Latest / Bloomberg Intelligence / Stock Drop Bears Markings of a Flash Crash: ISI’s DeBusschere

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Stock Drop Bears Markings of a Flash Crash: ISI’s DeBusschere · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim
• 0:08
  Speaker 1: Fox along with my co host Lisa A. Bramowitz. Each
• 0:11
  Speaker 1: day we bring you the most important, noteworthy, and useful
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  Speaker 1: interviews for you and your money, whether you're at the
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  Speaker 1: m L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com.
• 0:32
  Speaker 1: A lot of analysts are calling yesterday's market crash a
• 0:37
  Speaker 1: highly technical sell off, so I think it's wonderful day
• 0:40
  Speaker 1: to take a look at the infrastructure of markets. Was
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  Speaker 1: this a flash crash and what does that mean about
• 0:47
  Speaker 1: markets going forward? I am very happy to bring in
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  Speaker 1: Dennis Debuscher. He is head of portfolio strategy at ever
• 0:53
  Speaker 1: Core I s I and he joins us right now
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  Speaker 1: by phone. Dennis, thank you so much for being with us.
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  Speaker 1: So did we the witness a flash crash? And what
• 1:03
  Speaker 1: was behind this? I mean people are blaming algorithms. How
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  Speaker 1: how valid is that? Yeah, I mean it's tough to
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  Speaker 1: identify how valid it is, and we it's difficult to
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  Speaker 1: know what a flash crash technically is because it's a
• 1:17
  Speaker 1: terminus defined very loosely. But I would argue as far
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  Speaker 1: as the vixus concern and as far as volatility is concerned,
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  Speaker 1: it was absolutely a flash crash. If you invert the chart,
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  Speaker 1: of course UM and for the markets, UM you had
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  Speaker 1: elements of it. So what does that mean? The markets
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  Speaker 1: and certainly in a quantitative driven world optimized to certain
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  Speaker 1: certain conditions, and the conditions that existed was um in
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  Speaker 1: which led to a massive short volatility Trait either implicitly
• 1:45
  Speaker 1: or explicitly, was that there was going to be no
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  Speaker 1: inflation forever, and they were by extension, no economic volatility
• 1:52
  Speaker 1: and no market volatility. And it now it seems like
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  Speaker 1: you're pricing in some level of inflation, some higher level
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  Speaker 1: of rates, and that started to kick in this unwind
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  Speaker 1: of this ultra levered I would argue short volatility bet
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  Speaker 1: and given that we went to a high of fifty
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  Speaker 1: overnight on the vix from nine just not too long
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  Speaker 1: and long ago, and it really accelerated course today, I
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  Speaker 1: would say absolutely it's a flash crash. I would say.
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  Speaker 1: The one additional point here to make, and I don't
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  Speaker 1: think people realize, is algos make electronic trading, and electronic
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  Speaker 1: trading dominates all trading right now, and so orders the
• 2:26
  Speaker 1: depth of them are not as what they used to
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  Speaker 1: be when used to have classic market making UM people
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  Speaker 1: and bank that balance. She's very very levered in ability
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  Speaker 1: to absorb losses. So you have very little depth. And
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  Speaker 1: if you have millions of orders going in one direction
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  Speaker 1: and you re optimize to higher volatility, it can set
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  Speaker 1: off these type of crash flash crash events. Dennis, we
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  Speaker 1: want to just step back for a second, because as
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  Speaker 1: you just describe, you know, a lot of the trading,
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  Speaker 1: the day to day price is set by machines and algorithms,
• 2:57
  Speaker 1: whereas investors may actually buy companies that they think are
• 3:01
  Speaker 1: doing well or are going to actually do better um speak.
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  Speaker 1: If you cannabat capital spending expenditures when it comes to
• 3:08
  Speaker 1: companies and the tax overhaul plan and how that may
• 3:13
  Speaker 1: in affect sort of build on the improvements that we
• 3:17
  Speaker 1: saw in the stock market at least last year, and
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  Speaker 1: that we're going to see some spending when companies get
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  Speaker 1: their hands on all that cash not just going to
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  Speaker 1: be all shared by backs. Yeah, I mean, first, thanks
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  Speaker 1: for talking about fundamentals, so um yes, I mean one
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  Speaker 1: of the things we've noticed and you can see it
• 3:33
  Speaker 1: in the FEDS regional diffusion indices of capex plants of
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  Speaker 1: all accelerated meaningfully. It appears that post tax reform, atly
• 3:41
  Speaker 1: from the confidence readings you're getting from businesses, that capital
• 3:44
  Speaker 1: capital spending is going to increase meaningfully, which adds um.
• 3:48
  Speaker 1: You know another level, if you will, to GDP growth
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  Speaker 1: that's been entirely consumption driven for a long period of time,
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  Speaker 1: so companies will be spending more um that is going
• 3:58
  Speaker 1: to create much higher relative to expectations levels of GDP growth,
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  Speaker 1: not only this year but next year. And so that's
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  Speaker 1: why you have US GDP growth trending up from two
• 4:07
  Speaker 1: and a half to say maybe even three, and global
• 4:09
  Speaker 1: GDP because it's not just a US phenomenon somewhere in
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  Speaker 1: the three to three nine range. That's a very solid backdrop.
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  Speaker 1: And if you have some inflation with that and not
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  Speaker 1: a lot, that's a really good at backdrop for asset prices. Historically,
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  Speaker 1: we also have central bank policy globally that isn't going
• 4:24
  Speaker 1: to be pushing hard against improving economic growth. I either
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  Speaker 1: not going to be trying to lift the unemployment rate
• 4:30
  Speaker 1: to stop inflation. So all of that says that and
• 4:35
  Speaker 1: that's probably why credit spreads haven't blown out, which everybody
• 4:37
  Speaker 1: has talked about. That's why economic fundamentals are likely to
• 4:40
  Speaker 1: stay relatively solid. That a lot of what's happening now
• 4:44
  Speaker 1: is technical. The fundamentals are still there, and the market
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  Speaker 1: is still biased higher over time and so and it's
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  Speaker 1: very good obviously for earnings on a go forward basis
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  Speaker 1: when you're looking at one consentus for this year and
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  Speaker 1: one so I guess and Dennis, the question is can
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  Speaker 1: investors just completely ignore technical sell offs or should they
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  Speaker 1: pay attention, especially given the fact that some estimate that
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  Speaker 1: there's two trillion dollars tied to short volatility strategies right
• 5:13
  Speaker 1: now that really didn't move necessarily. I would never say
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  Speaker 1: I want to just ignore it, but I would sell you.
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  Speaker 1: The ability to profit from it is extremely difficult relative
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  Speaker 1: to history, when we used to have different measures of
• 5:27
  Speaker 1: sentiment that you could say, like just talking to people
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  Speaker 1: in the street, etcetera, that they might be um um
• 5:33
  Speaker 1: overly concerned about a market decline. I've been looking at
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  Speaker 1: my server all morning, and I can't tell if it's
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  Speaker 1: HAPPI or sad. I can't tell if it's capitulated. So
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  Speaker 1: I think you have to ride out the volatility if
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  Speaker 1: it's technical driven, are you really trying to assess the
• 5:46
  Speaker 1: state of mind if your computer saying I'm just saying,
• 5:50
  Speaker 1: in this new world, you know, trying to pick these
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  Speaker 1: bottoms and volatility has become to become very difficult. And
• 5:55
  Speaker 1: to answer your question, more or less, you do have
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  Speaker 1: to as long as you believe in the fundamental longer
• 6:01
  Speaker 1: term that our supporter of that, you do have to
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  Speaker 1: ignore a lot of this technical stuff and just have
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  Speaker 1: a you know, a tougher stomach stomach for it. Dennis
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  Speaker 1: does this as the head of portfolio strategy. It does
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  Speaker 1: this U sort of bring out that conversation with investors
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  Speaker 1: and clients. They say they can stomach the risk, but
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  Speaker 1: when the day like yesterday it takes place, it turns
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  Speaker 1: out that maybe they can't. I mean, yes, I mean
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  Speaker 1: in talking with UH, talking with the investors, that's obviously
• 6:27
  Speaker 1: a concern. But I would also say, don't forget where
• 6:30
  Speaker 1: we came from. We're just flat on on the end
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  Speaker 1: of season. I mean, you're up you know, two over
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  Speaker 1: twofold sense of financial crisis. You've had extremely UH favorable
• 6:40
  Speaker 1: returns in the market. So I don't think there's any
• 6:42
  Speaker 1: sense of panic at all from individual investors. Yes, there's
• 6:45
  Speaker 1: concerns because on all over the TV is this low
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  Speaker 1: volatility unwind. But we're not out of place or anywhere
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  Speaker 1: close to a place where anybody thinks about Paine. Market
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  Speaker 1: returns have just been too strong. Thanks very much for
• 6:56
  Speaker 1: being with us. Dennis to Busher, he is the head
• 6:58
  Speaker 1: of portfolio Strategy for ever Core I s I, helping
• 7:02
  Speaker 1: to manage more than eight billion dollars in a customer assets.
• 7:19
  Speaker 1: Before we say anything or do anything with the bond market,
• 7:22
  Speaker 1: we always check in with Ira Jersey. He is our
• 7:24
  Speaker 1: chief US interest rate strategist for Bloomberg Intelligence. And I
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  Speaker 1: got a little bit of a sell off at the
• 7:29
  Speaker 1: long end buying at the short end. Give us an
• 7:32
  Speaker 1: update on what's going on in the treasury market. Yeah,
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  Speaker 1: So in the treasury market today, it's it's actually selling
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  Speaker 1: just about everywhere. Um. Yesterday was you know, pretty um,
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  Speaker 1: pretty correlated with the move in the VIX. If you
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  Speaker 1: if you look, we had one of the biggest uh, well,
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  Speaker 1: we certainly had the biggest rally of of treasury yields
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  Speaker 1: in the last couple of a couple of months where
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  Speaker 1: you had a fourteen basis point rally and tenure yields.
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  Speaker 1: And the last time you saw that was around and uh,
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  Speaker 1: you know other little jitters and markets and um, you
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  Speaker 1: know it was it was really huge moves and and
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  Speaker 1: the volume that went through was astounding. In fact, you
• 8:09
  Speaker 1: don't normally see volume at three o'clock, like the volume
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  Speaker 1: after you see payrolls reports or FED or FED statements
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  Speaker 1: and uh, and that's exactly what you had yesterday, was
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  Speaker 1: just this massive volume going through lots of people. Well
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  Speaker 1: it's hard to tell if there were lots of people buying,
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  Speaker 1: but certainly the volume of buying was was quite astounding. Well,
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  Speaker 1: I want to home in on that because I'm wondering,
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  Speaker 1: do we have a sense of who's behind this. Is
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  Speaker 1: this real money accounts with people actually trying to liquidate
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  Speaker 1: some of their treasury holdings, or is this algorithmic trading
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  Speaker 1: that is correlated with stocks or whatever else. Uh, and
• 8:45
  Speaker 1: is sort of moving on its own affair and we'll
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  Speaker 1: get at some point rectified as people reassess inflation and
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  Speaker 1: growth expectations. Yes, that's a good question. And you know,
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  Speaker 1: I talked to a lot of people yesterday and we
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  Speaker 1: were all kind of scratching our heads and saying like
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  Speaker 1: this can't be humans. It's a little bit too fast
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  Speaker 1: for that. So UM, it probably was some kind of
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  Speaker 1: either algorithm or um. You know, people were talking about
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  Speaker 1: potentially risk parity strategies, rebalancing or or or something like that.
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  Speaker 1: But to your point, and that's a great point, is
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  Speaker 1: that today's move is kind of counter to that. So
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  Speaker 1: we put out a note this morning um on on
• 9:22
  Speaker 1: b I rates on your terminal and basically we discussed
• 9:26
  Speaker 1: that Look, when you get these moves of you know, ten, fifteen,
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  Speaker 1: twenty basis points in ten year treasuries or across the market,
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  Speaker 1: you tend then to see a lower volatility day that follows,
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  Speaker 1: and usually some counter trend to that, and that's exactly
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  Speaker 1: what we're getting today, um and and in fact, over
• 9:42
  Speaker 1: the last seven years, you tend to get these big
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  Speaker 1: bouts of volatility, and they might be driven by algorithmic
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  Speaker 1: or or electronic trading and UM and they tend to
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  Speaker 1: be very short lived. And then you wind up with
• 9:52
  Speaker 1: people saying, okay, is this justified based on the fundamentals,
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  Speaker 1: as anything really changed? Um And once you realize that, no,
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  Speaker 1: things haven't really changed. From an economic standpoint, then you
• 10:03
  Speaker 1: can get back to kind of the the old trends
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  Speaker 1: you were on. I just want to understand a little
• 10:08
  Speaker 1: bit more about old trends and new trends, because earlier
• 10:12
  Speaker 1: in the day we were speaking with Alberto Gallo of Algebras,
• 10:16
  Speaker 1: and he I thought it was very, very impression when
• 10:21
  Speaker 1: he said, people have been buying stocks for yield and
• 10:24
  Speaker 1: bonds for capital gains. Is that about to change? Well,
• 10:28
  Speaker 1: I think that that actually has changed. I mean, I
• 10:30
  Speaker 1: think that changed probably two years ago when we hit
• 10:32
  Speaker 1: the you know, one fifty yield on on tenure treasuries.
• 10:36
  Speaker 1: Because once you start to move back from that, it's
• 10:40
  Speaker 1: hard to see how you get significant returns or at
• 10:42
  Speaker 1: least returns much higher than the coupon at this point
• 10:45
  Speaker 1: on a lot of the treasury uh UM a lot
• 10:48
  Speaker 1: of the treasury market, whereas in equities now you you
• 10:51
  Speaker 1: have yields that are somewhat higher than than the dividend
• 10:54
  Speaker 1: payouts of equities UM. And at the same time, I
• 10:58
  Speaker 1: mean you have to look at things like Gina Martin
• 10:59
  Speaker 1: att Are Equity Strategists, has done some great work on
• 11:02
  Speaker 1: on things like earnings and the fundamentals are ultimately going
• 11:06
  Speaker 1: to be the driver of of long term prospects for
• 11:09
  Speaker 1: for equities. So within an environment like we have now
• 11:12
  Speaker 1: we have slightly higher inflation, where you have growth prospects
• 11:16
  Speaker 1: that seem okay at least in the in the near term. Um,
• 11:19
  Speaker 1: you know, the question is is there going to be
• 11:23
  Speaker 1: you know, pressure on margins and things like that, and
• 11:25
  Speaker 1: and that can wind up meaning that you have an
• 11:27
  Speaker 1: equity market that is based a lot more on fundamentals
• 11:30
  Speaker 1: than necessarily people buying it for income like you've had
• 11:33
  Speaker 1: over the past couple of years. Is this particular market
• 11:38
  Speaker 1: are we already seeing jitters and uh some kind of
• 11:42
  Speaker 1: pricing in of the debt ceiling and the possible risk
• 11:45
  Speaker 1: there or can we expect a whole new hiccup as
• 11:49
  Speaker 1: people start to wake up to that risk. Yeah. So,
• 11:51
  Speaker 1: so the depth ceiling is going to show up in
• 11:53
  Speaker 1: the in the T bill market, and there are the
• 11:55
  Speaker 1: t buil market keeps on pricing. Uh, a problem with
• 11:59
  Speaker 1: the depth sailing in and out and for various dates.
• 12:02
  Speaker 1: Because the problem with the death ceiling with analyzing where
• 12:05
  Speaker 1: the deaths when the death sailing is going to get
• 12:07
  Speaker 1: hit this time of year, is that starting about now?
• 12:10
  Speaker 1: You get a lot of tax refunds that come in,
• 12:11
  Speaker 1: and the timing of when those come in winds up
• 12:14
  Speaker 1: being very important because the way that the Treasury Department
• 12:17
  Speaker 1: pays out um the tax refunds is by issuing treasury bills.
• 12:22
  Speaker 1: And so we're at this point now where if you
• 12:24
  Speaker 1: wind up getting a whole lot of people come in
• 12:26
  Speaker 1: in the next two weeks, there it's possible that even
• 12:30
  Speaker 1: in the first week of March we wind up with
• 12:32
  Speaker 1: with the debt the death ceiling being a problem. Whereas
• 12:34
  Speaker 1: if those are a little bit slower than they were
• 12:36
  Speaker 1: stay last year, then you can wind up actually towards
• 12:39
  Speaker 1: the end of March. So yeah, the market is already
• 12:41
  Speaker 1: pricing for that. The market is pricing in and out
• 12:44
  Speaker 1: different March t bills um as being the problem. For
• 12:48
  Speaker 1: for the death ceiling. We we still think it's somewhere
• 12:50
  Speaker 1: in the second half of March. That's what our model shows,
• 12:53
  Speaker 1: but again there's a lot of uncertainty around the inputs
• 12:56
  Speaker 1: to that model. And uh and and that's the behavior
• 12:59
  Speaker 1: of the taxpayer. Thank you so much, iro A Jersey.
• 13:01
  Speaker 1: A really important time to be watching the treasury market
• 13:04
  Speaker 1: right now. Thank you so much for being with us
• 13:07
  Speaker 1: Jersey is an interstate strategist for Bloomberg Intelligence, coming to
• 13:10
  Speaker 1: us from our BI headquarters in Princeton, New Jersey. The
• 13:28
  Speaker 1: real story of this week's turmoil really is volatility exchange
• 13:34
  Speaker 1: traded notes and just generally the volatility and short volatility.
• 13:38
  Speaker 1: Trained here to talk about that is Sarah Ponzack Cross,
• 13:41
  Speaker 1: asked reporter with Bloomberg News. Uh, Sarah, thank you so
• 13:44
  Speaker 1: much for being with us. So we did get news
• 13:47
  Speaker 1: today that Credit Suites is liquidating, Uh, their short volatility
• 13:53
  Speaker 1: exchange traded note. Not tiny, this had what three billion
• 13:57
  Speaker 1: dollars at one point in it. Who are the investors
• 14:00
  Speaker 1: behind us? And walk us through what happened here? So
• 14:03
  Speaker 1: the investors behind this, it's definitely a combination. So Credit
• 14:07
  Speaker 1: Suite was the biggest holder of x i V. They
• 14:09
  Speaker 1: actually had about thirty two of the holding. So the
• 14:12
  Speaker 1: remaining sixty eight we can't know for sure. It can
• 14:14
  Speaker 1: be some institutional, but it is a lot of retail
• 14:17
  Speaker 1: investors who don't understand exactly what the risks of these
• 14:21
  Speaker 1: products are. I mean, I remember a couple of months back,
• 14:23
  Speaker 1: we had stories coming about out of workers at Walmart
• 14:27
  Speaker 1: who were making money off of buying these products trading
• 14:31
  Speaker 1: the VIX because they just thought that it was easy money,
• 14:33
  Speaker 1: because they thought this tranquility would stay calm forever. But
• 14:36
  Speaker 1: they didn't understand what would actually happen if the VIX
• 14:40
  Speaker 1: spikes like we saw it did happen yesterday. So my
• 14:43
  Speaker 1: question is were there advisors that were peddling these products
• 14:47
  Speaker 1: to them in a way that they shouldn't have been.
• 14:50
  Speaker 1: We saw that black Rock came out today demanding more regulation,
• 14:53
  Speaker 1: especially given the fact that exchange traded notes are often
• 14:56
  Speaker 1: conflated with exchange traded funds. Uh so what are people
• 15:01
  Speaker 1: saying about that exactly? So I think this is kind
• 15:03
  Speaker 1: of a watershed moment for the e t F industry
• 15:05
  Speaker 1: because we haven't had to deal like with something like
• 15:08
  Speaker 1: this yet. And what happened is, like he said, Larry,
• 15:10
  Speaker 1: thing came out black because come out they're urging more regulation,
• 15:13
  Speaker 1: saying that the people create these funds need to actually
• 15:17
  Speaker 1: say and let people know what these risks actually entail
• 15:21
  Speaker 1: and kind of separate themselves from the E t F
• 15:23
  Speaker 1: industry because they're not vanilla e T s. And I
• 15:26
  Speaker 1: think someone like a black Rock is really nervous that
• 15:29
  Speaker 1: people are going to start generalizing, and this is going
• 15:31
  Speaker 1: to affect their products. People are going to be scared
• 15:34
  Speaker 1: of buying their plane Vanilla A T S, buying the
• 15:36
  Speaker 1: S and P five hundred because of what has happened
• 15:38
  Speaker 1: with the vix. Now one was an E T N
• 15:40
  Speaker 1: x I V, but then one of them was actually
• 15:42
  Speaker 1: an E T F. It still operates in a similar way,
• 15:45
  Speaker 1: but still they're basically saying that there's just been more
• 15:48
  Speaker 1: regulations when you're not dealing with the plane Vanilla E
• 15:50
  Speaker 1: T F explaining what the actual risks at hand are. Well,
• 15:55
  Speaker 1: he is not playing vanilla when it comes to anything
• 15:58
  Speaker 1: related to the markets, and that is Corey Johnson, and
• 16:01
  Speaker 1: I want to bring him in. He is our anchor
• 16:03
  Speaker 1: and editor at large for Bloomberg TV and Radio and
• 16:05
  Speaker 1: co host with Carol Master Bloomberg Markets PM and also
• 16:09
  Speaker 1: if you look back into his history his career history,
• 16:12
  Speaker 1: he was also a portfolio manager previously at Kingsford Capital
• 16:16
  Speaker 1: Management as well as Canal Capital and Corey, what do
• 16:19
  Speaker 1: you make of this, Uh, this conversation about volatility and
• 16:22
  Speaker 1: volatility linked exchange traded funds. So I think what's really
• 16:26
  Speaker 1: amazing here is this is an unprecedented This is a
• 16:29
  Speaker 1: true black Swan event written into the structure of this
• 16:35
  Speaker 1: x I V product. The CT this exchange traded note
• 16:39
  Speaker 1: was a really interesting clause, and it said that it's
• 16:41
  Speaker 1: the underlying security spiked more than it could trigger essentially
• 16:47
  Speaker 1: a liquidation, and that it never happened before ever in
• 16:50
  Speaker 1: the history of the VIX. So even those people who
• 16:52
  Speaker 1: were sophisticated and may have actually gone to the trouble
• 16:55
  Speaker 1: of reading the perspectives and understanding what they were getting
• 16:57
  Speaker 1: into might have looked at this and said, yeah, but
• 16:59
  Speaker 1: when is is going to happen? And this really does
• 17:01
  Speaker 1: get to the old saw. You know, it's different this time.
• 17:04
  Speaker 1: It was different. This time, We've never ever seen volatility
• 17:07
  Speaker 1: spike more than in a given day. Um. It was
• 17:10
  Speaker 1: also interesting to see this happen really in the late
• 17:12
  Speaker 1: moments of the trade yesterday, when it was clear that
• 17:16
  Speaker 1: this thing was going to become um uh, you know,
• 17:18
  Speaker 1: this whole this whole instrument is going to disappear, and uh,
• 17:22
  Speaker 1: the underlong one of the underlowinged instruments suddenly traded down
• 17:25
  Speaker 1: in the last half an hour of trading. Worth noting
• 17:28
  Speaker 1: also that we know some of the robot advisors and
• 17:31
  Speaker 1: Vanguard were unable to deal with clients at that point.
• 17:33
  Speaker 1: They weren't picking up the phones, their systems weren't accepting trades.
• 17:37
  Speaker 1: So any investors were in this through that giant brokerage
• 17:39
  Speaker 1: House of Anger for example, couldn't get out. Um and uh,
• 17:43
  Speaker 1: it's it's a it's a real problem. Uh. And you know,
• 17:45
  Speaker 1: we talked with the value of this thing. We don't
• 17:46
  Speaker 1: know who the holders are, but if you just add
• 17:48
  Speaker 1: up the number of holdings that we do know about,
• 17:51
  Speaker 1: there were about college fifteen million shares out, which means
• 17:55
  Speaker 1: that the at at the ninety nine dollar value, we've
• 17:58
  Speaker 1: had about a one point five billion dollar valuation completely
• 18:02
  Speaker 1: wiped out overnight. And as you mentioned, that threshold that
• 18:06
  Speaker 1: was reached yesterday increase for the VIX. Yeah, and certainly
• 18:11
  Speaker 1: it is being liquidated and you have to wonder about
• 18:13
  Speaker 1: what kind of build on effect it has. Being liquidated
• 18:17
  Speaker 1: at a week time leaves even less value. Corey Johnson,
• 18:21
  Speaker 1: thank you so much for joining us Bloomberg Markets co anchor,
• 18:24
  Speaker 1: and also Sarah Ponzack Cross as reporter for Bloomberg News.
• 18:27
  Speaker 1: Thank you both very much. The head of the Bank
• 18:43
  Speaker 1: for International Settlements, he has really taken bitcoin to task.
• 18:48
  Speaker 1: He describes it as quote a combination of a bubble
• 18:50
  Speaker 1: a Ponzi scheme, and he says due to the energy
• 18:53
  Speaker 1: consumption required for mining it, he calls it an environmental disaster.
• 18:58
  Speaker 1: This was quote from Augustin Carston's he is the general
• 19:01
  Speaker 1: manager of the Bank of International Settlements. Here to give
• 19:04
  Speaker 1: us his view is Ryan Radloff. He is the chief
• 19:07
  Speaker 1: executive of coin Shares UK, helping to manage about a
• 19:10
  Speaker 1: billion dollars in crypto assets. Joining us from London, Ryan,
• 19:14
  Speaker 1: just give you the opportunity to respond to Mr Carston's
• 19:19
  Speaker 1: what would you say to him? Hi, thank you, thanks
• 19:22
  Speaker 1: for having me. I mean, bitcoin is obviously a controversial
• 19:25
  Speaker 1: topic and it's certainly not a ponzi um that we've
• 19:28
  Speaker 1: been in a state of mania about it over the
• 19:30
  Speaker 1: last twelve months. But really what bitcoin is is an
• 19:33
  Speaker 1: index measure of the dissatisfaction of the current legacy financial system,
• 19:37
  Speaker 1: and it's no surprise that individuals that are sitting on
• 19:40
  Speaker 1: the other side of that in the legacy system would
• 19:42
  Speaker 1: aim to take shots at it. But if you look
• 19:45
  Speaker 1: at what bitcoin is doing across the world from a
• 19:47
  Speaker 1: humanitarian standpoint, um, it is enabling people to be financially
• 19:50
  Speaker 1: free for the first time without having an account with
• 19:53
  Speaker 1: any bank or anywhere else. So it's serving just as
• 19:56
  Speaker 1: much good um as any any one of those negative
• 19:59
  Speaker 1: points that he mentioned. All Right, well, I've got to say,
• 20:03
  Speaker 1: financial freedom isn't what I think of when I look
• 20:05
  Speaker 1: at the star at the price of bitcoin over the
• 20:08
  Speaker 1: past couple of weeks. Uh, it certainly is not financial
• 20:11
  Speaker 1: freedom for the people who bought it at eighteen dollars,
• 20:15
  Speaker 1: since it's fallen below six th latest reading in a second.
• 20:19
  Speaker 1: But I'm just wondering, I mean, do you really think
• 20:22
  Speaker 1: that the people who are in bitcoin right now are
• 20:25
  Speaker 1: people protesting the structure of the financial system actually right now,
• 20:29
  Speaker 1: just to clarify, it's a little over seven thousand dollars
• 20:32
  Speaker 1: um but or or rather is this people who are
• 20:35
  Speaker 1: bored of the markets that have gotten very tranquil, not
• 20:38
  Speaker 1: this week withstanding, and are trying to make a big
• 20:42
  Speaker 1: buck by going in here. Well, I think it's both
• 20:45
  Speaker 1: without question. I mean, the early days of bitcoin, where
• 20:48
  Speaker 1: you had technologist and early adopters, there's even this libertarian
• 20:51
  Speaker 1: movement to it, as I mentioned. You know, in the
• 20:53
  Speaker 1: last few months we've seen the users come into into
• 20:57
  Speaker 1: crypto high your moment for a speculation purposes, and they're
• 21:01
  Speaker 1: getting a hard lesson right now. UM, a lesson that
• 21:04
  Speaker 1: many of us have learned over the last four years
• 21:06
  Speaker 1: being in this market that this is going to correct
• 21:07
  Speaker 1: every quarter. Um, it's it's going to be volatile. Hold
• 21:10
  Speaker 1: on for the ride, um and you know, but it's
• 21:13
  Speaker 1: it's going to be increasing and user adoption, network value
• 21:16
  Speaker 1: over a long term scale. So we look at it
• 21:19
  Speaker 1: much more on a long term horizon. Okay, so let's
• 21:22
  Speaker 1: let's look at a long term horizon. Where are we
• 21:24
  Speaker 1: headed with this? Well, there's a few new fundamentals to
• 21:27
  Speaker 1: look at. Um. You know what what we see is
• 21:30
  Speaker 1: bitcoin and you've heard this before, displacing the concept of
• 21:33
  Speaker 1: of a digital gold and creating this new market for
• 21:36
  Speaker 1: decentralized digital money, and the things that people should start
• 21:40
  Speaker 1: paying attention to our our new things like network stability,
• 21:44
  Speaker 1: node count, and new fundamentals of this asset class, not
• 21:48
  Speaker 1: necessarily what technical analysis of a price is going to
• 21:51
  Speaker 1: start doing. Um. So I think that as the market
• 21:54
  Speaker 1: becomes more educated, you'll start seeing and hearing things like network,
• 21:59
  Speaker 1: node count, and distribution. And that's the things that I
• 22:01
  Speaker 1: think users and people need to start paying attention when
• 22:04
  Speaker 1: they're analyzing these new asset classes like Bitcoin. What is
• 22:07
  Speaker 1: network node count? Yeah so so at coin shares, what
• 22:11
  Speaker 1: our research team will look at is the number of
• 22:14
  Speaker 1: nodes that are operating and running the Bitcoin software. And
• 22:18
  Speaker 1: the more nodes there are, the more decentralized and strong
• 22:22
  Speaker 1: the network becomes. And those are important fundamentals and factors.
• 22:27
  Speaker 1: And if you look at the last six months, Bitcoin's
• 22:30
  Speaker 1: network unquestionably has gotten stronger through the second half of
• 22:34
  Speaker 1: the year by growing and node count um and yes,
• 22:38
  Speaker 1: we're seeing a big risk off correction throughout the market.
• 22:41
  Speaker 1: It's not just Bitcoin in the first half of this year,
• 22:44
  Speaker 1: but if you look at the underlying fundamentals bitcoin, in
• 22:47
  Speaker 1: terms of network strength, Bitcoin has never been stronger um so,
• 22:50
  Speaker 1: so we were very excited about that. This is node count,
• 22:54
  Speaker 1: I beg your part an N O, D E node count,
• 22:57
  Speaker 1: that's right, it's an important that's an important factor to watch.
• 23:01
  Speaker 1: Almost think of as a new fundamental um and instead
• 23:04
  Speaker 1: of looking at price to earnings ratios or or margins
• 23:07
  Speaker 1: of a company, this is an example of what you
• 23:09
  Speaker 1: should be looking at in terms of analyzing a new
• 23:12
  Speaker 1: network based asset. Class like bitcoin or etherium or ripple
• 23:17
  Speaker 1: or one of these others. You know today, UH, I
• 23:20
  Speaker 1: know that the SEC chair is testifying in front of
• 23:23
  Speaker 1: Congress about cryptocurrency regulation. We've heard UH from South Korean regulators.
• 23:29
  Speaker 1: Japanese regulators are looking into uh, particularly one of the
• 23:33
  Speaker 1: exchanges there. I'm just wondering. I mean, you talk about
• 23:36
  Speaker 1: financial independence and independence from the sort of traditional financial system,
• 23:40
  Speaker 1: but you need to be connected to it in some
• 23:42
  Speaker 1: way since, as we see, futures now of bitcoin are
• 23:46
  Speaker 1: trading and a lot of these contracts are securities and
• 23:49
  Speaker 1: being treated as such by the SEC. So what's the
• 23:52
  Speaker 1: sort of comfortable intersection here of government oversight and regulation
• 23:57
  Speaker 1: UH and freedom or independence from traditional financial worlds. Yeah,
• 24:03
  Speaker 1: it's it's this is a good question. It's it's a
• 24:04
  Speaker 1: hot topic right now. And I personally I think that
• 24:07
  Speaker 1: we need more regulations specifically around the consumer protection UM
• 24:13
  Speaker 1: elements of what we're seeing in the I c O market. UM.
• 24:15
  Speaker 1: We need a clear cut UM you know, report that
• 24:20
  Speaker 1: I think comes from the crypto community almost like a
• 24:23
  Speaker 1: code of ethos of how things are going to be
• 24:25
  Speaker 1: done UM, and that needs to be liaison and passed,
• 24:29
  Speaker 1: passed through regulators from the legacy world. So it's going
• 24:32
  Speaker 1: to be very difficult for the regulators to come up
• 24:35
  Speaker 1: with this code of conduct if you will, on their own. UM. So,
• 24:38
  Speaker 1: I think this needs to come from the crypto community.
• 24:41
  Speaker 1: It needs to be brought to the regulators um and
• 24:45
  Speaker 1: and worked on that jointly. But it's gonna be very difficult.
• 24:48
  Speaker 1: And part of the reason why is because you have
• 24:50
  Speaker 1: three elements at play here. You've got, first the fact
• 24:53
  Speaker 1: that we're dealing with monetary assets that don't require a
• 24:56
  Speaker 1: name to be moved around. The second is that they're global,
• 24:59
  Speaker 1: so they don't fall under new jurisdiction. And the third
• 25:02
  Speaker 1: is that they can actually move other assets like dollars
• 25:05
  Speaker 1: over these over these networks. So it creates a very
• 25:08
  Speaker 1: difficult challenge for regulators. So that's why I think it
• 25:10
  Speaker 1: needs to come from the crypto community and then pass
• 25:13
  Speaker 1: through and worked with the regulators to come to some
• 25:15
  Speaker 1: code of ethos or conduct. Who who or what entity
• 25:20
  Speaker 1: from the crypto community would be the most likely leader. Well,
• 25:25
  Speaker 1: I think you know, if you think of it's even
• 25:26
  Speaker 1: of where the intersection it needs to happen, Where the
• 25:30
  Speaker 1: intersection of FIAT too, crypto occurs UM and that is
• 25:34
  Speaker 1: on the that's those are the exchanges, so the coin
• 25:37
  Speaker 1: basis of the world. UM. Those are the individuals that
• 25:41
  Speaker 1: are facilitating the process of the movement of legacy money
• 25:45
  Speaker 1: like FIAT money into blockchain based monetary assets or cryptocurrencies. UM.
• 25:50
  Speaker 1: So exchanges groups like us, We're gonna be working with
• 25:53
  Speaker 1: a group out of the UK UM to work with
• 25:55
  Speaker 1: the UK government on this. UM. We're gonna help spearhead that.
• 25:59
  Speaker 1: And then there's other companies like coin base that are
• 26:01
  Speaker 1: taking leadership roles as well. UM and and that that's
• 26:04
  Speaker 1: Those are the types of companies and the profile of
• 26:06
  Speaker 1: where it needs to come from. Ryan Radlof, thank you
• 26:08
  Speaker 1: so much for joining us. Really interesting and it would
• 26:11
  Speaker 1: be great to keep in touch with you as this
• 26:13
  Speaker 1: story unfolds. Ryan Radlof is chief executive officer of coin
• 26:17
  Speaker 1: Shares UK, which has a billion dollars in crypto assets
• 26:21
  Speaker 1: and it's based in London. Thanks for listening to the
• 26:28
  Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
• 26:31
  Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
• 26:35
  Speaker 1: you prefer. I'm pim Fox, I'm on Twitter at pim Fox,
• 26:39
  Speaker 1: I'm on Twitter at Lisa Abramo. It's one before the podcast.
• 26:43
  Speaker 1: You can always catch us worldwide on Bloomberg Radio