Latest / Bloomberg Intelligence / The Long Bond Is in The Danger Zone, Loomis' Dan Fuss Says

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The Long Bond Is in The Danger Zone, Loomis' Dan Fuss Says · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:14
  Speaker 1: you and your money, whether you at the grocery store
• 0:16
  Speaker 1: or the trading floor. Find the Bloomberg P L Podcast
• 0:20
  Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. I want
• 0:28
  Speaker 1: to bring in Dan Fuss. I am so excited to
• 0:31
  Speaker 1: uh to speak with him. He has vice chairman of
• 0:34
  Speaker 1: Blooma's sales, very respected bond manager over the years who
• 0:38
  Speaker 1: has made a lot of right calls. I am so
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  Speaker 1: pleased to have you here. Dan. I want to start
• 0:43
  Speaker 1: with longer dated US government bonds because duration levels have
• 0:49
  Speaker 1: reached the highest on record. Rates are going back down
• 0:52
  Speaker 1: near the record loads. You're seeing people pile into the
• 0:54
  Speaker 1: longer dated debt. You have Jeffrey Gunlock coming out and
• 0:59
  Speaker 1: saying it's the word first possible set up versus history.
• 1:02
  Speaker 1: Do you agree, Well, my history doesn't go all that
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  Speaker 1: far back. It goes I'm not meaning to imply that
• 1:10
  Speaker 1: you can. I'm just you know, from your perspective, do
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  Speaker 1: you think that the long bond is poised for a
• 1:16
  Speaker 1: big fall, a big fall. Note. What I do think, however,
• 1:22
  Speaker 1: is I think interest rates are on an upward track.
• 1:26
  Speaker 1: Right now. The Fed is raising short race and that
• 1:31
  Speaker 1: gradually does feed out the yield curve. Now, if they
• 1:36
  Speaker 1: do this for a long time, eventually, based on history,
• 1:41
  Speaker 1: the long end of the curves sort of bends over.
• 1:44
  Speaker 1: In other words, long yields will be lower than the
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  Speaker 1: ten year, etcetera. So when the yield curve bends, it
• 1:51
  Speaker 1: normally bends at the long year long end, and the
• 1:54
  Speaker 1: fields keep going up, then at least the way it
• 1:58
  Speaker 1: used to be back way back, uh to peak on
• 2:02
  Speaker 1: polls in But something else is going on, uh, And
• 2:06
  Speaker 1: we do have money flows into the country from elsewhere,
• 2:12
  Speaker 1: and we also have something else I don't understand. I
• 2:16
  Speaker 1: understand part of it, the liability matching at the long
• 2:19
  Speaker 1: end for the corporate to find benefit plans. I mean,
• 2:21
  Speaker 1: we're that's important business for us, and so the money
• 2:25
  Speaker 1: is coming in. UM now that's easing off a bit.
• 2:30
  Speaker 1: But when stocks were really up there, it made sense
• 2:33
  Speaker 1: to go say Salsa SMP five undered and go out
• 2:37
  Speaker 1: and buy long investment grade corporates. If you can't get
• 2:40
  Speaker 1: what you want, you buy the long treasury and then
• 2:44
  Speaker 1: you hope to swap. Just to be clear, this is
• 2:46
  Speaker 1: pension plans in particular. They're looking to lock in their
• 2:49
  Speaker 1: gains so that they can provide there. Well, what they're
• 2:52
  Speaker 1: doing this is most nearly all on the corporate side. Uh.
• 2:57
  Speaker 1: What they're doing is their liability man matching. In other words,
• 3:01
  Speaker 1: the here's their liability and that's that's a double digit
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  Speaker 1: number in terms of duration, and so let's buy some
• 3:08
  Speaker 1: long corporates against that and then get this volatility off
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  Speaker 1: our income statement and off our balance sheet. Dan, I
• 3:16
  Speaker 1: wonder if you could speak to the issue of liquidity
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  Speaker 1: in bond markets and what this means specifically for hedge
• 3:23
  Speaker 1: funds that focus on fixed income. Okay, uh, let me
• 3:28
  Speaker 1: find the short way to do this. The liquidity in
• 3:32
  Speaker 1: the most of the fixed income market is good. It's
• 3:37
  Speaker 1: actually a little better than it was the last time
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  Speaker 1: I was here, visiting all the way from treasuries on
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  Speaker 1: down through investment grade corputs. Once you get to high yield, however,
• 3:51
  Speaker 1: it starts to shift a little bit, and the liquidity
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  Speaker 1: in high yield and the lower edge of investment grade
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  Speaker 1: also is there for the on the run issues as
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  Speaker 1: you get off the run. Then liquidity uh is a
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  Speaker 1: sometime thing in the high yield area and once in
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  Speaker 1: a while in the lower edge of investment grade, so
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  Speaker 1: you can't count on it above that you can normally
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  Speaker 1: count on. And one thing that used to worry me
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  Speaker 1: a lot, uh, well, the e T s. I worry
• 4:30
  Speaker 1: far less about them now in the investment grade on up.
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  Speaker 1: I think they're actually a good thing for liquidity most
• 4:37
  Speaker 1: not all, but most of the time. But but with
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  Speaker 1: respect to high yield perhaps, uh, it's a it's a
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  Speaker 1: little bit of a diceer prospect. Its start hearing from you,
• 4:46
  Speaker 1: you know, I want to just go back you were saying,
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  Speaker 1: you know, you seem pretty sanguine about longer term bonds,
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  Speaker 1: just based on the fact that pensions that have been
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  Speaker 1: going into them and locking in those yields, as well
• 4:56
  Speaker 1: as the yield curved dynamic as the FED tightens the
• 4:59
  Speaker 1: short end. But you know, there are a lot of
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  Speaker 1: other areas that people are worried about. People have been
• 5:05
  Speaker 1: piling into a emerging market step, people have been piling
• 5:07
  Speaker 1: into high yield it. Do you think there are any
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  Speaker 1: dangerous spots right now that you personally are avoiding in
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  Speaker 1: debt markets. Yes, but uh, well the long end uh
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  Speaker 1: over the last couple of years. Uh, it's been pretty
• 5:25
  Speaker 1: well publicized. We we are average maturity and the Loomis
• 5:29
  Speaker 1: Sales bond Fund, the biggest of the funds, used to
• 5:32
  Speaker 1: run around thirteen years. Not the average maturity, not the duration,
• 5:38
  Speaker 1: the average maturity UM, and now it's about six. It
• 5:42
  Speaker 1: was six and a half and then quite recently brought
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  Speaker 1: down to about six. Uh. That's that's a huge difference,
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  Speaker 1: that's uh. And that's because I think the trend of
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  Speaker 1: rates is up and longer term even yes, I don't
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  Speaker 1: expect the yield curve to invert for quite a while.
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  Speaker 1: Now you say, well, in that case, Dan, how come
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  Speaker 1: Uh you know long end prices are going up at
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  Speaker 1: the moment. Yes, that's true, they are. Have you contrasted
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  Speaker 1: with a year ago? Oh? Good point? Okay, Uh, same
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  Speaker 1: all the way out the curve. The curve has definitely
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  Speaker 1: flattened in treasuries, and spreads of everything else against treasuries
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  Speaker 1: have been narrowing. So you see what's going on. Well,
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  Speaker 1: more buyers and sellers whatever you want to call it, um,
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  Speaker 1: but it's not the way to bet. I think the
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  Speaker 1: Fed governors and regional bank presence in their speeches have
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  Speaker 1: made it very clear data dependent rates are going up
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  Speaker 1: at least two times more this year and maybe three
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  Speaker 1: And in twenty seconds. Do you think that the longer
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  Speaker 1: end is going to suffer as the Fed unwind its
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  Speaker 1: balance sheet? Yes, okay, that was sort of got fifteen
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  Speaker 1: seconds left. If you'd like to elaborate, well, I mean
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  Speaker 1: it will actually be felt more in the intermediate area.
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  Speaker 1: All right, Thanks very much. Dan Fuss is always great
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  Speaker 1: to have you with us. He is the vice chairman
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  Speaker 1: of Loomis Sales. They're based in Boston, of course, home
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  Speaker 1: to Bloomberg twelve, and he is one of the managers
• 7:27
  Speaker 1: of the Loomis Sales bond Fund. They've got fourteen billion
• 7:31
  Speaker 1: dollars in assets. We wish Matt Tucker a happy birthday,
• 7:48
  Speaker 1: not for himself but for his fund. He is head
• 7:51
  Speaker 1: of North American Fixed Income I share strategy at black Rock,
• 7:55
  Speaker 1: and he helped found the suite of fixed income ETFs
• 7:58
  Speaker 1: that have dominated headlines and dominated bond market trading for years.
• 8:03
  Speaker 1: We want to talk specifically about the tenure anniversary of
• 8:06
  Speaker 1: h y G. This is the biggest high old bond
• 8:09
  Speaker 1: et F out there with almost nineteen billion dollars of assets. Matt,
• 8:12
  Speaker 1: we are so glad that you are with us. I
• 8:15
  Speaker 1: want to start with being the black shape of the
• 8:18
  Speaker 1: fund management complex for so long, so many people picked
• 8:21
  Speaker 1: on h y G as sort of harbinger of doom
• 8:24
  Speaker 1: in bond markets, that it was going to destroy things,
• 8:27
  Speaker 1: that people were going to withdraw money all at once.
• 8:30
  Speaker 1: Have those dark clouds lifted? Do you feel like much
• 8:32
  Speaker 1: more embraced by fund managers and investors alike. Now, well,
• 8:37
  Speaker 1: thanks for having me this morning. So you know, if
• 8:39
  Speaker 1: I think about the history of h y G and
• 8:41
  Speaker 1: kind of how it's really matured over the years, I
• 8:44
  Speaker 1: do think there's been a shift. I think initially people
• 8:46
  Speaker 1: saw it as just an index fund in the high
• 8:48
  Speaker 1: old market, and there are questions about how the fund
• 8:51
  Speaker 1: would react in different stressed markets, what happened when investors
• 8:54
  Speaker 1: might rush in or rush out of the fund. But
• 8:56
  Speaker 1: I think we've seen so many different crises since the
• 8:59
  Speaker 1: fund was launched ten years ago, and so many different
• 9:00
  Speaker 1: stress events in the market. You've got a lot of
• 9:02
  Speaker 1: really good data now you can look at and say, well,
• 9:04
  Speaker 1: what did what did the fund next to do? What
• 9:05
  Speaker 1: is HyG actually done in his markets. I think people
• 9:08
  Speaker 1: realize that, you know, what actually performs kind of as
• 9:10
  Speaker 1: you expect. You know, it trades like the high old market. Um.
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  Speaker 1: So it's used increasingly by a lot of institutions who
• 9:16
  Speaker 1: might not have reached for it, you know, even five
• 9:18
  Speaker 1: years ago. It's not becoming a pretty core part of
• 9:22
  Speaker 1: a lot of institutional HIRLED portfolios just because it's another
• 9:25
  Speaker 1: way to invest in the market, another way to get
• 9:27
  Speaker 1: access to liquidity. Let's talk a little bit about some
• 9:30
  Speaker 1: of the characteristics of h y G. The I shares
• 9:33
  Speaker 1: eybox high old corporate bond e t F and I
• 9:36
  Speaker 1: wonder if you could start with this idea that the
• 9:39
  Speaker 1: over the counter to an exchange traded fund. Yeah, I
• 9:43
  Speaker 1: think a lot of ways this is the core innovation
• 9:45
  Speaker 1: behind bond ETFs in general, and it's something that I
• 9:48
  Speaker 1: think people lose sight of when they look at just
• 9:50
  Speaker 1: e t f s broadly and look at equity t s.
• 9:52
  Speaker 1: You know, the equity tp was a very interesting idea.
• 9:54
  Speaker 1: You took a bunch of securities, a bunch of stocks
• 9:57
  Speaker 1: which trade on the exchange, and you stuff them and
• 9:58
  Speaker 1: do this thing called an e t F, which is
• 10:00
  Speaker 1: also on the exchange. UM. That is important a lot
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  Speaker 1: of benefits to it. But I think the fixed income
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  Speaker 1: ETF was really transformative because you took this over the
• 10:07
  Speaker 1: counter bond market, which is very hard for a lot
• 10:10
  Speaker 1: of investors to see, hard to invest in, challenges with information,
• 10:14
  Speaker 1: transparent liquidity, and you put it onto the exchange. We're
• 10:17
  Speaker 1: successible and visible to everybody. And I really think that
• 10:20
  Speaker 1: as a transformative change. I mean, you now can see
• 10:23
  Speaker 1: a portfolio of high old bonds trading tick by ticks
• 10:26
  Speaker 1: throughout the day UM, which is a pretty crazy concept
• 10:29
  Speaker 1: when you think about it relative to the rest of
• 10:31
  Speaker 1: the high old bond market, where it's really hard to
• 10:33
  Speaker 1: get information about transactions that are actually taking place. And
• 10:36
  Speaker 1: h y G certainly was innovative and has been rewarded
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  Speaker 1: for that as UH it has become really a note
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  Speaker 1: of activity unto itself within the high old market and
• 10:44
  Speaker 1: really dominated a lot of the trading. I want to
• 10:46
  Speaker 1: want to ask you though about some of the choices
• 10:48
  Speaker 1: that black Rock didn't make, that I Shares didn't make,
• 10:51
  Speaker 1: in particular leveraged loans, because we have seen, uh, you know,
• 10:54
  Speaker 1: with throughout the fixed income space, we've seen a proliferation
• 10:57
  Speaker 1: of e t f s, and we have seen some
• 10:59
  Speaker 1: try to get into the leverage loan space and including
• 11:01
  Speaker 1: invest Goo with their Power Shows Power Shares Senior Loan portfolio.
• 11:05
  Speaker 1: It's a nine point two billion dollar fund. There clearly
• 11:08
  Speaker 1: is a lot of demand. Why has black Rock not
• 11:10
  Speaker 1: created a fund like this? Well, you know we have,
• 11:13
  Speaker 1: you know, but at products on the market, you you've
• 11:14
  Speaker 1: got funds give you access to a lot of different
• 11:16
  Speaker 1: segments to the market. We just didn't feel like it
• 11:19
  Speaker 1: was prudent to launch a loan e t f UM.
• 11:21
  Speaker 1: You know, black Rock has a big loan mutual fund
• 11:23
  Speaker 1: business that we run UM and I think that the
• 11:26
  Speaker 1: real question we asked ourselves as well. You know, if
• 11:29
  Speaker 1: you haven't asked a class like loans that really it's
• 11:31
  Speaker 1: not really there's already even securities, right, loans are basically
• 11:34
  Speaker 1: you know, actual bank loans. Those things cannot be in kinded,
• 11:37
  Speaker 1: meaning that let's see, everyone wants to leave a fund.
• 11:40
  Speaker 1: Everyone wants to go and leave h y G tomorrow.
• 11:42
  Speaker 1: HyG can actually in kind of all its securities out
• 11:45
  Speaker 1: give them back to investors. There's no liquidity risk that's
• 11:48
  Speaker 1: worn by the fund that is not presented to investors. Um,
• 11:51
  Speaker 1: that's not the same thing in that market like loans,
• 11:53
  Speaker 1: where you may not be able to actually liquid it
• 11:55
  Speaker 1: all your security. So we just kind of looked at
• 11:57
  Speaker 1: it and said, you know what, there may be some
• 11:58
  Speaker 1: risks and some stressed markets that a lone ETF could present,
• 12:01
  Speaker 1: and we didn't feel like that was consistent with how
• 12:03
  Speaker 1: we think about our platform. Are you concerned about the
• 12:06
  Speaker 1: increase in proposals for active ETFs and non transparent et
• 12:11
  Speaker 1: fs and the potential for this innovative, very simple model
• 12:15
  Speaker 1: of creating redeem and taking something and putting it in
• 12:19
  Speaker 1: in something that's transparent and able to trade daily like
• 12:22
  Speaker 1: a stock. Do you think that that this new kind
• 12:25
  Speaker 1: of element to the market could end up changing the
• 12:29
  Speaker 1: image of ETFs, which has so far been been fairly pristine. Well,
• 12:33
  Speaker 1: I do think we're seeing an evolution in e t
• 12:35
  Speaker 1: F and kind of what E t F means. Um,
• 12:37
  Speaker 1: you know, for a long time, E t F meant
• 12:40
  Speaker 1: index fund right in and meant index fund that had
• 12:43
  Speaker 1: generally made a fund that had this in kind creation redemption,
• 12:46
  Speaker 1: And to your point, pretty much every et F on
• 12:48
  Speaker 1: the market fit that description. But we've already seen over
• 12:51
  Speaker 1: the years, A lot of variants come in on this,
• 12:53
  Speaker 1: you know, whether it's you know, funds that use commodities
• 12:56
  Speaker 1: as opposed to securities, whether it's funds that employed leverage
• 12:59
  Speaker 1: in some way, funds that are actively managed. I think
• 13:02
  Speaker 1: what needs to happen is the market needs to get
• 13:03
  Speaker 1: more sophisticated about subdividing the e t F as a
• 13:06
  Speaker 1: class and thinking about different types of funds. So maybe
• 13:09
  Speaker 1: not everything is an e t F. There are things
• 13:11
  Speaker 1: out there that we should describe as an active et
• 13:13
  Speaker 1: F or as some other use some other term to
• 13:16
  Speaker 1: help really specify the type of exposure it gives an
• 13:19
  Speaker 1: investor and the risks it presents the investor. Man, I
• 13:22
  Speaker 1: wonder if you could speak about the use of h
• 13:25
  Speaker 1: y G or indeed other e t s, but specifically
• 13:28
  Speaker 1: h y G for hedging for portfolios for long managers
• 13:32
  Speaker 1: or short managers who want a liquid instrument, whether it
• 13:37
  Speaker 1: be the option or the actual underlying in order to
• 13:40
  Speaker 1: hedge or in some way mitigate the risk in their portfolios. Yeah,
• 13:44
  Speaker 1: this is I think been a really popular usage. We've
• 13:46
  Speaker 1: seen in a growing usage of h YG in particular
• 13:49
  Speaker 1: as a high y old hedging instrument. I think if
• 13:52
  Speaker 1: you look at an investors, say in the equity market,
• 13:54
  Speaker 1: they're very cupful with the idea that there are liquid
• 13:56
  Speaker 1: futures markets that allow them to get exposure to, you know,
• 14:00
  Speaker 1: whatever segment of the equity market they want, right doesn't
• 14:03
  Speaker 1: exist in fixed income. Right in fixed income, if you
• 14:05
  Speaker 1: want to think about hedging instruments, you've got treasury futures
• 14:07
  Speaker 1: which don't really track HILED very well. You've got credit
• 14:11
  Speaker 1: to fault swap in dissees which have their own basis
• 14:13
  Speaker 1: or performance difference first to HILD cash market. So HG
• 14:17
  Speaker 1: has really filled avoid and allowing people to go out
• 14:20
  Speaker 1: and trade an instrument which actually has a return that
• 14:23
  Speaker 1: resembles the HILED cash market, and you can buy it
• 14:25
  Speaker 1: and go along the a t F. And we've seen
• 14:27
  Speaker 1: that you can also borrow it and sell it short
• 14:30
  Speaker 1: much like you would do a stock you know, borrow
• 14:32
  Speaker 1: and short sale um. And there's even an increasing options
• 14:35
  Speaker 1: market on h y G, so you can think aboue
• 14:37
  Speaker 1: different options strategies to be used as hedging. So I
• 14:40
  Speaker 1: think this has actually provided a use case that investors
• 14:43
  Speaker 1: needed for a long time and just didn't really have
• 14:45
  Speaker 1: a product for So how big. Do you think the
• 14:47
  Speaker 1: high led E t F complex can grow too? I said,
• 14:51
  Speaker 1: set of management. Lie, you know, it's really difficult to forecast.
• 14:54
  Speaker 1: I think we're running right around forty billion right now
• 14:56
  Speaker 1: in terms of US listed hildts, just across different flavors,
• 15:00
  Speaker 1: different cuts to the market. Um, could that get bigger?
• 15:03
  Speaker 1: I think it could, But you know, you know it's
• 15:05
  Speaker 1: so can h y g B Instead of nineteen billion
• 15:08
  Speaker 1: it is about now? Okay, it could be twenty or
• 15:10
  Speaker 1: thirty I think definitely. Um. But I think we're actually
• 15:13
  Speaker 1: going to see grow more rapidly is the trading volume
• 15:16
  Speaker 1: on the e t F. And we've actually seen this
• 15:17
  Speaker 1: through time. Is that as the fund has grown and
• 15:20
  Speaker 1: more investors have used it as a hedging as liquidity vehicle,
• 15:23
  Speaker 1: the fun turnover has been increasing. I think it's the
• 15:25
  Speaker 1: turn we're going to see really grow. The assets will grow,
• 15:28
  Speaker 1: but I think it's really the volume and adoption by
• 15:30
  Speaker 1: investors which is going to really be the big driver
• 15:33
  Speaker 1: going forward. Thanks very much, Matt Tucker's head of North
• 15:36
  Speaker 1: American fixed Income. I shares a strategy team for black Rock,
• 15:40
  Speaker 1: helping to manage more than seventeen billion dollars. Let's turn
• 15:56
  Speaker 1: our attention now to Apple and a legal back all
• 16:00
  Speaker 1: that Apple faces from Qualcom, and here to kind of
• 16:02
  Speaker 1: give us the details is Shira Oviday, our technology columnist
• 16:06
  Speaker 1: Bloomberg gad Fly, which of course is our fast commentary
• 16:10
  Speaker 1: section of Bloomberg. You can follow Shira on Twitter at
• 16:14
  Speaker 1: Shira Oviday. So Shara tell us about Qualcom claiming that
• 16:18
  Speaker 1: Apple has made threats and has lied to regulators. What
• 16:23
  Speaker 1: are they making threats and lying to regulators about? Yeah,
• 16:26
  Speaker 1: this is pretty pretty juicy stuff. So let me just
• 16:29
  Speaker 1: turn the clock back to January that Apple basically kicked
• 16:31
  Speaker 1: off this litigation basically saying that Qualcom, which makes very
• 16:35
  Speaker 1: essential technology for basically every smartphone, every phone sold in
• 16:39
  Speaker 1: the world, Apple basically said that Qualcom is unfairly abusing
• 16:47
  Speaker 1: it's its market power to overcharge customers, including Apple, for
• 16:53
  Speaker 1: use of its wireless technology. Every phone that's sold or
• 16:56
  Speaker 1: most phones that sold, Qualcom gets a cut of the
• 17:00
  Speaker 1: sale price of that phone, regardless of whether the phone
• 17:03
  Speaker 1: is using Qualcoms computer ships or not. And Apple basically said,
• 17:07
  Speaker 1: you know, the way that Qualcom charges for its patented
• 17:11
  Speaker 1: technology is unfair. And Qualcom overnight basically said that Apple
• 17:16
  Speaker 1: this litigation from Apple is bogus and that Apple kind
• 17:21
  Speaker 1: of misled regulators UM who are also looking into the
• 17:26
  Speaker 1: same issue and how Qualcom charges for its computer chips
• 17:29
  Speaker 1: and technology. So stock traders seemed to have voted on
• 17:32
  Speaker 1: who they agree with because Qualcom shares are down more
• 17:36
  Speaker 1: than twelve percent since this litigation was first kicked off,
• 17:40
  Speaker 1: or as Apple is not down twelve percent. So is
• 17:43
  Speaker 1: that is that an accurate portrayal or a trader sort
• 17:45
  Speaker 1: of overlooking something? I think it's it's less about which
• 17:49
  Speaker 1: company might win if this litigation can go to trial,
• 17:52
  Speaker 1: and more about the risks for each company, So Qualcom.
• 17:56
  Speaker 1: I mean, look if it Qualcom loses this case of
• 17:58
  Speaker 1: the case goes to trial and qual Come loses, you
• 18:00
  Speaker 1: can see a scenario where Qualcoms essential business model is
• 18:05
  Speaker 1: at risk. And so that's what you've seen in the
• 18:08
  Speaker 1: share place people to pay for intellectual problem correct, Getting
• 18:11
  Speaker 1: people to pay for intellectual property, which is UH generates
• 18:14
  Speaker 1: the majority of Qualcoms profit. And so that's what you've
• 18:18
  Speaker 1: seen in the stock price reaction. Is just this risk
• 18:21
  Speaker 1: two Qualcoms business model and UH, if Apple loses, the
• 18:25
  Speaker 1: risk is is lower. Can I just say um. There
• 18:28
  Speaker 1: was a story about Apple's initial litigation where uh Apple's
• 18:33
  Speaker 1: CEO Tim Cook said that the situation was analogous to
• 18:36
  Speaker 1: someone buying a sofa and then charging that customer a
• 18:39
  Speaker 1: different price depending on the price of the house that
• 18:42
  Speaker 1: it goes into. Is that a valid argument, I don't know.
• 18:45
  Speaker 1: I mean, Apple is not the only person to pick
• 18:49
  Speaker 1: on this particular business approach by Qualcom of charging a
• 18:54
  Speaker 1: patent royalty based on the total cost of a phone
• 18:59
  Speaker 1: rather than a component cost. Right, So, I'm sure there's
• 19:03
  Speaker 1: gonna be lots of scathing analogies back and forth about
• 19:06
  Speaker 1: sofas or whatever other living room furniture there might be. Look,
• 19:10
  Speaker 1: this is a business dispute. Putting aside all kinds of
• 19:13
  Speaker 1: high minded analogies, This is a business dispute. Um. Qualcom
• 19:18
  Speaker 1: has a business model that it wants to protect. Apple's
• 19:22
  Speaker 1: revenue and profit margins are under pressure like they never
• 19:25
  Speaker 1: have been before, and it's trying to reduce the costs
• 19:28
  Speaker 1: that it pays for components of iPhones that can make
• 19:31
  Speaker 1: more money. Business dispute. I wanted to just pick up
• 19:35
  Speaker 1: on that theme because the backdrop to this is there
• 19:39
  Speaker 1: are companies which depend on Apple orders for the significant
• 19:44
  Speaker 1: portion of their business. I'm thinking today about the drop
• 19:46
  Speaker 1: and this shares a Dialogue Semiconductor in Germany down about
• 19:49
  Speaker 1: fourteen and a half percent because there's a rumor or
• 19:52
  Speaker 1: there's a thought that maybe Apple is going to go
• 19:54
  Speaker 1: out and create their own ships, which they have done
• 19:57
  Speaker 1: in the past. Does that really kind of cast a
• 20:01
  Speaker 1: shadow over all the set of Apple decides they're gonna
• 20:04
  Speaker 1: make their own chip, then you know, Qualcom can do
• 20:07
  Speaker 1: whatever it wants with that Snapdragon. Yeah. I mean, look,
• 20:10
  Speaker 1: there's a whole cottage industry of of suppliers to Apple
• 20:14
  Speaker 1: and other smartphone makers that are highly dependent on Apple
• 20:18
  Speaker 1: for business, right, And that's what you see when you
• 20:20
  Speaker 1: have these relatively small companies or even a big company
• 20:22
  Speaker 1: like fox Con, even the specter of losing business from
• 20:26
  Speaker 1: Apple sends the share price down. The same thing happened
• 20:28
  Speaker 1: to Qualcom um Apple and its latest model of iPhone
• 20:32
  Speaker 1: used chips from Intel, qualcom competitor in some handful of
• 20:37
  Speaker 1: of UM phones, and that was something when when that
• 20:41
  Speaker 1: first got announced. That's sent down Qualcom's share price. Now
• 20:44
  Speaker 1: Qualcom is not a tiny uh component maker like Dialogue,
• 20:48
  Speaker 1: but look you it is. It is dependent on Apple
• 20:53
  Speaker 1: for business. So does Qualcom have any leverage here? Does
• 20:59
  Speaker 1: it have leverage? I I mean because basically there are
• 21:03
  Speaker 1: other like Intel. Apple could just go to Intel to
• 21:05
  Speaker 1: make the parts. Yeah. Or Apple could just say, look,
• 21:09
  Speaker 1: we're gonna leave you unless we unless you allow us
• 21:11
  Speaker 1: to pay so much less for for your parts. Qualcoms
• 21:16
  Speaker 1: mobile technology and chips are pretty essential. I don't know
• 21:20
  Speaker 1: to what extent um Apple would be able to completely
• 21:24
  Speaker 1: shift away from Qualcom if it came to that. I
• 21:27
  Speaker 1: think Qualcom does have leverage just because of the power
• 21:31
  Speaker 1: of its technology and how essential it is in in
• 21:35
  Speaker 1: mobile phones. Qualcom has been the target of other regulators,
• 21:40
  Speaker 1: notably in South Korea. Tell us what happened there? Yeah,
• 21:44
  Speaker 1: I mean, this is again, this is not an unusual
• 21:46
  Speaker 1: fight that in South Korea, in China, in the US
• 21:50
  Speaker 1: with the Federal Trade Commission, the regulars are looking into
• 21:53
  Speaker 1: have been looking into similar issues that Apple is alleging, right,
• 21:56
  Speaker 1: which is again Qualcom kind of abusing it's uh, it's
• 22:01
  Speaker 1: market power to use its intellectual property to get customers
• 22:05
  Speaker 1: to pay more um. And you know the question about
• 22:10
  Speaker 1: places like South Korea and in China too, is are
• 22:12
  Speaker 1: the regulators kind of carrying water for local UH companies. Right,
• 22:16
  Speaker 1: So Samsung is obviously one of the largest and most
• 22:18
  Speaker 1: powerful companies in South Korea, and so the question is,
• 22:21
  Speaker 1: did regulators kind of go after Qualcoms business model to
• 22:26
  Speaker 1: help Samsung? Just to give us a sense of how
• 22:29
  Speaker 1: much money is its stake? How much money is its steake?
• 22:33
  Speaker 1: It's a little bit unclear, so um, we don't know
• 22:36
  Speaker 1: exactly what um Apple pays Qualcom for each iPhone sold,
• 22:40
  Speaker 1: but it's probably like tens of dollars per phone. And
• 22:44
  Speaker 1: when you're talking about the scale of Apple, right, three
• 22:47
  Speaker 1: million iPhones sold every year, it's a lot of money.
• 22:51
  Speaker 1: Shara Ovida, thank you so much for joining us and
• 22:53
  Speaker 1: explaining things UH in clear terms without even using you know,
• 22:57
  Speaker 1: sofas or lampshades anything else. So Shira O v Day
• 23:02
  Speaker 1: is a technology called columnist for Bloomberg gad Fly, which
• 23:05
  Speaker 1: is our fast commentary group here at Bloomberg, and his
• 23:08
  Speaker 1: terrific I mean, I just throw that in there anyway.
• 23:12
  Speaker 1: But it's a fascinating debate and it's obviously has a
• 23:15
  Speaker 1: very big standing on a huge swath of business. It
• 23:18
  Speaker 1: frankly has been driving a lot of growth in the
• 23:20
  Speaker 1: US regulatory reform and Dodd Frank legislation. What's the future
• 23:37
  Speaker 1: for it in Washington and how will it affect banks?
• 23:40
  Speaker 1: That's why we have Frank Sarentino. He is the chairman
• 23:42
  Speaker 1: and the chief executive of Connect one Bank Assets Center
• 23:46
  Speaker 1: management more than four and a half billion dollars. They're
• 23:48
  Speaker 1: based in Englewood Cliffs, New Jersey, and you can follow
• 23:52
  Speaker 1: Frank on Twitter at Frank three as in Roman numeral three.
• 23:57
  Speaker 1: All right, Frank Sorrentino, tell us about Dodd fran legislation.
• 24:01
  Speaker 1: How will it change and how can banks take advantage
• 24:04
  Speaker 1: of the changes that you foresee? Well, thanks Lisa and
• 24:07
  Speaker 1: Pim and so. Dodd Frank obviously was written in haste
• 24:11
  Speaker 1: in two thousand and ten UH to solve what was
• 24:15
  Speaker 1: thought to be or was a financial crisis here in
• 24:18
  Speaker 1: the United States, and a lot was put into that
• 24:21
  Speaker 1: bill that really wasn't well baked. It took a number
• 24:24
  Speaker 1: of years for all the regulations too, and I think, yeah,
• 24:27
  Speaker 1: even as of today, they haven't all been written, and
• 24:29
  Speaker 1: so we don't even know what a lot of uh
• 24:32
  Speaker 1: the regulation is going to look like. I think only
• 24:34
  Speaker 1: sixty or sevent of the bill has been written into regulation,
• 24:38
  Speaker 1: and so as you can well imagine, um all banks
• 24:41
  Speaker 1: were thrown into one bucket. Regulation was set for you know,
• 24:44
  Speaker 1: banks pretty much of all sizes. And so what I
• 24:47
  Speaker 1: think we're seeing today is a much calmer mood relative
• 24:51
  Speaker 1: to bank regulation. And I think we need to segregate
• 24:54
  Speaker 1: the smaller community banks and mid size banks from the
• 24:57
  Speaker 1: largest money center institutions and tailor regulation based on those
• 25:02
  Speaker 1: financial institutions and the risk appetite for each of those
• 25:05
  Speaker 1: types of financial institutions. And it's not just size, right,
• 25:09
  Speaker 1: there are banks that are ten billion dollars today that
• 25:12
  Speaker 1: could potentially be much riskier than a hundred billion dollar
• 25:15
  Speaker 1: institution that has a much more simple business plan. And
• 25:18
  Speaker 1: this is something that even some of the current regulators,
• 25:21
  Speaker 1: or as of a few weeks ago, current have even
• 25:24
  Speaker 1: acknowledged that community banks have gotten disproportionately hit by Dodd
• 25:28
  Speaker 1: frank um and that this needs I mean, even Daniel
• 25:30
  Speaker 1: Tarullo has come out and said that I'm wondering how
• 25:33
  Speaker 1: quickly do you think that some of these provisions could
• 25:35
  Speaker 1: be rolled back, given that Dodd frank itself took years
• 25:38
  Speaker 1: and years to even get written, let alone get implemented
• 25:41
  Speaker 1: well it's not going to happen by executive order, and
• 25:44
  Speaker 1: we need Congress to have uh, the want and the
• 25:49
  Speaker 1: desire to do this there you know, as in any
• 25:51
  Speaker 1: political discourse, Uh, there are those on both sides who
• 25:55
  Speaker 1: have different opinions about what cannon can't be done. And
• 25:57
  Speaker 1: with the agenda that's in front of Congress right at
• 26:01
  Speaker 1: the moment, I think this is one of the top
• 26:03
  Speaker 1: three or four priorities, but I'm not sure it's the
• 26:06
  Speaker 1: top priority at the moment. So I think we'll see.
• 26:08
  Speaker 1: I think we'll see it in stages. I think we'll
• 26:09
  Speaker 1: see some simple things be done sooner than later, and
• 26:13
  Speaker 1: I think that would be good. I think, you know,
• 26:14
  Speaker 1: changing some of the changing some of the caps, whether
• 26:17
  Speaker 1: it's the fifty billion dollar threshold for city institution, the
• 26:20
  Speaker 1: ten billion dollar threshold for when the CFPB starts to
• 26:24
  Speaker 1: you know, regulate institutions, uh, some of those asset based numbers,
• 26:30
  Speaker 1: and and and this differentiation between community banks and the
• 26:33
  Speaker 1: larger money center banks. I think we'll see legislation around
• 26:35
  Speaker 1: that move quicker. I don't know if that means this
• 26:38
  Speaker 1: year or next, but certainly there's a bill in Congress
• 26:42
  Speaker 1: today that uh, you know, that that they're looking to
• 26:44
  Speaker 1: do just that. So how much better would your banks
• 26:47
  Speaker 1: earnings be if some of these rules were changed. It
• 26:50
  Speaker 1: doesn't really, Uh, it wouldn't impact a bank like connect
• 26:53
  Speaker 1: One Bank all that much. We have a very simple
• 26:55
  Speaker 1: business model and we're sort of in that sweet spot
• 26:57
  Speaker 1: right now. We're way below the ten billion dollar threshold
• 27:00
  Speaker 1: at four and a half billion, and Connect One Bank
• 27:03
  Speaker 1: has a fairly simple model. We take in deposits in
• 27:06
  Speaker 1: our local market and we make loans. We don't do
• 27:08
  Speaker 1: a lot of other things that really step over the line.
• 27:11
  Speaker 1: There would there may be some compliance cost savings. A
• 27:14
  Speaker 1: lot of banks are complaining these days about the cost
• 27:17
  Speaker 1: of of of compliance component within the institution and what
• 27:21
  Speaker 1: they've had to put in place relative to the regulations.
• 27:24
  Speaker 1: So I think there would be some savings there on
• 27:25
  Speaker 1: the expense side. As far as your bank goes, I'm
• 27:29
  Speaker 1: wondering if you could tell us about the health of business,
• 27:32
  Speaker 1: because I know you've got a background and construction, so
• 27:34
  Speaker 1: construction lending is is important, and uh, tell us a
• 27:38
  Speaker 1: little bit about how you see the pricing of of
• 27:42
  Speaker 1: money for those kinds of projects. So today there's availability
• 27:46
  Speaker 1: for you know, construction projects Um, there has been some
• 27:49
  Speaker 1: pullback in the marketplace, you know, just relative to pricing
• 27:53
  Speaker 1: expectations going forward, the threat or the or the the
• 27:57
  Speaker 1: outlook that interest rates are rising, although you know, I
• 28:01
  Speaker 1: sort of have a mixed view about that going forward. Uh,
• 28:04
  Speaker 1: tell us about that, because I mean I keep asking myself, well, gee,
• 28:07
  Speaker 1: you know, well, twenty five basis points really crater a project? No, Um,
• 28:12
  Speaker 1: I think I think to the extent that interest rates
• 28:14
  Speaker 1: are are up at fifty basis points, Uh, that's fine.
• 28:18
  Speaker 1: The problem we're sort of heading towards, though, is that
• 28:21
  Speaker 1: the long end is not moving, is not cooperating with
• 28:23
  Speaker 1: the short end. And as you know, banks make their
• 28:26
  Speaker 1: money based on a you know, the slope of that curve,
• 28:30
  Speaker 1: and if it gets flatter over time, that's not great
• 28:32
  Speaker 1: for banks. When will your bank or has your bank
• 28:35
  Speaker 1: started to pass along the higher rates that we've seen
• 28:38
  Speaker 1: in the front end two depositors, So again, it's it's
• 28:41
  Speaker 1: not it's not that simple a question to answer. A
• 28:44
  Speaker 1: lot of banks haven't. We'll become an interesting sort of
• 28:47
  Speaker 1: pressure right now. So as as rates have gone up
• 28:50
  Speaker 1: on the short end by fifty basis points over the
• 28:52
  Speaker 1: last six months or so, the rates on the long
• 28:55
  Speaker 1: end have actually come down. Right. Rates were as high
• 28:57
  Speaker 1: as to sixty seventy not too long ago, right after
• 28:59
  Speaker 1: the election, and uh they're now down to to thirty
• 29:02
  Speaker 1: or so today. Um, so what's actually happening. There has
• 29:05
  Speaker 1: been some flattening in the curve and so banks are
• 29:07
  Speaker 1: not able to pass those savings along. If we see
• 29:10
  Speaker 1: if we see the curve steepening, I think you will
• 29:12
  Speaker 1: see and both are going up at the same time.
• 29:15
  Speaker 1: You will start to see depositors start to benefit from that.
• 29:19
  Speaker 1: Thank you so much. Frank Sorrentino, Chairman and chief executive
• 29:22
  Speaker 1: officer of Connect One Bank in Englewood Cliffs, New Jersey,
• 29:25
  Speaker 1: with about four and a half billion dollars under management.
• 29:27
  Speaker 1: Should I say Frank Sparentino the third? I should say
• 29:30
  Speaker 1: Frank Sarentino the third? What just makes it easier on
• 29:33
  Speaker 1: the Twitter handle? Yes, yes, there's an anything else that
• 29:39
  Speaker 1: the other middle names we should add. Uh, this is
• 29:41
  Speaker 1: a This is a fascinating topic though, and it is
• 29:43
  Speaker 1: important to to keep track ups. So we really appreciate
• 29:46
  Speaker 1: you taking time with us. Frank Sarentino, thanks for listening
• 29:54
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 29:57
  Speaker 1: and listen to interviews at iTunes, SoundCloud, or whatever podcast
• 30:02
  Speaker 1: platform you prefer. I'm pim Fox. I'm out there on
• 30:05
  Speaker 1: Twitter at pim Fox. I'm out there on Twitter at
• 30:09
  Speaker 1: Lisa Abramo. It's one before the podcast. You can always
• 30:12
  Speaker 1: catch us worldwide on Bloomberg Radio