Latest / Bloomberg Intelligence / We're Pretty Late In The Credit Cycle: TCW's Rivelle

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We're Pretty Late In The Credit Cycle: TCW's Rivelle · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you.
• 0:05
  Speaker 1: Along with my co host Lisa Brahma Wicks. Each day
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  Speaker 1: we bring you the most noteworthy and useful interviews for
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  Speaker 1: you and your money. Whether at the grocery store or
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  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
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  Speaker 1: podcast or wherever you listen to podcasts, as well as
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  Speaker 1: at Bloomberg dot com. Well, given a sharp rally we
• 0:23
  Speaker 1: have seen in a fixed income market so far in
• 0:26
  Speaker 1: many investors are asking themselves what's next. So to try
• 0:29
  Speaker 1: to get the answer to this question and others, let's
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  Speaker 1: bring on Tad Revel Tad as a chief investment officer
• 0:35
  Speaker 1: for fixed income at tc W t c W haws
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  Speaker 1: about a hud billion dollars under management, and it is
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  Speaker 1: based in Los Angeles. Tad, thanks so much for joining us.
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  Speaker 1: I wonder if, just to start off, if you could
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  Speaker 1: give us a sense where do you think we are
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  Speaker 1: in the credit cycle right now? We think we're pretty
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  Speaker 1: late in the credit cycle, and when we think about
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  Speaker 1: the economic cycle and the investing cycle, we actually try
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  Speaker 1: not to think about it in the narrower sense of
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  Speaker 1: the credit cycle, but rather in a more expansive way
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  Speaker 1: in the sense that I think that apperusal of the
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  Speaker 1: last twenty or thirty years of economic downturn suggests that
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  Speaker 1: we actually live in a world of interlocked credit asset
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  Speaker 1: price business cycles. Like a three legged stool, you knock
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  Speaker 1: out one one leg, in this case maybe the credit,
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  Speaker 1: and you're in inevitably going to have a decline in
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  Speaker 1: risk based asset prices as well as an economic downturn.
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  Speaker 1: And there's many reasons that we do think that it's
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  Speaker 1: in the late stage of the credit cycle, or the
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  Speaker 1: asset price cycle as we put it, and we can
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  Speaker 1: discuss that if that's of interest. So given that we
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  Speaker 1: are in the later stages of the credit cycle, as
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  Speaker 1: you say, where are you in TCW seeing value right now? Well,
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  Speaker 1: the way we think about it in terms of a
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  Speaker 1: late cycle playbook for fixed income is that rather than
• 1:54
  Speaker 1: think about the fixed income market as a risk on,
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  Speaker 1: risk off type of flavoring, that you have to think
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  Speaker 1: about it in a little bit with a little bit
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  Speaker 1: more nuance and a little bit more complexity. So what
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  Speaker 1: that means is that as you look to your fixed
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  Speaker 1: income allocations, in our view, you should be thinking about
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  Speaker 1: it is really having three pieces to it, three broad pieces.
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  Speaker 1: One piece is sort of your traditional risk off type
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  Speaker 1: of securities like treasuries, and they're there for liquidity and
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  Speaker 1: for maintenance of some hedging risk against the potentiality of
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  Speaker 1: the clients and risk based asset prices. You're supposed to
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  Speaker 1: have bendable assets. And by bendable assets, what we're typically
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  Speaker 1: referring to are things like investment grade credit, triple A
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  Speaker 1: rated commercial mortgages, things that are subject to marking to
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  Speaker 1: market volatility, but assets that will not go into bankruptcy
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  Speaker 1: or provide haircuts or discounts to principle through some type
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  Speaker 1: of a workout situation. And so you balance your portfolio
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  Speaker 1: between vendable and risk off type assets, and you do
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  Speaker 1: your darn disk to try to avoid allocations to breakable assets.
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  Speaker 1: And by breakable asset, that's what we're talking about, our
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  Speaker 1: assets that are going to experience principal haircuts that are
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  Speaker 1: so to speak, get swept into the late cycle environment
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  Speaker 1: that inevitably has a degree of debt for equity swapping
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  Speaker 1: associated with it. Bankruptcy is distress, debt, exchanges, rescue financing,
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  Speaker 1: that sort of stuff understood. I'm just I'm curious what
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  Speaker 1: you think about the quality of the U S high
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  Speaker 1: yield market right now. There's lots of people talking about
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  Speaker 1: how investment grade quality is deteriorating with so many triple
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  Speaker 1: B s um and we're also at the same time
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  Speaker 1: seeing more rising stars this year, that is, high yield
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  Speaker 1: names are getting upgraded to investment grade. Does that mean
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  Speaker 1: the high old qualities getting worse if the best of
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  Speaker 1: the names are leaving well. Um, when when we ask
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  Speaker 1: questions about high yield, we're probably supposed to also think
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  Speaker 1: about that a little bit more expensively. Because the sibling,
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  Speaker 1: the the nearly identical twin of the high yield market
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  Speaker 1: is the bank loan, the syndicated bank loan market, and
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  Speaker 1: the syndicated bank loan market has always been another vehicle
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  Speaker 1: by which companies, or leverage companies or below investment grade
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  Speaker 1: companies have been able to to to borrow, and that
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  Speaker 1: has been basically the part of the credit markets, the
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  Speaker 1: leverage credit markets that has grown so in such an
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  Speaker 1: outsized way over the course of this cycle. In the
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  Speaker 1: leverage bank loan market, we see absolutely substantial evidence of
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  Speaker 1: major deterioration in terms of the quality of underwriting that
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  Speaker 1: has gone on over the course of the cycle. And
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  Speaker 1: the simplest way to put it, and I'm sure it's
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  Speaker 1: been spoken too many times, is that this was a
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  Speaker 1: marketplace that number one was a lot smaller ten years ago,
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  Speaker 1: but number two and more importantly, was dominated with covenant
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  Speaker 1: heavy issuance. Covenant light issuance, which now is something like
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  Speaker 1: eight of this market is something that basically came along
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  Speaker 1: over the course of this cycle, and covenant light lending
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  Speaker 1: almost by definition, means that the borrower has substantial ability
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  Speaker 1: to work um mostly eclusively for the shareholders, to the
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  Speaker 1: detriment of bondholders. So I think that when you look
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  Speaker 1: at leverage lending in a sort of holistic way, the
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  Speaker 1: only conclusion that you can reach is actually is that
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  Speaker 1: the quality of underwriting in general is actually rather poor. Well,
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  Speaker 1: are there any sectors in particular than this leverage loan
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  Speaker 1: market that are concerning to you. Well, the the leverage
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  Speaker 1: loan market has has found its way into most every
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  Speaker 1: nook and cranny. But I think that, you know, maybe
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  Speaker 1: maybe one way to make the discussion just a little
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  Speaker 1: bit more pointed or a little bit more concrete, if
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  Speaker 1: I could, Maybe I'll put it this way, because I
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  Speaker 1: think people talk about covenants and it sounds like maybe
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  Speaker 1: it should be important, but maybe people don't totally get
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  Speaker 1: why it matters, and maybe an example helps that. I think,
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  Speaker 1: first of all, to personalize it is consider the fact
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  Speaker 1: that when you buy a home and you take out
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  Speaker 1: a mortgage on it, you may not think about the
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  Speaker 1: fact that you're agreeing to a covenant, but you are
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  Speaker 1: agreeing to very important covenant. That that being essentially that
• 6:03
  Speaker 1: when the day comes that you sell that house, the
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  Speaker 1: first use of proceeds is to pay off the lender.
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  Speaker 1: You don't get to sell your house, put the money
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  Speaker 1: in the bank, take a trip around the world, come back,
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  Speaker 1: have a discussion with your lender. Maybe I'll pay you back. Now.
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  Speaker 1: That type of covenant protection is necessary so that there
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  Speaker 1: isn't a separation of collateral from the lender the house,
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  Speaker 1: so to speak, from the mortgage loan. In the in
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  Speaker 1: the bank loan market, it doesn't work that way. We've
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  Speaker 1: seen numerous examples of situations in which companies have transferred assets,
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  Speaker 1: sold divisions, sold important assets of the business, and with
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  Speaker 1: the proceeds of that of those funds, they make dividends
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  Speaker 1: to shareholders. And that sounds like a good thing, except
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  Speaker 1: that from the point of view of the lender, I'm
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  Speaker 1: watching you sell valuable pieces of your business, and the
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  Speaker 1: money is basically leaving the collateral package, which is to say,
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  Speaker 1: your company or specific entities in your company. It's going
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  Speaker 1: to shareholders and leaving me, the bond holder, with the
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  Speaker 1: potentiality of a uh, not exactly an empty shell, but
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  Speaker 1: a shell that is emptying in the process and reducing
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  Speaker 1: my protections. The important, the critical point here, of course,
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  Speaker 1: is that credit needs to be understood not just statically
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  Speaker 1: how do you look visa via your borrower today, but
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  Speaker 1: what it could look like in the event that that
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  Speaker 1: business got stressed. As as bankers love to say, there
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  Speaker 1: is no genius so to speak, in making the loan.
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  Speaker 1: All of the hard work is involved in collecting on
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  Speaker 1: the loan. Yep, interesting, very interesting moving. We've had this
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  Speaker 1: big move up in the market and investors are trying
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  Speaker 1: to figure out do I go to quality and uh.
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  Speaker 1: Lots of questions being asked by fixed income investors. Thanks
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  Speaker 1: for some of these answers. Tad Ravel Tad is a
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  Speaker 1: chief investment officer for fixed income at tc W. Joining
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  Speaker 1: us on the phone from Los Angeles, The right sharing
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  Speaker 1: company Lift is about to begin its I p O
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  Speaker 1: road show and investors are pouring through its perspectus to
• 8:09
  Speaker 1: better understand the company's business and financial prospects. So it
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  Speaker 1: help us evaluate the Lift story. Is our good friends
• 8:16
  Speaker 1: Shire overday Share is a technology calumnist for Bloomberg Opinion.
• 8:20
  Speaker 1: She joins us in our Bloomberg Interactive Broker Studio. So Shia,
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  Speaker 1: thanks so much for being with us. You know, when
• 8:25
  Speaker 1: you take a look at the perspectus for Lift, one
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  Speaker 1: thing that jumps out is it is not profitable at
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  Speaker 1: lost nine million dollars last year. So what are investors
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  Speaker 1: looking at to try to get a sense of the
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  Speaker 1: prospects for this company? And maybe evaluation and so on. Yeah,
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  Speaker 1: So look, there's two things that investor two big things
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  Speaker 1: that investors will be looking at. One is the rate
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  Speaker 1: of growth, which is very fast. We should give them
• 8:48
  Speaker 1: credit for revenue is sort of doubling or so a
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  Speaker 1: year over year, which is an impressive growth rate for
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  Speaker 1: a company with two billion dollars in revenue last year.
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  Speaker 1: The other thing is Lift points people to a number
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  Speaker 1: of metrics that are intended to show the improving financial
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  Speaker 1: economics of the main business it's in, which is you know,
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  Speaker 1: single use on demand rides. And the piece that I
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  Speaker 1: wrote about was on something sort of nerdy. So everybody,
• 9:17
  Speaker 1: hold onto your ears. Um called the take rate. That's
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  Speaker 1: the kind of common vernacular in a business like Lift,
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  Speaker 1: which is the effective share of money that lift gets
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  Speaker 1: from every dollar of that People are excuse me that
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  Speaker 1: people are spending on rides, right, So when I take
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  Speaker 1: a ride in the lift, I think the the you know,
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  Speaker 1: uber or lift or whatever gets twenty or thirty cents
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  Speaker 1: of every dollar I spend. Is that what you're talking about?
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  Speaker 1: The take That's exactly what I'm talking about. And and and
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  Speaker 1: it's the complicated it's complicated formula because it's not like
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  Speaker 1: I pay twenty dollars for a lift ride and the
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  Speaker 1: driver gets some portion and and lift gets some portion.
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  Speaker 1: It's a complicated formula. But effectively, yes, uh, Lift is
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  Speaker 1: keeping something like five or thirty cents of every dollar
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  Speaker 1: that that I spend on that. And how how is
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  Speaker 1: that trending? It's it's up, It's up significantly. You know
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  Speaker 1: that that percentage is going more and more towards lift
• 10:10
  Speaker 1: lifts favor, which again, Lift is trying to say, look,
• 10:15
  Speaker 1: yes we are. Losses are extremely large, but you can
• 10:18
  Speaker 1: see that we're getting more efficient with our spending over time.
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  Speaker 1: The problem that I wrote about is that number that
• 10:24
  Speaker 1: that take rate, that efficiency rate for LIFT is getting
• 10:29
  Speaker 1: muddier and muddier with every passing moment. And that's because
• 10:32
  Speaker 1: of the changing nature of lifts business. So Lift bought
• 10:36
  Speaker 1: a company called Motivate just recently. Motivated is the company
• 10:40
  Speaker 1: behind city bike and these other kind of city bike
• 10:44
  Speaker 1: rental programs. Lift also offers electric scooters in the doctor
• 10:49
  Speaker 1: or so US cities. And the distinction here is when
• 10:53
  Speaker 1: I rent a scooter or a bicycle from Lift, there's
• 10:57
  Speaker 1: no driver, there's no driver. With the share of it,
• 11:00
  Speaker 1: they keep a dcent of the revenue, and so that
• 11:03
  Speaker 1: affects the company's overall take rate. It lifts it higher
• 11:07
  Speaker 1: and higher, and it says us Yeah. So investors need
• 11:11
  Speaker 1: to be prepared to kind of dig through that a
• 11:12
  Speaker 1: little bit, right exactly, that that is going to be
• 11:14
  Speaker 1: a complicated number for them to sift through. So one
• 11:17
  Speaker 1: of the interesting things about the Lift I p O
• 11:18
  Speaker 1: is there first, they're coming up before Uber. Is there
• 11:21
  Speaker 1: a sense that that is an advantage for them? I mean,
• 11:25
  Speaker 1: how how are they trying to spin it? Do you think?
• 11:26
  Speaker 1: I know there's a lot of game theory about this
• 11:29
  Speaker 1: race between Uber and Lift to the public markets. I'm
• 11:32
  Speaker 1: not sure there's really much of an advantage. I think, yes,
• 11:35
  Speaker 1: Lift as the smaller player, as the more focused on
• 11:39
  Speaker 1: just on demand ride player, they do have an advantage
• 11:43
  Speaker 1: from going first, from getting more attention than they would
• 11:47
  Speaker 1: have if they were after Uber um, and from kind
• 11:51
  Speaker 1: of being able to focus investors on these are the
• 11:54
  Speaker 1: markets we think you should pay attention to, These are
• 11:56
  Speaker 1: the metrics we think are important to our business, and
• 12:00
  Speaker 1: they get to plant a flag in the ground on
• 12:02
  Speaker 1: those points. I don't think Uber has any disadvantage from
• 12:05
  Speaker 1: being second. They're so large, they're gonna suck up so
• 12:09
  Speaker 1: much oxygen when and if they do go public this year.
• 12:12
  Speaker 1: UM So, I think this was the natural order of
• 12:15
  Speaker 1: IPO timing. It's interesting as you look at this model,
• 12:18
  Speaker 1: the Lift model, and presumably when we get the the
• 12:21
  Speaker 1: numbers from Uber, it will be similar. The path to profitability,
• 12:24
  Speaker 1: it's not nearly as clean as it was for some
• 12:28
  Speaker 1: of the advertising driven tech companies that also came out
• 12:31
  Speaker 1: of big valuations, because you do have to subsidize the
• 12:33
  Speaker 1: these drivers. Are you getting a sense from investors or
• 12:36
  Speaker 1: the marketplace that people are comfortable that there is some
• 12:39
  Speaker 1: path to profitability for these companies. I hope so, because
• 12:43
  Speaker 1: otherwise I don't see how these businesses can survive. But yeah,
• 12:46
  Speaker 1: you're right that snap Snapchat, for example, is a company
• 12:49
  Speaker 1: that had enormous losses when that company would public, really
• 12:53
  Speaker 1: staggering losses and negative free cash flow. But as you said,
• 12:58
  Speaker 1: there are examples from other advertising focus businesses like Google
• 13:02
  Speaker 1: and Facebook that have become very profitable and and that
• 13:06
  Speaker 1: business model is well understood by investors. What Lift and
• 13:09
  Speaker 1: Uber are doing is is is a totally different thing.
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  Speaker 1: And it's really going to be hard to model this
• 13:16
  Speaker 1: out because you don't know the ultimate economics of this business.
• 13:21
  Speaker 1: You don't know the total market size of this business.
• 13:25
  Speaker 1: I think it's all just a big string of question marks. Yeah,
• 13:27
  Speaker 1: I think it's I'm guessing just some you're talking to
• 13:30
  Speaker 1: some investors that the company is kind of positioning themselves.
• 13:32
  Speaker 1: Is that that total addressable market out there? We think
• 13:36
  Speaker 1: it's just huge. We don't know, and quite fact that
• 13:38
  Speaker 1: we're probably under reporting it because more and more people
• 13:40
  Speaker 1: are you know, really turning to ride sharing across you know,
• 13:44
  Speaker 1: different vehicles and so on and so forth, and Bloomberg
• 13:47
  Speaker 1: business Week even wrote a story a couple of weeks ago,
• 13:49
  Speaker 1: but maybe peak auto and one of the reasons that
• 13:51
  Speaker 1: we may be at peak auto production globally is because
• 13:54
  Speaker 1: of the rise of ride sharing. So I suspect that
• 13:56
  Speaker 1: that's what these companies will try to play up. Is
• 13:58
  Speaker 1: the long term. That's the bull is case on on
• 14:01
  Speaker 1: both Uber and Lift, right, is that the transportation market,
• 14:04
  Speaker 1: the the amount of money that people spend on buying
• 14:07
  Speaker 1: cars and operating cars is large, and if Lift and
• 14:10
  Speaker 1: Uber can can steal some of that spending, that's going
• 14:13
  Speaker 1: to be an enormous business. But I just don't know
• 14:16
  Speaker 1: whether rides on demand will ever be that big outside
• 14:21
  Speaker 1: of a handful of cities in the world where it's
• 14:24
  Speaker 1: sort of appealing and viable. Is there a sense just
• 14:27
  Speaker 1: switching from Lift, is there a sense for Uber? What
• 14:29
  Speaker 1: the the timing is on that IP? I know they
• 14:32
  Speaker 1: talked about it being, uh, you know, obviously later in
• 14:34
  Speaker 1: the year, but at any sense of whether it's a
• 14:36
  Speaker 1: kind of first half or second half. I certainly the
• 14:39
  Speaker 1: last time I asked around it sounded more like second
• 14:42
  Speaker 1: quarter um than second half of the year, but who knows.
• 14:47
  Speaker 1: I think a lot of a lot of the timing
• 14:49
  Speaker 1: got affected by the government shutdown, which impacted the ability
• 14:52
  Speaker 1: of Uber and left to get feedback on their their
• 14:56
  Speaker 1: draft I p O filings. So well, we'll see what happens.
• 14:59
  Speaker 1: And the I mean on Lift, I mean they keep
• 15:01
  Speaker 1: saying it's imminent. Do you have any sense of whether
• 15:03
  Speaker 1: it's how imminent it might be. It seems like they're
• 15:06
  Speaker 1: going to meet with investors later this month, and then
• 15:09
  Speaker 1: I assume the listing would happen either late March or
• 15:13
  Speaker 1: early April. Interesting, and I think, yeah, this will be interesting.
• 15:15
  Speaker 1: It would be interesting to see about the valuation, what
• 15:17
  Speaker 1: kind of valuation they get in the marketplace. And the
• 15:19
  Speaker 1: question is will Uber come out at a premium to Lift?
• 15:22
  Speaker 1: Presumably I guess they would because it's bigger. It's a
• 15:25
  Speaker 1: little bit hard to know because on the one hand,
• 15:29
  Speaker 1: Lift is growing much faster. On the other hand, Uber's
• 15:32
  Speaker 1: business is much more diverse, for better for worse. Right,
• 15:35
  Speaker 1: they do restaurant food delivery. They operate in many many countries,
• 15:39
  Speaker 1: whereas Lift is pretty much just the U. S and Canada.
• 15:43
  Speaker 1: Lift owned Steaks and all of these global right Herring
• 15:46
  Speaker 1: healing companies, So it may deserve a premium or maybe not.
• 15:49
  Speaker 1: Got it? Interesting? Very interesting? Okay, but keep on top
• 15:52
  Speaker 1: of this one share over date technology commist for Bloomberg
• 15:54
  Speaker 1: Opinion joining us here in the Bloomberg Interactive Broker Studio. Well,
• 16:13
  Speaker 1: despite today's sell off of over one percent, yes and
• 16:16
  Speaker 1: p this year to date is up about ten and
• 16:20
  Speaker 1: after the meltout we saw in the fourth quarter. The
• 16:22
  Speaker 1: question is is this a continuation of the bowl market?
• 16:26
  Speaker 1: Is this more of a bear market kind of rally?
• 16:28
  Speaker 1: If you will, to help us kind of dig into
• 16:30
  Speaker 1: that as Bill Smead. Bill is the chief executive officer
• 16:34
  Speaker 1: and chief investment officer of SMED Capital Management, a little
• 16:37
  Speaker 1: over two point one billion dollars under management. Bill joins
• 16:41
  Speaker 1: us here on our Bloomberg Interactive Broker Studio. So, so, Bill,
• 16:44
  Speaker 1: what do you make of what we've seen in the
• 16:46
  Speaker 1: marketplace over the last three or four months? Is this
• 16:49
  Speaker 1: um Is this performance we've seen in the in the
• 16:52
  Speaker 1: beginning of this year real? Oh, it's always real. It's
• 16:56
  Speaker 1: real money, right, It's it's real money. Uh. In the
• 16:59
  Speaker 1: in the long run, the market's a weighing machine. And
• 17:02
  Speaker 1: in the short run, it's kind of a snapshot, and uh,
• 17:06
  Speaker 1: we fall into the camp of people that believes that
• 17:09
  Speaker 1: the excitement around e commerce was a parabolic bubble. And
• 17:16
  Speaker 1: we've got a chart that shows over the last forty
• 17:18
  Speaker 1: five years there it's the third biggest bubble behind the
• 17:21
  Speaker 1: dot com and the ridiculous housing thing that we didn't
• 17:25
  Speaker 1: know four oh six. So if you believe that we
• 17:31
  Speaker 1: we would not trust the market, uh if in it.
• 17:36
  Speaker 1: In fact, it's going to continue to be led by
• 17:39
  Speaker 1: a the most aggressive growth sector in a tenure stretch
• 17:45
  Speaker 1: where growth is completely pasted value. Right, right, let's talk
• 17:49
  Speaker 1: about I was gonna ask you about some some sectors
• 17:52
  Speaker 1: and some names dream but let's let's lead off the
• 17:54
  Speaker 1: one that is not a good story for you. Today.
• 17:56
  Speaker 1: Kroger put out some weaker than expected numbers stocked down
• 18:00
  Speaker 1: today around that's just a holding of years. What woul
• 18:03
  Speaker 1: happened with the company this quarter? Well, you have to
• 18:06
  Speaker 1: go back to what got us involved, which which is
• 18:09
  Speaker 1: coming up on two years ago Amazon announced they were
• 18:12
  Speaker 1: going into the grocery step space. We're in Seattle, our
• 18:15
  Speaker 1: headquarters is about ten twelve blocks from Amazon and at
• 18:20
  Speaker 1: the time they bought Whole Foods, they said they bought
• 18:24
  Speaker 1: it um for reasons of, you know, accelerating their move
• 18:31
  Speaker 1: into the grocery store business. But those of us that
• 18:33
  Speaker 1: were watching their beta tests on Amazon French Fresh locally,
• 18:37
  Speaker 1: we're seeing that no one was using Amazon Fresh. And
• 18:40
  Speaker 1: you've got a young, very highly target it's a target market.
• 18:45
  Speaker 1: And if Amazon Fresh isn't working in Seattle, it's not working.
• 18:48
  Speaker 1: So then they had to try something else. Uh So
• 18:52
  Speaker 1: what happened was Kroger stock fell all the way to
• 18:54
  Speaker 1: twenty one, and that's what got us involved. Okay, it
• 18:57
  Speaker 1: sent rebounded to about thirty three, and we just stayed
• 19:01
  Speaker 1: with the original position. And now it's back down to
• 19:04
  Speaker 1: about to share and we believe, we sincerely believe that, uh,
• 19:12
  Speaker 1: the grocery business is going to be to Amazon what
• 19:15
  Speaker 1: invading Russia was for Napoleon. Right, let's let's go to
• 19:19
  Speaker 1: that first of all. For you've been in this business
• 19:22
  Speaker 1: forever thirty some odd years and money management business. When
• 19:25
  Speaker 1: you have a position like this is pretty significant position
• 19:27
  Speaker 1: for you, it takes a hit today. What do you
• 19:30
  Speaker 1: do on that position? Well, when you're a value guy
• 19:33
  Speaker 1: and value has significantly underperformed growth over the course of
• 19:37
  Speaker 1: the last two or three years. Uh, it's kind of
• 19:42
  Speaker 1: a body below. You hate to have x amount of
• 19:46
  Speaker 1: of the value of your portfolio get hit on one
• 19:48
  Speaker 1: stock like that. But it's been a fairly regular exercise
• 19:53
  Speaker 1: for the last couple of years, so we're just getting
• 19:55
  Speaker 1: used to it. We're getting because, Uh, the fact of
• 19:59
  Speaker 1: the matter is that our portfolio trades at about twelve
• 20:03
  Speaker 1: times earnings in a market that trades about sixteen and
• 20:07
  Speaker 1: so we're paying way less for our future luck than
• 20:11
  Speaker 1: than the index ers are. And and really, how you
• 20:15
  Speaker 1: do relatively the index is a combination of what you buy,
• 20:19
  Speaker 1: but also what you paid to participate in what you buy,
• 20:24
  Speaker 1: and and that's where the value is. If if if
• 20:27
  Speaker 1: we analyze the company and use very very high interest
• 20:31
  Speaker 1: rates to do an intrinsic value calculation, and there's a
• 20:33
  Speaker 1: big spread there, as there are with most of the
• 20:36
  Speaker 1: things we own right now. Uh. We we know that
• 20:39
  Speaker 1: time is our ally and so we're operating in a
• 20:42
  Speaker 1: five to ten year continuum, and most of the market
• 20:45
  Speaker 1: participants are working in a six month continuum. If you're
• 20:47
  Speaker 1: in a six month continuum and you get kicked around
• 20:49
  Speaker 1: on a stock like Kroger, you're sunk because you're not
• 20:53
  Speaker 1: gonna so do you take to do you just say
• 20:55
  Speaker 1: we still like this position, that the thesis is still
• 20:57
  Speaker 1: there and we buy more on the weakness. Yeah, the
• 21:00
  Speaker 1: grocery business has a history of not being very good
• 21:03
  Speaker 1: unless there's some inflation. It's actually good for the grocery
• 21:07
  Speaker 1: store companies to have the produce and the meat and
• 21:10
  Speaker 1: and those ingredients going up in price, and they just
• 21:13
  Speaker 1: aren't going up right now, and so therefore it was
• 21:16
  Speaker 1: going to be a more difficult time. But I think
• 21:18
  Speaker 1: if you dig into the numbers with with Kroger, what
• 21:21
  Speaker 1: they're doing to insulate themselves and be the grocery store
• 21:25
  Speaker 1: of millennials ten years from now is investing in online
• 21:30
  Speaker 1: and pick up at the store and and and and
• 21:33
  Speaker 1: in their mobile capability. That that stuff costs money, and
• 21:36
  Speaker 1: they're doing it, but they're doing it so that they
• 21:39
  Speaker 1: are as successful in the future as they've been in
• 21:41
  Speaker 1: the past. Ten seconds. Why do you think that this
• 21:44
  Speaker 1: grocery business will be very difficult from Amazon? As you mentioned, Oh, well,
• 21:48
  Speaker 1: the the answer is having the physical stores is a
• 21:51
  Speaker 1: huge positive attribute. In fact, having physical stores when when
• 21:56
  Speaker 1: when you're doing anything online targets set in December of
• 21:59
  Speaker 1: their wine orders were picked up the store that saves
• 22:02
  Speaker 1: them five dollars or seven dollars per delivery. Interesting and
• 22:06
  Speaker 1: that's real money. Good Bill Smith, thanks so much for
• 22:09
  Speaker 1: for being here with us. I don't want a tough day.
• 22:10
  Speaker 1: I for you're on with one of your big names.
• 22:12
  Speaker 1: Share Bill Smee, chief executive officer in chief Investment officer
• 22:15
  Speaker 1: of SMED Capital Management, talking value investing, which has been
• 22:19
  Speaker 1: underperforming and tough relative to growth in this bull market.
• 22:23
  Speaker 1: Talking a little b about the supermarket business, which continues
• 22:25
  Speaker 1: to be a challenging business as it deals with changing
• 22:28
  Speaker 1: consumer taste as well as the Amazon effect. Well, yesterday
• 22:45
  Speaker 1: Facebook had some very interesting news. CEO Mark Zuckerberg published
• 22:49
  Speaker 1: a plan to quote pivot to privacy. This is obviously
• 22:54
  Speaker 1: in response to consumer backlash against big tech as it
• 22:57
  Speaker 1: relates to privacy. So it helps par through what is
• 23:00
  Speaker 1: going on in big tech and privacy. We welcome Amy
• 23:03
  Speaker 1: Webb Amy as Professor of Strategic Foresight at the n
• 23:06
  Speaker 1: y U Stern School of Business. She is also a
• 23:08
  Speaker 1: founder of the Future Today Institute. She joins us in
• 23:11
  Speaker 1: our Bloomberg eleven three OH studios. Professor Webb is also
• 23:14
  Speaker 1: the author of a new book entitled The Big Nine,
• 23:18
  Speaker 1: How the Tech Titans and their Thinking Machines Could Warp Humanity. Professor,
• 23:23
  Speaker 1: thank you so much for joining us. What are the
• 23:25
  Speaker 1: main takeaways of this book in terms of warping humanity? Sure? So,
• 23:30
  Speaker 1: I think the pieces of this that everybody needs to
• 23:32
  Speaker 1: understand is that, for a very long time are um
• 23:36
  Speaker 1: market economy. Free market economy has enabled big tech companies
• 23:40
  Speaker 1: to flourish and to deliver great returns for their investors.
• 23:44
  Speaker 1: The challenges that during that process UM Oftentimes there have
• 23:48
  Speaker 1: been decisions made in relationship privacy, UH and automation and
• 23:52
  Speaker 1: a bunch of other things UM that have started to
• 23:56
  Speaker 1: UH make the general public a little nervous, and that
• 23:59
  Speaker 1: is ending ripples throughout the hill. And so what we
• 24:02
  Speaker 1: could be facing, I think in the future is regulation
• 24:06
  Speaker 1: coming from from new places, which is neither good for
• 24:08
  Speaker 1: investors nor good for for all of us who are
• 24:11
  Speaker 1: going to be living with the future of AI. Well,
• 24:13
  Speaker 1: let's let's talk about AI, and kind of specifically about
• 24:16
  Speaker 1: a AI. What are the I guess the applications and
• 24:19
  Speaker 1: implications of AI that you think are most concerning sure, well,
• 24:23
  Speaker 1: you know, there's a lot of misplaced optimism and fear
• 24:25
  Speaker 1: when it comes to artificial intelligence, and it very much
• 24:27
  Speaker 1: feels like something out in the distance. In fact, it's
• 24:30
  Speaker 1: been with us for many years. Most businesses in some
• 24:32
  Speaker 1: ways use AI, whether it's their risk and compliance systems
• 24:36
  Speaker 1: or the auto complete and there are inboxes. All of
• 24:39
  Speaker 1: us are using AI all of the time. Now, the
• 24:42
  Speaker 1: challenges come in to play when we have a consolidation
• 24:45
  Speaker 1: of power among just a few companies with a fairly
• 24:48
  Speaker 1: homogeneous group of people whose job it is to make
• 24:50
  Speaker 1: decisions for all of us. And you know, for a
• 24:53
  Speaker 1: lot of businesses that are currently choosing which AI and
• 24:56
  Speaker 1: the cloud systems to use, um, you know, which Auto
• 25:00
  Speaker 1: made it services to use, which frameworks, um. You know,
• 25:03
  Speaker 1: they're they're having to choose now between Microsoft, Amazon, and Google,
• 25:08
  Speaker 1: which means that they're going to have to start making
• 25:10
  Speaker 1: much much smarter decisions. Right. So when we think so
• 25:13
  Speaker 1: you identifying your book, a number of players to be concerned.
• 25:16
  Speaker 1: What you mentioned Google, Amazon, So what species? Who are
• 25:20
  Speaker 1: they just us companies? Are they're also companies outside the
• 25:23
  Speaker 1: US show So there are nine companies that are essentially
• 25:25
  Speaker 1: building the future of AI doesn't mean that there aren't
• 25:28
  Speaker 1: others in the mix. However, these nine have the majority
• 25:32
  Speaker 1: of patents, they own the biggest part of market share,
• 25:36
  Speaker 1: They attract the best talent, They have the most significant
• 25:39
  Speaker 1: amount of funding. So so these nine companies are in China,
• 25:43
  Speaker 1: there are three the bat Bay, Do, Ali, Baba and
• 25:45
  Speaker 1: ten Cent. In the United States, I like to call
• 25:48
  Speaker 1: them the g mafia. So those six are Google, Amazon, Microsoft, IBM, Facebook,
• 25:55
  Speaker 1: and Apple. Doesn't mean that Uber and Salesforce and others
• 25:59
  Speaker 1: aren't in the mixed doing great things. But these nine
• 26:02
  Speaker 1: companies for the most part, have consolidated power um and
• 26:05
  Speaker 1: and are are pulling shots. And so what you mentioned
• 26:09
  Speaker 1: regulatory risk, and I think for investors the big concern
• 26:12
  Speaker 1: out there has always been regulatory risk, not coming out
• 26:15
  Speaker 1: of Europe the East. You know, the European Union has
• 26:17
  Speaker 1: always been tough on US tech, going all the way
• 26:19
  Speaker 1: back to Microsoft and the operating system and and now
• 26:22
  Speaker 1: they're obviously, you know, tough on some of these social
• 26:24
  Speaker 1: media companies. But boy, when you bring Mark Zuckerberg and
• 26:27
  Speaker 1: some of these other CEOs in front of Congress, that's
• 26:30
  Speaker 1: a different game. Do you think the US Congress has
• 26:32
  Speaker 1: any appetite for regulating big tech. Well, I think this
• 26:35
  Speaker 1: new Congress certainly does. Uh. And but but that's that's
• 26:38
  Speaker 1: a problem for many reasons. First of all, uh, you
• 26:40
  Speaker 1: know there listen, there's a lot of smart engineers working
• 26:43
  Speaker 1: at these big companies, and I actually don't believe that
• 26:45
  Speaker 1: any of these companies are intentionally doing anything evil. I
• 26:48
  Speaker 1: think just you know, when you get to be big
• 26:50
  Speaker 1: and you've got different business units and staff, sometimes they
• 26:52
  Speaker 1: don't all talk to each other, and you've got to
• 26:54
  Speaker 1: start making quick decisions because investors, you know, are are
• 26:58
  Speaker 1: hungry for high return earns and and good margins. So um,
• 27:02
  Speaker 1: the challenges that you know, we're gonna have one too
• 27:05
  Speaker 1: many calls for privacy, one too many sets of constituents
• 27:08
  Speaker 1: who get really upset. Um. And given who's currently in
• 27:11
  Speaker 1: Congress right now, I can guarantee you that they're you know,
• 27:15
  Speaker 1: they're they're looking at regulatory action, which is which is
• 27:18
  Speaker 1: is going to be bad for all of these companies,
• 27:20
  Speaker 1: but also for us because any regulations that get constructed
• 27:24
  Speaker 1: now are definitely not going to keep pace with how
• 27:26
  Speaker 1: technology evolves. Yeah, yeah, exactly. I think that's one of
• 27:29
  Speaker 1: the issues we've seen some other tech tech industries, they're
• 27:31
  Speaker 1: always oftentimes behind behind the terms. Amy Web, thank you
• 27:34
  Speaker 1: so much for joining us. Amys Professor of Strategic Foresight
• 27:37
  Speaker 1: at n y U Stern School of Business, also a
• 27:39
  Speaker 1: founder of the Future Today Institute. Her book The Big Nine,
• 27:43
  Speaker 1: How the Tech Titans and their Thinking Machines Could Warp Humanity.
• 27:45
  Speaker 1: Thank you very much, Professor. That's very interesting about technology. Again,
• 27:49
  Speaker 1: the big risk for tech investors is US regulatory oversight,
• 27:53
  Speaker 1: and that's something they want to avoid at all all costs.
• 27:57
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 27:59
  Speaker 1: You can subscribe. I've been listening to interviews at Apple
• 28:01
  Speaker 1: Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney.
• 28:04
  Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa abram Woits
• 28:07
  Speaker 1: I'm on Twitter at Lisa abram Woits one. Before the podcast,
• 28:10
  Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio