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Speaker 1: global business, finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: So about a week ago, Bloomberg News was that with
Speaker 2: a story. It was about how airlines first class makeovers
Speaker 2: are giving the rich hotel rooms in the sky. That
Speaker 2: means carriers are investing billions of dollars to upgrade cabins.
Speaker 2: They've got sofas, double beds, TVs, desks, wardrobes, mini bars,
Speaker 2: and in some cases, Matt Maller walking showers.
Speaker 3: That's awesome. I know, I think that rung sign.
Speaker 2: It's like your flight. You're gonna take it at over
Speaker 2: the weekend, right.
Speaker 3: Yeah, No, I'm flying to Detroit over the weekend. It'll
Speaker 3: probably be on an incredibly uncomfortable narrow body jet in coach. Okay,
Speaker 3: sorry about that.
Speaker 2: Well listen. If that doesn't cut it, though, these upgrades
Speaker 2: that some are enjoying in first class, you can always
Speaker 2: buy your own private jet, including you, Matt Miller. So
Speaker 2: let's get into that with our next guest. Janine Janarelli.
Speaker 2: She is founder and president of par Avion. It's an
Speaker 2: international business aircraft sales and a marketing firm, and she
Speaker 2: joins us once again on zoom in Houston, Texas. Janine,
Speaker 2: nice to have you back here on Bloomberg. It's been
Speaker 2: a little while. Tell us about the market and what
Speaker 2: you're seeing right now and how everything is really kind
Speaker 2: of settled in post pandemic, Aha.
Speaker 4: Settled in? Well. The term that you're hearing oft used
Speaker 4: among the trade is a return and normalization, and it
Speaker 4: certainly feels that way now that we're through Q one
Speaker 4: and well into Q two, as compared to the last
Speaker 4: two years, Whereas in late twenty one and all of
Speaker 4: twenty two we were saying, who knew a pandemic could
Speaker 4: be good for business aviation? But it was. And now
Speaker 4: that we're on the backside of that, we see I
Speaker 4: personally see and I hear it echoed by my peers,
Speaker 4: a pronounced slowdown in the number of inquiries, the level
Speaker 4: of activity, and you know, prices are starting to correct.
Speaker 3: So is that because I mean, I guess during the pandemic,
Speaker 3: if you had enough money to fly, not just privately,
Speaker 3: but more importantly, separately from everyone else. You did that
Speaker 3: so that you wouldn't get sick. Now maybe people are
Speaker 3: less worried about that and willing to you know, as
Speaker 3: Carol said, you know airlines. Commercial airlines are putting your
Speaker 3: own room on the flight, so you might as well
Speaker 3: just take that instead of buying a G five point
Speaker 3: fifty or whatever it is.
Speaker 4: Well, there's still a huge difference between commercial airline travel
Speaker 4: and that of flying on your own aircraft. I mean,
Speaker 4: let's just talk about the convenience. First of all, there's
Speaker 4: not necessarily a deadline by which time they're going to
Speaker 4: close the door and you've missed your flight. Secondly, it's
Speaker 4: not the restrictive sort of feel with business or private
Speaker 4: aviation as it has with commercial commercial. You're sharing the
Speaker 4: space still with dozens, if not hundreds of fellow passengers
Speaker 4: that are trampling down the same aisle, using the same restrooms,
Speaker 4: taking advantage of all the well limited open space that
Speaker 4: you have, Whereas when people gravitated towards private aircraft during
Speaker 4: the pandemic, it was exactly that, creating a health corridor,
Speaker 4: so they knew who they were mingling with, what they
Speaker 4: were touching from the moment they left their home till
Speaker 4: they reached their destination. You are correct there is a
Speaker 4: slide back towards commercial travel, but I would say most
Speaker 4: of the draw Sorry.
Speaker 2: No, well you don't even want to jump in because
Speaker 2: I am curious. You said normalization pronounced slow down. I
Speaker 2: am curious what that means in your business? Is it
Speaker 2: down fifty percent? Is it down forty percent? I mean,
Speaker 2: I'm looking at your website.
Speaker 5: You know.
Speaker 2: What have I got here? Assessna citation, a Bombardier Global
Speaker 2: seventy five hundred. You're talking about Planesecho for at tens
Speaker 2: of millions of dollars, hundreds of millions of dollars. These
Speaker 2: are not an expensive items. And I'm just curious, what's
Speaker 2: a slowdown in this space look like?
Speaker 4: Well, you know, slow down is probably let's talk activity.
Speaker 4: Whereas before you could even get the airplane the market,
Speaker 4: you had a ready buyer for it. It was gone.
Speaker 4: The advertising was just done to sort of serve as
Speaker 4: a means by which to get other people to call in.
Speaker 4: Today we are now seeing lead times where I should say,
Speaker 4: bring the aircraft to market, and you're going to sit
Speaker 4: on the market ninety one hundred and twenty days on average.
Speaker 4: With most of the aircraft, I would say the flight
Speaker 4: or the decline in activity is being felt at the
Speaker 4: top end for sure, as well as at the entry level.
Speaker 4: The two to seven million dollar business jet that people
Speaker 4: jumped on a in a panic, in a frenzied buying,
Speaker 4: I would say through late twenty right up until Q
Speaker 4: three twenty two.
Speaker 3: Right, that's all gone away, by the way.
Speaker 2: Uh.
Speaker 3: In terms of you know, owning a private jet and
Speaker 3: using it, how many people actually fly their own? Do
Speaker 3: you have clients like that?
Speaker 4: A few, but very few? That is the small percentage
Speaker 4: of the entire let's say ownership pool that actually pilot
Speaker 4: their own aircraft. So at least in the category airplane
Speaker 4: I work with.
Speaker 3: What So, what are the hottest ones that you sell?
Speaker 3: What's the private jet? If I, you know, have some
Speaker 3: liquidity event and I'm all of a sudden holding a
Speaker 3: billion cash, I come to you and say, can you
Speaker 3: sell your bitcoin? Yeah, Jennine, give me the hottest it
Speaker 3: jet that you've got. What's the one that everybody wants?
Speaker 5: OK?
Speaker 4: Got Global seventy five hundred that you're taking a good
Speaker 4: look at. If you come into a billion dollars, that
Speaker 4: is the aircraft for you, you can go anywhere in the
Speaker 4: world quite comfortably. But the other side of the it jet,
Speaker 4: let's call it an IT sector, is the mid size,
Speaker 4: super mid sized popular airplane, perfect size, ideally suited for
Speaker 4: continental US travel, and the charter operators love it.
Speaker 2: You know what I'm curious too about I think the
Speaker 2: last time we talked, and again it was a few
Speaker 2: years ago, I think cross border was a big thing
Speaker 2: for you, and so were entrepreneurs. Who is buying today,
Speaker 2: And I'm curious entrepreneurs maybe think Silicon Valley Bank or
Speaker 2: slow down if that's had an impact.
Speaker 4: Well, X sector certainly has seen a slow down and
Speaker 4: a decline of inquiries coming from that particular industry. But
Speaker 4: entrepreneurs are still my sweet spot. And remember there are
Speaker 4: entrepreneurs doing many different things, and one market declines, another
Speaker 4: one rises, one industry declines, and other rises. In the
Speaker 4: aircraft sales world, we make money coming and going in
Speaker 4: economic cycles. As far as the cross border that's starting
Speaker 4: to pick up, but still lagging behind demand within the
Speaker 4: United States.
Speaker 3: If I only have, like I don't know, fifty sixty
Speaker 3: million bucks, but I have a few friends with fifty
Speaker 3: or sixty million bucks. Do you recommend people going in
Speaker 3: on a jet or where do you steer someone away
Speaker 3: from that idea? I mean, does it really make sense
Speaker 3: to buy your own jet? Isn't it better to be
Speaker 3: able to lease it out occasionally?
Speaker 4: Well, what you buy is driven by your need. For sure,
Speaker 4: how many hours per month you anticipate you'll be flying,
Speaker 4: what's the distances you're going to be traveling. While partnership
Speaker 4: in aircraft is not uncommon, it doesn't always work because
Speaker 4: you have conflicting needs or conflicting schedules. So if you
Speaker 4: had three friends and each of you had fifty million apiece,
Speaker 4: sure pull and buy one jet. That might facilitate some
Speaker 4: of the trips. But ultimately I think you'll find you
Speaker 4: each need to your own.
Speaker 2: You know, I do wonder too, Jinny, like there are weird,
Speaker 2: kind of weird things that we sometimes look at for
Speaker 2: global economic indicators, And I'm curious about what you are
Speaker 2: seeing in your business as it says to you that
Speaker 2: a recession is on the horizon, or how would you
Speaker 2: describe kind of the economic outlook the.
Speaker 4: Big R word. So that's obviously been something that's been
Speaker 4: discussed within the trade for oh since the Middle of
Speaker 4: last year, because we know it's looming. An economic cycle
Speaker 4: is inevitable, and we've been through a boom period in
Speaker 4: our business, and I would say that business checks historically
Speaker 4: have been a pretty good leading indicator of things to come.
Speaker 4: I think the waters are a bit muddied at this
Speaker 4: time that we're not predicting what's coming next. The slowdown
Speaker 4: that we're feeling, I think was inevitable as a result
Speaker 4: of several things. One the one hundred percent bonus appreciation
Speaker 4: going away at the end of last year. The pandemic
Speaker 4: frenzied buying is pretty much over. Most everyone made their selections,
Speaker 4: got their deals done. And now that's why we call
Speaker 4: it a return to normalization, a normal turn time on
Speaker 4: the aircraft. The number of inquiries are equalizing, and you know,
Speaker 4: as prices slide, it's going to stimulate demand once again.
Speaker 4: And I have to say that I'm not sure prices
Speaker 4: are going to slide dramatically. They're going to correct slightly.
Speaker 4: And one of the questions I have on a panel
Speaker 4: that I'm going to host next week at the European
Speaker 4: Business Aviation Conference is if this prices slid to twenty
Speaker 4: nineteen level, is that still a win for everybody.
Speaker 3: I hear you. I think about that all the time myself. Actually,
Speaker 3: what's that you know, if we drop just back to
Speaker 3: twenty nineteen levels, is that bad? Or is that a win?
Speaker 3: We've gone through this incredible pandemic. You know, it's it
Speaker 3: doesn't seem like it's such a horrible stat anyway, Janine,
Speaker 3: great having you on. I always love to get a
Speaker 3: check on the private jet industry, Janine Ganarelli. They are
Speaker 3: founder and president of par Avion.
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Speaker 5: All right?
Speaker 2: Chairs in Morgan Stanley Charlie talking certainly about the top stories,
Speaker 2: including Morgan Stanley which is the stockdown about two and
Speaker 2: a half percent. It is, I believe still the most
Speaker 2: read story on the Bloomberg about James Gorman, who transformed
Speaker 2: the company, who has been CEO. He's now in his
Speaker 2: fourteenth year. He's getting ready to leave in the next
Speaker 2: twelve months at least as CEO. So what you need
Speaker 2: to know from Bloomberg News Finance reporter Shrinaajen in studio
Speaker 2: with us our Bloomberg Interactive Broker Studio along with Bloomberg
Speaker 2: News Wall Street reporter Shinali Bosik. First of all, I'm
Speaker 2: going to count down from three and you have to
Speaker 2: say yes or no whether you were surprised that he
Speaker 2: made this announcement. Wait, wait, three to one. Okay, nicely done,
Speaker 2: nicely done. Okay, Why were you not surprised?
Speaker 6: Although I would, She said yes, she was surprised.
Speaker 7: Oh, you know, I don't think I'm surprised about the announcement.
Speaker 7: I'm surprised that he said it at the annual meeting
Speaker 7: this morning in this fashion. Morgan Stanley kind of has
Speaker 7: a weird way of it.
Speaker 3: Agree. I mean, it was like, of course, he's been
Speaker 3: there for thirteen years, he's done a bang of he's
Speaker 3: ready to go.
Speaker 7: He's twenty sixty five in July.
Speaker 2: How many How many years has Jamie been there?
Speaker 6: Fifty five years?
Speaker 3: Okay, but see since two thousand and five. All right,
Speaker 3: it's still it's still was a headline where when I
Speaker 3: saw it, I went, wow, well, because it's good news,
Speaker 3: so it's not like it's unexpected but it still was
Speaker 3: kind of a surprise.
Speaker 2: Okay, Well, and investors are a little bummed out, So
Speaker 2: what do we need to know?
Speaker 6: Which is the nicest compliment? Right, If you've been a
Speaker 6: CEO for fourteen years and you say you're going to.
Speaker 2: Step down rallies, you really have to get worse.
Speaker 3: I mean, they're not that bummed out in a down market?
Speaker 3: What's Morgan Stanley shares off two percent?
Speaker 7: Yeah?
Speaker 3: Percent? Not for bank stock going to say in a
Speaker 3: down market? You know, I mean I'm a lot of
Speaker 3: that day. If I were leaving, I would want it
Speaker 3: to be at least decimated.
Speaker 2: Stop jap mortgage just down.
Speaker 6: For he's decimated. Yes, that will speak for your legacy.
Speaker 2: Okay, So our parents are calling in and saying, Okay,
Speaker 2: what do we need to know about this? So what
Speaker 2: do we need to know?
Speaker 3: It's an important move.
Speaker 6: But James Gorman has been one of the longest tenure
Speaker 6: on Wall Street leaders. You know, you would put him
Speaker 6: in the same club as Brian Moynen, who took over
Speaker 6: as CEO at Bank of America around the same time
Speaker 6: in twenty ten. And the only other longer term veteran
Speaker 6: out there is Jamie Diamond. Who will always be the
Speaker 6: CEO of JP Morgan into twenty one hundred, but almost
Speaker 6: fourteen years at the top. For the last three years,
Speaker 6: he's been very public about executing this succession plan. It
Speaker 6: started up, started off with the leadership overall. In twenty
Speaker 6: twenty one, you got a firm timeline. Then that's when
Speaker 6: we found out that James Gorman told the Morgan Stanley
Speaker 6: board that he plans to be around for about three
Speaker 6: more years in twenty twenty three. Today he says another year.
Speaker 6: So it's all pretty much going a long plan. But
Speaker 6: it still is the momentous occasion because he took on
Speaker 6: a bank that almost collapsed during the previous global financial crisis.
Speaker 6: All of them did right well, Morgan Stanley in particular.
Speaker 4: The check the check.
Speaker 7: Yeah, they had to bring in a big infusion of
Speaker 7: capital from FFGP.
Speaker 5: No.
Speaker 6: It was a real mess, and a lot of his
Speaker 6: first few years was tackling with that because they were
Speaker 6: in deep trouble for the first few years of James
Speaker 6: Gorman's leadership. But what we've also seen over the past
Speaker 6: decade is a real transformation. Now you have a bank
Speaker 6: that has a dual engine of the investment bank that
Speaker 6: seems to be working just fine. The top three Goldman
Speaker 6: JP Morgan Stanley. That's how we think about the investment
Speaker 6: banking space. They are far ahead of everyone else. And
Speaker 6: then this giant wealth management juggernaut, four point five trillion
Speaker 6: dollar manager in the wealth space, bigger than anyone else
Speaker 6: out there. Even after the UBSCS merger, even after the
Speaker 6: UBS Credit Swie merger, Morgan Stanley will still be the
Speaker 6: largest wealth manager in the world. And that tells you something.
Speaker 6: And now that they've set it up that way, it
Speaker 6: seems like this is about the right time for James
Speaker 6: Gorman to step aside.
Speaker 7: So that leads us to the people.
Speaker 2: So who comes in? So who?
Speaker 7: So there's a story that our former boss, Mike Moore,
Speaker 7: who is now our boss's boss's boss, he had broke
Speaker 7: back in twenty fifteen, and it was this moment where
Speaker 7: Goldman Morgan Stanley planned to cut fixed income jobs across
Speaker 7: all regions. It was a big moment on Wall Street,
Speaker 7: and it came a month after this fellow named Ted
Speaker 7: Pick had taken over. And Ted Pick is someone who
Speaker 7: rose under colmb Kalaher who is now the chairman of UBS,
Speaker 7: and he had really tough positions. He had really had
Speaker 7: surgically had to fix some division that Morgan family, to
Speaker 7: Tree's point, that had not done very well after the
Speaker 7: financial crisis. So he's one of the people that is
Speaker 7: in line. But then you also and by the way,
Speaker 7: that division is loyal to each other. The question is
Speaker 7: if he does not become the CEO, does that cause
Speaker 7: an attrition problem underneath those ranks. Then to Sheree's point.
Speaker 2: Wait, so they have a good bench.
Speaker 7: Huge. Yeah, they have a bench of three people, two
Speaker 7: that are particularly watched, Ted Pick being one of them,
Speaker 7: and the other being Andy Sapperstein, who she has written
Speaker 7: about really recently in the Markets magazine story who is
Speaker 7: the wealth boss? And this man brings in or is
Speaker 7: expected to bring in a trillion dollars of net new
Speaker 7: assets that the wealth manager every three years. He is
Speaker 7: just raking in money.
Speaker 6: And two interesting things I'd like to point out. Anytime
Speaker 6: you have you know, you identify the likely successes, and
Speaker 6: you go out and survey the analyst. Generally you have
Speaker 6: some level of consensus. They might still say it's a
Speaker 6: close race, but everyone probably leans towards one candidate. But
Speaker 6: when we have heard from analysts today about half of
Speaker 6: them are like, yeah, it's a very close race, but
Speaker 6: we think Andy Seperstein's more likely wealth management has been
Speaker 6: their growth engine that's responsible for two thirds of their valuation,
Speaker 6: and the other half are saying, no, it's probably Ted Pick.
Speaker 6: The wealth management success is priced in more growth. Isn't
Speaker 6: necessarily expected that growth trajectory might be the same. But
Speaker 6: if you had to see real upshot, which is if
Speaker 6: you wanted a tequila shot on your smoothie, that's going
Speaker 6: to come from your investment back and that's where Ted
Speaker 6: piggrain and.
Speaker 2: Where the growth will come right is is what.
Speaker 6: Some of the analysts are saying. Not everyone agrees, but
Speaker 6: to me, it's just interesting that there is this neat
Speaker 6: little divide in the analyst universe. And the other thing
Speaker 6: I'd like to point out, and I think it's underappreciated
Speaker 6: when we think about James Gorman's tenure, and there will
Speaker 6: be more and more reflection and discussion on this. The
Speaker 6: Morgan Stanley that James Gorman joined was rife with political infighting.
Speaker 6: He joined Morgan Stanley from Merrill Lynch right after the
Speaker 6: former CEO of Morgan Stanley, Phil Purcell, was ousted in
Speaker 6: a coup people hated each other, divisions hated each other.
Speaker 6: True that he doesn't seem to be very much the
Speaker 6: case these things.
Speaker 7: Remember you know Morgan Stanley is the white shoe shop, right,
Speaker 7: I mean they don't fight publicly there, and.
Speaker 2: So it doesn't mean they don't fight, right, Well, No.
Speaker 7: What is interesting is they fight in a way. Well,
Speaker 7: it's not that they compete, and they set it up
Speaker 7: to compete. So if you think about how amazing the
Speaker 7: succession story has been since Gorman has taken over, think
Speaker 7: about how many high profile presidents of Paul Tauman went
Speaker 7: off and founded his own firm. Her now the chairman
Speaker 7: of UBS. And I remember colmbe was probably at that
Speaker 7: point not going to take over a CEO of Morgan
Speaker 7: Stanley anymore, leading the you know the baton here to
Speaker 7: Ted pick and Andy and all that. But uh, you
Speaker 7: know Rockefeller, Greg Fleming, right, I mean, this is a
Speaker 7: history of talent.
Speaker 3: Come, I don't hear any women A great question.
Speaker 7: And you know we've in the commercial break we were
Speaker 7: talking about this as well, and they've been criticized on
Speaker 7: the Hill for this as well. It's not just women.
Speaker 7: Morgan Stilly has lost a lot of high profile women
Speaker 7: in recent years. I think Shelley O'Connor, she was once
Speaker 7: on that succession list as well. She yes, I think
Speaker 7: I think Carla Harris, who is not necessarily in a
Speaker 7: line of succession, but one of the most senior black
Speaker 7: women on Wall Street. So not only talent drain here,
Speaker 7: but also the lack of a pipeline high enough you're
Speaker 7: welcome anytime.
Speaker 3: Does this put any pressure on Superstar bank CEO the
Speaker 3: king himself, Jamie Diamond. I mean, he's been at JP
Speaker 3: Morgan forever. I know that over the same period they've
Speaker 3: outperformed in terms of the stock. But he's sixty seven
Speaker 3: years old, He's had his own health issues. Why doesn't
Speaker 3: he at some point say like, okay, I'm done too.
Speaker 7: You know what, I have a question for Shree. Do
Speaker 7: you think that they have to take someone from inside
Speaker 7: of JP Morgan or do you think they could bring
Speaker 7: back on that James or Charlie Sharp at this point
Speaker 7: do you think they've telegraphed to interesting.
Speaker 6: You know that that makes this massive supposition that there
Speaker 6: will be a day when Jamie Diamond.
Speaker 3: It may never happen, guys.
Speaker 7: It has to happen one day.
Speaker 3: He really loves his job with.
Speaker 7: JP Morgan's Monday, he will be asked.
Speaker 3: Wait, Carroll, you're saying, do you think AI could be
Speaker 3: the new CEO of JP Morgan?
Speaker 2: They could be a Jamie and get to this point
Speaker 2: right metaverse. Who knows what could happen?
Speaker 7: Do you think Jamie is sitting there recording his sayings
Speaker 7: and what he would do so even when he's not.
Speaker 3: There, because he uploaded his consciousness.
Speaker 7: That's exactly what I was thinking.
Speaker 2: All right, great you, great conversation, Happy Friday, More to come.
Speaker 2: I know I thought Fridays were supposed to be quiet?
Speaker 2: What's up with this? Shinettarrojen, thank you so much, senior
Speaker 2: financial porter of a Bloomberg News here in our studio,
Speaker 2: Shineli bask Wall Street Reporter, Bloomberg News.
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Speaker 1: York station Just Say Alexa, playing Bloomberg eleven thirty.
Speaker 2: It's a story that is being also read by a
Speaker 2: lot of folks on the Bloomberg we're talking about.
Speaker 8: It's among the most.
Speaker 3: Cloning the quand strategy. I love this story. Yes, absolutely,
Speaker 3: Not that.
Speaker 2: He isn't interested, he's just not focused right now. But
Speaker 2: that's okay.
Speaker 3: He's focused. I'm just not organized, So yeah, you know it.
Speaker 2: To me, seventy billion dollar business on Wall Street cloning
Speaker 2: quad trades.
Speaker 3: To me, there were a couple of really big kind
Speaker 3: of bank innovation slash trading stories. Yes, that I was
Speaker 3: excited to talk about this morning. So yeah, I'm focused
Speaker 3: on this all right. I know, I just didn't know
Speaker 3: this was coming in. We're doing cookies right later, so
Speaker 3: I thought maybe you were.
Speaker 1: Yea.
Speaker 2: Sam Potter has stayed up really late to do the
Speaker 2: story with us, so let's get to it. He is
Speaker 2: the editor on The story was written by Justina Lee,
Speaker 2: Bloomberg News Senior editor and ETF. Sam Potter with his
Speaker 2: on zoom in London. Sim I'm so sorry. We'll get
Speaker 2: Matt focused for you. So glad you would do this
Speaker 2: because we did really want to talk about it. We
Speaker 2: think it's really important in terms of the innovation that's
Speaker 2: going on. So tell us about this story and what
Speaker 2: exactly Wall Street is up.
Speaker 8: To Yeah, no problem. So this is a really interesting one.
Speaker 8: It's a story that I know that Justine has been
Speaker 8: trying to put together for a while. But essentially it's
Speaker 8: about these products that the big Wall Street banks have
Speaker 8: been hawking to their major institutional clients, so pension funds, insurers, endowments,
Speaker 8: family offices. They're called QIS. It stands for quantitive investment strategies,
Speaker 8: and that's terribly dry and terribly boring and probably designed
Speaker 8: to be. But what they really is is kind of
Speaker 8: knock off quant strategies. So the kind of the kind
Speaker 8: of clever quant strategies, think trend following, think momentum, think value,
Speaker 8: these things that have a real basis in academia and
Speaker 8: that are pioneered by the likes of h u R
Speaker 8: Capital Management. Essentially, what the banks are doing is taking
Speaker 8: that idea, taking that trading strategy, and turning it into
Speaker 8: a swap or a structured product, and that is something
Speaker 8: that they can package and sell very easily. It's something
Speaker 8: that those big investors they can pick and choose the
Speaker 8: ones they want. They're not stuck with, you know, whatever
Speaker 8: the hedge fund is pursuing. They can pick with strategies
Speaker 8: they want to take. And yeah, it's it's turned into
Speaker 8: a kind of huge and largely unnoticed business in Wall
Speaker 8: Street because it's taking place between these big you know
Speaker 8: a few of the big banks and their big clients.
Speaker 8: It doesn't really hit the hit the headlines in the
Speaker 8: same way that that you know, normal quant business does.
Speaker 3: I mean, I think it's so cool. It's kind of
Speaker 3: like the the trade that Steve Carell was trying to
Speaker 3: negotiate with Ryan Gosling in The Big Short if you
Speaker 3: remember so. And one thing I was wondering when I
Speaker 3: read the story is does Cliff Asnaz get mad about this?
Speaker 3: I mean, if these banks are like taking his ip
Speaker 3: essentially and then packaging it up and selling it off.
Speaker 3: You know, the people who invented these quant trades, or
Speaker 3: the professors that dreamt up these ideas and figured out
Speaker 3: how to you know, put them into action, how do
Speaker 3: you how do you just take their trades and sell them?
Speaker 8: Well, yeah, it's a it's an interesting one. You mentioned, Cliff.
Speaker 8: We didn't We didn't speak to a QR for this one,
Speaker 8: and I'm not sure they would have commented had we
Speaker 8: approached them. Obviously, QR is one of the most famous
Speaker 8: hedge funds pursuing these quant strategies. But of course, as noted,
Speaker 8: the strategies didn't originate with these hedge funds. You know,
Speaker 8: they were dreamt up in the classroom, and famously that's
Speaker 8: actually where cliff assnests started off in Chicago Booth School.
Speaker 8: I think for that reason, because it did originate in academia,
Speaker 8: the big hot hedge funds, they can't get too upset
Speaker 8: about it, But I think what they we do have
Speaker 8: a hedge fund voice in the story, and what they
Speaker 8: object to, perhaps more than anything, it's not so much
Speaker 8: the strategy being used, but any suggestion that these qis
Speaker 8: are comparable to what they deliver. The qis are essentially
Speaker 8: simplified versions, and by turning it into a swap or
Speaker 8: a structured product, you can't make changes to it, right,
Speaker 8: It's going to be a fixed thing. And the big
Speaker 8: thing that hedge funds would say is that they're a
Speaker 8: bit more so mistigated than that that they're constantly evolving
Speaker 8: these things. And the main objection and actually that they
Speaker 8: have is pointing out that banks don't have a fiduciary
Speaker 8: duty to the client in the same way that a
Speaker 8: hedge fund would and that means that cost of execution
Speaker 8: and things like that are not necessarily going to be
Speaker 8: contained in the same way.
Speaker 2: Well, you can see why hedgephones don't like it. They've
Speaker 2: got to justify their fees right in what they charge.
Speaker 2: But having said that, sam do these strategies Ultimately, these
Speaker 2: cloning strategies pay off for investors.
Speaker 8: I mean, there's such a ranger that there are more
Speaker 8: than four thousand according to the estimates in the story,
Speaker 8: more than a thousand added last year, So it really
Speaker 8: is a bit of a boom last year that those
Speaker 8: who what the industry say about sixty one percent of
Speaker 8: strategies actually made money, which is not bad in the
Speaker 8: sort of sophisticated trading space. But you know, as with
Speaker 8: all of these quant strategies risk premiere as they are known,
Speaker 8: a big question mark always does hang over them over
Speaker 8: how effective they really are, because of course many of
Speaker 8: them are based on historic data on looking back, the
Speaker 8: question is whether that work's going forward. And we do
Speaker 8: mention one study from twenty twenty one in the story
Speaker 8: that actually suggested that these strategies don't provide the diversification
Speaker 8: that investors are looking for, at least not when the
Speaker 8: markets go wrong. So yeah, I guess it depends on
Speaker 8: your specialty as an investor. And it is worth noting
Speaker 8: that it's big institutions, people who really know their sort
Speaker 8: of risk management and their allocations, who are using these things,
Speaker 8: presumably as part of a wider clever strategy, as who.
Speaker 3: Are using these incredibly sophisticated products. But it is innovative
Speaker 3: on the part of the banks. And I noticed another
Speaker 3: story that I thought jibed well. JP Morgan is expanding
Speaker 3: its algorithmic trading offering to US Treasury investors, betting that
Speaker 3: computer powered strategies can make further headway there into the
Speaker 3: world's biggest bond market. So there's just a couple of stories,
Speaker 3: and I should note both of them out of London, Sam,
Speaker 3: with your name on them. That that just further this
Speaker 3: narrative that banks are finding new ways and more more
Speaker 3: interesting ways to make money, right, They're just coming up
Speaker 3: with these new products, and I guess that means investors
Speaker 3: must need them.
Speaker 8: Well, you know, every one of those products has got
Speaker 8: some sort of edge. You know, it's gonna be cheaper,
Speaker 8: it's gonna be faster, it's gonna reduce your your bit
Speaker 8: off spread in the case of the algoes. In the
Speaker 8: treasury market, they are always, especially the big banks guys
Speaker 8: like JP Morgan and their peers, they are always pushing
Speaker 8: the envelope. They're always trying to stay ahead of what
Speaker 8: client demand is going to be. In the case of
Speaker 8: the in the case of the algoes. In the treasury market,
Speaker 8: what we've seen in treasuries has been a slow kind
Speaker 8: of evolution at the treasury market and trading platforms, and
Speaker 8: it's giving investor's different options, different ways to access them.
Speaker 8: And so this is a question of JP Morgan trying
Speaker 8: to stay at at the sort of leading edge of that,
Speaker 8: if you like. The question for me really is, and
Speaker 8: what I'm hoping to dig into the in the sort
Speaker 8: of year ahead is what the impact, the sort of
Speaker 8: secondary impact of some of this stuff is. So with
Speaker 8: the algos, for instance, ostensibly they're supposed to help with liquidity,
Speaker 8: right they reduced a bit are spread, they make it
Speaker 8: easier and quicker to execute, But there are also worries
Speaker 8: that they create an illusion of liquidity that's not going
Speaker 8: to be there in a sell off, or that they
Speaker 8: could accelerate a sell off and make things worse. So right,
Speaker 8: we're pushing very hard. Yeah, it's pushing very hard to
Speaker 8: be at the front, but the consequences.
Speaker 2: We got to wrap up. Sam, But it does feel
Speaker 2: like the test is still yet to be had, right,
Speaker 2: like when everything starts to come undone Ultimately does this
Speaker 2: help institutional investors or hurt or hurt them?
Speaker 8: Hurt?
Speaker 3: Exactly? Remember after the Great Financial Crisis, everybody was like,
Speaker 3: why are we dealing with these incredibly complicated derivatives? Exactly?
Speaker 2: It wasn't like a savior, Sam Potter, your gem. Thank
Speaker 2: you so much for staying up because we really wanted
Speaker 2: to do this story. Have an incredible weekend. Sam Potter
Speaker 2: is senior editor in ETFSR at Bloomberg News, joining us
Speaker 2: on Zoom from London. You know, we don't make a
Speaker 2: lot of people's ours around here.
Speaker 3: True, it's awesome to be a czar and we love
Speaker 3: Sam's work on the etf IQ show as well. I
Speaker 3: should note, right, but staying up until what time is
Speaker 3: it there? It's like nine to thirty. That's beyond the pale.
Speaker 8: It's not too bad.
Speaker 3: You need to get off to the pub. It's going
Speaker 3: to be last call in an hour and a half.
Speaker 2: Have an incredible weekend.
Speaker 5: Bromuck on.
Speaker 3: A journal.
Speaker 2: Now about you let me drive?
Speaker 3: Oh no, no, no, no, who's gone to drive? Honey?
Speaker 1: Please the gravels.
Speaker 3: Let's wait, I want to drive.
Speaker 8: It's a question.
Speaker 1: This is the drive to the globe dot com. Think
Speaker 1: we'll buy a round yelled it on Bluebirg Radio.
Speaker 2: All right, everybody, we've got about eighteen minutes left in
Speaker 2: the trading session, getting ready to wrap up the day
Speaker 2: and the week overall. And we've got stocks just off
Speaker 2: their lows, little changes down about zero point three percent,
Speaker 2: point three percent of both the down the NAZAC as
Speaker 2: you heard from Charlie, down about two ten percent in
Speaker 2: the S and P. But it's really been the yield trade,
Speaker 2: the treasury trade in particular, that's been bouncing around right now.
Speaker 2: That two year note Matt four point three? Who yes,
Speaker 2: and we were above that?
Speaker 3: Yes, uh it was. There were very serious moves in
Speaker 3: the two year we saw the Republicans walk out of
Speaker 3: that debt ceiling negotiation. The first thing I did, actually,
Speaker 3: when I saw that headline cross my screen was type
Speaker 3: WB and pull up the two year and put a
Speaker 3: g ip of it up. Because you can see the
Speaker 3: huge spike in yields. You know, if people are worried
Speaker 3: that the government is going to default on its debt,
Speaker 3: the first thing they do is sell off the shortest
Speaker 3: term bonds, and that drives the yield obviously high.
Speaker 2: It want to be holding because I'm going to get
Speaker 2: defaulted on, all right, So let's do what John Porter
Speaker 2: has to say. He's chief investment officer of equities at
Speaker 2: Newton Investment Management, a global investment firm. On he joins
Speaker 2: us on the phone in Boston. John, Hey, good to
Speaker 2: have you here with Matt and myself. It's been a
Speaker 2: little bit of a wacky week again. Debt ceiling certainly
Speaker 2: on front and center for everyone. How are you factoring
Speaker 2: it in at all when it comes to strategies right now?
Speaker 5: Great to be here. Yes, I think that the debt
Speaker 5: ceiling is something that I've honestly been surprised at how
Speaker 5: complacent equity market has been towards it. Sort of two minds.
Speaker 5: On one hand, short term, this is a massive obstacle
Speaker 5: for the market to try and clear over the next
Speaker 5: few weeks, and if there's any kind of setbacks as
Speaker 5: you see in just about glimpse of today, I think
Speaker 5: there could be a significant rise and volatility in the markets,
Speaker 5: and I don't think equity investors are positioned for that.
Speaker 5: On the other hand, if I take a two three
Speaker 5: four month time horizon, I'm confident that you know, minds
Speaker 5: will prevail in Washington, and they'll do the right thing.
Speaker 5: They'll find a compromise, they'll set their agendas aside, and
Speaker 5: we'll clear this and we'll move on to other issues.
Speaker 5: There's an awful lot of issues, I think for equity
Speaker 5: markets to digest, but the debt ceiling is the one
Speaker 5: that's foremost in our mind right now.
Speaker 3: I mean, I'll take the other side of that trade
Speaker 3: because and I wouldn't have until a couple of days ago,
Speaker 3: and I was reminded that we just suspend the debt
Speaker 3: ceiling all the time. If you look back over the
Speaker 3: past five years, we've been above it more than we've
Speaker 3: been below it because of the COVID pandemic. But you've
Speaker 3: had people on both sides of the eye. I'll say,
Speaker 3: we're not going to default, from Kevin McCarthy to Mitch
Speaker 3: McConnell to President Biden himself, which makes which leads me
Speaker 3: to believe that if they really do run into an
Speaker 3: impass that pushes us too close, They'll just suspend it
Speaker 3: for a period.
Speaker 5: It's a reasonable scenario, Matt, I would I would caution
Speaker 5: you not to believe everything that you read. And you know,
Speaker 5: I take all of the headlines that we hear from
Speaker 5: both sides with with the DOSA skepticism, and I would
Speaker 5: say if the debt ceiling was only the only obstacle
Speaker 5: for the market, I would completely share your view. We've
Speaker 5: dealt with this time and again for years, for decades,
Speaker 5: and it will be in the rearview mirror at some
Speaker 5: point and we'll move on to other things. I think
Speaker 5: the challenge is there's so many other things that I
Speaker 5: think the market has to digest. Business momentum is slowing.
Speaker 5: The bank stress that reared to Tugley headed mark, I
Speaker 5: think is leading to reduce credit availability. Consumer savings is
Speaker 5: about to be exhausted, you know, on and on. Inflation
Speaker 5: is a concern. I think the expectations of FED rate
Speaker 5: cuts are premature. So I think that with all of
Speaker 5: those other issues beyond the debt feeling, I think it's
Speaker 5: a challenging set up for equity markets right now.
Speaker 3: You know, to me, one of the biggest worries is
Speaker 3: going to be liquidity, right, and John authors or to
Speaker 3: column about how liquidity, the fact that the Fed has
Speaker 3: provided so much in the BTLP program is what's driven
Speaker 3: this rally. But we've seen stories the past couple of
Speaker 3: days about expectations for treasury bill issuance that could be
Speaker 3: as high as a trillion dollars in the short span
Speaker 3: of a short few months after the debt ceiling negotiations
Speaker 3: are done, and that could mop up liquidity. Does that
Speaker 3: worry you at all?
Speaker 5: It worries me a tremendous amount. Matt. It sounds like
Speaker 5: you've been in some of our internal research meetings at
Speaker 5: Newton this week, because we're literally just talking about this
Speaker 5: flood of liquidity that's come into the mark market over
Speaker 5: the past few weeks and months, in part to offset
Speaker 5: the banking relaid stress with the bank failures, in part
Speaker 5: in anticipation of the debt ceiling showdown. But that liquidity
Speaker 5: is going to come out of the markets, and if
Speaker 5: you want to know what moves markets in the short term,
Speaker 5: it's hard to find a factor that's more important than liquidity.
Speaker 5: And that's due to be drawn out of the market
Speaker 5: sooner rather than later.
Speaker 2: So are you positioning ahead of that yet?
Speaker 5: We're trying to Look, there's a fear of missing out
Speaker 5: trade in the market right now that you have to respect,
Speaker 5: and no more so than in the technology area. And
Speaker 5: look at Newton, we're long term investors. We're investing with
Speaker 5: a two three year time horizon, but we also make
Speaker 5: marginal investment decisions every day. And speaking for myself, in
Speaker 5: addition to my CIO responsibilities, I manage all of our
Speaker 5: guest growth strategies. I have cash a little bit higher.
Speaker 5: I'm trying to trade my portfolio is a little bit
Speaker 5: more to take take advantage of some tactical opportunities I see.
Speaker 5: I definitely think that investors should be pruven and have
Speaker 5: a little dry powder in the face. So what I
Speaker 5: expect will be a minimum rising volatility, but potentially a
Speaker 5: bit of a downward movement inequities. I just see the
Speaker 5: risk award for equities to being pretty unattractive right now.
Speaker 3: What are the tactical opportunities you've seen.
Speaker 5: I've been trimming tech as an example. Look, this has
Speaker 5: been a perfect storm for technology this year. You had
Speaker 5: low expectations coming into the year, you had cost disciplined
Speaker 5: by some of the biggest market cap companies. That's led
Speaker 5: to strong earnings growth. The cyclical business, the recession fears
Speaker 5: that have been so prevalent in the market is they
Speaker 5: continue to subside. Texts benefited from that interest rate expectations falling.
Speaker 5: It's a group that benefits from that. You know, AI Heights.
Speaker 5: I probably Sulo's did that first. There's been a lot
Speaker 5: of things that have come together to make tech a
Speaker 5: great investment so far. Year to date really probably the
Speaker 5: thing that's that's held up equity markets. But I see
Speaker 5: that trade is getting long in the tooth.
Speaker 2: I do wonder. Yeah, it's funny. I was looking at
Speaker 2: I think there was a column too in the Bloomberg
Speaker 2: about different technical indicators, and if you look at the
Speaker 2: relative strength index on the Nasdaq one hundred, we definitely
Speaker 2: are seeing an over bought indicator in a big way.
Speaker 2: But we've seen that for several months only for uh
Speaker 2: the names in the Nasdaq and tech names in particular.
Speaker 2: Some of the big ones just continue to fuel higher.
Speaker 2: But you think it's time for a little bit of
Speaker 2: a break here, and just got about thirty seconds.
Speaker 5: I think, so I mean to get you know, the
Speaker 5: Nasacs up twenty one percent your day, the Russell two
Speaker 5: thousands up one percent your day, the narrow narrowness in
Speaker 5: the market that the chase for performance in those megacap
Speaker 5: tech stocks, you know, I think is you know, running
Speaker 5: on fumes at this point.
Speaker 2: All right, we got it one. Hey, listen, John, have
Speaker 2: a great weekend.
Speaker 3: Thank you so much, right talking to you, John.
Speaker 4: So appreciate it.
Speaker 2: John Porter's chief investment officer of Equities at Newton Investment Management,
Speaker 2: joining us on the phone from Boston. This is the.
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