particularly when fees are added, is not 558 00:35:06,480 --> 00:35:10,440 Speaker 1: so high. Um, we believe that we have identified managers 559 00:35:10,480 --> 00:35:13,239 Speaker 1: and over time they have produced so called alpha in 560 00:35:13,239 --> 00:35:16,879 Speaker 1: the US equity markets net of fees. But it's really hard. 561 00:35:16,920 --> 00:35:19,080 Speaker 1: It's one of those don't try this home kind of 562 00:35:19,080 --> 00:35:23,879 Speaker 1: thanks Barry. Robert Kirby Capital Guardian Trust L A years ago, 563 00:35:23,920 --> 00:35:27,920 Speaker 1: the legendary Robert Kirby said, if you're making two percentage 564 00:35:27,920 --> 00:35:32,840 Speaker 1: points net, that's real big success over benchmark. That's a 565 00:35:32,920 --> 00:35:36,040 Speaker 1: huge success. We would we would we would send champagne 566 00:35:36,040 --> 00:35:39,320 Speaker 1: to any US equity manager who consistently produced two bases 567 00:35:39,360 --> 00:35:44,399 Speaker 1: points Champagne to come on the show. Yes I do. 568 00:35:44,480 --> 00:35:48,080 Speaker 1: I buy my way on here early in the morning. 569 00:35:48,560 --> 00:35:50,279 Speaker 1: But you know, outside the U S it's a little 570 00:35:50,280 --> 00:35:52,759 Speaker 1: bit different. There are many much less of it. There 571 00:35:52,760 --> 00:35:55,839 Speaker 1: are much less efficient markets around the world. Uh. Even 572 00:35:55,840 --> 00:35:58,560 Speaker 1: places like Japan, where a lot of money managers left 573 00:35:58,640 --> 00:36:00,799 Speaker 1: because they just didn't think they could make money, has 574 00:36:00,840 --> 00:36:03,920 Speaker 1: become a pretty inefficient market. So we look around the world, 575 00:36:03,960 --> 00:36:06,520 Speaker 1: we look at developed ex North America, we look in 576 00:36:06,560 --> 00:36:10,800 Speaker 1: emerging markets. We we just were speaking to the folks 577 00:36:10,800 --> 00:36:14,360 Speaker 1: at black Rock who are describing a sudden influx of 578 00:36:14,440 --> 00:36:18,720 Speaker 1: capital into e m Where should the long term investor 579 00:36:18,800 --> 00:36:21,880 Speaker 1: be looking. Do you only focus on the efficient US 580 00:36:22,360 --> 00:36:24,960 Speaker 1: or do you take advantage of inefficiencies and look around 581 00:36:24,960 --> 00:36:29,320 Speaker 1: the world. The long term individual investor or even institutional 582 00:36:29,320 --> 00:36:32,360 Speaker 1: investor in the US is fundamentally operating as a dollar 583 00:36:32,440 --> 00:36:36,399 Speaker 1: based institution, and so I believe that they should keep 584 00:36:36,440 --> 00:36:39,960 Speaker 1: the majority of their assets in the US, recognizing their 585 00:36:40,040 --> 00:36:43,759 Speaker 1: highly efficient markets, perhaps simply investing them passively unless they 586 00:36:43,800 --> 00:36:47,040 Speaker 1: feel they have the skilled identified managers. And then you know, 587 00:36:47,200 --> 00:36:49,319 Speaker 1: and then in a well routed portfolio, you take say 588 00:36:49,320 --> 00:36:52,400 Speaker 1: another twenty and you put that into the developed world Europe, 589 00:36:52,400 --> 00:36:54,640 Speaker 1: in Japan, and you might take ten percent or a 590 00:36:54,680 --> 00:36:57,120 Speaker 1: little bit more and put that into e m UH 591 00:36:57,120 --> 00:36:58,839 Speaker 1: and put that into M where so you've got your 592 00:36:58,880 --> 00:37:00,960 Speaker 1: risk management and improved in the zone as well as 593 00:37:00,960 --> 00:37:05,600 Speaker 1: your currency alignment. Tom, what do you think? I think 594 00:37:05,600 --> 00:37:09,200 Speaker 1: that what is fascinating here in the great distortion that 595 00:37:09,239 --> 00:37:12,960 Speaker 1: we're living in is what the new actual assumption would be. 596 00:37:13,000 --> 00:37:14,919 Speaker 1: Now you like to say you're a private equity guy, 597 00:37:15,239 --> 00:37:18,120 Speaker 1: and you're always downplaying your skills. Blowny, You know what 598 00:37:18,160 --> 00:37:21,440 Speaker 1: the actual number is? What is our deep money? What 599 00:37:21,520 --> 00:37:24,839 Speaker 1: are our insurance companies and our pension plans gonna do 600 00:37:25,360 --> 00:37:29,400 Speaker 1: when they're looking at a new actual assumption. That's come on, Steve, five, 601 00:37:30,040 --> 00:37:34,360 Speaker 1: This this is a disaster that is not well recognized. 602 00:37:34,400 --> 00:37:36,400 Speaker 1: I know it is well recognized in this room and 603 00:37:36,400 --> 00:37:40,280 Speaker 1: probably in this building. But the situation for pension funds, 604 00:37:40,280 --> 00:37:43,320 Speaker 1: which historically have invested a substantial part of their assets 605 00:37:43,360 --> 00:37:46,279 Speaker 1: and fixed income and used to use that income to 606 00:37:46,320 --> 00:37:49,640 Speaker 1: match against their liabilities, they are in deep doo doo, 607 00:37:49,760 --> 00:37:52,600 Speaker 1: not to use a technical term, because exactly as you're saying, 608 00:37:52,880 --> 00:37:55,120 Speaker 1: if you've got assumptions of seven seven and a half, 609 00:37:55,160 --> 00:37:57,360 Speaker 1: some of them probably still even have eight percent in 610 00:37:57,440 --> 00:38:00,680 Speaker 1: your calculations, you're making two percent at the moment, you 611 00:38:00,719 --> 00:38:03,160 Speaker 1: are getting deeper and deeper into a very bad deep hole. 612 00:38:03,200 --> 00:38:05,440 Speaker 1: I say it's a huge problem. I mean, Barry, I 613 00:38:05,440 --> 00:38:08,720 Speaker 1: think this is like the major major issue going into 614 00:38:08,760 --> 00:38:12,680 Speaker 1: two thousand seventeen. Uh, Steve Wrtner, we run out of time. 615 00:38:12,719 --> 00:38:14,560 Speaker 1: Thank you so much for coming. Don't be a stranger. 616 00:38:14,880 --> 00:38:19,480 Speaker 1: I'm happy to come anytime. I have my Bloomberg badge. Okay, 617 00:38:19,480 --> 00:38:23,080 Speaker 1: bring champagne. Steve Bratner with one of the associates on 618 00:38:23,440 --> 00:38:29,000 Speaker 1: buying hold or lack of buying hold. Thanks for listening 619 00:38:29,080 --> 00:38:33,560 Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews 620 00:38:33,600 --> 00:38:39,000 Speaker 1: on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm 621 00:38:39,000 --> 00:38:43,360 Speaker 1: on Twitter at Tom Keane, Michael McKee is at Economy 622 00:38:43,400 --> 00:38:47,160 Speaker 1: Before the podcast. You can always catch us worldwide. I'm 623 00:38:47,200 --> 00:38:48,080 Speaker 1: Bloomberg Radio