Latest / Bloomberg Intelligence / WalMart Is The Buy Of The Decade After Stock Plunge: Flickinger

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WalMart Is The Buy Of The Decade After Stock Plunge: Flickinger · 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
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• 0:32
  Speaker 1: of Walmart they are lower right now by about nine
• 0:35
  Speaker 1: and a half percent as comes after the company reports
• 0:39
  Speaker 1: that it's online business not doing as well as analysts
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  Speaker 1: had estimated. Well, here to tell us more about Walmart
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  Speaker 1: and the retail industry is none other than Birch Flickincher.
• 0:49
  Speaker 1: He is managing director of the Strategic Resource Group. He
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  Speaker 1: can be found online on Twitter at Birch Underscore flickincher Bert.
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  Speaker 1: Let's begin with Walmart. What do you think happened? Cleaning
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  Speaker 1: the deck? Clean, quarter, Clean fiscal. Walmart's investing at record
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  Speaker 1: levels to take on Amazon with many fulfillment centers, were rooms,
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  Speaker 1: Etcetera be launched through Sam's Club, as you and Lisa
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  Speaker 1: reported earlier and starting this fall, winner of eighteen nineteen,
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  Speaker 1: Walmart's gonna take it to Amazon. It's gonna be Amazon's
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  Speaker 1: worst nightmare. So today's the buying opportunity of a decade
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  Speaker 1: with Walmart. Okay, so the buying opportunity of a decade
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  Speaker 1: bold call. Given the unite and a half percent drop
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  Speaker 1: in Walmart shares, can you explain how cleaning the decks
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  Speaker 1: relates to slowing online growth? Specifically, what did Walmart do
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  Speaker 1: to divert resources away from getting more clients online that
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  Speaker 1: you think is productive. It's a complete reset, Lisa under
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  Speaker 1: Mark Laurie with Jet dot Com, getting rid of Rob Walton,
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  Speaker 1: the lawyer's uh, son of Sam Walden who was chairman
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  Speaker 1: of the board, having Doug McMillan, really moved to a
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  Speaker 1: European formula similar to what Okado does so successfully against Amazon.
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  Speaker 1: That's going to be the Walmart model in the US.
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  Speaker 1: And to do that they had to divert capital to
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  Speaker 1: your point, so click and collect, pick up in the store,
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  Speaker 1: delivery to home offices, and doing it more effectively and efficiently. Uh,
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  Speaker 1: you and your Bloomberg listeners and and terminal subscribers will
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  Speaker 1: see this within a hundred and fifty days. So it's
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  Speaker 1: just taking capital from the old way, putting it into
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  Speaker 1: the new way. I was just looking at Walmart and
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  Speaker 1: they are now offering free to day shipping, no membership fee.
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  Speaker 1: Is that the kind of promotion that is going to
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  Speaker 1: cause a reaction at Amazon? It's going to carouse the reaction.
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  Speaker 1: But it's my colleague, Paul Bower says, Amazon does not
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  Speaker 1: have the balance sheet to get into a price war
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  Speaker 1: with Walmart. Walmart wins. So Walmart's winning on apparel for
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  Speaker 1: the first time, It's winning on general merchandise, hardlines, soft lines,
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  Speaker 1: and Walmart always wins on food, and we'll win on
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  Speaker 1: our X. So Walmart will win ubiquitously, while Amazon's winning
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  Speaker 1: on there's core ears of strengths from books to aws
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  Speaker 1: or Amazon Web services in the cloud. So is this
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  Speaker 1: just a one quarter kind of cleaning the decks type
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  Speaker 1: of blip? In other words, if we see UH sort
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  Speaker 1: of lower than expected online sales UH in the first quarter,
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  Speaker 1: is that is that a red flag? It's not a
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  Speaker 1: red flag because it's clean up. As you reference this quarter, Lisa,
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  Speaker 1: as it will be next quarter the following quarter. What
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  Speaker 1: I'd be most worried about is Campbell soup that Walmart
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  Speaker 1: describes as liquid sodium and a can Bennett Doran's uh,
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  Speaker 1: the leading shareholder of Campbell's is best friend with Rob Walton.
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  Speaker 1: Walmart is punishing Campbell's continuing items, de emphasizing the brands
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  Speaker 1: getting tough with all vendors, including vendors that use Amazon
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  Speaker 1: Web services, that they will not be allowed to do
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  Speaker 1: business with Walmart. So this is the retail war of
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  Speaker 1: the world's online and in the stratosphere. Turn your attention now.
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  Speaker 1: Another retailer that we want to learn more about is
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  Speaker 1: this h the Right Aid deal? And you know a
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  Speaker 1: little bit about this uh this business tell us about
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  Speaker 1: why couldn't Walgreen's get this deal done? I? Uh, professionally,
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  Speaker 1: I think uh while got y'all of the anti trust
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  Speaker 1: and m and a uh lawyer's euro monitor didn't get
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  Speaker 1: the job done. Phil Progert Jones Day got Jack Ecker
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  Speaker 1: Drug Company equally and cleanly split between Right Aid and CVS.
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  Speaker 1: Christine Varney at Kravath gets these deals done. Uh while
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  Speaker 1: gotchall they lost Dennis Block to Greenberg. Trouty didn't have
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  Speaker 1: all the horse is that they've had in the past,
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  Speaker 1: and uh Walgreen's boots paid a fortune for an inferior result.
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  Speaker 1: Bob Miller, the humble, brilliant country boy from Mississippi, came
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  Speaker 1: in great best turnaround retail CEO in forty years in
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  Speaker 1: any sector. Miller bought it for nothing, as Lisa reference
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  Speaker 1: six and an eighth bonds traded up to par Stockholder's
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  Speaker 1: gotten next to nothing. Yeah and right and Uh, Albertson
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  Speaker 1: Albertson's with the Oscar drug stores becomes number three overnight
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  Speaker 1: and as you referenced on Bloomberg Radio an hour ago,
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  Speaker 1: Right eight is the leader in consumables and sales for
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  Speaker 1: store solid snacks, cookies and crackers, beer pop as we
• 5:44
  Speaker 1: say in Buffalo where I grew up, and also the
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  Speaker 1: leader in in tobacco. So it's a not because right
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  Speaker 1: Ad pushes tobacco, but because they're in blue collar states
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  Speaker 1: were twenty of their shoppers smoke. Bob Miller can help
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  Speaker 1: make the is UH consumers healthier while driving very significant
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  Speaker 1: profitable growth for Albertson Safe Way Oscar. I love the
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  Speaker 1: pop reference that brings me back to my mother, uh
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  Speaker 1: and talking about our childhood about the Midwest. Real quick,
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  Speaker 1: do you have any sense of what could be the
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  Speaker 1: next sort of healthcare pharmaceutical tie up that you're expecting. Uh.
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  Speaker 1: Still still see Albert Albertson's by buying a number of
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  Speaker 1: express scripts type acquisitions. So so they're still in the market.
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  Speaker 1: Still in the market, looking for everything from from small
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  Speaker 1: the big uh as CVS is continued to do that.
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  Speaker 1: Dr Tom Ryan had started at CVS so brilliantly and H.
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  Speaker 1: Walgreen's boots is put together as well. I'm gonna have
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  Speaker 1: five thousand location nearly five thousand locations, more than forty
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  Speaker 1: three hundred pharmacy counters and more than three hundred clinics.
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  Speaker 1: And Bob Miller does not get the at it for
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  Speaker 1: saving right aid the first time from Marty Grass's financial fraud.
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  Speaker 1: Bob Miller came as chairman, turned around the first time.
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  Speaker 1: We'll turn around the second time. Thank you so much,
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  Speaker 1: Managing director at Strategic Resource Group. Watch this space. Albertson's
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  Speaker 1: maybe in the market for it yet another purchase is
• 7:34
  Speaker 1: the recent spike in volatility over and what does it
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  Speaker 1: mean for your investments? Russ Costa Ridge is the head
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  Speaker 1: of Asset Allocation for Black Rocks and Global Allocation Fund
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  Speaker 1: black Rock, of course, helping to manage over four trillion
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  Speaker 1: dollars worth of assets and RUSS is based in San Francisco. RUSS,
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  Speaker 1: thanks very much for being with us. As always, maybe
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  Speaker 1: just give us your your current outlook as it relates
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  Speaker 1: to volatility and what investors should take away from it. Well, PIM,
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  Speaker 1: I think volatility of the of the time we had
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  Speaker 1: in February and I haven't had for quite some time,
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  Speaker 1: is probably gonna become a more permanent feature of the market.
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  Speaker 1: It doesn't mean stocks can't go higher, but it does
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  Speaker 1: mean the type of very unusual environment we had in
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  Speaker 1: the back half of sixteen and most of seventeen were
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  Speaker 1: stocks just steadily one up day after day. That's probably done.
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  Speaker 1: And part of the reason for that is, for the
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  Speaker 1: first time in a while, we have a said that
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  Speaker 1: may tighten more than the market expects. RUS. We keep
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  Speaker 1: talking a lot about the record auctions of three and
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  Speaker 1: six months tea bells that are coming up. Are you
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  Speaker 1: going to be a buyer at these auctions? Well, right now,
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  Speaker 1: we've actually been using the last few weeks to back
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  Speaker 1: up in yields to actually add a bit of duration
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  Speaker 1: in the US. So I do think that yields are
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  Speaker 1: becoming more attractive. Wait, hold on one second, I'm sorry
• 8:51
  Speaker 1: to interrupt you, but you said duration, that's not short
• 8:53
  Speaker 1: term debt, that means like ten year and thirty year treasury.
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  Speaker 1: We haven't been going that far out of the curve.
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  Speaker 1: We've mostly been focusing on the five to ten year
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  Speaker 1: part of the curve. But I do think there are
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  Speaker 1: a couple of challenges, which means that right now we're
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  Speaker 1: waiting and seeing before adding much more. The first challenge
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  Speaker 1: is how much more we're going to see inflation accelerate.
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  Speaker 1: We've already seen a bit of that in the wage
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  Speaker 1: numbers in the January cp I. The second issue, which
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  Speaker 1: is a longer term one, is how effective is the
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  Speaker 1: market going to be and absorbing what will probably be
• 9:24
  Speaker 1: trillion dollar deficits, which of course create more supply in
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  Speaker 1: the coming years. You know, I have to wonder what's
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  Speaker 1: driving the upward direction of benchmark treasury yields. Is it
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  Speaker 1: just the deficit purely on its own? I mean, if
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  Speaker 1: you take inflation out of it, Let's say we enter
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  Speaker 1: a period where we have the same type of inflation,
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  Speaker 1: would we still see the yield rise that we've seen.
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  Speaker 1: I think a lot of it so far has been
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  Speaker 1: the yield apartment has been inflation. A matter of fact,
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  Speaker 1: if you go back and you look at where inflation
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  Speaker 1: expectations were back in September, when bond yields were much
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  Speaker 1: lower than they are, inflation expectations have moved up a
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  Speaker 1: great deal about fifty basis points uh And the good
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  Speaker 1: news there is that we've probably already seen much of
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  Speaker 1: that adjustment. So I do think the question going forward is,
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  Speaker 1: with an economy that's likely to grow faster than we've
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  Speaker 1: seen in the post crisis world, and we have more
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  Speaker 1: supply coming at a time when the economy is already
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  Speaker 1: already running close to capacity, is that going to nudge
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  Speaker 1: real or inflation just at rates higher? And I think
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  Speaker 1: that's one of the things that is the market a
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  Speaker 1: bit nervous right now, all right. So if that's the
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  Speaker 1: case or US and you do see this extended growth
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  Speaker 1: in the US economy, won't that benefit of emerging markets?
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  Speaker 1: It does benefit emerging markets a matter of fact, I
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  Speaker 1: think one of the places where you would expect to
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  Speaker 1: see the biggest benefits is an emerging market. So a
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  Speaker 1: lot of people when they think of the im equities,
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  Speaker 1: they think only about the dollar. The dollar is less
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  Speaker 1: relevant for e em equities, and it used to be
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  Speaker 1: they tend to run lower current account deficits, they have
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  Speaker 1: higher reserves. The think is determinant of e M stocks
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  Speaker 1: relative performance has been the strength of a global economy.
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  Speaker 1: So if you do believe as we do, that you're
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  Speaker 1: going into an environment where not only US growth is
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  Speaker 1: likely to be stronger, but the global economy is likely
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  Speaker 1: to be stronger, and that's an environment where i M
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  Speaker 1: stocks are likely to do well. So Russ you said,
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  Speaker 1: you said that you've been or you had been increasing
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  Speaker 1: a little bit of duration, particularly five year treasuries. What's
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  Speaker 1: what else have you done recently? What other sort of
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  Speaker 1: allocation shifts have you made that that you think are important? Well,
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  Speaker 1: the other thing we've added a bit to is our
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  Speaker 1: gold holdings. Gold is an interesting asset class, and a
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  Speaker 1: lot of people wrestle with it is that an asset
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  Speaker 1: class is a currency. I think the most important thing
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  Speaker 1: about gold is gold is a risk mitigant. Not always
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  Speaker 1: doesn't work in all circumstances. But going back to the
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  Speaker 1: original question, or we're going to see higher volatility than
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  Speaker 1: last year, I think we are. And if part of
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  Speaker 1: what you want to do is have a portfolio that
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  Speaker 1: can dampen that volatility create a little bit of a
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  Speaker 1: smoother ride that I think having a moderate amount of
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  Speaker 1: gold help. So that's been another place we've been adding
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  Speaker 1: to in recent weeks. So how much have you been
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  Speaker 1: adding there? And in contrast have you been reducing risk assets?
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  Speaker 1: What we've added. We haven't added that much to gold.
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  Speaker 1: We've added probably about roughly maybe basis points, So our
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  Speaker 1: goal position is somewhere around five percent. I think that's
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  Speaker 1: probably about right for the fund. Outside of gold, we
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  Speaker 1: have been looking for other places to add, uh, mostly
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  Speaker 1: in some of the higher quality companies in the US
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  Speaker 1: that we think can produce solid earnings growth regardless of
• 12:31
  Speaker 1: whether or not we see rates being a bit higher.
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  Speaker 1: Right now, what kind of companies technology? We have been
• 12:36
  Speaker 1: adding to technology? We do have a modest overweight to tech.
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  Speaker 1: Now again, I think with tech you've got to be
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  Speaker 1: careful as we all know their pockets of stretched valuations.
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  Speaker 1: We do think many of the large cap tech names
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  Speaker 1: do still offer good value at these levels. When you
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  Speaker 1: talk about stretched valuations, what kind of metric are you using,
• 12:57
  Speaker 1: what's the what's the comparison? Well, you know, this is
• 12:59
  Speaker 1: one of challenging thing there never is the one right
• 13:01
  Speaker 1: valuation metric, and I think right now, if you look
• 13:04
  Speaker 1: at US equities, by and large, the market is on
• 13:07
  Speaker 1: the expensive side. The good news is that if you
• 13:11
  Speaker 1: have an environment, which we believe we're in UH where
• 13:14
  Speaker 1: earnings growth is likely to be strong, then we believe
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  Speaker 1: these valuations are sustainable over the next year. Having said that,
• 13:20
  Speaker 1: I think one of the things a lot of investors
• 13:22
  Speaker 1: want to think about is adding to positions in non
• 13:25
  Speaker 1: US markets. Have already spoken about em out at Japan
• 13:29
  Speaker 1: as another market that we right now are very overweight.
• 13:32
  Speaker 1: And the reason this is important is that for most
• 13:34
  Speaker 1: of the last seven or eight years, investors have benefited
• 13:36
  Speaker 1: from a home country bias, most of their money in
• 13:39
  Speaker 1: the US. In a strengthening global economy, other economies are
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  Speaker 1: catching up and those markets are likely to also start
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  Speaker 1: to catch up with the US. Rest cos Stretch always
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  Speaker 1: wonderful to catch up with you, really interesting comments. Rest Costritch,
• 13:53
  Speaker 1: head of Asset Allocation for black Rocks Global Allocation Fund
• 13:56
  Speaker 1: and black Rock, the biggest asset management firm in the world.
• 14:18
  Speaker 1: New news from Washington, an attorney who worked for a
• 14:21
  Speaker 1: prominent law firm was charged with making false statements to
• 14:25
  Speaker 1: federal authorities as part of Special Council Robert Mueller's probe
• 14:29
  Speaker 1: of Russian collusion into the sixteen presidential election. Here to
• 14:34
  Speaker 1: help us make some sense of all this is Richard Kahn.
• 14:36
  Speaker 1: He is managing partner of Eurasia Advisors, and he joins
• 14:41
  Speaker 1: us in our eleven three oh studios. Richard, can you
• 14:45
  Speaker 1: tell us about you're knitting together the various public pieces
• 14:51
  Speaker 1: of information that we have received, the various indictments of
• 14:55
  Speaker 1: the thirteen efficient people previously having participated in some kind
• 15:02
  Speaker 1: of meddling in the US sixteen presidential election. And now uh,
• 15:07
  Speaker 1: this latest indictment charge rather of making false statements, is
• 15:13
  Speaker 1: having to do with Alex vanders Van charge with Lyne
• 15:16
  Speaker 1: to the FBI and Robert Mueller's office about his work
• 15:21
  Speaker 1: related to a report that was prepared for the former
• 15:26
  Speaker 1: president of Ukraine. Well, look, the first thing I would
• 15:31
  Speaker 1: comment on is you know that the Muller indictment and
• 15:34
  Speaker 1: these other other indictments speak to the breadth and scope
• 15:38
  Speaker 1: and capabilities of the Russian FSB in terms of their
• 15:41
  Speaker 1: ability and willingness to the successor to the KGB. Yes, correct,
• 15:46
  Speaker 1: their ability to mount what we might call asymmetrical attacks
• 15:50
  Speaker 1: to deal with either retaliatory types of situations or what
• 15:55
  Speaker 1: they view is defensive situations. That's how they would characterize it. Uh.
• 16:00
  Speaker 1: But they are extremely effective in uh locating people not
• 16:04
  Speaker 1: just in the United States, but elsewhere who are part
• 16:07
  Speaker 1: of whether governments or part of press or part of
• 16:10
  Speaker 1: institutions that can affect public influence. UH. And they are
• 16:15
  Speaker 1: extremely effective in their willingness to utilize those techniques to
• 16:20
  Speaker 1: try to see people elected to power that are favorable
• 16:24
  Speaker 1: to them. So I think, you know, the big benefit
• 16:27
  Speaker 1: of the Mueller indictment as I look at it is
• 16:30
  Speaker 1: it is uh. It brings to the forefront that there
• 16:34
  Speaker 1: is actually something that took place here. The analogy I
• 16:38
  Speaker 1: would draw is to say the tower is falling during
• 16:41
  Speaker 1: the September eleventh attack. In the mindset of the United States,
• 16:46
  Speaker 1: there was no question that that happened up until the
• 16:49
  Speaker 1: moment that we have them all our indictment, which I
• 16:51
  Speaker 1: really hope everyone will read. UH. There was some doubt
• 16:54
  Speaker 1: caused by potential co conspirators as to whether there was
• 16:57
  Speaker 1: actually a set of crimes that occurred. Now we know that,
• 17:01
  Speaker 1: and you have to be basically willing not to look
• 17:04
  Speaker 1: at the World Trade Center of tapes and and accept
• 17:07
  Speaker 1: them to take the view that there really is no
• 17:09
  Speaker 1: crime here at this stage. So it has changed dramatically
• 17:12
  Speaker 1: the ability of the narrative in the United States to
• 17:17
  Speaker 1: disagree on at least one fundamental set of crimes that
• 17:21
  Speaker 1: has occurred against our nation. So we're heading into mid
• 17:25
  Speaker 1: term elections. Reading over the indictment, do you think that
• 17:30
  Speaker 1: the Russian government will likely try to interfere again? And
• 17:32
  Speaker 1: do you think that the US government will be better
• 17:34
  Speaker 1: prepared to intervene. Oh, look, I'm not optimistic that our
• 17:39
  Speaker 1: current administration has any interest whatsoever in stopping that from happening. Um.
• 17:46
  Speaker 1: I think it's clear that the Trump and his team
• 17:48
  Speaker 1: were the beneficiaries of Russian interference that comes out of
• 17:52
  Speaker 1: the Mulla Report. I think they are in a conflicted position,
• 17:55
  Speaker 1: to say the least, in terms of wanting to see
• 17:57
  Speaker 1: that stop and and not see people that are going
• 17:59
  Speaker 1: to continue to help protect him elected to Congress in
• 18:02
  Speaker 1: the midterm elections. So I would look to, if you will,
• 18:05
  Speaker 1: our traditional resources and namely the head of our own government,
• 18:09
  Speaker 1: which as you know, leads our law enforcement agencies, as
• 18:12
  Speaker 1: essentially hopefully conflicted in this um and seeking to avoid
• 18:16
  Speaker 1: being drawn into it by by making statements you know
• 18:20
  Speaker 1: that he has not involved. I'm just pausing for a
• 18:25
  Speaker 1: second to try to figure out is this the case
• 18:27
  Speaker 1: of following the money and the power or is it
• 18:30
  Speaker 1: just about money at least for some of the people involved. Oh,
• 18:35
  Speaker 1: I think it's going to be a mixture. I would
• 18:38
  Speaker 1: expect that Mueller is going to come out with indictments
• 18:40
  Speaker 1: that layout uh for example, obviously the d n C
• 18:44
  Speaker 1: hacking um, as well as the link to wiki leaks.
• 18:49
  Speaker 1: I think he's going to lay out money trail issues
• 18:52
  Speaker 1: that deal with Trump and with his family that are
• 18:56
  Speaker 1: based on, for example, Don Junior statements in two thousand
• 18:59
  Speaker 1: eight that had disproportioned amount of money came from Russia,
• 19:02
  Speaker 1: you know, into the Trump organization. I think all of
• 19:05
  Speaker 1: those are going to weave together a picture that demonstrates
• 19:09
  Speaker 1: how it is that the Russians essentially were able to
• 19:13
  Speaker 1: recruit at a certain level agents to to work with
• 19:17
  Speaker 1: them in the United States. So you speak a lot
• 19:21
  Speaker 1: with people in Russia who are close to Russia, have
• 19:24
  Speaker 1: it involved with dealmaking cross borders. What's the perception from
• 19:28
  Speaker 1: that side? Well, look, let me start by saying, it
• 19:32
  Speaker 1: would be a huge mistake and tragedy if the lesson
• 19:35
  Speaker 1: out of all this is that Russians are bad. This,
• 19:38
  Speaker 1: this is not at all what we ought to be
• 19:40
  Speaker 1: thinking about. But this is clearly through a wrench in
• 19:42
  Speaker 1: the relationship between the US and Russia, regardless of what
• 19:45
  Speaker 1: the leadership does. Oh yes, no, and I'll get to that.
• 19:47
  Speaker 1: What I'm referring to is we all have neighbors and
• 19:50
  Speaker 1: friends who are Russian descent, for example here, or may
• 19:53
  Speaker 1: be the immigrants from Main fact be still living in Russia. Uh.
• 19:57
  Speaker 1: There's always a possibility that the FSB is involved in
• 20:00
  Speaker 1: some way in public life in our country or in others.
• 20:03
  Speaker 1: But that certainly doesn't mean that's simply by virtue of
• 20:06
  Speaker 1: being Russian that you're somehow implicated in this. I think
• 20:08
  Speaker 1: it's an important point for us all to keep in
• 20:10
  Speaker 1: mind less we go down the road that Trump wants
• 20:13
  Speaker 1: us to go down of divisiveness and of making assumptions
• 20:15
  Speaker 1: about people. But in terms of the number one, the
• 20:18
  Speaker 1: business climate is absolutely dead between Russia and the United States.
• 20:22
  Speaker 1: I think Russians themselves are well aware that their government
• 20:25
  Speaker 1: did this. Some of them take great pride in that. Uh.
• 20:29
  Speaker 1: Others are embarrassed and are very hopeful that over time
• 20:34
  Speaker 1: this regime and Russia will change. They're lad, for example,
• 20:37
  Speaker 1: by a gentleman named Navali who comes out with videos periodically,
• 20:40
  Speaker 1: uh demonstrating the corruption at the highest levels of the
• 20:43
  Speaker 1: Russian government. Uh. He just came out with one that
• 20:46
  Speaker 1: was relevant to this very investigation, showing ties between Russian
• 20:50
  Speaker 1: oligarchs and this investigation in other words, in the in
• 20:53
  Speaker 1: the both the hacking as well as in the uh
• 20:57
  Speaker 1: the election uh for you know, potential fraud itself. So UH.
• 21:01
  Speaker 1: And that was taken down off the Internet by the
• 21:03
  Speaker 1: Russians within days once they saw it was up there. Really,
• 21:07
  Speaker 1: you know, superb work by by Navali. But look, at
• 21:10
  Speaker 1: the end of the day, the Russians have their agenda,
• 21:13
  Speaker 1: and we obviously must as a first step, focus on defense,
• 21:19
  Speaker 1: meaning dealing with the likelihood which I would view is
• 21:24
  Speaker 1: virtually a certainty that the Russians are going to continue
• 21:27
  Speaker 1: these activities in terms of influencing our electorate as best
• 21:32
  Speaker 1: they can during the upcoming midterms. And simultaneously, we're going
• 21:37
  Speaker 1: to have to eventually get to the UH prosecution of
• 21:41
  Speaker 1: people who in the United States may have been involved
• 21:44
  Speaker 1: in this, if only to send the message worldwide that
• 21:47
  Speaker 1: if you cooperate with the Russians and these activities, there
• 21:50
  Speaker 1: will be a day of reckoning. That is an important
• 21:53
  Speaker 1: thing to do to undermine their infiltration of these different organizations.
• 21:56
  Speaker 1: Richard Khn, thank you so much for being with us.
• 21:58
  Speaker 1: Richard Khan, managing partner of Eurasia Advisors, based in New York.
• 22:16
  Speaker 1: The Petro is going on sale today. You may not
• 22:19
  Speaker 1: have heard of it. It may just be the first
• 22:22
  Speaker 1: sovereign cryptocurrency and it is being issued by Venezuela. Is
• 22:27
  Speaker 1: this a game changer or simply a stunt to try
• 22:31
  Speaker 1: to attract some more money? Here to talk about that
• 22:34
  Speaker 1: and what's been going on in the cryptocurrency worlds. Kris Perniski,
• 22:38
  Speaker 1: partner and a placeholder also advisor to our investment management.
• 22:42
  Speaker 1: He joins us here in our Bloomberg eleven three oh studios. Chris,
• 22:46
  Speaker 1: thank you so much for coming back. So what do
• 22:48
  Speaker 1: you make of Petro? I would go with the latter
• 22:51
  Speaker 1: assessment in terms of this is a stunt um and
• 22:55
  Speaker 1: I don't think of it as a cryptocurrency um. And
• 22:58
  Speaker 1: the reason I say that is cryptocurrencies need to be
• 23:01
  Speaker 1: decentralized in the infrastructure that supports them, in the way
• 23:04
  Speaker 1: in which the code is curated, in the way in
• 23:06
  Speaker 1: which the community is managed. And the petro is really
• 23:10
  Speaker 1: a top down, hierarchically controlled asset, and it's much more
• 23:14
  Speaker 1: akin to a new way to tokenize oil. So to
• 23:19
  Speaker 1: use an analogy here, when the first gold ETFs came
• 23:22
  Speaker 1: out in the early two thousands, that didn't create a
• 23:24
  Speaker 1: new asset class, right, That was just a new rapper
• 23:27
  Speaker 1: or a new wrapper around gold specifically, but the gold
• 23:30
  Speaker 1: asset class remained intact, and that's what drove the value.
• 23:33
  Speaker 1: With the petro, we really have a new wrapper around
• 23:36
  Speaker 1: oil um and that's not creating a new asset class,
• 23:40
  Speaker 1: which is why I wouldn't put it in the bucket
• 23:41
  Speaker 1: of crypto assets with cryptocurrencies, crypto commodities, and crypto tokens.
• 23:45
  Speaker 1: But does it set some sort of precedent for sovereign
• 23:48
  Speaker 1: issuance of digital tokens? That it does, and I think
• 23:53
  Speaker 1: that's the key takeaway here. Um, these are things I
• 23:56
  Speaker 1: call crypto fiat um in terms of you're using the
• 23:59
  Speaker 1: under long technology, and this is very common with disruptive
• 24:02
  Speaker 1: innovations where you have a new technology come online that's
• 24:06
  Speaker 1: highly disruptive, and UH incumbents will take parts of that
• 24:10
  Speaker 1: technology and use it to make their existing services better, faster, cheaper.
• 24:15
  Speaker 1: And I think this is an example of that, and
• 24:17
  Speaker 1: we'll see a lot more of this from other nation
• 24:19
  Speaker 1: states in the years to come. Chris, maybe just some
• 24:22
  Speaker 1: definitions to help me hear what is a cryptocurrency in
• 24:26
  Speaker 1: your mind? So I think of a cryptocurrency as a
• 24:31
  Speaker 1: asset that is tracked using an immutable and distributed ledger
• 24:37
  Speaker 1: with code that is open source and community defined. All right,
• 24:42
  Speaker 1: does that differ from a crypto token? So this is
• 24:45
  Speaker 1: where we get into my taxonomy, So yes, it would differ.
• 24:49
  Speaker 1: Um if we think of the asset class as a
• 24:51
  Speaker 1: whole as crypto assets. There are right now three maybe
• 24:55
  Speaker 1: four verticals within that asset class. So there's cryptocurrencies, which
• 24:59
  Speaker 1: are means of exchange in store value unit account. But
• 25:01
  Speaker 1: using that stack, there's crypto commodities, which are really taking
• 25:05
  Speaker 1: all of our physical world commodities but applying that to
• 25:09
  Speaker 1: digital world commodities. So compute or storage or GPU flops
• 25:13
  Speaker 1: or whatever it may be, and the PU what flops,
• 25:16
  Speaker 1: So like UH, that's a metric for a graphical processing unit.
• 25:21
  Speaker 1: Flops is the number of floating point calculations that can
• 25:23
  Speaker 1: make in a second UM. And then crypto tokens if
• 25:27
  Speaker 1: we use the analogy of an economy bringing together UH,
• 25:31
  Speaker 1: currencies and commodities to create finished goods and services, I
• 25:34
  Speaker 1: see crypto tokens as the consumer facing applications that are
• 25:38
  Speaker 1: provisioning these finished digital services to consumers. Okay, what is
• 25:42
  Speaker 1: an initial coin offering? What is that? How does that
• 25:45
  Speaker 1: connect with all this? And initial coin offering is one
• 25:49
  Speaker 1: means of many to create a liquidity event for a
• 25:52
  Speaker 1: crypto asset UM. So something that concerns me is I
• 25:55
  Speaker 1: see people conflating I c O or initial coin offering
• 25:59
  Speaker 1: with crypto assets. Probably that's that's not the right connection
• 26:02
  Speaker 1: to make. It's one mechanism, one liquidity event. There are
• 26:06
  Speaker 1: many other, many others. We started this whole space with mining,
• 26:10
  Speaker 1: right where you're organically minting and issuing the crypto asset
• 26:13
  Speaker 1: as a function of resources provided the network. There are
• 26:16
  Speaker 1: things like air drops were actually just give it away
• 26:19
  Speaker 1: to try and seed a user and holder base UM,
• 26:22
  Speaker 1: and there are all kinds of evolving things. There's auctions
• 26:25
  Speaker 1: which we were talking about before, which is, you know,
• 26:28
  Speaker 1: maybe a more responsible variant of an I c O UM,
• 26:31
  Speaker 1: but really important to not conflate I c O with
• 26:34
  Speaker 1: crypto assets. Probably, So, Chris, what your firm does is
• 26:38
  Speaker 1: supply venture capital to firms in the crypto space. Correct.
• 26:43
  Speaker 1: I'm trying to get a sense of where the opportunities
• 26:46
  Speaker 1: lie at this point. What types of companies look promising
• 26:50
  Speaker 1: to you, given the fact that there has been at
• 26:52
  Speaker 1: this rush of cash into a lot of companies almost indiscriminately. Uh,
• 26:57
  Speaker 1: where is the value what kinds of companies for us
• 27:00
  Speaker 1: UM as a venture capital firm, Right, we're focused ten
• 27:03
  Speaker 1: years out, that's our our time horizon. And when we're
• 27:07
  Speaker 1: looking at at teams, they're not companies, right, Their decentralized
• 27:11
  Speaker 1: information networks and centifized with the token, and so we're
• 27:14
  Speaker 1: looking at the cryptoeconomics, the government structure, all of these
• 27:18
  Speaker 1: things that we think will lay a foundation for something
• 27:20
  Speaker 1: to provide utility and value five ten years out. So
• 27:24
  Speaker 1: you're not giving money to a company or uh, you're
• 27:28
  Speaker 1: you're trying to help spur activity on decentralized platforms. Is
• 27:33
  Speaker 1: that correct? Yes, So a way to think of it
• 27:36
  Speaker 1: UM is we are funding teams early on that want
• 27:39
  Speaker 1: to build future protocols, future networks UM and so they
• 27:43
  Speaker 1: can raise say a million or two million dollars, not
• 27:47
  Speaker 1: a massive amount, right, but enough to fund say a
• 27:50
  Speaker 1: year or two years of development to then have a
• 27:52
  Speaker 1: working protocol two then more responsibly be able to launch
• 27:56
  Speaker 1: a cryptosity. Isn't this really dangerous just because there's a
• 27:59
  Speaker 1: lot of people expect there to be some massive shakeout
• 28:02
  Speaker 1: where there's one winner in this space or three winners
• 28:04
  Speaker 1: that take all We think UM, this structure is actually
• 28:09
  Speaker 1: the most responsible approach to the market. UM. By having
• 28:12
  Speaker 1: a ten year fund, we inject time diversity both into
• 28:15
  Speaker 1: the way our thesis involved and valuations involved. Right if
• 28:19
  Speaker 1: we have a massive valuation reset, we can recover from
• 28:22
  Speaker 1: that because we're not fully allocated UM. And then in
• 28:25
  Speaker 1: terms of you know, picking our spots and whether we're
• 28:28
  Speaker 1: going to have a handful of winners or a vast
• 28:32
  Speaker 1: proliferation of winners, that's to be seen UM for us
• 28:36
  Speaker 1: as a venture firm. Historically, venture firms can return their
• 28:39
  Speaker 1: fund based on one big home run, right that goes
• 28:42
  Speaker 1: a hundred x or goes a thousand x UM so
• 28:45
  Speaker 1: that is one option, or we could have a number
• 28:46
  Speaker 1: of base hits that get us there. The future is
• 28:49
  Speaker 1: to be seen, but we have designed this structure to
• 28:52
  Speaker 1: really support the entrepreneurs and developers behind these networks and
• 28:56
  Speaker 1: allow them to responsibly build over the long term. The
• 29:01
  Speaker 1: governor of the Financial Supervisory Service in South Korea has
• 29:06
  Speaker 1: said that the government will quote support cryptocurrency trading if
• 29:10
  Speaker 1: normal transactions are made. They already have a ban on
• 29:15
  Speaker 1: anonymous trading that took place at the end of January.
• 29:19
  Speaker 1: What do you believe will happen as a result of this.
• 29:23
  Speaker 1: I think that we're going to see a lot of
• 29:24
  Speaker 1: learnings from the equity markets and the traditional capital markets
• 29:28
  Speaker 1: UM about best practices brought to crypto UM. And that's fine,
• 29:31
  Speaker 1: that's a good thing, right. We need to better protect
• 29:34
  Speaker 1: consumers UM, and so I just see South Korea UM
• 29:39
  Speaker 1: as leading the charge in that Japan has also been
• 29:42
  Speaker 1: active and that you as active UM in terms of
• 29:45
  Speaker 1: classifying bitcoin as a foreign currency. I think that was
• 29:48
  Speaker 1: in UM, but we're going to see more and more
• 29:51
  Speaker 1: conversation around this. I'm just glad that the fear and
• 29:54
  Speaker 1: certainty and doubt from mid December has been clarified, and
• 29:58
  Speaker 1: it's clear. South Korea isn't banning cryptocurrency trading, they're just
• 30:01
  Speaker 1: better regulating it. So if you want to learn about
• 30:03
  Speaker 1: if you want to be in the forefront of cryptocurrencies,
• 30:06
  Speaker 1: just take a trip to South Korea. That's one of
• 30:08
  Speaker 1: my plans. All right, Well done, Thanks very much for
• 30:11
  Speaker 1: being with us. Chris Pernisky. He is a partner placeholder
• 30:14
  Speaker 1: advisor to ARC Investment Management. You can be followed on
• 30:18
  Speaker 1: Twitter at a ce Bernisky. Thanks for listening to the
• 30:23
  Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
• 30:26
  Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
• 30:30
  Speaker 1: you prefer. I'm pim Fox. I'm on Twitter at pim Fox.
• 30:35
  Speaker 1: I'm on Twitter at Lisa Abramo. It's one before the podcast.
• 30:38
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.