Latest / The Financial Exchange Show / Private equity is coming for your retirement. Should you be worried?

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Private equity is coming for your retirement. Should you be worried? · The Financial Exchange Show

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Speaker 2: Hour two here on the Financial Exchange, and as we
1:23
Speaker 2: kick things off here for this hour, we got markets mixed,
1:27
Speaker 2: but I think again kind of a strange market that
1:30
Speaker 2: we're seeing. So let me let me just give you
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Speaker 2: some context. The Dow is up one hundred and ninety
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Speaker 2: one points. Yahoo great if you follow the Dow in
1:37
Speaker 2: those thirty companies. The S and P five hundred is
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Speaker 2: down sixteen points, and it's largely being dragged by the Nasdaq,
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Speaker 2: which is down one hundred and eighty eight points, are
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Speaker 2: about one percent. What is moving things today? We got
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Speaker 2: Tesla down four percent, Meta, Google and Amazon all down
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Speaker 2: about one and a half percent. In Video down four
1:57
Speaker 2: point six percent, So it is big tech in mag
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Speaker 2: seven that is kind of dragging the ship right now.
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Speaker 2: Because the interesting thing is that when you look at
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Speaker 2: the S and P five hundred, there are currently one
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Speaker 2: hundred and ninety two more companies that are up for
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Speaker 2: the day rather than down for the day, and yet
2:13
Speaker 2: the index is down about a third of a percent.
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Speaker 2: So you got more companies up and down, but the
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Speaker 2: big ones are down, and so that is dragging things
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Speaker 2: lower for the S and P. Tenure. US Treasury is
2:25
Speaker 2: up four point two basis points to four point three
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Speaker 2: five percent, a little bit of a move upward in
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Speaker 2: yields after coming down. For the last six to seven weeks.
2:34
Speaker 2: We've got oil West Texts Intermediate up ninety eight cents
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Speaker 2: a barrel to sixty nine to ninety eight per barrel
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Speaker 2: tripa national average four. Gas prices up another one point
2:44
Speaker 2: one cents per gallon overnight to three point fifteen even
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Speaker 2: some of this due to gas prices to oil prices
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Speaker 2: rising from sixty five up to where they are now,
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Speaker 2: but a big portion of this we had kind of
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Speaker 2: talked about in the last couple of weeks that hey,
2:57
Speaker 2: this is when you get the refinery switching over to
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Speaker 2: the summer blend that's a little bit more expensive. And
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Speaker 2: so this is a pretty normal seasonal effect that you
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Speaker 2: see and probably absent any further move, and oil prices
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Speaker 2: taps out another five to seven cents higher around three
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Speaker 2: twenty to three twenty two per gallon in the next
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Speaker 2: couple of weeks. Here also, we've got gold today not
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Speaker 2: really doing much of anything, down a dollar seventy and
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Speaker 2: ounced to threeenty twenty four dollars and twenty cents. The
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Speaker 2: Trump administration announcing tougher limits on exports to Chinese tech
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Speaker 2: companies of American technology I'll quote here. The US on
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Speaker 2: Tuesday added dozens of Chinese companies to a trade blacklist
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Speaker 2: over national security concerns. American business is seeking to sell
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Speaker 2: technology to these companies will need approval from the government, though.
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Speaker 2: Among those added were subsidiaries of Inspur Group, China's largest
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Speaker 2: server maker and a major customer for US chip makers,
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Speaker 2: and also companies linked to China's largest supercomputer maker, Shugan.
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Speaker 2: We're also added. So this is stuff that's been percolating
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Speaker 2: for you know, a couple different administrations. Now, the first
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Speaker 2: Trump administration started this process, the Biden administration continued it.
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Speaker 2: Now you have the second Trump administration going further on this.
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Speaker 2: And this is stuff that given you know, the potential
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Speaker 2: adversarial nature of the relationship between the US and China,
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Speaker 2: quite honestly, yeah, you should be making it difficult for
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Speaker 2: them to get high end technology from the US to
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Speaker 2: be able to use domestically.
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Speaker 3: I don't know how successful these efforts will be, but
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Speaker 3: I guess you gotta try.
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Speaker 2: They're not going to be one hundred percent successful because
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Speaker 2: there's always you know, some willing middleman in random third
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Speaker 2: country who says, oh, I'll buy this and find a
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Speaker 2: way to smuggle it into China and get it to them.
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Speaker 2: But you're making it more expensive and more challenging and
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Speaker 2: you know, stuff like that for them to do it,
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Speaker 2: and so like, I don't have a problem with them
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Speaker 2: doing this. I think there should.
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Speaker 3: Be very sensible. It's frustrating because there's no air tight
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Speaker 3: way to apply and enforce these, as you said, very sensible,
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Speaker 3: maybe even urgent restrictions.
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Speaker 2: Yeah. So this is something that again I think makes
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Speaker 2: a ton of sense. I would like to see more
5:18
Speaker 2: of it if possible. But a strong move from the
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Speaker 2: Trump administration to attempt a further crackdown at US technologies
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Speaker 2: showing up in China.
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Speaker 3: Why can't I realize the objectives are different, but why
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Speaker 3: can't they conduct tariff policy like this? Clear decisive. We
5:34
Speaker 3: understand the reason. It's implemented as effectively, I suppose, as
5:39
Speaker 3: is humanly as possible. This seems like.
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Speaker 2: Good execution, yes, very much so.
5:45
Speaker 3: So it's not that they're not capable of it.
5:47
Speaker 2: No, I don't know why this is being executed.
5:51
Speaker 3: Different in a different issue here, in a different issue sorry, but.
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Speaker 2: No, I agree because we still have a lot of
5:56
Speaker 2: I mean, we're a week away now from this new
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Speaker 2: round of tariffs that's set to be implemented. We still
6:03
Speaker 2: don't have any details on what it's going to be.
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Speaker 2: It sounds like even internally negotiations are still ongoing there.
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Speaker 2: And this seems to be a much cleaner, more straightforward
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Speaker 2: and right more impactful, you know move that's that's being
6:18
Speaker 2: done pretty cleanly.
6:20
Speaker 3: Act unny, you're seeing that out. Whether or not you
6:22
Speaker 3: agree with agree with, say, immigration enforcement, they seem to
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Speaker 3: be acting with resolve decisively and I'll just say effectively.
6:30
Speaker 3: It's not my area, but that's my general impression. And
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Speaker 3: the fact that they're not making a lot of making
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Speaker 3: everybody happy suggests that they're probably executing because a lot
6:39
Speaker 3: of people are howling why can't we get the same coherent,
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Speaker 3: consistent policy with respect to tariffs. It's very, very frustrating.
6:47
Speaker 2: I want to touch on this piece from uh this
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Speaker 2: is from Bloomberg and it gets it's something that we
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Speaker 2: were talking about. I don't remember if it was earlier
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Speaker 2: this week or maybe it was last week, but the
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Speaker 2: headline is gamb is no longer investing's evil twin. Legal
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Speaker 2: and regulatory attitudes are rooted in a morality that few
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Speaker 2: people accept today. And basically what it's saying is, look,
7:11
Speaker 2: the line has been blurred between gambling and investing over
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Speaker 2: you know, significantly blurred over the last I would say,
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Speaker 2: eight to ten years, you know, somewhere in that ballpark.
7:22
Speaker 2: And I'll just you know, I'll read a couple of
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Speaker 2: quotes here just because I think it's you know, interesting
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Speaker 2: to see what they're getting at here. We live with
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Speaker 2: a dysfunctional legal and regulatory attitude towards gambling and investment
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Speaker 2: that are rooted in a morality fewer people except today
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Speaker 2: and that never made economic sense. These attitudes make it
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Speaker 2: difficult to think about Robin Hood's March Madness plan rationally
7:45
Speaker 2: in terms of being able to like, wager on sports
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Speaker 2: in an investment account. Is their economic merit to such
7:51
Speaker 2: products should they be offered by brokerages and overseen by
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Speaker 2: federal market regulators, or left to the current patchwork of
7:58
Speaker 2: state rules that govern sports or entirely reimagined. And it's
8:04
Speaker 2: talking about, you know how, the distinction between gambling and
8:06
Speaker 2: investing is not one that everyone inherently believes in and Look,
8:12
Speaker 2: there's a if you're asking me what the differences between
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Speaker 2: gambling and investing, there's one very simple, clear thing that
8:26
Speaker 2: I come back to with investing in that ultimately, investing
8:32
Speaker 2: is buying. It's deploying your capital into something that, based
8:40
Speaker 2: on the success of that venture in the real world,
8:45
Speaker 2: has lasting impacts beyond simply what it is doing to
8:49
Speaker 2: your own personal wealth. So, as an example, if I
8:54
Speaker 2: were to go and place a bet on how many
9:00
Speaker 2: three pointers are going to be made during the Sweet sixteen,
9:05
Speaker 2: is there any lasting economic benefit to more or fewer
9:09
Speaker 2: three pointers being made this weekend? No, there's not like
9:14
Speaker 2: the Ultimately, no one is made better off by more
9:17
Speaker 2: or fewer three pointers.
9:18
Speaker 3: Being the guys, the guys that paint the stripe.
9:22
Speaker 2: How often do you have to paint those I don't
9:23
Speaker 2: think it's often. You have to refinish the floor on
9:26
Speaker 2: a regular base.
9:27
Speaker 3: Threes people might be stepping on the line then back
9:29
Speaker 3: wearing the stripe out. So think about the stripers.
9:31
Speaker 2: That's if that's if they're not good three point.
9:33
Speaker 3: Shooters, Well, you're you're making sure you're not online. You're
9:36
Speaker 3: on the line half the time you step back.
9:38
Speaker 2: And I don't know you shouldn't be stepping on any lines.
9:41
Speaker 3: No, no, but you make sure you're behind it so you.
9:43
Speaker 2: Well, exactly, but you you should have that muscle memory
9:46
Speaker 2: to not be stepping on the lines, to be.
9:48
Speaker 3: You know where it is. If you you gotta look down,
9:50
Speaker 3: muscle memory, you're on it half the time.
9:52
Speaker 2: Yeah, muscle memory. How did Ted Williams know where the
9:53
Speaker 2: strike zone was? He just knew. He just knew, He
9:58
Speaker 2: just knew. So there's no economic benefit from you know,
10:03
Speaker 2: Alabama and Arkansas hoisting five hundred three pointers in a
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Speaker 2: single game.
10:08
Speaker 3: Guys that make the nets. It's harder on the net, right,
10:09
Speaker 3: it is harder on the net count you're replacing who
10:12
Speaker 3: replaces the nets, like the guy's name?
10:17
Speaker 2: No, no, who makes the nets?
10:18
Speaker 3: Oh, I don't know.
10:19
Speaker 2: I don't know either. Anyways. On the other hand, if
10:25
Speaker 2: if Apple comes out with a cheaper iPhone that can
10:31
Speaker 2: do more, there is real world economic impact to that
10:35
Speaker 2: in terms of how it moves. If IBM issues a
10:39
Speaker 2: bond because they need to borrow money in order to
10:42
Speaker 2: fund expansion, there's real economic impact there everything else, even
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Speaker 2: within markets. If you are if you're looking at this
10:50
Speaker 2: in terms of hey, well you know, I trade options
10:53
Speaker 2: on a weeklier daily basis quite honestly, gambling not investing.
10:57
Speaker 2: It might happen in investing account, but it's not in investing.
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Speaker 2: I'll even go you could have a third classification, you know, gambling, trading,
11:04
Speaker 2: and investing. Maybe it falls under trading instead of gambling,
11:08
Speaker 2: but it still isn't investing, because investing is the idea
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Speaker 2: that the money that you are putting into something is
11:15
Speaker 2: generating real world impact over the long run that will
11:18
Speaker 2: pay you back more over time.
11:21
Speaker 3: So two quick points. The idea that morality should somehow
11:25
Speaker 3: not be a consideration is suspecious. It undergirds all law.
11:29
Speaker 2: I'm not even talking about.
11:30
Speaker 3: So no, I'm I'm going back to the I just
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Speaker 3: want to I want to challenge one of the assumptions.
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Speaker 2: Right, if doesn't matter, then all law then we could
11:38
Speaker 2: do anything.
11:38
Speaker 3: This isn't really my area, but I know enough to
11:40
Speaker 3: know that all law, even though we're pretty far removed
11:44
Speaker 3: from like mosaic law now and other forms of religiously
11:46
Speaker 3: inspired law, all law comes from some type of norm
11:49
Speaker 3: which you could call morality. So I reject the argument
11:52
Speaker 3: that morality has no bearing, even though I'm sympathetic to
11:55
Speaker 3: letting people blow their whole net worth if they like
11:59
Speaker 3: on gambling. As a sort of libertarian person, it's a
12:02
Speaker 3: free country. Knock yourself out. I would make your point,
12:06
Speaker 3: maybe more compactly, I would just say, is it generative
12:10
Speaker 3: or not. If it's generative, you're buying something with a yield.
12:13
Speaker 3: It could be a bond too, because country companies and
12:16
Speaker 3: countries float bonds to make investments. You're raising capital in
12:21
Speaker 3: an effort to produce more.
12:23
Speaker 2: Capital investment with the idea that there's going to be growth.
12:26
Speaker 2: That happens in order to realize your gains, not just
12:31
Speaker 2: number go up.
12:32
Speaker 3: Even people who are speculating on a very short term basis,
12:35
Speaker 3: and securities facilitate price discovery. They help us get at
12:40
Speaker 3: the right price for a stock or so even what
12:42
Speaker 3: seems like it might be speculative activity, and say equities
12:46
Speaker 3: or bonds or some other asset class probably contributes to
12:49
Speaker 3: the more efficient functioning of those capital markets. So that,
12:53
Speaker 3: in a sense, is generative.
12:55
Speaker 2: To take a quick break here. When we come back,
12:58
Speaker 2: we've got trivia, and then we'll talk talk a little
13:00
Speaker 2: bit about private equity. Coming for your phone k right
13:04
Speaker 2: after this, ohaha.
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Speaker 1: Today.
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Speaker 4: That's DAV five k dot Boston. Time for trivia here
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Speaker 4: on the Financial Exchange and on this day. Back in
14:21
Speaker 4: twenty eighteen, Ali Baba partnered with an American automaker on
14:25
Speaker 4: a car vending machine without salespeople that was five stories high.
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Speaker 4: Customers would select a car model, make a deposit electronically,
14:35
Speaker 4: schedule a pickup time, and the car would then be
14:38
Speaker 4: dispensed from the multi story structure. So trivia question today,
14:44
Speaker 4: which American car maker partnered with Ali Baba on the
14:48
Speaker 4: car vending machine?
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Speaker 2: Once again?
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15:18
Speaker 2: So this has been making the rounds over the last
15:23
Speaker 2: couple of months now. There have been a number of
15:25
Speaker 2: pieces on this. Bloomberg is the latest here. It's titled
15:28
Speaker 2: private Equity is Coming for America's twelve trillion in retirement savings,
15:33
Speaker 2: and the premise behind this is, look, there are a
15:35
Speaker 2: bunch of private equity firms and private credit firms that
15:38
Speaker 2: want to get their products into four to one K plans.
15:42
Speaker 2: The argument they make is that individuals like the average
15:46
Speaker 2: Joe is missing out quote here, is missing out on
15:50
Speaker 2: gains that buyout firms have delivered institution in recent decades.
15:54
Speaker 2: The industry wants Washington's help to make it easier for
15:57
Speaker 2: companies to offer private investment private equity investments in one
16:00
Speaker 2: K plans despite concerns about complexity, cost, and risk. Some
16:04
Speaker 2: companies are already adding private equity investments there for when
16:07
Speaker 2: K plans, and the industry is working to develop model
16:09
Speaker 2: portfolios and address concerns about liquidity and performance. So whenever
16:13
Speaker 2: I read any piece anywhere, the first question that I
16:18
Speaker 2: ask myself is why am I reading this now? Because
16:23
Speaker 2: I think it. You know, pieces don't just make their
16:25
Speaker 2: way into the news for no reason. There there are
16:29
Speaker 2: billions of stories going on in any particular day. Why
16:32
Speaker 2: does this one end up, you know, becoming one that
16:36
Speaker 2: gets published is the question, And at the risk of
16:43
Speaker 2: just appearing generally anti private equity and private credit mark
16:52
Speaker 2: these are groups that private actuty in private credit. Private
16:55
Speaker 2: equity has been around for forever. At this point, you know,
16:58
Speaker 2: you go back like forty fifty years on it now.
17:01
Speaker 2: Private credit's kind of a newer development, especially the expansion
17:04
Speaker 2: of it in the last you know, three to five years.
17:07
Speaker 2: But is it wrong to say that private equity and
17:10
Speaker 2: private credit have been around for quite a while and
17:13
Speaker 2: they've made a boatload of money for the managers of
17:16
Speaker 2: private equity and private credit in doing so.
17:19
Speaker 3: No, of course not. Private equity is older than public equity,
17:24
Speaker 3: but it is in its current shorm.
17:26
Speaker 2: The way that people think about it with like the
17:27
Speaker 2: LBOs and things like that, that's really a creature of
17:30
Speaker 2: like onward.
17:31
Speaker 3: Yeah, it became prominent in public and Taft Hartley with
17:35
Speaker 3: your union, pension funds and endowments starting in the mid
17:38
Speaker 3: to late nineties after a very famous investor who ran
17:42
Speaker 3: the Yale Endowment popularized the idea of allocating a significant
17:46
Speaker 3: portion of your portfolio to private companies. And go ahead
17:51
Speaker 3: with the rest of your point on I want to
17:52
Speaker 3: go on my little tangent.
17:53
Speaker 2: Yet where I'm going with this is the second anyone
17:58
Speaker 2: who's consistently been served having large institutional sophisticated investors, you know,
18:03
Speaker 2: might have a handful of different clients that they work
18:07
Speaker 2: with as soon as they start saying, hey, we need
18:09
Speaker 2: to tap into this big group you know of less
18:12
Speaker 2: sophisticated investors. My intenna go up because I immediately say
18:16
Speaker 2: they're trying to dump everything on them because they can't
18:19
Speaker 2: find enough demand for it from their old clients. Is
18:24
Speaker 2: that a bad way to look at it?
18:26
Speaker 3: No, this is a complicated subject. I want to reduce
18:30
Speaker 3: it to what I think is the key point for
18:31
Speaker 3: individual investors, if you don't mind, and then maybe at
18:33
Speaker 3: eleven thirty five we talk about the motivation.
18:35
Speaker 2: We can keep covering this for a while.
18:37
Speaker 3: Yeah, I'd like to because this is going to be
18:38
Speaker 3: critically important for you in your four oh one k
18:41
Speaker 3: as the company that's companies that sponsor and evaluate managers
18:44
Speaker 3: that offer private equity. I want to close my comments
18:48
Speaker 3: this segment with a key distinction between private and public.
18:51
Speaker 3: You get the market return when you buy public equities,
18:54
Speaker 3: particularly through an index fund. Finance people call that beta.
18:58
Speaker 3: Maybe you've heard that jargon. It's something you just harvest.
19:01
Speaker 3: You can benefit from it passively. That's why it's so cheap.
19:04
Speaker 3: You don't have to exercise any skill in selection. Private
19:07
Speaker 3: equity depends critically on selecting managers, who in turn can
19:11
Speaker 3: select good companies, or at least go in and fix
19:14
Speaker 3: up companies that aren't working well. You don't get that
19:17
Speaker 3: automatic if you will premium from investing in private equities.
19:20
Speaker 3: They're fundamentally different from public equity.
19:23
Speaker 2: Take a quick break. There's still more to dig into
19:25
Speaker 2: on this, because again I think it's a nice meaty
19:27
Speaker 2: topic to cover here. We'll do that and we'll also
19:30
Speaker 2: give you the trivia answer after this.
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20:06
Speaker 4: Trivia question today was which American car maker partnered with
20:11
Speaker 4: Ali Baba on the car vending Machine.
20:13
Speaker 2: Well, that would be Ford.
20:15
Speaker 4: Customers could select a car model, make it depositive, electronically,
20:19
Speaker 4: schedule a pickup time, take a selfie, and verify their identity.
20:23
Speaker 4: The car would then be dispensed from the multi story structure.
20:29
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20:35
Speaker 4: to Mike, and we play trivia every day here on
20:38
Speaker 4: the Financial Exchange See complete contest rules at Financial Exchange
20:42
Speaker 4: Show dot com.
20:44
Speaker 2: But not taking home a new forward. What do you
20:48
Speaker 2: mean that was the company that did it right? Right?
20:50
Speaker 3: Correct?
20:51
Speaker 2: Yeah, I was just making a joke that the trivia
20:54
Speaker 2: winner was not taking home a Ford.
20:56
Speaker 3: Oh, oh gotcha.
20:59
Speaker 4: No, it's a T shirt.
21:00
Speaker 2: Yeah, is there're FOURD on the T shirt? No, No,
21:03
Speaker 2: it's blue though blue. It's a blue T shirt. It's good,
21:08
Speaker 2: it's great. Let's talk more about private equity in retirement plans. Yeah,
21:12
Speaker 2: so a my antenna, as I noted that they go
21:16
Speaker 2: up whenever I see someone who's traditionally dealt with institutions
21:21
Speaker 2: deciding they want to pivot to everyone else under the
21:25
Speaker 2: guise of, you know, democratizing access. Well, why didn't you
21:28
Speaker 2: democratize to begin with? Why didn't you start with you know,
21:32
Speaker 2: retail if that's what was really important to you, Like,
21:34
Speaker 2: did you suddenly like wake up and have this epiphany
21:36
Speaker 2: just like Jue, you know, I really believe that the
21:39
Speaker 2: returns on private equity are better and we should offer
21:42
Speaker 2: them to everyone. Like no, like you don't just well,
21:44
Speaker 2: it doesn't just happen like that.
21:46
Speaker 3: I can tell you that Jerry Maguire, I used to
21:49
Speaker 3: work for a firm that is now democratizing access and
21:52
Speaker 3: the reason they are doing it is because they've run
21:55
Speaker 3: out of customers.
21:56
Speaker 2: They want to grow bigger, they like the ones that
21:58
Speaker 2: they've worked with previously.
21:59
Speaker 3: Or as far as humanitarian urge, no, no, and there's
22:04
Speaker 3: nothing wrong with that, by the way. No, we can critical.
22:07
Speaker 2: You can accept that businesses want to make as much
22:09
Speaker 2: money as possible. But in the investing world, when it
22:12
Speaker 2: comes to hey, what are you actually getting and when
22:17
Speaker 2: are you getting it? Like, those are the questions that matter,
22:20
Speaker 2: like what's inside the wrapper? And is it still ripe
22:24
Speaker 2: or as it started to go bad?
22:26
Speaker 3: And I hope people ask themselves. I hope consultants who
22:28
Speaker 3: advise on menus to frow when K plans ask people
22:32
Speaker 3: pitching them these strategies, why is it worth the opportunity
22:35
Speaker 3: cost of shifting out of public markets which we all
22:38
Speaker 3: have access to cheaply, which I said in the last segment,
22:41
Speaker 3: are just a commodity you can get for a couple
22:44
Speaker 3: fractions of a percent exposure to the S and P
22:47
Speaker 3: five hundred or the Russell three thousand, or the MSCI,
22:51
Speaker 3: the Morgan Stanley Europe, Australasia, et cetera Develop Markets Index
22:55
Speaker 3: for international diversification. You can build a solid diversified line
23:00
Speaker 3: up as an individual investor very inexpensively. These days. Private
23:04
Speaker 3: equity is expensive because it involves the very careful selection
23:09
Speaker 3: of in labor intensive monitoring of people that buy and generally,
23:14
Speaker 3: though not always, fix up companies. I can't underscore enough
23:18
Speaker 3: how different private market investing is from public market investing.
23:22
Speaker 3: We probably also can't underscore enough how success in investing
23:26
Speaker 3: in private markets depends critically on the ability to select
23:30
Speaker 3: good managers. And I hate to break it to you,
23:32
Speaker 3: but you're not going to get the top tier managers
23:35
Speaker 3: that have been so successful for the big endowments of
23:38
Speaker 3: the world like Harvard, Yale and others. You're not going
23:41
Speaker 3: to get access access access to those excuse me, in
23:45
Speaker 3: your four oh one K plan.
23:46
Speaker 2: You're just not And and even let's say that you did, like,
23:49
Speaker 2: let's say that you did get access.
23:51
Speaker 3: To them, Fine, are they going.
23:53
Speaker 2: To supply the exact same deals to for one K
23:56
Speaker 2: participants that they suppl's That's what I mean.
23:58
Speaker 3: I'm sorry, I meant the deals. You're right, yeah, thank you.
24:00
Speaker 3: I don't mean the label, because they're going to be
24:02
Speaker 3: labeled KKR, Blackstone, Toma, Bravo, and you're thinking, whoa, I've
24:07
Speaker 3: got these institutionally sort of gold plated like this. It's
24:10
Speaker 3: sort of like driving the least expensive Porsche. No offense
24:14
Speaker 3: if you have the least expensive Porsche. I think they're beautiful,
24:16
Speaker 3: but it's like you're not really getting top of all.
24:19
Speaker 3: You're getting like a VW with the gold badge. Right,
24:23
Speaker 3: no offense to anybody, But you know what I mean, I.
24:25
Speaker 2: Don't think you're offending Porsche owners.
24:27
Speaker 3: Well, I don't want somebody might have just dropped sixty
24:29
Speaker 3: five k on a Macon. I don't want to offend them,
24:32
Speaker 3: but they know they're just that's the entry level. Yes, okay,
24:36
Speaker 3: I'm digging myself into a deeper hole here with them.
24:39
Speaker 2: It's all. But I don't think you need to be
24:41
Speaker 2: worried about offending the Porsche owners on this. Yeah, okay,
24:44
Speaker 2: maybe they already have private equity in their portfolio.
24:46
Speaker 3: You know. So it's very common in pension funds. Why
24:49
Speaker 3: is that? Because it's very liquid, They tie you up
24:52
Speaker 3: for ten years. Think about what they're doing. They're raising money,
24:55
Speaker 3: they're not telling you what it's for. And then they
24:56
Speaker 3: go out and buy companies, companies that you may know.
25:00
Speaker 3: They take them private, They fire a lot of people,
25:03
Speaker 3: they generally load the company up with debt because they
25:05
Speaker 3: have to. They make a lot of operational improvements, they're
25:08
Speaker 3: very hands on, think Warren Buffett's on steroids. And then
25:12
Speaker 3: they sell it back into public markets or to another
25:14
Speaker 3: private equity shop. That's the very simplified long and short
25:18
Speaker 3: of what private equity and it's a very complicated space.
25:21
Speaker 3: This is just one simple example. That's the long and
25:23
Speaker 3: the short of what they do. Think about how different
25:25
Speaker 3: that is from owning a public company, which you could
25:27
Speaker 3: flip ten times a day if you wanted to as
25:30
Speaker 3: an investor. It is a fundamentally different asset class with
25:32
Speaker 3: its own risks.
25:33
Speaker 2: If you want an example of this, look no the
25:36
Speaker 2: New England region where our show's based. BJ's Wholesale Club
25:41
Speaker 2: back in twenty eleven, maybe twenty twelve. They're bought by
25:45
Speaker 2: a couple of different private equity firms. They were taken private.
25:48
Speaker 2: They then were re released out into the wild. I
25:50
Speaker 2: think it was back in twenty eighteen so it was
25:52
Speaker 2: like a six or seven year cycle that they went through,
25:56
Speaker 2: and again like the company went through some huge changes
26:00
Speaker 2: during that time, and ultimately, if you were someone that
26:05
Speaker 2: was you know, invested in that private equity firm during
26:08
Speaker 2: that time, you couldn't just say halfway through, do you
26:10
Speaker 2: give me back my money? I don't think this is
26:12
Speaker 2: like a good idea. You're typically you're typically locking it up.
26:15
Speaker 2: So one of the other things they have to navigate is, hey,
26:18
Speaker 2: how do we provide sufficient liquidity? Because in four oh
26:21
Speaker 2: one K plans, yes, you're not supposed to touch the money
26:24
Speaker 2: until age you know, fifty nine and a half in
26:26
Speaker 2: older to avoid penalties. But there are plenty of people
26:30
Speaker 2: that get into trouble at one point or another in
26:32
Speaker 2: their life and need to tap it, whether it's for
26:34
Speaker 2: you know, a four to one K loan or actually
26:36
Speaker 2: like tapping it and pulling the money out. How do
26:39
Speaker 2: you provide the liquidity that is needed inside of their.
26:42
Speaker 3: I think they fixed that part of it, but it
26:44
Speaker 3: comes at the expense. Just like in high yield bonds
26:47
Speaker 3: if you've ever owned that, in your four one K plan,
26:49
Speaker 3: very a liquid asset class. So what you sacrifice is returns.
26:54
Speaker 3: You can't have both high liquidity and very high return.
26:57
Speaker 2: Souse you end up with higher expenses than in order
26:59
Speaker 2: to offset that, because they need to build up capital
27:01
Speaker 2: surpluses in order to potentially pay those that liquidity out
27:04
Speaker 2: and stuff like that. Because if BJ's has taken private
27:09
Speaker 2: and an investor says, hey, pay me back my investment,
27:12
Speaker 2: they don't go to BJ's and be like, hey, give
27:13
Speaker 2: them ten thousand dollars. No, they need the liquidity from
27:16
Speaker 2: operating funds and things like that to be able to pay.
27:19
Speaker 2: And that's built up through higher expenses and stuff like that.
27:22
Speaker 3: I particularly considering the mixed success which private equity has
27:29
Speaker 3: exhibited or realized in pension funds. Some have done really
27:32
Speaker 3: well by it, most have not. Though most pension fund
27:35
Speaker 3: trustees or endowment decision makers will tell you they're disappointed
27:39
Speaker 3: in their private equity portfolio relative to public markets.
27:41
Speaker 2: Guidges, and aren't we seeing There's been a few pieces
27:43
Speaker 2: in the last year or so about large institutional investors again, pensions, endowments,
27:51
Speaker 2: things like that, talking about de private equitifying their portfolio is.
27:56
Speaker 3: Not well, they're all at target now, so their target
27:58
Speaker 3: might by that, I mean they set a target ten
28:00
Speaker 3: to fifteen percent of the fund for private equity. It
28:02
Speaker 3: took years, starting in about two thousand more or less,
28:05
Speaker 3: to get up to that, because, as I said, you
28:08
Speaker 3: make these investments gradually. Now they're at target and they
28:13
Speaker 3: don't need to be adding to it. Thus the desire
28:17
Speaker 3: for those that manage public equity private equity excuse me,
28:21
Speaker 3: to find new investors.
28:24
Speaker 2: Yeah, let's take a quick break here. When we come back,
28:30
Speaker 2: we'll do a little bit of stack Roulettes.
28:33
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29:01
Speaker 2: Mark, what do you got for me for stock? Rule?
29:03
Speaker 3: Game Stop share sword seventeen percent? After retailer says, now,
29:09
Speaker 3: normally you'd hope after that that that initial clause in
29:13
Speaker 3: this sentence to read something like announces new expansion plan
29:19
Speaker 3: or changes.
29:20
Speaker 2: Change his name from game Stop to game Start. Because
29:23
Speaker 2: we're just at the beginning.
29:24
Speaker 3: Even I would even take that chuck the reason the
29:27
Speaker 3: stock sword, I guess, is because they've announced that whatever
29:33
Speaker 3: cash they have, not all of it, but a good
29:36
Speaker 3: fraction of it, they're going to be investing in cryptocurrency
29:39
Speaker 3: bitcoin specifically. That was enough to boost the stock nothing
29:43
Speaker 3: does nothing for their long term prospects. Seems like a
29:47
Speaker 3: gimmick and blurs the line that we were talking about
29:49
Speaker 3: earlier between investing, which is generally generative you will pre yield,
29:54
Speaker 3: you hope it'll be put to productive use, and gambling,
29:56
Speaker 3: which bitcoin, with all due respect to people who think
29:59
Speaker 3: it's an asset, clearly is here.
30:02
Speaker 2: Here's the here's the big thing. If you are game stop.
30:07
Speaker 2: And again this is not to you know, give any
30:10
Speaker 2: kind of opinion on bitcoin, because I have no idea
30:12
Speaker 2: what the heck it's gonna do or not do. Like it,
30:14
Speaker 2: it's it's there. But I'm looking at just the last
30:18
Speaker 2: ten years, dating back to actually about eleven years. This
30:21
Speaker 2: is through June of twenty fourteen, and during that timeframe
30:27
Speaker 2: it had three separate unique drawdowns of at least seventy
30:34
Speaker 2: five percent. Now it's also if you look at the
30:37
Speaker 2: price of it done fantastically overall since then. You know,
30:41
Speaker 2: you go back to the beginning of that period, and
30:43
Speaker 2: it was at you know, six hundred dollars per bitcoin,
30:46
Speaker 2: and now it's you know, eighty seven thousand or something.
30:49
Speaker 2: So it's not to say it's gonna do good, bad,
30:51
Speaker 2: or ugly, because I have no freaking clue of what
30:54
Speaker 2: I am saying. Is if I am Game Stop and
30:59
Speaker 2: I'm just pulling this up just to get the financial
31:02
Speaker 2: numbers correct here, game Stop as of the most recent quarter,
31:06
Speaker 2: has about four point six billion dollars in cash and
31:09
Speaker 2: short term investments. They have free cash flow right now
31:13
Speaker 2: of minus forty seven million dollars for the last twelve months. Now.
31:18
Speaker 2: That has gotten better because at one point a couple
31:21
Speaker 2: of years ago, their free cash flow was down around
31:24
Speaker 2: you know, negative nine hundred million. So they've they've seen
31:27
Speaker 2: some improvement in the fundamentals of their business. But here's
31:30
Speaker 2: what I'm getting at is, let's say the fundamentals deteriorate,
31:34
Speaker 2: and let's say the company starts losing a whole bunch
31:36
Speaker 2: of money and they need cash from their stockpile. If
31:41
Speaker 2: they're four point six billion dollars in bitcoin has now
31:46
Speaker 2: become one point two billion because of a seventy five
31:49
Speaker 2: percent draw down you now have sacrificed the stability of
31:52
Speaker 2: your company in order, you know, for the hope that
31:55
Speaker 2: that four billion in cash turns into forty billion in cash.
31:59
Speaker 2: And that's kind of a problem when you're talking about
32:02
Speaker 2: in an emergency fund. There's a reason why people say, like,
32:04
Speaker 2: don't put your emergency fund in the stock market, because
32:06
Speaker 2: you never know what it's going to do. Even if
32:09
Speaker 2: it's boring and it earns you one percent, you wanted
32:11
Speaker 2: in a safe FDIC insured bank account because it's there.
32:16
Speaker 2: This is the problem here is that GameStop has gotten
32:19
Speaker 2: to the point where they're underlying business, which by the way,
32:22
Speaker 2: I say like they've you know, they've stabilized and seen
32:24
Speaker 2: some fundamental improvements. Those improvements have mostly been on the
32:27
Speaker 2: cost cutting side, because their revenue is dropped by fifty
32:29
Speaker 2: percent in the last ten years, so it's more been
32:32
Speaker 2: that they've been cutting expenses. Bitcoin game Stop has gotten
32:37
Speaker 2: to the point where there is no fundamental case for
32:41
Speaker 2: growth of the business, and so they're just kind of
32:43
Speaker 2: throwing in this lottery ticket.
32:44
Speaker 3: Yeah, they had nothing that not work for them. Did
32:46
Speaker 3: decided not to return it to shareholders special dividend, whatever,
32:49
Speaker 3: decided not to invest it because there's nothing to invest
32:52
Speaker 3: it in. Yes, the highest and best use of this
32:54
Speaker 3: capital to them was bitcoin. They could have bought an
32:56
Speaker 3: S and P five hundred index. Well, here's called it a.
32:58
Speaker 2: Here's the thing I have no If game Stop wants
33:01
Speaker 2: to say, look, we got four billion cash, we can't
33:03
Speaker 2: figure out what to do with it. Here's a big
33:04
Speaker 2: special dividend for four billion going out to investors.
33:07
Speaker 3: Problem solve.
33:07
Speaker 2: And those investors say, we want to put it in bitcoin. Fine, Like,
33:11
Speaker 2: it's not the fact that it's going into bitcoin. It's
33:14
Speaker 2: the fact that it's going into bitcoin as their cash
33:18
Speaker 2: that is set aside for operations in rainy day. If
33:21
Speaker 2: you don't know what's going to happen with your rainy
33:24
Speaker 2: day fund, it's not really a rainy day fund anymore.
33:26
Speaker 2: It's speculation. And that's the problem there.
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34:37
Speaker 2: I want to talk about either of you following this
34:41
Speaker 2: news on United Airlines flight one ninety eight from earlier
34:45
Speaker 2: this week, no what so. On Saturday, United one ninety
34:50
Speaker 2: eight took off from Los Angeles. They were going to Shanghai.
34:55
Speaker 2: They had to turn around two hours into the flight
34:57
Speaker 2: because one of the pilots operating the plane forgot their
34:59
Speaker 2: passpor Hum, weren't gonna be allowed to land and you know,
35:06
Speaker 2: disembark in China. So they went on a four hour
35:09
Speaker 2: flight to nowhere. They had to get alternate crew on
35:12
Speaker 2: board the plane and then take the plane off over
35:16
Speaker 2: to China afterwards.
35:18
Speaker 4: What did he announced to the flight My bad?
35:20
Speaker 2: I don't know. I haven't heard any you know, recordings
35:24
Speaker 2: of you know, why they were turning the plane around.
35:28
Speaker 2: United did say the customers were provided with meal, vouchers
35:31
Speaker 2: and compensation, but in a statement to Fortune, United said
35:35
Speaker 2: the pilot did not have their passport on board, were
35:37
Speaker 2: arranged for new crew to take our customers to their destination.
35:40
Speaker 2: That evening customers were provided with meal, vouchers and compensation.
35:43
Speaker 3: Sounds a little fishy.
35:45
Speaker 2: I don't think it does.
35:46
Speaker 3: No, Okay, so he can't what dplane? He can't clear customs?
35:52
Speaker 3: He like, he can't sit in the cockpit while they refueled, Like,
35:55
Speaker 3: can't they reassign pilots? It was it was light.
36:00
Speaker 2: Standing this well, I think about it this way. On
36:03
Speaker 2: long haul flights like that, you typically don't have backup
36:06
Speaker 2: flight crews in those other areas. It's one thing if
36:09
Speaker 2: you're flying from Canada, JFK, I got a million of those. Fine, whatever.
36:13
Speaker 2: When you are flying to Shanghai, you have you know, yeah,
36:16
Speaker 2: you don't have additional flight crews just on standby in Shanghai.
36:20
Speaker 2: It's kind of a okay, you're not going to have
36:23
Speaker 2: a whole separate flight crew. You're not doubling the cost
36:25
Speaker 2: of your labor.
36:26
Speaker 3: I guess what I'm asking is why couldn't he just
36:28
Speaker 3: stay on the plane, take a nap, and pilot it back.
36:31
Speaker 2: Probably because of regulations in terms of how long you're
36:34
Speaker 2: allowed to be, like what's considered operating the plane? Where
36:36
Speaker 2: do you have to sleep? You know, these kinds of things.
36:40
Speaker 2: Uh So, in any case, they had to turn the
36:42
Speaker 2: plane around. But hmm, four hours wasted. I mean you
36:46
Speaker 2: think they're lying about this? I don't know, Chuck, what
36:50
Speaker 2: why would the airline lie about this? Like because it's
36:55
Speaker 2: I'm gonna put the I'm gonna put the burden of
36:57
Speaker 2: proof on you, Marcus airline. Like we get all kinds
37:00
Speaker 2: stories out of airlines. We had all kinds of shuff.
37:03
Speaker 3: You just gave a reasonable explanation. He would not have
37:05
Speaker 3: been permitted to pilot the plane back. If that is
37:09
Speaker 3: the case, it is open and shut. Is that the
37:11
Speaker 3: case you were speculating that wasn't included in the fact.
37:14
Speaker 2: Yes, well I's not speculating as far as you are. No,
37:17
Speaker 2: what are they trying to hide? Was there? Did they
37:20
Speaker 2: run into UFOs and we're told to turn around?
37:24
Speaker 3: Now? Some other problem potential that they perhaps do not
37:27
Speaker 3: want to divulge. Mechanical issue.
37:30
Speaker 2: Oh we hear mechanical issues. How many times are you
37:32
Speaker 2: on a plane and you're like, sorry, we've got a
37:33
Speaker 2: mechanical issue. We need to, you know, head back to
37:35
Speaker 2: the gate.
37:36
Speaker 3: Chuck, I'm the absence of a clear, open and shut
37:41
Speaker 3: explanation as you just provided to me is curious. Maybe
37:44
Speaker 3: it was just a journalistic omission. I would have asked
37:47
Speaker 3: the question, why couldn't he just fly the plane back? Oh,
37:49
Speaker 3: because regulations don't permit it? Okay, thank you? Doesn't a
37:53
Speaker 3: curious journalist.
37:54
Speaker 2: Ask, well, I'll tell you what. Here's the deal. I
37:56
Speaker 2: got a couple of pilot friends and I'm going to
37:59
Speaker 2: text them after this and ask what would the problem
38:01
Speaker 2: have been? And I will have an update tomorrow for you.
38:05
Speaker 2: Does that sound good?
38:06
Speaker 3: I look forward to it. I'll tune in and Mike Armstrong.
38:09
Speaker 2: I appreciate that you don't normally listen to us when
38:11
Speaker 2: you're not on I get it. Markets are now all negative.
38:15
Speaker 2: The Dow's down eighteen points, SMP down forty three, NASDAC
38:18
Speaker 2: down one and a half percent, two hundred and seventy
38:20
Speaker 2: six points. We'll see how things turn out the rest
38:22
Speaker 2: of the day. We'll see you back here tomorrow on
38:23
Speaker 2: the Financial Exchange