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0:27

and Elephants

0:30

the loveliest of all Near

0:34

All right, we are talking about unicorns,

0:37

not what you think though. In Dancing

0:39

a Little Jake, Don't

0:41

Give It Away, cover story of the magazine this

0:43

week, unicorns everywhere, spreading

0:46

fear of an end to the bull market, of course,

0:48

talking about the unicorns getting ready for their

0:50

I p O s. Let's bring in senior

0:52

editor and lead blogger at the Bloomberg Markets Live blog,

0:55

Michael Reagan. He wrote the cover story this

0:57

week in the magazine. He joins us

0:59

along with Joel Hoe, our editor of Bloomberg Business

1:01

Week, both in our Bloomberg Interactive Broker Studio.

1:04

We've had the chance to already talk about this story. It's really

1:06

kind of I must read of the week

1:08

because we're in this market environment. We're trying to figure

1:10

out where are we in this market cycle, one

1:12

that has gone on for much longer than we expected.

1:15

Those unicorns might provide a clue

1:17

maybe, Well, it's it's sort of

1:19

this buzz that comes over Wall Street

1:21

whenever there's a big I p O or a big

1:24

year of I p O s that oh boy that you know,

1:26

someone's whispering into these companies ears.

1:28

You know, this is it the markets about the top? Uh?

1:31

You know, now is the time to cash in. So

1:33

there's that elements to it um and there's

1:35

also just the element of supplying demand when you

1:37

suddenly supply the market with a lot more

1:40

stock. Uh. You know. Obviously economics

1:42

one on one tells you more supply, lower

1:44

prices. But what I think is interesting

1:47

this time is it does coincide with all these other

1:49

issues we're talking about, the inverted yield curve,

1:51

this general global uncertainty

1:55

about the outlook, and it's just another

1:57

one of those sort of things that you add into

1:59

the X psych. Oh boy, it looks

2:01

like the top. Now that said I, I kind

2:04

of do not conclude that, yes,

2:06

this is absolutely the top. My conclusion

2:08

is that it's almost impossible to call a top

2:11

um. But you know, it is definitely something

2:13

that I think a lot of It It resonates with a lot of people,

2:15

especially because two thousand and seven and

2:18

the last years before the last really

2:20

major bear markets also

2:23

saw very hyperactive IPO issues.

2:25

So Joel Weber tell us how a story

2:28

like this is born in the magazine. So,

2:31

um, Mike and I have a little bit of a history,

2:33

and whenever I swing by his desk and just go

2:35

hey about X for me, and

2:38

then I come back to him like three days later, I was

2:40

like, oh, by the way, that was for the cover and

2:47

better off, But what did you see,

2:49

you know, sort of looking across

2:51

your team. So uh, last

2:54

week, as I was sort of starting to think about

2:56

this week's cover, UM,

2:58

Matt Levine wrote yet another

3:01

amazing uh post

3:03

on Money Stuff about the

3:05

unicorns and the enchanted forest. And

3:07

this has been something that he's been writing about

3:10

endlessly for the past few years,

3:12

and I've always paid attention to

3:14

how he writes about it and the enchanted

3:16

forest obviously being private markets,

3:19

right, And the bigger shift here is sort of this private

3:21

versus public discussion that's been going on forever.

3:24

But I realized actually like we had to do this cover

3:27

now because with lift

3:29

basically impending as the first

3:31

of many of these UHM

3:34

impending um I p o s, we

3:36

have to mark the moment of them

3:38

leaving the forest and entering the public markets.

3:40

And that's why I wrote this little deck for

3:43

the company the cover. I thought of this as

3:45

Unicorn season, right, but

3:47

these special the special breed of

3:50

company is about to not be

3:52

that special anymore because they're just going to be publicly

3:54

traded companies. But I

3:56

would add in Matt Levin's ahead of us, all

3:59

of us on pretty much everything. So but

4:03

it's the timing is fantastic

4:05

because we are in this weird time

4:07

and we could see the trade this week

4:09

was was unusual, and that we're still waiting

4:11

on Brexit, we're still waiting on US China.

4:13

We're not quite sure exactly how to read the FED stuff.

4:16

We're in the middle of between earning season,

4:18

and I think we're all trying to figure out what are the

4:20

cues credit market, bond market versus stock

4:23

market, what do we follow well? And that to

4:25

me is also why it's happening, right, like the

4:28

urgency that these companies have clearly

4:30

been acting on to get to market

4:32

before something bad might happen and then

4:34

they might not be able to come out for a while.

4:37

Right, So so beat the storm.

4:39

Uh, if you're if you're gonna do anything, be the storm.

4:41

I mean, if Levi Strauss can have a strong I PM

4:44

and I don't think that, but it's they're not this super

4:47

I'm sorry, and I like a

4:49

unicorn of yesterday, unicorn

4:51

of yesteryear. It's

4:53

not like some super high tech app or something.

4:56

But anyway, they had a good I think they

4:58

are sorry leave they

5:02

were the original San Francisco

5:04

innovator. Um. But yeah, you're you're

5:06

absolutely right. It's the sort of confluence of

5:09

events that you know, I think I started off the piece

5:11

saying, you know, uh, someone knows something

5:13

that you don't. And that's kind of the

5:15

the zeitgeist on the market right now.

5:17

What does the FED no, uh

5:19

that we don't that they're raising rates? You

5:21

know, I would argue probably nothing, But

5:24

you know, what does the bond market no with

5:26

this field curve in version that that the equity

5:28

market doesn't know. But the fact Tom

5:30

King called that he wants his word back.

5:33

I am just saying we love you, Tom, We really

5:35

do. Anyway, you just have to pay a little royalty.

5:38

Uh, you know. And it is interesting how much

5:40

it is on the mind to people. Yesterday. You and I were

5:42

corresponding yesterday because Bill Ford from

5:44

General Atlantic. I mean this came up because

5:46

they're an investor in some of

5:48

these current and future uh

5:51

unicorns. Obviously, both on the private

5:53

side and on the public side. Everybody is

5:55

really interested to see how this works out,

5:57

because we're gonna set a lot of bogs

6:00

here. Yeah, and I thought Bill Ford made

6:02

some some pretty interesting comments in that interview. He

6:04

uh the one thing he talked about was he kind of

6:06

compared it to when Facebook went public, you know,

6:09

sort of finally quenching that thirst

6:11

for social media, the big social media uh

6:14

in the public market. And now

6:16

these companies are sort of quenching that thirst

6:18

for the quote unquote sharing economy,

6:20

uh company of

6:23

this new economy. But here's the thing, these

6:25

are mature companies, right

6:27

and we've written about this before, like what's

6:30

coming to market right now? Compared

6:32

to Facebook at that moment. These are companies

6:34

that have had multiple lives already, Like Facebook

6:37

was still pretty young when it came right right

6:39

well, but then again still unprofitable, you

6:41

know, and that and you know to to bring these

6:44

you know, it did similar from nine two

6:46

thousand where a company was around, it feels like

6:48

for a couple of months through dot comedy

6:50

into their name and they went absolutely

6:52

so definitely not that type of frenzy. And

6:54

that you know, was like this that

6:56

that that's by a thousand cuts because there

6:58

was so many individual

7:01

is shoes coming at you, whereas here, you

7:03

know, it's it's a bigger valued, smaller

7:05

list, but nonetheless a pretty big dollar figure

7:08

list. It's I must read

7:10

for the week at it on the TV

7:12

show. That's true. She's

7:15

making history, working victory, all

7:22

right. That is taking us I

7:24

mean history. I love it, taking us back.

7:26

My grandmother was no kidding.

7:28

Yep, wow, Nicole. That explains

7:30

a lot, does it. Okay, so tough,

7:33

I am tough. I'm tough, tough

7:35

and yeah, okay, tough fish all

7:37

right. Amy Nelson joins us now. She's the

7:40

founder of the Riveter. She's based

7:42

in Seattle, joining us on the

7:44

phone. So Amy,

7:46

we were just talking. You may have heard us about the fact

7:49

that like diversity in the workplace. I

7:51

said, it's complicated. Carol said, it's not. But

7:53

clearly people are having a hard time getting

7:55

to where they need to be and so much of

7:57

it comes to leadership,

8:00

up and perception. Help us understand

8:02

what you're doing at the Riveter. Yeah,

8:05

thanks so much for having me on. And I loved that Rose

8:07

and the Riveter of music, the Riveter

8:09

of the network of community and workspaces

8:11

built by women for everyone. So we

8:13

are building workspaces where we think

8:15

about women's first, which is something that is somewhat

8:17

unheard of in corporate America. And

8:19

we're working with women and men who are building

8:22

businesses, providing resources for that group.

8:24

And then we're also working with corporate America. I

8:27

was a litigator for a decade before we started

8:29

this company UM and really saw a lot of these

8:31

issues around diversity that we're talking about.

8:34

And I learned when I became a mother that's still

8:36

today almost half of women off land

8:38

after they have kids, And to me, I thought

8:40

that means the system is broken. So how can

8:42

we UM work on it and find

8:44

pathways to a different future because I

8:46

think it's something that would make our country a lot

8:49

stronger. It would certainly change our GDP if

8:51

we could figure out how to retain women in the workforce.

8:54

So at the Riveter we also work with companies on

8:56

issues around that. So I'm curious to

8:58

hear what kind of things you guys have come up with that

9:01

actually works, because what's interesting too.

9:03

And we did have this equality summit at Bloomberg

9:05

yesterday and I hosted a lunch with a bunch

9:07

of CEOs talking about gender

9:09

in the workplace using technology, And

9:11

one of the things that came up as somebody said, listen,

9:14

women, they are

9:16

the ones who actually give birth, So

9:18

it is a little bit different, right, But what's

9:20

sad is the perception of men versus

9:22

women in the workplace, Like how do we change

9:25

that? So some of it is what providing maybe

9:27

different kind of facilities, but there's also the perception

9:29

side as well. Yeah,

9:31

I think about this a lot because as a female

9:33

CEO, I looked to who are my model as a

9:35

leadership And the fact is that there are

9:37

still more Fortune five CEOs

9:40

today named John than there

9:42

are women CEOs, which is I think something

9:45

that should strike us all as kind of very

9:47

very outdated. UM. But I think one

9:49

of the things that we do at the Riveter is we have kind

9:52

of very stiffle conversations that

9:54

I think aren't happening inside workplaces.

9:57

I think that everyone wants corporate America to looks

9:59

different, but we do really have a guide book to get there,

10:01

and so within companies, I think it can sometimes be

10:03

hard to stop and pause and say, what are some simple

10:06

things that he can do to change the dynamic

10:08

here and make sure that all voices are

10:11

being heard. So we have, for example,

10:13

a four week series where we work with male executives

10:15

called Good Guys Series, where we really talk

10:17

about issues around UH inclusivity,

10:20

about what it means to be an ally in the workplace.

10:22

It can even be as simple as having a conversation

10:24

about something that I think happens in many workplaces

10:27

across the country every day where you'll

10:29

all you'll all be in a meeting, a mixed gender meeting, of

10:31

course, and you know a woman has talked

10:33

over which is something that happened a lot in meetings.

10:35

We know that statistically, UM,

10:37

And a lot of times after that meeting, a male

10:39

colleague a walk up with a woman in the hall and say hey,

10:42

I heard Bob talk over you. He shouldn't have done

10:44

that. And the way we can actually change that behavior

10:47

is by calling it out in the meeting, not

10:49

in an aggressive way, because Bob is not a bad guy,

10:51

but by saying, hey, Rob that you know that

10:53

was Cindy's ideas. Sindy just said

10:56

that, And I think it really just simple steps

10:58

like that can lead us to a different place, which

11:00

is I think now what Charlie Pellett was really don't

11:02

interrupt right well, whether speak no,

11:05

no, no, that's what. Well.

11:07

It's interesting too because this echoes so nicely.

11:09

Amy with a conversation I had yesterday

11:11

with Joann Littman, who wrote a book called

11:13

That's what she said. You probably read

11:15

it and and know it. She

11:18

made that exact point about interrupt the

11:20

interrupters. I mean, it's a really interesting

11:23

way of changing behavior because

11:25

Amy, as as I think you're you're pointing

11:28

out, part of this is really

11:30

just day to day, minute to minute awareness.

11:32

And can I just say we do this at home when we're having

11:34

conversation in my family and if somebody was

11:36

like, wait, let this person is finish speaking,

11:39

it gets a little crazy. Anyway,

11:41

go ahead, um, and so help

11:44

us understand just about forty seconds

11:46

left, Amy, sort of where your business

11:49

goes from here. Clearly it's catching on, and clearly

11:51

this idea of you know, how

11:53

we work is very much front

11:56

of mine for for everybody, women

11:58

and men. Yeah, I mean, I

12:00

think we're headed to a

12:02

place where we'll have thirteen locations across

12:04

seven states by the end of the year, which we're growing

12:06

faster than even we worked in the early

12:09

years. And I think the idea of building spaces

12:11

thinking about women first, but being inclusive

12:13

of all, it's something that's very critical.

12:15

We come through in the programming that we offer and

12:17

also just the amenities that we provide.

12:20

And I do think that as we see women

12:22

make up the majority of the workforce, which is where we're

12:25

trending. Uh, spaces like this are incredibly

12:27

important. Amy Nelson is

12:29

the founder of the Riveter based

12:31

in Seattle. She joined us on the phone.

12:34

Very very cool, and I mean it is

12:37

interesting to think about how we work. We

12:39

spend so much time. Yeah

12:41

here it worked the way we interact with each other. But also

12:43

we've seen companies be the good

12:45

ones at least be much more thoughtful about space,

12:48

about accommodating and whatnots

12:53

God,

12:56

all right, Well, as Carol mentioned at the top

12:58

of the show, you want to get a story

13:01

read on the Bloomberg terminal, talk about bonuses

13:03

or talk about job cuts, and we're

13:05

unfortunately talking about the latter here JP

13:08

Morgan and Nomura

13:10

among those just

13:15

checking what that's not nice? Oh?

13:17

Come on, just fun with you

13:20

alright ahead, They are among

13:22

those who are pairing their work forces.

13:24

Want to understand why, so we turn to

13:27

our expert, Michael Moore, finance

13:29

team leader here in New York

13:31

City for Bloomberg. Mr Moore,

13:33

So what's going on? Because different explanations

13:36

for for each of these banks, right, Yeah, You've

13:38

had a number of firms recently, uh,

13:41

you know that have been cutting jobs.

13:44

But every story is a little bit different.

13:46

This is that time of year, you know, bonuses

13:48

have been paid. A lot of firms do

13:51

some march calls where they cut

13:53

some under performers to make way for

13:55

the new class of graduates and over

13:57

the summer. But in other

14:00

cases, particularly Nomura, in

14:02

this case, it's more about,

14:05

uh, there's been a struggle to achieve

14:07

some profitability outside of Japan. UM

14:09

they've struggled in Europe for a while. Uh

14:12

So this is more about you know, trimming

14:14

those costs and and trying to get

14:17

to profitability. And for JP Morgan, JP

14:20

Morgan falls more into the category

14:22

of um, we saw them do this

14:25

last year with the asset management

14:27

side of the business. This this time around focus

14:29

more on the wealth management side, but more

14:32

kind of a right sizing rather than well

14:34

and clearly one of the big

14:37

storylines you guys have been falling

14:39

in and certainly our colleagues in Europe have been falling

14:41

even more closely, is this potential

14:43

Deutsche Bank Commerce Bank tie up. And we're

14:45

talking about tens of thousands of jobs they

14:48

could be eliminated there.

14:50

What's the latest on that deal? Just since

14:52

we're we're talking about we don't know where it's going

14:55

to end up. But I feel like we were actually

14:57

talking about on the morning show today.

14:59

You know you've got Commerce Bank saying well,

15:01

we're not so into your investment bank and

15:03

Jojia Bank saying well, we don't think you're

15:06

making very good loans and a good relationship.

15:08

Right, this is really gonna be a

15:10

tough marriage if it comes through. Yeah,

15:12

and we are colleagues in Europe had a great

15:14

story out this afternoon about UM the

15:16

deal perhaps losing some momentum.

15:19

You have a lot of reasons not to do it, you

15:21

know, UM, you have the opposition

15:23

from the labor groups because you mentioned potentially

15:26

thirty thousand jobs being cut. You

15:29

have a potential capital raise that would

15:31

need to happen because you

15:35

know that all depends on the price that

15:37

they get it at. But there are concerns

15:39

about the you know,

15:41

the asset books of both banks, and that's

15:43

why they're in this position to begin with. UM.

15:46

So I think there's a lot

15:48

of opposition to the deals

15:51

from a number of categories.

15:53

So there's stuff going on in the industry,

15:55

right. There's also technology and automation increasingly

15:58

taking over some of those simple

16:00

of simpler tasks in the

16:02

financial industry, although they're even starting to take

16:04

over some of those more complicated tasks. It seems

16:06

like, right, I think you know what we tried

16:08

to hit out with this story is, you

16:10

know a lot of these cuts happen every year,

16:12

but there's does seem to be a bit more angst this

16:14

year. Uh, And I think some of that

16:17

comes down to it's a tough environment.

16:19

Uh, everyone's talked about the first quarter

16:21

being difficult. Uh.

16:23

And the other one is this kind of

16:26

long term creeping fear

16:28

of automation. Um.

16:31

It's

16:33

both. Um. You know, I think people

16:35

are scared of, you know, just how many

16:37

jobs it could replace. You've

16:40

seen on the retail side, you know, more

16:42

customers are moving digital. We've seen

16:44

the banks cutting branches. You know, on

16:46

the institutional side, you're starting

16:48

to get more trading move

16:51

to electronics. So I

16:53

think there's that long term

16:55

fear of you know, can my job be replaced?

16:58

It is amazing too. And you know, looked

17:00

at Steve Dixon's story that sort of

17:02

outlines this, and you guys sort

17:04

of bullet pointed out really nicely, and you're

17:06

sort of going along. You're like, oh, JP, Morgan, Nomura,

17:09

Deutscha Goldman, and then

17:11

you're like scroll scrolls. But I mean,

17:13

and it really does at the other side of

17:15

the page printed out. I mean, we're talking about

17:18

Standard Charter, We're talking about London Stock Exchange,

17:20

We're talking about HSBC, black

17:22

Rock, State Street, a q R. You know, I

17:24

mean, this is all across

17:26

the board. So as you say, part

17:28

of this is sort of cyclical in terms of the

17:31

year. But I do think

17:33

back to the cover story about you

17:35

know, all these unicorns going public and that's

17:37

great and everybody's excited. But could

17:40

we be seeing the end of a bull run? And

17:43

if this bull run ends, Wall Street

17:45

is gonna maybe have at least a mini

17:47

reckoning right right, Well, and I think

17:49

it's already happening even during that bull run.

17:52

Uh. You know, front office head count

17:54

at the biggest investments has gone down every

17:56

year, uh, you know, at least

17:58

the last five years. So uh, even

18:01

during what has been a pretty good

18:03

market environment, you've

18:05

had people getting replaced, you know,

18:07

either by technology or because revenues

18:10

have been lower on the fixed income side. Um,

18:13

you know, I don't think they need a downturn to

18:15

have a reckoning in terms of jobs. I got to ask you

18:17

though about Deutsche Bank. You spent some time over in

18:19

London. I mean, what is you know, we've

18:22

also had some stories in the magazine right that you

18:24

put Deutsche Bank together with Commerce

18:26

Bank and it's not like week Bank plus

18:28

week Bank equales Strong Bank

18:30

ran. I mean, do

18:33

they have to do a deal in order

18:35

to exist? I mean, I just

18:37

wonder what the future is, right I

18:39

don't think they have to do a deal, but they

18:42

they seem to need to do something dramatic,

18:44

you know, and um, and I

18:46

think they got through a lot

18:49

of the capital questions. You know, some of those capital

18:51

questions could re emerge if they do this deal,

18:53

but they seem to get through the

18:56

main capital concerns they had in and

18:59

then get in twenty sixteen. But

19:01

now it's just a cost

19:04

and revenue question. It's simply a

19:06

profitability question of you

19:08

know, if revenues are not growing, can

19:11

you cut your way to profitability? And so

19:13

far that answer has been known well. And I think back

19:15

to Eliza Martinussy's story last

19:17

week, and and Michael, you are as

19:19

familiar of this is probably more familiar than most

19:22

sort of this this dichotomy between

19:24

the European banks in the US banks and

19:26

how you know, we're leaking around here in the US. William's

19:28

pretty healthy banks in general, you know, notwithstanding

19:31

some of this little culing that we're talking about

19:33

in this segment, but generally speaking,

19:35

you talked to Jamie Dimon, you talked to Brian moynihan,

19:38

you talked to you know, Gorman,

19:40

Like they're feeling pretty good. Yeah, I think

19:42

the term golden age was thrown around last

19:44

year. You know, like we had record

19:47

banking profits last year. Um

19:49

JP Morgan had the highest profit of any

19:51

bank ever last year. Yeah, so, uh,

19:54

you're seeing very different, um,

19:57

very different environments the leaders

20:00

up in a lot of the US banks, which is certainly

20:02

not the case with a lot of the Europeans.

20:04

I mean, we just had that it was that the sweb Bank CEO

20:07

have to step aside this morning that

20:09

we're talking about money laundering over this. I mean, what

20:11

a tale that was the market right basically, why

20:13

can't the European banks get it right? It's also a fragmented

20:16

market, right, so that even if Deutsche Bank and Commerce

20:18

Bank it together, there's still kind of a small

20:20

percentage of the overall market,

20:23

kind of different from over here where the big banks

20:25

really dominate. Yeah, And I think there's

20:27

two elements of it. One is the bank The US

20:29

banks took their medicine early, they raised

20:32

capital, they got some of the fines

20:34

out of the way. The fines have dragged on. For

20:36

the Europeans, the capital raising has dragged

20:38

on. And then the other piece of

20:40

it is the market environment. You know, the big banks

20:42

here have UM

20:44

a lot of concentration in terms of on the

20:47

wholesale businesses there. It's a little

20:49

more fragmented. Uh, and the

20:51

economy has not been as healthy in Europe.

20:54

Well, and look, we didn't even get to talk about

20:56

Brexit and what the implications are even for

20:58

how all the worker and all the

21:00

money may start to move around. Michael Moore,

21:03

what a rock star. Always great to have you here

21:05

in studio with us. He leads all of our finance

21:07

coverage here in the United States.

21:17

So the US and China is certainly looking

21:19

for a better way forward when it comes

21:21

to trade. Now, we've talked about this specifically

21:24

before, about the warnings of an economic iron

21:26

curtain falling between the United States

21:28

and China. If there is a tech cold war between

21:30

the two countries, it's one that will likely have no

21:32

winners. So rights are Andy Brown,

21:35

he is editorial director at Bloomberg New Economy

21:37

Forum. He joins us back in our Bloomberg

21:39

Interactive Broker studio here in New York

21:42

City. Is so good to have you here with us. I

21:44

think as we watch Andy the negotiations

21:46

going back and forth, everybody's

21:48

focusing on things like soybeans or

21:50

cars, or specific things. You say,

21:53

that's not what we sing on. I

21:55

mean, I think a lot of people I'm missing the whole

21:57

point here looking at the trade wool

22:00

and looking at these tariff schedules,

22:02

when what is really important is

22:04

not the Iron curtain, it's the silicon curtain.

22:07

It's this technology cold

22:09

war that's coming up behind the

22:13

trade war, and in particular this

22:15

list of high technology goods

22:17

that the US government has drawn up with

22:19

a view to banning their export to

22:21

China. And so what

22:24

sorts of electronics are we talking about here, and

22:26

how does it play into products

22:28

that we know and love and probably

22:31

use a lot. So these these

22:33

are products that are high tech products that are potentially

22:35

dual use. Right, So they've got this long list

22:38

and now they have to decide, you know what are they

22:40

going to ban? And the critical

22:42

point is is you know what question are they going to

22:44

ask? If the question they're asking is

22:46

how do we stop the people's liberation

22:49

army? Okay, you're gonna end up with a

22:51

rather short list of absolutely

22:54

critical technologies that, under no

22:57

circumstance can you allow to get into the hands

22:59

of the Chinese military and security

23:01

services. Okay, but legitimate,

23:04

very legitimate national That makes sense. That makes

23:06

a lot of sense, right, Nobody, nobody's disputing that. If

23:08

the question you're asking is how

23:11

do we stop the Chinese economy,

23:13

okay, then you're going to end up with a

23:16

very very long list, including

23:18

technologies that go into cars

23:21

produced in Detroit, for instance. Well, and

23:23

what's interesting too is you say, you know, China

23:25

is going to move forward even if there are limitations,

23:27

So then they will be tapping technology from

23:29

Europe from elsewhere, correct, because

23:31

on something like self driving cars, they

23:34

essentially might be setting the standards going forward

23:36

because they can totally. I mean, so the

23:38

the the the mistake

23:40

behind will the assumption behind that that only

23:43

the United States has got this technology

23:45

is completely false. I mean, if if the US won't supply

23:47

this technology, much of it they can get from Europe,

23:50

from Israel, from Japan, from Korea,

23:52

from other places. And the point is

23:54

this, it's China that is actually

23:56

setting the pace on new energy

23:59

vehicles right. Oh, you know, they're roaring

24:01

towards this future they got. By two thousand

24:03

and twenty, they're gonna have annual production

24:06

of you know, about two million electric

24:08

vehicles. And these are really high

24:10

tech and contains so much of the technology

24:12

that is now on this list. You're talking about artificial

24:15

intelligence, neural networks, you're

24:17

talking about positioning navigation systems,

24:19

you're talking about advanced radar. So

24:21

if the US wants to play in this

24:23

China market, which by the way, is bigger

24:26

than the US market

24:29

at plus Japan plus Germany

24:31

plus the rest of the Europe combined, okay,

24:34

you have to be all in well, and I

24:36

gotta tell you, I love numbers. And when you say that

24:38

by this market would be about

24:40

two million cars electric vehicles in

24:42

China, that is twenty times the size

24:44

of the United States. If you want a little perspective and

24:47

get an idea of who's going to be leading the way,

24:49

it's a really clear picture there. And what

24:51

about the manufacturing piece, because one of

24:53

the things you point out in this story is

24:55

this idea of the iPhone as

24:58

it exists today doesn't ex without

25:01

Chinese manufacturing, right well exactly, so

25:03

you imagine what would have happened to Apple

25:05

if the Apple iPhone had contained

25:07

technology that was banned from export

25:10

to China, it wouldn't have been able to have assembled

25:12

these things in China for a global market.

25:15

We would be paying five thousand bucks

25:17

apiece for for an Apple iPhone, right,

25:19

so I mean completely unaffordable.

25:21

And let's face it, the next generation

25:24

car is going to be a high tech

25:26

gadget connected to the internet, basically a

25:28

smartphone all wheels, right, So let's

25:30

our way forward. The

25:33

real question now is the degree

25:35

to which China is regarded in

25:37

the US as a potential security This is a

25:39

big national security issue, right,

25:41

so, you know, the trust has come out of the relationship.

25:44

Things are really falling apart. You

25:46

know, if if if the issue is you

25:49

know, are we trying to block China

25:51

as a security threat? You know, all the red lights

25:53

of flashing and

25:56

so are you optimistic, pessimistic,

25:59

neutral that some

26:01

deal gets done, that President

26:04

Trump can declare victory, but

26:06

CEOs across especially

26:09

the United States, don't say holy

26:11

Shmoley's as scroll Master would say,

26:14

dramatically makes

26:17

my business harder. Yeah, well, look, I'm

26:19

pretty optimistic that the trade war is going

26:21

to find some kind of a resolution. I think we're

26:24

heading in that direction. I'm actually

26:26

quite pessimistic that this tech cold

26:28

war can be resolved resolved anytime

26:30

soon. I think this silicon cut and is going

26:32

to be very much a permanent pot of the U.

26:34

S. China relationship. Dividing the two countries

26:37

just got about thirty seconds left, and it's important China

26:39

should worry too, because right this has been in a very

26:41

important bilateral relationship. So

26:44

it's not just the US getting it right. China's

26:46

gotta get it right to China absolutely

26:48

has to get this right. I mean, there are a lot

26:50

of technologies that China needs, there's

26:52

a lot of collaboration. They need Silicon

26:55

Valley, they need the innovation that's coming out of

26:58

Silicon Valley. That's been really the key driver

27:00

of innovation globally over the last ten years.

27:02

Andy Brown, thank you as always. Andy Brown is

27:04

our editorial director at Bloomberg New Economy

27:06

form in our Bloomberg Interactive Broker studio.

27:09

I'm roc journal.

27:15

Yeah, but you let me drive. Oh no, no, nor

27:18

home honey, please, I'll do

27:20

the right drivel. I

27:23

want to drive all just

27:26

drive baby, good

27:30

questions, trying the

27:39

drive to the globe commune.

27:41

Thanks, we'll drive us dawn on

27:43

Bloomberg Radio, and

27:46

it is time for the drive

27:48

to the close. I'll pay Desponde,

27:51

Founder and Chief Investment Officer of Centerstone

27:53

investors, he joins us again, he's on

27:56

the phone here in New York

27:58

City. I'll pay great to have

28:00

you back with us. Thanks for having me.

28:02

All right, So what's happening

28:04

in this market? I feel like we're still trying

28:07

to get our arms around a semi

28:09

volatile kind of a couple of weeks. What's

28:11

really driving the trade at this point, Yeah,

28:15

it's the market. I mean, forgive

28:17

me for geeking out for a minute. Please geek

28:19

away. I'm going to geek away. There

28:21

are so many multiple states of the world that are being

28:24

sort of assumed at the same time in the stock

28:26

market, especially while in the markets generally speaking,

28:28

it's a global recession, it's a reflation because it's

28:30

Chinese tax cuts, it's you know, everything

28:33

all at the same time is being sort of considered and priced

28:36

in. It seems like that volatility has just been driven

28:38

by the you know, the odds shifting

28:40

slightly one way or the other, um, you

28:43

know, towards one camp or the other um.

28:45

And the reality is that really there has

28:47

just been no evidence to suggest that there's a

28:50

massive, imminent, you know, nine

28:53

style global recession right around

28:55

the corner, much less one than just in the United States.

28:58

But there's at the same time, um,

29:00

there's not any evidence that this reflation

29:03

kind of trade that's been if you look at metals

29:05

prices and what not, there's sort of this implication

29:07

that we're going back to two thousand sixteen Chinese

29:09

reflation um kind of um

29:12

in a moment, and there's no evidence that that's actually

29:15

occurring either, other than the fact that the Chinese have

29:17

started to to have to provide some fiscal

29:21

uh uh, you know, influence

29:23

on fiscal policies. So I do wonder

29:25

abe uh and you bring

29:27

some good points. I mean, I just think we're at a very interesting,

29:30

potentially inflection point in the markets. We're just trying

29:32

to figure out where we go from here. We've

29:34

spent so much time talking

29:37

about the inversion of the yield curve. Right

29:39

we're about a weekend since it all started

29:41

and kind of caught our attention, and we've seen, you

29:43

know, a tremendous bond market,

29:46

global bond market rally and yields really

29:48

backing off. How do you read

29:50

it? Is it potentially a warning

29:53

sign? I

29:55

read it that in December, UM,

29:58

like a bunch of institutions sort of said, oh

30:00

no, there's an inversion coming, and so let's

30:02

get ahead of that. And they sold stock

30:05

and you know, kind of reallocated. Basically,

30:07

that's been kind of what's been going on here, and

30:10

uh, you know, now

30:13

everyone else is catching up to the other side of that. Oh

30:15

no, there's um, you know, inflation,

30:17

so maybe we need to buy stocks. And so

30:19

at the same time, there's still that crowd that

30:21

says, no, the longer term in version.

30:24

Uh, in the longer term, the inversion

30:26

is the real story, So let's buy bonds. And

30:28

that's just kind of goes back to my first point. There are so many

30:31

different states of the world that are being kind of debated

30:33

right now and priced in, and that's really a

30:35

source of volatility for the stock market,

30:38

well for Marcus generally speaking. Um,

30:40

but you know what we've we've been

30:43

saying for probably nine

30:45

years since the financial

30:48

crisis is that we're in a just a different state of the world

30:50

where we're just gonna moddle through. Um,

30:53

there's gonna be growth scares, there's gonna be you

30:55

know, all kinds of you know, potentially inflation scares.

30:57

Although at this moment it looks like the inflation

31:00

genie is back in the bottle um.

31:02

You know, they're going to be all kinds of things that are reminiscent

31:05

to what it was like from two ten

31:07

until that. You know, so they call two

31:09

thousand six hen Trump was elected. So I

31:11

think it's just we're just getting back to that

31:13

muddle through environment that

31:15

existed for years after the financial

31:17

crisis, which reflects the fact that there's a

31:19

huge amount of leverage in the system. Interest

31:22

rates can't really go up that high. Otherwise it would because

31:24

it's it's almost a self corrective mechanism. If

31:26

it's interest rates go high with the amount

31:28

of leverage that's in the system, that you

31:31

will cause a recession. So there's a buffer,

31:33

a or a limited in terms

31:35

of how much higher interest rates can go

31:38

and also how much lower they can go, because that's

31:40

the you know, the Federal Reserve and other

31:42

central banks will step in. Um. So

31:44

I think we're just back to this buddle through environment.

31:46

The stock market, the bond market, like they have a

31:48

very difficult time with the

31:51

gray area, you know, they can they just

31:53

want to know, oh, are we going into is there another reflation

31:55

or is it another global recession? Well,

31:58

if it's in between, it's really difficult

32:00

for them to to figure it out. And

32:03

so let's talk some names. How do you invest

32:05

into a market like this Given

32:08

everything that you've just laid out

32:10

and I love that list that you gave at

32:12

the top of the conversation, but putting

32:14

some money to work, where do you go? Yeah,

32:16

center Stone is ultimately center Stone is

32:19

a is a bottom up investor. And sometimes

32:21

when you have these moments where there's

32:24

sort of uh, you know, extreme

32:27

kind of pessimism or optimism however

32:29

you want to look at it regarding

32:32

bonds or stocks. I mean, the

32:34

extremities reveal

32:36

that sometimes the market becomes very monolithic

32:40

in certain industries. And so when you're concerned

32:42

about recessions, the entire industrial

32:44

sector gets hit, the entire housing

32:46

sector gets hit, and in this case also last

32:49

year, the entire semiconductor industry

32:51

got hit. In when we

32:53

look at cyclical industries like that that get hit,

32:55

what we try to do is find of toll booths within

32:57

those industries. That is it companies

33:00

that are independent from the cycle, things that can clip the

33:02

coupon from just the ongoing production

33:04

needs of an industry. So in the semiconductor

33:06

industry, we found a company called Versoom which

33:09

is a recent relatively

33:11

recent spinoff, and they provide

33:13

the especially chemicals that allow semiconductors

33:17

many factors to actually produce a semiconductors.

33:20

So we don't, you know, it's like a toll booth. We don't really

33:22

require more fabs to be built. Now

33:24

that stock went down, just

33:27

like all the other semiconductors were going

33:29

down. But finally

33:31

someone figured out, oh there's some value

33:33

here. The market is mispricing things. This is

33:35

a toll booth business. And a company like in called

33:38

Integrits came in and made a stock bid,

33:40

and then Mark k g A, which is a German competitor

33:42

which is in similar line of business but much larger,

33:45

made a competing bid of almost higher.

33:48

So we're in this in this kind of bidding more to

33:50

to to you know, get a business like that. And

33:52

I have other examples if we have time, but that's

33:55

kind of what we're looking at in these in these cyclical

33:57

business which explains to the

33:59

stock being up a deeper sent because people are bidding

34:01

over it. Yet you do have we love talking names.

34:03

So Mohawk Industries is another one that

34:05

you that's definitely on your radar you're investing

34:08

in it suggesting others do likewise,

34:11

Yeah, I think it's I mean, you know, just on stated

34:13

PE multiples, and we look at much more

34:15

than the E multiples. You also look at the quality of

34:17

the management and the defensiveness, you

34:19

know, the defensiveness I guess of the franchise.

34:22

You know, what we're trying to avoid is like that Amazon risk

34:24

that you know, can just completely muddy the picture and

34:26

destroy the earnings power of the business. But

34:28

Mohawks, you know, they make um if for those

34:30

of you not that are not familiar, they're there essentially

34:33

one of the I mean, they are the largest, huge covering

34:36

the United States, and certain categories are almost

34:38

their duopolis, very close to a monopolist. And

34:40

they're also vertically integrated. They make everything.

34:43

Uh they even have UM you know, uh,

34:45

the sourcerrow materials from their own minds

34:47

and whatnot, and they create the product

34:49

that makes them the lowest cost producer of

34:52

most floor coverings. And

34:54

now that stock gets beaten down. Every time housing

34:57

stocks go down, there's a there's a problem

34:59

in housing market. And right now the problem

35:01

the housing market is that um obviously,

35:03

interest rates have gone up, lack of supply though,

35:07

uh what do you mean sorry, I didn't catch

35:09

that lack of supply of housing. Oh

35:11

no, there's plenty of demands. So people

35:13

focus on the news. Home starts

35:17

um and the the

35:20

You know, the market is existing homes, and existing

35:22

homes are down a little bit, but not enough

35:25

to justify a stock price decline of over

35:28

good franchise. It's good management team,

35:30

got it a good balance sheet. You know, kind of qualifies

35:33

as that toll move type of business.

35:35

Hey, Abbe, we've got to run great

35:37

to the talk names with you and get the overview.

35:39

Abbe Desponde, He's founder and chief investment

35:41

officer as Centerstone Investors, on

35:44

the phone in New York City.

35:46

Thanks for listening to Bloomberg Business Week. You

35:48

can subscribe to the podcast on iTunes, SoundCloud,

35:51

or Bloomberg dot com. You can also listen to

35:53

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35:55

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