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This One Weird Number Explains Everything: DataTrek's Colas · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Joining
• 0:27
  Speaker 1: me now, Nick Kolas. He is the co founder of
• 0:30
  Speaker 1: Data Trek Research. He is also a Bloomberg opinion columnist,
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  Speaker 1: and he's going to help everybody because he says, he
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  Speaker 1: has one weird number that explains everything. Nick, it's a
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  Speaker 1: pleasure to have you here. What is the number and
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  Speaker 1: what does his What does it explain? Yes, thank you.
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  Speaker 1: The one weird number isn't so weird, but it is
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  Speaker 1: kind of sad. It is the twenty year compounded annual
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  Speaker 1: return on the S and P. This is the number
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  Speaker 1: that every investor ultimately cares the most about because how
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  Speaker 1: much money you can make in the market when you
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  Speaker 1: buy and hold, and sadly, that number is about five
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  Speaker 1: percent over the last twenty years. In terms of a
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  Speaker 1: compounded annual growth rates, the average back to twenty eight
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  Speaker 1: is eleven percent, so more than double that number, and
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  Speaker 1: we've very rarely seen these kind of five five and
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  Speaker 1: a half percent to the actual precise number going back
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  Speaker 1: to the nineteen twenties. A matter of fact, it's just
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  Speaker 1: as bad as the period right after World War Two
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  Speaker 1: when the twenty years trailing numbers were about four percent.
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  Speaker 1: But that includes the Great Depression. So we've had very
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  Speaker 1: very low returns in US stocks over the last twenty years.
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  Speaker 1: Does it matter if we then delve a little bit
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  Speaker 1: deeper and try to find out why? It matters intensely?
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  Speaker 1: And the simple reason why is we've had two thirty
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  Speaker 1: five percent corrections in the stock market, one from two
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  Speaker 1: thousand one to two thousand three, the second and two
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  Speaker 1: thousand eight obviously, and it's those major pullbacks that have
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  Speaker 1: really crushed returns. So when you here that you've got
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  Speaker 1: to stay in the market because no one is good
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  Speaker 1: at market timing, and that if you miss those higher movements,
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  Speaker 1: those increases in price and start to worry about just
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  Speaker 1: as you describe these declines these sell offs, that's not
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  Speaker 1: really going to work to your advantage. What do you
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  Speaker 1: think the bottom line is? If you're going to be
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  Speaker 1: an investor, and an investor with a capital I you
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  Speaker 1: have to live through these cycles and they are wrenching.
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  Speaker 1: It is painful to see your returns go down thirty
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  Speaker 1: plus percent over short periods of time. The good news
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  Speaker 1: is that the SMP at least has done better than say,
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  Speaker 1: emerging markets or the EFA stocks. If you look at
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  Speaker 1: the long term chart on e f A or e
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  Speaker 1: M the two E T F to track EFA and
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  Speaker 1: emerging markets, you'll see that they are below their two
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  Speaker 1: thousand eight highs today by twenty five plus percent. Those
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  Speaker 1: stocks haven't even had the bull run that the SMP
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  Speaker 1: had from two thousand eight onwards. So is it is
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  Speaker 1: it possible to make the case that diversification is a
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  Speaker 1: great marketing tool but does not get you the kind
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  Speaker 1: of returns that you think you're going to receive. Well,
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  Speaker 1: you know it's the old past performance is no indication
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  Speaker 1: kind of phenomena. The best thing you can say are
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  Speaker 1: the most act thing you can say is for the
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  Speaker 1: last decade, they have not done you any favors. Diversifying
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  Speaker 1: internationally has not worked. The SMP has been the place
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  Speaker 1: to be, and even this year with these parlos returns,
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  Speaker 1: it continued to be the place to be. Well. I
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  Speaker 1: was going to go down the path that if you
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  Speaker 1: are able to identify an investment, whatever kind it is,
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  Speaker 1: but let's just use the equity market as an example.
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  Speaker 1: If you are able to identify and it may be
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  Speaker 1: more art than science specific companies or a specific company,
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  Speaker 1: and are able to ride it to a higher price
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  Speaker 1: while managing losses or downturns in other assets or other stocks,
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  Speaker 1: that that may be a way to actually produce returns.
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  Speaker 1: It absolutely is. This goes back to the whole active
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  Speaker 1: versus passive argument because what you're describing is a selective
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  Speaker 1: active strategy. And look, something as simple as overweighting the
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  Speaker 1: text docs for the last five years has been that ticket.
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  Speaker 1: But it wasn't for the first five years after the
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  Speaker 1: financial crisis. It was financials and other more prosaic sectors
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  Speaker 1: that really worked. Tech was a classic mid to late
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  Speaker 1: cycle play. So even in thinking through that paradigm, you've
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  Speaker 1: got to think about it in terms of where you
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  Speaker 1: are on the cycle in order to execute on It's
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  Speaker 1: something as simple as owning Tesla for the last ten
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  Speaker 1: years has actually been a reasonable way to app from
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  Speaker 1: the SMP because it's not even in the SMP. So
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  Speaker 1: does this beg the question all of the dynamics that
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  Speaker 1: exists in the marketplace and the various computer programs that
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  Speaker 1: slice and dice are really all for nought because that
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  Speaker 1: is more of the selling machine rather than the investing machine. Yeah,
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  Speaker 1: I would put it as it's more than market making machine.
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  Speaker 1: It's how basically we arbitrage. Where stocks trade in the US.
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  Speaker 1: You know, the average stock trades at thirty different venues.
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  Speaker 1: Someone's got to arb those out a hundred shares at
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  Speaker 1: a time. And that's what the machine really is reasonably
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  Speaker 1: good at in a fairly efficient automated fashion. But in
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  Speaker 1: terms of how society, how the US economy is creating
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  Speaker 1: value for shareholders, were coming were basically we're coming at
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  Speaker 1: the end of a really low period of returns. The
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  Speaker 1: good news it's better than the rest of the world.
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  Speaker 1: The bad news is it's less than half of what
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  Speaker 1: we've all been taught. Are the right long term returns
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  Speaker 1: of ten to eleven. You've been a watcher of markets
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  Speaker 1: for longer than I'm going to hold you accountable for.
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  Speaker 1: Is there a psychological change in the investor community now
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  Speaker 1: versus when you first entered the business. There absolutely is,
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  Speaker 1: and I would summarize it around the numbers that we're
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  Speaker 1: talking about, because look at the twenty year trailing returns
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  Speaker 1: in nine were seventeen point seven percent trailing twenty year returns.
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  Speaker 1: You were doubling your money every four or years. Now
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  Speaker 1: it's taking you much longer, and as a result, investors
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  Speaker 1: are both getting more passive because with low returns comes
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  Speaker 1: the need to have low fee structures, and that's a
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  Speaker 1: challenge for active managers. But it also says that people
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  Speaker 1: have to look much further afield for returns, whether it
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  Speaker 1: be the retail investor looking at cryptocurrency is trying to
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  Speaker 1: use returns, or the institutional investor buying into private equity
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  Speaker 1: and venture capital to try to get their returns. Because
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  Speaker 1: remember most pension funds have a seven eight percent required
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  Speaker 1: rate of return or expected rate of return. They physically
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  Speaker 1: cannot get that inequities they haven't gotten inequities over the
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  Speaker 1: last twenty years. They have to go into PE, they
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  Speaker 1: have to go into VC, They have to find ways
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  Speaker 1: to either leverage or go into early stage companies to
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  Speaker 1: get the returns they need. So it's a huge change. Nick,
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  Speaker 1: I want to ask you something about stock buy backs
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  Speaker 1: and the money that companies spend on stock buy backs.
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  Speaker 1: Given the five five and a half percent annualized return
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  Speaker 1: in the SMP five hundred which you have calculated, did
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  Speaker 1: does it make sense for companies to be buying their
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  Speaker 1: own stock if they're going to end up with the
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  Speaker 1: same return that their investors do. Yeah. No, it's a
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  Speaker 1: great question, and the short answer is no, it does
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  Speaker 1: not make sense to the same magnitude that we've seen
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  Speaker 1: buy backs this year, which as we know, is close
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  Speaker 1: to a trillion dollars when it's all said and done.
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  Speaker 1: By far the biggest buyers in this market, better bigger
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  Speaker 1: than passive flows for example, or anything else we can measure.
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  Speaker 1: And the reason it doesn't make sense is because if
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  Speaker 1: you think about buying back your stock as an exercise
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  Speaker 1: and investment, you're only going to earn that five and
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  Speaker 1: a half percent return. And most corporations likely think their
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  Speaker 1: cost of capital is ten percent because that's the number
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  Speaker 1: we've all been trained to think about. So it means
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  Speaker 1: that there's a whole raft of projects that are going
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  Speaker 1: to earn perspectively five to ten percent, but these companies
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  Speaker 1: aren't taking on. Now, look to give the CFOs of
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  Speaker 1: these companies and boards these companies some credit. They probably
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  Speaker 1: look at all the volatility that we talked about in
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  Speaker 1: the prior segment, these thirty five percent draw downs twice
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  Speaker 1: in the past twenty years, and think, you know what,
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  Speaker 1: we have to mitigate the volatility of our stock and
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  Speaker 1: buy backs can help us do that. And so they
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  Speaker 1: might think of buybacks in the micro is a good
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  Speaker 1: thing because it minimizes or reduces volatility. But in the
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  Speaker 1: macro sense, it means that we are not as a
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  Speaker 1: society allocating capital to its the best possible use. Because
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  Speaker 1: we're buying back stock at five and a half, we
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  Speaker 1: should be investing in seven and nine percent return projects,
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  Speaker 1: but companies aren't doing that. Does that also reflect the
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  Speaker 1: way in which companies account for their capital expenditures that
• 8:30
  Speaker 1: if you spend money on research and development, that almost
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  Speaker 1: counts against you when you take a look at the
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  Speaker 1: balance sheet. Yeah, it's a funny thing about R and D.
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  Speaker 1: I mean R and D in most cases is expensed
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  Speaker 1: in the current period because it has an uncertain outcome,
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  Speaker 1: and so it does hit the P and L. So
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  Speaker 1: if you're looking to make an EPs number, R and
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  Speaker 1: D is not exactly your friend, and you have to
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  Speaker 1: budget for it very carefully. And yet those are the
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  Speaker 1: projects that you want to be focused on because that's
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  Speaker 1: what's going to produce those future returns exactly right. And
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  Speaker 1: you know, it's a funny thing about R and D
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  Speaker 1: and CAT and CAPEX and buy backs because buy backs
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  Speaker 1: don't really crowd out R and D necessarily, but corporations
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  Speaker 1: have to think about it in terms of what you
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  Speaker 1: just said, which is an investment in future growth, And
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  Speaker 1: if they're looking for more shut things, then you know,
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  Speaker 1: perspectively riskier things than they will be cutting back on
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  Speaker 1: R and D. Now does your one number the five
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  Speaker 1: and a half percent return? Does that also lead you
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  Speaker 1: to the conclusion that fees when it comes to managing
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  Speaker 1: money will become even more compressed because people are gonna
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  Speaker 1: want to eke out whatever gain they can. Yeah, this
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  Speaker 1: is the most important point for active managers and for
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  Speaker 1: the money management industry as a whole. And what's happened
• 9:44
  Speaker 1: is look that the peak period of Wall Street for brokers,
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  Speaker 1: for asset managers, for active managers was the nineteen nineties,
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  Speaker 1: and that was the period where we had these fifteen
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  Speaker 1: to seventeen percent compounded annual returns, and of course ASCID
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  Speaker 1: owners are going to be feel fine about paying somebody
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  Speaker 1: one and a half for two percent active or two
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  Speaker 1: and twenty as a hedge fund in order to have
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  Speaker 1: a shot at out performing when you're at five percent.
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  Speaker 1: Nobody has any patients for high fees. And as a
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  Speaker 1: matter of fact, we as we know, we see e
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  Speaker 1: t F basically almost zero fees and that's a direct
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  Speaker 1: function of these declining returns. And until returns begin to
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  Speaker 1: improve on a structural basis, asset management will find it
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  Speaker 1: very hard to charging her mental fees. So what do
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  Speaker 1: you see for the future when it comes to the
• 10:26
  Speaker 1: specific industry dynamics. Fewer participants but bigger participants. Yeah, I mean,
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  Speaker 1: basically you've seen it for the last ten years. Economies
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  Speaker 1: of scale at low fee structures is how the industry
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  Speaker 1: is shaping itself. Also making sure that the entire infrastructure
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  Speaker 1: of the industry, the trading that we see every day
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  Speaker 1: happens in an automated, very low cost fashion, and it
• 10:47
  Speaker 1: creates some brittleness and markets as we've seen this month. Um,
• 10:50
  Speaker 1: you don't want the same away from the recent market
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  Speaker 1: volatility and these big points swings. Two things. The first is,
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  Speaker 1: you know, we had a very unusual year because things
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  Speaker 1: look rate until October, and then Tech rolled over and
• 11:02
  Speaker 1: a lot of folks sold tech stocks that they've had
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  Speaker 1: huge capital gains in. And then in only December, the
• 11:08
  Speaker 1: entire market rolled over, and all of a sudden, a
• 11:10
  Speaker 1: lot of managers began to realize, we cannot give our
• 11:13
  Speaker 1: clients a big tax bill on top of showing them
• 11:16
  Speaker 1: that they have negative returns on the year, and so
• 11:18
  Speaker 1: you had wholesale selling of tax loss candidates all these
• 11:22
  Speaker 1: stocks that have suffered the entire year in order to
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  Speaker 1: offset those gains managers took in October and November selling tech.
• 11:29
  Speaker 1: And that, to me is what just cranked this market
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  Speaker 1: down in December was profound tax laws selling over this
• 11:36
  Speaker 1: issue of not wanting to show taxable gains on top
• 11:38
  Speaker 1: of the paper loss for the year. Thankfully, we're almost
• 11:41
  Speaker 1: all the way through it, and that's why you've seen
• 11:42
  Speaker 1: market stabilize. Well. Thanks very much for sharing your thoughts
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  Speaker 1: with us, and really a wonderful piece. I encourage everyone
• 11:49
  Speaker 1: to read it. Much appreciated. Nick cholis He is the
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  Speaker 1: co founder of Data Trek Research. He is also a
• 11:54
  Speaker 1: Bloomberg opinion columnist, and as he said, he's got one
• 11:58
  Speaker 1: weird number that explains well mostly everything. Thanks very much
• 12:01
  Speaker 1: for being with us, and just to bring you up
• 12:03
  Speaker 1: to date on what's happening in markets right now. Stocks
• 12:08
  Speaker 1: they're trading at their lows of the session, the Dow
• 12:10
  Speaker 1: Jones Industrial Average down a hundred and thirty six points,
• 12:13
  Speaker 1: SMP five hundred, down fourteen, and the NASDAC down. The
• 12:22
  Speaker 1: topic now is Brexit and many small businesses in the
• 12:26
  Speaker 1: United Kingdom could face a big tax. This could be
• 12:31
  Speaker 1: an attacks that would affect them after Britain leaves the
• 12:35
  Speaker 1: European Union. Members of Parliament on the EU Scrutiny Committee
• 12:40
  Speaker 1: have warned that VAT tax value add attacks will have
• 12:43
  Speaker 1: to be paid by small businesses for the first time,
• 12:47
  Speaker 1: and that comes at a time when even retail sales
• 12:50
  Speaker 1: in the United Kingdom seemed to be suffering from the
• 12:53
  Speaker 1: Brexit effect. Here to tell us more about the effects
• 12:56
  Speaker 1: of the pull out from the European Union is Dr
• 12:59
  Speaker 1: Sam Nahapof. He is the president of Empire Global Ventures.
• 13:03
  Speaker 1: He previously served as Senior Advisor to the Governor of
• 13:06
  Speaker 1: the State of New York for International Commerce as well
• 13:09
  Speaker 1: as Deputy Commissioner of the New York State Department of
• 13:12
  Speaker 1: Economic Development for International Development, Dr Natapoff, thank you very
• 13:17
  Speaker 1: much for being with us. Maybe just lay out your
• 13:21
  Speaker 1: scenario for what happens in Britain after they leave the
• 13:27
  Speaker 1: European Union. What does it look like? Okay, okay, First,
• 13:31
  Speaker 1: thank you for having me. Second, I think the probability
• 13:34
  Speaker 1: now of a no deal brexit, no agreement between Britain
• 13:38
  Speaker 1: and the European Union on how this exit is going
• 13:41
  Speaker 1: to be handled, is a most likely scenario. So in
• 13:44
  Speaker 1: a no deal Brexit, every major economic, social, and political
• 13:48
  Speaker 1: institution in Britain is under threat. The British government itself
• 13:52
  Speaker 1: estimates that they'll lose ten of their GDP and seven
• 13:56
  Speaker 1: fifty thou jobs, or about three percent of all jobs
• 13:59
  Speaker 1: in Britain would be a hundred and fifty thousand in
• 14:01
  Speaker 1: London alone. The Bank of England says that Britain would
• 14:05
  Speaker 1: lose about fifty two trillion dollars in Euro denominated derivative
• 14:10
  Speaker 1: contracts based in London which would be at risk in
• 14:13
  Speaker 1: a no deal Brexit. And to give you some sense
• 14:15
  Speaker 1: of what that means, Britain's entire economy is only two
• 14:18
  Speaker 1: point six trillion, So they're putting at risk twenty times
• 14:22
  Speaker 1: the size of their own national economy. So the two
• 14:25
  Speaker 1: things about Brexit that are important to remember is that
• 14:28
  Speaker 1: it's almost completely irrational and it's almost completely unpredictable. Your
• 14:33
  Speaker 1: your running talking about what's going to happen with V
• 14:36
  Speaker 1: A T. Nobody knows, and that's what's making markets so scared.
• 14:40
  Speaker 1: Based on your experience and I know that you have
• 14:43
  Speaker 1: contributed your expertise to the U S Department of Commerce,
• 14:47
  Speaker 1: the European Central Bank, the German Bundesbank. Based on your
• 14:51
  Speaker 1: experience and expertise, do you expect that kind of no
• 14:56
  Speaker 1: deal Brexit to take place or will there be some
• 14:59
  Speaker 1: kind of accommodation or maybe an extension of a transition period.
• 15:07
  Speaker 1: I think that there won't. My personal opinion is there
• 15:10
  Speaker 1: won't be a no deal Brexit. They'll extend the transition period,
• 15:14
  Speaker 1: and in my gut, I think there will be a
• 15:16
  Speaker 1: second referendum in Britain. And do you believe that that
• 15:19
  Speaker 1: second referendum will conclude that the British want to stay
• 15:24
  Speaker 1: in the European Union. Yes, I think they do, because
• 15:30
  Speaker 1: it has never been it was never expressed Brexit was
• 15:33
  Speaker 1: never explained to the British people about what they were
• 15:35
  Speaker 1: going to lose. It was always told to them about
• 15:38
  Speaker 1: what they're going to gain. They've since learned that everything
• 15:41
  Speaker 1: they thought they were going to gain wasn't true, and
• 15:45
  Speaker 1: everything they were going to lose was true. And the
• 15:48
  Speaker 1: British people are pretty good business people in the end,
• 15:51
  Speaker 1: so that I think they're going to change their minds.
• 15:54
  Speaker 1: There's going to be a second referendum and they're going
• 15:57
  Speaker 1: to try and put right this terrible mistake that they've
• 15:59
  Speaker 1: been living under for about eighteen months. Do you believe
• 16:02
  Speaker 1: that the UK Prime Minister Theresa May will survive this effort? No,
• 16:08
  Speaker 1: I don't um. Theresa May, in the next three weeks
• 16:11
  Speaker 1: is going to bring her Brexit deal to the floor
• 16:13
  Speaker 1: of the House of Commons for a vote on the
• 16:15
  Speaker 1: agreement that she negotiated. She will lose that vote. Then
• 16:20
  Speaker 1: there's only three possible outcomes. One they manage no deal Brexit,
• 16:24
  Speaker 1: which will be an economic and political catastrophe, to a
• 16:27
  Speaker 1: second referendum on leaving the EU. Or three a general election,
• 16:32
  Speaker 1: which will probably end up with a second referendum if
• 16:35
  Speaker 1: she loses that vote. And I think it's quite clear
• 16:37
  Speaker 1: that she will either her party will force her to
• 16:40
  Speaker 1: resign for leading them down this path, or there'll be
• 16:44
  Speaker 1: a general election and Jeremy Corbyn will become prime minister
• 16:47
  Speaker 1: the leader of the Labor Party. Let's explore those scenarios.
• 16:51
  Speaker 1: If Jeremy Corbyn becomes the prime minister, what kind of
• 16:57
  Speaker 1: Brexit or no Brexit will Britain experience. Jeremy Corbyn is
• 17:03
  Speaker 1: an unregenerate seventies socialist from Britain's long and distant past.
• 17:08
  Speaker 1: He doesn't want to stay in the EU because thirty
• 17:11
  Speaker 1: years ago the Labor Party didn't believe in the European Union.
• 17:14
  Speaker 1: His problem is his party wants to stay in and
• 17:18
  Speaker 1: he will. He will reluctantly, I think, agree to a
• 17:22
  Speaker 1: second referendum. And we know this because his Shadow Chancellor,
• 17:26
  Speaker 1: John McDonald said that a second referendum was inevitable about
• 17:30
  Speaker 1: two weeks ago if Theresa May couldn't get her deal
• 17:33
  Speaker 1: through the Commons. So if Labor wins the upcoming general
• 17:36
  Speaker 1: election and Jeremy Corbyn becomes Prime minister, I think he
• 17:40
  Speaker 1: will reluctantly hold a second referendum, and I think they'll
• 17:43
  Speaker 1: vote to remain this time. If it is not Jeremy
• 17:46
  Speaker 1: Corbin but another Conservative or Tory Party candidate becomes Prime
• 17:51
  Speaker 1: minister without calling a general election, who do you think
• 17:55
  Speaker 1: it will be. I'm afraid it will be Boris Johnson.
• 18:00
  Speaker 1: Bars Johnson is the former Lord Mayor of London. He's
• 18:03
  Speaker 1: part of the reason that we're in this mess to
• 18:06
  Speaker 1: this point. But you need to understand Brexit a little
• 18:09
  Speaker 1: bit in the same way that in the United States
• 18:11
  Speaker 1: we understand Obamacare. The Conservative Party in Britain is split
• 18:16
  Speaker 1: down the middle about Brexit. Half of them don't want it,
• 18:19
  Speaker 1: but a small group of them, ideologically committed people, they do,
• 18:22
  Speaker 1: and they can't agree in the same way that many
• 18:25
  Speaker 1: in the Republican Party in the United States wants to
• 18:27
  Speaker 1: move on from the Obamacare repeal issue on the Republican Party,
• 18:31
  Speaker 1: but a small cadre of ideologically committed people still want
• 18:35
  Speaker 1: to repeal it, and that is the problem. The Conservatives
• 18:37
  Speaker 1: can't move on from Brexit in the same way that
• 18:40
  Speaker 1: the Republicans can't move on from Obamacare. Dr Natapoff, is
• 18:44
  Speaker 1: it a lack of an ability to admit that there
• 18:48
  Speaker 1: was a mistake made with some way to save face
• 18:53
  Speaker 1: that has put the British Conservative Party in this corner. Yes,
• 19:01
  Speaker 1: all right, well well done. Is there a way for
• 19:04
  Speaker 1: them to do this? Though? I mean, because you know,
• 19:06
  Speaker 1: people do make mistakes, Political parties make mistakes. Why is
• 19:11
  Speaker 1: it so difficult to admit a mistake and move on?
• 19:14
  Speaker 1: The governing philosophy of the British Conservative Party over Brexit
• 19:18
  Speaker 1: now seems to be a hundred thousand lemmings. Can't be wrong.
• 19:22
  Speaker 1: They would rather leap off a cliff than rethink their position,
• 19:26
  Speaker 1: and that's a really bad way for a governing party
• 19:28
  Speaker 1: to rule a country. Indeed, yes, all right, well anything more?
• 19:33
  Speaker 1: I mean, you've certainly put paid to this to this topic.
• 19:36
  Speaker 1: I mean, I just just quickly give you twenty seconds.
• 19:38
  Speaker 1: Do you think the European Union is just standing by
• 19:41
  Speaker 1: watching with dismay at what the British are doing. It's
• 19:46
  Speaker 1: fair to say that the Europeans have never understood the British,
• 19:50
  Speaker 1: and today that even more true. Today they're looking and
• 19:53
  Speaker 1: think what are you doing? The only two economics um
• 19:57
  Speaker 1: economic economic benefits the British shall for the world their
• 20:01
  Speaker 1: membership in the European Union and their ownership of Europe's
• 20:05
  Speaker 1: financial capital, and Brexit is Britain intentionally giving up both
• 20:10
  Speaker 1: of them. No one can understand why they're doing it,
• 20:13
  Speaker 1: not even the Conservative Party. Thank you very much. Dr
• 20:16
  Speaker 1: Sam Natapoff. He is the president of Empire Global Ventures.
• 20:20
  Speaker 1: You can follow him on Twitter at Sam Natapoff. You're
• 20:25
  Speaker 1: listening to Bloomberg Markets. I'm pim Fox. This is Bloomberg Radio. Well,
• 20:33
  Speaker 1: the partial government shutdown that began last week appears as
• 20:37
  Speaker 1: if it will continue into the new year. Here to
• 20:40
  Speaker 1: help us understand what is open, what is closed, and
• 20:43
  Speaker 1: what the likely resolution will be is Eric Wasson. He
• 20:46
  Speaker 1: is a congressional reporter for Bloomberg and he joins us
• 20:50
  Speaker 1: now from Washington. Eric, thank you very much for being
• 20:53
  Speaker 1: with us. What can you tell us about any negotiations
• 20:58
  Speaker 1: that are taking place? Who resolved the shutdown or is
• 21:01
  Speaker 1: this now just a public slanging match between the president
• 21:06
  Speaker 1: and Democrats in Congress. Yeah, so there were really no
• 21:09
  Speaker 1: negotiations going on whatsoever. Democrats have basically decided that their
• 21:13
  Speaker 1: hand is strengthened on next Thursday, on January three, when
• 21:17
  Speaker 1: Nancy Pelosi will become Speaker of the House and then
• 21:19
  Speaker 1: Democrats will take over the lower chamber. At that point
• 21:22
  Speaker 1: they're going to just start passing bills to reopen the
• 21:24
  Speaker 1: government and to pressure Trump and the Republicans Senate to
• 21:28
  Speaker 1: also pass those bills and reopened government. And they feel like,
• 21:30
  Speaker 1: you know, once they have the gavel, they can start
• 21:32
  Speaker 1: that process. So, you know, there was some show of
• 21:35
  Speaker 1: potential talks this week, but it really became clear that,
• 21:38
  Speaker 1: you know, after there was a offer from Vice President
• 21:40
  Speaker 1: Pence to Chuck Schumer, the Senate Democratic leader, last Saturday,
• 21:43
  Speaker 1: there really was no more back and forth negotiations. So
• 21:46
  Speaker 1: we were told that Pence went in there and said,
• 21:48
  Speaker 1: instead of five billion for the wall, uh, the President
• 21:50
  Speaker 1: would accept two point five billion for some kind of barriers.
• 21:53
  Speaker 1: You could call it offence, we could call a wall.
• 21:54
  Speaker 1: Let's just be done with it. But the thing is
• 21:57
  Speaker 1: Trump never publicly embraced that, and the Democrats feel that
• 22:01
  Speaker 1: they've been burned before, and they say, you know, Trump,
• 22:03
  Speaker 1: when he was a private sector businessman, he often would
• 22:05
  Speaker 1: try to get the best deal by ripping up negotiations
• 22:08
  Speaker 1: and until Trump comes out and says all except half
• 22:10
  Speaker 1: of what I thought about, we're not going to talk
• 22:12
  Speaker 1: to you. So that's where things stalled. The capital is
• 22:14
  Speaker 1: completely empty this week except for maintenance screws and people
• 22:17
  Speaker 1: moving boxes around as lawmakers get into their new offices.
• 22:20
  Speaker 1: So uh yeah, right now it's just a public show
• 22:23
  Speaker 1: of of mud slinging and no talks. Now, this affects
• 22:26
  Speaker 1: more than just let's say, certain areas of the government
• 22:30
  Speaker 1: National Park Service and saw on. I mean, it could
• 22:32
  Speaker 1: be something as specific as the federal investigation into Facebook
• 22:37
  Speaker 1: because the agency, the Federal Trade Commission, is going to
• 22:41
  Speaker 1: run out of funding today. Are there any repercussions that
• 22:46
  Speaker 1: have not been highlighted that are going to prove very
• 22:50
  Speaker 1: detrimental to the public. Well, I think you know, you
• 22:53
  Speaker 1: see that there's a diffuse group of agencies and tasks
• 22:56
  Speaker 1: that are being affected. Everything from the I R S
• 22:58
  Speaker 1: which is furlowed. Most of it's some ployees that was
• 23:00
  Speaker 1: attempting to roll out the tax filing season of this
• 23:04
  Speaker 1: new tax code that was passed by Congress and semi
• 23:07
  Speaker 1: President Trump. And you know they say that they were
• 23:08
  Speaker 1: going to be into training or to open up the
• 23:11
  Speaker 1: tax season uh next month, and that may be delayed
• 23:14
  Speaker 1: the filing season. We're looking at economic reports from the
• 23:17
  Speaker 1: Commerce Department that will also be delayed. We're looking at
• 23:20
  Speaker 1: sec fraud, securities fraud investigations that are on hold. As
• 23:24
  Speaker 1: you mentioned, the Justice Department is also affected. This is
• 23:27
  Speaker 1: really a wide range of government activities. You know, most
• 23:30
  Speaker 1: of the e p A Is on furlough. Uh. You know,
• 23:32
  Speaker 1: it might be hard for the average citizen to feel
• 23:35
  Speaker 1: a direct effect unless they're one of the eight hundred
• 23:37
  Speaker 1: thousand federal workers who aren't getting paid, but you know
• 23:40
  Speaker 1: that the effects are going to start to mount. And
• 23:42
  Speaker 1: there's also just the general inefficiencies. You know, the two
• 23:45
  Speaker 1: government shutdown costs the economy twenty four billion dollars. This
• 23:48
  Speaker 1: is a smaller shutdown, but nonetheless, you know, you've got
• 23:51
  Speaker 1: a lot of workers who are sitting at home idle
• 23:53
  Speaker 1: and intradition is that those people do get paid eventually,
• 23:57
  Speaker 1: but they're being paid for doing nothing. Yes, and also
• 23:59
  Speaker 1: to know that about what ent of Coastguard employees could
• 24:05
  Speaker 1: be forced to work without pay for the duration of
• 24:07
  Speaker 1: the shutdown. Yes, that's right. The Coast Guard is now
• 24:10
  Speaker 1: under the Homeland Security Department, which is one of the
• 24:13
  Speaker 1: departments that has been affected. We're also looking at border patrol,
• 24:17
  Speaker 1: customs and Border protection agents. We're looking at ICE agents.
• 24:21
  Speaker 1: And you know, the President did come out and say
• 24:22
  Speaker 1: that most the people affected their Democrats. There's really no
• 24:25
  Speaker 1: evidence for that, and especially if you look at some
• 24:28
  Speaker 1: of these agencies that tend to skew more towards Republican membership,
• 24:32
  Speaker 1: you know, you're seeing a wide range of people who
• 24:34
  Speaker 1: are affected by this directly. Just go back to what
• 24:36
  Speaker 1: you said earlier about the political battle between Democrats and
• 24:41
  Speaker 1: President Donald Trump. What do the Democrats and if Nancy
• 24:46
  Speaker 1: Pelosi is indeed voted to be the Speaker of the House,
• 24:50
  Speaker 1: what do they expect to accomplish. Well, you know, just
• 24:54
  Speaker 1: like the Republicans, Democrats are a bit diverse, but certainly
• 24:57
  Speaker 1: the left wing of the party really wants to see
• 25:00
  Speaker 1: Pelosi go after Trump. They have their voters are very
• 25:03
  Speaker 1: frustrated with the president, think he's completely out of control.
• 25:06
  Speaker 1: They want to emphasize investigations, oversight, possible impeachment, and they
• 25:10
  Speaker 1: view the shutdown battle as you know, one of these, uh,
• 25:13
  Speaker 1: you know, things that they must win that there will
• 25:15
  Speaker 1: be no compromise. So that's that's a factorness as well.
• 25:18
  Speaker 1: On the on the side of the Republicans, you've got
• 25:20
  Speaker 1: people who don't like federal government. We have had guests
• 25:23
  Speaker 1: here in Bloomberg Radio talking about how, well, maybe these
• 25:26
  Speaker 1: federal workers shouldn't be getting paid for these activities that
• 25:28
  Speaker 1: are not essential. So that's part of the debate as well.
• 25:31
  Speaker 1: But there is there is probably a consensus in the middle,
• 25:34
  Speaker 1: a group of rank and file Senate Republicans who don't
• 25:37
  Speaker 1: like a months long shutdown, a group of moderate swing
• 25:40
  Speaker 1: district Republicans who maybe even be willing to override a
• 25:44
  Speaker 1: presidential video in the House. And you know, if this
• 25:46
  Speaker 1: drags on into February, you can start to see those
• 25:48
  Speaker 1: dynamics come into play where the President would lose leverage.
• 25:52
  Speaker 1: I think, what is the role of the Senate in this,
• 25:55
  Speaker 1: because of course they are also part of the deliberations.
• 25:58
  Speaker 1: But according to Senate Majority Leader Mitch McConnell, uh, he
• 26:03
  Speaker 1: has said that in order to preserve maximum flexibility, they'll
• 26:07
  Speaker 1: only vote for this procedure if there is a funding
• 26:11
  Speaker 1: agreement on the wall. That's right. I think Ms McConnell
• 26:14
  Speaker 1: was really put out on a limb by President Trump.
• 26:16
  Speaker 1: The Vice President came up and said that Trump was
• 26:17
  Speaker 1: willing to sign a stopgap measure till February eight. They
• 26:21
  Speaker 1: put on the floor, It passed the Senate, and then
• 26:23
  Speaker 1: suddenly Trump changed his mind, and and that makes Mitch
• 26:26
  Speaker 1: McConnell very vulnerable to right wing pundits and and radio.
• 26:30
  Speaker 1: Uh he's someone who is up for re election in Kentucky,
• 26:33
  Speaker 1: a very Trump heavy state. Uh So he's got to
• 26:35
  Speaker 1: really look out for that as well. Uh So, his
• 26:38
  Speaker 1: current position is we're not putting anything on the floor.
• 26:40
  Speaker 1: The President won't sign. We'll see though, if the if
• 26:42
  Speaker 1: the shutdown drags on for months. Uh you know, at
• 26:45
  Speaker 1: some point that position may change and he may be
• 26:48
  Speaker 1: willing to put something on the floor to try to
• 26:49
  Speaker 1: provoke an agreement. All right, Thanks very much for the
• 26:52
  Speaker 1: detailed analysis. Eric Wasson is our congressional porter for Bloomberg,
• 26:57
  Speaker 1: joining us from Washington. D E see where we have
• 27:01
  Speaker 1: entered day seven of the partial government shutdown. You're listening
• 27:06
  Speaker 1: to Bloomberg Markets. I'm pim Fox, my co host and
• 27:09
  Speaker 1: colleague Lisa Bromwitz on holiday. You're listening to Bloomberg Radio.
• 27:13
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 27:16
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 27:20
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 27:24
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa
• 27:27
  Speaker 1: abramowits one before the podcast. You can always catch us
• 27:30
  Speaker 1: worldwide on Bloomberg Radio