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Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane

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Speaker 1: jay Ley. We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg We

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Speaker 1: hear a lot about, you know, will Facebook be regulated

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Speaker 1: and if so, how much will that affect their bottom line?

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Speaker 1: Here to weigh in on that and other Washington policy

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Speaker 1: matters is Isaac Boltanski, director of Policy Reacher Research for

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Speaker 1: Compass point Um. Isaac, thank you so much for joining us.

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Speaker 1: I want to really start with Facebook because this is

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Speaker 1: what's dragging down futures ahead of the New York Open

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Speaker 1: How realistic do you think it is that the folks

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Speaker 1: in d C will actually make some kind of move

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Speaker 1: on Facebook in the near term. I think my city

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Speaker 1: is going to talk about it a fair amount, but

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Speaker 1: I don't believe that's gonna lead to actual action. You know,

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Speaker 1: Congress has a way of moving from headline or crisis

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Speaker 1: to headline or crisis, and there was some focus on

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Speaker 1: social media's impact on the electoral process UH at the

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Speaker 1: end of last year on Capitol Hill, but as Congress

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Speaker 1: often does, it simply moved on. So we should expect

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Speaker 1: sporadic herings and some pointed commentary key lawmakers. But as

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Speaker 1: for actual legislative action, it's unlikely in the near So Isaac,

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Speaker 1: you're taking off legislative action with respect to the fact

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Speaker 1: that fifty million people's UH information was exposed to an

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Speaker 1: analytics company that helped President Trump get elected, and their

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Speaker 1: information was disclosed through the Facebook platform, take us behind

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Speaker 1: the scenes. How much will Facebook have to spend end

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Speaker 1: in order to ward off any legislative action in UH

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Speaker 1: lobbying efforts in discussions or will this just be sort

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Speaker 1: of a hot topic for a moment and that everyoneill

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Speaker 1: move on. I think that all of the media, excuse me,

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Speaker 1: social media firms are going to have to increase their

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Speaker 1: d C um presence over the next few years. The

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Speaker 1: conversations and particularly the policy conversations around UH content and

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Speaker 1: and proper channel protection and data security and data fluidity,

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Speaker 1: all of those things are going to continue in d C,

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Speaker 1: and so all of those firms are going to have

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Speaker 1: to increase their presence in town even though the likelihood

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Speaker 1: of actual action remains well well, the CEOs might be

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Speaker 1: spending a little bit more time in Washington, d C.

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Speaker 1: As well. I imagine, Isaac, how long before we see

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Speaker 1: the CEOs of these big tech firms just lined up

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Speaker 1: in front of Congress. I think it's something that's absolutely possible.

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Speaker 1: During this Congress, you hear more and more as you

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Speaker 1: walk the halls to the Hill concerns about the impact

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Speaker 1: of social media on the election process. And with the

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Speaker 1: mid terms only a few months away, I think that

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Speaker 1: there's a real shot that that could happen over the

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Speaker 1: next few months. Um, if it's not, then it will

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Speaker 1: be soon because this topic is going to hang around

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Speaker 1: Capitol Hill for the foreseeable future. So certainly this was

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Speaker 1: another instance playing into the bigger story of what happened

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Speaker 1: in the election previously, what was Russia's involvement, What did

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Speaker 1: the tech firms do or rather did not do. And

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Speaker 1: at the center of all of that, Isaac is Special

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Speaker 1: Counsel Robert Mueller, And we're sitting here trying to work

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Speaker 1: out what happens next. And if he gets fired, how

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Speaker 1: significant would it be weigh in place, Isaac. Yeah, Look,

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Speaker 1: weekends at the White House, right, I Mean, we had

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Speaker 1: a pretty active we had a pret active weekend, with

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Speaker 1: the dismissal of Mr McCabe, the tweet about Mr Mueller's investigation.

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Speaker 1: You know, when you take all these things together, these

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Speaker 1: actions appear to have at least raised the specter of

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Speaker 1: President Trump dismissing Special Counsel Robert Mueller. Now, late last night,

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Speaker 1: the White House lawd one of the White House lawyers

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Speaker 1: excuse me, actually President Trump's lawyer came out and said

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Speaker 1: that there is no consideration of firing Mr Mueller if

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Speaker 1: it happened. If it happened, though, Isaac trying to understand,

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Speaker 1: drain the politics from this, because certainly, if you ask

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Speaker 1: a Democrat, how significant it would be that give you

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Speaker 1: one answer. To ask a Republican, they'll give you another.

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Speaker 1: Drain the politics from this? Constitutionally speaking, how significant would

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Speaker 1: that be? You look, most of the personnel questions and

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Speaker 1: volatility that's come out of this White House has been

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Speaker 1: akin to reality TV spectacle. Dismissing Mueller would skew far

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Speaker 1: closer to an actual viable constitutional crisis. There would be

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Speaker 1: broad bipartisan rebukes from both fins uh, both sides of

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Speaker 1: the aisles, and both chambers on Congress. And I think

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Speaker 1: that it would become the number one talking point heading

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Speaker 1: into the mid terms. UM, So this would have fire

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Speaker 1: and Mueller would have actual, real world, tangible impact, unlike

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Speaker 1: the personnel carousel that we've seen at the White House

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Speaker 1: for the past fourteen months or so. So, Isaac. Something

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Speaker 1: else that's going to have real world impact is some

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Speaker 1: of the proposals to roll back financial regulation. And we

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Speaker 1: have seen the recent aspect of Dodd Frank that's getting

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Speaker 1: rolled back that affects particularly smaller UH banks that are

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Speaker 1: in communities. I'm just wondering, from your perspective, has the

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Speaker 1: potential regulatory rollback been priced into US financial stocks already.

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Speaker 1: I think that it's it's coming close, um, when we

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Speaker 1: when we look at some of these banks, especially because

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Speaker 1: UH the one of the core benefits, which is raising

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Speaker 1: the fifty billion threshold UM is only raised to one

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Speaker 1: billion and imediately, and you have to wait another eighteen

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Speaker 1: months before it's raised to two and fifty billion. And

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Speaker 1: that increase, ultimately I think will be a tailwind for

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Speaker 1: M and A, which is part of the story here

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Speaker 1: with community and regional banks. My my only point of

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Speaker 1: caution is it will take time for that tailwind to

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Speaker 1: fully materialized when you're talking about among community banks, correct

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Speaker 1: community banks, and and and even moving into the regional space.

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Speaker 1: So in other words, you expect the regulatory rollbacks to

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Speaker 1: pave the way to bigger regional banks. Absolutely, okay, and

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Speaker 1: that hasn't been priced in. I don't think so ISAK

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Speaker 1: going forward? This has been a bipartisan push. What are

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Speaker 1: the limits of that? Well, look, this bill that we've

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Speaker 1: been following that got out of the Senate and is

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Speaker 1: now being held up in the House as Republican leadership

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Speaker 1: wants to add more to it. This bill is the

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Speaker 1: last train leaving the station. From a legislative perspective, um,

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Speaker 1: this has been eight years in the making, it's been

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Speaker 1: uh and and furthermore, every single data points suggests that

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Speaker 1: Democrats have a tailwind at their back heading into the midterms,

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Speaker 1: especially in the House. So this bill from a legislative perspective,

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Speaker 1: this is it. After this is done, we're going to

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Speaker 1: have to start focusing on the alphabet soup of financial regulators,

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Speaker 1: the O, c c f D, I, c c FDB

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Speaker 1: and the others to look for ractual changes. So for izing,

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Speaker 1: anyone's talking about infrastructure, are they just whistling in the wind. Uh. Well,

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Speaker 1: we're going to get a spending bill tonight, and that

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Speaker 1: spending bill should see increases in some infrastructure spending programs.

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Speaker 1: But other than that, that's it for this Congress. There

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Speaker 1: is simply no legislative will UH to act on broader

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Speaker 1: infrastructure policy in this Congress yet. I think we'll see tonight.

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Speaker 1: Always great to catch up with you. Thank you very

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Speaker 1: much for joining us, sir. The compass points senior VP

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Speaker 1: and policy analysts, connecting the world of Washington, d C.

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Speaker 1: Into the world of Wolf Street. So we bring Bob

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Speaker 1: Michael in. Let's bring him in. JP Morgan Asset Management,

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Speaker 1: Chief Investment Officer and head IF the Global Fixed Income

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Speaker 1: Currency in Commodities Division. He has the longest title on

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Speaker 1: the street. But Michael. Love catching up with you, sir

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Speaker 1: and looking forward to the FED decision later this week.

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Speaker 1: What are you looking out for? Well, we're looking at

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Speaker 1: a number of things. I think the first thing we're

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Speaker 1: looking for is expectations for the rest of the year.

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Speaker 1: Since four members have to shift to go to four

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Speaker 1: hikes from three, we don't think it's going to happen.

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Speaker 1: We think that they'll still indicate three, but they'll end

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Speaker 1: up doing four over the course of the year. And

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Speaker 1: then I'm looking at the longer term m DOT. We're

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Speaker 1: just below three pc. Do they start to move that

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Speaker 1: up to three, say three and an eighth percent. What's

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Speaker 1: the catalyst for the longer term dots to drift higher, Bob,

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Speaker 1: Because most people would say that the tax bill that's

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Speaker 1: gone through is going to be positive for growth. You

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Speaker 1: see it in the numbers. This year, the Fed may

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Speaker 1: react to that, but next year is more doubtful. In

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Speaker 1: the year after that even more doubtful. Well, it looks

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Speaker 1: to us that that the long term dot has become coincident.

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Speaker 1: And if you believe that there has been a pick

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Speaker 1: up and global growth, global inslation, things look good over

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Speaker 1: the intermediate horizon. Some of the rhetor are coming out

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Speaker 1: of the e C. B was also pretty positive talking

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Speaker 1: about how Europe is doing well. I think it's all

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Speaker 1: part of the normalization process, so we are expecting it

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Speaker 1: to move higher. So, Bob, not all rate hikes are

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Speaker 1: the same. And as the FED is creeping towards the

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Speaker 1: neutral rate, at what point does this create opportunity in

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Speaker 1: the short end in the words, people going into cash

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Speaker 1: and short term debt at the expense of risk assets. Well,

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Speaker 1: right now it's all going the other way. Right there's

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Speaker 1: a lot of pressure on the front end of the

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Speaker 1: market because you've had a tremendous amount of funding come

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Speaker 1: out of the treasury billion in bill issuance. You've got

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Speaker 1: the repatriation of cash coming in from from overseas and

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Speaker 1: a lot of that's been liquidated, and the cross currency

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Speaker 1: swap basis, which had made the front end of the

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Speaker 1: market attractive to Asian and investors, has evaporated. I think

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Speaker 1: we're getting pretty close. When you look at three month

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Speaker 1: libor and you're at two point one, Suddenly you can

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Speaker 1: take a profit in a risk asset and leave it

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Speaker 1: in cash and generate something on it. And I think

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Speaker 1: as we get into the back half of this year,

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Speaker 1: as the central banks switched from balance sheet expansion to

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Speaker 1: contraction and the FED in our view, has raised three

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Speaker 1: times going to four, that's when you're going to see

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Speaker 1: cash as a mighty attractive alternative to risk assas So, Bob,

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Speaker 1: leading up to that, you've been incredibly, incredibly constructive on

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Speaker 1: credit at a time when many other well known asset

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Speaker 1: managers of de risked and brought down their exposure to

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Speaker 1: things like high yield. You've stuck with it, are you saying? Later?

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Speaker 1: This year could be an inflection point even for the

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Speaker 1: likes of you guys. Um, it depends what earnings look like.

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Speaker 1: We look at high yield spreads for example, that that's

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Speaker 1: really the flash point for the market. Your three sixty

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Speaker 1: basis points and all we've done over the last couple

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Speaker 1: of months is consolidated between three forty and call it

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Speaker 1: three eight, So things look pretty stable for what's been

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Speaker 1: viewed as a sell off end of cycle. High yield

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Speaker 1: credit spreads tend to go through three hundred over. We

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Speaker 1: think we're going to be on that path because corporate

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Speaker 1: profit and ability will look great. The top line will

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Speaker 1: be growing with tax reform, the bottom line will be

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Speaker 1: expanding and get a bit of physical spend um. It

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Speaker 1: will all look good. You and I caught up on Friday, Bob,

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Speaker 1: and one thing that stood out for me when we

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Speaker 1: taught was that you don't believe the credit spreads have

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Speaker 1: bottomed for this year. Whynot? Just because there's so much

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Speaker 1: positive momentum in corporate America. I told you I've been

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Speaker 1: doing this for thirty seven years. I don't remember a

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Speaker 1: time when corporate America has had more financial flexibility. And

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Speaker 1: I think right now in every corporate boardroom, uh, the CFO,

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Speaker 1: the treasurer, they're struggling deciding what to do. I mean,

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Speaker 1: they're like kids in a candy store. With tax reform. Uh,

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Speaker 1: they've taken out cost from their operating model over the

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Speaker 1: last several years. And if you get that physical spend

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Speaker 1: and you see revenue growth and then they've got a

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Speaker 1: lot of levers they could pull in and we'll see

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Speaker 1: where that all leads to. But right out all looks

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Speaker 1: pretty positive. Well, Campbell's board wasn't necessarily a kid in

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Speaker 1: a candy shop because they tried to sell debt and

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Speaker 1: had to pay up to issue it. And we are

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Speaker 1: seeing even though you see tightening of spreads in the

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Speaker 1: high yield space, you're not seeing the same an investment grade.

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Speaker 1: Are you buying that? Are you buying the weakness in

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Speaker 1: investment grade? Right now? We are? And yeah, you know,

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Speaker 1: you're going through a period of indigestion. There's no doubt

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Speaker 1: about it. It doesn't matter. You know, if you go

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Speaker 1: back to the start of the year, people were talking

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Speaker 1: about a melt up in equity prices and a melt

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Speaker 1: up in bond yield and and it hit a wall,

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Speaker 1: and we've been in that consolidation period. Campbell's made the

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Speaker 1: acquisition of Snyder's, they had to issue debt. I think

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Speaker 1: if you step back and look at they're all in

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Speaker 1: funding yields relative to where they thought they would have

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Speaker 1: had to do something like that years ago, it's still very,

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Speaker 1: very attractive. I'd say that's the one wild card for

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Speaker 1: the corporate bond market is just to see how much

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Speaker 1: corporate finance activity is going to come out of corporate America.

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Speaker 1: Are you going to see a lot of m and

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Speaker 1: A activity which is going to lead to a surgeon

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Speaker 1: in issuance? But just in a very basic argument, we

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Speaker 1: had this conversation about what the higher yield at the

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Speaker 1: front end could mean for risk assets, eltsewhere And I

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Speaker 1: think for a lot of people, you get higher yields,

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Speaker 1: and it starts to bleed down through the capital structure,

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Speaker 1: through senior bonds, through junior bonds, and it makes its

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Speaker 1: way to equities a whole lot later, and we're certainly

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Speaker 1: not there yet in the views of many people. You

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Speaker 1: kind of take this opposite argument way Basically, you say,

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Speaker 1: everyone's bullish equities, and if you bullish at the bottom

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Speaker 1: end of the capital structure, why wouldn't you be bullish elsewhere.

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Speaker 1: Can you reason with me why the opposite argument doesn't

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Speaker 1: apply here? Well, I think the the opposite argument could apply,

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Speaker 1: and it's a debate that I'm having with our in

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Speaker 1: our equity team quite a bit right now. As I said,

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Speaker 1: everything looks pretty good for for both ends of the

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Speaker 1: capital structure. But at some point in time, the said

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Speaker 1: will raise rates to a level which will lean into

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Speaker 1: growth and inflation, and we'll see it and we'll have

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Speaker 1: to start pricing in a recession. And as they get

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Speaker 1: to that level, I don't know if it's a free handle,

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Speaker 1: but as you get up there, and if you have

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Speaker 1: some steepness to the yield curve um, then suddenly you've

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Speaker 1: got to start discounting every other asset class by a

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Speaker 1: higher rate. And when you talk to equity investors, whether

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Speaker 1: they're public or private, you talk to private parts of

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Speaker 1: the credit market, everyone spread to some sort of yield

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Speaker 1: and using some sort of discount rate, and they have

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Speaker 1: to recognize that normalization means higher rates, and they have

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Speaker 1: to be sure that their business plan can absorb a

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Speaker 1: higher discount rate. So, Bob, since we're still sort of

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Speaker 1: in this goldilocks scene, given what you're saying, do you

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Speaker 1: find yourself trading less? The incentive to trade has been

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Speaker 1: limited certainly over the last fifteen months as volve has compressed.

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Speaker 1: Although everyone's anxious to try to do something, there's nothing.

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Speaker 1: There hasn't really been everything anything to do. Everything has

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Speaker 1: moved together. I think as we get into the middle

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Speaker 1: and certainly the back half of the year, who are

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Speaker 1: going to see volatility pick up and that's going to

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Speaker 1: give you an opportunity to trade around And I think

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Speaker 1: we'd be very happy to see that. But Michael sticking

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Speaker 1: with us right here on Bloomberg Surveillance on Bloomberg Radio,

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Speaker 1: the JP Morgan Asset Management, chief investment Officer and head

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Speaker 1: of the Global Fixed Income, Currency and Commodities division over there.

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Speaker 1: Well of Facebook, the shares right now and free market

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Speaker 1: trading are down a little bit more than four percent.

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Speaker 1: This comes after the social media company is being targeted.

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Speaker 1: I guess you could say with the reports that it

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Speaker 1: is under review having to do with one of it's

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Speaker 1: a research employees and what that employee knew about leaked

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Speaker 1: information on fifty million people to Cambridge Analytica. This is

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Speaker 1: the advertising data firm that was supported by Donald Trump's

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Speaker 1: campaign to win the twenties sixteen presidential election. And here

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Speaker 1: to tell us about the effects of this news on

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Speaker 1: Facebook is our own Paul Sweeney. He is the director

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Speaker 1: of North American Research for Bloomberg Intelligence, and he joins

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Speaker 1: us here in our eleven three oh studios. So well,

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Speaker 1: Paul Sweeney, Um, you you were a little bit more

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Speaker 1: careful about what you do on Facebook or what you

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Speaker 1: believe on Facebook, or you just always dawned us about

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Speaker 1: the whole thing anyway. Yeah, I think at this point

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Speaker 1: in my career I'm pretty jaun this, but clearly Facebook, uh,

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Speaker 1: in particular, but I think social media in general, you know,

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Speaker 1: really have a real data issue, a data security, data

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Speaker 1: integrity issue. Um, and they really need to get ahead

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Speaker 1: of this thing much quicker than they have been. I

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Speaker 1: think if you think about in this particular case, it

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Speaker 1: just kind of goes to the issue of you know,

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Speaker 1: this Facebook in this case really understand what data it has,

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Speaker 1: who has access to it, how it can be redistributed. Um.

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Speaker 1: I think there's a lot of issues here that just

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Speaker 1: I think would cause users over time to become very

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Speaker 1: concerned about how their data is being used, and then

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Speaker 1: ultimately the business impact that Facebook could be felt on

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Speaker 1: the advertising line if advertisers felt like this wasn't necessarily

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Speaker 1: the best environment for their ad message. So there's a

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Speaker 1: lot of things here, long term issues that I think

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Speaker 1: Facebook and again technology companies in general, social media companies

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Speaker 1: in general, need to focus on. That is data integrity. Well, Paul,

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Speaker 1: I want to want to talk about exactly what you're

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Speaker 1: saying with respect to advertising and other business impacts, because

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Speaker 1: every analysts who we've spoken to this morning has said

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Speaker 1: that they don't see Washington d C. Making some legislative

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Speaker 1: move in regulating Facebook more directly. So exactly why are

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Speaker 1: the shares down so much in pre market activity? Uh?

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Speaker 1: What are what are traders reacting to here? I think

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Speaker 1: what they're reacting to is that if you were to ask,

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Speaker 1: you know, long term tech investors, maybe what is one

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Speaker 1: of the greatest risk to the great tech tape that

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Speaker 1: we've seen over the last several years, particularly the fang stocks,

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Speaker 1: you know, the Amazons and Google's, the netflix is and facebooks,

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Speaker 1: And that would probably be regulatory risk. These companies have

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Speaker 1: gotten so big, so global, they exert so much control

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Speaker 1: over the global flow of information, uh, that there are

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Speaker 1: there is really long term concerns about regulatory risk for

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Speaker 1: these companies, particularly starting in Europe. Europe has historically been

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Speaker 1: probably the most aggressive regulators of US technology companies, going

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Speaker 1: as far back as Microsoft years ago, and uh, so

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Speaker 1: I think that is probably the bigger issue here, so

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Speaker 1: uh long term, I think people feel like this is

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Speaker 1: something that the industry really would be well served to

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Speaker 1: get ahead of and take care of on its own

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Speaker 1: before regulators do come in uh and maybe put some

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Speaker 1: limitations on their business. You know, Paul, I'm just wondering

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Speaker 1: whether this is a buying opportunity then to some people,

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Speaker 1: because it's unlikely that Washington, d C. Is going to

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Speaker 1: really do anything like with respect to regulating Facebook in

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Speaker 1: the near term. EU is another story, but they were

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Speaker 1: going to regulate Facebook anyway. Or is the real story

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Speaker 1: here advertisers and users stepping away from the platform because

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Speaker 1: of this new awareness of the risks. Yeah, I think so.

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Speaker 1: I think you know what, you know, the Facebook revenue

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Speaker 1: story is a very simple story. It's the same story

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Speaker 1: that a newspaper has a TV or station or radio

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Speaker 1: station has that has amassed the biggest audience. You can

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Speaker 1: advertising against that audience. But it's the same story without

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Speaker 1: the same responsibility, exactly the same traceability exactly right and

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Speaker 1: uh and and really when you think about Facebook, it's

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Speaker 1: all this unstructured data, which is just basically just means,

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Speaker 1: you know, all the information that we put onto Facebook

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Speaker 1: and we share with everybody. So the unstructured nature the

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Speaker 1: data makes it very difficult to manage. But I think

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Speaker 1: if you're an advertiser, um, you really cared about the

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Speaker 1: size of the audience, the engagement of the audience, and

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Speaker 1: the environment in which your ad um actually is placed.

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Speaker 1: Is that in the proper environment or is it next

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Speaker 1: to some objectional content? Uh So, I think, you know,

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Speaker 1: unless this really impacts user growth user engagement, there probably

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Speaker 1: is not much of a near term impact on on

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Speaker 1: on these companies certainly. And I think that's why, you know,

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Speaker 1: we've seen from these stocks time and time again that

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Speaker 1: there might be a little bit of a setback as

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Speaker 1: some regulatory risk pop pops up, but then they surge

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Speaker 1: right back up on the higher revenues. You know, I

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Speaker 1: was struck once by finding out that there are hundreds

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Speaker 1: of thousands of compliance officers at just the biggest Wall

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Speaker 1: Street banks. That's expensive. These are not cheap employees to have.

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Speaker 1: And I'm wondering, do we have a sense of what

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Speaker 1: the compliance costs are for a Facebook and how much

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Speaker 1: that could grow. Uh, they don't necessarily break out that number,

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Speaker 1: but I think in the last year or so, they've

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Speaker 1: said that they have ramped up their investment um in

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Speaker 1: R and D to kind of, you know, go to

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Speaker 1: the compliance issues and the data integrity issues. They also

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Speaker 1: disclosed that they hired, you know, ten thousand people just

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Speaker 1: to review content on Facebook, uh, to you know, try

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Speaker 1: to weed out objectional objection well content, so um, you know,

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Speaker 1: they are saying that they're ramping up their spending to

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Speaker 1: try to manage at this issue. I don't think that

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Speaker 1: spending is certainly material to the facebooks of the world

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Speaker 1: or the Googles of the world, but they really need

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Speaker 1: to make sure that they get their story out there

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Speaker 1: that they are uh, you know, managing this thing aggressively.

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Speaker 1: The alternatives is something that I don't think they want

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Speaker 1: any chance that they're going to do something like require

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Speaker 1: people at Facebook or Twitter or any of these other

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Speaker 1: social media platforms to have such designations as a Series

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Speaker 1: four team, which is typically in the securities industry, something

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Speaker 1: you need to be a compliance officer. I can't imagine. Um, yeah,

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Speaker 1: I really can't. Can't imagine here. I think the issue, Um,

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Speaker 1: you know, when you think about these technology companies, it's

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Speaker 1: all about the free flow of information, access to that information,

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Speaker 1: redistribution of that information. It's been mostly a self regulatory environment,

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Speaker 1: and it's actually also been a user regulatory environment where

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Speaker 1: where users, you know, kind of call out the platforms

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Speaker 1: and call out bad behavior on some of the social

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Speaker 1: platform So it's been really a unique way to monitor it.

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Speaker 1: Paul Sweeney, thank you so much for joining us. As always,

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Speaker 1: we love hearing what you have to say. Paul Sweeney,

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Speaker 1: director of North American Research for Bloomberg Intelligence. And right

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Speaker 1: now people are embarrassed on Facebook and dragging down the

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Speaker 1: whole of the US stock market with it. Well, we

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Speaker 1: got him, and we dragged him off the beach finally

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Speaker 1: put his surfboard away for just a moment. Mark Travis

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Speaker 1: is the president and chief executive of Intrepid Capital Management.

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Speaker 1: They're based in Jacksonville Beach, of Florida, Marc, thanks very

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Speaker 1: much for being with us. Maybe just help people a

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Speaker 1: little bit about how a surfer like you with a

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Speaker 1: bachelor's degree from the University of Georgia ends up running

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Speaker 1: Intrepid Capital. My, what a long story age trip it's been, Pim,

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Speaker 1: as the Grateful Dead used to say, Um, you know, Pim.

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Speaker 1: I started in the industry as a twenty two year

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Speaker 1: old broker at E. F. Hutton and I sold investment

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Speaker 1: management for a decade and didn't like the way a

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Speaker 1: lot of the other firms that we're raising money for

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Speaker 1: we're doing it. So we struck out on our own

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Speaker 1: now twenty three years ago, and we ran separate accounts

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Speaker 1: for a decade and then started the first of our

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Speaker 1: an hour six no load funds um in two thousand five.

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Speaker 1: I think what really put us on the map was

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Speaker 1: doing well in the financial crisis of oh eight and nine.

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Speaker 1: Are Small Cap Fund won a Liperal award in both

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Speaker 1: two thousand and eight and two thousand nine. It's interesting

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Speaker 1: to be here today with you and think back now

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Speaker 1: ten years ago the demise of bear Stearns and all

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Speaker 1: the things that happened since then, and frankly the change

430
00:24:51,280 --> 00:24:55,639
Speaker 1: in investor psychology since center, particularly in the last nine years. Okay,

431
00:24:55,640 --> 00:24:58,480
Speaker 1: with you running now over a billion dollars a billion

432
00:24:58,560 --> 00:25:02,360
Speaker 1: to in in an asset, what has been the change

433
00:25:02,440 --> 00:25:05,119
Speaker 1: and how have you reacted to it or how have

434
00:25:05,240 --> 00:25:08,119
Speaker 1: you absorbed that change to the benefit of you and

435
00:25:08,119 --> 00:25:12,600
Speaker 1: your customers. Well, PIM, I think that I like to

436
00:25:12,640 --> 00:25:15,560
Speaker 1: say somewhat sarcastically, but I do believe it's true. Most

437
00:25:15,600 --> 00:25:18,440
Speaker 1: people are hard wired to buy high and sell low.

438
00:25:19,119 --> 00:25:22,359
Speaker 1: And you know, if if you really think too again

439
00:25:22,480 --> 00:25:24,960
Speaker 1: a decade ago or even going back further to the

440
00:25:25,520 --> 00:25:28,760
Speaker 1: tech bubble in two thousand, you know, most of the

441
00:25:28,800 --> 00:25:31,680
Speaker 1: money came into the NASTAC and probably February of two

442
00:25:31,680 --> 00:25:34,399
Speaker 1: thousand in the market rolled over again. I'm hard to

443
00:25:34,400 --> 00:25:38,360
Speaker 1: believe about this time eighteen years ago, and for those

444
00:25:38,400 --> 00:25:40,520
Speaker 1: who don't know it, it took about fifteen years so

445
00:25:40,600 --> 00:25:45,840
Speaker 1: the nasdack to reclaim that old high. So I think

446
00:25:45,880 --> 00:25:50,680
Speaker 1: to me, you know, you saw investors in the depths

447
00:25:50,680 --> 00:25:53,640
Speaker 1: of the financial crisis in February and March about nine

448
00:25:53,720 --> 00:25:59,000
Speaker 1: kind of wide eyed and just terrified. Um pupils dilated,

449
00:25:59,119 --> 00:26:03,640
Speaker 1: just the smell fear was everywhere. And today I think

450
00:26:03,960 --> 00:26:08,880
Speaker 1: um you've had up until probably late January, unusually kind

451
00:26:08,880 --> 00:26:14,720
Speaker 1: of uh unusually low volatility um that's kind of let

452
00:26:14,760 --> 00:26:19,680
Speaker 1: everybody become complacent, and so, you know, I think that's

453
00:26:19,680 --> 00:26:22,800
Speaker 1: when people need to be on their highest guard. And

454
00:26:24,040 --> 00:26:26,600
Speaker 1: so we'll see what happens if we know, move into

455
00:26:26,680 --> 00:26:29,720
Speaker 1: this week and on and on from there. So Mark,

456
00:26:29,880 --> 00:26:32,440
Speaker 1: you think that people should be careful. But we have

457
00:26:32,440 --> 00:26:36,000
Speaker 1: have we seen a full sort of bull capitulation, this

458
00:26:36,119 --> 00:26:39,639
Speaker 1: sort of you know, retail investors throwing in the towel,

459
00:26:39,760 --> 00:26:42,840
Speaker 1: pouring all their money into equities that look really crowded.

460
00:26:43,080 --> 00:26:46,280
Speaker 1: Because so far it seems like there still is the

461
00:26:46,359 --> 00:26:51,400
Speaker 1: residual fear from the credit crisis hanging over markets. Well,

462
00:26:51,600 --> 00:26:54,800
Speaker 1: I think there's some Again. I think that we went

463
00:26:54,800 --> 00:26:57,520
Speaker 1: through a period kind of starting with the Trump bump

464
00:26:57,560 --> 00:27:00,920
Speaker 1: in November of sixteen up until the kind of the

465
00:27:01,840 --> 00:27:06,440
Speaker 1: VIX implosion or the inverted VIX implosion of late January.

466
00:27:06,920 --> 00:27:10,280
Speaker 1: You know, we we'd had volatilely below ten or twelve,

467
00:27:10,560 --> 00:27:13,480
Speaker 1: and you had almost uh, fourteen months of nothing but

468
00:27:13,640 --> 00:27:17,080
Speaker 1: up so I think it's sucked in a lot of money.

469
00:27:17,080 --> 00:27:19,440
Speaker 1: But now is the short end of the treasury curve

470
00:27:19,520 --> 00:27:21,840
Speaker 1: is starting to come up. I think there's gonna be

471
00:27:21,880 --> 00:27:26,200
Speaker 1: competition for money. And look that even that small move

472
00:27:26,960 --> 00:27:31,040
Speaker 1: with these long duration assets UM with you know three

473
00:27:31,119 --> 00:27:37,080
Speaker 1: years three thirty year treasury dings those long bonds pretty quickly,

474
00:27:37,480 --> 00:27:40,600
Speaker 1: and you see it reflected in you know fund uh

475
00:27:41,000 --> 00:27:44,520
Speaker 1: no load funds that are owning that type asset. So

476
00:27:45,160 --> 00:27:49,160
Speaker 1: my motto today is short duration has a lot of merit,

477
00:27:49,200 --> 00:27:51,479
Speaker 1: and I think that's the way we like to think

478
00:27:51,560 --> 00:27:54,400
Speaker 1: of ourselves in terms of discounting back a free cash

479
00:27:54,400 --> 00:27:58,280
Speaker 1: flow and inequity, or underwriting a particular piece of debt.

480
00:27:58,680 --> 00:28:01,880
Speaker 1: How quickly can we get that cash back to us

481
00:28:02,000 --> 00:28:05,960
Speaker 1: as an investor and subsequently to our fun shareholders. So

482
00:28:06,080 --> 00:28:09,680
Speaker 1: how much of your portfolio have you shifted into short

483
00:28:09,800 --> 00:28:12,200
Speaker 1: term debt? And at what expense? I mean, is it

484
00:28:12,280 --> 00:28:14,639
Speaker 1: moving away from equities and into short term debt or

485
00:28:14,680 --> 00:28:19,800
Speaker 1: longer term debt into short Well, I'm really just opportunistic.

486
00:28:19,880 --> 00:28:22,920
Speaker 1: It depends what I come across as to how I'll

487
00:28:22,960 --> 00:28:27,399
Speaker 1: be allocated. It's a fairly non traditional balance account. It

488
00:28:27,400 --> 00:28:32,080
Speaker 1: tends to float between forty five to six equity um

489
00:28:32,160 --> 00:28:35,000
Speaker 1: and then there's generally a residual amount of cash and

490
00:28:35,080 --> 00:28:37,600
Speaker 1: where from ten to fift the rest of them fixed income.

491
00:28:38,080 --> 00:28:41,680
Speaker 1: I do think with the really tight spreads we saw

492
00:28:41,840 --> 00:28:45,120
Speaker 1: Cohen into late January that it really didn't make sense.

493
00:28:45,600 --> 00:28:48,840
Speaker 1: I almost would say high yield was an oxymoron at

494
00:28:48,880 --> 00:28:52,360
Speaker 1: that point. And um, you know, so there's probably five

495
00:28:53,120 --> 00:28:59,000
Speaker 1: in very short high quality, high grade um debt um.

496
00:28:59,400 --> 00:29:02,680
Speaker 1: The equity though, really is driven by what we can

497
00:29:02,720 --> 00:29:05,600
Speaker 1: find both in the US and across the globe. And

498
00:29:05,640 --> 00:29:09,720
Speaker 1: can we use very conservative you know, private market valuation,

499
00:29:09,760 --> 00:29:12,680
Speaker 1: intrinsic value, discount of free cash f how you want

500
00:29:12,680 --> 00:29:15,360
Speaker 1: to term it um to get to a higher share

501
00:29:15,400 --> 00:29:18,960
Speaker 1: price without a lot of lofty assumptions. Can we talk

502
00:29:19,000 --> 00:29:20,880
Speaker 1: about one stock that I know you're interested in, and

503
00:29:20,920 --> 00:29:25,480
Speaker 1: this is the Cheesecake Factory based in Calabasas Hills, California.

504
00:29:25,880 --> 00:29:30,280
Speaker 1: What do you like about Cake? Well, PIM, I think

505
00:29:30,360 --> 00:29:34,880
Speaker 1: there's been some private equity, uh you know, activity in

506
00:29:35,000 --> 00:29:38,719
Speaker 1: the retail space at the restaurant space, excuse me. And

507
00:29:39,800 --> 00:29:43,239
Speaker 1: I think that Cake is kind of a destination. I

508
00:29:43,280 --> 00:29:46,240
Speaker 1: think they do more volume per store than almost any

509
00:29:46,280 --> 00:29:48,200
Speaker 1: restaurant I know of. I think it's close to eleven

510
00:29:48,200 --> 00:29:53,200
Speaker 1: million dollars um per restaurant. Mr. Overton's very particular about

511
00:29:53,240 --> 00:29:58,440
Speaker 1: where he'll put one. Um they're they really good uh dining,

512
00:29:58,440 --> 00:30:02,240
Speaker 1: the experience, and at a pretty moderate per head ticket price,

513
00:30:02,320 --> 00:30:06,800
Speaker 1: somewhere in the maybe forty one or two dollars per head. UM.

514
00:30:06,840 --> 00:30:10,840
Speaker 1: You know, there's very little what we will call net debt. UM.

515
00:30:10,960 --> 00:30:15,120
Speaker 1: So it's UM. I think you could see one of

516
00:30:15,200 --> 00:30:18,360
Speaker 1: two things there. UM One, I think you can see

517
00:30:18,360 --> 00:30:21,480
Speaker 1: a higher price because of why we've kind of done

518
00:30:21,480 --> 00:30:23,760
Speaker 1: the valuation work on it. But I think you could

519
00:30:23,800 --> 00:30:26,880
Speaker 1: see either what we will call a dividend recap where

520
00:30:26,880 --> 00:30:28,360
Speaker 1: they borrow some money to pay it out as a

521
00:30:28,400 --> 00:30:31,240
Speaker 1: special dividend because at this point there's really no debt

522
00:30:31,320 --> 00:30:34,560
Speaker 1: in their capital structure. It's really about a two point

523
00:30:34,560 --> 00:30:38,160
Speaker 1: one billion dollar market cap and you know, at less

524
00:30:38,160 --> 00:30:42,640
Speaker 1: than nine times pre tax cash flow. UM. I wouldn't

525
00:30:42,640 --> 00:30:45,360
Speaker 1: be shocked if a private equity firm wanted to try

526
00:30:45,400 --> 00:30:47,560
Speaker 1: to buy them and take it out at a higher price.

527
00:30:47,640 --> 00:30:53,240
Speaker 1: They're just starting to kind of go international in their franchises,

528
00:30:54,080 --> 00:30:59,880
Speaker 1: both in Canada and in the China. UM. So there

529
00:31:00,000 --> 00:31:03,480
Speaker 1: it and Mr Overton is not a particularly large equity

530
00:31:03,600 --> 00:31:06,440
Speaker 1: whole room. I mean David Overton, former chief executive in

531
00:31:06,480 --> 00:31:09,320
Speaker 1: the co founder of cheesecake Factory, Mark Travis. Thank you

532
00:31:09,360 --> 00:31:19,720
Speaker 1: so much for joining us of Intrepid Capital. Thanks for

533
00:31:19,800 --> 00:31:24,200
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to

534
00:31:24,360 --> 00:31:30,080
Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.

535
00:31:30,640 --> 00:31:34,000
Speaker 1: I'm on Twitter at Tom Keane before the podcast. You

536
00:31:34,000 --> 00:31:37,400
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio