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Western Union's Looking at Digital Currency, But Not Ready Yet · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m 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
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Lisa,
• 0:32
  Speaker 1: you know, if you want to send billions of dollars
• 0:34
  Speaker 1: around the world as a corporation, there are banking systems
• 0:38
  Speaker 1: and relationships that are already set up to do that
• 0:41
  Speaker 1: and to do that compliantly and efficiently. But let's say
• 0:44
  Speaker 1: you want to just move two hundred dollars around the world.
• 0:47
  Speaker 1: The gentleman who we have next is our guest, knows
• 0:50
  Speaker 1: all about that business. His name is Ogilan Almeida. He
• 0:53
  Speaker 1: is the president of Global Money Transfer at Western Union.
• 0:57
  Speaker 1: Thank you very much for being here, Thank you for
• 0:58
  Speaker 1: having me. Maybe just to explain to people, first of all,
• 1:02
  Speaker 1: was I accurate in describing a little bit about the business,
• 1:05
  Speaker 1: And maybe you can build that out as a little
• 1:07
  Speaker 1: story about describing some particular money flow that exists in
• 1:12
  Speaker 1: the world that people may not know about. I think
• 1:14
  Speaker 1: it was perfect that that's exactly what we do. I mean,
• 1:16
  Speaker 1: we make it viable to sound smaller amounts of money
• 1:20
  Speaker 1: across the globe today operating two hundred countries, sixteen thousand corridors,
• 1:24
  Speaker 1: a hundred thirty currencies and it's amazing. Corridors. Maybe just
• 1:28
  Speaker 1: explain how you use that term. YEA corridors is when
• 1:31
  Speaker 1: you talk about one country to another countries. For example,
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  Speaker 1: US to Bangladesh is one corridor. Bangladesh to US is
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  Speaker 1: another corridor. So it is the origin and the destiny
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  Speaker 1: of the money. Uh. And it's amazing to see those flows.
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  Speaker 1: And we have corridors like um Way to Paxtan to India,
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  Speaker 1: um In Toronto, corridors in Africa. But the beauty of
• 1:56
  Speaker 1: the business is not only about the money flow, but
• 1:58
  Speaker 1: it's about the people flow because we can track people
• 2:02
  Speaker 1: flow around the globe based on the dynamics of the corridors. Well,
• 2:06
  Speaker 1: given that we've heard so much protectionist rhetoric recently from
• 2:10
  Speaker 1: a number of different governments and attempts to restrict immigration,
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  Speaker 1: have you seen that in your flows and is that
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  Speaker 1: something that is somewhat of a headwind for the business. Yes,
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  Speaker 1: we we uh we're pretty for we have been oparating
• 2:23
  Speaker 1: for the last six five years, so in those years
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  Speaker 1: we have seen countries interblocks, countries living blocks. More protection
• 2:30
  Speaker 1: is less protection list. We know that there is a
• 2:32
  Speaker 1: relation about growth and protectionism, so countries get more protectionists
• 2:37
  Speaker 1: when there's no growth and and living That has been
• 2:41
  Speaker 1: also very very useful for us, so we can in
• 2:44
  Speaker 1: some way hedge the risks. So for example, if there
• 2:48
  Speaker 1: is an issue in certain corridor, we still have the
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  Speaker 1: other hundred fifty nine point nine thousand corridors to to explore,
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  Speaker 1: so it's always like a trade off. Thank today we
• 2:59
  Speaker 1: don't see the world more protectionalist than before. We see
• 3:02
  Speaker 1: pockets of protectionists, but overall it's not one sweeping movement
• 3:08
  Speaker 1: across all of the different channels. But talking about moving
• 3:11
  Speaker 1: money from one place to another in a secure channel
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  Speaker 1: really raises the question of bitcoin and ethereum and some
• 3:17
  Speaker 1: of these digital currencies that have been started in order
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  Speaker 1: to transfer money easily no matter where you are in
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  Speaker 1: the world. How has that affected what Western Union? Does?
• 3:27
  Speaker 1: We know? We are we are we are the market
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  Speaker 1: leaders in retail, the market leaders in digital around the globe,
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  Speaker 1: but they're very humble we look into those startups as
• 3:36
  Speaker 1: as learning for us, and we're very close a lot
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  Speaker 1: of them at this point. For example, you think about
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  Speaker 1: bitcoin is just not regulated and this still has lots
• 3:44
  Speaker 1: of risks related to that. So we are falling and seeing, um,
• 3:48
  Speaker 1: what's happening behind that. On the other side, blockchain, which
• 3:51
  Speaker 1: is the technology behind that, that's a tremendou success and
• 3:54
  Speaker 1: it's working very well and going to other industries so forth.
• 3:57
  Speaker 1: So we have being a lot of attention all those things,
• 3:59
  Speaker 1: and that we we we we pay attention on the startups,
• 4:02
  Speaker 1: we pay attention on the new stuff that is coming along,
• 4:05
  Speaker 1: and we have always the option of copying with our
• 4:07
  Speaker 1: scale or buying. So how do you respond to those
• 4:11
  Speaker 1: people who want to understand the pricing model that you
• 4:14
  Speaker 1: have because the consumative consumer business has been under intense competition. Yeah,
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  Speaker 1: I think that that's that's a great point that the
• 4:24
  Speaker 1: prices is really dictated by the market today. Right. We
• 4:27
  Speaker 1: have been gaining market share in the last years, which
• 4:29
  Speaker 1: chose me that our value equation is working well. But
• 4:33
  Speaker 1: you're gonna see very different prices around the globe. For example,
• 4:36
  Speaker 1: in corridors that are more competitive, you're gonna see very
• 4:38
  Speaker 1: low price incuraters that are not the competitive the price
• 4:42
  Speaker 1: is higher. So it's all about competition. I want to
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  Speaker 1: go back to something that you said that you would
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  Speaker 1: consider buying some of these competitors. Is that on Western
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  Speaker 1: Union's radar to possibly purchase one of these digital currencies.
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  Speaker 1: We're always open, we are always I'm not digital currencies
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  Speaker 1: that any any play or any new chnology that comes,
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  Speaker 1: like a your own net for example, any any any
• 5:04
  Speaker 1: kind of different technology that comes. I think our net
• 5:06
  Speaker 1: is not a new technology by itself, but if we
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  Speaker 1: feel like there's something new that is easier to buy
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  Speaker 1: than just to create what kind of thing? What kind
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  Speaker 1: of thing today? To have you to tell the truth,
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  Speaker 1: there is nothing very clear how or rather that it's
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  Speaker 1: going to be very new that we cannot um copy
• 5:22
  Speaker 1: and paste. So for example, five years ago or ten
• 5:25
  Speaker 1: years ago, we're very we're not that strong on digital.
• 5:28
  Speaker 1: And then we start to see the movement of the industry,
• 5:30
  Speaker 1: the move of the consumer. Before you continue, I'm trying
• 5:33
  Speaker 1: to understand, does that mean that you actually were just
• 5:35
  Speaker 1: taking money cash and shipping it across the seas. No,
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  Speaker 1: it was that wasn't what you're talking about. What are
• 5:41
  Speaker 1: you talking about when you say that? Just thank you
• 5:43
  Speaker 1: for that. We we separate the business in two parts.
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  Speaker 1: One is originated by cash, so when you enter a
• 5:49
  Speaker 1: location of us and put the cash over there and
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  Speaker 1: then the money it is digital, but it is originating cash.
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  Speaker 1: And there is another part that is originally directly from
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  Speaker 1: an account. So you enter our wood dot com site
• 6:00
  Speaker 1: or our app and you send money directly from your
• 6:02
  Speaker 1: account debit card, credit card or Apple pay for example,
• 6:05
  Speaker 1: so you can send that. So digital, I'm talking about
• 6:07
  Speaker 1: origination in digital. That origination digito was not really a
• 6:13
  Speaker 1: real factor ten years ago. Then everything started five years ago.
• 6:17
  Speaker 1: Our business was in Bryonic on that then we start
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  Speaker 1: learning around the globe and today we are the market
• 6:22
  Speaker 1: leaders after five years, growing more than the industry. So
• 6:25
  Speaker 1: we have not seen yet something very new enough for
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  Speaker 1: us in the market, so we would acquire. At this point,
• 6:34
  Speaker 1: I think that we don't see any any disruption, an
• 6:37
  Speaker 1: important disruption. Thank you so much for joining us. Truly
• 6:40
  Speaker 1: a fascinating business and marketing. Gilon all made a president
• 6:43
  Speaker 1: of Global money Transfer at Western Union. He's based in
• 6:47
  Speaker 1: an airplane, but I guess technically in Miami We've been
• 7:01
  Speaker 1: hearing a lot about the very hot housing market in
• 7:05
  Speaker 1: the US over the past few years, and yet construction
• 7:08
  Speaker 1: workers still are not building enough homes to say demand.
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  Speaker 1: Construction starts for new homes have declined for three straight
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  Speaker 1: months and permits were at a one year low in May. UH.
• 7:18
  Speaker 1: This raises a lot of questions, and who better to
• 7:20
  Speaker 1: answer them other than Logan Moda Shapi. He's senior loan
• 7:23
  Speaker 1: officer at a MC lending group and he comes to
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  Speaker 1: us UH now from Irvine, California. Logan, can you give
• 7:30
  Speaker 1: this a sense of what this sort of restraint is
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  Speaker 1: all about with respect to housing starts and does it
• 7:37
  Speaker 1: point to even higher prices going forward? Well, first, I
• 7:41
  Speaker 1: disagree with the thesis that the housing market is very
• 7:44
  Speaker 1: hot and strong, and I would UH focus on new
• 7:48
  Speaker 1: home sales. You know, the reason why housing starts hasn't
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  Speaker 1: hit the fifty year moving average at one point five
• 7:53
  Speaker 1: million is that if you look at new home sales
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  Speaker 1: you adjusted to population using a six month moving average,
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  Speaker 1: it's below five of the last six recessions. So why
• 8:02
  Speaker 1: would the builders build more single family homes when monthly
• 8:05
  Speaker 1: supply for them is higher in this cycle than in
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  Speaker 1: the previous cycle. So it makes sense to me why
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  Speaker 1: the builders aren't building because the demand isn't there. And
• 8:14
  Speaker 1: if you look at existing home sales today, it came
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  Speaker 1: in at five point six two million, you know, but
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  Speaker 1: still uh, if you look at mortgage demand, it's still
• 8:23
  Speaker 1: back to level. So there's there's nothing that warrants a
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  Speaker 1: strong hot housing market if you base it on mortgage
• 8:31
  Speaker 1: demount on cash buyers. Yet the cash buyers are very strong,
• 8:34
  Speaker 1: even even this year's but there's nothing out there in
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  Speaker 1: the new home sales data or the mortgage application data
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  Speaker 1: to warrant a a very strong housing cycle. Alright. So
• 8:42
  Speaker 1: having said that, maybe you can extrapolate and connect that
• 8:47
  Speaker 1: with perhaps some other bits of conventional wisdom that you
• 8:51
  Speaker 1: think are not necessarily accurate. Well, number one, we don't
• 8:55
  Speaker 1: have the demographics in the cycle to have a strong
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  Speaker 1: housing market. We're very young still. Uh. Second, there is
• 9:02
  Speaker 1: no tight lending out there. Uh. Letting standards are very liberal.
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  Speaker 1: It's just that housing affordability is not as good as
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  Speaker 1: it appears. The the the the economists run a model
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  Speaker 1: that basically assumes everybody has down and because interest rates
• 9:17
  Speaker 1: are two percent lower in this cycle than the previous cycle.
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  Speaker 1: It alleviates that affordability, but still bigger homes, bigger mortgage payments,
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  Speaker 1: bigger down payments. It's very hard, especially for young buyers
• 9:31
  Speaker 1: to have even three and a half to five percent down,
• 9:33
  Speaker 1: especially in coastal cities, to have that kind of a
• 9:38
  Speaker 1: marketplace where they would be pushing up demand and then
• 9:42
  Speaker 1: you know, move up buyers would actually you know, be
• 9:44
  Speaker 1: able to go up because I think move up buyers
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  Speaker 1: are are the area that needs to be focused on.
• 9:48
  Speaker 1: It's very difficult for them to move up because they
• 9:51
  Speaker 1: had they don't have enough selling equity yet. And this
• 9:54
  Speaker 1: is why you see sales numbers where it's at right now,
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  Speaker 1: and again why the builders are not building U homes
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  Speaker 1: as much as some people think they should. You know,
• 10:02
  Speaker 1: logan as you speak and thinking about some of the
• 10:05
  Speaker 1: buildings that I have seen coming up in a variety
• 10:09
  Speaker 1: of places across Manhattan and Brooklyn and the Bronx, and
• 10:12
  Speaker 1: I think about how different some of the large metropolitan
• 10:15
  Speaker 1: areas are from other places in the United States, And
• 10:18
  Speaker 1: I'm wondering, have you ever seen a housing market in
• 10:22
  Speaker 1: the US as bifurcated as the one that we're seeing today. No,
• 10:26
  Speaker 1: and it goes straight into the inequality issue. The inequality
• 10:30
  Speaker 1: issue in this country is really between home owners and renters.
• 10:33
  Speaker 1: It's not so much of the one percent versus. To
• 10:37
  Speaker 1: be a homeowner, you really have to be the strong
• 10:40
  Speaker 1: educated middle class. And you see that in the wage data.
• 10:43
  Speaker 1: You know, since the nine college educated Americans are really
• 10:46
  Speaker 1: making much more money than those who never went to college,
• 10:49
  Speaker 1: and that gap. Those are your homeowners. And this is
• 10:53
  Speaker 1: why the builders are always building for them, because if
• 10:56
  Speaker 1: you look at it, new homes, new home construction is
• 11:00
  Speaker 1: bigger and bigger and bigger homes. That's not going to
• 11:02
  Speaker 1: help housing affordability by building bigger and bigger homes, but
• 11:06
  Speaker 1: they're making a market really for that strong educated middle class.
• 11:10
  Speaker 1: And for the rest you don't even have. You know,
• 11:12
  Speaker 1: all the rental units are in theory luxury units. They're
• 11:15
  Speaker 1: not even building cheap, affordable rental units. So there's your
• 11:19
  Speaker 1: inequality right there. It's basically the rich versus the poor,
• 11:23
  Speaker 1: and it's basically homeowners versus renters. Now, Logan a mc
• 11:27
  Speaker 1: Lending has been sort of checking on mortgage mortgage industry
• 11:33
  Speaker 1: in California since not what right, Okay, and I'm wondering
• 11:39
  Speaker 1: if you could then describe now from an investor's point
• 11:41
  Speaker 1: of view, what are some of the best investments in
• 11:45
  Speaker 1: the worst investments when it comes to listening to experts
• 11:48
  Speaker 1: tell you about real estate, Well, right now, rental UH,
• 11:52
  Speaker 1: rent inflation is cool and off. We've we've built a
• 11:55
  Speaker 1: lot of rental units over the last few years, and
• 11:58
  Speaker 1: we're almost at the point to where dem graphics are
• 12:00
  Speaker 1: gonna be favored for ownership in a few years. So
• 12:02
  Speaker 1: you see rent inflation cooling up. So if you're looking to,
• 12:07
  Speaker 1: you know, pay up for a rental unit, be mindful
• 12:09
  Speaker 1: of that um because unit sales are so low for
• 12:14
  Speaker 1: new homes. You know, the entire builder index could still
• 12:17
  Speaker 1: have legs in a few years out there because unit
• 12:21
  Speaker 1: sales are still low. So it depends on what you
• 12:23
  Speaker 1: want to pay for the builders out there. But again,
• 12:27
  Speaker 1: the housing cycle should be better in a few years.
• 12:31
  Speaker 1: But if you believe in this hot housing market or
• 12:33
  Speaker 1: that there's some over investment thesis in housing, you know,
• 12:37
  Speaker 1: you're you're you're laying a trap for you know, uh,
• 12:40
  Speaker 1: for sales to come down. And I just I can't
• 12:42
  Speaker 1: see a very major barish thesis for housing because it
• 12:46
  Speaker 1: isn't very strong. It's still very low. Mortgage demand per
• 12:49
  Speaker 1: the mortgage purchase application data is still at levels and
• 12:54
  Speaker 1: two thousand seventeen has been one of the weakest years
• 12:56
  Speaker 1: year over year in terms of mortgage demand growth, but
• 12:59
  Speaker 1: still old cycle high demand, just not quite there with
• 13:03
  Speaker 1: any unit sale growth for new homes or existing homes.
• 13:06
  Speaker 1: I want to thank you very much. Logan Mata Shami.
• 13:09
  Speaker 1: He is a senior loan officer a MC Lending group
• 13:13
  Speaker 1: in Irvine, California. You can follow him on Twitter at
• 13:16
  Speaker 1: Logan Mota Shami. Well, we want to learn a little
• 13:31
  Speaker 1: bit more about a big change in the ms c
• 13:34
  Speaker 1: I Global Index because China is now part of the club.
• 13:39
  Speaker 1: And here to tell us about it is Brendan Hearn.
• 13:41
  Speaker 1: He is the chief investment officer at Crane Shares. Brendan,
• 13:45
  Speaker 1: how important is this? What what are some of the
• 13:48
  Speaker 1: specific ramifications? Well, the ultimately means there's gonna be a
• 13:52
  Speaker 1: lot more China in investors portfolios in the years to come. Uh,
• 13:56
  Speaker 1: the supertanker doesn't turn on a dime, So that's yesterday's
• 13:59
  Speaker 1: and now sent with just the orders coming down from
• 14:03
  Speaker 1: from the captain to start turning that wheel. But but
• 14:06
  Speaker 1: China is going to grow from about of m s
• 14:09
  Speaker 1: c I emerging markets to well over in the years
• 14:12
  Speaker 1: to come. You know, one thing that I don't understand,
• 14:15
  Speaker 1: Brendan is the construction of indexes. People think that they
• 14:20
  Speaker 1: are investing in passive funds, and yet it's a very
• 14:23
  Speaker 1: active decision to decide whether or not to bring Chinese
• 14:28
  Speaker 1: domestic shares into the index and how much to include
• 14:32
  Speaker 1: as well. I mean, what do you draw from this
• 14:34
  Speaker 1: process and whether people are actually getting exposure in proportion
• 14:38
  Speaker 1: to the actual shares outstanding. Now, it's it's a great
• 14:41
  Speaker 1: question list because I think in general we talked about
• 14:43
  Speaker 1: the growth of passive investment vehicles and next funds and
• 14:47
  Speaker 1: ETFs on a daily basis, there's very little examination of
• 14:50
  Speaker 1: the index methodologies that dictate how those trillions are actually invested.
• 14:55
  Speaker 1: So in the case of m s c I, their
• 14:57
  Speaker 1: Global Investible Market Indices methodology. G It's about a hundred
• 15:00
  Speaker 1: and seventy two pages long and I'm probably the only
• 15:03
  Speaker 1: person who's actually read it. Um So, so I think
• 15:07
  Speaker 1: there you know you you you can do your homework
• 15:09
  Speaker 1: and understand the thought process that drives some of these changes.
• 15:13
  Speaker 1: But it is true. There is there is a human
• 15:15
  Speaker 1: element and a lot in the case of m s
• 15:17
  Speaker 1: c I is the will and desire of their clients
• 15:20
  Speaker 1: as well as the ability to implement. And that's what
• 15:22
  Speaker 1: really sparked the change was the great work to Hong
• 15:25
  Speaker 1: Kong stock Exchanges done in implementing the Connect Trading program. Well, Brendon,
• 15:30
  Speaker 1: will this inclusion improve the China A share investment rules? Well,
• 15:36
  Speaker 1: I think it's certainly. We got to this point of
• 15:40
  Speaker 1: starting to including M s c I definition of Shanghai
• 15:43
  Speaker 1: and sins and names because of the openness of the
• 15:48
  Speaker 1: Chinese regulators UH to abide by some of the UH
• 15:53
  Speaker 1: rules that MSc had asked for, as well as the
• 15:55
  Speaker 1: implementation of this Connect Trading program, which provides a much
• 15:58
  Speaker 1: greater level of acts us versus the historical quota program.
• 16:02
  Speaker 1: So so so we have this great trajectory and great
• 16:05
  Speaker 1: projection of continued access as well as in further adapting
• 16:11
  Speaker 1: to institutional standards globally. Brendan people estimate that this change
• 16:17
  Speaker 1: in the M s c I indexes will funnel hundreds
• 16:19
  Speaker 1: of billions of dollars into Chinese shares that wouldn't have
• 16:23
  Speaker 1: otherwise gone UH do you expect this to lift the
• 16:26
  Speaker 1: valuations or does it sort of highlight the interconnectedness of
• 16:30
  Speaker 1: the financial system that could become a problem should there
• 16:32
  Speaker 1: be a hard landing in China. Well, that's a good question.
• 16:35
  Speaker 1: I mean I think I think ultimately yes, I mean,
• 16:37
  Speaker 1: hundreds of billions of dollars are going to go into
• 16:40
  Speaker 1: uh the securities that that we hold today at Crane
• 16:43
  Speaker 1: shares um kind of self serving and highly behy us.
• 16:46
  Speaker 1: But you know that that will take time. This isn't
• 16:50
  Speaker 1: gonna happen overnight. It's going to take many, many years.
• 16:53
  Speaker 1: It could take between five and ten years for the
• 16:55
  Speaker 1: full inclusion of msdis definition of Shanghai and Shenzen Um. Ultimately,
• 17:01
  Speaker 1: you know that probably will have a benefit in potentially
• 17:05
  Speaker 1: raising the markets there. That's but but certainly the world
• 17:08
  Speaker 1: is interconnected today, and uh this market has been very
• 17:11
  Speaker 1: low correlated because it's been ring fence from from globalized funflows,
• 17:16
  Speaker 1: and that that will change in the years to come. Well,
• 17:18
  Speaker 1: you know, it's interesting. Part of our reporting from China
• 17:21
  Speaker 1: includes comments from the company called Spring Air and Spring Airlines.
• 17:29
  Speaker 1: This is a budget carrier in China, and says the
• 17:31
  Speaker 1: decision to be included in the ms c I UH index.
• 17:35
  Speaker 1: UH is both an incentive and pressure, and it talks
• 17:39
  Speaker 1: about how it will now increase transparency and boost corporate governance.
• 17:45
  Speaker 1: That's got to be a good thing. Oh, I think
• 17:48
  Speaker 1: without question, this puts a very high onus UM index
• 17:51
  Speaker 1: funds and exchange traded funds will mechanically by the securities
• 17:56
  Speaker 1: within the m s c I China a International UH
• 17:59
  Speaker 1: into which are k B A is benchmark too. At
• 18:02
  Speaker 1: the same time, active managers are going to be evaluating
• 18:05
  Speaker 1: picking amongst those two twenty names that will be added
• 18:08
  Speaker 1: next next year. So so I think I think it
• 18:12
  Speaker 1: is a good thing. The market will institutionalized, just as
• 18:15
  Speaker 1: the market as institutionalized here over the last several decades.
• 18:18
  Speaker 1: So that's I think it is a net net positive
• 18:20
  Speaker 1: for both China as well as investors globally. Brendon to
• 18:23
  Speaker 1: hear and thank you so much for joining us. It's
• 18:24
  Speaker 1: always terrific to speak with you. Brendon to her and
• 18:26
  Speaker 1: his chief investment officer of Crane Funds Advisors, the investment
• 18:30
  Speaker 1: manager for Crane shares Et f S, which is based
• 18:33
  Speaker 1: in New York. This is a tremendous change with China's
• 18:36
  Speaker 1: domestic shares being accepted into the m s c I
• 18:40
  Speaker 1: Index for Emerging Markets in particular, and you know, Pim,
• 18:43
  Speaker 1: I've got to wonder how much this will lead to
• 18:45
  Speaker 1: selling of other securities that are already in the index
• 18:49
  Speaker 1: that are going to be taken out in order to
• 18:50
  Speaker 1: make room for China uh, and and whether there's enough
• 18:54
  Speaker 1: incoming flows to emerging markets stock funds that will offset
• 18:57
  Speaker 1: that definite. That's why I like you, because you always
• 18:59
  Speaker 1: find the there's and the losers. Yeah, I mean there's
• 19:01
  Speaker 1: gonna be there's gonna be some kind of shakeout perhaps
• 19:03
  Speaker 1: or perhaps this flood of CASHU will continue. Well this year,
• 19:17
  Speaker 1: we've heard a lot of angst about whether we've seen
• 19:19
  Speaker 1: a bubble in tech stocks, But our next guest says,
• 19:23
  Speaker 1: not only is there not a bubble, but frankly, tech
• 19:26
  Speaker 1: stocks are cheap. David Kodla joins US now. He chief
• 19:29
  Speaker 1: executive officer and chief investment strategist at Mainstay Capital Management,
• 19:33
  Speaker 1: with about two billion dollars under management in Grand Blanc, Michigan. David,
• 19:38
  Speaker 1: how can you say that many tech shares are actually cheap? Well,
• 19:44
  Speaker 1: I don't know if I want to qualify it as
• 19:46
  Speaker 1: cheap as much as I think they're not overly expensive,
• 19:50
  Speaker 1: and and and our messages is poor investors to stay
• 19:54
  Speaker 1: with tech stocks, don't be shaken out. This past week
• 19:57
  Speaker 1: or so, we saw weakness in in tech names, not
• 20:01
  Speaker 1: based on fundamentals, just a correction in price. They've come
• 20:04
  Speaker 1: a long way, uh this year, but when we look
• 20:08
  Speaker 1: at the evaluations, we hear a lot of people talking
• 20:11
  Speaker 1: about the prices being the highest ever higher than in
• 20:14
  Speaker 1: two thousand, But valuations are really still quite low. Trailing
• 20:19
  Speaker 1: earnings for the tech sector in two thousand at the peak,
• 20:22
  Speaker 1: we're at seventy times earnings. Now we're only about twenty
• 20:27
  Speaker 1: three and a half times earnings, a little bit richer
• 20:30
  Speaker 1: than the S and P five hundred, but this is
• 20:32
  Speaker 1: where the growth is. This is where we see secular growth.
• 20:34
  Speaker 1: We're not dependent on cyclical forces. So we think it's
• 20:37
  Speaker 1: important that investors stay with the tech names. All right,
• 20:40
  Speaker 1: we'll give us some of those names. Explain the thesis
• 20:42
  Speaker 1: and the strategy and what you came up with. Well,
• 20:45
  Speaker 1: we all we all know the fang stocks that have
• 20:48
  Speaker 1: been talked about so much, and those are the big Facebook, Amazon's,
• 20:52
  Speaker 1: the big half, the leaders. We do own them all okay,
• 20:56
  Speaker 1: and you're not selling and we're not selling, all right,
• 20:59
  Speaker 1: we're not helling, so you know. And also, uh, you know,
• 21:03
  Speaker 1: through you can own that through xl K to E
• 21:06
  Speaker 1: t F, you can own the triple queues which give
• 21:08
  Speaker 1: you a lot of the big calf names, which you
• 21:10
  Speaker 1: can also own an open end fund like to row
• 21:13
  Speaker 1: Price Technology to ro Priced Global Technology, which is a
• 21:17
  Speaker 1: global fund, so it has some of the tech names
• 21:20
  Speaker 1: abroad like Ali, Baba, ten Cent, which have lower valuations
• 21:25
  Speaker 1: and further to run. So in a in a in
• 21:27
  Speaker 1: a global fund like that, you get some of the
• 21:30
  Speaker 1: lower valuations where uh, we know that the valuations of
• 21:35
  Speaker 1: the U S tech names have have run up, but
• 21:38
  Speaker 1: we think that you stay with that sector. What would
• 21:40
  Speaker 1: you have to see to make your second guess that
• 21:42
  Speaker 1: and actually start selling your tech shares. I think that
• 21:47
  Speaker 1: right now, when we look at the overall market, really
• 21:50
  Speaker 1: what we would be more concerned about is a broader
• 21:53
  Speaker 1: stock market correction. We had the so called Trump trade
• 21:57
  Speaker 1: earlier this year, or the reflation trade that's kind of
• 22:01
  Speaker 1: gone by the wayside. Uh. We think that large cap
• 22:06
  Speaker 1: growth is the place to be right now, and what
• 22:09
  Speaker 1: would change our outlook would really be concerned about the
• 22:13
  Speaker 1: stock market in general, but what could actually do that?
• 22:16
  Speaker 1: I mean, right now, we've seen political instability around the world,
• 22:19
  Speaker 1: We've seen geopolitical conflict. We've seen questions about how quickly
• 22:24
  Speaker 1: the US can grow. The FED is seems dead set
• 22:27
  Speaker 1: on hiking interest rates. What what more do we need
• 22:31
  Speaker 1: for there to be a sell off? Our biggest concern
• 22:34
  Speaker 1: is the FED and the rate at which they hike rates. Um,
• 22:39
  Speaker 1: we've had three quarter point rate hikes in the last
• 22:41
  Speaker 1: seven months or the last six months, and that's not
• 22:47
  Speaker 1: a quick pace by historical standards, even though it seems
• 22:51
  Speaker 1: like a quicker pace than we've had the past several years. Obviously,
• 22:55
  Speaker 1: the concern is is that they raised fast enough or
• 22:58
  Speaker 1: high enough in the of economic data. And then economic
• 23:01
  Speaker 1: data when we look at inflation peaked in February and
• 23:05
  Speaker 1: inflation has come down, wage or jobs growth is slowing.
• 23:10
  Speaker 1: The hard economic data is not pointing to the need
• 23:14
  Speaker 1: for higher rates, and we're seeing the FED we think
• 23:18
  Speaker 1: rays for structural reasons rather than based on economic data.
• 23:22
  Speaker 1: They've basically signaled that if they do that too fast,
• 23:25
  Speaker 1: too far, too fast, we get what we call a
• 23:28
  Speaker 1: FED event, which creates a market event or even worse.
• 23:33
  Speaker 1: We've seen the yield curves, whether it's to two to ten,
• 23:36
  Speaker 1: two to thirty five to thirties flattening, and the closer
• 23:41
  Speaker 1: we get to flattening or an inversion, we have the
• 23:45
  Speaker 1: risk of recession. Well, I was going to say that
• 23:47
  Speaker 1: that is exactly so what you were describing earlier when
• 23:50
  Speaker 1: we were speaking with Jerome Schneider, But he didn't think
• 23:53
  Speaker 1: that we were heading towards recession. He thought that you're
• 23:56
  Speaker 1: going to just see is that the FED is trying
• 23:58
  Speaker 1: to normalize as quickly as possible. Uh, and you are
• 24:01
  Speaker 1: seeing that flattening as a result. Indeed, you know, maybe
• 24:04
  Speaker 1: if you could just focus then on all right, we
• 24:07
  Speaker 1: buy this scenario. There are no shocks to this system
• 24:12
  Speaker 1: that at least haven't been discussed at least right now. Right.
• 24:16
  Speaker 1: I mean, you're talking about the FED. We know that
• 24:17
  Speaker 1: that could go cross on. But the thing that really
• 24:20
  Speaker 1: sent sent the market down, and you know it was,
• 24:22
  Speaker 1: was the Lehman Brothers bankruptcy, the you know, the unknown
• 24:26
  Speaker 1: unknown for giving that, do you think stocks can go
• 24:30
  Speaker 1: much higher this year? I think stocks will continue you
• 24:33
  Speaker 1: go higher. We still see upside of the stock market
• 24:36
  Speaker 1: through year and and into next year. We have strong
• 24:40
  Speaker 1: earnings earnings growth UH through the last earning season, looking
• 24:45
  Speaker 1: at six and a half percent earnings growth for the
• 24:48
  Speaker 1: next quarter, strong earnings growth through and as long as
• 24:53
  Speaker 1: those earnings come through, we think the stock market goes higher.
• 24:56
  Speaker 1: We have room to run, even though valuations are a
• 24:59
  Speaker 1: little bit stretched. The political events in Washington, d C.
• 25:03
  Speaker 1: We saw a sell off for one day in the
• 25:05
  Speaker 1: market recover UM. There's always the risk of a black
• 25:09
  Speaker 1: Swan event, a geopolitical event, outside event that impacts the
• 25:14
  Speaker 1: market for a day, a week, a month, But when
• 25:16
  Speaker 1: we look at underlying fundamentals, we're still bullish on stocks.
• 25:20
  Speaker 1: You know, David, when I speak with investment managers, one
• 25:23
  Speaker 1: of the most consensus trades is Europe by Europe stocks.
• 25:27
  Speaker 1: Are you on that train? We are on that training
• 25:31
  Speaker 1: of our kets. We like Europe and emerging markets. UH,
• 25:36
  Speaker 1: specifically Europe and emerging markets. Europe we like because they're
• 25:40
  Speaker 1: they're not as far along in this cycle as we
• 25:43
  Speaker 1: are UM, but we're seeing earnings growth come through. So
• 25:46
  Speaker 1: we have lower valuations in Europe than we have in
• 25:49
  Speaker 1: the US with earnings growth coming through. So we like
• 25:53
  Speaker 1: Europe specifically an h F we like that not for
• 25:56
  Speaker 1: the faint of heart f EU, which invests in UH
• 26:01
  Speaker 1: the europe Stock fifty, which has done you know, very
• 26:04
  Speaker 1: well this year. In emerging markets, we have a CAPE
• 26:07
  Speaker 1: ratio of about fourteen cyclically adjusted price to earnings ratio
• 26:11
  Speaker 1: versus thirty for the S and P five hundred. Here
• 26:14
  Speaker 1: in the US, specifically, we like India within emerging markets.
• 26:18
  Speaker 1: At EATF we like their skin s C I N
• 26:21
  Speaker 1: get skin in the game. Interesting combination. Thank you very
• 26:25
  Speaker 1: much for joining us. David Kudla is the chief executive
• 26:29
  Speaker 1: and the chief investment strategist for Mainstay Capital Management. He's
• 26:33
  Speaker 1: got more than two billion under management based in Grand Blank, Michigan,
• 26:37
  Speaker 1: and he can be followed on Twitter at David Underscore
• 26:42
  Speaker 1: k U d L a very interesting technology select sector
• 26:45
  Speaker 1: of course, the x l K and then the tro
• 26:47
  Speaker 1: Price Global Technology p r G t X is the symbol.
• 26:54
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 26:57
  Speaker 1: You can subscribe and listen to interviews at full Podcasts,
• 27:01
  Speaker 1: SoundCloud or whatever podcast platform you prefer. I'm pim Fox.
• 27:05
  Speaker 1: I'm on Twitter at pim Fox. I'm on Twitter at
• 27:08
  Speaker 1: Lisa Abramo wits one before the podcast. You can always
• 27:11
  Speaker 1: catch us worldwide on Bloomberg Radio