Latest / Bloomberg Intelligence / Marc Rowan, First Republic, Stagflation, and AI (Podcast)

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Marc Rowan, First Republic, Stagflation, and AI (Podcast) · Bloomberg Intelligence

• 0:00
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
• 0:04
  Speaker 1: my co host Matt Miller.
• 0:05
  Speaker 2: Every business day we bring you interviews from CEOs, market pros,
• 0:09
  Speaker 2: and Bloomberg experts, along with essential market moven news.
• 0:14
  Speaker 1: Find the Bloomberg Markets podcast called Apple Podcasts or wherever
• 0:17
  Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
• 0:21
  Speaker 3: I would love to be a fly on the wall
• 0:23
  Speaker 3: through your weekend because it's no secret that private equity
• 0:26
  Speaker 3: interest has been in and around the regional banks. Were
• 0:29
  Speaker 3: you interested at all in buying First Republic assets?
• 0:31
  Speaker 4: So assets? Yet?
• 0:32
  Speaker 5: We're always interested in buying assets, but not in the
• 0:35
  Speaker 5: banking business. We like others. We're not banks, we don't
• 0:38
  Speaker 5: intend to be banks. We don't buy banks. But if
• 0:40
  Speaker 5: we can be supportive of restructuring of the banking system
• 0:43
  Speaker 5: through the purchase of assets, absolutely.
• 0:46
  Speaker 3: Now I want you to look beyond even just today
• 0:49
  Speaker 3: because we have the First Republic sale to JP Morgan.
• 0:52
  Speaker 3: But you have Jamie Dimond saying that the banking crisis
• 0:54
  Speaker 3: is almost over. Do you see a whole second wave
• 0:58
  Speaker 3: of this crisis coming?
• 1:00
  Speaker 5: I think part one of the banking crisis is over
• 1:02
  Speaker 5: and I would never disagree with Jamie because this is
• 1:04
  Speaker 5: his job and he lives it. But if my observation
• 1:07
  Speaker 5: is what's happened so far totally predictable, marked to market
• 1:11
  Speaker 5: losses and treasury security is well known to everyone, structure
• 1:14
  Speaker 5: of deposits above minimum guarantees well known to everyone. Are
• 1:18
  Speaker 5: we surprised we shouldn't be. Everyone knew what was happening here.
• 1:23
  Speaker 5: Rising rates created the stress. The interesting thing to me
• 1:27
  Speaker 5: is not whether these street banks failed, it's what's the
• 1:30
  Speaker 5: business of regional banking going forward?
• 1:32
  Speaker 4: Think about it.
• 1:33
  Speaker 5: Forty two billion left SVB in four hours without a line.
• 1:37
  Speaker 4: So you're now the CEO of a big regional bank.
• 1:40
  Speaker 5: Your cost of funds is up, your regulatory costs are up.
• 1:45
  Speaker 4: Can you lend money?
• 1:46
  Speaker 5: Or is your business model going to need to change,
• 1:48
  Speaker 5: going to need to evolve. I think that's what's interesting.
• 1:52
  Speaker 5: And I think we have a second wave in commercial
• 1:53
  Speaker 5: real estate.
• 1:54
  Speaker 3: The second wave in commercial real estate. Do you think
• 1:57
  Speaker 3: that that wave pertains to the banking system at large
• 1:59
  Speaker 3: or a broader set of investors?
• 2:02
  Speaker 4: I think it is.
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  Speaker 5: Look, there are lots of people own real estate across
• 2:05
  Speaker 5: the world, across the economy. Investors who own real estate,
• 2:09
  Speaker 5: suffer losses. Investors suffer losses all the time growth stocks
• 2:12
  Speaker 5: go down, investor suffer losses. That to me is not
• 2:15
  Speaker 5: systemic in any way. A banking system which has government
• 2:19
  Speaker 5: guarantees where people put their money in a trust relationship,
• 2:23
  Speaker 5: if they suffer significant losses, that's what causes concern, and
• 2:27
  Speaker 5: that's what we have here. It won't be systemic in
• 2:29
  Speaker 5: my view, but it'll be concentrated. Regional banks once again
• 2:33
  Speaker 5: are the primary lenders to many of our regional real
• 2:37
  Speaker 5: estate issues.
• 2:38
  Speaker 3: Now, we just saw this morning the big get bigger,
• 2:41
  Speaker 3: JP Morgan buying a massive regional bank. But what happens
• 2:45
  Speaker 3: to the banking system moving forward? You mentioned there will
• 2:47
  Speaker 3: be changes. What does the new banking system look like
• 2:51
  Speaker 3: coming out of these troubles.
• 2:53
  Speaker 5: I think it's already changed. We have yet to adjust
• 2:56
  Speaker 5: to the changes of two thousand and eight. So if
• 2:58
  Speaker 5: you think about two thousand and eight and Dodd Frank,
• 3:00
  Speaker 5: ostensibly the legislation was to restrict the exposure of the
• 3:04
  Speaker 5: US economy to large, systemically important banks. By the way
• 3:08
  Speaker 5: it worked, banks are less than twenty percent of all
• 3:11
  Speaker 5: lending in the US. The new banks, by the way,
• 3:14
  Speaker 5: are investors. Everyone who's at this conference today, in some
• 3:17
  Speaker 5: way or another participates in the banking system. But if
• 3:20
  Speaker 5: you ask about banking proper, I do think in the
• 3:22
  Speaker 5: short term we're going to see the big get bigger.
• 3:25
  Speaker 5: People fly to safety when you have any.
• 3:27
  Speaker 4: Sort of crisis.
• 3:28
  Speaker 5: JP Morgan is positioned to step into fixed safe first
• 3:31
  Speaker 5: Republic should not be surprised. But regional banks are a
• 3:36
  Speaker 5: very attractive political entity.
• 3:38
  Speaker 4: Everyone has a regional bank.
• 3:40
  Speaker 5: It'll be interesting to see how the system deals with
• 3:43
  Speaker 5: the fundamental issues facing regional banking.
• 3:45
  Speaker 3: Yeah, well, you mentioned banking system has already been our
• 3:48
  Speaker 3: only twenty percent of the country's lending here, So what
• 3:51
  Speaker 3: does that mean for who will and will not be
• 3:54
  Speaker 3: able to have access to credit in the future.
• 3:58
  Speaker 5: Look, we are I'll say it at a country level,
• 4:01
  Speaker 5: we are fifty percent of the world's capital. We are
• 4:04
  Speaker 5: Our businesses benefit, our government benefit, our consumers benefit. We
• 4:08
  Speaker 5: already have unrestricted assets to credit. Sometimes it's more expensive,
• 4:12
  Speaker 5: sometimes it's less expensive. Go anywhere else in the world.
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  Speaker 5: We are the envy of the world. No one has
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  Speaker 5: what we have, So I don't know that it gets
• 4:20
  Speaker 5: to who has access to credit. The democratization of credit
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  Speaker 5: through the investor investment marketplace has already created unparalleled access.
• 4:28
  Speaker 3: Now, if you think about the commercial real estate issues
• 4:31
  Speaker 3: that we've been talking about, I'm really wondering. I know,
• 4:33
  Speaker 3: over at Apollo, you guys look at things security by security,
• 4:35
  Speaker 3: sometimes building by building. What are the office vacancies telling
• 4:40
  Speaker 3: you about the state of the commercial real estate market.
• 4:43
  Speaker 5: It's a bad day to be an office owner in
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  Speaker 5: San Francisco and Chicago.
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  Speaker 4: I mean, we could get more.
• 4:47
  Speaker 5: Granular than that, but I step back and again try
• 4:50
  Speaker 5: to put it in big picture. Every piece of real
• 4:52
  Speaker 5: estate everywhere in the world that was purchased pre the
• 4:55
  Speaker 5: run up in interest rates as a result of the
• 4:57
  Speaker 5: change in interest rates is now worthless.
• 5:01
  Speaker 4: We've had such a move in.
• 5:02
  Speaker 5: Interest rates and real estate is an interest rate sensitive activity,
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  Speaker 5: that everything is worthless. It does not mean it won't
• 5:08
  Speaker 5: come back, It does not mean it won't ultimately be
• 5:10
  Speaker 5: a good investment. But in the short term we have
• 5:12
  Speaker 5: significant dislocation. But we also have this change in how
• 5:15
  Speaker 5: people use real estate. Office being the most visible, we
• 5:19
  Speaker 5: are going to see losses.
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  Speaker 3: Now I'm sitting here in conversation with Mark Rowan, the
• 5:23
  Speaker 3: CEO of Apollop Global Management, now, Mark, you mentioned this
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  Speaker 3: kind of pain that the office system is still yet
• 5:31
  Speaker 3: to see the office buildings and the commercial real estate.
• 5:34
  Speaker 3: Now what does that mean not just for investors in
• 5:37
  Speaker 3: commercial real estate, but also investors in the regional banks
• 5:40
  Speaker 3: as a derivative effect. Do you think the market is
• 5:42
  Speaker 3: still under counting how bad things can get?
• 5:47
  Speaker 5: I think the market has yet to ask the long
• 5:49
  Speaker 5: term question. Right now, the question being asked is is
• 5:52
  Speaker 5: the bank safe? Will there be a run on a bank?
• 5:54
  Speaker 5: Will it survive?
• 5:55
  Speaker 4: Safety?
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  Speaker 5: I believe has been our primary focus. But we've already
• 5:59
  Speaker 5: seen and the government can make this safe with the
• 6:02
  Speaker 5: stroke of a pen. I believe the banking system to
• 6:05
  Speaker 5: be safe. That is different than what is the business
• 6:08
  Speaker 5: of a regional bank going forward? If you don't know
• 6:10
  Speaker 5: how sticky your deposits are, if your cost of funds
• 6:13
  Speaker 5: is high, your cost of operations is high, what is.
• 6:16
  Speaker 4: Your business model going forward?
• 6:18
  Speaker 5: Like every other industry that has had to adjust to technology,
• 6:21
  Speaker 5: regional banking is going to have to adjust to technology.
• 6:24
  Speaker 5: I'll be shocked if five years from now the business
• 6:26
  Speaker 5: model of a regional bank looks like what they do today.
• 6:30
  Speaker 3: Now, let's take a big step back for a second.
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  Speaker 3: Because there's this big understanding in the industry that you're
• 6:35
  Speaker 3: in that you can't unwind twelve years of easy money
• 6:39
  Speaker 3: so easily. And you saw a lot of hiccups already,
• 6:41
  Speaker 3: the LDI crisis in the UK now, the regional banking crisis,
• 6:45
  Speaker 3: the crypto crash. What else is still yet to break.
• 6:51
  Speaker 5: It's hard to be a predictor of what else is
• 6:53
  Speaker 5: to break. But I look at places in the world
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  Speaker 5: where we have mismatches between liquid asset liquid liabilities, like
• 7:01
  Speaker 5: a bank borrow short and len long. We have other
• 7:04
  Speaker 5: places in the world where that same build up has
• 7:06
  Speaker 5: taken place ten years twelve years of easy money forced
• 7:10
  Speaker 5: people to do unnatural things to look for yield and
• 7:13
  Speaker 5: to look for rate of return. LDI was the first
• 7:15
  Speaker 5: time systemically the question was called. LDI was nothing more
• 7:20
  Speaker 5: than a misplaced expectation in the part of UK institutions
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  Speaker 5: that public securities were liquid. They found out they're only
• 7:27
  Speaker 5: liquid on the way up, they're not liquid on the
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  Speaker 5: way down. We have that same in certain open end
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  Speaker 5: of mutual funds. We've seen it in ETFs in point
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  Speaker 5: of stress. We've seen it even in some private vehicles
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  Speaker 5: in point of stress. So this is not a public
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  Speaker 5: or private issue. This is a mismatch between the underlying
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  Speaker 5: liquidity of assets and the structure of liabilities.
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  Speaker 3: Well, speaking of the public markets, there's some question about
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  Speaker 3: how well the public markets have actually held up in
• 7:50
  Speaker 3: the base of some of this. You know, how safe
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  Speaker 3: can you feel in the fact that you have liquidity.
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  Speaker 5: Look, I stepped and I think about what's happened in
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  Speaker 5: the world and the difference between public and private. We
• 8:04
  Speaker 5: used to think public was safe and private was risky.
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  Speaker 5: We now know public can be risky as well. We
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  Speaker 5: now have found out that private can be both safe
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  Speaker 5: and risky. What we're talking about is differing degrees of liquidity.
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  Speaker 5: What we have elected to do in our industry and
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  Speaker 5: certainly for.
• 8:19
  Speaker 4: Apollo, is we focus on private.
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  Speaker 5: And the reason we focus on private is we don't
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  Speaker 5: believe there is sustainable alpha excess return in publicly traded markets,
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  Speaker 5: particularly in publicly traded debt markets. Therefore, if investors come
• 8:32
  Speaker 5: to us for excess return, we need to step away
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  Speaker 5: from daily liquid markets. Fortunately, there's plenty.
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  Speaker 4: For us to do now.
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  Speaker 3: Just this morning there was news about arrival of Yours.
• 8:44
  Speaker 3: Blackstone facing another wave of redemptions when it comes to
• 8:47
  Speaker 3: its semi liquid vehicle. When it comes to the real
• 8:49
  Speaker 3: estate market, you know, a lot of big private credit funds,
• 8:53
  Speaker 3: big private equity funds are trying to court retail investors.
• 8:56
  Speaker 3: When you look at some of the hiccups that some
• 8:58
  Speaker 3: of the current funds are facing in the market, here
• 9:01
  Speaker 3: some of the challenges when it comes to the investors
• 9:03
  Speaker 3: ask for their money back with the for long dated investments.
• 9:08
  Speaker 3: You're on the other side. What does this tell you
• 9:10
  Speaker 3: about the direction of travel? Is investor confidence in retail
• 9:14
  Speaker 3: semi liquid funds becoming dented in disenvironment?
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  Speaker 5: I don't know about dented. First, I think Blackstone is
• 9:21
  Speaker 5: doing exactly the right thing. I think the industry owes
• 9:24
  Speaker 5: them a debt of gratitude because they are teaching investors
• 9:27
  Speaker 5: that alternatives are not an ATM. Now they're in an
• 9:31
  Speaker 5: asset class that is under stressed because people are concerned
• 9:34
  Speaker 5: about real estate valuations, and they are redeeming because they
• 9:37
  Speaker 5: think valuations are headed down. Blackstone is behaving responsibly and
• 9:41
  Speaker 5: doing exactly what they are supposed to do and what
• 9:44
  Speaker 5: these vehicles are designed to do. But I look forward
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  Speaker 5: and I think about the structure of our business. I
• 9:50
  Speaker 5: think retail investors high net worth are going to be
• 9:53
  Speaker 5: fifty percent allocated to alternatives in the next five years. No, fifty,
• 9:57
  Speaker 5: but not alternatives private equity and hedge funds. Alternatives are
• 10:01
  Speaker 5: just alternatives to publicly traded.
• 10:03
  Speaker 4: Stocks and bonds. They go from double A to equity.
• 10:07
  Speaker 3: What do you say to people who criticize the private
• 10:10
  Speaker 3: markets the credit markets in particular, is masking some of
• 10:13
  Speaker 3: the risks that would be in public credit markets.
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  Speaker 5: I think the easiest thing to value as a bond
• 10:18
  Speaker 5: bonds are cash flows, intrat rate and duration, and bonds
• 10:22
  Speaker 5: adjusts quickly. The fact is, better risk reward has been
• 10:27
  Speaker 5: available in private markets than in public markets for much
• 10:31
  Speaker 5: of the last ten to twelve years. Everyone in our
• 10:34
  Speaker 5: industry has picked a different segment. The segment we've picked
• 10:37
  Speaker 5: is private investment grade. Private investment grade is something people
• 10:41
  Speaker 5: haven't even contemplated. Think about what banks used to do,
• 10:44
  Speaker 5: what ge capital used to do. That's the business we've built,
• 10:48
  Speaker 5: and at four hundred billion of private credit, mostly investment grade, unfortunately,
• 10:53
  Speaker 5: we're not relevant. It sounds like a lot four hundred billion,
• 10:56
  Speaker 5: but we're talking about a forty trillion dollar market.
• 10:58
  Speaker 4: We have a long way to go.
• 11:00
  Speaker 3: Hundred billion, but getting bigger as well. There's a lot
• 11:03
  Speaker 3: of discussion in Washington, for example, about regulating non banks.
• 11:07
  Speaker 3: Do you think that you will face tighter regulation as
• 11:10
  Speaker 3: things to procure?
• 11:11
  Speaker 5: I think we all face tighter regulation. That is clearly
• 11:14
  Speaker 5: the direction of travel. Ultimately people look for, is the
• 11:18
  Speaker 5: information available? Yes, the information is already public. Are we
• 11:22
  Speaker 5: mismatched in terms of borrowing short and lending long? No,
• 11:25
  Speaker 5: We're actually countercyclical, and the vast majority of institutions countercyclical
• 11:30
  Speaker 5: as well.
• 11:30
  Speaker 4: Are we levered No? Are we concentrated?
• 11:33
  Speaker 6: No?
• 11:34
  Speaker 4: Are we a diversifier for the economy? Yes.
• 11:37
  Speaker 5: At the end of the day, the US financial system
• 11:40
  Speaker 5: is the envy of the world.
• 11:41
  Speaker 4: We are fifty percent of all the action everywhere in
• 11:43
  Speaker 4: the world, and it's a result of.
• 11:46
  Speaker 5: Decisions made along the way to allow investors to be
• 11:49
  Speaker 5: suppliers of credit.
• 11:50
  Speaker 3: Well, I think that's the other part of the argument here.
• 11:52
  Speaker 4: If not you, then who that's the choice?
• 11:55
  Speaker 5: The US economy, the world economy will need a certain
• 11:57
  Speaker 5: amount of credit, and the choices are you will allow
• 12:00
  Speaker 5: it to be supplied exclusively by the banking system, backed
• 12:04
  Speaker 5: by government guarantees, as we have in many foreign countries,
• 12:07
  Speaker 5: or do we allow investors broadly defined retail investors, high
• 12:11
  Speaker 5: net worth investors, pension investors, institutions to participate and get
• 12:15
  Speaker 5: diversification and socialization of risk. Investors for the most part,
• 12:19
  Speaker 5: are prepared for things that go up and down, things.
• 12:22
  Speaker 3: That go up and down. You had mentioned kind of
• 12:24
  Speaker 3: the benefits of the private markets in terms of return
• 12:26
  Speaker 3: opportunities here in the credit markets. I'm curious about what
• 12:30
  Speaker 3: you think about the current state of investment grade when
• 12:33
  Speaker 3: you look at the public markets. There has been a
• 12:35
  Speaker 3: lot of discussion about how eerily calm that spreads have
• 12:39
  Speaker 3: been behaving in the face of what many feel is
• 12:42
  Speaker 3: a pending recession. Do you think that there's more risks
• 12:45
  Speaker 3: under the surface when you look at public credit.
• 12:48
  Speaker 5: I don't think there's more risks under the surface. I
• 12:50
  Speaker 5: think that you have a confused market. You have lots
• 12:53
  Speaker 5: of talk about recession, and you have a yield curve
• 12:55
  Speaker 5: the shape of which is.
• 12:56
  Speaker 4: Up and then down.
• 12:58
  Speaker 5: So it does not surprise me that investors who are
• 13:00
  Speaker 5: being offered yields today of a certain magnitude are active
• 13:04
  Speaker 5: in locking them in, especially after a decade of very
• 13:08
  Speaker 5: low rates.
• 13:09
  Speaker 3: Well, you've mentioned also I've heard you say a few
• 13:10
  Speaker 3: times that kind of the era equity is eroding here.
• 13:14
  Speaker 3: Does that make a bigger kind of secular push to
• 13:16
  Speaker 3: credit in general?
• 13:18
  Speaker 4: I think it does.
• 13:19
  Speaker 5: I think this is an amazing entry point for credit,
• 13:21
  Speaker 5: not just because we're in it, but because of what's transpired.
• 13:24
  Speaker 5: Equity we printed eight trillion dollars from two thousand and
• 13:28
  Speaker 5: eight until twenty twenty two. Exactly what was supposed to
• 13:31
  Speaker 5: happen happened. Now that we've started withdrawing it. Entry point
• 13:35
  Speaker 5: for credit is fabulous. Has adjusted very quickly. Liquidity has eroded,
• 13:41
  Speaker 5: banking crisis has further roded it. We have a unique
• 13:44
  Speaker 5: entry point for credit. It will not always be this good.
• 13:47
  Speaker 5: Equity has adjusted somewhat, but not nearly as much as
• 13:50
  Speaker 5: credit now.
• 13:51
  Speaker 3: Also, I mean we've seen from the banking system that
• 13:54
  Speaker 3: what was safe yesterday can be rated as junk tomorrow.
• 13:57
  Speaker 3: Do not believe that we would be facing the greater
• 14:00
  Speaker 3: wave of downgrades.
• 14:01
  Speaker 4: I think all pricement, there's no doubt.
• 14:04
  Speaker 5: But if you are concerned about the direction of travel,
• 14:07
  Speaker 5: if there's uncertainty, I would almost always rather be top
• 14:10
  Speaker 5: of the capital structure, senior secured.
• 14:12
  Speaker 4: You tend to get paid back.
• 14:14
  Speaker 5: So for our shop, the bet we've made has been
• 14:17
  Speaker 5: on private investment grade.
• 14:19
  Speaker 4: I like our hand.
• 14:21
  Speaker 5: I would rather play our hand than anyone else's hand
• 14:23
  Speaker 5: in our industry.
• 14:23
  Speaker 3: Now, I'm kind of curious about Apollo's plans throughout the
• 14:26
  Speaker 3: rest of this year. You're looking across Wall Street, You're
• 14:28
  Speaker 3: seeing a lot of people either slimming back on hiring
• 14:32
  Speaker 3: or flat out letting go of thousands of staff. What
• 14:35
  Speaker 3: opportunity do you see there? Given Apollo has already tremendously
• 14:38
  Speaker 3: added to have headgn in the.
• 14:39
  Speaker 4: Last we will continue to grow.
• 14:41
  Speaker 5: We've already said our business will be up in the
• 14:43
  Speaker 5: asset management side. We've told the street better than twenty
• 14:46
  Speaker 5: five percent this year, on the retirement services side, better
• 14:49
  Speaker 5: than twenty percent this year. And that's with an overlay
• 14:52
  Speaker 5: to our strategy of what we call no new toys.
• 14:56
  Speaker 5: And the reason no new toys is not to add
• 14:58
  Speaker 5: new things. The upside from simply executing the business plan
• 15:02
  Speaker 5: that's in front of us is so high that the
• 15:05
  Speaker 5: price of distraction is just very hard to contemplate. So
• 15:09
  Speaker 5: I think twenty three for us, we will grow, we
• 15:12
  Speaker 5: will add team, but we will do it in the
• 15:14
  Speaker 5: context of the envelope of our business that exists and
• 15:18
  Speaker 5: no new toys.
• 15:18
  Speaker 3: Are you finding it very easy these days to hire
• 15:21
  Speaker 3: from the banks or even the technology companies that are
• 15:24
  Speaker 3: slums back.
• 15:25
  Speaker 4: It's never easy to hire. This is always about culture.
• 15:28
  Speaker 4: But we have.
• 15:29
  Speaker 5: Grown the team tremendously and in fact is the limitter
• 15:32
  Speaker 5: of our growth. At the end of the day, we
• 15:35
  Speaker 5: provide our client's judgment, and that judgment comes from people
• 15:38
  Speaker 5: being at Apollo for a long time and integrating into
• 15:41
  Speaker 5: our culture. We can only grow as fast as we
• 15:44
  Speaker 5: can culturally absorb people.
• 15:46
  Speaker 4: There's a natural hedge.
• 15:47
  Speaker 5: If you will, or a natural limitter to our growth,
• 15:51
  Speaker 5: and we watch that balance very very carefully.
• 15:53
  Speaker 3: Before I let you go, before Wednesday's big FED day,
• 15:57
  Speaker 3: what do you expect in terms of the direction of
• 15:59
  Speaker 3: travel when you look at the interest rate trajectory for
• 16:01
  Speaker 3: the rest of this year and what it means for
• 16:03
  Speaker 3: the state of markets.
• 16:05
  Speaker 5: Look, I think there's a there's a push pull. I
• 16:08
  Speaker 5: think the direction of travel Wednesday is going to be up.
• 16:12
  Speaker 4: It'll all depends about the.
• 16:13
  Speaker 5: Language that surrounds it and the activities that take place
• 16:17
  Speaker 5: following it. If we have a second leg of this
• 16:19
  Speaker 5: banking crisis that I obviously augurs for slower. If we
• 16:23
  Speaker 5: don't and we continue to see the wage pressures that
• 16:26
  Speaker 5: we just saw, it'll be tougher.
• 16:30
  Speaker 7: You're listening to the team. Hen's are live program Bloomberg
• 16:33
  Speaker 7: Markets weekdays at ten am Eastern on Bloomberg dot Com,
• 16:37
  Speaker 7: the iHeartRadio app and the Bloomberg Business app, or listen
• 16:40
  Speaker 7: on demand wherever you get your podcasts.
• 16:44
  Speaker 1: Let's bring in Herman Chance, speaking of Bloomberg Intelligence. He
• 16:46
  Speaker 1: covers the regional banks here. So Herman, I guess it's done.
• 16:50
  Speaker 1: JP Morgan, First Republic. You know, we kind of went
• 16:53
  Speaker 1: into Friday thinking something's going to happen. JP Morgan was
• 16:55
  Speaker 1: certainly on the list. We kind of wake up Monday morning.
• 16:58
  Speaker 2: Here way up there at the time, top of the list. Boom,
• 17:01
  Speaker 2: they got it. What a shocker? What did how did
• 17:04
  Speaker 2: why did they?
• 17:05
  Speaker 4: What did J?
• 17:06
  Speaker 3: I guess?
• 17:06
  Speaker 4: How did jpmore win?
• 17:08
  Speaker 1: What did they do to put them over the top
• 17:10
  Speaker 1: to beat out Bank of America and.
• 17:12
  Speaker 2: P and C and some others? Yeah?
• 17:13
  Speaker 8: Sure, so what Bank of.
• 17:14
  Speaker 2: America declined to even participate in the addiction? Okay, so
• 17:17
  Speaker 2: did US Bank? And we know that PNC and citizens
• 17:21
  Speaker 2: were invited.
• 17:23
  Speaker 8: But I'm assuming they probably made a bid, but really
• 17:25
  Speaker 8: assumption what really put JP Morgan over the top is
• 17:30
  Speaker 8: that they are acquiring all of the assets that are underwater,
• 17:36
  Speaker 8: both on the loans and security side, Whereas any potential
• 17:39
  Speaker 8: regional bank that would have made a bid probably would
• 17:41
  Speaker 8: have just cherry picked the best and most attractive assets
• 17:44
  Speaker 8: and left these underwater securities and loans with the FDIC. So,
• 17:48
  Speaker 8: in effect, the FDIC made the best choice in limiting
• 17:53
  Speaker 8: the losses to the Deposit Insurance Fund by doing the
• 17:57
  Speaker 8: deal with JP.
• 17:57
  Speaker 1: We don't know, this probably isn't in your remit. But
• 18:00
  Speaker 1: the flip side to that is that now we kind
• 18:04
  Speaker 1: of set a precedent for a JP Morgan or I
• 18:06
  Speaker 1: don't know, somebody else that's of that ILK, that they're really,
• 18:10
  Speaker 1: you know, the lender of last resort, that they're really
• 18:13
  Speaker 1: the backstop. It may not be the regulators.
• 18:15
  Speaker 8: Yeah, we just wrote about a little bit about this
• 18:18
  Speaker 8: with respect to PNC, that was in our mind the
• 18:22
  Speaker 8: most likely acquire of the First Republic assets and deposits.
• 18:26
  Speaker 8: And if the regulators are going to let these systemically
• 18:31
  Speaker 8: important banks acquire these failed banks, then it makes the
• 18:37
  Speaker 8: region is less likely to be able to absorb these
• 18:40
  Speaker 8: these types of deals because the FDIC would most likely
• 18:44
  Speaker 8: prefer to deal with the largest banks because they can
• 18:46
  Speaker 8: acquire the entirety of these troubled assets onto their own balance.
• 18:50
  Speaker 2: Shot, let's parse this out because there's also a lot
• 18:54
  Speaker 2: of spin here. There's a lot of politics. The FDIC
• 18:58
  Speaker 2: doesn't want to be blamed for bailing out there rich,
• 19:02
  Speaker 2: which they did, and they didn't want to take the
• 19:05
  Speaker 2: bank into receiver ship, so went to JP Morgan. But
• 19:08
  Speaker 2: they had to first take the bank into receivership. Right,
• 19:13
  Speaker 2: how much is the FDIC going to have to pay
• 19:16
  Speaker 2: initially and how much are they going to have to
• 19:18
  Speaker 2: guarantee in terms of insurance to convince Jamie Diamond, who remember,
• 19:23
  Speaker 2: wouldn't even take a call for SBB because his board
• 19:27
  Speaker 2: wouldn't let him. Now his board's got lenient in just
• 19:29
  Speaker 2: six weeks time. How much does the FDIC really have
• 19:32
  Speaker 2: to shell out in this big bail out of the rich.
• 19:34
  Speaker 8: The FDIC estimated in the press release it's going to
• 19:36
  Speaker 8: be a thirteen billion dollar hit to the Deposit Insurance Fund, which,
• 19:39
  Speaker 8: in the grand scheme of things, is better versus the
• 19:42
  Speaker 8: twenty billion dollar hit they're taking with the SVB failure,
• 19:45
  Speaker 8: So dealing with JP Morgan is more is more advantageous
• 19:50
  Speaker 8: for the regulators, and the FDFC is offering a lost
• 19:56
  Speaker 8: your agreement on the loans for First Republic and their
• 19:59
  Speaker 8: offering so financing.
• 20:00
  Speaker 2: Lost share agreement. So they had to pay thirteen billion
• 20:03
  Speaker 2: upfront and they're going to have to pay the other
• 20:05
  Speaker 2: at least nine billion down the line because JP Morgan
• 20:08
  Speaker 2: and their slides estimated that the loans they bought are
• 20:11
  Speaker 2: worth twenty two billion dollars less than par.
• 20:15
  Speaker 8: Right, so they're taking a thirteen percent haircut on the loans,
• 20:19
  Speaker 8: which is much larger than what we've seen out the others.
• 20:25
  Speaker 8: For example, the other failed bank deal that we found
• 20:30
  Speaker 8: from a New York community and signature, they were only
• 20:33
  Speaker 8: taking a five percent haircut. So it just reflects the
• 20:37
  Speaker 8: underwater nature of the loan book that First Republic had.
• 20:40
  Speaker 1: All right, Herman, thank you once again for coming to
• 20:43
  Speaker 1: our rescue, bringing it making it all clear here what's
• 20:45
  Speaker 1: happening on the regional bank front. Herman Chann from Bloomberg Intelligence.
• 20:49
  Speaker 7: You're listening to the tape cats are Live program Bloomberg
• 20:52
  Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
• 20:56
  Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
• 20:59
  Speaker 7: You can also listen live on Amazon Alexa from our
• 21:02
  Speaker 7: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
• 21:09
  Speaker 1: A little preview, what maybe the markets are thinking about
• 21:12
  Speaker 1: when we get to that FED day. Let's bring in
• 21:15
  Speaker 1: one of our all time faves, and whenever we see
• 21:17
  Speaker 1: her running around the Bloomberg HQ, we grab bring her
• 21:21
  Speaker 1: down here to the studio. Liz McCormick, Chief correspondent of
• 21:23
  Speaker 1: Global macro Markets with Bloomberg News List, Thanks so much
• 21:27
  Speaker 1: for joining us here. What are you going to be
• 21:30
  Speaker 1: looking for this week? I mean, we've got the Fed
• 21:32
  Speaker 1: on Wednesday, We've got economic data. Every time we turn around,
• 21:35
  Speaker 1: there's something being released throughout this week. What are you
• 21:38
  Speaker 1: looking at? What do you think the markets are looking at?
• 21:40
  Speaker 9: Well, yeah, it's like a blockbuster week. We have the
• 21:42
  Speaker 9: Fed and also on Wednesday, for the bond walks, there's
• 21:45
  Speaker 9: a Treasury refunding, you know, so the Treasury Department weighs
• 21:48
  Speaker 9: in on their thoughts about borrowing, and then payrolls on Friday.
• 21:51
  Speaker 2: And wait, what is the Treasury refunding, they weigh in,
• 21:55
  Speaker 2: they just give commentary.
• 21:56
  Speaker 9: No no, no, So they say, hey, this is our
• 21:59
  Speaker 9: borrowing plan for the quarter. So you know, dealers are
• 22:02
  Speaker 9: always looking are they going to increase auction sizes more
• 22:04
  Speaker 9: notes and bonds this time? Given the constraints of the
• 22:07
  Speaker 9: debt limit, their kind of hands are tied. They think
• 22:09
  Speaker 9: they're going to keep notes in bonds stable, but they're
• 22:12
  Speaker 9: looking for insight.
• 22:13
  Speaker 2: You know, does every sentence have an asterisk at this
• 22:16
  Speaker 2: time or do they say, like, actually, as of now,
• 22:19
  Speaker 2: we don't have enough money to borrow at anything at all.
• 22:23
  Speaker 2: I mean, well, that's exactly right.
• 22:25
  Speaker 9: If you look at Luke crandall from rights and he
• 22:27
  Speaker 9: was writing that some of these they give some financing
• 22:30
  Speaker 9: estimates today and then the refunding is Wednesday, but that
• 22:33
  Speaker 9: Treasury has been assuming each time they do these numbers
• 22:36
  Speaker 9: that there is a resolution of the debt ceiling, which
• 22:39
  Speaker 9: of course hasn't happened. So it's a lot of asterisks
• 22:41
  Speaker 9: and if and only so that's why they're going to
• 22:44
  Speaker 9: try to like do nothing with the big kahunas the
• 22:46
  Speaker 9: notes and bonds and just give some more guidance because
• 22:49
  Speaker 9: there's a lot of people saying, you know, there's going
• 22:52
  Speaker 9: to be a wave of new treasury bills after we
• 22:54
  Speaker 9: get through the debt limit because they've been kind of
• 22:57
  Speaker 9: cutting them back dealing with the extraordinary measures and to
• 23:00
  Speaker 9: stay under the debt limit.
• 23:02
  Speaker 3: So there's the short end.
• 23:04
  Speaker 9: Folks have a lot on their mind. You know, bills
• 23:06
  Speaker 9: as you talk about, a lot affect the curve. There's
• 23:09
  Speaker 9: pricing of the you know, risk of the debt ceiling.
• 23:11
  Speaker 9: Let's not buy the bills in certain areas, so for
• 23:14
  Speaker 9: the bond folks, and there's other things that they'll kind
• 23:16
  Speaker 9: of communicate about their plans. So but on the FOMC,
• 23:19
  Speaker 9: I was listening to you guys chatting with Jess and
• 23:21
  Speaker 9: I think she kind of really nailed it. That people
• 23:25
  Speaker 9: are saying, well, stocks and things are holding it okay
• 23:28
  Speaker 9: because the market is priced for like hike, a pause,
• 23:32
  Speaker 9: a pivot, and a cut. That's like Tom s e
• 23:34
  Speaker 9: of A seven's report always says that. But if the
• 23:37
  Speaker 9: Fed doesn't signal that, or if they you know, hike
• 23:39
  Speaker 9: one more time and make it sound like wow, there's
• 23:42
  Speaker 9: a chance we have to do more or just really
• 23:44
  Speaker 9: try to push back on this surety for cuts, then
• 23:47
  Speaker 9: they're talk but yes, yes, might take a hit, you know,
• 23:50
  Speaker 9: So that's what people are looking for.
• 23:51
  Speaker 1: What does he have to say, Well, that's what they
• 23:53
  Speaker 1: I mean. So if that's what they have been saying
• 23:56
  Speaker 1: consistently the Federal Reserve, So if they don't say it
• 24:00
  Speaker 1: as consistently this time, that in and of itself is news,
• 24:04
  Speaker 1: right right.
• 24:04
  Speaker 9: In fact, Anna Wong at Bloomberg Economics is calling for
• 24:08
  Speaker 9: a hawkish hike, right, you know, But I said, the
• 24:11
  Speaker 9: problem is the market doesn't seem to take it that way.
• 24:14
  Speaker 2: So I don't know what all has to say.
• 24:17
  Speaker 1: You and some other folks, Garfield Reynolds and Red Pickered
• 24:21
  Speaker 1: are out with something a note today or I guess
• 24:24
  Speaker 1: call it a piece of journalism. I don't know what
• 24:26
  Speaker 1: you call it. In research we called research note. Anyway,
• 24:29
  Speaker 1: it's good reporting. I think I know stagflation when I
• 24:33
  Speaker 1: see it. It's a slowing economy and high inflation. That's stagflation.
• 24:37
  Speaker 1: That sounds bad, is it?
• 24:40
  Speaker 9: Well, it depends on what you're in, right, You try
• 24:42
  Speaker 9: to and I keep saying to people, this is maybe
• 24:44
  Speaker 9: not your mother's stagflation. It's like, you know, people are
• 24:47
  Speaker 9: calling it stagflation light, so maybe zero to one percent growth,
• 24:52
  Speaker 9: inflation staying above the Fed's target, so not the horrific
• 24:56
  Speaker 9: horrible seventies, but not great, So you got to kind
• 24:59
  Speaker 9: of pick your spot.
• 25:00
  Speaker 2: So real stagflation is inflation with contraction.
• 25:04
  Speaker 4: Exact.
• 25:05
  Speaker 2: Mean, it's pretty basic. And I know everyone's tried to
• 25:07
  Speaker 2: make up new definitions over the past couple of years.
• 25:10
  Speaker 2: But if you have inflation and if you have a contraction,
• 25:14
  Speaker 2: that's stagflation. That's not in the Miller household.
• 25:17
  Speaker 1: Yes, that's that's a Midwestern and we have no debt ceiling.
• 25:21
  Speaker 9: Yeah, there's just so many things on the radar here,
• 25:24
  Speaker 9: you know. And I was joking with a colleague, you know, inflation,
• 25:27
  Speaker 9: even though you hear, oh, certain things are getting better,
• 25:30
  Speaker 9: I don't know.
• 25:30
  Speaker 1: When I go shopping, I'm like, wow, that.
• 25:33
  Speaker 2: Those berries are expensive.
• 25:35
  Speaker 9: I think I can live on bananas, you know, whatever's cheaper.
• 25:38
  Speaker 2: Everything I do is more expense. I had I broke
• 25:40
  Speaker 2: my iPhone. I had to buy a new one. I
• 25:43
  Speaker 2: don't even want to tell you how much it costs. Well,
• 25:45
  Speaker 2: I went to the movies on Saturday. Very expensive. I
• 25:48
  Speaker 2: want shopping.
• 25:49
  Speaker 1: This week, I went to a factory outlet store for
• 25:51
  Speaker 1: the first time in my.
• 25:52
  Speaker 2: Life, the first time you've ever been to a factory
• 25:54
  Speaker 2: outlet store? Yes, which one? Did you go to? Nike?
• 25:59
  Speaker 1: So just just you didn't go to one of the
• 26:00
  Speaker 1: factory Alan malls. It was the factory out of malls,
• 26:03
  Speaker 1: the Shore Factory out let.
• 26:05
  Speaker 2: Mall in fall Es.
• 26:06
  Speaker 1: Actually it's got had everything every brand. I didn't know
• 26:09
  Speaker 1: that this whole world existed. I saw a movie about
• 26:11
  Speaker 1: Nike this weekend.
• 26:12
  Speaker 2: I want to see that. I want to air the
• 26:15
  Speaker 2: Air Jordan movie. My wife loved it and I thought
• 26:19
  Speaker 2: it was pretty good. And Liz ask him how he
• 26:22
  Speaker 2: got there. He drove in a Sure, we drove there
• 26:25
  Speaker 2: in a white Rolls Royce ghost with red bright red
• 26:29
  Speaker 2: leather interior.
• 26:30
  Speaker 1: What do you not notice us and see in his
• 26:35
  Speaker 1: town that didn't even stand out? It's just like, oh yeah,
• 26:38
  Speaker 1: that's just the Miller's all right. Liz McCormick, thanks so
• 26:40
  Speaker 1: much for joining us. Lots of echo data, lots of
• 26:42
  Speaker 1: fun stuff we'll keep an eye on all week.
• 26:46
  Speaker 7: You're listening to the team Ken's Are Live program Bloomberg
• 26:50
  Speaker 7: Markets weekdays at ten am Eastern on Bloomberg dot com,
• 26:53
  Speaker 7: the iHeartRadio app, and the Bloomberg Business app or listen
• 26:57
  Speaker 7: on demand wherever you get your podcasts.
• 27:01
  Speaker 2: I want to talk ETFs. Ye, right now. I love
• 27:03
  Speaker 2: talking about ETFs. You have a show TV show by ETF. Yes,
• 27:07
  Speaker 2: and it's a you know, it's a more than ten
• 27:09
  Speaker 2: trillion dollar industry globally. Forecasts are for the ETF industry
• 27:15
  Speaker 2: to double within the next I think five years, so
• 27:19
  Speaker 2: right now seven trillion in the US.
• 27:20
  Speaker 1: And that's why the young guys are going to the
• 27:22
  Speaker 1: ETF business.
• 27:23
  Speaker 2: Yes, but there's some old people in ETFs as well.
• 27:25
  Speaker 1: Okay, were you with Northern Trust before I was with
• 27:28
  Speaker 1: the Trust. I haven't even brought him in, But here's
• 27:31
  Speaker 1: the story. Our next guest was with Northern Trust in Chicago.
• 27:34
  Speaker 1: The crustiest money you could ever imagine that all the
• 27:38
  Speaker 1: money in the Midwest, Northern Trust manages. You go into
• 27:40
  Speaker 1: their offices in Chicago, it's like the nineteen thirties, which
• 27:43
  Speaker 1: is awesome, which was.
• 27:44
  Speaker 2: When Chicago was at its peak.
• 27:47
  Speaker 1: Right, And so this young buck a Northern Trust gets
• 27:50
  Speaker 1: trained up in the crusty world of pensions and all
• 27:52
  Speaker 1: that kind of stuff and he goes to the et business.
• 27:54
  Speaker 2: Well, that actuallyins it. I think it's a pretty convincing product.
• 27:57
  Speaker 2: He also worked at Invesco, one of the biggest ETF
• 27:59
  Speaker 2: issuers in the business. Tim Urbanowitz is in the studio.
• 28:03
  Speaker 2: Thank you, Tim for coming to New York and joining
• 28:05
  Speaker 2: us here in the in the studio. It's always great
• 28:09
  Speaker 2: to have guests live. You are the head of research
• 28:12
  Speaker 2: at Innovator ETFs. Now after the experience, we've talked about
• 28:15
  Speaker 2: your CV already, and you went to Wheaton College as well,
• 28:18
  Speaker 2: so you're all in when it comes to Chicago. Tell
• 28:23
  Speaker 2: us first of all about Innovator ETFs and what drew
• 28:27
  Speaker 2: you to that firm.
• 28:28
  Speaker 6: Yeah, So Innovator ETFs it was actually founded by the
• 28:31
  Speaker 6: same two partners that founded the Power Shares ETF franchise
• 28:35
  Speaker 6: back in the early two thousands, Bruce Bond, John Southern.
• 28:39
  Speaker 6: That business was then sold to Investco, fourth largest ETF
• 28:41
  Speaker 6: business in the world. Now, so I had the opportunity
• 28:44
  Speaker 6: to work at power Shares for a while, really cut
• 28:46
  Speaker 6: my teeth in the ETF business. Learn a little bit
• 28:48
  Speaker 6: about it. You saw power Shares grow to the monster
• 28:52
  Speaker 6: that it is now and then Innovator. You know, Bruce
• 28:55
  Speaker 6: and John founded Innovator back in twenty and seventeen, and
• 28:58
  Speaker 6: the idea was really you know, the first time, it
• 29:01
  Speaker 6: was how do we take the ETF rapper put a
• 29:04
  Speaker 6: more intelligent strategy underneath the hood, and that was how
• 29:06
  Speaker 6: smart beta was born. This time around with Innovator, it
• 29:09
  Speaker 6: was how do we take some of the interesting payoffs
• 29:12
  Speaker 6: that we're seeing in the structured noteworld and make those
• 29:15
  Speaker 6: more efficient. How do we use the ETF wrapper to
• 29:18
  Speaker 6: provide the tax efficiency, the liquidity, get rid of the
• 29:22
  Speaker 6: lock up period, surrender charges, all that stuff that you
• 29:25
  Speaker 6: see in the structured noteworld and just make that experience
• 29:27
  Speaker 6: much more efficient for investors. And that's really how Innovator
• 29:30
  Speaker 6: was birth.
• 29:31
  Speaker 2: And this is I mean, the ets we're going to
• 29:33
  Speaker 2: talk about now are part of a whole new class.
• 29:35
  Speaker 2: You had your playing vanilla atfs. Of course, I think
• 29:38
  Speaker 2: now thirty years ago was when they first put out
• 29:42
  Speaker 2: the spies, and then you had smart beta ETFs. You know,
• 29:47
  Speaker 2: different weighting on stocks and the index for example, is
• 29:49
  Speaker 2: one way that people do that. Then you had thematic ETFs,
• 29:52
  Speaker 2: which were all the rage last year. And now buffers
• 29:56
  Speaker 2: have become Buffers is like a keyword now. But you
• 29:59
  Speaker 2: say a barrier APRJ for example, is your innovative innovator
• 30:04
  Speaker 2: premium income, thirty percent barrier ETF. What exactly does this
• 30:08
  Speaker 2: product do?
• 30:09
  Speaker 6: Yeah, so, I mean you look at the category of
• 30:11
  Speaker 6: we call it defined outcome investing, and really this is
• 30:14
  Speaker 6: when we talk to advisors more than anything else. What
• 30:17
  Speaker 6: their clients want to do is to remove as many
• 30:20
  Speaker 6: of the unknowns out there as possible, and really a
• 30:24
  Speaker 6: buffer and even a barrier. They do that by providing
• 30:27
  Speaker 6: a defined or known outcome, so we really remove the
• 30:31
  Speaker 6: guesswork altogether. So with a barrier, what we're striving to
• 30:34
  Speaker 6: do is provide a defined level of high income with
• 30:38
  Speaker 6: built in risk management, so a known barrier against losses
• 30:43
  Speaker 6: over the outcome period. So APRJ you have a thirty
• 30:46
  Speaker 6: percent barrier against losses over the next twelve months.
• 30:51
  Speaker 2: With meaning you can lose up to thirty percent but
• 30:53
  Speaker 2: no more.
• 30:54
  Speaker 6: Meaning that if the market were to go down on
• 30:56
  Speaker 6: a price return basis anywhere from zero to thirty percent
• 30:59
  Speaker 6: from a April to April, you would be fully protected
• 31:02
  Speaker 6: from those losses.
• 31:03
  Speaker 2: Oh sorry, okay, you can. You can avoid losses down
• 31:06
  Speaker 2: to thirty percent, but when it's if it loses more
• 31:09
  Speaker 2: than thirty percent, which God forbid, right, then you've got
• 31:12
  Speaker 2: to start taking a hit exactly.
• 31:14
  Speaker 6: So that's when you would see if you break that
• 31:16
  Speaker 6: thirty percent barrier, that's when you're down one for one
• 31:19
  Speaker 6: with the market the whole way. The difference here is
• 31:22
  Speaker 6: that you're always going to get that income, so that
• 31:24
  Speaker 6: distribution rate is known and that continues to be paid
• 31:28
  Speaker 6: out regardless of if we break the barrier or not.
• 31:31
  Speaker 6: So at APRJ, that thirty percent barrier level, just given
• 31:34
  Speaker 6: a client's view of the market right now, that is
• 31:36
  Speaker 6: one of the most popular strategies that we've seen since
• 31:39
  Speaker 6: launching one of the biggest asset gatherers. Just you know,
• 31:41
  Speaker 6: if you don't think the market's going to go down
• 31:43
  Speaker 6: more than thirty percent, to be able to say, hey,
• 31:46
  Speaker 6: I can get you that seven percent rate with no guesswork,
• 31:50
  Speaker 6: it's a very powerful conversation for the advisor to hit
• 31:52
  Speaker 6: and have with their clients.
• 31:53
  Speaker 2: Paul, a thirty percent drop on the S and P
• 31:55
  Speaker 2: five hunder it would take us to twenty nine nineteen.
• 31:57
  Speaker 1: Oh that's not good, so it's pretty far down. So
• 32:00
  Speaker 1: what's in there for you guys? I'm get seven percent,
• 32:02
  Speaker 1: I got downside protection. You're not doing this for free.
• 32:06
  Speaker 6: So we charge a management fee. Seventy nine basis point
• 32:09
  Speaker 6: expense ratio. That's all we get other than that. We're
• 32:12
  Speaker 6: setting the options package on day one of the strategy,
• 32:16
  Speaker 6: and we set that package. That's how we're able to
• 32:18
  Speaker 6: deliver that defined outcome. So there's nothing else other than
• 32:21
  Speaker 6: that expense ratio.
• 32:22
  Speaker 2: You have another one, PAPR. That's the innovator. You asked
• 32:25
  Speaker 2: equity fifteen percent power buffer ETF. I guess this is similar, right,
• 32:31
  Speaker 2: what's the difference between the buffer and a barrier.
• 32:34
  Speaker 6: It's similar, but there's also a big difference. So similar
• 32:36
  Speaker 6: in the sense that you have a defined outcome, so
• 32:38
  Speaker 6: we know whatever the market does, we're going to have
• 32:40
  Speaker 6: that fifteen percent downside buffer in place. So with a buffer,
• 32:46
  Speaker 6: no matter where the market goes, So let's say the
• 32:47
  Speaker 6: market goes down fifty percent, you're always going to have
• 32:50
  Speaker 6: that fifteen percent downside protection in place. So in that
• 32:54
  Speaker 6: scenario the market goes down fifty percent, you would be
• 32:56
  Speaker 6: down thirty five percent. On the flip side of that,
• 33:00
  Speaker 6: Unlike the barrier, you have upside potential with the buffer ETF,
• 33:04
  Speaker 6: So PAPR you're capturing the first fifteen give or take
• 33:08
  Speaker 6: fifteen percent of the upside of the sens P five
• 33:12
  Speaker 6: hundred ETF's price return with that fifteen percent built in
• 33:16
  Speaker 6: buffer against losses.
• 33:18
  Speaker 2: So right now, so instead of the seven percent guaranteed return,
• 33:23
  Speaker 2: you're allowed to take part in the upside up to
• 33:25
  Speaker 2: about fifteen percent exactly.
• 33:27
  Speaker 6: You get that upside appreciation. And I think part of
• 33:31
  Speaker 6: it is, you know, why you're seeing this defined outcome
• 33:33
  Speaker 6: in buffer category one of the fastest growing categories of
• 33:36
  Speaker 6: ETFs again this year, is because a lot of clients
• 33:39
  Speaker 6: look at the market they say, Okay, is it really
• 33:41
  Speaker 6: going to go up more than fifteen percent? All the
• 33:44
  Speaker 6: headwinds that we have, restrictive monetary policy, all the impacts
• 33:48
  Speaker 6: of the past hikes that we've seen, the chances of
• 33:51
  Speaker 6: that A lot of advisors think that's very low. So
• 33:54
  Speaker 6: they view this as a very good trade off to
• 33:56
  Speaker 6: be able to help hedge some of that recession risk.
• 33:58
  Speaker 2: But Paul apr Jam, I mean, you're talking all the
• 34:00
  Speaker 2: time about putting money in the two year YEP for
• 34:03
  Speaker 2: four point one percent right now, which makes sense. But
• 34:06
  Speaker 2: if you don't think the market's going to fall more
• 34:08
  Speaker 2: than thirty percent, which is serious crater edge YEP, then
• 34:12
  Speaker 2: you're going to get seven percent with apr.
• 34:14
  Speaker 1: J, I tell you, these guys selling me right here,
• 34:18
  Speaker 1: here's I stand. So who's actually just consistens of that
• 34:22
  Speaker 1: flows in into these funds? Yep, So inception the barrier.
• 34:25
  Speaker 6: ETFs launched at the beginning of April, and we've already
• 34:29
  Speaker 6: seen over sixty million dollars of inflows in just the
• 34:32
  Speaker 6: first few weeks, which, if you know about getting ETFs
• 34:35
  Speaker 6: off the ground, that's that's there's been a lot of demand.
• 34:37
  Speaker 6: I think a lot of that demand has really come
• 34:39
  Speaker 6: from a lot of advisors that have seen the benefits
• 34:42
  Speaker 6: that come with the defined outcome wrapper and they're just
• 34:46
  Speaker 6: translating them over. So they had this on their you know,
• 34:48
  Speaker 6: the equity side for the price return. Now they're transferringing
• 34:51
  Speaker 6: that over to the income sleeve with their portfolio. So
• 34:53
  Speaker 6: how do I replace things like high yield bonds with
• 34:56
  Speaker 6: a thirty barrier or you know, even investment grade bond?
• 35:01
  Speaker 6: How can we put those in that sleeve?
• 35:04
  Speaker 1: How many ETFs are there out there? It seems like
• 35:07
  Speaker 1: you guys are coming through the door every week with
• 35:09
  Speaker 1: new things that every time I'm like, boy, that's cool,
• 35:11
  Speaker 1: that's interesting. How many ETFs are out there? And how
• 35:13
  Speaker 1: do you differentiate yourself.
• 35:15
  Speaker 6: So we have I don't know what the industry right now,
• 35:17
  Speaker 6: it's hard to keep track of.
• 35:18
  Speaker 2: I feel like it's growing quickly close.
• 35:20
  Speaker 6: Yeah, it is. We have about ninety in our lineup,
• 35:23
  Speaker 6: and really, you know, we don't just launch anything, but
• 35:26
  Speaker 6: our goal is to really take ideas that clients want
• 35:29
  Speaker 6: exposure to. We look at what's going on in the
• 35:31
  Speaker 6: structured note world, what are sales like there, what are
• 35:34
  Speaker 6: clients gravitating towards, and again taking those payoff profiles that
• 35:38
  Speaker 6: have been very successful, whether it be a buffer all.
• 35:41
  Speaker 1: The time, Matt, that's kind of what my guys pitch
• 35:44
  Speaker 1: me all the time.
• 35:44
  Speaker 6: Yeah, and we're taking that. We're doing it for cheaper
• 35:47
  Speaker 6: without the bank credit risk, which is obviously becoming more
• 35:50
  Speaker 6: and more important, without the lock ups, the surrenders. You know,
• 35:53
  Speaker 6: the ETF rapper is just so advantageous and so beneficial
• 35:57
  Speaker 6: in so many ways. We're really just taking at and
• 36:00
  Speaker 6: gravitating toward ideas that we know advisors already need in
• 36:03
  Speaker 6: their portfolio.
• 36:04
  Speaker 2: What's the best place to live around Chicago, what's the
• 36:07
  Speaker 2: what's the uh Wheaton looks great, right, Lake Forest. I've
• 36:12
  Speaker 2: heard a lot about up there.
• 36:13
  Speaker 6: What's the Uh, Well, I'm a big fan of Wheaton, Illinois.
• 36:17
  Speaker 6: We're calling it basically outside of New York ETF capital
• 36:20
  Speaker 6: of the World too.
• 36:21
  Speaker 2: Lot of it really is the ETF capital of the world.
• 36:24
  Speaker 2: I mean, Eric Beltunas was this just there and did
• 36:26
  Speaker 2: like six meetings in that little suburb.
• 36:29
  Speaker 6: He was in our office walking just point to point.
• 36:31
  Speaker 6: So it's a great, little, great little town.
• 36:33
  Speaker 2: Go figure.
• 36:34
  Speaker 1: Somebody's got to do it right, all right, Wheaton, Illinois.
• 36:36
  Speaker 1: Timber Bannitt's Bandwitz, I'm sorry. Timber Bannowitz, head of research
• 36:39
  Speaker 1: at Innovator ETFs. Joinings here in our Bloomberg Interactive Brookers studio.
• 36:42
  Speaker 7: You're listening to the tape cans are live program Bloomberg
• 36:46
  Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
• 36:49
  Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
• 36:53
  Speaker 7: You can also listen live on Amazon Alexa from our
• 36:55
  Speaker 7: flagship New York station. Just say Alexa play Bloomberg eleven.
• 37:01
  Speaker 1: Matt, did you know that AI stands for Artificial intelligence?
• 37:06
  Speaker 2: I had heard had heard about that. I think that's
• 37:08
  Speaker 2: becoming a thing.
• 37:10
  Speaker 1: I think it's something that we need to pay attention
• 37:12
  Speaker 1: to I'm not gonna I don't know anything about this thing,
• 37:14
  Speaker 1: but our next guest does and that's why.
• 37:16
  Speaker 2: We got him in our Bloomberg Interactive Broker studio.
• 37:18
  Speaker 1: Krishna Gupta, chairman of Presto Automation, Christian, thanks so much
• 37:22
  Speaker 1: for joining us here. Can you tell us what you
• 37:24
  Speaker 1: guys do at Presto Automation, which, by the way, publicly
• 37:27
  Speaker 1: traded company pr ST is a simpler to put into
• 37:31
  Speaker 1: Bloomberg terminal.
• 37:33
  Speaker 10: Yeah, so thanks for having me and really excited to
• 37:36
  Speaker 10: talk about AI and Presto here. So Presto is quite
• 37:39
  Speaker 10: simply an enterprise AI business for the restaurant industry. Restaurants, okay,
• 37:43
  Speaker 10: and very simply. What we're looking to do is automate
• 37:46
  Speaker 10: every drive through in the country, so using voice AI
• 37:49
  Speaker 10: instead of having a human. I mean, I'll just ask
• 37:51
  Speaker 10: a simple question. Do you think in three years time
• 37:53
  Speaker 10: there's going to be a human taking your order in
• 37:55
  Speaker 10: the drive through?
• 37:56
  Speaker 2: I guess it depends where we go, right because.
• 38:00
  Speaker 1: No, now that you mention it, no, I'll go with
• 38:02
  Speaker 1: you on this one. So tell us how it works,
• 38:05
  Speaker 1: how you think it's going to evolve? Yeah, well, it
• 38:07
  Speaker 1: works very simply can I actually drive up and say
• 38:09
  Speaker 1: number two with a coke? Well, when you drive up,
• 38:12
  Speaker 1: someone says, hi, what would you like to have?
• 38:13
  Speaker 7: Right?
• 38:14
  Speaker 10: Right, So that's what our AI will do.
• 38:16
  Speaker 11: Hi.
• 38:16
  Speaker 10: You know, it's like they ask you what would it
• 38:18
  Speaker 10: like to have? Then you might well that we're gonna
• 38:21
  Speaker 10: get to that. It's very interesting. So he's gonna say
• 38:24
  Speaker 10: number two, or he's gonna say I want whatever, and
• 38:26
  Speaker 10: then they'll say, okay, great, would you like fries with that?
• 38:29
  Speaker 10: Would you like a drink with that? It's hot outside?
• 38:32
  Speaker 10: Would you like an ice drink with that? So you know,
• 38:35
  Speaker 10: let's sort of split up what the value proposition is
• 38:37
  Speaker 10: for the restaurant. The obvious one is there's some labor
• 38:40
  Speaker 10: labor cost savings. And there's a reason why this is
• 38:43
  Speaker 10: relevant today. We're a really specific and interesting moment in
• 38:46
  Speaker 10: time where labor costs are rising, and so in the past,
• 38:51
  Speaker 10: you know, restaurants hadn't adopted much AI or technology because
• 38:54
  Speaker 10: labor costs were low. And then the other thing is
• 38:56
  Speaker 10: the AI technology has developed. We couldn't do this eighteen
• 38:59
  Speaker 10: twenty four months ago, and so the fact that those
• 39:02
  Speaker 10: things have converged, so there's clearly a labor automation play.
• 39:05
  Speaker 10: But then the other part is, you know, to what
• 39:07
  Speaker 10: Matt was talking about is the upsell, and the upsell
• 39:10
  Speaker 10: is something I obsess over because the human being, the
• 39:14
  Speaker 10: minimum wage employee is not up selling. They're forgetting to upsell.
• 39:17
  Speaker 10: They get tired top sell. They are very far from
• 39:19
  Speaker 10: an optimal up cell. And we look at our team incentive,
• 39:23
  Speaker 10: right and they have no incentive. They have no incentive,
• 39:25
  Speaker 10: and so so whereas for us, the AI never gets tired,
• 39:28
  Speaker 10: it never forgets, and we are increasingly making it more optimal.
• 39:32
  Speaker 10: You know, right now we can we can personalize it
• 39:35
  Speaker 10: to some extent by time of day, weather or maybe
• 39:37
  Speaker 10: what you ordered. Over time, I'll be able to reach
• 39:40
  Speaker 10: your license plate, I'll be able to sink into the
• 39:41
  Speaker 10: loyalty system and say, okay, Krishna driving through. You know,
• 39:45
  Speaker 10: clearly he's ordered a vegan burger. He probably wants a
• 39:48
  Speaker 10: vegan brownie because it's a chocolate addict. And so that level,
• 39:51
  Speaker 10: like the perfect upsell, does three things. It makes people,
• 39:55
  Speaker 10: you know, move through the sort of drive through is
• 39:58
  Speaker 10: still in a very fast way while increasing the check
• 40:00
  Speaker 10: size by a few percent. And the other thing it
• 40:03
  Speaker 10: does it leads the customers happier, you know, like customers
• 40:05
  Speaker 10: walk away feeling like they got something that they didn't
• 40:07
  Speaker 10: necessarily know they wanted. So yeah, that's it's it's very
• 40:11
  Speaker 10: simple to understand, and that's what we do.
• 40:13
  Speaker 2: So what I mean, you founded this business in twenty seventeen,
• 40:17
  Speaker 2: but you say you didn't have the technology to do
• 40:19
  Speaker 2: what you're doing eighteen twenty four months ago. What changed?
• 40:23
  Speaker 2: I mean, what motivated you to found it before you
• 40:26
  Speaker 2: had the technology and what changed since you started the company.
• 40:29
  Speaker 10: So we actually started the company more than a decade
• 40:31
  Speaker 10: ago out of MIT, and the the sort of impetus
• 40:34
  Speaker 10: was always engineering school.
• 40:36
  Speaker 2: Yeah, I've heard of it. I've heard of it. They're
• 40:37
  Speaker 2: pretty good at here.
• 40:39
  Speaker 10: Yeah, we're okay, you know. And so so you know,
• 40:41
  Speaker 10: we started it initially to do the same thing, which
• 40:44
  Speaker 10: is drive labor automation and increased revenue. But initially the
• 40:47
  Speaker 10: use case was at the table. So we have tablets
• 40:50
  Speaker 10: at the table where you can order, you can play,
• 40:52
  Speaker 10: you can pay, and that's that's a business that's out there.
• 40:54
  Speaker 10: It's several large chains using that technology. Three four years ago,
• 40:59
  Speaker 10: we realized that the same kind of labor automation play,
• 41:01
  Speaker 10: especially as we headed into COVID, we realized could be
• 41:05
  Speaker 10: applied to the drive through and that's where we started.
• 41:08
  Speaker 10: COVID is what forced us to start thinking about it.
• 41:10
  Speaker 10: So I would say our current business is a direct
• 41:12
  Speaker 10: output of COVID.
• 41:13
  Speaker 1: So talk to us about some of the conversations you're having.
• 41:16
  Speaker 2: I don't know who you.
• 41:17
  Speaker 1: Can discuss disclose with whom, But where are you in
• 41:20
  Speaker 1: terms of the discussions here and rolling out the technology
• 41:23
  Speaker 1: and how's it going?
• 41:25
  Speaker 2: Is it better for bigger chains? For example? I can
• 41:29
  Speaker 2: see how this would work really well with a McDonald's.
• 41:32
  Speaker 2: Everybody knows that order the menu is pretty simple, and
• 41:36
  Speaker 2: it would be more difficult I guess a more customizable,
• 41:40
  Speaker 2: smaller fast food restaurant.
• 41:44
  Speaker 10: Yeah, so it works for everyone, right, It really does.
• 41:47
  Speaker 10: I'm not gonna comment on a specific name, and what
• 41:49
  Speaker 10: we have out there publicly is we work with checkers
• 41:51
  Speaker 10: in Del Taco. At the end of the day, it
• 41:54
  Speaker 10: works for everyone because everyone has the same challenges right
• 41:57
  Speaker 10: now in the industry, whether you're a large chain or
• 42:00
  Speaker 10: mull chain. Labor is hard to find, it's expensive, and
• 42:03
  Speaker 10: then you know you have a menu that's constantly changing.
• 42:06
  Speaker 10: You need to figure out a way so there's complexity
• 42:08
  Speaker 10: in the technology, and so when we think about how
• 42:11
  Speaker 10: we roll it out, we are thinking very actively about
• 42:15
  Speaker 10: what the corporate cares about and what the franchisees care about.
• 42:17
  Speaker 10: And this is one of the technologies, not every technology
• 42:20
  Speaker 10: and hospitality actually it's a few of them are with
• 42:22
  Speaker 10: a franchise ease really wanted because they see the value proposition.
• 42:27
  Speaker 10: These see the ROI, and then they're going to corporate
• 42:30
  Speaker 10: and saying can we have this? And then corporate is
• 42:33
  Speaker 10: sort of doing their evaluation and doing what the corporate does.
• 42:36
  Speaker 10: But it's been really energizing for us to hear from
• 42:39
  Speaker 10: franchisees directly and understand their need. And so when we
• 42:43
  Speaker 10: roll out where we sell to corporate, we are actively
• 42:46
  Speaker 10: thinking about the franchise e population first and form.
• 42:48
  Speaker 2: Is there a legacy problem because the systems, the automated
• 42:51
  Speaker 2: voice systems that we already deal with. I was on
• 42:54
  Speaker 2: the phone at the horizon for two hours yesterday. They suck.
• 43:00
  Speaker 2: They're really bad.
• 43:01
  Speaker 10: You know.
• 43:02
  Speaker 2: The worst thing that can happen is if I call
• 43:04
  Speaker 2: a service department and I get a computer and I
• 43:07
  Speaker 2: immediately start saying agent, agent, agent, give me a human.
• 43:11
  Speaker 2: Now I can imagine a better use case at a
• 43:14
  Speaker 2: drive through, But do you have a difficulty selling it
• 43:16
  Speaker 2: because the automated systems the computer voices were used to
• 43:19
  Speaker 2: have been so useless.
• 43:21
  Speaker 10: It's a great question. And and you know, I would
• 43:24
  Speaker 10: say we talk a lot about AI, I mean talk
• 43:26
  Speaker 10: a lot about generative AI these days, but you know,
• 43:29
  Speaker 10: the drive through actually ends up being one of the
• 43:32
  Speaker 10: most immediately actionable and scalable like applications of generative AI
• 43:36
  Speaker 10: in the enterprise. The other one would be customer service
• 43:39
  Speaker 10: to some extent, but customer service is actually much harder
• 43:42
  Speaker 10: because you have to deal with you know, you're on
• 43:44
  Speaker 10: the phone with Verizon, and I know that business very well.
• 43:46
  Speaker 10: I'm a large share holder of another company that works
• 43:49
  Speaker 10: with companies like Verizon, so you know that business. You're
• 43:53
  Speaker 10: dealing with an angry customer that can go in all
• 43:55
  Speaker 10: kinds of different directions. And you know the baseball game
• 43:58
  Speaker 10: this that in the through, you have a relatively confined
• 44:02
  Speaker 10: situation where you have only so many different ways it
• 44:04
  Speaker 10: can go. Now it can go in different ways, so
• 44:06
  Speaker 10: it's not so trivial. You know, you might think, you know, hey,
• 44:09
  Speaker 10: I want a chocolate shit. Oh no, actually I want
• 44:11
  Speaker 10: a strawberry shake. Oh what about your special? Can I
• 44:13
  Speaker 10: get fries with that? Honey? What do you want?
• 44:16
  Speaker 4: You know?
• 44:16
  Speaker 10: So there is sort of complexity in terms of what
• 44:18
  Speaker 10: the voice has to pick up on.
• 44:20
  Speaker 2: What's the original frosty they're offering me now, Vanilla or chocolate?
• 44:23
  Speaker 2: It's one of frosty. When I was a kid, there
• 44:25
  Speaker 2: was only one choice there, you go.
• 44:26
  Speaker 10: Well, so now there's gonna be a lot more choices.
• 44:28
  Speaker 9: You know.
• 44:29
  Speaker 10: I'm very upset still that Starbucks killed the pistachio latte
• 44:31
  Speaker 10: from three months ago, but apparently no one else seems
• 44:33
  Speaker 10: to like it, so so, you know, I think there
• 44:37
  Speaker 10: is there's a real opportunity to the voice qualities. When
• 44:41
  Speaker 10: I said this couldn't be done eighteen twenty four months ago,
• 44:43
  Speaker 10: it's partially because the quality of the voices and the
• 44:45
  Speaker 10: humanness of the voices has improved dramatically too, so it
• 44:49
  Speaker 10: is increasingly sounding more conversational, and at the end of
• 44:53
  Speaker 10: the day, our goal is just to make it as
• 44:55
  Speaker 10: much like a human frankly better than a human, right,
• 44:58
  Speaker 10: so that you're getting in and out of their as
• 45:00
  Speaker 10: fast as you can and getting what you want.
• 45:01
  Speaker 1: All right, interesting stuff, interesting, practical application of artificial intelligence
• 45:07
  Speaker 1: in the hospitality business. Christiana Gupta, chairman of Presto Automation
• 45:11
  Speaker 1: Trades PRST is the ticker. It went public via a
• 45:16
  Speaker 1: spack as a lot of companies will want to do
• 45:19
  Speaker 1: back in the day, so I want to keep an
• 45:21
  Speaker 1: eye on this one.
• 45:22
  Speaker 7: You're listening to the tape Cat's are live program Bloomberg
• 45:25
  Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
• 45:29
  Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
• 45:32
  Speaker 7: You can also listen live on Amazon Alexa from our
• 45:35
  Speaker 7: flagship New York station, Just say Alexa play Bloomberg eleven
• 45:39
  Speaker 7: thirty Man.
• 45:41
  Speaker 1: To be perfectly honest with you, I know absolutely nothing
• 45:44
  Speaker 1: about insurance, ignorant to the nth degree, and I've tried
• 45:47
  Speaker 1: to educate myself, but it just doesn't help. Fortunately, I've
• 45:50
  Speaker 1: got some good people.
• 45:51
  Speaker 2: Helping me out.
• 45:52
  Speaker 1: I think, or maybe they're fleecing me, but I think
• 45:55
  Speaker 1: I'm in good shape. But I know I like the
• 45:57
  Speaker 1: business and I like talking to Pat Gallagher. He's the
• 46:00
  Speaker 1: CEO of Gallagher Insurance and the stock simles a JG.
• 46:04
  Speaker 1: You put that in there and then you hit GP
• 46:06
  Speaker 1: for to get the graph. The stock is hitting an
• 46:08
  Speaker 1: all time high today two d and ten dollars. Not
• 46:12
  Speaker 1: too shabby. It's up twelve percent year to date, up
• 46:14
  Speaker 1: twenty seven percent over at trailing twelve months. Pat, congratulations
• 46:18
  Speaker 1: on the stock price.
• 46:19
  Speaker 2: Good for you.
• 46:20
  Speaker 1: Why is your stock hitting an all time high?
• 46:22
  Speaker 11: Well, thank you guys for having me on. Look. I
• 46:25
  Speaker 11: think a couple of things are happening that make a
• 46:27
  Speaker 11: lot of sense to me. Number One, we're finding that
• 46:30
  Speaker 11: our middle market clients, that Corporate America and the tech
• 46:35
  Speaker 11: companies are not necessarily indicative of what's happening in our
• 46:38
  Speaker 11: client base. Our clients are healthy, their businesses are growing.
• 46:41
  Speaker 11: We are seeing infrastructure spending in construction accounts, et cetera,
• 46:45
  Speaker 11: et cetera, and so the recession that has been touted
• 46:48
  Speaker 11: in the press for the last twelve months has not
• 46:50
  Speaker 11: yet at least hit our major base of where our
• 46:53
  Speaker 11: clients are, and they continue to be healthy. Secondly, rates
• 46:57
  Speaker 11: in the insurance industry continue to rise, and that's because
• 47:00
  Speaker 11: loss costs are up in large part due to inflation
• 47:03
  Speaker 11: and nuclear settlements, judgments by juries, which is forcing lost
• 47:08
  Speaker 11: costs on insurance companies to rise, and they're covering those
• 47:12
  Speaker 11: by raising premiums. And lastly, we have inflation. And when
• 47:16
  Speaker 11: you look around the world and try to find an
• 47:18
  Speaker 11: industry that does well with inflation, they're few and far behind.
• 47:22
  Speaker 11: And the insurance brokerage space does well. When your property
• 47:26
  Speaker 11: values rise, your premiums rise, our commissions rise, makes it
• 47:30
  Speaker 11: more difficult for us to do the placement for you
• 47:32
  Speaker 11: if you're a large portfolio. But nonetheless we get paid
• 47:35
  Speaker 11: for it, and I think that's what's happening. We fall
• 47:37
  Speaker 11: on a lot of screens. We look very good, we're
• 47:40
  Speaker 11: very healthy, and the company's done extremely well over the
• 47:43
  Speaker 11: last number of years. So also we're not extraordinarily priced
• 47:48
  Speaker 11: at a high multiple. We're at a multiple that fits
• 47:50
  Speaker 11: the SMP makes sense in a business that makes sense,
• 47:54
  Speaker 11: that is a business that everybody needs, that's growing organically
• 47:58
  Speaker 11: and by acquisition everyday, single quarter.
• 48:01
  Speaker 2: So first I want to touch on one thing that
• 48:05
  Speaker 2: has well. I guess it has a lot to do
• 48:07
  Speaker 2: with the business, but not day to day operations. You
• 48:11
  Speaker 2: were voted among the world's most ethical companies. I thought
• 48:15
  Speaker 2: of that when Paul said he's trusts the guys he
• 48:17
  Speaker 2: has advising him, or maybe he's getting fleeced. I'm taking
• 48:21
  Speaker 2: it from this award that you don't fleece people.
• 48:25
  Speaker 11: Well, you know what, I really appreciate you bringing that
• 48:26
  Speaker 11: up because we're extremely proud of that. So thirteenth year
• 48:29
  Speaker 11: we've been recognized by the Ethisphere Institute, whose role is
• 48:34
  Speaker 11: to promote ethical behavior in the business community on a
• 48:38
  Speaker 11: global basis. The only award this to about one hundred
• 48:41
  Speaker 11: and thirty five companies. The process by which we go
• 48:45
  Speaker 11: to apply for this award is incredibly onerous, and it's
• 48:49
  Speaker 11: very important to our culture to continue to emphasize from
• 48:54
  Speaker 11: the day that my grandfather started this business in nineteen
• 48:56
  Speaker 11: twenty seven, ethical behavior is critical to our success. Never
• 49:03
  Speaker 11: ever forget it, and we take that right to the
• 49:06
  Speaker 11: mail room, and we're proud of this award recognizes that
• 49:10
  Speaker 11: I take it.
• 49:10
  Speaker 2: Your grandfather with Arthur J. Gallagher and and how cool
• 49:14
  Speaker 2: would it be to have your initials as the ticker? Yeah,
• 49:17
  Speaker 2: for the company, AJG is the ticker. And every time
• 49:21
  Speaker 2: I point this stock out to somebody, I have been
• 49:23
  Speaker 2: pointing it out a lot since we last spoke to you, Pat.
• 49:26
  Speaker 2: They're always blown away by the size and the value
• 49:30
  Speaker 2: of the company. How do you deal with getting that big?
• 49:33
  Speaker 2: Is it hard, you know, because I imagine at this
• 49:37
  Speaker 2: size you have to always be hiring more employees.
• 49:41
  Speaker 4: With the kind of.
• 49:41
  Speaker 2: Regulation that we deal with, you have to have a
• 49:43
  Speaker 2: huge compliance department. I mean, the operation must be so
• 49:48
  Speaker 2: large that your grandfather might not even recognize it today.
• 49:51
  Speaker 11: Well I'm sure you wouldn't recognize it at all, but
• 49:53
  Speaker 11: thank you for bringing that up. I mean, first of all,
• 49:55
  Speaker 11: I think we've built just an outstanding team, and it's
• 49:58
  Speaker 11: a team that over the years, have to each other. Look,
• 50:01
  Speaker 11: we've got to build a chassis that can put a
• 50:04
  Speaker 11: twenty billion dollar company on top of it.
• 50:06
  Speaker 5: Now.
• 50:06
  Speaker 11: The other thing, too, is when you talk about all
• 50:08
  Speaker 11: the things you just mentioned, people look at us to go, oh,
• 50:10
  Speaker 11: Gallagher's on its way to ten billion. But remember, we
• 50:14
  Speaker 11: count the revenue that we get as commissioned So if
• 50:16
  Speaker 11: we're a manufacturer, in essence, our revenues would be ten
• 50:21
  Speaker 11: times because they're counting their gross revenues, we're counting net.
• 50:25
  Speaker 11: So it makes the company even bigger. But we've got
• 50:29
  Speaker 11: a chassis that deals with that. Our professional back room
• 50:32
  Speaker 11: is outstanding. You're correct. We have a significant compliance component
• 50:37
  Speaker 11: and we're proud of that. Our people get it and
• 50:40
  Speaker 11: I'll tell you what I'm most proud of of anything
• 50:43
  Speaker 11: we've accomplished, including our stock price, which is really just
• 50:46
  Speaker 11: beginning its run, is that this culture has hung together.
• 50:51
  Speaker 11: I started with this company in nineteen seventy two is
• 50:54
  Speaker 11: an intern We didn't have one hundred and twenty people,
• 50:57
  Speaker 11: and today the culture feels the same as it did
• 51:00
  Speaker 11: forty six thousand employees later. And that is the answer
• 51:03
  Speaker 11: to our success.
• 51:05
  Speaker 1: That is an impressive We have a listener writing in
• 51:08
  Speaker 1: pat His name is Matthew Pallazola. He's kind of a
• 51:11
  Speaker 1: plant because he's the insurance CENTERLS for Bloomberg Intelligence. He
• 51:14
  Speaker 1: asked that your company's been going into the non admitted market,
• 51:19
  Speaker 1: so he's suggesting maybe you describe what that market is
• 51:21
  Speaker 1: and kind of why you're in the market, what trends
• 51:23
  Speaker 1: are you seeing there.
• 51:24
  Speaker 11: So not admitted is referred to in the industry as
• 51:27
  Speaker 11: excess and surplus and what not admitted does not mean
• 51:30
  Speaker 11: that they can't trade. It means that they're not regulated
• 51:34
  Speaker 11: by the state to form and rate in the state
• 51:37
  Speaker 11: that they're applying their insurance. And you have to tell
• 51:40
  Speaker 11: the client that you have to say, look, I am
• 51:42
  Speaker 11: not XYZ insurance company who file files their rates and
• 51:46
  Speaker 11: has governmental oversight. I can basically sell you the coverage
• 51:51
  Speaker 11: I want at the price I want. That's excess and surplus,
• 51:54
  Speaker 11: and that market is growing exponentially because of the fact
• 51:58
  Speaker 11: that the regulated carriers are having a very hard time
• 52:01
  Speaker 11: getting the rates they need, and every one of them
• 52:04
  Speaker 11: are putting rates up and having to go to regulators
• 52:06
  Speaker 11: to get those approved. And insurance is something that's absolutely necessary.
• 52:10
  Speaker 11: So those that trade around those rules appropriately, by the way,
• 52:15
  Speaker 11: I don't want to make it sound like they're doing
• 52:16
  Speaker 11: anything wrong. Access in surplus is a very very important
• 52:20
  Speaker 11: part of the market, especially when you look at things
• 52:23
  Speaker 11: like California fire, earthquake, Florida wind, that type of thing,
• 52:27
  Speaker 11: And that market has always existed, but now it's growing
• 52:32
  Speaker 11: at a much faster pace than normal because losses have
• 52:36
  Speaker 11: been so great.
• 52:37
  Speaker 1: Well, that kind of goes to my next question.
• 52:38
  Speaker 2: Pat.
• 52:39
  Speaker 1: It seems like almost every week every month, we see
• 52:42
  Speaker 1: some devastation going through the state of Florida, whether it's
• 52:44
  Speaker 1: hurricanes or floods or tornadoes. Talk to us about insurance
• 52:49
  Speaker 1: in Florida. Can can anybody ensure that area down there?
• 52:52
  Speaker 11: Well, there's another factor in Florida that is really difficult,
• 52:55
  Speaker 11: and I think the governor's rightfully trying to address it.
• 52:59
  Speaker 11: The state has passed and needs to make sure it
• 53:02
  Speaker 11: holds to it to tort reform, because Florida has a very,
• 53:07
  Speaker 11: very litigious nature. So here it is the darling of
• 53:10
  Speaker 11: the business community. You know, what a great place to trade,
• 53:13
  Speaker 11: and it is and we low taxes, et cetera, et cetera,
• 53:16
  Speaker 11: and a great economy and people are moving down there
• 53:18
  Speaker 11: left and right. But there's the tort situation there is
• 53:23
  Speaker 11: really really difficult for insurance companies. So add that to
• 53:26
  Speaker 11: the fact that you've got floods and surge and wind,
• 53:29
  Speaker 11: and you hit right on the reason access and surplus
• 53:32
  Speaker 11: is growing so quickly because it is a very difficult
• 53:36
  Speaker 11: place to insure. And I'll tell you my friends all
• 53:39
  Speaker 11: over the state have called me, can you help me
• 53:40
  Speaker 11: on my homeowners? Can you do something about my insurance?
• 53:43
  Speaker 11: And I'll say to them one thing, do you have
• 53:45
  Speaker 11: a quote?
• 53:46
  Speaker 6: Yeah?
• 53:46
  Speaker 11: Yeah, yeah, but it's expensive by it yep, So it is.
• 53:51
  Speaker 11: You raise a very good point. It's a difficult state
• 53:53
  Speaker 11: for insurers to make money in, and the state and
• 53:57
  Speaker 11: the governor are trying to address that. And I think appropriately.
• 53:59
  Speaker 2: So, Pat, let me just ask you how you've dealt
• 54:02
  Speaker 2: with the rate risk that has taken out now four
• 54:05
  Speaker 2: banks in six weeks. You know it's easy to fault
• 54:09
  Speaker 2: those managers in hindsight, but at the time, you know,
• 54:15
  Speaker 2: treasuries seem like a safe bet, mortgages a super rich
• 54:17
  Speaker 2: people seem like a safe bet. How have you dealt
• 54:19
  Speaker 2: with that risk without having the same problems as these others.
• 54:23
  Speaker 11: Well, remember, we're brokers and we're not frankly risk takers.
• 54:28
  Speaker 11: So when you look at an insurance company, we're the
• 54:31
  Speaker 11: ones who packish your risk. So we're the ones that
• 54:34
  Speaker 11: would when we started the conversation, you know you're getting advice.
• 54:36
  Speaker 11: We would typically be the ones giving advice and making
• 54:40
  Speaker 11: sure that your placement was with a licensed carrier. Then
• 54:43
  Speaker 11: when the loss happens in your house burns down, we
• 54:45
  Speaker 11: don't pay it. So similarly to the banking industry, we
• 54:49
  Speaker 11: aren't the major buyer of those bonds, et cetera. We
• 54:53
  Speaker 11: take a dollar, we keep a dime, We send ninety
• 54:56
  Speaker 11: cents to an insurance company. So I really don't have
• 54:59
  Speaker 11: any commentary about the banking industry because I'm not expert
• 55:02
  Speaker 11: in that.
• 55:02
  Speaker 1: At all, well, that sounds like a good business you're in.
• 55:05
  Speaker 2: Yeah know what I mean.
• 55:06
  Speaker 1: That's like an asset asset you know, kind of liability
• 55:09
  Speaker 1: light business. And Pat's the only guy that can make
• 55:12
  Speaker 1: insurance interesting to me. I don't know how he does it.
• 55:14
  Speaker 1: Pat Gallagher, thanks so much for joining us. As always,
• 55:17
  Speaker 1: Pack Gallagher the CEO of Gallagher Insurance, formerly known as
• 55:21
  Speaker 1: Arthur Gallagher and Company Arthur J. Gallagher, which gives you
• 55:25
  Speaker 1: the symbol a J G on your terminy. You punch
• 55:28
  Speaker 1: that into your Bloomberg terminal, you'll see a forty five
• 55:31
  Speaker 1: billion dollar market at company that's hitting all time highs.
• 55:34
  Speaker 1: That's not too shabby.
• 55:38
  Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can
• 55:41
  Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
• 55:45
  Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
• 55:49
  Speaker 2: at Matt Miller nineteen seventy three. And I'm fall Sweeney.
• 55:53
  Speaker 1: I'm on Twitter at pt Sweeney. Before the podcast, you
• 55:55
  Speaker 1: can always catch us worldwide at Bloomberg Radio