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Epic S&P Rally Is Powered By Assets You Can't See or Touch · Bloomberg Intelligence

• 0:01
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along
• 0:04
  Speaker 1: with my co host of Bonnie Quinn. Every business day
• 0:06
  Speaker 1: we bring you interviews from CEO, market pros, and Bloomberg experts,
• 0:10
  Speaker 1: along with essential market moving news. Find a Bloomberg Markets
• 0:13
  Speaker 1: podcast on Apple podcast or wherever you listen to podcasts,
• 0:17
  Speaker 1: and on Bloomberg dot Com. Allow me to digress for
• 0:21
  Speaker 1: just this tiny second and invoked the memory of Ken Pruitt,
• 0:24
  Speaker 1: who used to be a wonderful anchor here on Bloomberg Radio.
• 0:27
  Speaker 1: He used to distinguish between the modern economy and the
• 0:29
  Speaker 1: older economy by talking about things that you can pull
• 0:32
  Speaker 1: out of the ground in terms of what companies are
• 0:34
  Speaker 1: doing well. Sarah Ponzac, who joins me in studio now,
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  Speaker 1: has a version of that idea in a fantastic story
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  Speaker 1: today where she talks about the epic SMP five Raleigh
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  Speaker 1: being powered by assets you can't see or touch. Sarah,
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  Speaker 1: give us a little rundown of what goes on there. Well,
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  Speaker 1: thank you very much, Bonnie. The idea behind this is
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  Speaker 1: really that all year long, we constantly hear about tech
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  Speaker 1: outperforming tech out performance. The reality is that COVID nineteen sure,
• 1:02
  Speaker 1: it has sped this up, but this has been a
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  Speaker 1: trend for a very long time, and in speaking with professors, researchers, economists,
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  Speaker 1: one thing that you can really trace this back to
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  Speaker 1: is the difference between intangible assets and tangible assets. So
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  Speaker 1: intangible assets being those things that you cannot see, you
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  Speaker 1: cannot touch, think of them as a brand name like
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  Speaker 1: the iPhone, for example, or data collected on people, algorithms, software,
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  Speaker 1: even you can think about it in the sense of
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  Speaker 1: a vaccine being created. All the R and D that
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  Speaker 1: does go into that, it's all considered intangible and it's
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  Speaker 1: not recorded on a company's balance sheet. So a on
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  Speaker 1: impotent On institute. They put out a report back in ten.
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  Speaker 1: It was recently cited by Bank of America by Carlyle.
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  Speaker 1: This has really become a topic of conversation and what
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  Speaker 1: they found. The way that they did this was they
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  Speaker 1: took total SMP five market cap and they subtracted out
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  Speaker 1: what's called tangible book value. Then they said every thing else, well,
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  Speaker 1: that's due to intangible assets, which represented eighty four percent
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  Speaker 1: of the SMP five dred. Now there are some discrepancies
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  Speaker 1: here about how you can actually go about calculating this,
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  Speaker 1: and it's really difficult because so touchy feely and accounting
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  Speaker 1: measures really aren't that great surrounding this. But yes, you
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  Speaker 1: have to take into account that what we see in
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  Speaker 1: the length of market cap and that gap is also
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  Speaker 1: due to projected earnings from both tangible intangible assets. But
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  Speaker 1: the reality is that growth in intangible assets has just
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  Speaker 1: been astronomical over the past two decades, over the past
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  Speaker 1: decade in particular, and now sped up by COVID nineteen.
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  Speaker 1: And that has extreme implications for the economy and the
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  Speaker 1: labor market too. And of course how you value these
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  Speaker 1: assets is what's important, or how investors value them. I
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  Speaker 1: should say, some of these are just runs, some of them,
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  Speaker 1: as you say, or you know, intellectual property and so on.
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  Speaker 1: Some of them produced revenue, others absolutely don't. Right, There
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  Speaker 1: are many implications of this. Often spoken about is what
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  Speaker 1: this means for value investing. There is large question about
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  Speaker 1: if this is the reason why value seems to be
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  Speaker 1: quote unquote dead, why value hasn't been able to outperform.
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  Speaker 1: Is it the reality that value investors are missing this
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  Speaker 1: key input of intangible assets. Bank of America, for example,
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  Speaker 1: how a recent report on this and they created their
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  Speaker 1: value Intangibles basket where they incorporated intangibles into value investing
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  Speaker 1: and they got much better returns. There's also a value
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  Speaker 1: et F, for example, that holds Amazon, and the reason
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  Speaker 1: that it holds Amazon is because they do take into
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  Speaker 1: account intangible value. But when you think about the macro
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  Speaker 1: economic effects of this and the macro economic implications when
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  Speaker 1: you think about a company with a lot of intangible assets,
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  Speaker 1: for example, a software company, there's a lot of R
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  Speaker 1: and D research and development that goes into this. But
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  Speaker 1: once the software is created, or once a vaccine is created,
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  Speaker 1: for example, they have immense scale and you don't need
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  Speaker 1: too many people working to keep that scale growing, to
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  Speaker 1: keep software being issued too many different people to many
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  Speaker 1: different companies for example. Same with a vaccine having it
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  Speaker 1: administered around the world. So what people wonder and what
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  Speaker 1: the proof has shown is that aside from the growth
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  Speaker 1: of intangible assets alongside it, I should say we've also
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  Speaker 1: seen slower labor market recoveries because if you think in
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  Speaker 1: the olden days, if you think with oil wells and factories,
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  Speaker 1: you needed a lot of people to really power these
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  Speaker 1: tangible assets. Well, with intangible assets, the idea is that
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  Speaker 1: you don't need that much growth and employment, you don't
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  Speaker 1: need that many people. So people are starting to think
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  Speaker 1: about and really wonder about what this means for the
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  Speaker 1: future of the economy. One interesting area is brand names,
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  Speaker 1: as you said, And yesterday I was speaking with somebody
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  Speaker 1: who owns many Reads or who's the CEO of a
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  Speaker 1: red company, and he talked about how they've undone some
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  Speaker 1: deals they had with Marriott or I h S for example,
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  Speaker 1: and you have to wonder, you know, he talked about
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  Speaker 1: a hundred fifty hotel brands that they used to work
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  Speaker 1: with and now they're really consolidating that and going with
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  Speaker 1: their own hotel brands like Sanesta. You have to wonder,
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  Speaker 1: will some of these brands just go away or decrease
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  Speaker 1: significant dy and value. Well, you have to wonder that.
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  Speaker 1: And when you think about a brand, you have to
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  Speaker 1: think about the emotions that comes with it, also just
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  Speaker 1: how recognizable it is to a majority of people. When
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  Speaker 1: I was working on this story, one example that came up,
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  Speaker 1: for example, was the likes of band aid. For example,
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  Speaker 1: band aid is a brand, but when we talk about
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  Speaker 1: using band aids, I mean, I'll go ahead and say
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  Speaker 1: the name you talk about using band aids, so that
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  Speaker 1: is such value that is added to the company that
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  Speaker 1: creates band aid. For example, you think about the likes
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  Speaker 1: of Apple and It's iPhone. When people talk about phones,
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  Speaker 1: a lot of people will just off handly use iPhone
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  Speaker 1: because such a large proportion of the population uses it.
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  Speaker 1: So when you think about the value of a company,
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  Speaker 1: brand names are so important and the ideas the emotion
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  Speaker 1: that comes with it. Another one that comes to mind
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  Speaker 1: is Disney. Disney has such a great brand value that
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  Speaker 1: comes with it. Even though it's a company that does
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  Speaker 1: have a high amount of tangible assets, you also have
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  Speaker 1: to think about the brand. To Sarah, there's so much
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  Speaker 1: more we can talk about in this story, but we
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  Speaker 1: do have to leave it there for now. Sarah Ponzac
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  Speaker 1: is our Cross Asset reporter here at Bloomberg. Again, if
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  Speaker 1: you have a chance to have a read through this story,
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  Speaker 1: it really is just a fun story, but also extraordinary,
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  Speaker 1: lust lustrative, and also educational epic SMB five values powered
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  Speaker 1: by assets you can't see or touch. That Sarah Ponzac,
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  Speaker 1: time for a conversation now about monopoly, and I'm not
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  Speaker 1: talking the board game. I'm talking Google which our next
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  Speaker 1: guest says should learn from Microsoft's a tough lesson. Jon
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  Speaker 1: Oh Sarah joins us now Bloomberg opinion columnist. What was
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  Speaker 1: the tough lesson that Microsoft learned, Joe that Google is
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  Speaker 1: about to learn? According to you, you fight the federal
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  Speaker 1: government at your peril. Uh, let's let's start there. Um.
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  Speaker 1: You know the the when you look at the complaint
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  Speaker 1: that the Dust's Department filed against Google, it is uncannily
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  Speaker 1: similar to the complaint the Justice Department file twenty two
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  Speaker 1: years ago against Microsoft. Microsoft was accused of using it,
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  Speaker 1: you know, operating system monopoly to squash um a competitor,
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  Speaker 1: Netscape that had a browser that was competing with with
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  Speaker 1: the Microsoft browser Internet Explorer. Um Uh. Google is being
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  Speaker 1: accused of basically, um uh, going to going to Apple
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  Speaker 1: and other companies and basically saying, we want to be
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  Speaker 1: the pre we want to be the defalse search engine.
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  Speaker 1: We'll pay you to put our search engine you know,
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  Speaker 1: embedded in your in your devices and keep everybody else out.
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  Speaker 1: It's very very similar, and you know, Microsoft lost that case,
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  Speaker 1: and even though antitrust is um gotten a little more
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  Speaker 1: las fair since then. I think Google's in a heap
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  Speaker 1: of trouble. Well, there have been twenty two years in
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  Speaker 1: the meantime. Is there anything in case slow or anything
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  Speaker 1: in precedent that Google might be able to learn from
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  Speaker 1: and use to its advantage. Well, the main thing that
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  Speaker 1: they will argue about is how to define the market.
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  Speaker 1: So if the if the market is defined purely as
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  Speaker 1: the search engine market, then I think Google's going to
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  Speaker 1: have real problems defending its position. But if they can
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  Speaker 1: persuade the judge to make the market um, you know,
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  Speaker 1: Internet platforms or something that's broader and wider than simply search,
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  Speaker 1: then I think they've got a pretty good shot. I
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  Speaker 1: think a lot. So it's a it's as technical term,
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  Speaker 1: but it's super important in the antitrust is how do
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  Speaker 1: you define the market? Uh? And if you define it
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  Speaker 1: one way, it can you know, then you're a monopolist.
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  Speaker 1: If you define it another way, then maybe you're not.
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  Speaker 1: They will have teams and teams of lawyers, Joe, I
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  Speaker 1: mean how will this play out? I mean will it
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  Speaker 1: be a public spectacle? Will we be able to see
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  Speaker 1: a lot of drama, a lot of theater? Um? Well,
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  Speaker 1: in the past, Google has uh wound up usually settling
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  Speaker 1: Uh with gup various governments or in Europe paid to
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  Speaker 1: paid large fines. So the real question is will it
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  Speaker 1: get to the trial stage. If it does get to
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  Speaker 1: the trial stage, I think it's quite likely that it
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  Speaker 1: will be, um, you know, one of those uh high
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  Speaker 1: profile rock and roll you know trials with lots of
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  Speaker 1: fireworks and you know, inflammatory emails and you know, so
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  Speaker 1: on and so forth. Um. I'm sure one thing that
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  Speaker 1: they learned from the trial is uh, not to act
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  Speaker 1: the way Bill Gates acted during his deposition, which was
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  Speaker 1: devastating for Microsoft. As you were called, he was his
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  Speaker 1: his answers were he he barely seemed to know you know,
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  Speaker 1: what the words meant, and when that was played in
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  Speaker 1: the courthouse, that did not help Microsoft at all. Joe,
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  Speaker 1: you know, Google is going to face this first, but
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  Speaker 1: it's clear that some of the other major tech companies
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  Speaker 1: are going to face this as well. Is there anything
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  Speaker 1: to suggest that one company might prevail over some of
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  Speaker 1: the others, or that that companies will take a different
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  Speaker 1: tech when dealing with us, Well, each company is going
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  Speaker 1: to have a different issue, you know, and that's what
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  Speaker 1: makes this so hard. So, you know, Facebook, you know,
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  Speaker 1: is the is the eight hundred pound gorilla UH in
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  Speaker 1: social media. UM, and if the government went after them,
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  Speaker 1: they would probably try to break them up and and
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  Speaker 1: and you know, UH separate them from Instagram and What's App,
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  Speaker 1: which which they both own. Amazon is the platform company
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  Speaker 1: that is being accused of using data from UH it's
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  Speaker 1: its own customers, companies that sell on Amazon to make
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  Speaker 1: their own products to compete with these other companies. And
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  Speaker 1: UH so that's what they'll be suit over UM an Apple.
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  Speaker 1: If the government goes after them, it'll be because of
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  Speaker 1: the way they enforce the rules and and handle their
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  Speaker 1: own UM the app store, the propriety of the app store.
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  Speaker 1: So each case is going to be different. They're all
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  Speaker 1: antitrust cases, but but the the emphasis in each case
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  Speaker 1: is going to be quite different. And it's really hard
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  Speaker 1: to know at this point which of the cases are
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  Speaker 1: the stronger for the Justice Department and which are ones
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  Speaker 1: are the weaker. I think the other thing that's gonna
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  Speaker 1: happen though, don't forget, there's also Congress, and so if
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  Speaker 1: the Democrats take the Senate and UM the White House,
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  Speaker 1: you're almost surely going to see laws being written and
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  Speaker 1: passed that UM that outlaws some of the practices these
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  Speaker 1: tech companies have been doing. UH, so that there's no
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  Speaker 1: there's no ambiguity about about whether they violate the law
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  Speaker 1: or not. They're just gonna say this is against the law.
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  Speaker 1: You cannot do this Amazon, or you cannot do this Facebook.
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  Speaker 1: It's so fascinating. I'm also curious as to whether a
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  Speaker 1: change in administration should we get one, and that's absolutely
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  Speaker 1: not not determined yet. But if we get one, doesn't
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  Speaker 1: make a difference in this what's going to be a
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  Speaker 1: year's one case. I don't think it does. UM. This
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  Speaker 1: this case was clearly put together by the UM career
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  Speaker 1: professionals at the Justice Department. They're not going to go anywhere. UM.
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  Speaker 1: The Democrats, as I wrote in another column recently, are
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  Speaker 1: really UM geared up to go after these big tech
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  Speaker 1: companies on antitrust grounds. And UM the idea that Biden
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  Speaker 1: administration would back away from this lawsuit is almost inconceivable.
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  Speaker 1: If anything, they will add additional charges that are not
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  Speaker 1: currently contained in in the in the in the in
• 12:51
  Speaker 1: the complaint right now. Yeah, I mean, it's really interesting.
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  Speaker 1: There's also the question of how the do o J
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  Speaker 1: is going to be staffed up and so on, Joe.
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  Speaker 1: But you think these things just carry on sort of
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  Speaker 1: seamlessly transition or no, well, seamlessly it is probably overstatement.
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  Speaker 1: I mean, don't forget don't forget a T and T
• 13:12
  Speaker 1: T and T deal with time. Warner was just about
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  Speaker 1: locked up when making del Rayhan became the antitrust chief
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  Speaker 1: of the Juice Department under under under President Trump, and
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  Speaker 1: he immediately reversed course on it with much of the
• 13:26
  Speaker 1: dismay of the career professionals. But in this particular case,
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  Speaker 1: I think the career professionals and whoever hit their superiors
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  Speaker 1: turn out to be are going to be going to
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  Speaker 1: be aligned on this case. Joe. It's always so fascinating
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  Speaker 1: to speak to you just on a stufford note, before
• 13:41
  Speaker 1: we let you can ask you what you think it's
• 13:44
  Speaker 1: going to happen tomorrow night, debate night. You can ask me.
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  Speaker 1: But I don't know that's a fair enough answer. It's uh,
• 13:53
  Speaker 1: it's not fair to put an opinion columnist on the
• 13:55
  Speaker 1: spot like that, Joe. Thank you. Jonah Sarah is a
• 13:58
  Speaker 1: Boombrig opinion columnists covering business. We should say, and of
• 14:01
  Speaker 1: course I do check out if you haven't heard it.
• 14:04
  Speaker 1: His project the Bloomberg Wandere Project, the Shrink next Door
• 14:08
  Speaker 1: for all sorts of prizes, and really just a fascinating
• 14:11
  Speaker 1: liston as well. So Joe, thanks for joining today's column.
• 14:14
  Speaker 1: Is that Google should learn from Microsoft's tough lesson and
• 14:18
  Speaker 1: well worth a read for anybody out there. Let's get
• 14:23
  Speaker 1: back to the markets now. A very interesting conversation coming
• 14:26
  Speaker 1: up with Anderson Capital Management. Peter Anderson, who is located
• 14:30
  Speaker 1: in Boston and manage is something called the weather marka
• 14:33
  Speaker 1: fun It's a credit driven, concentrated, low turnover stock portfolio
• 14:38
  Speaker 1: that apparently incorporates a truly different esoteric stock selection process.
• 14:43
  Speaker 1: So Peter, welcome and give us just a little hint
• 14:46
  Speaker 1: of what this esoteric stock selection process might be. Well,
• 14:50
  Speaker 1: good morning, Bonnie. Yes, so I come from a fixed
• 14:52
  Speaker 1: income background and inequity background, and not many people have
• 14:56
  Speaker 1: that combination. Usually you stay in one swim lane for
• 15:00
  Speaker 1: your profession. But I switched over to equities and I
• 15:03
  Speaker 1: found it very convenient and helpful, frankly, to borrow from
• 15:07
  Speaker 1: the fixed income marketplace the different tools they use and
• 15:10
  Speaker 1: apply that to equity analysis. So what I have is
• 15:13
  Speaker 1: a current portfolio or fifteen stocks, but they are derived
• 15:17
  Speaker 1: mainly by looking at dislocations between how the bond market
• 15:21
  Speaker 1: might have an opinion on a company versus how an
• 15:23
  Speaker 1: equity market would have an opinion on the same company.
• 15:27
  Speaker 1: So what does it led you to put into your
• 15:30
  Speaker 1: portfolio in the last six months? And have you changed much? Uh?
• 15:34
  Speaker 1: You know, my turnover is very low relatively speaking. You know,
• 15:38
  Speaker 1: there are a lot of competitors out there. Mutual funds
• 15:40
  Speaker 1: would have over ad percent turnover, but mine is only
• 15:43
  Speaker 1: about twenty five. So that's an indirect way of saying
• 15:47
  Speaker 1: that my turn my new stock selection is pretty slow.
• 15:51
  Speaker 1: At most. Ill pick maybe one or two stocks a year,
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  Speaker 1: and uh, I hoping that's a sign of my conviction
• 15:58
  Speaker 1: on the holdings that I currently have, of uh in
• 16:01
  Speaker 1: terms of my outlook for their market appreciation. Okay, how
• 16:07
  Speaker 1: specific can you get when you talk to us about
• 16:09
  Speaker 1: what's actually in your portfolio? Because last year, for example,
• 16:13
  Speaker 1: return on an eighteen stock portfolio. Yes, yes, and I've
• 16:17
  Speaker 1: delighted to talk to you about that, and I wanted
• 16:19
  Speaker 1: to also tie that in to you know, what my
• 16:22
  Speaker 1: current assessment is of where we are. I think it's
• 16:25
  Speaker 1: extremely difficult right now. You know, COVID has just kind
• 16:28
  Speaker 1: of dropped a bomb on all the standard metrics that
• 16:32
  Speaker 1: either economists use or equity analysts used. I think they're
• 16:35
  Speaker 1: having a very very hard time formulating, oh, what is
• 16:39
  Speaker 1: going to happen, say with the next three months. So
• 16:41
  Speaker 1: I don't take an approach like that. This approach takes
• 16:44
  Speaker 1: a longer view, and I tried to simplify UH supply
• 16:48
  Speaker 1: demand and try to get a clearer sense of what
• 16:51
  Speaker 1: stocks out there will endure and indeed appreciate regardless of
• 16:55
  Speaker 1: what happens in the White House, how long the virus lasts,
• 16:59
  Speaker 1: or whether an we have our hopes for the vaccine
• 17:02
  Speaker 1: or dash. So with that in mind, some enduring themes
• 17:06
  Speaker 1: are believe it or not, pet care. That's the most
• 17:08
  Speaker 1: recent editions I've had in the portfolio, and I have
• 17:11
  Speaker 1: a theme of pet care sub theme if you will
• 17:14
  Speaker 1: have three stocks in there, and I can explicitly tell
• 17:17
  Speaker 1: you what they are, the Trupanion Fresh pet in Zoetics.
• 17:20
  Speaker 1: Each one has a very specific place in the pet
• 17:25
  Speaker 1: care of this nation. At least we own over a
• 17:28
  Speaker 1: hundred million cats and dogs out there, and I've write
• 17:31
  Speaker 1: reason to that no matter what happens, we treat our
• 17:34
  Speaker 1: pets equal to and to a family members in a family.
• 17:40
  Speaker 1: So Trupanion is the only publicly traded stock that provides
• 17:45
  Speaker 1: healthcare insurance for pets, and their market penetrations is only
• 17:48
  Speaker 1: one percent of the entire hundred million animals out there.
• 17:53
  Speaker 1: So just think of that. If it doubles its market share,
• 17:56
  Speaker 1: it's only up two percent in market share, but it
• 17:59
  Speaker 1: certainly double its revenues in fresh pet is gourmet food
• 18:04
  Speaker 1: for pets and zoetts. Provides the medication, the prescription medication
• 18:09
  Speaker 1: that once you bring your pet to UH doctor veterinarian,
• 18:14
  Speaker 1: you will usually get UH prescription for medication and most
• 18:19
  Speaker 1: likely the way if this is a manufacturer of that.
• 18:21
  Speaker 1: So this is a long term perspective. Uh, from now
• 18:25
  Speaker 1: through the end of the year. I think that there
• 18:28
  Speaker 1: will be incredible volatility, but who can predict who's going
• 18:31
  Speaker 1: to win, when the virus will end, when the vaccines
• 18:35
  Speaker 1: will come out. But I think these socks have an
• 18:37
  Speaker 1: enduring quality. Are any of your holdings at all dependent
• 18:41
  Speaker 1: on more stimulus coming? You know, I try to stay
• 18:45
  Speaker 1: away from me because when you think about it, pets
• 18:47
  Speaker 1: are definitely, you know, something that costs some money. You know,
• 18:50
  Speaker 1: you just said it yourself, right, So you're essentially trying
• 18:53
  Speaker 1: to gather the extra pennies that people have, and in
• 18:56
  Speaker 1: this case it's through their pets. But a lot of
• 18:59
  Speaker 1: people who have pets that you know, don't get extra stimulus,
• 19:02
  Speaker 1: will not be able to get their pet that extra
• 19:04
  Speaker 1: operation or that medicine. Yes, that's a possibility, but I
• 19:08
  Speaker 1: would also say that if that's the case, it's almost
• 19:11
  Speaker 1: like saying you wouldn't be able to provide for your
• 19:14
  Speaker 1: own family member. So I think there is a strong
• 19:18
  Speaker 1: commitments and I would say almost an inelastic demand for
• 19:22
  Speaker 1: pet care in this country, at least the way um
• 19:26
  Speaker 1: the demographics read and all the latest polling of pet
• 19:31
  Speaker 1: um owners say that this is top on their list
• 19:35
  Speaker 1: next to a family member to spend. So I think
• 19:37
  Speaker 1: you'd really have to erode. There's a lot of inelastic
• 19:40
  Speaker 1: demand elements out there that I try to avoid, uh.
• 19:43
  Speaker 1: And I do think that these stocks, for instance, will
• 19:46
  Speaker 1: be unaffected by a stimulus as some other sectors, such
• 19:51
  Speaker 1: as data security and data storage. Those are other to
• 19:53
  Speaker 1: two other themes that I play in the portfolio, but
• 19:56
  Speaker 1: I think also have enduring qualities. Interesting. Alright, Peter's thank
• 20:00
  Speaker 1: you some wonderful things to think about. Their Peter Anderson,
• 20:03
  Speaker 1: as founder of Anderson and Capital Management, talking to us
• 20:07
  Speaker 1: there about some pet care stocks and then also data storage,
• 20:10
  Speaker 1: and of course we know storage of all kinds has
• 20:13
  Speaker 1: been pretty popular in this pandemic, a lot of people transferring.
• 20:16
  Speaker 1: There's the literal physical buildings into physical storage in inner
• 20:21
  Speaker 1: cities as well. So that's another theme that we can
• 20:24
  Speaker 1: look at another day. Let's get now to our next
• 20:29
  Speaker 1: guest who keeps an eye on emerging markets, but also
• 20:31
  Speaker 1: so much more than that. Damian Sasaur is just an
• 20:34
  Speaker 1: absolute genius when it comes to watching the markets. He's
• 20:37
  Speaker 1: chief Emerging markets credit strategist for Bloomberg Intelligence. But I
• 20:41
  Speaker 1: know that in his spare time he does a lot
• 20:42
  Speaker 1: more than that, such as looking at frontier markets. And Damian,
• 20:46
  Speaker 1: if you don't mind me jumping you with the question,
• 20:49
  Speaker 1: we haven't really spent any time on Nigeria or on
• 20:52
  Speaker 1: any of the problems that have been having that we've
• 20:54
  Speaker 1: been seeing on the periphery. Have you looked at any
• 20:58
  Speaker 1: of the frontier markets that are that are suffering right
• 21:00
  Speaker 1: now and where is experiencing the most trouble. So it's
• 21:05
  Speaker 1: interesting actually that you bring that up, Bonnie. And by
• 21:07
  Speaker 1: the way, I'm blushing, thank you for the introduction. So
• 21:09
  Speaker 1: you know, the reality is in Nigeria. You know, you've
• 21:11
  Speaker 1: had some protests. Nigeria is kind of a closed market.
• 21:13
  Speaker 1: There's a big dislocation between the niro, which is its
• 21:16
  Speaker 1: local currency, and and the black market rates. So you know,
• 21:19
  Speaker 1: I mean, you know, it's not really an investors market
• 21:22
  Speaker 1: from a US dollar investor perspective, but you can get
• 21:26
  Speaker 1: some really high carrying a lot of frontier markets for
• 21:28
  Speaker 1: for example, Egypt and Uruguay and Ghana. You know, you've
• 21:31
  Speaker 1: got double digit yields and all of those economies, um,
• 21:33
  Speaker 1: and you know, you know you can get that, albeit
• 21:36
  Speaker 1: with increased currency risk. So I think that's the real
• 21:38
  Speaker 1: risk here. But my goodness, the moving the dollar is
• 21:40
  Speaker 1: definitely catching people's attentions. And you know, I can see
• 21:43
  Speaker 1: a lot of people putting more money to work in
• 21:45
  Speaker 1: the front along the frontier and emerging markets. Right, So
• 21:47
  Speaker 1: net net is it better for these markets when that
• 21:50
  Speaker 1: happens or is it is it a disaster? Do they
• 21:53
  Speaker 1: need to run to the I M F and runder
• 21:55
  Speaker 1: any program that that will host them. Well, it certainly depends,
• 21:58
  Speaker 1: right I mean, certainly the I m F is there
• 22:00
  Speaker 1: for you know, real troubled economies. I mean, we saw
• 22:03
  Speaker 1: what they're doing with with in places like Argentina, Ukraine,
• 22:06
  Speaker 1: you know, even Ecuador. But you know, when you're looking
• 22:08
  Speaker 1: at the front here, you know, and and some of
• 22:10
  Speaker 1: the markets I just mentioned, I wouldn't say stable is
• 22:12
  Speaker 1: the right word to to characterize them, but certainly more
• 22:15
  Speaker 1: stable than than than the former. So you know, Egypt
• 22:18
  Speaker 1: is one place where you can carry really really well
• 22:20
  Speaker 1: in the short end. You can get double digit yields there.
• 22:23
  Speaker 1: But again, you know, those economies are subject to real
• 22:25
  Speaker 1: volatile moves in their local currencies relative to the dollars.
• 22:28
  Speaker 1: So you know, for example, if we see you know,
• 22:31
  Speaker 1: a Trump victory and the dollar rallies off the back
• 22:33
  Speaker 1: of that, all bets are off, right, So you know,
• 22:35
  Speaker 1: you have to be very selective, and most people use
• 22:38
  Speaker 1: that exposure as sort of a satellite within their core
• 22:41
  Speaker 1: emerging market portfolio. So it's really more of a terro
• 22:44
  Speaker 1: risk kedge or like what I like to call a
• 22:46
  Speaker 1: free call option. We like to call that a free
• 22:50
  Speaker 1: call option as well. Of course, Damian talks us about
• 22:52
  Speaker 1: the some of the things that did get resolved this
• 22:54
  Speaker 1: week in terms of some of this Latin American countries.
• 22:58
  Speaker 1: In the South American countries, we saw Argentina, for example,
• 23:01
  Speaker 1: take a big step. Bolivia too. Yeah, no, absolutely, So
• 23:05
  Speaker 1: you know Bolivia is obviously pivoted more towards the socialist bent. Um.
• 23:08
  Speaker 1: You know, look, what's interesting is, you know, if you
• 23:11
  Speaker 1: just want to just kind of think about Latin America,
• 23:13
  Speaker 1: Latin America is really underperformed. Um. I'm talking local Latin
• 23:16
  Speaker 1: America effects relative to the broader emerging market universe. And
• 23:20
  Speaker 1: you know, if we do see you know, the US
• 23:22
  Speaker 1: E pretty market reopening. You know, if we do see
• 23:24
  Speaker 1: a steeper U S treasury yield curve, if we see
• 23:26
  Speaker 1: the election risk subside, and you know vaccine sentiments improved,
• 23:29
  Speaker 1: Latin America for FFX is gonna is gonna rally off
• 23:32
  Speaker 1: the back of US. I mean, so you know, for me,
• 23:34
  Speaker 1: I'm actually looking at a basket of Latin American currencies
• 23:37
  Speaker 1: for example, Brazil, Mexico, Chile, Colombia. You know, that's sort
• 23:40
  Speaker 1: of a way of playing for you know, um, you know,
• 23:44
  Speaker 1: good news after the election, right and so um, So
• 23:47
  Speaker 1: that's one thing that you know, we think a lot
• 23:48
  Speaker 1: of investors should take a long, hard, good, a long
• 23:51
  Speaker 1: look at here in the current environment, Well what evaluations like,
• 23:54
  Speaker 1: I mean, what's priced in our people already sort of
• 23:57
  Speaker 1: getting involved? Is it already of date? Now? Latin America
• 24:02
  Speaker 1: is one that's really lagged the broader complex. So it's
• 24:04
  Speaker 1: one that we like, I mean, like Brazil. Like Brazil
• 24:07
  Speaker 1: has itsissues, but in my opinion, it's going to receive
• 24:09
  Speaker 1: some tactical re leafs, primarily because short positioning remains elevated,
• 24:12
  Speaker 1: the macro risks are abating, and quite frankly, the budget
• 24:15
  Speaker 1: discussions are going to be pushed out, so left it
• 24:17
  Speaker 1: in November municipal elections, so you could have a two
• 24:20
  Speaker 1: to three month window here where the RAYL really regains
• 24:22
  Speaker 1: a lot of the lost ground in the rails off
• 24:25
  Speaker 1: of the dollar year today it's Banni, So you know
• 24:27
  Speaker 1: that would be one. Mexico's another. You know, Mexico is
• 24:30
  Speaker 1: now testing that twenty one level, that key twenty one
• 24:33
  Speaker 1: level in the currency, and you know, if it breaks
• 24:35
  Speaker 1: below that, you know we could easily see it go
• 24:37
  Speaker 1: down to levels we saw a pre pandemic, and so
• 24:40
  Speaker 1: you know, again these are currencies are ways to kind
• 24:43
  Speaker 1: of more liquid, cheaper ways to play for a US
• 24:46
  Speaker 1: equity market reopening or sort of a recovery basket, so
• 24:49
  Speaker 1: to speak, because as we know, a lot of value
• 24:51
  Speaker 1: stocks in the US are still quite crazy, right And
• 24:54
  Speaker 1: of course it all depends on you know, whether we
• 24:58
  Speaker 1: get back to trade discussions on how that works as well,
• 25:00
  Speaker 1: and immigration policy and so on. So really, you know,
• 25:03
  Speaker 1: the change that might occur with this election could have
• 25:07
  Speaker 1: a big influence on valuations. Now, well, it already is.
• 25:10
  Speaker 1: I mean, just look at the China you on, I mean,
• 25:12
  Speaker 1: and we're at the strongest level. I think we're six
• 25:14
  Speaker 1: sixty four dollar you on now, I mean, that's the
• 25:16
  Speaker 1: strongest level we've seen since July eighteen. And look, you know,
• 25:19
  Speaker 1: I've long been an advocate of receiving in China. UM
• 25:22
  Speaker 1: the People's Bank of China wants a stable affirm currency
• 25:25
  Speaker 1: to attract for an influence, it's maintaining domestic confidence. And look,
• 25:29
  Speaker 1: it's the only central bank in Asia to embark on
• 25:32
  Speaker 1: effects intervention where they're actually selling dollars in the last
• 25:35
  Speaker 1: year through August, So you know, that's you know, it's
• 25:38
  Speaker 1: it's actually coming out of the pandemics much stronger than
• 25:41
  Speaker 1: its peers, and it's one area that we like to
• 25:43
  Speaker 1: look at. But you know, there is beneath the surface
• 25:45
  Speaker 1: some fiscal vulnerability. I mean, we put out of debt
• 25:48
  Speaker 1: just this morning, Vonnie talking about e mxternal debt ratios
• 25:50
  Speaker 1: which are rising across the whole of emerging markets. I
• 25:53
  Speaker 1: mean full year hard currency debt issue and from emerging
• 25:56
  Speaker 1: markets is on track to eclipse seven hundred and fifty
• 25:59
  Speaker 1: billion dollars this year. The former high was in only
• 26:02
  Speaker 1: four hundred and seventy one billions, So they are levering
• 26:05
  Speaker 1: up and that is certainly a risk going forward. Yeah,
• 26:08
  Speaker 1: for sure, Damian, you mentioned, you know, six sixty four
• 26:11
  Speaker 1: on the off shore, you on, this has been creeping lower.
• 26:14
  Speaker 1: I mean it was around six seventy for a long time,
• 26:16
  Speaker 1: and then there was a big range between the off
• 26:18
  Speaker 1: shore and the on shore that's now narrowed. What's going
• 26:21
  Speaker 1: on with the Chinese currency, Well, I think the reason
• 26:24
  Speaker 1: we saw that that the entrere off shore basis, you know,
• 26:27
  Speaker 1: widen out, had more to do with the fact that
• 26:29
  Speaker 1: you know, China was on vacation for eight days. But
• 26:31
  Speaker 1: you know, now that's kind of it's kind of subsided,
• 26:34
  Speaker 1: you know, for me, the best way to express a
• 26:36
  Speaker 1: China view if your bullish on China is through the
• 26:39
  Speaker 1: short end of the curve, right, I mean, like everyone's
• 26:41
  Speaker 1: talking about receiving in the belly and China government bonds
• 26:44
  Speaker 1: at three and five year tenners. But you know, for me,
• 26:46
  Speaker 1: I mean you can get you know, one to two
• 26:49
  Speaker 1: hundred basis points above treasuries just by carrying on a
• 26:51
  Speaker 1: one year or less basis right, So using efforts forwards
• 26:55
  Speaker 1: to not only take advantage of a strengthening currency relative
• 26:58
  Speaker 1: to the US dollar and also very large pickup over treasuries.
• 27:02
  Speaker 1: It's a really nice it's a really nice way to
• 27:04
  Speaker 1: play this market into your end in my opinion, Damien,
• 27:07
  Speaker 1: really fascinating speaking with you. Always are you coming? You see,
• 27:11
  Speaker 1: you know a matrix when you look at markets, and
• 27:12
  Speaker 1: it's just really it's really great. And of course you
• 27:14
  Speaker 1: have all of the um history as well, so it
• 27:19
  Speaker 1: rings bells. I'm sure for you to other ears and
• 27:22
  Speaker 1: eras and other years. Damien Sasaur joining us there. He
• 27:26
  Speaker 1: is chief Emerging Markets credit strategist for Bloomberg Intelligence. Thanks
• 27:32
  Speaker 1: for listening to Bloomberg Markets Podcast. You can subscribe and
• 27:35
  Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
• 27:39
  Speaker 1: you prefer. I'm Bonnie Quinn. I'm on Twitter at Bonnie Quinn.
• 27:43
  Speaker 1: And Paul Sweeney I'm on Twitter at pt Sweeney. Before
• 27:46
  Speaker 1: the podcast, you can always catch us worldwide at Bloomberg
• 27:48
  Speaker 1: Radio