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Vanderbilt's Smith on Planning for Money Market Reforms (Audio) · Bloomberg Intelligence

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  Speaker 1: Broadcasting live to New York, Bloomberg eleventh, RYO to Washington,
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  Speaker 1: d C, Bloomber to Boston, Bluemberg, dwell under It to
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  Speaker 1: San Francisco, Bloomberg nine to the countries. Do these exam
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  Speaker 1: General one ninet and around the globe the Bloomberg Radio,
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  Speaker 1: Los App and Bloomberg got gone. This is taking stock.
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  Speaker 1: I'm Kathleen Hayes along with Pim Fox. Something's been hard
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  Speaker 1: to find recently showing up in the money markets, and
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  Speaker 1: that's yield rising rates paid by banks and other company's
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  Speaker 1: initial commercial commercial paper are learning new new investors to
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  Speaker 1: the market. And we have a guest coming up who
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  Speaker 1: says investors who choose not to participate in a government
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  Speaker 1: forced money market fund migration stand to profit handsomely. Pim Yes.
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  Speaker 1: I'm also I'm gonna be talking about some changes to
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  Speaker 1: the rules that govern money market funds. That's all coming up.
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  Speaker 1: All right now, let's go to Charlie Pellet in the
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  Speaker 1: Bloomberg newsroom for Bloomberg Business Flash, and I thank you
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  Speaker 1: very much, Pim Pox. Thank you, Kathleen Hayes. The down
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  Speaker 1: the SMP Nez Bank All Advancing final thirty minutes of
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  Speaker 1: three now to three again there of two tents of
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  Speaker 1: one percent, Nestack now up eighteen points, Hire by four
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  Speaker 1: tenths of one percent down, Industrials up twenty nine points
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  Speaker 1: again there of two tents of one percent. One of
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  Speaker 1: today's catalysts for the move higher a number of companies
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  Speaker 1: a um I think that I think they're beginning to
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  Speaker 1: learn the lesson that they're there. They really are hurting
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  Speaker 1: profitable for banks to lend, and so I think that
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  Speaker 1: message is getting through. Right now, the SMP five hundred
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  Speaker 1: index is trading higher by three points to three, a
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  Speaker 1: gain there of two tents of one percent, down Industrials
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  Speaker 1: of twenty nine again, also of two tens of one percent,
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  Speaker 1: and as stand up eighteen a gain of four tenths
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  Speaker 1: of one percent. Ten year up seventeen thirty seconds yield
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  Speaker 1: one point five four percent, and gold of twenty thirty
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  Speaker 1: twenty six thirty, a gain there of two percent. Three
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  Speaker 1: I'm Charlie Pellett and that's a Bloomberg business flash. This
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  Speaker 1: is you Can Stock with Kathleen Hayes and Prim Fox
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  Speaker 1: on Bloomberg Radio. Government forced money market fund my gration.
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  Speaker 1: Some who don't participate stand to profit handsomely, and yet
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  Speaker 1: there are a lot of people seem to be hitting
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  Speaker 1: in that direction. So what is the red light that
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  Speaker 1: our next guest is holding up. We're very happy to
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  Speaker 1: welcome back to the show Hanley Smith. He's senior vice
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  Speaker 1: president at Vanderbilt. So good afternoon, sir, thank you for
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  Speaker 1: having me back. Thank you, well, it's great to have you,
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  Speaker 1: great to have you in studio. So, first of all,
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  Speaker 1: what is going on with the regulations that are changing
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  Speaker 1: set the table for us, No, we'll starting October, the
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  Speaker 1: SEC is instituting new rules on what's called money market
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  Speaker 1: funds or in the trade to a seven funds, and
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  Speaker 1: I won't get too technical, but it's a two point
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  Speaker 1: seven trillion dollar market that's being rewritten. UM. Prime money
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  Speaker 1: market funds which use commercial paper repo, those types of things,
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  Speaker 1: non government types of holdings, will be to do one
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  Speaker 1: of three things. Number one, they'll float their net asset value.
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  Speaker 1: Now we've all grown up with the one dollar in
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  Speaker 1: one dollar rout. That's changing just for prime money market funds.
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  Speaker 1: And more to the point, which I think is what's
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  Speaker 1: getting people concerned, is if the money fund gets in
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  Speaker 1: any kind of distress, which is unusual, but it did
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  Speaker 1: happen in two thousand and eight. As we know that
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  Speaker 1: the fund can institute redemption fees or can actually gate
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  Speaker 1: the redemptions. So a lot of corporate treasures and CFOs
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  Speaker 1: that typically use. Prime money market funds are migrating out
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  Speaker 1: of those types of funds into government only funds, which
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  Speaker 1: will continue to have the one dollar rena V without
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  Speaker 1: the requirements of gating or redemption fees. So that's where
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  Speaker 1: you're seeing this migration. So I think it was maybe
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  Speaker 1: the spring or probably earlier the summer, where prime funds
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  Speaker 1: were always much higher in terms of assets. Now that's switched,
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  Speaker 1: so you're starting to see that great migration. And what
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  Speaker 1: it's happening and what's it's causing is that the types
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  Speaker 1: of assets that's usually invest in prime money funds are
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  Speaker 1: getting cheaper because people are selling them. So I think
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  Speaker 1: that there's an opportunity for those investors that want to
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  Speaker 1: remain in those types of assets to to benefit. And
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  Speaker 1: you're starting to see that three month library one month
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  Speaker 1: labrary has popped up. You're starting to see prime money
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  Speaker 1: market funds as well as those that you separately managed accounts,
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  Speaker 1: starting to see much greater yields than you've seen over
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  Speaker 1: the last couple of years because of this migration. Let's
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  Speaker 1: say you're an individual that has a money market account
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  Speaker 1: as part of your brokerage account, your overall portfolio. I
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  Speaker 1: know that it's not a bank account. But many people
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  Speaker 1: you and I were just talking about this before you
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  Speaker 1: came on. Many people treat it like a bank account
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  Speaker 1: because you can write checks against it. You can also
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  Speaker 1: use a credit or debit card against it. What are
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  Speaker 1: some of the questions that if you have a money
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  Speaker 1: market fund, what kind of detailed answers do you need
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  Speaker 1: in order to understand whether any of this is going
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  Speaker 1: to affect you. Well, first of all, you're right, they've
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  Speaker 1: been sold for so many years as as dollar good,
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  Speaker 1: so it's a savings account to many people, and that's
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  Speaker 1: the way it's been sold for forty years. Uh. In
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  Speaker 1: two thousand and eight where we had the hiccup so
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  Speaker 1: to speak, that those all those rules changed. But people
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  Speaker 1: have to remember it's not a saving as account. It's
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  Speaker 1: actually an investment portfolio with investments underneath that actually fluctuate.
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  Speaker 1: Now they might be short term three months, nine months,
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  Speaker 1: so the fluctuations are minimal, but still they do. And
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  Speaker 1: I think where the real concern is because of the
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  Speaker 1: cost of running some of these funds. Due to the
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  Speaker 1: extra regulations. UH, some of these money funds have stretched
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  Speaker 1: into areas where they haven't normally have been to get
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  Speaker 1: some yield into the portfolio. So first and foremost you'll
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  Speaker 1: get a statement, or you'll get our perspectives, or you'll
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  Speaker 1: get a quarterly report on the money fund. Take a
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  Speaker 1: look at it. Um. We do a lot of investing
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  Speaker 1: at Vanderbilt Avenue for family offices and high net worth individuals,
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  Speaker 1: and if you do what We've looked at some of
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  Speaker 1: these portfolios, and I saw one recently where I looked
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  Speaker 1: at the portfolio. Half of the assets I didn't understand
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  Speaker 1: what they were and the other half I wouldn't own
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  Speaker 1: if I would. So it's important, um, for those in
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  Speaker 1: the industry as well as in the retail sector, just
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  Speaker 1: to take a look at the portfolio. Are you comfortable
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  Speaker 1: with those those assets? Okay? So who's to blame or
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  Speaker 1: who's causing this? Because it seems that people are yield
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  Speaker 1: hungry right understandably. Uh, the Federal Reserve keeping the key
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  Speaker 1: rate just off zero, that's one side of it. The
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  Speaker 1: other side, though, is all the regulation that the Dodd
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  Speaker 1: Frank legislation piled onto just about any kind of entity
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  Speaker 1: doing business in the financial services industry. Yeah, check one,
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  Speaker 1: end two, Because again I think we've been in an
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  Speaker 1: artificial environment because of the low rates, because of all
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  Speaker 1: the uh QEI and the things that we've talked about
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  Speaker 1: for so many years keeping these rates down, and so
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  Speaker 1: there's a lot of unintended consequences that could arise from
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  Speaker 1: coming back off of you know, normalization policy or whatever
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  Speaker 1: might But you're right, there's been a lot of regulations
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  Speaker 1: to camp clamp down on these particular types of funds,
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  Speaker 1: and so we're we're just concerned as a firm that
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  Speaker 1: again people treated as a bank account when it truly isn't.
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  Speaker 1: And the thing that I would just be cautious of
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  Speaker 1: is because of all the uncertainty and the volatility we've
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  Speaker 1: seen in the markets over the last couple of years,
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  Speaker 1: people have been holding on to a lot more cash
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  Speaker 1: just to feel comfortable. So pre two thousand and eight,
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  Speaker 1: where cash was a couple of percentages points of my
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  Speaker 1: portfolio and it was on a money market fund and
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  Speaker 1: it was okay, and I didn't have to worry about it.
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  Speaker 1: Post two thousand eight, that's changed with a lot of investors.
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  Speaker 1: We're seeing cash could be anywhere from twenty of the portfolio,
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  Speaker 1: and uh, what that's forcing them to do is go
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  Speaker 1: places where they wouldn't normally be, and that's where the
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  Speaker 1: problem comes up. Thank you very much. Henley Smith is
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  Speaker 1: senior vice president Vanderbilt Avenue Asset Management. They're based in
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  Speaker 1: New York. You're listening to taking stock and this is Bloomberg.
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  Speaker 1: No such thing as a free lunch inflows to et F,
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  Speaker 1: laying the seeds for heightened volatility and value destruction in
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  Speaker 1: the future because of ill liquid assets they hold us.
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