Latest / Bloomberg Intelligence / Broadcom-Qualcomm Would Create Cross-Sector Chips Powerhouse, Srinivasan Says

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Broadcom-Qualcomm Would Create Cross-Sector Chips Powerhouse, Srinivasan Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
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  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. Quaal
• 0:31
  Speaker 1: calm Broadcom. Will they get together? How much will this
• 0:35
  Speaker 1: deal cost? And will it benefit investors? Let's find out
• 0:39
  Speaker 1: more from a Trina Aston. He is our senior semiconductor
• 0:42
  Speaker 1: and hardware analyst for Bloomberg Intelligence. Also joining us is
• 0:46
  Speaker 1: Brooks Sutherland, our mergers and acquisitions columnist for Bloomberg gad Fly.
• 0:51
  Speaker 1: Thank you both for being here on Maybe you can
• 0:54
  Speaker 1: start by just explaining why this might be a good
• 0:57
  Speaker 1: deal for Broadcom. Look, I mean this creates a powerhouse,
• 1:02
  Speaker 1: create an alto Intel, if you will. And Broadcom's um
• 1:07
  Speaker 1: claim to the semiconductor industry comes from the fact that
• 1:10
  Speaker 1: it is a phenomenal roller up of companies. It's done
• 1:14
  Speaker 1: this pretty extensively since its existence, and in in doing
• 1:19
  Speaker 1: Broadcom first acquiring Brocade first, Avago buying Broadcom then the
• 1:24
  Speaker 1: renaming themselves to Broadcom, buying Brocade, and then potentially buying Qualcom,
• 1:29
  Speaker 1: which is in and of itself. In the process of
• 1:31
  Speaker 1: buying n XP will assemble a company that is very
• 1:35
  Speaker 1: very strong in the data center and all your routers,
• 1:37
  Speaker 1: which is all your networking gear. Number one. It will
• 1:41
  Speaker 1: be incredibly powerful in your phone, both from a modem
• 1:45
  Speaker 1: and processor perspective as well as the RF chip. And
• 1:48
  Speaker 1: if they're able to swing an XP into that equation,
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  Speaker 1: they will own your auto two, so, so and and in.
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  Speaker 1: One of the things that comes as a byproduct of
• 2:00
  Speaker 1: UH Qualcomm's management focus in this equation is that they
• 2:05
  Speaker 1: are an incredible leverager of costs. UH there a s
• 2:09
  Speaker 1: g n A is a percentage of sales is actually
• 2:12
  Speaker 1: incredibly low in the semiconductor industry. UM, they'll have a
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  Speaker 1: tremendous amount of scale and reduced manufacturing costs. So from
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  Speaker 1: a whole host of angles, this makes a lot of sense.
• 2:23
  Speaker 1: Now if you look at Qualcom, the target entity, it's
• 2:27
  Speaker 1: got some drama going on with its intellectual property assets
• 2:30
  Speaker 1: and it's embroiled with in litigation with with with Apple.
• 2:35
  Speaker 1: Broad Broadcom is much much more friendly with Apple so
• 2:39
  Speaker 1: potentially they come in, they readjust this relationship, reassess where
• 2:46
  Speaker 1: royalty rates are, and UM start a new relationship going forward.
• 2:50
  Speaker 1: I think that that is doable. UM. If they're not
• 2:54
  Speaker 1: willing to do that, you can potentially corral the i
• 2:57
  Speaker 1: P assets in a in a particular UH basket, potentially
• 3:01
  Speaker 1: sell it off or potentially diminish its value, move all
• 3:04
  Speaker 1: the IP over to the chip division. There's a whole
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  Speaker 1: host of things you can do here, UM, and I
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  Speaker 1: think it makes for a very very compelling semiconductor company.
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  Speaker 1: All right, Son, you seem to be pretty optimistic about
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  Speaker 1: this whole deal and sort of the rationale behind it. Brooke,
• 3:21
  Speaker 1: come on in here, because you express some skepticism in
• 3:24
  Speaker 1: a recent column saying that u Qualcom is not such
• 3:27
  Speaker 1: an obvious target, and there are so many moving pieces
• 3:31
  Speaker 1: here that all have to fit together perfectly. Given the
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  Speaker 1: fact that the n XP purchase hasn't been completed yet
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  Speaker 1: and because of all these mergers, can you just walk
• 3:38
  Speaker 1: us through your your thinking here? Yeah? I think that
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  Speaker 1: would be You know, my biggest sort of pushback is
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  Speaker 1: that you are piling you know, I think at this
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  Speaker 1: point six big deals on top of each other if
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  Speaker 1: this goes ahead, if you include you know, the purchases
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  Speaker 1: and a n XP made before clock n XP, or
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  Speaker 1: the purchases that Brocade Maine. I mean, so I you know,
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  Speaker 1: to and on the point, I think that Broadcom CEO
• 4:00
  Speaker 1: Hawk Tan is known as this good operator and this
• 4:03
  Speaker 1: sort of skilled master of rolling up deals. But we're
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  Speaker 1: talking about multitudes of what he's done in the past.
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  Speaker 1: And any time you talk about a mega merger, there's
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  Speaker 1: integration risk there. If you start piling them on top
• 4:15
  Speaker 1: of each other, it just makes everything more complicated. And
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  Speaker 1: it's not like these companies are just humming along perfectly
• 4:22
  Speaker 1: at this point. You know, I think there are probably
• 4:24
  Speaker 1: opportunities to reassess the Apple situation or to you know,
• 4:27
  Speaker 1: sort of rethink the configuration of the businesses, but that
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  Speaker 1: is also going to be complicated, and it does sort
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  Speaker 1: of open up maybe the potential for increased competition from
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  Speaker 1: some of these companies rivals um and you know, I
• 4:39
  Speaker 1: think sort of just raises the question of ultimately what
• 4:42
  Speaker 1: this company is going to look like and how well
• 4:44
  Speaker 1: it's going to be able to What about the debt,
• 4:46
  Speaker 1: I mean, how is it going to pay for it? Well,
• 4:48
  Speaker 1: that's The other thing is that you you know, the
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  Speaker 1: debt load after all of these deals. Their companies are
• 4:52
  Speaker 1: sitting on a pretty hefty burden here. And I think
• 4:56
  Speaker 1: you know that that is another factor here that you
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  Speaker 1: have to think about, is that what is the motivation
• 5:01
  Speaker 1: for all of these deals. I mean, they're not doing
• 5:03
  Speaker 1: it because they're growing really well on their own. They're
• 5:06
  Speaker 1: doing that because this is the opportunity for them to
• 5:08
  Speaker 1: get scale and to sort of build growth through M
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  Speaker 1: and A. And I think you know, anytime you sort
• 5:13
  Speaker 1: of see that happening in the companies simultaneously piling on debt,
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  Speaker 1: I you know, I think that should give you pause.
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  Speaker 1: You know, I'm actually going to push back on that
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  Speaker 1: for a whole host of reasons. One is that if
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  Speaker 1: you look at the revenue profiles on on all of
• 5:26
  Speaker 1: these companies, there's very little overlap. If you look at Broadcom, Brocade,
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  Speaker 1: n XP, Qualcom, the overlap the adjacencies are are between
• 5:36
  Speaker 1: Broadcomm and Brocade are pretty significant. Between Broadcom and Qualcom
• 5:40
  Speaker 1: are pretty significant. But there's no reason Qualcom is buying
• 5:43
  Speaker 1: n xp s because it wants to diversify away from handsets.
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  Speaker 1: And how far do you have to get away. You
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  Speaker 1: can go go to autos. The other part of it is,
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  Speaker 1: for the last five years we've been writing about semiconductors
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  Speaker 1: being the new industrials and the fact that they are
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  Speaker 1: cash rich and debt poor. And you know, debt has
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  Speaker 1: never been a good word in the technology industry. And
• 6:05
  Speaker 1: debt is cheap, right, and there is capital term set
• 6:09
  Speaker 1: stake here, and an optimal mix of debt is is
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  Speaker 1: good UM investor friendly nights Brook, what do you think
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  Speaker 1: at a response? No, I mean, I think, you know,
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  Speaker 1: there's there's two sides of this coin, but I just think,
• 6:25
  Speaker 1: you know, having seen a lot of these big deals,
• 6:27
  Speaker 1: and you know, I understand that the semi conductor industry
• 6:30
  Speaker 1: is sort of adapting to this new sort of financial profile,
• 6:34
  Speaker 1: but you know that is debt and integration risk is
• 6:38
  Speaker 1: is still there, and so I think we'll just sort
• 6:39
  Speaker 1: of see how this plays out. But there certainly are
• 6:42
  Speaker 1: risks here. It's definitely gonna be interesting to watch, especially
• 6:45
  Speaker 1: because Upqualcom is saying that they're not going to accept it,
• 6:49
  Speaker 1: so Broadcom is going to probably have to wage some
• 6:51
  Speaker 1: kind of proxy war. So it should be interesting to
• 6:53
  Speaker 1: see how this plays out. A non screen of US
• 6:56
  Speaker 1: and senior semi conductor and hardware analyst for Bloomberg Intelligence.
• 6:59
  Speaker 1: Our thanks to you and our thanks to you. Brook Sutherland,
• 7:02
  Speaker 1: Mergers and Acquisitions columnist for Bloomberg Gadfly Bloomberg dot com
• 7:06
  Speaker 1: slash goad Fly. You can find all the columns there.
• 7:09
  Speaker 1: And you know both of you raise really good points.
• 7:10
  Speaker 1: I mean, I think it's going to be interesting to
• 7:12
  Speaker 1: watch the biggest tech deal on record. Shares of Michael
• 7:28
  Speaker 1: Course Holdings they're up more than thirteen and a half percent.
• 7:32
  Speaker 1: This comes after the company handily beats earnings estimates in
• 7:36
  Speaker 1: the fiscal second quarter. Despite the drop in the same
• 7:40
  Speaker 1: store sales, they posted better than expected results. The retailer
• 7:44
  Speaker 1: preparing a yes for that all important holiday shopping season.
• 7:47
  Speaker 1: And here to help us understand what's going on is
• 7:49
  Speaker 1: the all important Craig Johnson. He is the president of
• 7:51
  Speaker 1: Customer Growth Partners. They're based in New Canaan, Connecticut, and
• 7:54
  Speaker 1: he joins us now. Craig, thank you very much for
• 7:56
  Speaker 1: being with us. Tell us what do you see as
• 8:00
  Speaker 1: the positive and negative aspects of what Michael Core's Holdings
• 8:04
  Speaker 1: is doing right now? Uh? Well, first, good morning him.
• 8:08
  Speaker 1: Great to be with you and Lisa. Um. Of course,
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  Speaker 1: of course we've been noticing, and you know, we have
• 8:13
  Speaker 1: a team of eighteen people across the country's another person
• 8:16
  Speaker 1: in London, so we're in the stores every week, and
• 8:19
  Speaker 1: we've seen kind of a step by step recovery there.
• 8:24
  Speaker 1: Um that you know, it's not quite in the positive territories,
• 8:27
  Speaker 1: but it had been mid to high single digits and
• 8:29
  Speaker 1: the guided to negative mid single digits. Now the only
• 8:32
  Speaker 1: one point a percent negative. And um, we think there's
• 8:35
  Speaker 1: a company that slowly, slowly returning to health after some
• 8:39
  Speaker 1: very severe damage to the brand by via over distribution,
• 8:44
  Speaker 1: over promotion and so forth, and by going back to
• 8:46
  Speaker 1: the basics of its core DNA style and fashion skills.
• 8:51
  Speaker 1: We think it's on the way back. So those are
• 8:54
  Speaker 1: the major factors. Uh, there's you know a couple of
• 8:57
  Speaker 1: the factors. You know that the watches there are strong
• 9:00
  Speaker 1: and you know, watches have been in the ditch for
• 9:01
  Speaker 1: a couple of years now. The watches are having a
• 9:03
  Speaker 1: nice comeback this holiday and that's another factor as well.
• 9:08
  Speaker 1: So Craig, can you sort of expand out based on
• 9:11
  Speaker 1: the success that Michael course has had and turning itself around,
• 9:15
  Speaker 1: can you extra polate out who you expect to do
• 9:18
  Speaker 1: well this holiday season coming up and who you don't
• 9:21
  Speaker 1: based on who has made an effort at changing with
• 9:25
  Speaker 1: the times. Well, the I want to be carefully you
• 9:29
  Speaker 1: don't want to extrapolate too much off of uh, you know,
• 9:33
  Speaker 1: you know one company that has had let's just say,
• 9:37
  Speaker 1: some ups and downs and you know, they've been pretty
• 9:39
  Speaker 1: challenged for the last year or two. But again on
• 9:40
  Speaker 1: the on the road to recovery, we say, right now, um,
• 9:44
  Speaker 1: but if if you look across the spectrum some of
• 9:48
  Speaker 1: the players are that have been challenged, you're going to
• 9:50
  Speaker 1: continue to be challenged. Irrespect you of course performance and
• 9:54
  Speaker 1: I particularly mean the department stress sector there and that
• 9:57
  Speaker 1: with the potential exception of nor Them, which is really
• 10:01
  Speaker 1: doing fairly well, the sector is very very challenged UM.
• 10:06
  Speaker 1: And then you have other sectors such as apparel broadly UM,
• 10:10
  Speaker 1: which is doing better than it was earlier in the year,
• 10:15
  Speaker 1: but it's still only going to get to maybe two
• 10:17
  Speaker 1: percent year of year growth this holiday as a sector.
• 10:20
  Speaker 1: And so it's you know, it's a little bit of
• 10:22
  Speaker 1: a mixed bag among facts about what we're seeing overall
• 10:25
  Speaker 1: is is that if we've done these these we've done
• 10:28
  Speaker 1: annual forecasts since the turn of the century, this century, um,
• 10:32
  Speaker 1: and we're seeing the sales as being up four point
• 10:35
  Speaker 1: three percent year of a year, and that's compared to
• 10:37
  Speaker 1: a consensus about three point seven And we think the
• 10:40
  Speaker 1: risk to our forecast there's overall retailed. The risk of
• 10:43
  Speaker 1: the forecast is not on the downside. The risk is
• 10:46
  Speaker 1: actually more likely to be the high side. You know,
• 10:49
  Speaker 1: all the signals where our team has been seeing. We've
• 10:52
  Speaker 1: issued our forecast last month, but everything we've seen since
• 10:55
  Speaker 1: then confirms that this may actually be not just a
• 10:58
  Speaker 1: four point three percent, but could even approached towards five percent,
• 11:01
  Speaker 1: which will be the best growth in some years. Craig,
• 11:05
  Speaker 1: not to to port too much cold water on the
• 11:08
  Speaker 1: Michael Course story, but you know, the purchase of Jimmy
• 11:12
  Speaker 1: Chew obviously going to add sales to the to the
• 11:15
  Speaker 1: to the company. But when you look at the camp
• 11:17
  Speaker 1: store sales, the numbers were not that great, right, I
• 11:20
  Speaker 1: mean Camp store sales down about two uh A lot
• 11:23
  Speaker 1: of this the income had to do with reduction in
• 11:27
  Speaker 1: the tax rate, and um, you know, I'm just wondering
• 11:32
  Speaker 1: if your flagship label in the same store sales category
• 11:37
  Speaker 1: are gonna fall in the high single digits in the
• 11:39
  Speaker 1: Christmas quarter and decline the description is by the mid
• 11:42
  Speaker 1: single digits in the fiscal year as a whole. How
• 11:45
  Speaker 1: does that point to a turnaround? I mean, and maybe
• 11:47
  Speaker 1: you can twin that with the concept of tapestry, you know,
• 11:50
  Speaker 1: the old coach they're reporting tomorrow, so that you go out,
• 11:53
  Speaker 1: you buy Jimmy Chew. You say things are great, but
• 11:56
  Speaker 1: if your flagship brand isn't working well, what you have
• 12:01
  Speaker 1: to look at is is that here's a company that's
• 12:04
  Speaker 1: been so deeply troubled for a good a good couple
• 12:06
  Speaker 1: of years. Although the seeds of that difficulty go back
• 12:10
  Speaker 1: four or five six years when this when the store
• 12:12
  Speaker 1: began to um over expand over distribute um was in
• 12:19
  Speaker 1: doors worldwide. It just it was too much. You don't
• 12:22
  Speaker 1: need that, and you you do. You can destroy your
• 12:25
  Speaker 1: brand that way, and to repair that brand damage when
• 12:30
  Speaker 1: you're so over promoted and you're so overdistributed. That doesn't
• 12:34
  Speaker 1: happen overnight. So we see the one camp that negative
• 12:39
  Speaker 1: that they reported this quarter as being compared to guidance
• 12:43
  Speaker 1: of negative mid single digits, and for the last several
• 12:46
  Speaker 1: quarters they've been running high single digits, uh negative or
• 12:51
  Speaker 1: even a little a little worse. And so one is improvement.
• 12:55
  Speaker 1: Now whether how how steady that's going to be going
• 12:59
  Speaker 1: full it is a little bit of a little bit
• 13:01
  Speaker 1: of an open question. But the first thing they needed
• 13:04
  Speaker 1: to do was take the hard medicine of cutting back
• 13:07
  Speaker 1: on the promotions and cutting back on the distribution. And
• 13:10
  Speaker 1: so the comp numbers may bounce around a little because
• 13:15
  Speaker 1: you're comparing numbers versus last year when they were, you know,
• 13:19
  Speaker 1: juicing up the the promotional hype. Right well, Craig, you know,
• 13:23
  Speaker 1: I just want to get your sense about this upcoming
• 13:26
  Speaker 1: holiday season. I mean, it's got to be a make
• 13:28
  Speaker 1: it or break it period for a lot of retailers.
• 13:31
  Speaker 1: If they cannot at least boost their revenues by hooking
• 13:36
  Speaker 1: onto the increase in watches or luxury sales or technology,
• 13:40
  Speaker 1: then are they dead? Because we're seeing consumers actually spend
• 13:43
  Speaker 1: more and we're seeing the economy doing well. If they
• 13:46
  Speaker 1: can't make it now, is this it? Well I'm not
• 13:49
  Speaker 1: prepared to say this this is it, but people that
• 13:52
  Speaker 1: don't react to way the consumers are behaving now, the
• 13:56
  Speaker 1: way they're spinning choices are changing. Um, they are going
• 13:59
  Speaker 1: to get crushed. But the smart players, um are are
• 14:03
  Speaker 1: reacting like the watches are are are coming back. And
• 14:06
  Speaker 1: so you have the you know the Apple series three.
• 14:09
  Speaker 1: They they finally got it right, you know on the
• 14:11
  Speaker 1: third try. Uh, that's that's that's that's better. You have
• 14:15
  Speaker 1: an overall economy that's expanding. Um, you know, disposable income
• 14:19
  Speaker 1: is up. There's a wealth effect coming at tourist and returning.
• 14:23
  Speaker 1: And clearly, if if you're a retailer and you don't
• 14:27
  Speaker 1: do well in this season, when overall reach out growth
• 14:30
  Speaker 1: is going to be you know four three four eight,
• 14:33
  Speaker 1: somewhere in that neighborhood, Uh, you have some real explaining
• 14:37
  Speaker 1: to do. Hey, Craig, can you tell us who is
• 14:41
  Speaker 1: on on your blacklist in terms of not going to
• 14:44
  Speaker 1: do well the rest of the year and who's doing
• 14:46
  Speaker 1: who's knocking the ball out of the park. Well, I
• 14:49
  Speaker 1: think the folks that are going to be most challenged
• 14:52
  Speaker 1: again are the department stares and you know, it's like
• 14:54
  Speaker 1: round up the usual suspect. JCP just had their penny,
• 14:58
  Speaker 1: just had their announcement the other day that had you
• 15:01
  Speaker 1: know that basically did the inventory liquidation because they were
• 15:04
  Speaker 1: way way over inventory. May She's is having challenges, Dillerdence
• 15:08
  Speaker 1: is having challenges. Um and those are some of the
• 15:10
  Speaker 1: ones that are having the most difficulties. Some of the apparel,
• 15:13
  Speaker 1: the women's where players are are challenged. And the people
• 15:17
  Speaker 1: that are going to do well. There are people that
• 15:19
  Speaker 1: really sell value, and so you think value, you think
• 15:22
  Speaker 1: at the very larger and you have companies like Costco
• 15:25
  Speaker 1: and Walmart which you're doing great. Target is much improved,
• 15:28
  Speaker 1: and then you have the off prices t J's, Burlington
• 15:32
  Speaker 1: and Ross which are all very well positioned for holiday.
• 15:37
  Speaker 1: Craig Johnson, thank you so much for joining us. Craig Johnson,
• 15:39
  Speaker 1: president of Customer Growth Partners, which is based in New Canaan, Connecticut. Well.
• 15:57
  Speaker 1: In the past few weeks, CME Group announced its plans
• 16:00
  Speaker 1: to offer a bitcoin futures contract this year, and Aaron Brown,
• 16:05
  Speaker 1: who is a columnist for Bloomberg Profits as well as
• 16:08
  Speaker 1: former managing director and head of financial market Research at
• 16:11
  Speaker 1: a q R Capital Management, wrote a really compelling column
• 16:14
  Speaker 1: where he said that this is kind of a sort
• 16:16
  Speaker 1: of tipping point for the cryptocurrency. He wrote, if regulators
• 16:20
  Speaker 1: smile and clearing houses operate without problems, will find out
• 16:24
  Speaker 1: what happens when cryptocurrency prices are exposed to real money.
• 16:28
  Speaker 1: Aaron Brown joins us. Now, Aaron, thank you so much
• 16:30
  Speaker 1: for joining us. The implication here is that bitcoin hasn't
• 16:33
  Speaker 1: been exposed to real money yet. Can you explain your
• 16:36
  Speaker 1: idea here and what you expect to happen? Sure, Lisa,
• 16:40
  Speaker 1: thank you for having me. UM. The cryptocurrency total market
• 16:44
  Speaker 1: capitalization if you look across all currents a cryptocurrencies have
• 16:47
  Speaker 1: stated at something like a hundred billion or two hundred
• 16:50
  Speaker 1: billion dollars, but that really only represents a couple of
• 16:53
  Speaker 1: billion real dollars people have put into it, most of
• 16:56
  Speaker 1: those bitcoins and most of those cryptocurrencies, and incidentally, coin
• 17:00
  Speaker 1: is maybe two thirds of that total. It's it's a
• 17:02
  Speaker 1: majority of it. UM either were people who got their
• 17:07
  Speaker 1: allocations free through mining or something, or they about relatively
• 17:11
  Speaker 1: low prices. So we don't really know if people are
• 17:16
  Speaker 1: willing to pay two hundred billion dollars for all those cryptocurrencies,
• 17:20
  Speaker 1: or perhaps they're willing to pay five hundred billion, or
• 17:22
  Speaker 1: maybe they're only willing to pay ten billion. We don't
• 17:24
  Speaker 1: really know, UM, and that's because the exchanges to this
• 17:28
  Speaker 1: point have essentially shut out most institutional money, most big holdings.
• 17:32
  Speaker 1: You had to be either a PhD in computer science
• 17:35
  Speaker 1: or you had to be a very serious UH individual
• 17:38
  Speaker 1: to put substantial amount of money to work in cryptocurrencies.
• 17:43
  Speaker 1: It seems possible, although we're not sure yet that in
• 17:46
  Speaker 1: two or three months that will no longer be true
• 17:48
  Speaker 1: and anybody can put as much money to work as
• 17:51
  Speaker 1: easily into cryptocurrencies as they can to stocks or bonds,
• 17:55
  Speaker 1: and then we'll finally see what these things are really worth.
• 17:59
  Speaker 1: You own bitcoin, right, yes, yes, I have investments in
• 18:03
  Speaker 1: a number of cryptocurrencies. So what are you looking for
• 18:06
  Speaker 1: To determine whether big institutions actually are interested in investing
• 18:12
  Speaker 1: in bitcoin and putting their big money to work, well,
• 18:16
  Speaker 1: they have to recognize it as an asset class basically,
• 18:20
  Speaker 1: so this would mean that you know and and it
• 18:22
  Speaker 1: would only be the more innovative pension funds, for example,
• 18:25
  Speaker 1: might might consider doing this, but they might say we're
• 18:27
  Speaker 1: going to put one percent or two percent of our
• 18:29
  Speaker 1: assets UH into cryptocurrencies um. Also, of course, a bitcoin
• 18:34
  Speaker 1: or or or any sort of cryptocurrency e t F
• 18:37
  Speaker 1: would allow individual investors to get in very easily, and
• 18:41
  Speaker 1: some people are predicting that, you know, tons of money
• 18:44
  Speaker 1: will flow in and hundreds of billions of dollars in
• 18:47
  Speaker 1: the price of cryptocurrencies will sore. But I think it's
• 18:49
  Speaker 1: equally likely that we'll find out that while there is
• 18:52
  Speaker 1: some institutional appetite and some individual investor appetite, most of
• 18:56
  Speaker 1: it is just chasing high returns and people aren't really
• 18:59
  Speaker 1: willing to put large amounts of money in, and and
• 19:02
  Speaker 1: the price will fall. But whatever the new price is,
• 19:05
  Speaker 1: it will be a real price. It will be something
• 19:07
  Speaker 1: where you can really buy and sell large quantities. Aaron
• 19:12
  Speaker 1: is the increasing level of skepticism by some investors going
• 19:17
  Speaker 1: to assure the continued rise in the value of bitcoin.
• 19:21
  Speaker 1: You know, it's like the more the more you come
• 19:22
  Speaker 1: up with reasons for why it really makes no sense,
• 19:25
  Speaker 1: the greater the value of it seems. Uh yeah, that
• 19:29
  Speaker 1: that is true. Bitcoin and cryptocurrencies in general are what
• 19:32
  Speaker 1: we call in the financial bis, badly anchored assets with
• 19:36
  Speaker 1: badly anchored prices. There's really no strong fundamental reason why
• 19:41
  Speaker 1: bitcoin should be ten dollars or a million dollars or
• 19:44
  Speaker 1: seven thousand dollars whatever it is. Um just whenever everybody
• 19:48
  Speaker 1: agrees that's what the price should be that's when it
• 19:51
  Speaker 1: becomes valuable. That's how currencies work. Okay, all right, so
• 19:54
  Speaker 1: happy dollars should be worth either, all right. So having
• 19:56
  Speaker 1: said that, it seems that there's a philosophical thread for
• 19:59
  Speaker 1: bitcoin which is get away from the fiat currencies of governments. Correct. Uh,
• 20:06
  Speaker 1: that was certainly much of the motivation for inventing it.
• 20:09
  Speaker 1: But I think we're moving very far away from that.
• 20:11
  Speaker 1: If we have CNY futures trading on our cbo E
• 20:14
  Speaker 1: futures trading on bitcoin, uh, then it's not far away
• 20:17
  Speaker 1: from the currencies. Well, but I also have to wonder
• 20:20
  Speaker 1: erin you know, there hasn't been a way for they
• 20:24
  Speaker 1: sayers to short bitcoin, and that has sort of removed
• 20:29
  Speaker 1: some of the healthy aspects of a functioning market. How
• 20:32
  Speaker 1: much does that concern you. I don't think that's a
• 20:35
  Speaker 1: big factor, because you'd have to be a very very
• 20:38
  Speaker 1: brave short seller, uh to want a short bitcoin. So
• 20:42
  Speaker 1: conceivably we'll see a bunch of people come in and
• 20:44
  Speaker 1: and frankly, there is a way to short cryptocurrencies. You
• 20:47
  Speaker 1: make your own cryptocurrency and sell it um. So really
• 20:50
  Speaker 1: we've seen thousands of people do that UM and it
• 20:54
  Speaker 1: hasn't you know, uh, drammatically pushed down the price. I
• 20:57
  Speaker 1: don't think short selling is going to have a big
• 20:59
  Speaker 1: effect on the price one way or the other. That's
• 21:01
  Speaker 1: really fascinating, PIM. I had never thought about it. But
• 21:03
  Speaker 1: if you sell your own cryptocurrency, you're basically raising money
• 21:07
  Speaker 1: from people who are willing to give it to cryptocurrencies
• 21:09
  Speaker 1: without having to actually give as much back to them.
• 21:12
  Speaker 1: I suppose that's a big short Yes. Well, having said that, UM,
• 21:16
  Speaker 1: I kind of think that creating your own script, I
• 21:19
  Speaker 1: think the federal government might have a little comment or
• 21:22
  Speaker 1: two about that. Thanks very much, Aaron Brown. He is
• 21:25
  Speaker 1: the former managing director in the head of Financial market
• 21:28
  Speaker 1: Research at a q R Capital Management, and he is
• 21:31
  Speaker 1: also a Bloomberg Prophets contributor. The market has been waiting
• 21:47
  Speaker 1: for a tax reform plan out of Washington, d C.
• 21:51
  Speaker 1: We got it, and the response has been less than impressed.
• 21:55
  Speaker 1: We could see that certainly in the bond market at least,
• 21:57
  Speaker 1: yields going lower typically an indication that people are expecting
• 22:02
  Speaker 1: slower growth ahead. To talk about this, I want to
• 22:05
  Speaker 1: bring in Jim Vogel Interest Rate Strategistic FTN Financial coming
• 22:09
  Speaker 1: to us from Memphis, Tennessee. Jim, thank you so much
• 22:12
  Speaker 1: for joining us. I'm looking at the yield curve today
• 22:15
  Speaker 1: in the U S. I'm looking at the gap between
• 22:17
  Speaker 1: ten ure and two year treasury yields. It is now
• 22:20
  Speaker 1: at the narrowest since the end of two thousand and seven,
• 22:24
  Speaker 1: in the week of the announcement of this tax reform bill.
• 22:27
  Speaker 1: What does this tell you? I think the market had
• 22:31
  Speaker 1: always been anticipating that the personal taxes would be cut
• 22:35
  Speaker 1: more than developed in the plan that we're eventually that
• 22:38
  Speaker 1: we're looking at this week. And without those personal tax cuts,
• 22:42
  Speaker 1: there's not going to be that sort of sugar rush
• 22:44
  Speaker 1: next year as people um spend their share of the
• 22:48
  Speaker 1: accumulative one point five trillion dollars and cuts. Jim, can
• 22:52
  Speaker 1: you just give us sort of your perspective on interest
• 22:55
  Speaker 1: rates right now and where they would be without the
• 22:57
  Speaker 1: vast amounts of either quantitative easing in the Added States
• 23:00
  Speaker 1: or bond buying that's been going on in Europe. That's
• 23:04
  Speaker 1: a tough question, but I mean, in rough terms, you
• 23:07
  Speaker 1: probably need to think about at least twenty five to
• 23:09
  Speaker 1: thirty five basis points higher. Uh. And the real question
• 23:14
  Speaker 1: is going to be not whether we go up um
• 23:17
  Speaker 1: as that bonbuying slowly um disappears. But whether people will
• 23:23
  Speaker 1: continue to issue a lot of debt like Apple today
• 23:27
  Speaker 1: as rates go up in response, well, and you can
• 23:30
  Speaker 1: add into that the tax plan because the interest that
• 23:35
  Speaker 1: a lot of companies pay on that debt would not
• 23:38
  Speaker 1: be deductible from taxes under that plan. So there has
• 23:43
  Speaker 1: been speculation into the Bank of America. Mary Lynch, for example,
• 23:46
  Speaker 1: came out today with the report saying that they expect
• 23:49
  Speaker 1: big corporations to reduce their leverage by ten to thirty
• 23:52
  Speaker 1: percent in the wake of these tax changes. Do you
• 23:55
  Speaker 1: agree with that assessment in rough terms? Absolutely, there's it
• 24:01
  Speaker 1: depends on how there still maybe some people that can
• 24:04
  Speaker 1: get in under the most recent test, and so there
• 24:08
  Speaker 1: could be some people that are actually expanding their leverage
• 24:11
  Speaker 1: to take advantage of the cap in terms of interest
• 24:14
  Speaker 1: rate deductibility. But um, the days of corporate issuing new
• 24:20
  Speaker 1: debt hand over fist and just doing nothing but any
• 24:23
  Speaker 1: leverage or at least going to calm down, both because
• 24:27
  Speaker 1: their stock is more expensive on the buybacks and because
• 24:31
  Speaker 1: the deductibility question is going to be an open issue
• 24:35
  Speaker 1: maybe for the next three to five years. So Jim,
• 24:37
  Speaker 1: I don't understand in that context. I don't understand how
• 24:41
  Speaker 1: yields could rise because if you have the supply of
• 24:44
  Speaker 1: bonds getting reduced pulled back as companies issue less debt,
• 24:50
  Speaker 1: then you have a sort of smaller supply. You've got
• 24:53
  Speaker 1: the same amount of demand or more as retirees, Uh,
• 24:56
  Speaker 1: save money. So wouldn't this lead to even lower corporate
• 25:00
  Speaker 1: els It pushes down on them. Yes, But on the
• 25:04
  Speaker 1: other hand, you've got what Tim was talking about in
• 25:08
  Speaker 1: terms of the large amount of buying that's been done
• 25:10
  Speaker 1: by central banks. So it's very possible for the two
• 25:13
  Speaker 1: to net offset. And that's why we come up with
• 25:17
  Speaker 1: um the potential for raids to slowly drift up as
• 25:20
  Speaker 1: the market begins to approach equilibrium. Jim, you know, one
• 25:25
  Speaker 1: of the things that everyone talks about, it seems to
• 25:27
  Speaker 1: be inflation with the lack thereof and uh, is it
• 25:31
  Speaker 1: right to connect inflation with something that marks how old
• 25:35
  Speaker 1: we are? Excess money supply growth No one even talks about,
• 25:38
  Speaker 1: you know, M one, M two and three, men four.
• 25:40
  Speaker 1: I mean, no one mentions these things. But if you
• 25:43
  Speaker 1: have access money supply growth, you get inflation. If the
• 25:47
  Speaker 1: money supplies actually shrinking you get deflation? Do you buy that? Really?
• 25:55
  Speaker 1: We've not paid attention to it for so long because
• 25:58
  Speaker 1: um velac city of money turnover um kept changing and
• 26:03
  Speaker 1: so you can't really track relative to the monetary supply
• 26:07
  Speaker 1: and and draw a straight line to inflation any longer
• 26:10
  Speaker 1: for them in terms of thinking about interest rates, we
• 26:14
  Speaker 1: are so far more focused on inflation expectations now than
• 26:18
  Speaker 1: we ever were um uh six to eight years ago.
• 26:23
  Speaker 1: So I'd love to get your take on the federal Reserve.
• 26:25
  Speaker 1: We found out today that William Dudley Built Dudley, new
• 26:28
  Speaker 1: York Fed President, is planning to retire midyear next year.
• 26:33
  Speaker 1: I want to start with, who do you think would
• 26:36
  Speaker 1: be a good New York Fed President to succeed Bill Dudley.
• 26:40
  Speaker 1: We haven't gotten that far yet, okay. UM would be
• 26:43
  Speaker 1: fascinating though, if they brought somebody in internally that it
• 26:47
  Speaker 1: was already there. Because the regional Fed president choices have
• 26:52
  Speaker 1: become more and more controversial, and with the high profile
• 26:55
  Speaker 1: of the New York Fed, UM, it might make sense
• 26:59
  Speaker 1: for them to consider on internal candidates rather than bring
• 27:02
  Speaker 1: somebody with possible baggage in from the private sector. All right, Well,
• 27:07
  Speaker 1: how important is the fact that yet another Federal Reserve
• 27:12
  Speaker 1: president regional president is leaving after all the departures that
• 27:16
  Speaker 1: we've seen in all the vacancies. I mean, does this
• 27:19
  Speaker 1: change the equation for you as a bond strategist of
• 27:23
  Speaker 1: how to look at the way that the FED is
• 27:25
  Speaker 1: going to approach tapering the balance sheet, et cetera next year,
• 27:28
  Speaker 1: given the uncertainty here with the composition of the FED.
• 27:32
  Speaker 1: Not yet, because still we see just incredible, Um, we
• 27:37
  Speaker 1: see incredible, incredible longevity in the FED staff. UM. That's
• 27:43
  Speaker 1: supplying a lot of the views that the governors react to.
• 27:48
  Speaker 1: So while Dudley has been a principal architect of recent
• 27:51
  Speaker 1: policy and a chief salesman of the short term view
• 27:55
  Speaker 1: of what the FED was going to be doing, uh,
• 27:57
  Speaker 1: he replacing him doesn't really enter into our interest rate
• 28:01
  Speaker 1: equation yet at all. Do negative interest rates in Europe
• 28:05
  Speaker 1: and Japan enter into your equation? Uh? Guess, because they
• 28:13
  Speaker 1: constantly make the US Treasury rates on a comparable basis
• 28:19
  Speaker 1: that much more that they make them more um attractive.
• 28:24
  Speaker 1: And so anytime that we get like a run of
• 28:27
  Speaker 1: the ten year up to forty seven, like we did
• 28:29
  Speaker 1: at the end of October, you get a good bit
• 28:32
  Speaker 1: of buying because the yield gap out so far versus Europe. Jim,
• 28:37
  Speaker 1: real quick, where do you see the tenure yield going
• 28:39
  Speaker 1: within the next six months? This is boring. We see
• 28:44
  Speaker 1: it somewhere between two fifty. Well, that's up boring because
• 28:48
  Speaker 1: right now it's a two thirty one, I think, so
• 28:51
  Speaker 1: it's not that far off. What it's saying is it's
• 28:53
  Speaker 1: not going to move materially, and that potentially affect the
• 28:57
  Speaker 1: way that people invest. Right give sabelly to the stock
• 29:00
  Speaker 1: and bond markets correct, and so that that reduction of
• 29:05
  Speaker 1: volatility also helps keep corporate spreads tied. It reduces the
• 29:09
  Speaker 1: term premium. It just changes the basic equation that we
• 29:13
  Speaker 1: all grew up with in terms of thinking about the
• 29:15
  Speaker 1: long end of the bond market when the FED tightening.
• 29:18
  Speaker 1: Thank you very much for being with us. Jim Vogel
• 29:20
  Speaker 1: is interest rate strategist for ft N Financial. Thanks for
• 29:27
  Speaker 1: listening to the Bloomberg P and L podcast. You can
• 29:30
  Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or
• 29:34
  Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on
• 29:37
  Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 29:41
  Speaker 1: It's one before the podcast. You can always catch us
• 29:44
  Speaker 1: worldwide on Bloomberg Radio