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P&L: How Donald Trump May Save Banks Billions · 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. There's been
• 0:28
  Speaker 1: a big question Pim ever since Donald Trump's election about
• 0:33
  Speaker 1: bank regulation and just how much it would get rolled back.
• 0:37
  Speaker 1: Well to answer some of those questions or possibly give
• 0:39
  Speaker 1: us some insight, uh Silla Brush, a Bloomberg News reporter
• 0:43
  Speaker 1: covering regulation, wrote a story with the headline Trump may
• 0:46
  Speaker 1: save banks billions by disrupting global rules. We want to
• 0:50
  Speaker 1: bring in Silla Brush himself to explain which rules are
• 0:53
  Speaker 1: at greatest risk of getting rulled back. Silla, thanks for
• 0:56
  Speaker 1: joining us. Great to be with you. So what do
• 0:58
  Speaker 1: you think is most at rich? Which provisions are most
• 1:02
  Speaker 1: at risky? It rolled back to give banks more leeway
• 1:05
  Speaker 1: at this point. So one of the interesting things it's
• 1:08
  Speaker 1: in the focus of this story is about a whole
• 1:10
  Speaker 1: range of rules at the global level that aren't yet
• 1:13
  Speaker 1: actually on the books. So It's an interesting situation where
• 1:17
  Speaker 1: regulators at the global level are trying to finalize these
• 1:20
  Speaker 1: new standards, and yet this election has just occurred and
• 1:24
  Speaker 1: Donald Trump, president elect, wants to in his own words,
• 1:28
  Speaker 1: dismantle financial regulations. So for rules, uh that are aren't
• 1:33
  Speaker 1: even on the books, it just makes it at least
• 1:36
  Speaker 1: perhaps much less likely that they'll ever get on the books.
• 1:39
  Speaker 1: So it's a different question than rolling him back, which
• 1:42
  Speaker 1: he very well may do. For plenty of rules that
• 1:44
  Speaker 1: are already you know, on the books in the US,
• 1:46
  Speaker 1: can you describe some of the controversial rules and what
• 1:49
  Speaker 1: they might do to the bank stocks and to their
• 1:53
  Speaker 1: ability to generate profits. So some of these rules that
• 1:56
  Speaker 1: regulators have been spending the better part of the year
• 1:58
  Speaker 1: at the global level trying to to finish off, are
• 2:02
  Speaker 1: you restrictions on banks ability to use their own internal
• 2:06
  Speaker 1: models to basically decide how risky various types of loans,
• 2:10
  Speaker 1: corporate corporate securities, bonds, and other assets on their books are.
• 2:15
  Speaker 1: And these are very complicated models, but they they're basically
• 2:19
  Speaker 1: used to determine how much capital banks have. So you know,
• 2:24
  Speaker 1: if these don't if these new restrictions don't come on
• 2:28
  Speaker 1: for banks, in the US or around the world. Then
• 2:32
  Speaker 1: you know the warnings from the industry where that these
• 2:36
  Speaker 1: these rules could cost billions of dollars, in some cases
• 2:38
  Speaker 1: hundreds of billions of dollars, and they were generally going
• 2:41
  Speaker 1: to be softened over the They were getting softened over
• 2:44
  Speaker 1: the course of the year. But now there's this big
• 2:47
  Speaker 1: question about whether these rules actually make it on the books.
• 2:50
  Speaker 1: Well and talk a little bit. I mean Donald Trump
• 2:53
  Speaker 1: is is going to be the president of the United States,
• 2:55
  Speaker 1: uh and potentially could soften rules in the United States.
• 3:00
  Speaker 1: Why would this have such a big effect on global regulation?
• 3:05
  Speaker 1: So the US, UH, you know, there are these you know,
• 3:07
  Speaker 1: several different bodies at the global level that try to
• 3:10
  Speaker 1: set standards UM that work across around the world, that
• 3:14
  Speaker 1: basically set minimum standards that every nation jurisdiction has to
• 3:18
  Speaker 1: comply with. The idea general ideas that they want to
• 3:21
  Speaker 1: prevent regulatory arbitrage banks moving from one jurisdiction to the
• 3:25
  Speaker 1: next because the rules are softer and easier. UM. The
• 3:30
  Speaker 1: US has several seats on these tables, at these international tables,
• 3:35
  Speaker 1: and they help set the rules of the road. So
• 3:38
  Speaker 1: you know, if these rules don't get put on the
• 3:40
  Speaker 1: books and they aren't sort of enforced and implemented. Then
• 3:44
  Speaker 1: you start to get serious questions about you know what
• 3:48
  Speaker 1: what the sort of power of these international bodies is.
• 3:50
  Speaker 1: It's too early to answer those questions really, but it
• 3:53
  Speaker 1: certainly raises the question as far as domestic banking goes,
• 3:58
  Speaker 1: can you give us any side into what are the
• 4:01
  Speaker 1: hot button issues for domestic banks? For domestic I mean
• 4:05
  Speaker 1: the US banks, so that we've already seen sort of
• 4:08
  Speaker 1: big concerns about you know, what will happen about the
• 4:12
  Speaker 1: Consumer Financial Production Bureau UM, and that affects you know,
• 4:15
  Speaker 1: a whole range of domestic banks and mortgages and credit cards.
• 4:20
  Speaker 1: And you know whether Congress at at Trump's sort of
• 4:24
  Speaker 1: direction or encouragement UM starts to change sort of the
• 4:30
  Speaker 1: CFPP is ability to make make rules and and crack
• 4:33
  Speaker 1: down on the industry. UM. That's a major area. UH,
• 4:38
  Speaker 1: that's already popped up since the election. It is a
• 4:51
  Speaker 1: bond blood bath out there. Will this continue or is
• 4:56
  Speaker 1: this time when we finally see yields peak and then stabilized.
• 5:00
  Speaker 1: To answer that question, I want to bring Eric Stein,
• 5:03
  Speaker 1: co director of Global fixed Income at Eaton Vance. Uh. Eric,
• 5:07
  Speaker 1: thank you so much for joining us. What do you
• 5:11
  Speaker 1: think is this? Is this the start of a larger trend,
• 5:14
  Speaker 1: a larger bond sell off, or are we going to
• 5:16
  Speaker 1: hit some kind of equilibrium here where yields stabilize. You know,
• 5:19
  Speaker 1: I think it certainly could be the start of a
• 5:21
  Speaker 1: larger sell off. You know, do I expect to see
• 5:24
  Speaker 1: the sell off like we've had basically, you know, every day?
• 5:26
  Speaker 1: You know, we had the bond market effectively closed on
• 5:29
  Speaker 1: Friday for the Veterans Day holidays. We've really really had
• 5:32
  Speaker 1: three trading days post the election. We've seen a significant
• 5:35
  Speaker 1: sell off all of those days, really significant sell off
• 5:38
  Speaker 1: in the bond market since just about the time that
• 5:42
  Speaker 1: the President elect now Trump gave his speech about three
• 5:44
  Speaker 1: am Tuesday evening going into Wednesday morning. So I think
• 5:48
  Speaker 1: most of the sell off, though, has been an increase
• 5:50
  Speaker 1: in inflation expectations. If you take nominal treasuries and break
• 5:53
  Speaker 1: them between inflation expectations at real rates, there's been some
• 5:56
  Speaker 1: increased on the real rate. A lot of it's also
• 5:59
  Speaker 1: been an increase of inflation expectations. What are you advising
• 6:03
  Speaker 1: clients to do, just sit tight and wait and see
• 6:06
  Speaker 1: what happens, or is this the time. If you have
• 6:08
  Speaker 1: got if you have gains in the bond market, take
• 6:11
  Speaker 1: the gain and wait for a better time. You know,
• 6:13
  Speaker 1: I'm somewhat biased, but you know here at the advance
• 6:16
  Speaker 1: we do run a number of flexible portfolios or global
• 6:18
  Speaker 1: macro strategy are short teration strategy can come fund funds
• 6:21
  Speaker 1: that can short funds that can profit from higher rates
• 6:24
  Speaker 1: or a stronger US dollar, higher inflation expectations. I think,
• 6:28
  Speaker 1: you know, if you think broadly in markets, you know
• 6:30
  Speaker 1: we've had declining interest rates. Um, you know, we had
• 6:33
  Speaker 1: inflation expectations that got the very low levels. Now those
• 6:36
  Speaker 1: were picking up even ahead of the election. But I
• 6:38
  Speaker 1: think it's you know, we may be in for a
• 6:40
  Speaker 1: very different bond market given that we're certainly going to
• 6:43
  Speaker 1: have a larger fisc CO response that should lead to
• 6:46
  Speaker 1: higher inflation. Whether or not leads to higher growth I
• 6:48
  Speaker 1: think is still to be determined. Um, but I think
• 6:51
  Speaker 1: you know, potentially there is higher growth if we get
• 6:54
  Speaker 1: some stuff on the tax and regulatory side along with
• 6:57
  Speaker 1: some targeted um infrastructure spending, and if we're a new
• 7:00
  Speaker 1: growth and inflation paradigm, we should be in a new
• 7:03
  Speaker 1: interest rate and inflation expectations paradigm as well. Okay, so Eric,
• 7:06
  Speaker 1: since you have a flexible mandate, you can go in
• 7:09
  Speaker 1: and buy at this point. At what point do you
• 7:11
  Speaker 1: buy a thirty year bond at three yield? I want
• 7:16
  Speaker 1: to I want to see it keep backing up from here,
• 7:17
  Speaker 1: to be honest, or see you know, a change in
• 7:21
  Speaker 1: what people are expecting in terms of the fiscal stimulus
• 7:24
  Speaker 1: um that we're that we you know, may be getting
• 7:26
  Speaker 1: next year. How do you even plan though? How do
• 7:29
  Speaker 1: you how do we even we have no facts? Right
• 7:31
  Speaker 1: well exactly so to me, you know, when this election occurred,
• 7:34
  Speaker 1: that was certainly surprising. The way I thought about it was, Look,
• 7:37
  Speaker 1: the distribution of outcomes has widened. So if you said,
• 7:41
  Speaker 1: if we if if Hillary Clinton had been elected, and
• 7:43
  Speaker 1: we kind of have a continent continuation, I should say,
• 7:46
  Speaker 1: of the same policies, then we'd probably be in this
• 7:49
  Speaker 1: kind of muddle through one and a half two percent
• 7:51
  Speaker 1: not terrible but not certainly not great growth environment. Now
• 7:55
  Speaker 1: with President elect Trump now being ready to take over
• 7:58
  Speaker 1: beginning and Jane or of seventeen to be a distributions wider,
• 8:02
  Speaker 1: if we get two massive amounts of protectionism, that's that's
• 8:05
  Speaker 1: probably a higher probability of recession that we would have
• 8:08
  Speaker 1: had frankly under Hillary Clinton administration. However, if we get
• 8:12
  Speaker 1: tax and regulatory reform and some target infrastructure spending, that's
• 8:15
  Speaker 1: significantly higher probability of two and a half three type growth.
• 8:20
  Speaker 1: And I think the way the markets looking at and
• 8:21
  Speaker 1: I think this is correct, is we're going to get
• 8:24
  Speaker 1: more of the tax, regulatory and fiscal side. The protectionism side,
• 8:28
  Speaker 1: it's still to be determined. So I certainly agree with
• 8:31
  Speaker 1: the tony of your question. No one really knows, but
• 8:33
  Speaker 1: I'd say right now the distribution of outcomes is certainly
• 8:36
  Speaker 1: a lot wider than then, let's say, what it was
• 8:39
  Speaker 1: a week ago pre election. Eric, you think that the
• 8:41
  Speaker 1: increase in yields will have any effect on bond issuance
• 8:45
  Speaker 1: by corporate borrowers, Uh, you know, certainly. I think bar
• 8:49
  Speaker 1: you know, Barros to some extent have been, you know,
• 8:51
  Speaker 1: of all types of instruments, you know, emerging market countries,
• 8:55
  Speaker 1: corporates have been, you know, to some extent expecting higher rates.
• 8:59
  Speaker 1: I don't think anyone is expecting, you know, higher rates
• 9:02
  Speaker 1: in the exact manner, uh, and kind of speed that
• 9:05
  Speaker 1: we're getting them now. But you know, to the extent
• 9:07
  Speaker 1: that they think we're going into a lot higher rate regime,
• 9:10
  Speaker 1: which I don't think people really think. But um, you know,
• 9:12
  Speaker 1: maybe they want to issue quicker um and and kind
• 9:16
  Speaker 1: of get that out the way. With the extent that
• 9:18
  Speaker 1: you know, they want to be a little more tactical
• 9:19
  Speaker 1: and wait till markets will will settle down. Um you know,
• 9:22
  Speaker 1: maybe maybe then they would wait. But certainly, at some level, uh,
• 9:25
  Speaker 1: it gets it gets to be significantly more costly. That
• 9:28
  Speaker 1: being said, rates from a historical perspective, uh, and even
• 9:31
  Speaker 1: from where we were a couple of years ago, are
• 9:33
  Speaker 1: still at very low levels. It's just that they've they've rallied,
• 9:36
  Speaker 1: you know, really since the July time period, they've they've
• 9:39
  Speaker 1: sold off pretty significantly, obviously accelerated that sell off since
• 9:43
  Speaker 1: the election outcome. Eric, We've seen a lot of bonds
• 9:46
  Speaker 1: sell off. We've seen investment grade corporate bonds, we've seen
• 9:49
  Speaker 1: emerging markets debt, and of course treasuries, which asset class
• 9:53
  Speaker 1: with in fixed income. Do you think is the most
• 9:56
  Speaker 1: dangerous right now? Most most dangerous it's to me probably
• 10:01
  Speaker 1: it's probably still to some extent treasuries, um, just because
• 10:05
  Speaker 1: the nominal treasuries I should say I like tips. I
• 10:09
  Speaker 1: think tips are good places to be if you do
• 10:11
  Speaker 1: them on if you buy them on a treasury hedge basis.
• 10:14
  Speaker 1: I think you know US treasuries to the extent you know,
• 10:16
  Speaker 1: as I said earlier, we're gonna we likely are gonna
• 10:18
  Speaker 1: have higher inflation. We're going to have more fiscal easing,
• 10:22
  Speaker 1: which is, you know, whether it comes from taxes or spending,
• 10:25
  Speaker 1: were likely some combination of both. That means more issuance
• 10:28
  Speaker 1: and some more issues should we hand the treasury market?
• 10:31
  Speaker 1: And if we get more economic growth, which I think
• 10:33
  Speaker 1: is certainly not a given, but the potential for being
• 10:35
  Speaker 1: in a higher growth regime, uh certainly exists. Um, you know,
• 10:39
  Speaker 1: then those are three bad things. More growth, more issuance,
• 10:42
  Speaker 1: and more inflation are all bad for nominal holders of
• 10:45
  Speaker 1: of U S treasuries. What if you could speak to
• 10:48
  Speaker 1: the issue of high yield debt. There's been a big
• 10:51
  Speaker 1: sell off just looking at the eye shares iebox high
• 10:54
  Speaker 1: yield et F. He's taken a looking down about four
• 10:57
  Speaker 1: and a quarter percent since the beginning November. What about
• 11:01
  Speaker 1: high yield? Yes, so, I mean certainly the you know
• 11:03
  Speaker 1: you've seen across you know what I'll call kind of
• 11:05
  Speaker 1: the riskier credit asset classes. So whether it's high yield
• 11:08
  Speaker 1: or emerging markets, you know, what interest rates. If interest
• 11:11
  Speaker 1: rates are just going up from kind of a real
• 11:13
  Speaker 1: rate perspective, just the economies growing a little bit faster,
• 11:17
  Speaker 1: that that doesn't hurt those asset classes that much. But
• 11:19
  Speaker 1: I think given the kind of shock of the interest
• 11:22
  Speaker 1: rate move, which to me is again a combination of
• 11:24
  Speaker 1: potential for more issuance, uh definitely more inflation as well
• 11:28
  Speaker 1: as potentially higher real growth, I think you're you're you know,
• 11:31
  Speaker 1: you're gonna see some dislocation and credit markets you're seeing
• 11:34
  Speaker 1: it right now, and high yield you're seeing is seeing
• 11:37
  Speaker 1: in emerging markets as well. So I think you know,
• 11:39
  Speaker 1: at some point they're certainly gonna be opportunities in those
• 11:42
  Speaker 1: asset classes, whether on an absolute, uh you know, kind
• 11:45
  Speaker 1: of standpoint, or kind of relative to to U S. Treasuries.
• 11:48
  Speaker 1: So real quick, what do you think is the best
• 11:50
  Speaker 1: bet right now? Best bet? So, as I said before,
• 11:53
  Speaker 1: I like tips versus um, you know, I like tips
• 11:56
  Speaker 1: versus U S treasuries. I also h you know, I
• 11:58
  Speaker 1: also like so floating rate asset supporting right bank loans
• 12:01
  Speaker 1: clos those are attractive. Also, certain types of mortgage backed
• 12:05
  Speaker 1: securities IO interest only mortgage backs that actually have a
• 12:08
  Speaker 1: negative duration. We have some of those bonds in our
• 12:11
  Speaker 1: short duration Strategic Income fund. Um. You know, those have
• 12:14
  Speaker 1: been performing well over the past couple of days. Thank
• 12:17
  Speaker 1: you very much for spending time with us. Sarah Stein,
• 12:19
  Speaker 1: as a portfolio manager and co director of Global Fixed
• 12:23
  Speaker 1: Income for EAT Invents, helps to manage over three hundred
• 12:27
  Speaker 1: billion dollars of customer assets. He is based in Boston.
• 12:43
  Speaker 1: Samson Electronics, it wants to get into your car, and
• 12:47
  Speaker 1: it's spending eight billion dollars to do so. It has
• 12:50
  Speaker 1: agreed to buy Harmon International Industries. And here to tell
• 12:54
  Speaker 1: us more is Alex Sherman, Bloomberg's Mergers and Acquisitions and
• 12:57
  Speaker 1: Deals reporter Alex Sherman. Always a pleasure tell us about this,
• 13:01
  Speaker 1: uh recently announced deal to buy Harmon International. I mean,
• 13:05
  Speaker 1: I know we keep talking about the car, but is
• 13:07
  Speaker 1: Harmon just uh, you know, about automobiles or it is?
• 13:12
  Speaker 1: Is it also about audio? Yeah? So I mean if
• 13:15
  Speaker 1: you think back, you know a few years now, maybe
• 13:18
  Speaker 1: even decades ago, Harmon was all about audio. The BBL
• 13:22
  Speaker 1: for sure, audio home system, home audio system card exactly.
• 13:27
  Speaker 1: It has gotten recently, it has moved much more into
• 13:29
  Speaker 1: the connected car area. And that's for sure why Samsung
• 13:34
  Speaker 1: made this deal. Uh. You know, obviously everybody knows Samsung
• 13:37
  Speaker 1: for mobile phones. People might be surprised that, uh, they
• 13:41
  Speaker 1: own about half of memory chips and cars, so they're
• 13:44
  Speaker 1: already there to some degree. Uh. And I feel like
• 13:47
  Speaker 1: Samsung must have made the decision that if they really
• 13:50
  Speaker 1: want to get into uh you know, audio and and
• 13:53
  Speaker 1: and sort of full unconnected car, acquiring Harmon was the
• 13:56
  Speaker 1: way to do it. Because this game is all about scale.
• 13:58
  Speaker 1: They realized they probably gonna have to compete against Apple
• 14:01
  Speaker 1: in the next decade or so. Apple has sort of
• 14:03
  Speaker 1: gone back and forth with about how they want to
• 14:05
  Speaker 1: get into the car. It seems like they're going to
• 14:07
  Speaker 1: do something. Whether that means an acquisition or go it
• 14:10
  Speaker 1: alone still to be determined. Um, but this is a
• 14:13
  Speaker 1: way for Samsung to sort of be a first mover here. Uh.
• 14:16
  Speaker 1: So you know, it's a fairly big price tag eight
• 14:18
  Speaker 1: billion dollars. From my understanding and reporting on this, Uh,
• 14:22
  Speaker 1: there were some other potential buyers out there. Um, we
• 14:26
  Speaker 1: don't know who they are yet, so I will try
• 14:28
  Speaker 1: to keep doing reporting and if we can get a
• 14:30
  Speaker 1: little bit more clarity on who they might be, they
• 14:32
  Speaker 1: are likely to be other large tech companies because more
• 14:35
  Speaker 1: of the auto guys eight billion dollars is a bit rich. Well, okay,
• 14:39
  Speaker 1: so Samsung is a South Korean company and Harmon is
• 14:43
  Speaker 1: a US company based in Sanford, Connecticut, which raises the
• 14:47
  Speaker 1: question that you addressed in another story, uh, that you
• 14:50
  Speaker 1: co authored with Jonathan Browning, uh, looking at how some
• 14:55
  Speaker 1: Chinese companies are getting advice to pump the brakes on
• 15:00
  Speaker 1: cential deals in the US. In other words, wait, take
• 15:04
  Speaker 1: your time see what President elect Donald Trump's policies are
• 15:09
  Speaker 1: before making a move. Can you tell us a little
• 15:11
  Speaker 1: more about that? Yeah, So I've spent the last the
• 15:16
  Speaker 1: latter part of last week talking to dealmakers and simply
• 15:18
  Speaker 1: asking them a straight up question, you know, what does
• 15:21
  Speaker 1: the Donald Trump election mean for this inbound Chinese to us? Specifically? Uh,
• 15:27
  Speaker 1: you know, over the next four years or so, which
• 15:29
  Speaker 1: we should say has been going gangbusters. So that's sort
• 15:31
  Speaker 1: of why I asked. It's a volume for Chinese m
• 15:34
  Speaker 1: and a inbound to the United States is up like
• 15:37
  Speaker 1: over last year. It really was getting off to sort
• 15:40
  Speaker 1: of a rocking start at the beginning of the year UM,
• 15:43
  Speaker 1: and obviously they're like, it doesn't It doesn't take a
• 15:46
  Speaker 1: rocket scientist to think that maybe this may slow down,
• 15:48
  Speaker 1: considering how outspoken Trump has been about basically curbing UH
• 15:55
  Speaker 1: businesses leaving the United States and going to China. And
• 15:57
  Speaker 1: that's exactly what would happen in many of these cases China.
• 16:00
  Speaker 1: If China was to come in and buy US target,
• 16:03
  Speaker 1: at least some of that business, you'd have to think
• 16:05
  Speaker 1: would be rerouted to China. So my answer was sort
• 16:08
  Speaker 1: of split. I had at least three advisors um to
• 16:13
  Speaker 1: deals meeting bankers or lawyers tell me that they are
• 16:16
  Speaker 1: advising their clients to pump the brakes and say, well,
• 16:20
  Speaker 1: we don't really know what this means yet, but you'd
• 16:22
  Speaker 1: be wise to at least figure out what it means
• 16:25
  Speaker 1: before moving ahead with some large US acquisitions. I had
• 16:28
  Speaker 1: several other deal makers tell me that no, you know,
• 16:31
  Speaker 1: it's sort of industry specific, maybe, but we are not
• 16:34
  Speaker 1: seeing a slowdown yet. Chinese buyers still want to get
• 16:37
  Speaker 1: into the US. They have a lot of money to
• 16:39
  Speaker 1: spend UH, and because of the uncertainty, maybe they're not
• 16:44
  Speaker 1: convinced that a Trump presidency will necessarily mean that they
• 16:48
  Speaker 1: can stop making large US purchases. Alex Sherman, just to
• 16:53
  Speaker 1: focus on deals that we already know about in addition
• 16:56
  Speaker 1: to the Harmon International deal by Samsung previously, I know
• 17:01
  Speaker 1: that you have reported on the Qualcom deal to acquire
• 17:04
  Speaker 1: an XP Semiconductors that was a thirty eight billion dollar deal.
• 17:08
  Speaker 1: During the summer, Soft Bank of Japan purchased arm holdings
• 17:14
  Speaker 1: for thirty two billion dollars. Are there any more chip
• 17:16
  Speaker 1: companies or those kinds of companies left to buy? Well,
• 17:21
  Speaker 1: the world is getting smaller, but I would say the
• 17:23
  Speaker 1: short answer is yes. I still continue to hear that
• 17:27
  Speaker 1: sort of everyone is talking to everyone in chip land.
• 17:29
  Speaker 1: This is something that was enormous and it has continued
• 17:33
  Speaker 1: on to some people really push the envelope with me
• 17:36
  Speaker 1: and say, you know, anything's possible here. So Uh. Some
• 17:40
  Speaker 1: companies that we haven't really seen move yet, our Texas Instruments, Uh,
• 17:44
  Speaker 1: they haven't made a big acquisition at this point, intel
• 17:47
  Speaker 1: Bot Altera in early they that integration process is probably
• 17:52
  Speaker 1: to the point now where they could buy something else
• 17:54
  Speaker 1: as well. So yes, I would say we should probably
• 17:57
  Speaker 1: expect a few more mega chip deals of the next
• 18:00
  Speaker 1: year or so. Alex Srban, thank you so much for
• 18:03
  Speaker 1: being with us. Alex Sherman of Bloomberg News on the
• 18:06
  Speaker 1: latest mergers as well as the conundrum of what Chinese
• 18:10
  Speaker 1: companies should do in light of the Trump presidency. Taking
• 18:26
  Speaker 1: a look at what's going on in the world of
• 18:28
  Speaker 1: dividend paying stocks. Eric Irvine is the chief executive of
• 18:32
  Speaker 1: Reality Shares, and Eric, thank you very much for being
• 18:35
  Speaker 1: with us. Dividend paying stocks have been very popular with
• 18:39
  Speaker 1: investors because bond yields have been so historically low. What
• 18:44
  Speaker 1: is their outlook now? Yeah, well, I think it's important
• 18:47
  Speaker 1: to distinguish between, first of all, dividend paying stocks that
• 18:51
  Speaker 1: are focused on yield and dividend paying stacks that are
• 18:53
  Speaker 1: focused on growth, because that's been a tailor of two markets. Indeed,
• 18:57
  Speaker 1: the high yielding stocks have been single best performing sectors
• 19:02
  Speaker 1: or segments of the U S stock market since since
• 19:05
  Speaker 1: the first part of the year, all the way through
• 19:07
  Speaker 1: the end of the third quarter, and now they're almost
• 19:10
  Speaker 1: the single worst performing segment of the of the XMP five. Wait,
• 19:14
  Speaker 1: we just just back up. Can you explain the difference?
• 19:16
  Speaker 1: I mean, basically, you're talking about the dividend paying stocks
• 19:21
  Speaker 1: like utilities or things that are just steady as you go,
• 19:24
  Speaker 1: versus the dividend paying stocks that are dependent on um.
• 19:28
  Speaker 1: The more you sort of the more the economy grows,
• 19:31
  Speaker 1: the bigger the dividend will be that you'll pay. I
• 19:32
  Speaker 1: mean you're basically putting those into two different categories, correct, Yeah, exactly,
• 19:36
  Speaker 1: like think of you. I think it's perfect to point
• 19:39
  Speaker 1: out utility. So take a utility who's not really growing
• 19:42
  Speaker 1: their earnings. They've they've got their user base, they've got
• 19:44
  Speaker 1: their their customers, they're not really raising prices. They're just
• 19:48
  Speaker 1: focused on continuing to maintain the business and maintain the income.
• 19:52
  Speaker 1: So that business is going to pay out a high
• 19:53
  Speaker 1: portion of its income in the form of a dividend,
• 19:56
  Speaker 1: and it's going to be fairly stable. Maybe the yield
• 19:59
  Speaker 1: is as high as three and a half fo in
• 20:01
  Speaker 1: that category. Now, contrast that would say a Starbucks who
• 20:06
  Speaker 1: is growing its earnings, growing its business, and not quite
• 20:09
  Speaker 1: paying out as much of those earnings in the form
• 20:11
  Speaker 1: of a dividend, but still paying a nice dividend maybe
• 20:13
  Speaker 1: one one and a half to two. Starbucks is going
• 20:16
  Speaker 1: to be growing its dividend over time versus that utility
• 20:20
  Speaker 1: company which is just going to maintain a stable dividend. Yeah.
• 20:23
  Speaker 1: But having said that that, the idea that Starbucks and
• 20:26
  Speaker 1: other companies will grow the dividend, that's as much a
• 20:31
  Speaker 1: hope and a prayer as it is a contract enforceable
• 20:35
  Speaker 1: payment on a bond. Correct. Yeah, exactly, and and so
• 20:39
  Speaker 1: welcome to the investment universe. Right. Every everything is really
• 20:43
  Speaker 1: comes down to do you believe this company is going
• 20:46
  Speaker 1: to continue to do better in the future based on
• 20:50
  Speaker 1: really what what we value most, which is earnings growth?
• 20:53
  Speaker 1: So can they grow their earnings in the future. If
• 20:56
  Speaker 1: they can, likely that dividend will follow. And that's the
• 21:00
  Speaker 1: same equation or question everyone asks, even if they're investing
• 21:03
  Speaker 1: in the SMP five index fund, is can companies in
• 21:07
  Speaker 1: the SMPF grow their earnings? Otherwise I'll go home and
• 21:12
  Speaker 1: take my ball in play somewhere else. Really, so, Eric,
• 21:15
  Speaker 1: you're you're the CEO of this company, Reality Shares. Uh,
• 21:18
  Speaker 1: You're based in San Diego. Before that, you're at Morgan
• 21:21
  Speaker 1: Stanley for for fourteen years, and you built a group
• 21:24
  Speaker 1: to help people manage their money. Um, are you talking
• 21:28
  Speaker 1: with clients right now? I mean, do you get a
• 21:29
  Speaker 1: sense of just how skittish people feel and uncertain about
• 21:33
  Speaker 1: the future. Yeah, I think so. And it's it's kind
• 21:36
  Speaker 1: of ironic too, because you get a lot of complacency.
• 21:38
  Speaker 1: We've had, you know, seven now going on eight years
• 21:41
  Speaker 1: of positive SMP five type returns, and I think a
• 21:45
  Speaker 1: lot of people have in a way forgotten about market
• 21:48
  Speaker 1: corrections and how severe they can become. It's um, you know,
• 21:53
  Speaker 1: we all have short term memories when it comes to that.
• 21:55
  Speaker 1: But well, just to that point, I mean, it's sort
• 21:58
  Speaker 1: of I've got to say, I've been very confu used
• 22:00
  Speaker 1: as bond sell off and stocks rally, at what point
• 22:04
  Speaker 1: are people who are investing in to your point, the
• 22:06
  Speaker 1: dividend paying stocks are even just stocks broadly going to say,
• 22:09
  Speaker 1: you know what, we're worried about losses again, we're gonna
• 22:12
  Speaker 1: go back to bonds. They're paying a little bit more.
• 22:14
  Speaker 1: At least we can learn something. Well, I think you've
• 22:16
  Speaker 1: already started to see that, especially with these high yielders,
• 22:19
  Speaker 1: like utility sector was the single best performing sector up
• 22:22
  Speaker 1: until end of September almost I think at the high
• 22:27
  Speaker 1: they're in September just on a year today, basis not
• 22:30
  Speaker 1: exactly your Grandma's utilities toock right, and now they're only
• 22:34
  Speaker 1: up about six percent on the year, so they've already
• 22:36
  Speaker 1: given up nearly ten that's like three and a half
• 22:39
  Speaker 1: years of dividends wiped out in the course of just
• 22:42
  Speaker 1: two months. So I think that's the that's the start
• 22:46
  Speaker 1: of of that kind of flood out of these high
• 22:49
  Speaker 1: yielding stocks and into say the bond market. Now that's
• 22:53
  Speaker 1: not happening in the growths of those dividend growers because
• 22:56
  Speaker 1: those were basically ignored for the first part of the
• 22:59
  Speaker 1: year to barely keeping up with the SMP five, and
• 23:02
  Speaker 1: now all of a sudden, the industrials, the consumer discretionary stocks,
• 23:06
  Speaker 1: those are the ones that are really moving kind of
• 23:08
  Speaker 1: post election here, Eric, based on your experience, is there
• 23:12
  Speaker 1: a particular percentage yield that causes more investors to flee
• 23:19
  Speaker 1: stocks and go into either treasuries or c d s.
• 23:24
  Speaker 1: Is there a point where people say, you know what,
• 23:26
  Speaker 1: I'm willing to forego X in a company that's raising
• 23:30
  Speaker 1: its dividend, but I'd rather go buy a triple tax
• 23:33
  Speaker 1: free muni, or I'd rather go and buy a thirty
• 23:35
  Speaker 1: year that's paying who knows, maybe six. Yeah, it's Um,
• 23:40
  Speaker 1: it's not as simple as it used to be. It
• 23:42
  Speaker 1: used to be where if if you were able to
• 23:44
  Speaker 1: earn a yield that was higher than a treasury in
• 23:46
  Speaker 1: a stock, do you take that all day long? And
• 23:50
  Speaker 1: that the last five years or so have kind of
• 23:52
  Speaker 1: confused that issue, where as bond yields have have swayed
• 23:57
  Speaker 1: back and forth beneath the SMP yield, that's and the
• 24:00
  Speaker 1: real trigger point. But right now what you're seeing is
• 24:03
  Speaker 1: with that kind of the SNP at around two, if
• 24:06
  Speaker 1: we start to see bond yields creep, then by bond yields,
• 24:10
  Speaker 1: I mean the tenure creep above that two to two
• 24:13
  Speaker 1: and a half, three and beyond, I think people will
• 24:17
  Speaker 1: all of a sudden, yeah, there we come. And I
• 24:21
  Speaker 1: remember back to the days when you know, no client
• 24:23
  Speaker 1: could ever or whatever even dream of buying a municipal
• 24:27
  Speaker 1: bond that paid six percent tax free or less. And
• 24:30
  Speaker 1: then it was five percent, and then it was four.
• 24:32
  Speaker 1: And now I think people would you know, kill for
• 24:35
  Speaker 1: a stock or i'm sorry, bonds that would pay something
• 24:38
  Speaker 1: over three or four percent? What do you think is
• 24:39
  Speaker 1: the best bet from here to your end? We think
• 24:42
  Speaker 1: it's the growth of those stocks that are just healthy, good,
• 24:45
  Speaker 1: solid businesses with modest peas they can grow there, Um, Nike, Starbucks,
• 24:53
  Speaker 1: some of these like Coca Cola, ge MasterCard, Visa, some
• 24:58
  Speaker 1: of the just just a good alid growth companies that
• 25:01
  Speaker 1: are out there that haven't really been given in. You
• 25:04
  Speaker 1: consider master Card a growth company as well as Starbucks.
• 25:07
  Speaker 1: I mean, are they growing at those double digit multiples
• 25:10
  Speaker 1: that would justify the price? Actually they are. And and
• 25:15
  Speaker 1: again you know these are companies that have been around
• 25:17
  Speaker 1: for a long time, but they continue to grow those
• 25:20
  Speaker 1: those earnings and cash flows. And again with the growth,
• 25:24
  Speaker 1: we focus a lot on free cash flow because we're
• 25:26
  Speaker 1: so focused on the dividend and that the ability to
• 25:28
  Speaker 1: grow the dividend. But but that free cash flow growth
• 25:31
  Speaker 1: has been double digits and it's one of the few
• 25:33
  Speaker 1: pockets of of the SMP, Like I say, where you
• 25:36
  Speaker 1: can actually find double digit earnings growth in a lot
• 25:38
  Speaker 1: of these areas, and it's not easy to do with
• 25:41
  Speaker 1: multiples as high as they are. That's the other thing
• 25:43
  Speaker 1: is I'd say back off of the gas pedal and
• 25:46
  Speaker 1: and just if you if you're overweight stocks right now,
• 25:49
  Speaker 1: maybe now the time to just back off a little
• 25:52
  Speaker 1: bit and think about other alternatives that might be a
• 25:54
  Speaker 1: little bit more hedged. Eric Van, thank you so much.
• 25:57
  Speaker 1: Eric Ivan is chief executive officer at we led Shares,
• 26:01
  Speaker 1: talking to us from San Diego. Thanks for listening to
• 26:10
  Speaker 1: the Bloomberg PI and L podcast. You can subscribe and
• 26:13
  Speaker 1: listen to interviews at iTunes, SoundCloud, or whatever podcast platform
• 26:18
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• 26:21
  Speaker 1: at pim Fox. I'm out there on Twitter at Lisa Abramo.
• 26:25
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• 26:27
  Speaker 1: worldwide on Bloomberg Radio.