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GDP, Housing, Grayscale CEO, and VR Headsets (Podcast) · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
0:04
Speaker 1: my co host Matt Miller.
0:05
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
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Speaker 2: and Bloomberg experts, along with essential market moving news.
0:14
Speaker 1: Find the Bloomberg Markets Podcast called Apple Podcasts or wherever
0:17
Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
0:21
Speaker 1: I want to get to our next guest, Jennifer Lee.
0:22
Speaker 1: She's a senior economist managing director at BIMO Capital Markets. Jennifer,
0:27
Speaker 1: lots of economic data this week, and likely we'll have
0:31
Speaker 1: you know an effect on what we hear from our
0:33
Speaker 1: photo reserve in the coming months. What are you looking
0:35
Speaker 1: at this week in terms of the eco data?
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Speaker 3: Good morning everyone, Thanks for having me on. Sorry I'm
0:41
Speaker 3: still laughing about the bike to nowhere. That's how I
0:43
Speaker 3: feel sometimes with so for this this week, I think
0:48
Speaker 3: all the key numbers are coming out tomorrow, although this
0:50
Speaker 3: morning is a reports on GDP was a little bit
0:53
Speaker 3: kind of interesting. Even though we saw that downward revision,
0:56
Speaker 3: it was all due to inventories and net trade, but
1:00
Speaker 3: I noticed that the consumer spending portion was still a
1:02
Speaker 3: little bit, just a smidge higher, which is kind of interesting,
1:06
Speaker 3: but tomorrow's PC numbers, so it will be will be
1:08
Speaker 3: definitely the key because it's going to show you how
1:10
Speaker 3: Q three is beginning.
1:11
Speaker 4: So that's interesting too because this is a revision to
1:14
Speaker 4: that and you are seeing consumer spending revised higher there
1:18
Speaker 4: and those expectations. When I look at the ECFC function
1:21
Speaker 4: in the Bloomberg terminal that takes sort of the estimates
1:24
Speaker 4: for the average what economists are expecting, you don't see
1:26
Speaker 4: even a quarterly contraction anymore coming up for the next
1:29
Speaker 4: few quarters. So when you do have so many economists
1:32
Speaker 4: expecting that potentially we could see a recession in the
1:35
Speaker 4: next few quarters, how do you square that away? When
1:37
Speaker 4: you have data like this, it's being revised to the upside,
1:41
Speaker 4: so we are well.
1:42
Speaker 3: Actually, it was interesting because when you look at the components,
1:44
Speaker 3: it was all durables that actually was revised lower, but
1:47
Speaker 3: again it was upward divisions to services and that's where
1:50
Speaker 3: all the demand has been. But we actually have a
1:52
Speaker 3: contraction for the first quarter. I had to look at
1:54
Speaker 3: my in my notes here for the first quarter actually
1:57
Speaker 3: in around the turn of the year, because we are
1:59
Speaker 3: still looking for the for growth to slow overall We're
2:02
Speaker 3: not looking for that hard landing that many were calling for,
2:05
Speaker 3: you know, just a number of months ago. We're still
2:07
Speaker 3: looking for that soft landing. And so for all the
2:08
Speaker 3: data are putting in that direction, things are slowing, which
2:11
Speaker 3: is not a bad thing. Is what the Fed wants.
2:13
Speaker 3: This is what they really really want, and I think
2:18
Speaker 3: in terms of the consumer just to have them pulling
2:20
Speaker 3: back a little bit and eventually just taking all the
2:23
Speaker 3: spending off the table at some point in the early
2:25
Speaker 3: in the new year will help again growth slow even further,
2:28
Speaker 3: but not have that hard landing.
2:32
Speaker 1: So if there is not a hard landing here, how
2:34
Speaker 1: do you think the Federal Reserve will kind of interpret
2:37
Speaker 1: some of this data?
2:38
Speaker 5: Will they?
2:38
Speaker 1: I mean, they could very well pat themselves on the back,
2:41
Speaker 1: take a little bit of a victory lap, and just
2:42
Speaker 1: kind of stand pat for a while. Is that something
2:45
Speaker 1: you foresee or did they do? You feel like they
2:48
Speaker 1: may feel like they have more work to do in
2:50
Speaker 1: terms of pushing rates up a little bit.
2:53
Speaker 3: It's a it's all going to dependent. I mean, it
2:55
Speaker 3: sounds wishy washy, but that's you know, unfortunately, that is
2:57
Speaker 3: the case. Is everything is data dependent. I don't know
3:00
Speaker 3: they're gonna be doing victory laps. Just judging from what
3:02
Speaker 3: Fetcher Powell said last week in Wyoming, I don't think
3:05
Speaker 3: they're doing any victory lapse. You're still watching everything very carefully.
3:08
Speaker 3: He did get, by the way, give a nod to
3:10
Speaker 3: the more to the better inflation data of late, but
3:13
Speaker 3: he said it's just far too soon, and we already
3:14
Speaker 3: knew that. I mean, a couple of months of better
3:16
Speaker 3: inflation data is are definitely not enough to uh to
3:21
Speaker 3: to have them be very very comfortable. I think they
3:23
Speaker 3: need a lot more than that. But for sure, our
3:26
Speaker 3: official call is still that they are going to stay
3:29
Speaker 3: the course and keep watching the data and not do anything.
3:32
Speaker 3: And of course there is a risk. I still think
3:34
Speaker 3: that the risk is to is to raise race if
3:37
Speaker 3: things do not cool or or cool more than they
3:41
Speaker 3: want or less than they want. You know, I'm trying
3:43
Speaker 3: to say, of course, all the latest jobs data have
3:46
Speaker 3: been very interesting as well. With the ADP this morning,
3:49
Speaker 3: I don't take too much stock in it because it's
3:51
Speaker 3: sometimes quite locky compared to what the official data say.
3:54
Speaker 3: But you know, overall we have seen that slowly in
3:57
Speaker 3: growth in job growth, in job demanded, lower job openings,
4:02
Speaker 3: though there are fewer job openings out there, still far
4:04
Speaker 3: more than the number of unput Americans out there, So
4:06
Speaker 3: it's still tight, but at least we're all heading in
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Speaker 3: that right direction.
4:10
Speaker 4: We talk so much about whether or not we'll see
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Speaker 4: the Fed potentially raise at least one more time here,
4:15
Speaker 4: but what about just how long that they keep rates
4:18
Speaker 4: at an elevated level there, and how long are you
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Speaker 4: expecting that to potentially happen.
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Speaker 3: So we are looking officially for the first rate cut
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Speaker 3: to come probably sometime in the mid middle of twenty
4:29
Speaker 3: twenty four, mid year, so another year from now. We've
4:33
Speaker 3: actually been pushing that out a little bit more just
4:35
Speaker 3: because the data have shown that the US economy is
4:37
Speaker 3: a lot more resilient than anyone I would have hoped
4:39
Speaker 3: for at this point we're expected so if anything, they're
4:42
Speaker 3: going to keep rates for higher for longer.
4:46
Speaker 5: So a lot.
4:47
Speaker 3: So I don't think again, we're not going to see
4:49
Speaker 3: another rate cut or a rate cut coming until at
4:51
Speaker 3: the earliest middle of next year.
4:54
Speaker 1: We're going to get obviously, on Friday, the change in
4:58
Speaker 1: non form payrolls consensus it is for a gain of
5:00
Speaker 1: one hundred and seventy thousand. That would be down from
5:02
Speaker 1: prior period of one hundred and eighty seven thousand.
5:05
Speaker 5: But.
5:06
Speaker 1: Unemployment rate kind of sticking around three and a half percent.
5:09
Speaker 1: Where do you think that unemployment rate goes I have
5:12
Speaker 1: no idea how this labor economy is working. We got
5:15
Speaker 1: the jolt s Nummer come down yesterday. But where do
5:17
Speaker 1: you think the unemployment rate ultimately goes higher?
5:21
Speaker 3: If you have to pick a direction, it will be higher,
5:23
Speaker 3: but not too much higher. Probably something in the in
5:26
Speaker 3: the mid four I believe we have This is all
5:29
Speaker 3: to be expected at some point, like when you have
5:31
Speaker 3: over five hundred basis points of rate hikes coming from
5:34
Speaker 3: the Federal Reserve in such a short amount of time.
5:36
Speaker 3: At some point, you know, again, we're already seeing that
5:38
Speaker 3: job growth slowing. The demand for jobs are also starting
5:42
Speaker 3: to wane a little bit, So we're going to start
5:44
Speaker 3: seeing that unemployment rate inch a little bit higher, but
5:47
Speaker 3: it's not going to be ratcheting higher. And at the
5:49
Speaker 3: same time, they're still demand out there for certain categories
5:52
Speaker 3: of workers. Maybe not you know, on a broader scale,
5:54
Speaker 3: but certain areas like construction, we're still lacking even on
5:57
Speaker 3: the technology side. You know, I hearing stories about you know,
6:00
Speaker 3: shortage of engineers, for example, and not enough even though
6:03
Speaker 3: we've got all this money coming in on the fiscal
6:05
Speaker 3: side to build all these facilities to create semiconductors, we
6:09
Speaker 3: don't have enough people who are trained to build for
6:11
Speaker 3: that certain particular technologies. So certain pockets are still going
6:15
Speaker 3: to be a lot more demand. But broadly speaking, just
6:18
Speaker 3: because of slower growth, because of higher interest rates, we're
6:20
Speaker 3: going to start seeing that jobles rate into a little
6:22
Speaker 3: bit higher.
6:23
Speaker 4: Well across this pond. We do have the ECB having
6:25
Speaker 4: a meeting on September fourteenth, that is ahead of the
6:28
Speaker 4: Federal Reserves decision on September twentieth, but we are going
6:31
Speaker 4: to get some Eurozone inflation numbers on Thursday. How do
6:34
Speaker 4: you square away the issues when it comes to the
6:36
Speaker 4: inflation that Christine Leguard is clearly trying to fight and
6:39
Speaker 4: indicated that at Jackson Hole last week, versus what fetchair
6:42
Speaker 4: Jerome pal is trying to do in the United States.
6:46
Speaker 3: It's funny they're mentioning the ECB, because I for the ECB,
6:48
Speaker 3: it's almost like a coin toss right now. If anything,
6:51
Speaker 3: I would right now our official review, my official view
6:54
Speaker 3: is still that they're going to stay the course, just
6:56
Speaker 3: given that inflation has come down from those highs, given
6:59
Speaker 3: that all the hawks or most of the hawks have
7:01
Speaker 3: started to tone down their hawkishness, and the fact that
7:04
Speaker 3: China is slowing considerably as well. So I think that
7:07
Speaker 3: might be enough to put the lot of the ECB
7:10
Speaker 3: to sort of step aside a little bit. And she
7:11
Speaker 3: sort of hinted at that at that July meeting. However,
7:15
Speaker 3: the flat fact that inflation is still sticky. We got
7:17
Speaker 3: three new pieces of data overnight. Belgium, for example, it
7:20
Speaker 3: was like all over the map, Belgium CPI was relatively steady.
7:23
Speaker 3: German CPI edged a little bit lower, which is key,
7:27
Speaker 3: but it's just it wasn't as low as consensus had expected.
7:30
Speaker 3: And in Spain inflation rose for the second month in
7:33
Speaker 3: a row. So it's going to show that. I don't
7:34
Speaker 3: think we're going to go in to get a very
7:37
Speaker 3: clear signal from tomorrow's inflation report, and I think that
7:40
Speaker 3: will be put the ECB still at play for September.
7:44
Speaker 1: Well, most importantly, how are things in Canada.
7:48
Speaker 3: Things are slowing. It is actually slowing a little bit
7:51
Speaker 3: more than we had a little bit more actually than
7:54
Speaker 3: what's happening in the US. We're going to get some
7:55
Speaker 3: key data this week. On Friday, we're going to get
7:58
Speaker 3: our We're going to Foly going to release our real
7:59
Speaker 3: GDP for the second quarter, and we're looking for growth
8:02
Speaker 3: to slow to about a one point two percent a wicepace,
8:05
Speaker 3: which is about half of what we saw in Q one.
8:07
Speaker 3: We had a strong start to the year that we've
8:09
Speaker 3: been doing, dealing with a lot of wildfires almost see
8:12
Speaker 3: the coast to coast, labor strikes and all that's going
8:15
Speaker 3: to weigh on the second court. Of course, higher interest
8:17
Speaker 3: rates and consumers here are a lot more susceptible I
8:20
Speaker 3: guess two rates than they are in the US, So
8:23
Speaker 3: I think we are going to see slower growth. It's
8:25
Speaker 3: just something by the way, that the Bag of Canada
8:26
Speaker 3: is going to very much welcome because inflation is still
8:29
Speaker 3: too sticky. So as long as inflation or the economy
8:32
Speaker 3: continues to slow, which we're expecting in the second quarter,
8:35
Speaker 3: that will allow the Bag of Canada to stay also
8:38
Speaker 3: on hold for the rest of the year.
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Speaker 1: Hi, Jennifer, thanks so much. We appreciate getting the global view,
8:42
Speaker 1: including our good friends to Northern Canada. Jennifer Lee, Senior
8:45
Speaker 1: Economists and Managing director at BMO Capital Markets, that is
8:48
Speaker 1: Bank of Montreal.
8:51
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9:01
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9:05
Speaker 7: All.
9:05
Speaker 4: We did get a few different data points on the
9:08
Speaker 4: housing side today, so we were just talking about earlier
9:11
Speaker 4: the pending home sales unexpectedly rising for a second month,
9:14
Speaker 4: but also we did see that mortgage applications also rose
9:17
Speaker 4: in the latest week. So I want to get straight
9:19
Speaker 4: to our next guest, Odetta Cushy, Deputy chief Economists at
9:22
Speaker 4: First American, who's joining us on zoom to discuss the
9:25
Speaker 4: latest data in the housing market. Thanks so much for
9:28
Speaker 4: joining us. Walk us through these latest data points and
9:31
Speaker 4: what this really tells us about the housing market at
9:33
Speaker 4: this point, because we do know that mortgage rates are
9:35
Speaker 4: at about a two decade high at this point, that's right.
9:40
Speaker 8: So the recent increase in pending home sales, this is
9:42
Speaker 8: a second month in a row that there's been a
9:44
Speaker 8: modest increase in pending home sales, which is a leading
9:47
Speaker 8: indicator of a future sales. That's really a testament to
9:50
Speaker 8: the strength of the demand side of the equation. There's
9:53
Speaker 8: still quite a bit of pent up demand for homes,
9:57
Speaker 8: but insufficient supply to meet that demand. So some cautious
10:01
Speaker 8: optimism in the latest numbers. We saw this morning a
10:04
Speaker 8: weekly increase in purchase mortgage applications, although again a very
10:08
Speaker 8: modest increase on a year over year basis. We're still
10:12
Speaker 8: quite low both for mortgage applications and pending home sales.
10:16
Speaker 8: But you really see the strength of demand even in
10:19
Speaker 8: such a high interest rate environment and such a low
10:21
Speaker 8: inventory environment.
10:22
Speaker 4: What is the catalyst because typically the springtime is more
10:25
Speaker 4: of the boom there when you do see that when
10:27
Speaker 4: it comes to home sales, but this is a little
10:29
Speaker 4: bit later than that. Why is that, Well, the.
10:32
Speaker 8: Pent up demand there's been a lot of multiple offer situations,
10:36
Speaker 8: and so you know, the folks that are losing out
10:38
Speaker 8: on those multiple offer situations are on the sidelines, ready
10:41
Speaker 8: to jump in when there is sort of a house
10:43
Speaker 8: out there that meets their needs and what they're looking for.
10:47
Speaker 8: And so maybe a little break from seasonality there.
10:51
Speaker 1: So odetta is I'm going at the bank rate thirty
10:55
Speaker 1: year fixed mortgage seven point five three percent. Is there
10:59
Speaker 1: a level where that needs to decline, where that might
11:02
Speaker 1: free up sellers to maybe say, all right, I can
11:06
Speaker 1: in fact part with my lower rate mortgage and maybe
11:09
Speaker 1: put my home on the market. Is there a break
11:11
Speaker 1: given number out there that you think might be the
11:13
Speaker 1: magic number?
11:15
Speaker 8: Well, that's the big question right now. More than ninety
11:18
Speaker 8: percent of existing homeowners are locked into rates below six percent,
11:22
Speaker 8: So certainly we need to see something below seven percent
11:26
Speaker 8: to even see some movement there. There's not a lot
11:28
Speaker 8: of financial incentive for existing home owners to drop those
11:32
Speaker 8: record low mortgage rates that they locked into at this point.
11:35
Speaker 8: So I think, you know, well under seven percent, probably
11:39
Speaker 8: below six percent to unlock some of that inventory.
11:42
Speaker 4: We did see July opending sales rise the most in
11:45
Speaker 4: the West and also actually increase in the South, but
11:48
Speaker 4: probably not surprisingly, they did fall in the Northeast. What
11:51
Speaker 4: kind of dynamics are you seeing from a regional perspective
11:54
Speaker 4: at this point?
11:55
Speaker 8: So the West is that's your traditionally more expensive markets,
11:59
Speaker 8: and those are all the markets where we've seen the
12:01
Speaker 8: most severe price declines from the peak, and so in
12:04
Speaker 8: a higher mortgage rate environment, something needs to give, and
12:07
Speaker 8: in this instance it has to be price. So the
12:10
Speaker 8: areas where we're seeing price adjust to the reality of
12:13
Speaker 8: higher mortgage rates, they're seeing a little bit more activity.
12:16
Speaker 8: So in this instance, it would be the West Coast,
12:18
Speaker 8: those traditionally more expensive markets.
12:20
Speaker 1: So if there really aren't a lot of existing home
12:24
Speaker 1: sales in the market or available on the market, are
12:27
Speaker 1: are the builders making up any of that kind of
12:30
Speaker 1: shortfall by just building more houses new houses?
12:34
Speaker 8: That's right, builders are picking up market share. Traditionally, existing
12:38
Speaker 8: home inventory makes up about ninety percent of total inventory.
12:42
Speaker 8: These days it's more like seventy, so builders have really
12:44
Speaker 8: stepped up to build more homes. They're also offering incentives
12:48
Speaker 8: rate buydowns, price declines to sort of help button entice
12:54
Speaker 8: buyers into the new home market.
12:55
Speaker 4: Which builders have been kind of setting themselves apart the
12:59
Speaker 4: most in and which ones do you think are struggling
13:01
Speaker 4: more depending on I guess which type of demographic and
13:03
Speaker 4: you're trying to cater to.
13:06
Speaker 8: It's really the bigger builders that have had a little
13:08
Speaker 8: bit more power to be able to do these rate buydowns.
13:12
Speaker 8: So I think in this market it's more advantageous to
13:14
Speaker 8: be one of the big builders rather than the small
13:17
Speaker 8: builders that maybe don't have the ability to offer some
13:20
Speaker 8: of these incentives.
13:22
Speaker 5: Oh data.
13:22
Speaker 1: One of the things that I hear from the home
13:24
Speaker 1: builders is, you know when they talk about their costs,
13:26
Speaker 1: and I don't even think about it, but that's the
13:28
Speaker 1: biggest cost. I guess it's just land and some of
13:31
Speaker 1: these markets everybody's flocking to Texas and Florida and places
13:35
Speaker 1: like that, Where do they get land and can they
13:37
Speaker 1: get it on an affordable basis.
13:41
Speaker 8: Lands it's really multiple supply side headwinds and higher costs
13:45
Speaker 8: for builders. The cost of land certainly is higher, but
13:48
Speaker 8: of course they also are are grappling with ongoing supply
13:52
Speaker 8: chain headwinds right those those aren't totally gone. And of
13:55
Speaker 8: course the price of labor has gone up. Wages in
13:58
Speaker 8: the construction industry have gone up as well, and so
14:02
Speaker 8: costs all around for builders have gone up, and that's
14:06
Speaker 8: made it very difficult for them to build at that
14:08
Speaker 8: sort of starter starter home priced here, that entry level
14:12
Speaker 8: priced here, and that's the level that we need at
14:16
Speaker 8: this point because it's a lot of first time home
14:17
Speaker 8: buyers out there that have been priced out of this
14:19
Speaker 8: market and they're looking for that starter home price here
14:22
Speaker 8: and builders just aren't able to build at that price
14:25
Speaker 8: point because of higher costs.
14:28
Speaker 4: So how do we end up fixing the inventory issue
14:31
Speaker 4: That clearly got exacerbated during the pendit pandemic, but that
14:35
Speaker 4: was already an issue even coming out of the housing crisis.
14:38
Speaker 8: There is some mitigating factors here on the existing home side.
14:43
Speaker 8: Of course, if rates fall, that will help to boost
14:46
Speaker 8: the market a bit. But we also have forty two
14:48
Speaker 8: percent of existing homeowners who don't have a mortgage on
14:51
Speaker 8: their home. They're free and clear on their home, and
14:55
Speaker 8: so those are and they're sitting on a ton of equity,
14:58
Speaker 8: and so a lot of those homeowners can sort of
15:00
Speaker 8: be a mitigating factor amidst this rate lock in period.
15:04
Speaker 8: They aren't financially disincentivized by higher mortgage rates because they
15:08
Speaker 8: don't have a mortgage, and so there's that aspect on
15:12
Speaker 8: the existing home side. On the new home side, we
15:14
Speaker 8: just need builders to continue to build more homes, and
15:18
Speaker 8: they do have quite a few challenges, whether it be
15:21
Speaker 8: regulatory challenges, and so anything that can be done to
15:24
Speaker 8: sort of ease some of those challenges for builders to
15:26
Speaker 8: allow them to build more homes where people are looking
15:29
Speaker 8: to buy.
15:30
Speaker 4: How much of a concern is it for you when
15:32
Speaker 4: they can't potentially offer some of those price points to
15:34
Speaker 4: maybe younger buyers at this point, then.
15:38
Speaker 8: We see that happening quite a bit. There's a lot
15:41
Speaker 8: of buyers that are now priced out of the existing
15:43
Speaker 8: home market, and of course the new home market is
15:46
Speaker 8: traditionally been more expensive. It's been more expensive to buy
15:49
Speaker 8: a new home rather than an existing home on average,
15:53
Speaker 8: So a lot of those buyers are still on the
15:55
Speaker 8: sidelines and waiting for rates to come down, or their
15:59
Speaker 8: looking at a lower price point home if they can
16:01
Speaker 8: find it in their work.
16:02
Speaker 4: So what if people aren't willing to move out of
16:05
Speaker 4: their house if they already locked in stay like a
16:07
Speaker 4: two percent mortgage rador? Obviously we had rates at historic
16:11
Speaker 4: loans which translated into mortgage rates. But what do you
16:13
Speaker 4: do with that dynamic if people aren't willing to move,
16:16
Speaker 4: and then obviously you would have homebuilders that need to
16:18
Speaker 4: build homes.
16:20
Speaker 8: That's exactly the issue that we're facing in today's market.
16:23
Speaker 8: Existing home sales have been so depressed mostly because you know,
16:26
Speaker 8: an existing homeowner doesn't want to let go of that home,
16:30
Speaker 8: and that's likely a dynamic that will continue to see
16:32
Speaker 8: play out in the housing market over the next several years.
16:36
Speaker 8: I don't anticipate rates to go below three percent again,
16:40
Speaker 8: and so I think that that will be constraining on
16:42
Speaker 8: the housing market for some time.
16:44
Speaker 1: All Right, So let's say I do the Mathodeta and
16:46
Speaker 1: I can afford to pay a seven handle on my mortgage.
16:49
Speaker 1: I go into a mortgage lender. Am I going to
16:51
Speaker 1: get that loan? So?
16:54
Speaker 8: Credit standards have eased a bit since earlier this year.
16:58
Speaker 8: Certainly credit availability has been generally low, but it will
17:03
Speaker 8: really depend on your borrower characteristics, right on what kind
17:07
Speaker 8: of a borrower that you are from the perspective of
17:09
Speaker 8: the lender. But they have eased a bit.
17:12
Speaker 1: I think I'm a good credit Would you loan to me?
17:14
Speaker 5: I would?
17:14
Speaker 1: Yeah, I figured I wouldn't like certain people in this room.
17:17
Speaker 1: I might not, but glad to see Adeta Cushy, thank
17:20
Speaker 1: you so much for joining us. Adeta Cushy is the
17:23
Speaker 1: deputy chief economist for First American. First American is a
17:27
Speaker 1: financial company. They provide title settlement and risk solutions for
17:31
Speaker 1: the real estate transactions, so they kind of get to
17:33
Speaker 1: see the whole space there.
17:35
Speaker 6: You're listening to the tape. Cans are live program Bloomberg
17:38
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17:41
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17:45
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17:52
Speaker 9: The welcome now our Bloomberg TV and Radio audience. We
17:56
Speaker 9: are joined now by Michael Sunensheine, a great scale CEO
18:00
Speaker 9: and Bloomber Externally Basic also joining us as well.
18:02
Speaker 5: Michael.
18:03
Speaker 9: It's a real pleasure. This was a big day for
18:04
Speaker 9: you yesterday. What happens now? After the US Court sort
18:09
Speaker 9: of gave you some runway to be able to launch
18:11
Speaker 9: a spot bitcoin ETF? What do you do now?
18:14
Speaker 10: Yeah, so thank you so much for having me. Let's
18:16
Speaker 10: be clear about yesterday. So, yesterday was the culmination of
18:19
Speaker 10: more than a year worth of litigation. The SEC denied
18:23
Speaker 10: gbtc's conversion to an ETF. We immediately filed the lawsuit.
18:27
Speaker 10: Fourteen months later, now we finally got a decision from
18:30
Speaker 10: the DC Circuit and a panel of three judges unanimously
18:34
Speaker 10: voted and agreed with gray Scale, and that actually vacates
18:37
Speaker 10: the SEC denial order. Huge win for Gray Scale, huge
18:41
Speaker 10: win for our investors, and really the crypto and investment
18:44
Speaker 10: community is as a whole.
18:45
Speaker 11: But there's a process here to the point that you're making,
18:47
Speaker 11: and there is a chance that the SEC looks to
18:50
Speaker 11: broaden this out, potentially fight the decision, bringing this in
18:54
Speaker 11: front of a larger array of judges. And so if
18:58
Speaker 11: you're thinking about that potential ahead, do you have any
19:01
Speaker 11: concerns that the race to bring an ATF to the
19:04
Speaker 11: market will leave you behind.
19:07
Speaker 10: Well, So today is day one of a forty five
19:10
Speaker 10: day period during which the SEC has the ability to
19:13
Speaker 10: request a rehearing. Ultimately, at the end of that forty
19:17
Speaker 10: five day process, you could expect a final mandate from
19:20
Speaker 10: the court with operational next steps. Now, of course, in
19:23
Speaker 10: the interim, our attorneys are going to be working proactively
19:26
Speaker 10: with the SEC to try and make this conversion as
19:29
Speaker 10: expeditious as possible. But we really do need to ensure
19:33
Speaker 10: during this period we're adhering to the federal rules of
19:36
Speaker 10: the appellate court.
19:37
Speaker 11: Do you need to refile for an ETF and if
19:40
Speaker 11: you do need to refile or amend, are there certain
19:42
Speaker 11: things that you would add, such as a surveillance sharing agreement.
19:46
Speaker 11: Do you worry that the ones that already have one
19:48
Speaker 11: have a competitive advantage to your filing.
19:51
Speaker 10: Well, so the operational next steps on anything that Grayscale
19:54
Speaker 10: Willer won't have to do will be contained in that
19:56
Speaker 10: final mandate that comes out of the court. But one
19:59
Speaker 10: of the interesting things that we actually got from the
20:01
Speaker 10: Court in yesterday's decision was that the Court agreed with
20:04
Speaker 10: us that the arguments we've been putting forward all along
20:07
Speaker 10: throughout this process or such that the SEC already has
20:11
Speaker 10: the tools it needs to approve spot bitcoin products like GBTC,
20:15
Speaker 10: that there is sufficient surveillance between the CME where Bitcoin
20:18
Speaker 10: Future is trade in national securities exchanges like the New
20:22
Speaker 10: York Stock Exchange where we intend to list GBTC as
20:24
Speaker 10: an ETF. So there really shouldn't be any further grounds
20:28
Speaker 10: like the SEC has been relying on to continue denying
20:31
Speaker 10: these types of products from coming to market.
20:33
Speaker 12: Michael, you're very optimistic. Danny here by the way, and London,
20:36
Speaker 12: great to speak with you. It makes complete sense that
20:38
Speaker 12: you're optimistic and in a good mood. But do you
20:42
Speaker 12: have a nagging voice at the back of your head?
20:44
Speaker 12: That something might go wrong. What are you most afraid
20:47
Speaker 12: of that could kind of undo some of the progress
20:50
Speaker 12: that we saw in yesterday's decision.
20:52
Speaker 10: Well, I think we're really at a pivotal moment here
20:54
Speaker 10: for crypto. Certainly a lot of investors have been voicing
20:58
Speaker 10: to us increased optimism the recent Ripple victory, now obviously
21:02
Speaker 10: the Greyscale victory in court yesterday, as well as what
21:05
Speaker 10: they're seeing taking place in Washington. Right you now have
21:08
Speaker 10: draft legislation that's passing through Congress, and we're really optimistic
21:12
Speaker 10: that there will be greater regulatory clarity for investors through
21:17
Speaker 10: some of these types of actions. And I think if
21:19
Speaker 10: we take an even larger step back and look at
21:20
Speaker 10: the broader landscape, crypto has been one of the best
21:23
Speaker 10: performing assets year to date, and coming out of this
21:26
Speaker 10: most recent crypto winter, what we're hearing and what we're
21:28
Speaker 10: experiencing is that investors know that crypto as an asset
21:31
Speaker 10: class is most certainly here to stay.
21:33
Speaker 9: Can we just come back to refiling for a second.
21:35
Speaker 10: Sure, So, do you have to refile? We will have
21:38
Speaker 10: to see upon the final operational procedures that come through
21:42
Speaker 10: that final mandate that the court will issue.
21:44
Speaker 9: So you don't know, but you may.
21:46
Speaker 10: We don't know what the final opinion will say until
21:48
Speaker 10: we reach the end of that period, correct, is there.
21:51
Speaker 9: I've been reading us stuff from yesterday too that you know,
21:53
Speaker 9: you may have won this battle but then lose the
21:55
Speaker 9: war and that there's a bunch of other competitors now,
21:57
Speaker 9: so now you're not gonna be the only horse in town.
21:59
Speaker 10: Yes. So this is a topic we've talked about before, ladies.
22:02
Speaker 10: It's really a world in which there are multiple spot products.
22:06
Speaker 10: Is a world that Greyscale has long been ready for.
22:08
Speaker 10: There are multiple bitcoin futures products. We believe that there
22:11
Speaker 10: will be a world in which there are multiple spot
22:13
Speaker 10: bitcoin products. That being said, we want investors to have choice,
22:17
Speaker 10: and some of the things that we do think investors
22:19
Speaker 10: will look to when they are making those allocation decisions
22:21
Speaker 10: are the size of the fund, the liquidity of the fund,
22:24
Speaker 10: the track record of the fund. Right, let's not forget
22:26
Speaker 10: that GBTC is the largest bitcoin fund in the world.
22:29
Speaker 10: It's owned by millions and millions of investors, it has
22:33
Speaker 10: three plus percent of the outstanding bitcoin supply, and really
22:37
Speaker 10: now has almost a ten year track record of operational success. Right,
22:41
Speaker 10: whereas a lot of the other products coming to market
22:43
Speaker 10: are really making use of gbtc's operations, disclosures, reporting, and
22:48
Speaker 10: GBTC is really paving the way to broaden out that market.
22:51
Speaker 11: There's another massive market question here, and it's not just
22:54
Speaker 11: about the pace and time. It's about the structure and
22:57
Speaker 11: the fees. Because if you look at Blackrock Invesco Fidelity,
23:01
Speaker 11: these are asset managers with a history of coming in
23:03
Speaker 11: low and if you look at the fees that you
23:05
Speaker 11: have offered and really has made a very profitable entity
23:09
Speaker 11: for Digital Currency Group and gray Scale, how much lower
23:13
Speaker 11: exactly can fees get for the grayscale product in the
23:17
Speaker 11: form of an ETF.
23:18
Speaker 10: Well, what I've committed to historically, and we'll say again
23:21
Speaker 10: to you today, is we are committed to lowering fees
23:24
Speaker 10: when GBTC converts to an ETF. We'll obviously have to
23:27
Speaker 10: come back on and talk to you about what the
23:29
Speaker 10: fees are when that conversion actually happens.
23:32
Speaker 11: So the other strangeness here is the discount that the
23:36
Speaker 11: GBTC is currently trading at. You had gone from twenty
23:39
Speaker 11: four yesterday to fifteen below neat asset value back to
23:42
Speaker 11: twenty can you answer to this market volatility here and
23:46
Speaker 11: the uncertainty that investors are grappling with as you head
23:49
Speaker 11: towards this process.
23:50
Speaker 10: Well, there's a couple of things in that dynamic. So
23:53
Speaker 10: number one, there certainly was increased trading volume yesterday in GBTC,
23:57
Speaker 10: a lot of excitement and enthusiasm based on the victory
24:00
Speaker 10: that GBTC shareholders had in the court yesterday. Now, as
24:04
Speaker 10: we eventually approach an ETF, if you'd expect that eventually
24:08
Speaker 10: there will be an arbitrage mechanism through the ETF that
24:11
Speaker 10: will allow for any premiums or discounts to be eliminated.
24:15
Speaker 10: That's a really really important function of why ETFs serve
24:19
Speaker 10: in the capacity that they do, and it's really the
24:22
Speaker 10: core of what we've been fighting for throughout this entire lawsuit,
24:25
Speaker 10: right is to ensure that the optimal investment structure is
24:28
Speaker 10: there for investors and we do eliminate any premiums or discounts.
24:32
Speaker 12: Michael, have you heard anything from the SEC over the
24:34
Speaker 12: past twenty four hours, any updated communications or questions.
24:38
Speaker 10: We have not heard anything from the SEC. Only just
24:41
Speaker 10: from public reporting. We've seen certainly that the SEC is
24:46
Speaker 10: reviewing the decision much the same way. My team and
24:48
Speaker 10: my legal team is reviewing the decision as well, and
24:51
Speaker 10: again it is our intention to continue to have a
24:53
Speaker 10: proactive and constructive dialogue with the SEC during this forty
24:56
Speaker 10: five day period.
24:59
Speaker 9: I guess the question becomes, why here versus if crypto
25:04
Speaker 9: and bitcoin is going to become a hotter topic overseas, right,
25:08
Speaker 9: why launch here? Why not go somewhere else and launch.
25:10
Speaker 10: Well, this is the center of the financial markets and
25:13
Speaker 10: capital formation.
25:14
Speaker 9: But clearly the US government does not like crypto.
25:17
Speaker 10: Well, you know, from my standpoint, Greyscale now coming up
25:20
Speaker 10: on ten years of operational history, you know, we purposely
25:25
Speaker 10: decided to set up shop in the US, make use
25:28
Speaker 10: of existing rules and regulations, and it's our intention to
25:31
Speaker 10: continue to do so right enabling investors to access this
25:34
Speaker 10: innovative asset class, but in a way that feels traditional, familiar,
25:38
Speaker 10: and again within those regulatory you know, constraints to say
25:41
Speaker 10: that they're often used to.
25:43
Speaker 11: We were talking about the potential to either refile or amend.
25:46
Speaker 11: We were talking about the SEC's frustrations with crypto and
25:48
Speaker 11: fight against a lot of the parts of the crypto industry.
25:51
Speaker 11: Are you specifically addressing some of the SEC's concerns when
25:55
Speaker 11: it comes to their concerns around market manipulation, investor protection
25:58
Speaker 11: around retail investors, and are there any changes that need
26:02
Speaker 11: to be made before you head into a new relationship
26:06
Speaker 11: with them.
26:07
Speaker 10: Well, I think we always have and will continue to
26:09
Speaker 10: serve in a capacity that's educational with the SEC. This
26:12
Speaker 10: is an asset class that continues to evolve very rapidly,
26:15
Speaker 10: and we feel a tremendous responsibility to be serving in
26:18
Speaker 10: that capacity. Specifically though Shanali to manipulation, fraud, things of
26:23
Speaker 10: that nature. If you look closely at yesterday's opinion that
26:25
Speaker 10: the court issued, the court agreed with us that the
26:28
Speaker 10: SEC did not come up with substantive reasoning as to
26:31
Speaker 10: how to explain the difference between futures and spot and
26:35
Speaker 10: the fact that these mechanisms that we believe are already
26:37
Speaker 10: in place to detect things like fraud and manipulation in
26:40
Speaker 10: the bitcoin market are already present.
26:43
Speaker 12: Michael, you mentioned earlier in this conversation that you had
26:46
Speaker 12: some hope that Congress would take action when it comes
26:49
Speaker 12: to regulation.
26:50
Speaker 10: Perhaps there's more.
26:50
Speaker 12: Appetite for them to approve and to welcome such products.
26:54
Speaker 12: You said you haven't heard from the SEC. Have you
26:56
Speaker 12: heard from Congress? What sort of noise are you hearing
26:59
Speaker 12: around Capitol Hill?
27:00
Speaker 10: So we are certainly very engaged with both sides of
27:03
Speaker 10: the aisle in DC. There is no question now that
27:07
Speaker 10: crypto has become actually a nonpartisan issue, right We're realizing
27:11
Speaker 10: that so many of our legislators recognize that their underlying
27:16
Speaker 10: constituents are involved in crypto, are increasingly going to be
27:19
Speaker 10: involved in crypto, and they want to ensure that they're
27:22
Speaker 10: approaching legislation in an appropriate way that protects their underlying constituents.
27:27
Speaker 10: I am optimistic that this upcoming you know, Congress can
27:31
Speaker 10: actually move some legislation forward. And again, I do think
27:34
Speaker 10: it's really a pivotal time for US and other stalwarts
27:38
Speaker 10: within the crypto space to be educating our politicians about
27:41
Speaker 10: crypto so that they actually are looking at legislation through
27:45
Speaker 10: a very you know, knowledgeable lens.
27:47
Speaker 11: I'm going to push you just one more time on
27:49
Speaker 11: the fees here.
27:49
Speaker 10: Michael, of course you are Sonality Well.
27:52
Speaker 11: The reason being is this is a matter of competitiveness
27:54
Speaker 11: when we come to this market. It is also going
27:56
Speaker 11: to determine how much retail investors are going to really
27:59
Speaker 11: pay a product that has been more expensive than other
28:01
Speaker 11: ETFs in the past. Give us a roadmap here on
28:04
Speaker 11: how you're thinking about it, because you've had years to
28:06
Speaker 11: think about it.
28:07
Speaker 10: We have, and when GBTC converts to an ETF, we
28:11
Speaker 10: will lower the fee. You said that it's been more
28:14
Speaker 10: expensive than other ETFs. Notably, GBTC is not an ETF today, right,
28:18
Speaker 10: And so when GBTC converts to an ETF and it
28:21
Speaker 10: becomes in that product structure, and it perhaps is in
28:24
Speaker 10: an environment with other competing products, there will be other
28:27
Speaker 10: factors for us to consider there as well.
28:30
Speaker 6: Right.
28:30
Speaker 1: That was Grey Scale CEO Michael Sinstein, sitting down with
28:33
Speaker 1: our own Donnie Berger, Shanalie Bassic, and Alex Steele here
28:37
Speaker 1: at Bloomberg's HQ after the court. US Court ruled in
28:40
Speaker 1: favor of the Digital Currency Asset Manager. And let's get
28:44
Speaker 1: some more color on this because it is being held
28:46
Speaker 1: as a very important day in the world of crypto.
28:49
Speaker 1: Here James Seffert, he does his stuff for Living ETF
28:52
Speaker 1: research channels at Bloomberg Intelligence. James summarize for our listeners
28:56
Speaker 1: and our viewers here what the court ruled yesterday and
29:00
Speaker 1: why it's important to our good friends in the crypto space.
29:05
Speaker 7: Yeah, so Sunshine just did a good did a pretty
29:09
Speaker 7: good job of explaining what happened there. But at the
29:11
Speaker 7: end of the day, it was a complete and utter
29:13
Speaker 7: rebuke of all of the SEC's arguments for denying spot
29:16
Speaker 7: bitcoin ETFs in the past. Now specifically it was it
29:20
Speaker 7: was in favor of Gray Scales arguments. Basically, they went
29:24
Speaker 7: and they filed this lawsuit against the SEC and the
29:26
Speaker 7: DC Court of Appeals, and they were saying that this
29:29
Speaker 7: is a violation of the Administrative Procedures Act, which, to
29:32
Speaker 7: get wonky, just means you have to treat like situations alike.
29:34
Speaker 7: Regulator can't like look at one thing that's extremely similar
29:37
Speaker 7: and come up with a different answer. And what this
29:40
Speaker 7: ruling said is bitcoin futures ETFs are not substantially different
29:44
Speaker 7: from spot bitcoin etf which anyone who's been in financial
29:47
Speaker 7: markets knows that like futures markets are completely intertwined with
29:50
Speaker 7: the underlying spot.
29:51
Speaker 5: Markets of whatever they track.
29:53
Speaker 7: There's a ninety nine point nine percent correlation here. Basically,
29:56
Speaker 7: what the judges in this instant said is the SEC
30:00
Speaker 7: did not do any a good job at all of
30:03
Speaker 7: arguing why they approved futures ETFs and still denied spot
30:07
Speaker 7: bitcoin ETFs.
30:08
Speaker 4: So really, it doesn't mean that grey Scales Bitcoin trust
30:11
Speaker 4: would immediately be converting to an ETF. It's like you said,
30:13
Speaker 4: it means that the SEC did fail to explain why
30:16
Speaker 4: it approved bitcoin futures exchange treated products, but just not
30:20
Speaker 4: grace scals proposed products. So what does that mean next?
30:25
Speaker 7: Yeah, so, I mean it's a complicated question because one
30:28
Speaker 7: don't we don't fully know what it means.
30:30
Speaker 5: Next.
30:30
Speaker 7: I've read a bunch of these court case, these court
30:32
Speaker 7: decisions and opinions in the past to kind of understand,
30:35
Speaker 7: and in many cases the court will give like some
30:38
Speaker 7: sort of deadline before X y Z happens or they
30:41
Speaker 7: need to do this and what have you.
30:42
Speaker 5: And they kind of didn't do that here. So they
30:45
Speaker 5: have forty.
30:46
Speaker 7: Five days to The SEC has forty five days to
30:49
Speaker 7: go with an unbond hearing, which basically just means this
30:51
Speaker 7: is a panel of three judges decided this case and
30:54
Speaker 7: on bonk hearing you request to get one of those
30:56
Speaker 7: would be like with all the judges on the case,
30:58
Speaker 7: the on the court in this case, I think it's
31:00
Speaker 7: like seventeen judges. So basically rather than just three would
31:02
Speaker 7: be seventeen. But this was unanimous decision, right, So three
31:06
Speaker 7: judges all agreed and the language was very strong, rebuking
31:09
Speaker 7: everything that.
31:10
Speaker 5: The SEC said.
31:11
Speaker 7: So what next is I'm not really sure? Right, So
31:13
Speaker 7: the SEC they basically what they did is they vacated
31:16
Speaker 7: the SEC's order denying Greyscale's application to convert GBDC into
31:20
Speaker 7: an ETF. This isn't an approval letter that GBDC can
31:23
Speaker 7: now be an ETF. It's just your reasoning and your
31:26
Speaker 7: why you denied. This just isn't good enough, and you
31:28
Speaker 7: didn't do at all what you were supposed to do
31:31
Speaker 7: in issuing this order. So what comes next is basically
31:34
Speaker 7: trying to figure out what's the SEC gonna do. Are
31:37
Speaker 7: they going to come back and issue another denial order
31:39
Speaker 7: and basically say like come up with different reasons, or
31:42
Speaker 7: are they just going to come back and approve it.
31:44
Speaker 5: We also don't have timelines.
31:46
Speaker 7: Is the is Greyscale going to have to just go
31:47
Speaker 7: through this whole two hundred and forty day process again
31:50
Speaker 7: and refile. Is there going to be some other forty
31:52
Speaker 7: five sixty day deadline where the SEC is going to
31:54
Speaker 7: review this and then issue a statement we really don't know.
31:58
Speaker 1: Explain to me at least why and ETF on spot
32:02
Speaker 1: bitcoin is better than one that's based or based on futures.
32:07
Speaker 1: Why suspect works better?
32:09
Speaker 7: Yeah, so Spot Bitcoin, Spot ETFs in general are just
32:12
Speaker 7: the Holy Grail, right, I mean, the etf rapper It's
32:15
Speaker 7: technologies makes everything very easy. You can look at gold
32:18
Speaker 7: ETFs as a perfect example. But the reason that Spot
32:21
Speaker 7: is better is because in futures contracts, one.
32:24
Speaker 5: They're derivatives.
32:25
Speaker 7: So a lot of people don't like understand exactly what
32:27
Speaker 7: futures contracts are. And futures contracts they expire every month,
32:31
Speaker 7: so you need to roll these contracts. So basically what
32:33
Speaker 7: you're doing is you're buying this thing. Say you buy
32:35
Speaker 7: the September contract, then at the end of September you
32:38
Speaker 7: have to sell that contract and buy the October contract.
32:40
Speaker 5: And it's called rolling your futures.
32:42
Speaker 7: And if the futures market is in contango, which basically
32:45
Speaker 7: means if when you're selling your ETF if it goes
32:47
Speaker 7: from if when you're selling your futures, if you have
32:49
Speaker 7: to sell that that September futures contract and when you
32:52
Speaker 7: buy October the October contract is more expensive. You're losing
32:55
Speaker 7: out at a cost because you're selling, you're selling low
32:57
Speaker 7: and buying high, So there's additional call and constantly rolling
33:01
Speaker 7: these futures. Now those costs can go in reverse. But
33:03
Speaker 7: all it really means is it's not necessarily going to
33:05
Speaker 7: track the exact price of spot bitcoin over a really
33:08
Speaker 7: long term period. So over short term, for traders who
33:11
Speaker 7: want a couple days exposure, maybe even a couple weeks exposure,
33:13
Speaker 7: these futures ETFs are very good at giving exposure to bitcoin.
33:16
Speaker 7: But for buy and hold investors who want to hold
33:18
Speaker 7: this for a long term, or hold this for years,
33:20
Speaker 7: or what have you, like, the spot market is just
33:23
Speaker 7: so much better. And this is exemplified in twenty twenty three.
33:26
Speaker 7: So right now, futures ets like biddoh, the largest one
33:29
Speaker 7: in the US, is trailing spot bitcoin by eight percent
33:32
Speaker 7: this year.
33:33
Speaker 5: Going back to twenty twenty one.
33:34
Speaker 7: If before spop, before bitcoin futures ETFs were even approved,
33:38
Speaker 7: I mean those numbers go up to fifty sixty percent
33:41
Speaker 7: over a one year time period. Now, the future's market
33:43
Speaker 7: has gotten more efficient and that's unlikely to happen again.
33:45
Speaker 7: But you're still, like I said, the other date, you're
33:47
Speaker 7: trailing spot by eight percent, which that's a cost.
33:50
Speaker 5: That's a big cost that.
33:51
Speaker 7: You're taking on if you're investing in these bitcoin futures ets.
33:54
Speaker 4: We only have about a minute left, but the SEC
33:56
Speaker 4: is set to issue initial orders Friday on at least
33:59
Speaker 4: six spockcoin, spit bitcoin ETF applications. What are you expecting
34:05
Speaker 4: to happen?
34:06
Speaker 7: Yeah, so we actually just published a note this morning
34:09
Speaker 7: talking about this case and those applications. My base case
34:13
Speaker 7: is that those are going to be delayed. So the
34:14
Speaker 7: way this process works is there's a whole bunch of
34:16
Speaker 7: deadlines forty five days, forty five days, ninety days, sixty days,
34:20
Speaker 7: and until the last one they can just choose to
34:22
Speaker 7: delay rather than approve or deny. When they get to
34:24
Speaker 7: the last one, you have to approve, he deny. All
34:26
Speaker 7: these deadlines coming up on Friday, they can opt to delay,
34:30
Speaker 7: and it's very easy to do. I just think the SEC,
34:32
Speaker 7: I mean, it's not out of the complete realm of
34:34
Speaker 7: possibility that they just go ahead and approve these things.
34:36
Speaker 7: It might be a nice little pushback against gray Scale
34:40
Speaker 7: for winning this court case, but theoretically grey Scale would
34:43
Speaker 7: then be able to launch GBDC as an ETF very
34:45
Speaker 7: quickly after, but we're expecting delay on those orders. So
34:49
Speaker 7: we don't expect anything because the SEC is likely trying
34:51
Speaker 7: to get things in order. As Sun and Shine said
34:53
Speaker 7: in his interview, they haven't heard anything from the SEC.
34:55
Speaker 7: There's been a public statement that they are viewing the
34:57
Speaker 7: opinion from the DC circuit. So I think the the
35:00
Speaker 7: SEC is basically just getting their ducks in a row
35:02
Speaker 7: and they're just gonna basically punt on this connect to deadline,
35:05
Speaker 7: which is what they've done historically with these deadlines.
35:08
Speaker 1: All right, James, excellent stuff. As always, you kind of
35:10
Speaker 1: laid it out there, force a big, big day for
35:13
Speaker 1: the crypto space. James c for ETF Research analyst for
35:17
Speaker 1: Bloomberg Intelligence. Down there in our Princeton campus.
35:22
Speaker 6: You're listening to the team. Ken's are live program Bloomberg
35:26
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg dot com,
35:29
Speaker 6: the iHeartRadio app and the Bloomberg Business app, or listen
35:32
Speaker 6: on demand wherever you get your podcasts.
35:36
Speaker 1: Let's talk about these markets. Let's do it for with
35:38
Speaker 1: someone who does this stuff for a living, Ron Sanchez.
35:40
Speaker 1: He's EVP and CIO at Fiduciary Trust inter National joining
35:44
Speaker 1: us live in our Bloomberg Interactive Brokers studio. Thanks for
35:46
Speaker 1: making it and run. What do you make of this market? Again,
35:49
Speaker 1: some folks on the street Scockprone City says some people
35:53
Speaker 1: may be playing catch up for the remainder of the
35:55
Speaker 1: year and that might push markets a little bit higher.
35:57
Speaker 1: How are you guys thinking about these markets?
36:00
Speaker 13: So, markets have been tricky this year, and I think
36:04
Speaker 13: there has been some catch up. Our view has been
36:07
Speaker 13: the entire year is that we do believe in the
36:10
Speaker 13: soft landing. I think those that have been looking for
36:13
Speaker 13: a recession have.
36:15
Speaker 14: Been will continue to wait.
36:18
Speaker 13: One has not materialized in our expectations, is one will
36:21
Speaker 13: not for the balance of the year into twenty four.
36:25
Speaker 13: So we think from a market perspective, we saw a
36:28
Speaker 13: lot of people jump into this market embrace the soft
36:31
Speaker 13: landing in July and again market returns for the year
36:36
Speaker 13: to date have been obviously quite surprising and quite favorable.
36:40
Speaker 13: But I do think they reflect a well entrenched or
36:43
Speaker 13: embedded soft landing that is now consensus.
36:46
Speaker 4: So how do you advise clients to position in this
36:49
Speaker 4: type of environment?
36:51
Speaker 13: So, again, after the sort of the market return here,
36:54
Speaker 13: it gets a little tricky, And as I said earlier,
36:57
Speaker 13: I do believe that our expectations are that it's a
37:00
Speaker 13: soft landing, and I think that is in price, and
37:02
Speaker 13: so I think from an expectation standpoint, you want to
37:06
Speaker 13: sort of be patient here. I do expect sort of
37:08
Speaker 13: choppy markets.
37:09
Speaker 14: Or range bound.
37:10
Speaker 13: I think that range bound not only relates to the
37:14
Speaker 13: S and P five hundred, but also fixed income as well.
37:17
Speaker 13: And I think we're looking at sort of an incremental
37:20
Speaker 13: return profile for.
37:21
Speaker 14: The balance of the year, but we should hold our.
37:23
Speaker 13: Gains and so again sort of a reasonably neutral view.
37:28
Speaker 4: Are your clients typically more longer term investors?
37:31
Speaker 14: They are indeed really long time so.
37:33
Speaker 4: Right, so you're not going to be making changes.
37:34
Speaker 13: We would not be a sort of uber tactical here
37:37
Speaker 13: and sort of outguess ourselves. Markets are reasonably priced here,
37:41
Speaker 13: and again, in the absence of a sharp contraction and
37:46
Speaker 13: economic activity, we would stay invested.
37:48
Speaker 1: So where are you in terms of your allocation? I
37:51
Speaker 1: don't know the equities fixing coming, I know what else
37:53
Speaker 1: you throw in our alternatives? Kind of where's your allocation today?
37:55
Speaker 1: Maybe how's that different from normal times or other times?
38:00
Speaker 13: So from a global perspective, we are neutral the US
38:04
Speaker 13: and underweight international. Again, I think from sort of the
38:08
Speaker 13: US is the outlier here with the strongest growth pattern
38:11
Speaker 13: by far. There are challenges, as we all know, in
38:15
Speaker 13: in emerging markets as specifically the largest one in China
38:20
Speaker 13: and Europe is going to be sort of challenged as well.
38:23
Speaker 13: They've had a great return profile sort of in earlier
38:26
Speaker 13: in the year here, but our expectations that's pretty slow
38:29
Speaker 13: growth in that government. So again we're neutral US slide
38:32
Speaker 13: underweight outside of the US, and within fixed income we
38:36
Speaker 13: are neutral and with sort of an eye towards some
38:41
Speaker 13: finding fixed income here reasonably attractive and looking to potentially
38:45
Speaker 13: extend duration.
38:46
Speaker 1: Well, so, okay, so I can go to the two
38:48
Speaker 1: year and a couple of days aore, I get at
38:49
Speaker 1: five percent in a two year treasury, Why don't you
38:52
Speaker 1: just go there and then go head out to the beach.
38:54
Speaker 4: Or money market funds?
38:55
Speaker 1: Right, money market for.
38:56
Speaker 13: Yeah, So that is one of the most interesting sort
39:00
Speaker 13: of dynamics for a strategist with clients saying, boy, for
39:04
Speaker 13: the first time, cash is king. I can get north
39:07
Speaker 13: of five percent on a two year note or a
39:10
Speaker 13: money market. But again from an equity standpoint, the SMP
39:14
Speaker 13: is up double digit returns and so need to be
39:19
Speaker 13: real careful about the allure of cash. It's nice to
39:23
Speaker 13: have reserves, it's nice to be in the front end
39:25
Speaker 13: of the curve. But again, at some point in time,
39:29
Speaker 13: as the economy does moderate here into twenty four, the
39:33
Speaker 13: return profile for sort of that short intermediate, meaning a
39:36
Speaker 13: four and five year is going to be more appealing
39:39
Speaker 13: from a total rate return standpoint. But right now five
39:41
Speaker 13: is certainly doesn't hurt.
39:44
Speaker 4: What do you think the catalyst would be to move
39:46
Speaker 4: that money from say money market funds back into stocks.
39:50
Speaker 13: So I think you saw a little bit of that
39:52
Speaker 13: in July. Again, the allure of a risk free rate
39:55
Speaker 13: of five, I think has pulled a lot of money
39:58
Speaker 13: to the sidelines, and I think sort of the sort
40:04
Speaker 13: of the soft landing has pulled people in. Those that
40:06
Speaker 13: have been forecasting a recession have sort of come in.
40:10
Speaker 13: I think that really was the the pop in July.
40:13
Speaker 13: But there's plenty of dry powder here, and that's why
40:16
Speaker 13: I think it's sort of difficult to become a sort
40:18
Speaker 13: of bearish in this environment, both for fixed income and equity.
40:22
Speaker 4: You said you were neutral on the US for equities correct,
40:25
Speaker 4: so what takes you to move it even higher? For
40:28
Speaker 4: another reading on.
40:28
Speaker 13: That, So valuations are are definitely on the upper end.
40:32
Speaker 13: The risk premia has compressed as equity markets have come
40:36
Speaker 13: down a little bit, and fixed income has has gone
40:39
Speaker 13: to four and a quarter on a ten year The
40:41
Speaker 13: compensation for equity is not overly compelling.
40:44
Speaker 14: From a historical standpoint.
40:45
Speaker 13: I think for us to be a little more confident
40:48
Speaker 13: about the return profile going forward is a little more
40:51
Speaker 13: confidence that the economy is in a soft landing more
40:57
Speaker 13: definitively and or high conviction, and that earnings are bottoming,
41:01
Speaker 13: so more of the micro Once earnings have bottomed, I
41:05
Speaker 13: think we'll look.
41:05
Speaker 14: A little more favorably.
41:07
Speaker 1: I'm looking at the Bloomberg Index browser, I n go
41:10
Speaker 1: on the Bloomberg terminal and boy in the US corporate
41:12
Speaker 1: hygyield space total return year to data six point eight
41:15
Speaker 1: percent doesn't seem like the hy old markets too concerned
41:18
Speaker 1: about a recession. How do you guys think about the
41:20
Speaker 1: hygyield space?
41:21
Speaker 13: So I think the hyold has been very, very compelling.
41:25
Speaker 13: Here for the first time in a number of years,
41:27
Speaker 13: you're still north of eight Three or four months ago,
41:29
Speaker 13: you were closer to a nine. And if you believe
41:33
Speaker 13: in the soft landing and that there wouldn't be real
41:36
Speaker 13: pressure on credits here, that is a great carry trade
41:41
Speaker 13: and I think it still does. And the total turn
41:43
Speaker 13: numbers are pretty impressive. But again from evaluation standpoint, you're
41:47
Speaker 13: talking about spreads inside of four hundred. So again, I
41:50
Speaker 13: think the soft landing is priced into a number of markets,
41:54
Speaker 13: but the income generation of eight and eight and a
41:56
Speaker 13: quarter is reasonably appealing.
41:59
Speaker 4: It's interesting because Gina Martin Adams at Bloomberg Intelligence, she
42:03
Speaker 4: takes a close look at when you're looking at S
42:05
Speaker 4: and P five hundred EPs growth but on a year
42:08
Speaker 4: of a year basis, but excluding energy, if you look
42:10
Speaker 4: at the most recent quarter, it actually was marginally higher,
42:13
Speaker 4: and then we see that growth back to return even
42:16
Speaker 4: close to double digits toward the end of this year
42:20
Speaker 4: in the fourth quarter. And I know you were saying
42:22
Speaker 4: you're waiting for earnings to bottom. Do you think that
42:24
Speaker 4: when you're looking at energy, is it masking some of
42:28
Speaker 4: the benefits that we're seeing in other industries as we
42:30
Speaker 4: see that sector particularly weakend obviously with that correlation with
42:34
Speaker 4: what we're seeing with inflation abbing and commodity prices.
42:37
Speaker 13: That's fair, and I do think we're probably in the
42:39
Speaker 13: process of troughing here and energy has sort of depressed
42:44
Speaker 13: the overall earnings. But the economy has been above trend
42:48
Speaker 13: for the last twelve months, and I do think it
42:50
Speaker 13: is going to be is going to moderate as we
42:54
Speaker 13: go into year end. So there is a slowing of
42:57
Speaker 13: economic activity from an elevated level. I do think that
43:01
Speaker 13: that evolves over the over the next two quarters where
43:04
Speaker 13: we sort of bottom on the.
43:05
Speaker 4: End right the once we see the repayments resumed for
43:09
Speaker 4: federal student loans, I know that the interest just started occurring,
43:12
Speaker 4: but those payments begin again in October. How much does
43:15
Speaker 4: that fit into the consumer spending dynamic as far as
43:18
Speaker 4: potentially weighing on that.
43:19
Speaker 13: So I do think that consumer spending most likely has peaked,
43:23
Speaker 13: and that we're our view is that we're starting to
43:25
Speaker 13: see normalization it again.
43:27
Speaker 14: It has above I think a couple of things. One,
43:30
Speaker 14: as you know.
43:30
Speaker 13: Excess savings has been very high, Labor markets have been strong,
43:34
Speaker 13: wage gains have been solid, and there has been a
43:38
Speaker 13: lot of pent up demands, especially for services coming out
43:41
Speaker 13: of the pandemic they called revenge travel and I think
43:44
Speaker 13: most of that has will remain solid but has been
43:47
Speaker 13: above and is going to moderate and we're looking at
43:51
Speaker 13: sort of those dynamics returning to sort of twenty nineteen
43:54
Speaker 13: or what we would refer to as normalized levels.
43:56
Speaker 1: What are you guys penciling in over futiary of trust
43:59
Speaker 1: about our federal What.
44:00
Speaker 14: Are they going to do?
44:01
Speaker 1: Are they done or are they going to keep? Are they
44:02
Speaker 1: going to hike one more time?
44:04
Speaker 13: I think they're done. And so markets, as you know,
44:06
Speaker 13: are sort of a coin toss. They're definitely pausing next
44:11
Speaker 13: month in September, and obviously November is live and sort
44:14
Speaker 13: of data dependent, but markets have it at a fifty
44:17
Speaker 13: to fifty I would take the under.
44:19
Speaker 4: What's the top question you actually hear from clients right
44:21
Speaker 4: now more?
44:23
Speaker 14: But the one that you referred to earlier.
44:25
Speaker 13: This is a confusing market and a risk free rate
44:28
Speaker 13: of five percent?
44:29
Speaker 14: Why would I? Why would I do anything? And again,
44:32
Speaker 14: sort of the near.
44:33
Speaker 13: Term appeal versus long term opportunity is always It's always
44:37
Speaker 13: the guidance and there's a persistent negativity. I guess the
44:40
Speaker 13: biggest question of the last six months to a year
44:43
Speaker 13: is the perpetual recession question.
44:45
Speaker 14: When, when, when when?
44:47
Speaker 13: And again we had a pushback pretty hard that we
44:50
Speaker 13: didn't see it as a twenty three development and we don't.
44:52
Speaker 4: See it in you CFC function. You don't see that obviously,
44:56
Speaker 4: not on an annual basis, but even on a quarterly basis.
44:58
Speaker 4: Either it's no longer there.
45:00
Speaker 1: Yeah, it's been the I guess most widely telegraph recession
45:02
Speaker 1: that has yet to occur. Hey, Ron, thanks for coming in.
45:05
Speaker 1: Really appreciate it. Ron Sanchez. He is the EVP and
45:08
Speaker 1: CIO at Fiduciary Trust Company International.
45:12
Speaker 6: You're listening to the tape Cat's are Live program Bloomberg
45:15
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
45:18
Speaker 6: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
45:22
Speaker 6: You can also listen live on Amazon Alexa from our
45:25
Speaker 6: flagship New York station, Just say Alexa, play Bloomberg eleven.
45:29
Speaker 1: Thirty, Jess Menton Paul Sweeney live here in our Bloomberg
45:33
Speaker 1: Interactive Brokers studio. Let's get a little techy here, little wonky.
45:36
Speaker 1: Maybe we'll talk a little VR. And that's a virtual
45:39
Speaker 1: reality for those like John Tucker that may not be
45:41
Speaker 1: up on all that type of stuff. We might talk
45:43
Speaker 1: a little metaverse, and if we're not careful, we might
45:45
Speaker 1: even throw them a little AI and we can do
45:47
Speaker 1: all of this with Dan and Brian. He's president of
45:49
Speaker 1: the Americas and general manager for HTC. Hey, Dan, first,
45:53
Speaker 1: just give us give us an overview kind of what
45:56
Speaker 1: you guys do at HTC.
46:00
Speaker 7: One.
46:00
Speaker 15: Thanks for having me on. I really appreciate it, Paul
46:03
Speaker 15: and Jess, and it's great to be here. What HCC
46:07
Speaker 15: does is we are a technology company that focuses on
46:11
Speaker 15: a lot of different areas of innovation. You know, a
46:13
Speaker 15: lot of people know this for smartphones for many years.
46:16
Speaker 15: We now have over the last several years index towards
46:20
Speaker 15: virtual reality or extended reality, and we make products that
46:24
Speaker 15: create solutions for content creators to create content for the metaverse.
46:29
Speaker 15: We have also innovated and created solutions where you can
46:32
Speaker 15: actually stream content for the metaverse over say a five
46:37
Speaker 15: G network. And then we also create these headsets or
46:41
Speaker 15: wearables that you can interact with this data and this
46:45
Speaker 15: content in a very immersive way. So we are a
46:49
Speaker 15: you know, a holistic data, technology and innovation company that
46:54
Speaker 15: delivers all these different types of solutions for end users.
46:56
Speaker 4: Your firm did conduct a survey recently about how va
47:00
Speaker 4: our headsets are being used, particularly in healthcare and social
47:03
Speaker 4: assistance organizations. What did you find, You know.
47:07
Speaker 15: We found that over ninety percent of healthcare workers and
47:12
Speaker 15: healthcare providers expect to be using this technology in the
47:16
Speaker 15: future for training or for therapeutics. And so it really
47:22
Speaker 15: shows a resounding, you know, endorsement of hey, this is
47:25
Speaker 15: very effective. We know that can help with our healthcare
47:29
Speaker 15: professionals and training them. We can do reduce training costs,
47:33
Speaker 15: we can improve the actual training value. We can actually
47:37
Speaker 15: get better outcomes for our patients with better therapeutics and performance.
47:42
Speaker 15: So overall it becomes like a cost savings and an
47:45
Speaker 15: efficiency and a performance improvement in healthcare.
47:48
Speaker 1: So, Dan, one of the things you mentioned the met metaverse,
47:50
Speaker 1: and I don't think there is a concise definition of
47:54
Speaker 1: the metaverse, certainly not among shareholders of Meta formerly known
47:59
Speaker 1: as Fai Spoke, and that was a problem for the
48:01
Speaker 1: stock last year. To you, what is the metaverse.
48:05
Speaker 15: Well, it's really an extension of what we already do
48:07
Speaker 15: today in our internet today. It's really encompassing how you
48:13
Speaker 15: interact with the data. Think of yourself now as being
48:16
Speaker 15: able to as if you're wearing a wearable you know,
48:18
Speaker 15: it might be glasses, it might be VR glasses, it
48:21
Speaker 15: might be AR augmented reality glasses. You're simply interacting first
48:25
Speaker 15: party with that data and content. I gave an example
48:29
Speaker 15: a demo last year where we did a training for
48:33
Speaker 15: a knee operation and we had people that were on iPhones, iPads,
48:37
Speaker 15: a magical lea augmented reality glasses headset, a VR headset,
48:41
Speaker 15: and Android phones and we were all in this one
48:46
Speaker 15: space together doing this training together. But some people got
48:50
Speaker 15: to be in the space actually hands on doing the training,
48:53
Speaker 15: while other people were more of an observer. So the
48:56
Speaker 15: metaverse really becomes down to this very immersive, you know,
49:00
Speaker 15: vironment where you can interact, but it's not going to
49:03
Speaker 15: dismiss all the things that we use today in our
49:06
Speaker 15: everyday life.
49:08
Speaker 4: Whatever I hear metaverse, clearly, I think of Facebook, Parent
49:11
Speaker 4: Meta along with Apple, that are going along and spending
49:14
Speaker 4: a lot of money in this particular corner of the market.
49:17
Speaker 4: Where do you see this headed for these companies people
49:20
Speaker 4: are trying to kind of buy for different rivalship here
49:23
Speaker 4: As far as where it's headed and still a lot
49:25
Speaker 4: of uncertainty.
49:26
Speaker 15: Well, I think, you know, we're all approaching it at
49:29
Speaker 15: different angles. You know, Apple coming in, it's a great endorsement.
49:32
Speaker 15: They have great privacy policies, great data security policies that
49:36
Speaker 15: some of the other competitors do not have. We share
49:40
Speaker 15: those values as well, and that we protect our users data.
49:44
Speaker 15: We don't use that data to monetize it. So for us,
49:49
Speaker 15: you know, we're bringing solutions and value to the market
49:52
Speaker 15: to actually reduce costs, bring up efficiencies, bring in human
49:56
Speaker 15: performance improvements with training and things of that nature. Well
50:00
Speaker 15: clearly showing like how expensive this technology really is and
50:04
Speaker 15: if you're going to enter the market and not lose
50:07
Speaker 15: money on hardware, this is how much it really costs.
50:10
Speaker 15: So now you've got to see like a company like HCC,
50:12
Speaker 15: we come in right in the middle. People are getting
50:15
Speaker 15: great innovation for the price and the value. Meta they're
50:19
Speaker 15: really using a console you know model where they're subsidizing
50:22
Speaker 15: that hardware significantly and losing billions of dollars in order
50:26
Speaker 15: to you know, maintain that market share. But understand like
50:29
Speaker 15: that is all out of fear based, you know kind
50:32
Speaker 15: of management, and that they are very vulnerable in their
50:35
Speaker 15: current model to Apple and to you know, Google, an
50:38
Speaker 15: Android on the smartphone business to their revenue model, and
50:41
Speaker 15: they're trying to I think, you know, make themselves agnostic
50:45
Speaker 15: or you know, bolster against that vulnerability against those platforms
50:48
Speaker 15: and have more of a their own position. And so
50:52
Speaker 15: I think they're trying to buy their way out of
50:53
Speaker 15: that problem.
50:55
Speaker 10: Dan.
50:55
Speaker 1: When you think ahead over the next several years and
50:58
Speaker 1: you think about the VR business, the wearables business, how
51:02
Speaker 1: do you kind of think about it in a consumer
51:06
Speaker 1: use versus maybe business slash, you know, corporate use.
51:10
Speaker 15: Well, I think that you know, on the consumer side,
51:12
Speaker 15: you know, Meta is kind of settling the market at
51:14
Speaker 15: this very unnatural price point that doesn't really exist. And
51:18
Speaker 15: if you look at it, you know, the smartphone, comparing
51:20
Speaker 15: it to the early days of smartphone, you had probably
51:22
Speaker 15: about twelve to fifteen brands and companies you know, fighting,
51:26
Speaker 15: you know, in the market to grow the market, making
51:28
Speaker 15: a very healthy economy for you know, competition and supply
51:33
Speaker 15: chain and suppliers, which drove prices down. On the consumer side,
51:37
Speaker 15: it's really being strangled by that pricing tactic. So you're
51:43
Speaker 15: not seeing the competition come in because the other major
51:45
Speaker 15: players don't want to come in and lose their shirt
51:48
Speaker 15: on the enterprise and professional side, you can actually bring
51:51
Speaker 15: this technology for what it actually costs, and you can
51:55
Speaker 15: bring your companies and your partners and these types of
51:58
Speaker 15: customers massive value. Really see the savings right away within
52:02
Speaker 15: that year in terms of performance, higher retention rates with
52:08
Speaker 15: your training, more engagement, and if you have a diversified
52:12
Speaker 15: employee set that's spread out all over the world or
52:14
Speaker 15: all over the country, you can keep them connected right
52:17
Speaker 15: in these metaverse spaces. So this week I'm at the
52:21
Speaker 15: Industrial Immersive Conference down here in Houston, and companies like Exonmobile,
52:28
Speaker 15: Duke Energy, they've been using this technology since twenty sixteen,
52:33
Speaker 15: and they're now looking at all the different ways that
52:35
Speaker 15: they can be using this technology to improve site plans,
52:39
Speaker 15: site designs, working with their engineers in the field, and
52:43
Speaker 15: being able to actually see what they're working on, deconstructing
52:48
Speaker 15: existing platforms that are many, many years old that nobody
52:51
Speaker 15: knows how to work on anymore. So in terms of
52:53
Speaker 15: you know, growth and enterprise use and major corporations and
52:57
Speaker 15: brands being able to use it, we're seeing it grow
53:00
Speaker 15: very aggrastively on the enterprise side.
53:02
Speaker 1: Hey, Dan, really fascinating discussion. Thanks so much for joining
53:05
Speaker 1: us Dan O'Brien. He is the president of America's and
53:08
Speaker 1: a general manager for HTC, talking about the VR space,
53:12
Speaker 1: the wearable space, and then ultimately, presumably the metaverse.
53:18
Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can
53:21
Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
53:25
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
53:29
Speaker 2: at Matt Miller nineteen seventy three.
53:31
Speaker 1: And I'm fall Sweeney. I'm on Twitter at Ptsweeney. Before
53:34
Speaker 1: the podcast. You can always catch us worldwide at Bloomberg
53:37
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