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P&L: How Blockchain Will Affect Market Structures · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:14
  Speaker 1: you and your money, whether you're at the grocery store
• 0:16
  Speaker 1: or the trading floor. Find the Bloomberg P L Podcast
• 0:20
  Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. I want
• 0:28
  Speaker 1: to bring in Christian Catalini. He is a professor at
• 0:32
  Speaker 1: the m I T. Sloan School of Management, coming to
• 0:35
  Speaker 1: us from Boston. Christian, you recently wrote a paper UH
• 0:39
  Speaker 1: with Joshua and Gance of the University of Toronto arguing
• 0:42
  Speaker 1: that cryptocurrencies will affect key costs in the economy and
• 0:47
  Speaker 1: namely the cost of verifying transactions, the cost of running
• 0:50
  Speaker 1: a network platform or a marketplace. I just want to
• 0:53
  Speaker 1: get your sense of where we are in the evolution
• 0:56
  Speaker 1: away from paper money and towards cryptocurrencies. So thank you
• 1:01
  Speaker 1: very much for having me here. UM. I think this
• 1:04
  Speaker 1: is an interesting time, UM are around this space. We
• 1:07
  Speaker 1: we we just came back from I think the most
• 1:10
  Speaker 1: ip phase around cryptocurrencies and blockchain and digital ledgers. UH
• 1:15
  Speaker 1: twenty sixteen and fifteen have seen a lot of VC
• 1:17
  Speaker 1: investment and attention in this space, and I think as
• 1:20
  Speaker 1: people are starting to build solutions that actually deliver value
• 1:23
  Speaker 1: UH to to customers to different industry verticals, we're coming
• 1:27
  Speaker 1: closer to two applications. UH. Digital currency is clearly one.
• 1:31
  Speaker 1: A number of central banks are looking at this really
• 1:34
  Speaker 1: closely because it has implications for how we think about
• 1:37
  Speaker 1: monetary policy, taxation, UH, and a number of other dimensions.
• 1:41
  Speaker 1: Of course, as many other systemic changes. UH. It's unlikely
• 1:44
  Speaker 1: to happen overnight, and I think a lot of the
• 1:46
  Speaker 1: IPE has inserved well this UH this ecosystem because the
• 1:49
  Speaker 1: technology is complex and bringing it to market what will
• 1:52
  Speaker 1: take some time. Can you speak in detail about blockchain
• 1:55
  Speaker 1: and its ability to create or to offer tamper proof
• 1:59
  Speaker 1: trans action records. I mean that's part of the promise, absolutely,
• 2:04
  Speaker 1: and in fact, so in our piece, what we're trying
• 2:06
  Speaker 1: to focus on is really basic economic theory. So from
• 2:10
  Speaker 1: from an economics perspective, we verify attributes of transactions all
• 2:14
  Speaker 1: the time. Anything you can think of in the economy
• 2:17
  Speaker 1: is essentially a transaction, whether you're authenticate yourself, you buy
• 2:20
  Speaker 1: goods yourself goods, you're trading UM, and those attributes matter
• 2:24
  Speaker 1: a lot because often, you know, as long as things
• 2:26
  Speaker 1: go well, we we don't worry and and the transaction
• 2:29
  Speaker 1: goes smoothly. But when there's an exception, we often need
• 2:31
  Speaker 1: to go back and verify credentials of individuals involved, attributes
• 2:35
  Speaker 1: of the goods, think about the provenance, how they've been
• 2:38
  Speaker 1: manipulated across the supply chain, and that's usually very costly.
• 2:42
  Speaker 1: We usually perform an audit when we need to verify attributes.
• 2:45
  Speaker 1: Um I think the promise of blocation is really lowering
• 2:48
  Speaker 1: the cost of that process, that process of verifying attributes
• 2:51
  Speaker 1: to almost to zero, and that's quite fascinating, you know,
• 2:54
  Speaker 1: to to markets. Well, Christian, I want to look at bitcoin,
• 2:58
  Speaker 1: which is probably the most close watched virtual currency out there. Yesterday,
• 3:03
  Speaker 1: there was a story in the Wall Street Journal that
• 3:04
  Speaker 1: Circle Internet Financial, which is one of the most heavily
• 3:07
  Speaker 1: funded digital currency startups, will no longer offer customers the
• 3:10
  Speaker 1: ability to buy and sell bitcoins based on the setbacks
• 3:15
  Speaker 1: that we have seen with bitcoin gaining cloud as a currency,
• 3:19
  Speaker 1: and you know, the failure for block chain to really
• 3:22
  Speaker 1: take off at the big banks. What's your optimism that
• 3:24
  Speaker 1: we will transfer the financial system towards something that is
• 3:28
  Speaker 1: more in line with a cryptocurrency model. Absolutely, so I
• 3:32
  Speaker 1: think those are all very valid points and and those
• 3:35
  Speaker 1: are kind of the main challenges of a technology that
• 3:38
  Speaker 1: is evolving into compliance. Right. So Bitcoin was designed, let's
• 3:41
  Speaker 1: remember that to be totally decentralized, censorship proof and distribute it. Right.
• 3:46
  Speaker 1: So it was in in total antithesis to the regular
• 3:49
  Speaker 1: financial system. Uh, therefore it made some choices in terms of,
• 3:53
  Speaker 1: you know, the privacy of the transactions, who can vet
• 3:56
  Speaker 1: transactions that were very deu syncratic to Bitcoin at the
• 3:59
  Speaker 1: same time, and we need to not forget that the
• 4:01
  Speaker 1: major breakthrough in cryptography behind blockchain is much more general
• 4:05
  Speaker 1: and in fact, what you're seeing now is you know, banks,
• 4:07
  Speaker 1: financial institutions, accounting firms rethinking this technology from the ground
• 4:12
  Speaker 1: up and repurposing it for different markets. In different settings.
• 4:16
  Speaker 1: You will need different types of cryptocurrencies with different properties,
• 4:19
  Speaker 1: with different you know, compliance levels. Bitcoin, I think it's
• 4:23
  Speaker 1: scaling quite successfully on a global scale, but not necessarily
• 4:28
  Speaker 1: you know, in the way that it's the most compatible
• 4:30
  Speaker 1: to current financial systems. Um the movie that you you
• 4:33
  Speaker 1: mentioned by Circle is one where the company is seeing
• 4:35
  Speaker 1: itself more and more as you know, a global payment
• 4:39
  Speaker 1: app where people can easily transfer money across the globe.
• 4:42
  Speaker 1: It doesn't really matter what cryptocurrency they use. It could
• 4:45
  Speaker 1: be bitcoin, it could be something else. Uh, the technology
• 4:47
  Speaker 1: is still kind of working in the background, but the
• 4:49
  Speaker 1: consumer doesn't really need to see it. Is This competition
• 4:53
  Speaker 1: include companies such as Venmo and then maybe bringing our three,
• 4:57
  Speaker 1: which is that consortium back by financial firms right JP,
• 5:01
  Speaker 1: Morgan Chase, Bank of America and Barclay's absolutely and in fact,
• 5:05
  Speaker 1: I think you're seeing a lot of experimentations from startups
• 5:08
  Speaker 1: that maybe want to tie themselves to to bitcoin or
• 5:10
  Speaker 1: etherium or other cryptocurrencies to consertions of banks. Are three
• 5:15
  Speaker 1: recently released Korda's fascinating to see how even within that consortium,
• 5:20
  Speaker 1: some players have decided to just tell people what courtA
• 5:22
  Speaker 1: is briefly because that's an interesting collaboration result. Yea. So
• 5:25
  Speaker 1: essentially that's a number of banks that have decided to
• 5:28
  Speaker 1: design their own protocol to streamline transactions because I think
• 5:32
  Speaker 1: there's a huge opportunity here in improving our settlement and
• 5:35
  Speaker 1: reconciliation of books. Happens on a global scale. Um, but
• 5:40
  Speaker 1: even within KORDA I think you're starting to see that,
• 5:43
  Speaker 1: you know, uh, Goldman, Sacks and others are deciding to
• 5:46
  Speaker 1: go alone because maybe they want a slightly different implementation
• 5:49
  Speaker 1: of the same technology. So real quick, what's the one
• 5:52
  Speaker 1: thing that you're looking for, the one development that will
• 5:54
  Speaker 1: push the evolution of cryptocurrency into the mainstream and make
• 5:57
  Speaker 1: it the base of the financial system. I think it
• 6:00
  Speaker 1: will take time, but I think what we may see
• 6:03
  Speaker 1: is maybe an economy, a government or um. You know,
• 6:07
  Speaker 1: it could be even like a private player within an
• 6:10
  Speaker 1: ecosystem with the supply chain doing a major adoption effort. Um.
• 6:14
  Speaker 1: I think that would take some time, but as you
• 6:17
  Speaker 1: as you know, like recent events like the India demonetization
• 6:20
  Speaker 1: of the thousand and five hundred Europe's can provide the
• 6:23
  Speaker 1: fuel for for further adoption in this market. And I
• 6:25
  Speaker 1: wouldn't be surprised if, you know, given the current microeconomic turmoil,
• 6:30
  Speaker 1: maybe a central bank we considered this as an opportunity
• 6:32
  Speaker 1: to reform taxes and how they do many of their
• 6:35
  Speaker 1: services to citizens. Christian Catalini, thank you very much, Professor
• 6:39
  Speaker 1: of Entrepreneurship at the m I. T. Sloan School of Management.
• 6:55
  Speaker 1: If you want some immediate thoughts from our next guest,
• 6:58
  Speaker 1: John Stults was is Oppenheimer's chief investment strategist. He knows
• 7:02
  Speaker 1: everything about global markets. John, it's always a pleasure. Thanks
• 7:05
  Speaker 1: for being here with us. Let's start off with the
• 7:09
  Speaker 1: Mario Draga European Central Bank, and then I want to
• 7:11
  Speaker 1: get your thoughts on emerging markets. But won't you start
• 7:13
  Speaker 1: there and tell us what that all means for investors. Well,
• 7:16
  Speaker 1: we've been big fans of Mario dragging for a long
• 7:19
  Speaker 1: time with think his his process of doing whatever it
• 7:22
  Speaker 1: takes has has helped Europe. It's a very complex situation.
• 7:26
  Speaker 1: But when you consider it that it's they're coming up
• 7:29
  Speaker 1: on their second anniversary of KWI and already they're talking
• 7:33
  Speaker 1: tapering much of that not officially talking, but I was
• 7:37
  Speaker 1: just auty. We learned today at sixty right, sixty billion,
• 7:42
  Speaker 1: but for a longer period of time until December. It
• 7:48
  Speaker 1: reminds me of Shakespeare Arose by any other name, you know,
• 7:51
  Speaker 1: it's I mean, honestly, everyone today is debating the meaning
• 7:54
  Speaker 1: of taper. Basically, they said that they're going to lower
• 7:57
  Speaker 1: the pace of purchases next year of the longer term
• 8:01
  Speaker 1: bonds that they're buying, but they haven't discussed tapering. So
• 8:05
  Speaker 1: then you had all of these journalists asking Mario Traggy, wait,
• 8:09
  Speaker 1: but how does that work? You're you're you're slowing the purchases.
• 8:12
  Speaker 1: I actually looked up tapering in the dictionary this morning.
• 8:14
  Speaker 1: I'm like, that's the definition of it. That's the thing,
• 8:18
  Speaker 1: you know, The process is always one of a lot
• 8:21
  Speaker 1: of dialogue, questions of semantics, always wide for interpretation, and
• 8:26
  Speaker 1: that that probably offers the day to day drama for
• 8:28
  Speaker 1: the markets, which I think we saw on the currency
• 8:31
  Speaker 1: with the Europe first was stronger than it moved lower
• 8:35
  Speaker 1: uh ash as the announcement came out today. But I
• 8:38
  Speaker 1: think the good news is just the thought that they're
• 8:41
  Speaker 1: thinking of going to that UH sixty UH number on
• 8:46
  Speaker 1: a monthly basis versus eighties shows it yet very much
• 8:49
  Speaker 1: on parallel to Bernanky in in May of twenty uh
• 8:56
  Speaker 1: when when Bernanky intimated that the Fed was beginning to
• 8:59
  Speaker 1: think about the possibility of tapering, and uh when the
• 9:03
  Speaker 1: market took that the market actually had a tantrum. Then
• 9:07
  Speaker 1: it doesn't look like we're getting that today, And I
• 9:08
  Speaker 1: wanted to ask you about that. That to me is
• 9:11
  Speaker 1: meaningful that We're not seeing a tantment markets. Yes, you
• 9:13
  Speaker 1: are seeing some price wings, but these are pretty minor
• 9:16
  Speaker 1: moves in the scheme of things. This is not another
• 9:18
  Speaker 1: taper tantrum all over again. Does this mean to you
• 9:22
  Speaker 1: that central bankers have really lost their clout, that people
• 9:25
  Speaker 1: are not looking to them as much anymore. I really
• 9:27
  Speaker 1: don't think that that that's the the issue. I think
• 9:30
  Speaker 1: it's more that I think there's a recognition that the
• 9:32
  Speaker 1: central bankers have become remarkably experienced since two thousand and
• 9:36
  Speaker 1: eight dealing with a significant crisis situation, coming out of
• 9:40
  Speaker 1: it and managing a recovery process, both sometimes on a
• 9:44
  Speaker 1: concerted effort and sometimes really on a parallel effort. It
• 9:49
  Speaker 1: just just depends what they appear to have learned from
• 9:51
  Speaker 1: one another. And of course the next chapter is as
• 9:54
  Speaker 1: government start fiscal spend. We think the infrastructure story here
• 9:58
  Speaker 1: from state side, which would have happened I there with
• 10:00
  Speaker 1: Hillary Clinton and now will happen probably a greater extent
• 10:04
  Speaker 1: with Donald Trump, will spread around the world, and it's
• 10:07
  Speaker 1: something that's needed both by developed nations as well as
• 10:10
  Speaker 1: emerging nations. So and it will relieve, it will take
• 10:14
  Speaker 1: the onus away from the central banks we think of
• 10:17
  Speaker 1: having to carry these economies, aren't we. You mentioned emerging nations.
• 10:20
  Speaker 1: I'd like you to get a little specific and tell
• 10:22
  Speaker 1: us which ones do you think will benefit the most
• 10:24
  Speaker 1: from the fiscal stimulus that you're describing may appear in
• 10:27
  Speaker 1: the United States. Well, I would have to think that
• 10:30
  Speaker 1: on a regional basis, Uh, we would probably there's risks,
• 10:34
  Speaker 1: of course, because of the president elect Candida with Mario.
• 10:40
  Speaker 1: In fact, Mario said spec he said, quote political uncertainty
• 10:44
  Speaker 1: is dominant, and he cited Brexit and the election of
• 10:48
  Speaker 1: Donald Trump. Yeah, without a doubt that there are all
• 10:52
  Speaker 1: kinds of questions is to to what's going to come.
• 10:54
  Speaker 1: But I think that in terms of signals that are
• 10:57
  Speaker 1: coming out of fifty six Street and Fifth Avenue, we
• 11:00
  Speaker 1: would have to think that what we're looking at is uh,
• 11:03
  Speaker 1: certainly it's somewhat of a melioration from where the very
• 11:07
  Speaker 1: sharp rhetoric during the campaign being rounded out here. We'd
• 11:12
  Speaker 1: have to think in terms of emerging markets, we think
• 11:14
  Speaker 1: Asia looks like it's it's plenty happy about what's going on,
• 11:19
  Speaker 1: compared to what many would have thought initially, Uh, not
• 11:23
  Speaker 1: necessarily on China, but on the region, so their trading
• 11:26
  Speaker 1: partners of what we do like about China. Of course,
• 11:29
  Speaker 1: as we saw an uptick in imports and in exports, UH,
• 11:33
  Speaker 1: that's a good sign. And we can't help but think that, Yeah,
• 11:37
  Speaker 1: Donald Trump is a globalist, even though he is, he
• 11:40
  Speaker 1: is looking to uh perhaps take back some of the
• 11:43
  Speaker 1: economic edge we gave away years ago in trade agreements.
• 11:48
  Speaker 1: Now on a world where the competitive landscape has been
• 11:51
  Speaker 1: vastly reduced or leveled by globalization as well as by technology,
• 11:57
  Speaker 1: where emerging markets are so which countries okay? In terms
• 12:00
  Speaker 1: in terms of countries, I'd have to think, Uh, Korea, Taiwan.
• 12:06
  Speaker 1: I would have to think, are you naming countries that
• 12:08
  Speaker 1: have turmoil related to the political issues or opportunities both well?
• 12:14
  Speaker 1: I would say here opportunities from the extent that of
• 12:17
  Speaker 1: multinational uh trade positions that will likely not be as
• 12:23
  Speaker 1: affected as negatively as might be thought. And we'd have
• 12:26
  Speaker 1: to think China will come will benefit from this as well.
• 12:29
  Speaker 1: We we've just been usually we like to benefit from
• 12:32
  Speaker 1: the region more than direct in China. What about back
• 12:36
  Speaker 1: here in the U s UM, I've heard some calls
• 12:39
  Speaker 1: for decline and the SMP UH. Some people are saying
• 12:43
  Speaker 1: maybe just a ten percent. What's your thought? What what
• 12:47
  Speaker 1: in terms of you know, and we'd have to get
• 12:49
  Speaker 1: some kind of a bolt from the blue to see
• 12:51
  Speaker 1: some kind of a decline. Do you think that the
• 12:53
  Speaker 1: SMP is going to keep going up? I think that
• 12:56
  Speaker 1: the S and P will likely level out. We're hoping
• 12:58
  Speaker 1: it will go through our twenty target, which we put
• 13:01
  Speaker 1: in last December twenty two. We're about two and a
• 13:03
  Speaker 1: half percent away from that right now. But we've seen
• 13:08
  Speaker 1: real good performance, much better performance out of mids and smalls,
• 13:11
  Speaker 1: and we were market capagnostic also, so we're optimistic. We
• 13:16
  Speaker 1: think the the but the the level of and and
• 13:19
  Speaker 1: momentum that we're seeing now we think will carry through
• 13:22
  Speaker 1: the end of the year. But the first quarter may
• 13:24
  Speaker 1: have a traditional New Year's revisiting and consideration, but we're
• 13:29
  Speaker 1: not looking for a significant drop. Just real quick, What
• 13:31
  Speaker 1: about highyeld bonds related to high yield? You know, the
• 13:35
  Speaker 1: thing about high yield is if, if if anything, it
• 13:38
  Speaker 1: tends to be an area that we're sentiment swings very
• 13:41
  Speaker 1: sharply either one side of the boat or the other.
• 13:43
  Speaker 1: Right now, the fact that you're dealing with a scenario
• 13:47
  Speaker 1: that appears to be a continuation of increasing growth. State
• 13:52
  Speaker 1: side moving forward should be good for high yield bonds,
• 13:55
  Speaker 1: which are proxies for the equity market within the bond
• 13:58
  Speaker 1: space forward. You sound pretty bullish. Yeah, I still am bullish,
• 14:03
  Speaker 1: and I have been bullish actually since January of two
• 14:07
  Speaker 1: thousand and nine when we were looking forward. Fortunately we
• 14:10
  Speaker 1: were quoted by by a newspaper out in Des Moines
• 14:13
  Speaker 1: at that time, Otherwise we would have forgotten when we
• 14:16
  Speaker 1: turned bullish. John stultis Oppenheimer's chief investment strategist. Thank you
• 14:22
  Speaker 1: so much. I want to learn more about moonshot ideas,
• 14:36
  Speaker 1: to sort of out there crazy ideas that may one
• 14:40
  Speaker 1: day make another billion dollars with us, to tell us
• 14:43
  Speaker 1: all about those ambitions, ambitions and how they may be
• 14:47
  Speaker 1: getting ratcheted back at Google. Is Max Chafkin, Bloomberg tech
• 14:51
  Speaker 1: reporter who's here in Bloomberg eleven three Oh's studio. Max,
• 14:56
  Speaker 1: you wrote this fascinating story about how Google makes so
• 14:59
  Speaker 1: much money. Me that never had to worry about financial
• 15:02
  Speaker 1: discipline until now set the scene for us. Right. So, uh,
• 15:07
  Speaker 1: basically you think of Google, and you think of um
• 15:10
  Speaker 1: search obviously, but you also think of a very successful
• 15:13
  Speaker 1: email program. Maybe YouTube, Um, maybe you start thinking about
• 15:17
  Speaker 1: these these further off ideas, the self driving car, they
• 15:20
  Speaker 1: make internet balloons. Uh, they have venture capital arms, they
• 15:23
  Speaker 1: have all these different divisions trying to find a cure
• 15:25
  Speaker 1: for death trying. Yeah, there's a company called Calico trying
• 15:28
  Speaker 1: to find a cure for death, run by Art Levinson,
• 15:31
  Speaker 1: um and and and the weird kind of reality of
• 15:33
  Speaker 1: this is that there's really only one piece of the
• 15:36
  Speaker 1: business that makes a lot of money, which is their
• 15:39
  Speaker 1: advertising part, primarily search ads, the little ads that show
• 15:42
  Speaker 1: up when you search and you know, and that and
• 15:46
  Speaker 1: that's created kind of like one of the weirdest companies
• 15:48
  Speaker 1: I think in like the history of capitalism, where you
• 15:50
  Speaker 1: have this amazingly successful business and then all these other
• 15:54
  Speaker 1: businesses that are outside of that and um. For years, uh,
• 15:59
  Speaker 1: Larry Page ands are gay Brand basically allowed these other businesses,
• 16:03
  Speaker 1: which are kind of these little fife tums to just
• 16:05
  Speaker 1: do whatever they want. And now Google, which is now
• 16:08
  Speaker 1: called Alphabet, is trying to kind of rain that in
• 16:10
  Speaker 1: but also ran it in a way that doesn't totally
• 16:12
  Speaker 1: squash innovation. You know. One of the illustrations for this
• 16:15
  Speaker 1: story is an energy generating kite, and I confessed that
• 16:20
  Speaker 1: it immediately brought to mind images of Howard Hughes and
• 16:25
  Speaker 1: the spruce goose, the mega plane that flew just once.
• 16:30
  Speaker 1: Can you tell us about Astro Teller, the people that
• 16:33
  Speaker 1: you met while you made this story come to life? Right? So,
• 16:37
  Speaker 1: so my co writer and I Mark Bergen went inside
• 16:39
  Speaker 1: of X, which is used to be called Google X.
• 16:42
  Speaker 1: It is the crazy research lab that's responsible for for
• 16:45
  Speaker 1: Google's moonshots. They call themselves the Moonshot Factory. They all
• 16:49
  Speaker 1: have these crazy titles. Astro I think is now called CEO,
• 16:52
  Speaker 1: but for a long time he was keptain of moonshots
• 16:55
  Speaker 1: um and and so you have and so anyway, it's
• 16:57
  Speaker 1: it's it's this crazy research lab they have. They have
• 16:59
  Speaker 1: the driver car, they have the energy generating kites, they
• 17:03
  Speaker 1: have these Internet balloons, and they have drone delivery and
• 17:08
  Speaker 1: you know, all of these things. You know, they could
• 17:10
  Speaker 1: be huge businesses, but they're all still sort of a
• 17:13
  Speaker 1: ways off. I'd say the car, the driverless car, is
• 17:15
  Speaker 1: the thing that's closest to becoming you know, a revenue
• 17:20
  Speaker 1: generating uh business. They're they're supposedly they're going to spin
• 17:24
  Speaker 1: it off next year, although we don't know for sure.
• 17:27
  Speaker 1: I love this quote from the Owner's manual for Google shareholders,
• 17:32
  Speaker 1: do not be surprised if we place smaller bets in
• 17:35
  Speaker 1: areas that seem very speculative or even strange. Uh. You know,
• 17:39
  Speaker 1: you were talking Max about how Google is unlike any
• 17:43
  Speaker 1: other company possibly in history, because they get most of
• 17:46
  Speaker 1: their revenue from one area and then invest in all
• 17:48
  Speaker 1: these other areas. One possible agent for change has been
• 17:52
  Speaker 1: Ruth Poorat, who came to the company last year as
• 17:55
  Speaker 1: chief financial officer from Morgan Stanley. Uh. And she's developed
• 18:00
  Speaker 1: sort of an unflattering reputation among these sort of Moonshot magicians. Correct. Right, Well,
• 18:05
  Speaker 1: so it's probably important to point out that on Wall
• 18:08
  Speaker 1: Street people love this. They love they They're very happy
• 18:12
  Speaker 1: that Google is trying to be a little bit smarter
• 18:14
  Speaker 1: about how it spends its money. However, in the Moonshot
• 18:17
  Speaker 1: Factory and in some of these other divisions, uh, this
• 18:21
  Speaker 1: is look really looked at as like bringing in this
• 18:23
  Speaker 1: kind of New York Wall Street type to kind of,
• 18:27
  Speaker 1: you know, make a bunch of decisions where you know
• 18:30
  Speaker 1: what I mean, where where. From their perspective, she doesn't
• 18:32
  Speaker 1: know anything about Yeah, it's some one person called called
• 18:35
  Speaker 1: her referred to as a hatchet man. Um. Now, I
• 18:38
  Speaker 1: think what Google would say, and what what what people
• 18:42
  Speaker 1: inside of these bets as they're called say, is that
• 18:46
  Speaker 1: you know, from you know, constraints, you can still have innovation.
• 18:50
  Speaker 1: That sometimes it's important actually to say like you can
• 18:52
  Speaker 1: only spend this much money, because that forces people to
• 18:55
  Speaker 1: be a little bit more creative. I actually think there's
• 18:57
  Speaker 1: something to that. And I think one of the things,
• 19:00
  Speaker 1: especially when you look at, say the driverless car, I
• 19:03
  Speaker 1: think it's possible that the driverless car suffered a little
• 19:05
  Speaker 1: bit from basically an almost unlimited budget. Um. You know,
• 19:09
  Speaker 1: Google is technologically ahead of just just about everybody else,
• 19:13
  Speaker 1: but commercially they are actually kind of behind a bunch
• 19:16
  Speaker 1: of companies there, behind Tesla, they're behind Uber and you
• 19:19
  Speaker 1: wonder if maybe if they had had placed some more
• 19:22
  Speaker 1: constraints on the business, they would have been forced to
• 19:25
  Speaker 1: take a product to market sooner. On the other hand,
• 19:27
  Speaker 1: their safety reasons and and you know, it's a long game.
• 19:30
  Speaker 1: So we'll see. How was the food. The food at
• 19:34
  Speaker 1: Google and Alphabet is excellent, as you might imagine. Um,
• 19:38
  Speaker 1: And and one of the one of the most surreal experiences, Uh, Mark,
• 19:42
  Speaker 1: my co writer and I had during the during our
• 19:44
  Speaker 1: visit to X was you know, sitting there and there's
• 19:46
  Speaker 1: this picnic area where people are picking at you know,
• 19:49
  Speaker 1: seared tofu it's probably locally sourced or something. And you know,
• 19:53
  Speaker 1: just a few feet away from this picnic area, there's
• 19:55
  Speaker 1: a drone going up and down and up and down,
• 19:58
  Speaker 1: and everybody's just you know, basically ignoring it, like you know,
• 20:02
  Speaker 1: like it's nothing, and you just realize, like, man, this
• 20:04
  Speaker 1: is a this is an interesting place. Is a place
• 20:06
  Speaker 1: that's that's doing things that nobody else is doing, and
• 20:09
  Speaker 1: it's kind of doing it on a scale that nobody
• 20:11
  Speaker 1: else is doing it at while you're doing it on
• 20:13
  Speaker 1: a great scale. By sharing this information in this story
• 20:15
  Speaker 1: with us Max Chafkin, also with Mark Bergen, co authors
• 20:20
  Speaker 1: of this great story, you've got to read about Google
• 20:22
  Speaker 1: making so much money that it doesn't necessarily have to
• 20:24
  Speaker 1: worry about discipline. I want to take a look at bonds.
• 20:38
  Speaker 1: I want to look at particular European bonds which have
• 20:41
  Speaker 1: been out responding to today's ECB announcement that they will
• 20:46
  Speaker 1: slower the amount of bonds that they will purchase each
• 20:49
  Speaker 1: month starting in April next year. But they also had
• 20:52
  Speaker 1: some other messages that might be a little bit more uh,
• 20:55
  Speaker 1: sort of dovish. Frankly, I want to bring in for
• 20:57
  Speaker 1: more insight, uh, Max seems abay, Euro Area economist for
• 21:03
  Speaker 1: Bloomberg Intelligence. Uh, to give us a better sense of
• 21:05
  Speaker 1: what's going on here. So Maxie, what's your big takeaway
• 21:08
  Speaker 1: from the CBS announcement today? Yes, Settle from London. Well,
• 21:11
  Speaker 1: the the announcement of d c B was quite a
• 21:13
  Speaker 1: surprise actually because right, yeah, because they went for for
• 21:17
  Speaker 1: actually it went for longer than what I expected, but
• 21:19
  Speaker 1: at a bit at a smaller pace. So now they're
• 21:22
  Speaker 1: gonna buy sixty billion months starting in April until December
• 21:26
  Speaker 1: two thousand seventeen. So that means they're going to go
• 21:28
  Speaker 1: for one more year of que market expectations, well for
• 21:32
  Speaker 1: something a bit a bit shorter at the same current
• 21:35
  Speaker 1: eighty billion pace. So they're going smaller but for longer. Wait,
• 21:39
  Speaker 1: hold on, I just I want to raise one important point.
• 21:42
  Speaker 1: They also lowered the yields, or they allowed the ECB
• 21:45
  Speaker 1: to buy bonds with yields that are lower than the
• 21:48
  Speaker 1: deposit rate. In other words, Uh, this is saying, Okay,
• 21:51
  Speaker 1: you want to go buy those two year German yields,
• 21:53
  Speaker 1: German bonds that have yields that are too low under
• 21:55
  Speaker 1: the current provisions, go ahead, We're going to allow that.
• 21:58
  Speaker 1: And what you're seeing is a steepening in the yield curve.
• 22:01
  Speaker 1: In fact, the German yield curve steepened to the widest
• 22:06
  Speaker 1: of the year and uh and and the most in
• 22:09
  Speaker 1: in many years. So I'm looking at this and wondering,
• 22:11
  Speaker 1: is this a similar move to the Bank of Japan.
• 22:14
  Speaker 1: Is this basically the e c B saying we're gonna
• 22:16
  Speaker 1: peg short term rates and we're gonna allow longer term
• 22:19
  Speaker 1: rates to sort of creep upward. Well that's not what
• 22:22
  Speaker 1: they said explicitly, but maybe they're going to that. The
• 22:25
  Speaker 1: deposit rule well actually something they put in place from
• 22:27
  Speaker 1: the start to avoid making losses on on these purchases.
• 22:30
  Speaker 1: And basically now they can buy anything below the deposit
• 22:34
  Speaker 1: which is set a minus your point four percent. And
• 22:36
  Speaker 1: also another cuy parameters that changed today is the fact
• 22:40
  Speaker 1: that they can buy anything now until one year maturity.
• 22:45
  Speaker 1: Before that it was from two years and thirty years,
• 22:47
  Speaker 1: and now it's also one year to thirty years. So
• 22:51
  Speaker 1: there's there's a double effect here, obviously weighing on the
• 22:54
  Speaker 1: on the short end of the curveous, Can I just
• 22:57
  Speaker 1: ask you to comment on whether these projections into two
• 23:01
  Speaker 1: thousand nineteen really make any sense? I mean, I know
• 23:04
  Speaker 1: they have to answer the question and they have to
• 23:05
  Speaker 1: check the box. But you know, even if we just
• 23:08
  Speaker 1: look back to two thousand fifteen, originally the European Central
• 23:13
  Speaker 1: Bank estimated that they would have maybe a trillion euros
• 23:17
  Speaker 1: on their balance sheet. Today they have more than two
• 23:20
  Speaker 1: and a quarter trillion on target. This is a changing situation.
• 23:26
  Speaker 1: So why did these projections out to two thousand nineteen
• 23:30
  Speaker 1: and and beyond, Why does that really matter? Well, Um,
• 23:33
  Speaker 1: as an economist, it's always difficult to to to talk
• 23:35
  Speaker 1: about projection in the next three years. Obviously, it's already
• 23:38
  Speaker 1: difficult to do it for the next year, the next
• 23:40
  Speaker 1: two years, so three years obviously it's a bit stretched. Um.
• 23:43
  Speaker 1: The thing is they have to publish this because it's
• 23:46
  Speaker 1: also an eddication of how they assess um their own homework,
• 23:49
  Speaker 1: how they are reaching the target. And this thing to
• 23:52
  Speaker 1: to to be careful with these projection is that they
• 23:56
  Speaker 1: what they did today the announcement and all the decisions
• 23:59
  Speaker 1: are not penciled in these projections because they were made
• 24:02
  Speaker 1: before that. So it's important to keep that in mind. Um. Obviously, Drag,
• 24:06
  Speaker 1: you acknowledge during the press conference, just it just explained,
• 24:09
  Speaker 1: and so what does that mean? What should we what
• 24:11
  Speaker 1: should we take away from that? Well, let's takeaway is
• 24:13
  Speaker 1: that you acknowledge during the press conference that one point
• 24:15
  Speaker 1: seven percent in two thousand nineteen, which is the projection
• 24:18
  Speaker 1: they have now for inflation, is you acknowledge it is
• 24:21
  Speaker 1: not close to the target to the mandate and that
• 24:24
  Speaker 1: means the it's a very dovish message actually that they
• 24:26
  Speaker 1: could actually go for even longer than the seven two
• 24:29
  Speaker 1: seventeen uh. And yeah, again that's the dovish message from
• 24:31
  Speaker 1: drug Is saying we're not done here. It could be
• 24:33
  Speaker 1: much longer than than what we have today. Maxim, what
• 24:37
  Speaker 1: insight did you glean on what the latest ECB announcements
• 24:40
  Speaker 1: mean for the peripheral nations, namely Italy which has struggled, uh,
• 24:45
  Speaker 1: certainly after the no referendum vote, but also because of
• 24:47
  Speaker 1: the banking system there. Well, we know that the career
• 24:50
  Speaker 1: program is helping the periphery more than the core. If
• 24:54
  Speaker 1: even if they buy more at the core then at
• 24:56
  Speaker 1: the periphery because of the capital keys. But the message
• 24:59
  Speaker 1: sent from the EC year is that we're gonna be
• 25:01
  Speaker 1: here for longer. Mario Dreggie said that. He said, there's
• 25:03
  Speaker 1: no tampering. We're gonna stay in the market. We're gonna
• 25:06
  Speaker 1: continue exert pressure on prices. It was very clear about this.
• 25:09
  Speaker 1: The message is your boring costs are gonna say, uh,
• 25:12
  Speaker 1: for longer, I'm gonna stay very low, and that we're
• 25:16
  Speaker 1: here to help you, not just the periphery but the
• 25:18
  Speaker 1: Eurozone as a whole. Speak if you can about the
• 25:21
  Speaker 1: implications for currencies, because the tenure US Treasury at right
• 25:26
  Speaker 1: now two point three nine percent, a sell off of
• 25:30
  Speaker 1: sixteen thirty seconds. The thirty year stands at three point
• 25:33
  Speaker 1: oh eight percent. It is off one and six thirty seconds.
• 25:39
  Speaker 1: Implications for the euro and the dollar well, Obviously the
• 25:43
  Speaker 1: e c b S is probably expecting, it's probably hoping
• 25:46
  Speaker 1: for this to have an effects effect. Obviously with the
• 25:49
  Speaker 1: fom C next week, this would also be a factor. Uh,
• 25:53
  Speaker 1: it's not a policy target, as they say, but it's
• 25:55
  Speaker 1: surely something they're watching today. Thanks for listening to the
• 26:03
  Speaker 1: Bloomberg pien L Podcast. You can subscribe and listen to
• 26:07
  Speaker 1: interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.
• 26:12
  Speaker 1: I'm pim Fox. I'm out there on Twitter at pim Fox.
• 26:16
  Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one
• 26:19
  Speaker 1: before the podcast. You can always catch us worldwide on
• 26:22
  Speaker 1: Bloomberg Radio