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Bridgewater, Coinbase, China, and Commodities (Podcast) · Bloomberg Intelligence

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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
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Speaker 1: my co host Matt Miller. Every business day we bring
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Speaker 1: you interviews from CEO's, market pros and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast
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Speaker 1: called Apple Podcasts or wherever you listen to podcasts, and
0:18
Speaker 1: at Bloomberg dot com slash podcast. Yes you're just dark.
0:21
Speaker 1: Eric Schatzker is in the studio. I guess Paul Singer
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Speaker 1: is an active guy, right, But I always thought of
0:27
Speaker 1: Elliott as a distressed investor because Hans Humes like cut
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Speaker 1: his teeth there with Argentina. Elliott certainly started out that way.
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Speaker 1: I'd say Elliott is highly opportunistic more than anything else.
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Speaker 1: They make long only bets as well. Yes, they function,
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Speaker 1: they have an activist profile. They certainly throw their weight around.
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Speaker 1: But yes, I would say that bare knuckled distressed investing
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Speaker 1: is one of their specialties. It's not why you're in here, though,
0:53
Speaker 1: It's not. It's not you got something else to talk about. So,
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Speaker 1: Ray Dalio, you broke the story when he officially announced
1:02
Speaker 1: he was back in October. Yes, Ray Dalio, after twelve
1:05
Speaker 1: years of trying finally let go of the rains at Bridgewater.
1:09
Speaker 1: And we've been waiting for five months to find out
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Speaker 1: what the new generation of leadership under the CEO near Bardaa,
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Speaker 1: former Israeli military guy, really was going to do. And
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Speaker 1: now we know. So what are the details? Let us in.
1:22
Speaker 1: There is a lot happening, and it is happening on
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Speaker 1: a very accelerated timetable. The first thing people are going
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Speaker 1: to notice and find surprising is that Bridgewater is cutting
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Speaker 1: some jobs. The firm employees about thirteen hundred people and
1:33
Speaker 1: it's getting rid of about one hundred and not all
1:35
Speaker 1: of those people are junior folks. That will be some
1:37
Speaker 1: senior people as well. Why because it wants to deploy
1:41
Speaker 1: those resources. There isn't an infinite amount of money, even
1:44
Speaker 1: though Bridgewater is a big and very profitable firm, into
1:47
Speaker 1: new initiatives and we'll talk about those. The other thing
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Speaker 1: that's really worth mentioning is that Bridgewater is capping the
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Speaker 1: size of its so called flagship hedge fund strategy. This
1:57
Speaker 1: is it has a name Pure Alpha, and it is
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Speaker 1: the product, the hedge fund product that Bridgewater offers its clients.
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Speaker 1: The idea is that it will over time generate excess
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Speaker 1: return in other words alpha hence pure alpha. Bridgewater for
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Speaker 1: so many years defied the laws of hedge fund gravity.
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Speaker 1: The conventional wisdom was always that strategies outside of equities
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Speaker 1: were capacity constrained. Some strategies and things like distressed credit
2:27
Speaker 1: are very capacity constrained. There just isn't that much to do.
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Speaker 1: So that macroso pretty big, but too much money. They
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Speaker 1: can't put it to work. They can't generate high enough returns. Yet,
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Speaker 1: as I say, Bridgewater defied gravity because it's two principled strategies,
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Speaker 1: pure alpha and the risk parity strategy called all Weather.
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Speaker 1: Hoovered up assets at an unbelievable pace. In two eleven
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Speaker 1: it crossed one hundred billion dollars in total assets, and
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Speaker 1: then more recently it has been north of one hundred
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Speaker 1: and fifty. Wow, and now you know, the natural laws
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Speaker 1: of the universe appear to be taking hold. Bridgewater's performance
3:02
Speaker 1: during the twenty tens was you know, this is an understatement, uninspiring,
3:08
Speaker 1: and they've gone back to the well look, gave themselves
3:12
Speaker 1: a hard look in the mirror and recognize that things
3:14
Speaker 1: had to change. The inference I can draw from my
3:19
Speaker 1: reporting is that it was harder to change. While Ray
3:22
Speaker 1: was still there. He'd built the firm, He'd created its unusual,
3:27
Speaker 1: some would say odd culture, transparency, and he was, as
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Speaker 1: any founder would be, very attached to a certain way
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Speaker 1: of doing things. Now he's gone, a much younger generation
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Speaker 1: of leadership is in charge, and you can also infer
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Speaker 1: that they've been chomping at the bit because here are
3:45
Speaker 1: some things that they're doing that it would have been
3:48
Speaker 1: very difficult to see Bridgewater do if Ray were still
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Speaker 1: in command. All right, Eric, so we have, as you mentioned,
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Speaker 1: the new chief executive officer near Bardea. That's correct, former
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Speaker 1: Israeli military guys I mentioned he was a contoon leader. Interesting,
4:01
Speaker 1: what does a new team? What are they looking to
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Speaker 1: do in terms of new initiatives changes? Yes, we need
4:07
Speaker 1: to get into this. There's four areas they're pushing ahead.
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Speaker 1: In one is Asia. They want a bigger footprint in Asia.
4:13
Speaker 1: They're adding people. In Singapore, they want to get closer
4:15
Speaker 1: to some of the institutional clients there. You can draw
4:19
Speaker 1: some conclusions about who those might be. Gic, for example,
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Speaker 1: Tamask both like in love with China as well. Ray
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Speaker 1: said some controversial things about China and I talked to
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Speaker 1: Near about China. Their position on China is not ideological.
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Speaker 1: They want to be able to invest in China and
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Speaker 1: to be able to offer clients exposure to Asia. Why
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Speaker 1: because half of the world's economy is driven by Chinese
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Speaker 1: monetary policy in Chinese credit creation and China and Asia
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Speaker 1: more broadly are generating are adding to global GDP at
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Speaker 1: double the rate the US and Europe are. So it's
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Speaker 1: a place to simply have to be. Forget about anything
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Speaker 1: that Ray may have said or things that people might
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Speaker 1: believe have believed about his views on China. So Asia
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Speaker 1: is number one. They want to be much bigger in equities,
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Speaker 1: specifically long only equities. This is something their clients want
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Speaker 1: and it's not a long short equity fund. What they're
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Speaker 1: doing is taking their macro views. This is the specialty
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Speaker 1: at Bridgewater, the so called compounded understanding that they've built
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Speaker 1: over forty seven years and expressing it through equities. So
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Speaker 1: if pure alpha again the flagship strategy would have shorted bonds,
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Speaker 1: shorted treasuries in if it anticipated a rising rate environment,
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Speaker 1: a long only equity strategy would have minimized its exposure
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Speaker 1: to interest rate sensitive stocks or similarly, if pure alpha
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Speaker 1: was going to go long copper because it believed copper
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Speaker 1: prices were going to rise and industrial production was going
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Speaker 1: to boom, the long only equity strategy, again expressing a
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Speaker 1: macro view, would buy copper miners. The third area machine
5:54
Speaker 1: learning and artificial intelligence. This is not a chat GBT thing.
5:58
Speaker 1: Bridgewater has been experimented for a decade with these tools,
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Speaker 1: but it now wants to build them out, engineer something
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Speaker 1: that it can put to work making investment decisions. Again,
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Speaker 1: humans still part of the picture. And finally, sustainability. You'll
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Speaker 1: recall that Karen Carnial Tambour, only thirty seven years old,
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Speaker 1: was recently elevated from co chief of Sustainability to co
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Speaker 1: CIO at Bridgewater, and clearly you know her hand. Her
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Speaker 1: fingerprints are on some of this. Bridgewater is has to
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Speaker 1: respond to client demand for more products and sustainability, and
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Speaker 1: they want to do sustainability and equities and they want
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Speaker 1: to generate. Up until now, their sustainability product has been
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Speaker 1: BEATA driven. They they want alpha strategies in sustainability and
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Speaker 1: they want to express their views on sustainability. Similarly, inequities
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Speaker 1: four areas in which Bridgewater believes it can amass billions
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Speaker 1: upon billions of dollars, and if it's successful, they'll ultimately
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Speaker 1: be less reliant on what we were talking about before
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Speaker 1: pure Alpha and always that's interesting. Vanguard just did a
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Speaker 1: study on its ESG products and showed they had no
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Speaker 1: outperformance versus I guess, well, Vanguard is let's not forget
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Speaker 1: apart from the subadvised funds at Vanguard, Vanguard is a
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Speaker 1: beta shop, right. Vanguard is the pioneer of indexing, and
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Speaker 1: I'm not disputing Vanguard's conclusions right. What I am saying,
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Speaker 1: and what's clear to me is that clients, for better
7:28
Speaker 1: or for worse, want Bridgewater to offer them more in sustainability.
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Speaker 1: The clients might be wrong, that's for us. It doesn't matter.
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Speaker 1: That's fascinating that people want to put their money there. Still,
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Speaker 1: after the backlash that we've seen, you know against uh,
7:40
Speaker 1: you know, Larry Fink and black Rock, what about the
7:43
Speaker 1: radical transparency that to me defined Bridgewater's culture. I only
7:49
Speaker 1: know it obviously through reading your reporting for the most part.
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Speaker 1: But that's changed. Is that going to change? Because it
7:55
Speaker 1: seems like they weren't terribly transparent about Dahlia's fight for
7:59
Speaker 1: more money on his way out. Well, there are people
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Speaker 1: in Bridgewater who would dispute the account that you've you're
8:05
Speaker 1: referring to in another publication. Yes, but the culture is changing,
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Speaker 1: of Horse, it's changing. They're younger people in charge now.
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Speaker 1: They're no longer so attached to the pain buttons that
8:16
Speaker 1: you know, these these these apps, if you will, that
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Speaker 1: Bridgewater developed under Ray the baseball cards that you know,
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Speaker 1: tried to capture, you know, somebody's entire personality in every
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Speaker 1: decision he might make in the years ahead. Those things
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Speaker 1: still exist. Are they as popular as as frequently utilized today?
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Speaker 1: Hard for me to know. I'm not inside the firm,
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Speaker 1: But the distinct impression I get is that Bridgewater has
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Speaker 1: moved on from some of that stuff, and they were
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Speaker 1: definitely softening the approach that they took to designing things
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Speaker 1: like the baseball cards even before Ray left the firm.
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Speaker 1: All right, Eric, great, great stuff. One of the top
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Speaker 1: red stories on the Bloomberg terminal will be for the
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Speaker 1: entire day, I predict Eric Schatzker, Bloomberg News. Excellent reporting Greenby.
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Speaker 1: For those who know about Bridge Ray Dalio, the changes,
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Speaker 1: they're good stuff. We appreciate Eric being in on our studio.
9:14
Speaker 1: All right, we want to get into the private equity space,
9:16
Speaker 1: one of my favorite spaces. And quite frankly, I've been
9:19
Speaker 1: on Wall Street for thirty years. I kind of feel
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Speaker 1: like it's the last place where you can make outsized returns.
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Speaker 1: That's just my personal opinion. Hedge fund business game over
9:27
Speaker 1: traditional Wall Street game over in terms of making outsized returns.
9:32
Speaker 1: And that's why I like it. If I were a
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Speaker 1: young person, I'd be going into private equity right away.
9:36
Speaker 1: Andrea Auerback joins us. She's head of private Investments at
9:39
Speaker 1: Cambridge Associates. She gets a gold star because she is
9:42
Speaker 1: Live and our Bloomberg Interactive Brooker's studio. Andrea talked to
9:45
Speaker 1: us about the last I don't know, three or four years.
9:48
Speaker 1: The whole world's been upside down, markets all over the place.
9:52
Speaker 1: Now we've got a Federal Reserve raising rates and all
9:55
Speaker 1: this kind of stuff from the private equity space. Just
9:58
Speaker 1: give us when you go talk to clients, how do
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Speaker 1: you frame up the last few years? Wonderful question typically,
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Speaker 1: and good morning, by the way, big question, good morning
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Speaker 1: to you as well. Typically, when folks are asking us
10:11
Speaker 1: about what's happening in the private equity space. I kind
10:13
Speaker 1: of roll it back a few decades, okay, right, So,
10:17
Speaker 1: as you started out with your morning comments, private equity
10:21
Speaker 1: has only been institutionalizing since the eighties. It's basically forty
10:24
Speaker 1: years old. I wish I were forty years old again,
10:27
Speaker 1: and so it's constantly evolving, and so what you've been
10:32
Speaker 1: seeing in the last couple of years is really building
10:34
Speaker 1: off of a lot of phases that the industry has
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Speaker 1: already moved through. Leveraged buyouts are now referred to fondly
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Speaker 1: as private equity, and right, little euphemism twists there, but
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Speaker 1: part of the reasons for that is that private equity
10:45
Speaker 1: isn't just about applying a lot of leverage to a
10:47
Speaker 1: company anymore. It's immensely diversified space and ecosystem. So it's
10:52
Speaker 1: not just the one thing people tend to think about. Well,
10:55
Speaker 1: one thing I think about, and I've spent the last
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Speaker 1: six years going to the super Return conference in Berlin,
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Speaker 1: is just how much money private equity has a mass.
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Speaker 1: You know, every year that I went it was a
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Speaker 1: new impossible to understand figure like one point seven trillion,
11:13
Speaker 1: and then it was two point three trillion, and just
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Speaker 1: so much dry powder that I always wondered, you know,
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Speaker 1: with that much money chasing the same assets, is it
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Speaker 1: possible to get a decent price? Is that still the
11:25
Speaker 1: case that private equity has so much cash and is
11:29
Speaker 1: just impossible for them to put it to work. So
11:32
Speaker 1: the answer to that, so the big, the big headline
11:34
Speaker 1: number that you just mentioned is immense, but it breaks
11:36
Speaker 1: down pretty quickly into different categories. Right. So, as we mentioned,
11:40
Speaker 1: private equity has been evolving over decades, and so there
11:42
Speaker 1: are five thousand gps walking around who have raised some
11:46
Speaker 1: part of that one point trillion number that you gave us,
11:49
Speaker 1: and they're trying to deploy it within the space that
11:51
Speaker 1: they're occupying. Right. So when you break down that overhang
11:54
Speaker 1: that you talk about and we define that, i'd like
11:57
Speaker 1: to think we're the first to define it actually being honest.
12:00
Speaker 1: Amage Associates, Yes, many moons ago. Half of that belongs
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Speaker 1: to funds that have five million or more in capital
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Speaker 1: under management, right, And so a lot of the larger
12:09
Speaker 1: funds have the big money, the more money more problem problem,
12:13
Speaker 1: which is they're all maybe looking for a smaller group
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Speaker 1: of assets, whereas there's another cohort which might have less
12:19
Speaker 1: than a billion in capital, under management and they have
12:23
Speaker 1: a broader ecosystem to play in and go find a company,
12:26
Speaker 1: and don't forget there's something like six million private businesses
12:30
Speaker 1: in the US. They're not all private, private equity owned yet, right,
12:34
Speaker 1: all right, So twenty twenty two, the sixty forty portfolio
12:38
Speaker 1: for most investors crushed. He couldn't make money anywhere this year. Well,
12:42
Speaker 1: you could make money if you owned oil in alternative assets. Well,
12:46
Speaker 1: Welisha Brahmas has apartment. Yeah, I mean there's there were
12:50
Speaker 1: places where people knocked it out of the park, right, yeah,
12:52
Speaker 1: but most sixty forty folks, most it did not. So
12:55
Speaker 1: tough times. You come here to twenty twenty three. Now
12:56
Speaker 1: we've got a FED reserve kind of reversing raising ray.
13:00
Speaker 1: People are concerned, what's the private equity market like today?
13:04
Speaker 1: What are you telling clients? What are you hearing from
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Speaker 1: your clients? As you'd asked, right now, the private equity
13:09
Speaker 1: market is sort of on pause, right, just like most markets.
13:13
Speaker 1: Most folks who want to do a transaction, like I
13:15
Speaker 1: don't know how to forecast what's about to happen and
13:17
Speaker 1: it's impact on the companies I want to buy, and
13:20
Speaker 1: if I can't, if I can't forecast. I can't come
13:22
Speaker 1: up with an accurate valuation that I'm willing to pay.
13:25
Speaker 1: And I also don't know how these companies are going
13:26
Speaker 1: to perform because a lot of unknowns just became known
13:29
Speaker 1: over the last year or so, right, And so the
13:32
Speaker 1: market itself, transaction volumes have been on pause, waiting to
13:35
Speaker 1: sort of sort itself out. I think there's a lot
13:37
Speaker 1: of pent up transaction volume that will start to come
13:40
Speaker 1: to market once folks decide and settle out like this
13:43
Speaker 1: is our go forward operating environment. So it's been on
13:46
Speaker 1: pause right now, and it's sort of like, you know,
13:48
Speaker 1: you check your belongings. Do I have my wallet, my keys?
13:51
Speaker 1: Are the companies that I own currently? Are they performing okay?
13:54
Speaker 1: Given a lot of the changes that have been coming
13:56
Speaker 1: at us all right, higher inflation, higher interest rates, you know,
14:01
Speaker 1: difficulty finding good labor, difficulty getting your supply chain moving,
14:05
Speaker 1: all those things. So I think the industry itself has
14:08
Speaker 1: been a little bit on pause. Check your belongings before
14:11
Speaker 1: maybe moving forward into this environment with a plan. But
14:14
Speaker 1: sixty forty people for the most part are like you know,
14:17
Speaker 1: me and Eric, retail guys who until recently haven't had
14:22
Speaker 1: access to alternative assets. Paul is probably an incredited investor,
14:26
Speaker 1: so he could. We've had more and more guests on
14:29
Speaker 1: their giving access to private investments to retail investors in
14:35
Speaker 1: various ways, with various platforms. Is that growing in private
14:38
Speaker 1: equity as well? Yes. And one of the reasons for
14:42
Speaker 1: this is there's a long term there's a long term trend. Right.
14:45
Speaker 1: So when my dad, if you will, was actively working,
14:49
Speaker 1: he was receiving a pension right now, lucky I know exactly,
14:54
Speaker 1: and a lot of pensions because they were more institutionally
14:57
Speaker 1: managed by a centralized, centralized tea. They were pursuing private investments,
15:02
Speaker 1: and so a lot of our dads, I guess and
15:05
Speaker 1: moms could benefit from having some exposure to alts in
15:08
Speaker 1: their retirement program. Now I'm of a different generation. I'm
15:11
Speaker 1: in the four o one K class, right, and so
15:14
Speaker 1: four oh one k's typically don't have access to privates.
15:17
Speaker 1: One of the classic k I want some of that
15:20
Speaker 1: is the returns of privates have stood the test of
15:23
Speaker 1: time over a forty year period, still a very productive
15:27
Speaker 1: returning asset class. And I think a lot of folks
15:29
Speaker 1: who don't have access to pensions anymore would like some
15:32
Speaker 1: access to the sasset class and then enter stage left
15:36
Speaker 1: private equity firms and others trying to figure out how
15:39
Speaker 1: to provide exposure to private investments in an appropriate way
15:43
Speaker 1: to a four oh one K investor or to a
15:45
Speaker 1: retail investor. And that's regulators must and regulators must want
15:49
Speaker 1: to help out as well, because it's just really not
15:52
Speaker 1: fair if you're a Now we're a whole generation of
15:56
Speaker 1: four oh one k people, right, so all of a
15:58
Speaker 1: sudden that exposure is gone for retirement accounts, meaning the
16:03
Speaker 1: returns are going to be smaller for us than they
16:05
Speaker 1: were maybe for pension people. I wonder if you'll see
16:09
Speaker 1: changes in regulation or new products that allow retail investors
16:14
Speaker 1: to get in in a safe way. It's been interesting
16:17
Speaker 1: to watch this. So at Cambridge Associates, we're globally focused, right,
16:21
Speaker 1: so we're glad explain to us, really what Cambridge Associates does.
16:24
Speaker 1: I mean, you've been there for quite a while, yes,
16:27
Speaker 1: quite a while. Thank you, Thank you for being gracious
16:29
Speaker 1: there Cambridge Associates. So we advise and manage capital on
16:32
Speaker 1: behalf of endowments and foundations, pensions, sovereign wealth funds, and families.
16:37
Speaker 1: So we really advise and invest on behalf of a
16:41
Speaker 1: broad swath of family office people. Yeah, family offices, and
16:45
Speaker 1: we operate globally. One of the fun things about being
16:48
Speaker 1: able to operate globally is you can watch to your
16:51
Speaker 1: retail exposure to private equity in different parts of the world.
16:54
Speaker 1: They're trying to crack this not themselves, in different ways,
16:58
Speaker 1: and so depending on where you are, there is opportunity
17:00
Speaker 1: to participate in publicly traded private equity funds or be
17:05
Speaker 1: able to participate in a slice of private equity as
17:08
Speaker 1: provided to you by a government entity. So they're interesting
17:12
Speaker 1: things that I think US investors are looking at for
17:15
Speaker 1: ways to innovate and bring that here or to sort
17:17
Speaker 1: it out in a way that's American. Can you talk
17:20
Speaker 1: to just briefly about private credit, Matt, and I hear
17:22
Speaker 1: a lot more about that than we did. It's just
17:25
Speaker 1: so hot, yeah, yeah, yeah. Private So private credit. As
17:29
Speaker 1: you're probably aware, the area exploded after the GFC right
17:33
Speaker 1: and really became quite significant, and the amount of direct
17:36
Speaker 1: private direct lending exploded tenfold. I think it was one
17:39
Speaker 1: hundred and thirty billion in volume back into eight it's
17:43
Speaker 1: now upwards of one point three trillion in volume today,
17:46
Speaker 1: so it's definitely a blooming space, right And one of
17:49
Speaker 1: the reasons for that is because of the GFC, you
17:52
Speaker 1: had some of the changes in the regulations that really
17:54
Speaker 1: had to move lending out of banks into where into
17:58
Speaker 1: private credit and here comes the growth of that particular
18:01
Speaker 1: swath of industry. So private credit has been around for
18:04
Speaker 1: a while, it's gotten much more interesting right now, obviously
18:06
Speaker 1: because interest rates. Yep. Right, all right, Andrea, thank you
18:09
Speaker 1: so much for joining us. Really appreciate that very fascinating story.
18:12
Speaker 1: Andrea our backhead of private Investments at Cambridge Associates, joining
18:16
Speaker 1: us live here in our Bloomberg Interactive, a broker studio.
18:22
Speaker 1: We welcome now our Bloomberg TV viewers and radio listeners
18:25
Speaker 1: on Shinnali Bathik. And joining me now is Brian Armstrong
18:28
Speaker 1: coin Base, the CEO. Brian, thank you so much for
18:30
Speaker 1: joining us. You recently made this big interesting bet as
18:34
Speaker 1: a centralized exchange on decentralization a year or so ago.
18:39
Speaker 1: You know, decentralization was a big worry for traditional financial players,
18:44
Speaker 1: but more so now there are a lot of concerns
18:46
Speaker 1: about the space. So what is the case for traditional
18:50
Speaker 1: financial players to care about Defy. Yeah, well, we're definitely
18:54
Speaker 1: excited about a coin base, and we want to make
18:56
Speaker 1: sure we help build the future of this technology here
18:59
Speaker 1: in America. Actually, a lot of traditional financial services firms
19:02
Speaker 1: are integrating this technology. I mean everybody from you know, JP, Morgan,
19:06
Speaker 1: Visa and MasterCard, Franklin, Templeton, They're all they have projects
19:10
Speaker 1: and teams internally working on how to integrate crypto into
19:13
Speaker 1: their services. And I think the reason for that is that,
19:16
Speaker 1: you know, eighty percent of Americans are not happy with
19:18
Speaker 1: the current financial system as it is today. They think
19:20
Speaker 1: it's it's too slow, the fees are too high, it
19:23
Speaker 1: doesn't serve everybody equally, and a lot of the technology
19:26
Speaker 1: was built forty years ago. The laws we're one hundred
19:28
Speaker 1: years ago, and so people are really excited about how
19:31
Speaker 1: crypto as a technology can help improve and update the
19:34
Speaker 1: financial system, and that's why that's why we're here at
19:37
Speaker 1: coin base. We want to make sure that we enable
19:38
Speaker 1: that as well. But there are still near term challenges
19:42
Speaker 1: and which are the biggest among them. Are they the
19:44
Speaker 1: idea of hacks and any vulnerabilities in the system, or
19:47
Speaker 1: is it the regulatory environment in the United States. Yeah,
19:49
Speaker 1: I mean, my number one priority this year is the
19:52
Speaker 1: policy environment, so we need to make sure that gets
19:55
Speaker 1: to a good place in the US. You know, the
19:57
Speaker 1: rest of the world has actually embraced crypto. We've seen
19:59
Speaker 1: all the your financial hubs Singapore and Hong Kong and London,
20:02
Speaker 1: and you know, the EU just passed comprehensive crypto legislation.
20:05
Speaker 1: So really, what I believe should happen in the United
20:08
Speaker 1: States is that we need a clear rule book so
20:11
Speaker 1: that this industry can be built here. You know, we
20:12
Speaker 1: don't want it to be like five G or semiconductors
20:15
Speaker 1: that went offshore. It's actually a matter of national security.
20:18
Speaker 1: We get the future of the financial system built here
20:20
Speaker 1: inside the United States. And so I've been spending more
20:23
Speaker 1: time in DC here in New York, but in DC
20:25
Speaker 1: in particular, we're trying to meet with the relevant folks
20:28
Speaker 1: that could help draft legislation so Congress can come in
20:31
Speaker 1: and pass comprehensive legislation before we get to the Washington
20:34
Speaker 1: of it all. I want to still look out five
20:36
Speaker 1: years from now, because there are a lot of financial players,
20:39
Speaker 1: as you say, that are looking at tokenization. A lot
20:41
Speaker 1: of it's happening in the private markets to the extent
20:44
Speaker 1: that you think traditional securities can be tokenized five years
20:48
Speaker 1: from now. Are you working with collaborating with any banks
20:51
Speaker 1: to get to that point. Yeah, So crypto is many
20:55
Speaker 1: different things. Right There are crypto securities, which we believe
20:58
Speaker 1: there should be a robust market for that in the US.
21:01
Speaker 1: In fact, we acquired a broker dealer license that it's
21:03
Speaker 1: still dormant right now, but we'd like to work with
21:05
Speaker 1: the sec to activate that and create a healthy market
21:08
Speaker 1: structure to trade crypto securities. Now, you know, of the
21:10
Speaker 1: thousand assets we've looked at coin base, you know, eight
21:13
Speaker 1: hundred of them we've rejected. We don't think we have
21:15
Speaker 1: maybe their securities. Two hundred or so of them we
21:17
Speaker 1: have listed on our platform. We believe those are commodities,
21:20
Speaker 1: and so we're going to continue to build that piece
21:22
Speaker 1: of our business. We're regulated by the CFTC for instance,
21:25
Speaker 1: and make sure we grow that piece as well. But
21:26
Speaker 1: cryptos many things. It's commodities, it's securities, it's stable coins,
21:30
Speaker 1: it's artwork, it's decentralized identity systems, and so it's tough
21:34
Speaker 1: for people to wrap their head around, but it's ultimately
21:36
Speaker 1: going to have many different regulators, you know, before we
21:38
Speaker 1: get to the regulatory part of this too, we were
21:40
Speaker 1: talking kind of about traditional financial players and what role
21:43
Speaker 1: they have in this place, in this system. What kind
21:45
Speaker 1: of relationship do you have to high frequency trading firms
21:48
Speaker 1: prior to the implosion of FTX, who saw them working,
21:50
Speaker 1: for example, with IEX. Have you had any conversations with
21:53
Speaker 1: them or any others. Well, we're always talking with different
21:56
Speaker 1: firms out there and other exchanges that may want to
21:59
Speaker 1: trade crypto in various ways. You know, we can act
22:01
Speaker 1: as a brokerage or exchange, a custodian. We can play
22:03
Speaker 1: different roles in different market structures and in financial services.
22:07
Speaker 1: You often see, you know, a company that may compete
22:09
Speaker 1: on one product, they're actually collaborators on another product. And
22:12
Speaker 1: so we want to make sure that we're helping integrate
22:14
Speaker 1: crypto and all aspects of the financial system so we
22:17
Speaker 1: can update the financial system. So you were talking about
22:20
Speaker 1: the SEC, the CFTC, the SEC's crackdowns as of late.
22:23
Speaker 1: In particular, you work with a lot of institutions. Hedge
22:27
Speaker 1: funds had been very much getting into crypto prior to
22:30
Speaker 1: last year. I'm wondering if the SEC's crackdown is starting
22:32
Speaker 1: to scare any of them away. Well in a way, actually,
22:35
Speaker 1: I think Coinbase has been a net beneficiary of this
22:37
Speaker 1: because there's essentially a flight to quality, you know, a
22:41
Speaker 1: coin Base. We're a public company, we have audited financial statements,
22:44
Speaker 1: we're a qualified custodian. I mean, we're basically d choice
22:48
Speaker 1: you know, based here in the US that hedge funds
22:50
Speaker 1: are going to want to work with. And so in
22:51
Speaker 1: Q four I mentioned this on our earnings call, actually
22:54
Speaker 1: that we saw an increase in the number of institutions
22:57
Speaker 1: onboarding to coin Base. Now a lot of them have
23:00
Speaker 1: haven't deployed substantial capital to crypto yet in this market environment,
23:03
Speaker 1: they're kind of waiting and seeing. But it's great to
23:05
Speaker 1: see them onboarding, and that's kind of a coiled spring
23:07
Speaker 1: that I think could unleash a lot of potential in
23:09
Speaker 1: the next market change. Hedge funds still flocking too, crypto. Listen,
23:13
Speaker 1: we are resetting here just really quickly here with Brian Armstrong,
23:17
Speaker 1: the CEO of coin based for our Bloomberg television and
23:19
Speaker 1: radio listeners. Getting into the complicated regulatory environment now stable coins.
23:25
Speaker 1: You were talking about how there are multiple regulators for
23:27
Speaker 1: the crypto industry. But who should be the primary regulator
23:31
Speaker 1: for stable coins and is there a case for them
23:33
Speaker 1: to be overseen more like money market funds. Well, I
23:36
Speaker 1: think Congress ultimately is the one that's going to create
23:39
Speaker 1: the laws in the United States, right, and so we
23:41
Speaker 1: could probably use new legislation, new laws around how stable
23:45
Speaker 1: coins should be regulated. I don't presume to tell them
23:48
Speaker 1: how to do that, but I think some of the
23:50
Speaker 1: key things are uncontroversial. I mean, we need to have
23:53
Speaker 1: one to one backing of assets behind these stable coins.
23:56
Speaker 1: We need to have audited financial statements to make sure
23:58
Speaker 1: the firms issuing these are are doing a good job.
24:01
Speaker 1: So these are just kind of basic good practices, and
24:03
Speaker 1: I think a stable coin bill is one of the
24:05
Speaker 1: first things that could really help you get consensus and
24:08
Speaker 1: move things forward in DC to VISA. You still have
24:11
Speaker 1: concerns around the stable coin industry, what would they be?
24:15
Speaker 1: I mean, as broadly as a concept, I don't have
24:17
Speaker 1: concerns about it. There may be individual stable coins which
24:20
Speaker 1: are better or worse. I mean, we actually recently delisted
24:23
Speaker 1: you know, busd as an example, and the reason we
24:26
Speaker 1: did that was, you know, Paxos had gotten who's the
24:28
Speaker 1: issue of of BUSD had been kind of ordered to
24:30
Speaker 1: stop minting it, so we were concerned about liquidity issues
24:33
Speaker 1: for our customers. But you know, we're always evaluating through
24:36
Speaker 1: our internal processes different stable coins, different assets, and updating
24:40
Speaker 1: when we see new information that comes to light. I'm
24:42
Speaker 1: curious about your own way of using stable coins. Recently,
24:45
Speaker 1: in the fourth quarter, it's showed that in your filings,
24:47
Speaker 1: it's showed that USDC has doubled in your holdings prior
24:51
Speaker 1: to the quarter before. Why is that the case? Well, okay,
24:56
Speaker 1: so usdc is is growing quite a lot, and I
24:58
Speaker 1: think actually USDC is it's the best answer to a
25:02
Speaker 1: stable coin in the United States right. Um, it's it's
25:05
Speaker 1: issued by Circle, which is a US based company. We're
25:08
Speaker 1: in partnership with them, and we want to see that grow.
25:11
Speaker 1: It's also been a really nice source of subscription and
25:13
Speaker 1: services revenue for US, which is, you know, in contrast
25:16
Speaker 1: to trading fees, which are quite volatile. We've seen in
25:19
Speaker 1: our Q for earnings that our subscription and services revenue
25:22
Speaker 1: is now forty seven percent of coin is the revenue
25:24
Speaker 1: almost half, and so that's allowing us to build a
25:26
Speaker 1: more predictable business with a diversified set of revenue streams.
25:29
Speaker 1: So yeah, I'm quite bullish on USD coin, and I
25:32
Speaker 1: feel like that's a good solution for the US. Does
25:35
Speaker 1: that look a lot more like traditional banking? Not necessarily no,
25:39
Speaker 1: I mean in traditional there's many differences, you know, in
25:41
Speaker 1: traditional banking, they you know, there's fractional reserve, they have
25:44
Speaker 1: banking licenses, there's capital requirements. Everything in USD coin is
25:48
Speaker 1: backed one percent. There's no fractional reserve. So I think
25:52
Speaker 1: of USD coin as a really important tool to help
25:54
Speaker 1: payments be more efficient globally. It's helping provide you know,
25:58
Speaker 1: access to you know, something like a bank account, but
26:00
Speaker 1: it could be self custodial for many people around the
26:02
Speaker 1: world who don't have access to a stable currency. It
26:05
Speaker 1: can improve even you know, a lot of defy, which
26:08
Speaker 1: you mentioned at the beginning. The trading pairs are denominated
26:12
Speaker 1: in usdcoins. So these are all good things which are
26:14
Speaker 1: an important part of the ecosystem. So let's move to
26:17
Speaker 1: the staking part of the business here. Because you have
26:20
Speaker 1: been concerned, you have voice concerns you and your colleagues
26:23
Speaker 1: about the SEC's definition of staking and how they've approached staking.
26:27
Speaker 1: Are you prepared to fight the SEC on any front
26:29
Speaker 1: if you need to when it comes to the staking world. Yeah, so,
26:32
Speaker 1: I mean we recently saw there was a settlement with Kraken.
26:35
Speaker 1: That's another exchange out there, and they have what they
26:38
Speaker 1: called a staking product. It was kind of more of
26:40
Speaker 1: a yield product. But you know, in coin basis case,
26:42
Speaker 1: our staking product is not a security. There's many differences.
26:46
Speaker 1: I mean, we customers never turn over their assets to
26:48
Speaker 1: coin base, for instance. They're they're always in the customer's
26:51
Speaker 1: possession and we're really just providing a service that passes
26:54
Speaker 1: through those coins to help them, you know, participate in staking,
26:57
Speaker 1: which is a decentralized protocol. So that's an important part
27:01
Speaker 1: of you know, the cryptoeconomy that we want to make
27:03
Speaker 1: sure that we ensure that that's out there, and you know,
27:07
Speaker 1: we're prepared to defend that in court if we need to,
27:09
Speaker 1: but you know, we never we're never looking for a fight.
27:10
Speaker 1: We want to work collaboratively with regulators all over the world.
27:14
Speaker 1: But you know, we have to follow a rule of law,
27:15
Speaker 1: and in this case, I think we're well within the law.
27:17
Speaker 1: Given the stance the SEC has been taking regarding defining
27:21
Speaker 1: certain assets of securities. Is there anything that you think
27:25
Speaker 1: we'll need to get to that point? Well, you know,
27:28
Speaker 1: the SEC has expressed their view about what is a security,
27:32
Speaker 1: and they've taken kind of an expansive view of that.
27:34
Speaker 1: Um I think, you know, coin Base, we've evaluated over
27:36
Speaker 1: a thousand different assets, and as I mentioned earlier, eight
27:39
Speaker 1: hundred of them we've rejected and we do think they
27:41
Speaker 1: have some properties of being a security, so we don't
27:43
Speaker 1: trade those today. Another two hundred or so of them
27:45
Speaker 1: we do trade today, and we feel that those are commodities.
27:48
Speaker 1: So you know, look, I think as a as a CEO,
27:51
Speaker 1: we want to basically just have a clear rule book,
27:53
Speaker 1: right and if a clear rules are published, we're happy
27:55
Speaker 1: to follow it. And if and if those rules change,
27:57
Speaker 1: you know, we're happy to follow those. Um But I
28:00
Speaker 1: think you know, when we when we became a public company,
28:02
Speaker 1: we explained to the SEC and our S one filing
28:05
Speaker 1: and in dozens of meetings that we've had with the SEC,
28:08
Speaker 1: I think we worked pretty collaboratively with them. We've explained
28:11
Speaker 1: our business to them many times, including in our S
28:12
Speaker 1: one and you know, they approved us to become a
28:14
Speaker 1: public company. So we'll continue working with regulators all over
28:17
Speaker 1: the world about where the boundaries are on what's a commodity,
28:20
Speaker 1: what's the security, or what is something else we're setting
28:22
Speaker 1: once more for our Bloomberg radio and television audiences. In
28:25
Speaker 1: conversation with coin base CEO Brian Armstrong, you know we're
28:28
Speaker 1: talking about the SEC and state regulators as well. You know,
28:32
Speaker 1: in regulatory filings, you've noticed that you've received investigative subpoennuts
28:36
Speaker 1: from the SEC and state regulators. How and when do
28:38
Speaker 1: you get those resolved? Yeah, Well, subpoenas are really just
28:42
Speaker 1: requests for information, right, and so we're in dialogue with
28:45
Speaker 1: regulators not only here in the US at the state
28:47
Speaker 1: and federal level, but really around the world. I mean
28:50
Speaker 1: we're in Europe, European markets, and you know, in Singapore
28:53
Speaker 1: and Australia, et cetera, Canada, many different markets around the world.
28:57
Speaker 1: So I think subpoenas are an important part of the process.
28:59
Speaker 1: That's them asking us a question and saying we'd like
29:02
Speaker 1: more information on this, and we're happy to do that.
29:04
Speaker 1: It sounds like it sounds like there was a tension
29:08
Speaker 1: between the SEC and the industry before. It sounds like
29:11
Speaker 1: some of those tensions have boiled up after aft TX.
29:13
Speaker 1: I'm wondering if you think that the conversations between coin
29:16
Speaker 1: base and the SEC in particular have gotten more or
29:19
Speaker 1: less contentious over the years. I think we have a
29:23
Speaker 1: good relationship with the SEC commissioners and staff, and you know,
29:27
Speaker 1: I've met with the chair as well, and so we're
29:29
Speaker 1: going to continue to invest in those relationships. I would
29:31
Speaker 1: like us to find a way to bring crypto I
29:33
Speaker 1: think this is what they want to Our interests are aligned.
29:36
Speaker 1: We want to bring this industry within the regulatory perimeter
29:39
Speaker 1: so that we have good consumer protection, but we also
29:42
Speaker 1: preserve the innovation potential of this. And as I said earlier,
29:44
Speaker 1: you know, eighty percent of Americans want the financial system
29:47
Speaker 1: to be updated, and this is the most important technology
29:49
Speaker 1: I'm aware of that can help do that. So you
29:51
Speaker 1: and your collegues have also voiced a lot of concerns today.
29:53
Speaker 1: You've voiced concerns about kind of more of the crypto
29:55
Speaker 1: industry moving off shore. Draw us a picture here of
29:59
Speaker 1: what happens in five, ten, twenty years if the digital
30:03
Speaker 1: asset landscape exists mostly outside of the United States. Yeah,
30:07
Speaker 1: and exchanges that are not based here. Yeah, Well, I mean, look,
30:11
Speaker 1: I think that would be a terrible mistake for the
30:12
Speaker 1: United States. I mean, look at what's happening with AI, right,
30:16
Speaker 1: that's an important technology trend where it's becoming a matter
30:20
Speaker 1: of national security, right that some of these things are
30:22
Speaker 1: built in the US or we saw it in the
30:23
Speaker 1: past with five G or with semiconductors. And so if
30:27
Speaker 1: we have this really powerful technology, cryptocurrency that has the
30:30
Speaker 1: potential to update the financial system and improve it in
30:33
Speaker 1: so many ways, how can we sit on the sidelines
30:35
Speaker 1: in America and say, oh, okay, well, we're gonna let
30:38
Speaker 1: you know, the EU pass comprehensive legislation and so it'll
30:40
Speaker 1: be built there, and we're gonna let the UAE and
30:43
Speaker 1: you know, London and Singapore and Hong Kong. I mean,
30:45
Speaker 1: this is America. We need to be a technology hub,
30:48
Speaker 1: we need to be a financial hub, and the future
30:51
Speaker 1: of this industry needs to be built right here in America.
30:57
Speaker 1: I want to get to the bottom. It's I'm just
30:58
Speaker 1: reading the Bloomberg News reporting here and some Chinese economy
31:01
Speaker 1: shows strong recovery. Is COVID zero era ends? That's the headline.
31:05
Speaker 1: So when we talk China, we talk Leland Miller from
31:08
Speaker 1: the China Beije book Absolute expert Our go to source here.
31:12
Speaker 1: So Leland we had some manufacturing Purchase Managing Managers index
31:17
Speaker 1: rose to fifty two point six last month, the highest
31:20
Speaker 1: reading since April of twenty twelve. They had some other
31:23
Speaker 1: good data out there. Are you buying it? Well, yeah,
31:27
Speaker 1: there the economy is recovering, but very important is understanding
31:32
Speaker 1: what your base of comparison is. You know, if you
31:34
Speaker 1: look at from year ago levels, everything is still down.
31:39
Speaker 1: If you look at from the fourth quarter of twenty
31:41
Speaker 1: twenty two, everything is up from month on month January
31:45
Speaker 1: to February. Some things are up and some things are down.
31:48
Speaker 1: So it's telling a very confusing story right now. And
31:51
Speaker 1: that's even more convoluted because of course January February is
31:54
Speaker 1: difficult with lunar New Year, and people were down with
31:56
Speaker 1: COVID and so this has been a very difficult time
31:59
Speaker 1: to understand. But yes, you are seeing the beginnings of
32:02
Speaker 1: a recovery right now. So it doesn't seem to be
32:06
Speaker 1: supporting all the commodities I was hoping to see jump,
32:09
Speaker 1: you know, when China reopens. I was like, okay, so
32:11
Speaker 1: one point four billion people are now going to go
32:14
Speaker 1: to the gas station. But we haven't seen a huge
32:16
Speaker 1: gain in oil. Why do you think that is? I
32:19
Speaker 1: think people are just trying to understand what this recovery
32:22
Speaker 1: is going to look like. Certainly in the second quarter,
32:24
Speaker 1: you're going to see, you know, all systems go. You're
32:27
Speaker 1: going to see businesses start to reinvest and borrow and hire.
32:30
Speaker 1: You're going to see some measure of revenge consumer spending probably,
32:34
Speaker 1: and then you know, you also have funds and policy
32:37
Speaker 1: support flowing into property for the first time in a
32:39
Speaker 1: long while, so things will look better. But I think
32:42
Speaker 1: people aren't convinced that this is going to be a
32:44
Speaker 1: longer or sustainable recovery. They want to see what the
32:47
Speaker 1: policy support looks like. When we look at our data,
32:49
Speaker 1: there is credit flowing into the property set of the
32:52
Speaker 1: first time in a while, where you know, we are
32:53
Speaker 1: seeing policy support to property in particular. So I think
32:57
Speaker 1: some of these things will jump in the coming weeks,
32:59
Speaker 1: but it's it's it's a story about twenty twenty three,
33:02
Speaker 1: and markets aren't convinced yet that that the government's going
33:04
Speaker 1: to be behind the economy. Hey, Leland, I don't know
33:07
Speaker 1: if you have any data on this, but I have
33:09
Speaker 1: seen nothing really definitive about the reopening here. This seems
33:13
Speaker 1: to be the best, quickest, least painful reopening of all time.
33:19
Speaker 1: Do you have any sense of how bad it got
33:21
Speaker 1: in China, if at all as it relates to infections, deaths,
33:25
Speaker 1: that type of thing, because it seems to be like
33:27
Speaker 1: I think, there's nothing stuffed up hospitals and crematoriums that
33:31
Speaker 1: I don't know that's right here. I don't know. Oh yeah,
33:33
Speaker 1: of course, I look if they completely glossed over all
33:36
Speaker 1: the difficulties from getting from November to hear you know
33:40
Speaker 1: that we don't know what the death counts are. Nobody
33:42
Speaker 1: knows except the Chinese government. But we do track, you know,
33:44
Speaker 1: the COVID COVID spread our and our corporate networks, and
33:48
Speaker 1: what we were picking up is a lot more reports
33:50
Speaker 1: of COVID spread in February than what the government was
33:53
Speaker 1: was letting on. Everyone's obsessed with these subway indicators that they,
33:56
Speaker 1: you know, insist made. You know, they showed the economy,
34:00
Speaker 1: you know, recovering and peaking and getting back on step
34:03
Speaker 1: in January. We saw COVID flow through the economy in December.
34:08
Speaker 1: In January, still in February, and so, yes, the recovery
34:11
Speaker 1: is coming. Yes, you're already seeing improvement from from the
34:14
Speaker 1: end of last year, but the economy is not back
34:16
Speaker 1: up the story of the government about peaking last month.
34:19
Speaker 1: That's just not what we're seeing. So you know, this
34:22
Speaker 1: is a much lower process and it's a lot uglier
34:24
Speaker 1: underneath the underneath the hood than they're admitting. But you know,
34:27
Speaker 1: it's it's hard to tell when when they're you know,
34:29
Speaker 1: not admitting to anything behind the scenes. But I guess
34:32
Speaker 1: if I was an emerging market investor, if I was
34:34
Speaker 1: a China investor, no matter how it's getting done, don't
34:39
Speaker 1: I have to be bullish on China over the next
34:41
Speaker 1: sever you want to buy in before everyone else buy exactly,
34:44
Speaker 1: I think you need to be bullish on the next
34:46
Speaker 1: several months. I wouldn't be bullish on the next several years,
34:49
Speaker 1: because what you're seeing right now is a recovery that
34:52
Speaker 1: will happen in the second quarter. It could go from
34:54
Speaker 1: two to four quarters. You can continue on, but then
34:58
Speaker 1: you know this is a cyclical bound spec and the
35:00
Speaker 1: cyclical bounce back takes place with the backdrop of a
35:05
Speaker 1: long term structural slowdown. None of these problems that we
35:08
Speaker 1: saw before are taken care of. None of them are
35:11
Speaker 1: being dealt with. You're just seeing a cyclical bounce back
35:14
Speaker 1: from a very bad COVID zero recession. So you're going
35:17
Speaker 1: to see better data for the most of twenty twenty three.
35:20
Speaker 1: But twenty twenty three is going to be a head
35:21
Speaker 1: fake in terms of China's growth. We're not going back
35:24
Speaker 1: to the status quo anti things are slowing down going forward.
35:27
Speaker 1: We had a story yesterday that apple suppliers are moving
35:30
Speaker 1: out investing in Vietnam, looking at India. Is that going
35:33
Speaker 1: to be a big story across manufacturing for China from
35:37
Speaker 1: now forward. Yeah, it's a huge story. I mean, these
35:40
Speaker 1: are difficulties there, the supply chains. Some supply chains are
35:43
Speaker 1: being pulled out of China. They you know, they have
35:45
Speaker 1: had extraordinary manufacturing export growth for years, mostly because of COVID,
35:50
Speaker 1: but also because you know, you know a lot of
35:53
Speaker 1: people were buying around the world. Now you've got more
35:55
Speaker 1: of a global economic recession potentially looming. You know, you've
35:59
Speaker 1: got difficulties with supply chains and being pulled out of China.
36:01
Speaker 1: So it's gonna be a lot harder sledding in. You know,
36:04
Speaker 1: the manufacturing world. The hope from Beijing is that they
36:07
Speaker 1: have other sectors of the economy pick up, you know,
36:10
Speaker 1: pick up and drive growth. But it's very unclear how
36:14
Speaker 1: how domestic consumption is going to do that, because they're
36:16
Speaker 1: not doing anything to support domestic consumption being a long
36:19
Speaker 1: term structural driver of the economy. All right, Leland, great stuff.
36:22
Speaker 1: Really appreciate getting a few minutes of your time. You
36:25
Speaker 1: are absolutely one of our go to people as it
36:27
Speaker 1: relates to China, both from a geopolitical perspective but also
36:30
Speaker 1: obviously from the economic perspective. China Beige Book International, Leland Miller,
36:34
Speaker 1: he's a CEO there and the China Base Book folks,
36:36
Speaker 1: they have real primary data that they get from their
36:40
Speaker 1: network of people on the ground. They don't rely on
36:43
Speaker 1: government statistics. And so that's what I think really makes
36:46
Speaker 1: China Beage Book and Leland Miller really compelling to chat with.
36:53
Speaker 1: So Paul as an equities guy, right, an investment banker
36:56
Speaker 1: from the days of your thinks everyone else is a geek. Yeah,
37:00
Speaker 1: but he looks at fixed income. George Patterson, he's a
37:02
Speaker 1: CIO of PGIM Quantitative Solutions. George's kind of have to
37:05
Speaker 1: join us here in our Bloomberg Interactive Broker studio. George,
37:09
Speaker 1: just start us off and tell us how you guys
37:12
Speaker 1: at PGIM Quantitative Solutions. How do you guys invest capital
37:17
Speaker 1: h So, thank you very much, great to be here. UM.
37:19
Speaker 1: Our view is always trying to understand what the client's
37:23
Speaker 1: needs are and and really for us, we always think
37:27
Speaker 1: longer term and we always think we always think fundamentals driven.
37:32
Speaker 1: So you know, what, what are the what are the factors,
37:34
Speaker 1: what are the trends that are going to be rewarded
37:36
Speaker 1: over the next full cycle, and you know, how are
37:39
Speaker 1: we best position for that? UM and really for the
37:42
Speaker 1: clients that really you know, there's a lot of from
37:44
Speaker 1: our perspective, there's a lot of customization to really build
37:47
Speaker 1: a portfolio that meets a clients have a black box
37:50
Speaker 1: that spits out equities and fixed income options for you, Well,
37:55
Speaker 1: it's actually not a box. It's a triangle. Okay, it's
37:58
Speaker 1: a triangle, and it's not black, it's yellow. Okay no,
38:03
Speaker 1: So so you know, I'm very uh I love to
38:05
Speaker 1: say that. You know, again, from a quantitative perspective, we
38:08
Speaker 1: do have a model that's expressed in mathematics, but it is.
38:12
Speaker 1: Our model is very fundamentally driven. So the types of
38:15
Speaker 1: factors that we look at are going to be very
38:18
Speaker 1: fundamentally based, things like earnings, you know, earnings to price,
38:21
Speaker 1: or earnings based metrics, ebidom metrics, cash flow, you know,
38:26
Speaker 1: quality of the of a board. So we're really looking
38:29
Speaker 1: at things that fundamentals, fundamental investors look at, but we're
38:33
Speaker 1: doing it in a systematic way and that allows us
38:36
Speaker 1: to just be very disciplined. That it allows us to
38:38
Speaker 1: be disciplined, it also allows us to take the emotion
38:40
Speaker 1: out of the process. I want to get to what
38:42
Speaker 1: you're investing in, But before that, how did you get
38:47
Speaker 1: to this point in your career? I mean, you went
38:50
Speaker 1: to M I T. So I get the math part
38:52
Speaker 1: of it, but then you did a PhD in physics.
38:58
Speaker 1: How do you get from there to Wall Street? Essentially? Yep.
39:02
Speaker 1: So it was it was the mid nineties, and when
39:06
Speaker 1: I was graduating from school, it was a it was
39:08
Speaker 1: a recession or we were emerging from a recession, and
39:12
Speaker 1: I had an opportunity lined up. So I actually, in
39:14
Speaker 1: addition to doing those things, I actually worked at the
39:16
Speaker 1: Jet Propulsion Laboratory in Pasadena, California, so I can say
39:20
Speaker 1: that I'm an honest to goodness rocket scientist. However, at
39:24
Speaker 1: the time, I did a lot of soul searching about where,
39:28
Speaker 1: you know, what did I want to do? And I
39:30
Speaker 1: knew I was not going to do a traditional career,
39:33
Speaker 1: and I looked at a couple of different things. But
39:36
Speaker 1: I went to a presentation on quantitative investments and there
39:41
Speaker 1: was a fellow there who was presenting some of his research,
39:45
Speaker 1: and I kept pointing out errors in what he did,
39:48
Speaker 1: and we had a chat afterwards and he said, well,
39:52
Speaker 1: you know, we're hiring, but this is this is in
39:54
Speaker 1: San Francisco. I was in Los Angeles at the time,
39:57
Speaker 1: and next thing I know, I was working at bz W.
40:00
Speaker 1: Barclay's Global Investors. That is awesome. So and from there too,
40:04
Speaker 1: chief investment officer at PGIM Quantitative Solutions. How would you
40:08
Speaker 1: differentiate quantitative investing from I think there must not be
40:14
Speaker 1: a short leap to AI, which is still popular to
40:17
Speaker 1: talk about right now. But you'd basically plug things into
40:20
Speaker 1: a model. I guess the model just doesn't learn by itself.
40:23
Speaker 1: So it really so the way I like to think
40:26
Speaker 1: about it. So, if you think about the world of
40:28
Speaker 1: fixed income right, there's people have there's like this segmentation idea.
40:33
Speaker 1: There's people who focus on the long end of the curve.
40:35
Speaker 1: There's people who focus on the short end of the curve.
40:36
Speaker 1: There's people who focus in the middle. Quants are very
40:39
Speaker 1: much the same way. There are people who look at
40:41
Speaker 1: longer term trends, there's kind of mid horizon trends, and
40:45
Speaker 1: then there's ultra high frequency things. So the challenge with
40:50
Speaker 1: AI is that you need data to train the models.
40:54
Speaker 1: And you know, the great thing about science in general
40:58
Speaker 1: is that if you have you can do an experiment,
41:00
Speaker 1: and if you don't have enough data, you just do
41:01
Speaker 1: the experiment again. Um, and you can generate lots of
41:05
Speaker 1: data to train a model. And you can do that
41:09
Speaker 1: for short horizon models. It's very hard to do it.
41:11
Speaker 1: We just don't have enough data to do it. For
41:13
Speaker 1: long horizon models. There's some areas where it makes sense,
41:16
Speaker 1: but it really depends where where you're targeting within quant
41:20
Speaker 1: quant is kind of like saying, um, you know, you know,
41:24
Speaker 1: you know, my boyfriend plays sports, but I don't know
41:26
Speaker 1: what sport it is. There's a lot of difference between
41:28
Speaker 1: a hockey player and a soccer player and a football player.
41:30
Speaker 1: It's the same thing with quant There's a lot of
41:32
Speaker 1: different subspecialties within there. So where are you, where's your
41:36
Speaker 1: model focused well? And what and what are you coming
41:38
Speaker 1: up with? Tell us about some of the ideas that
41:41
Speaker 1: you've generated. So so all of our ideas are really
41:45
Speaker 1: implemented by buying baskets of securities. We're not buying you know,
41:48
Speaker 1: we're not building a concentrated portfolio. We're building a diversified portfolio.
41:52
Speaker 1: And for us, everything has to have some sort of
41:56
Speaker 1: route in um economic you know, economic or behavioral fundamentals,
42:04
Speaker 1: like we need to understand why something works. And the
42:06
Speaker 1: reason we do that, and we have a very high
42:08
Speaker 1: bar for putting things into our models is because we
42:12
Speaker 1: want to be We want to be able to be
42:13
Speaker 1: patient when the market is either going against us or
42:17
Speaker 1: in times of a crisis, because that's the one time
42:20
Speaker 1: you don't want to panic. So we spend a lot
42:22
Speaker 1: of time trying to understand why, why do the models
42:25
Speaker 1: we have work, what is behind them? And that allows
42:29
Speaker 1: us to be patient. It means that you know, like
42:32
Speaker 1: we're we are you know, we do use valuation based
42:35
Speaker 1: metrics and you've probably heard there was there's a period
42:38
Speaker 1: of time that everyone was talking about is value dead?
42:40
Speaker 1: Is value dead? And then value comes back? I think
42:43
Speaker 1: this is the kind of thing. I can't tell you
42:44
Speaker 1: how many times in my career I've seen somebody put
42:47
Speaker 1: on a trade and it goes against them, and it
42:49
Speaker 1: goes against them, and it goes against them, they decide
42:51
Speaker 1: to take the trade off, and the next day it
42:53
Speaker 1: starts working. So you have to be patient in this business.
42:58
Speaker 1: It is. It is one that test you on a
43:00
Speaker 1: daily basis. Are you buying equities here? Are they too rich?
43:04
Speaker 1: If you're buying equities, you're buying US equities, international equities,
43:07
Speaker 1: So from a multi asset allocation perspective, we're generally much
43:12
Speaker 1: more positive outside the US. The US has great fundamentals,
43:15
Speaker 1: as we all know, the economy is firing on all cylinders.
43:18
Speaker 1: But US equities do look expensive on a number of
43:20
Speaker 1: different metrics, so we do tend to favor non US,
43:24
Speaker 1: whether it be EFA or EM. A lot of interesting
43:27
Speaker 1: opportunities out there In terms of the US. What do
43:33
Speaker 1: you see this market telling us about, you know, the economy,
43:38
Speaker 1: the possibility of becoming recession. You know, earnings seem to
43:42
Speaker 1: paint a far worse picture than the data that we're
43:46
Speaker 1: getting from unemployment and prices paid impmiyes. Like everything looks
43:51
Speaker 1: so great, and then you look at earnings and they
43:54
Speaker 1: not only were disappointing, but expectations are for them to
43:57
Speaker 1: disappoint more throughout the year. Yeah, but look look where
44:00
Speaker 1: we've come. Look where we come from, right, you know,
44:03
Speaker 1: we came from COVID where like literally, you know, unemployment
44:07
Speaker 1: you know, was going through the roof. I mean the
44:10
Speaker 1: economy came to a stop. Right, Planes basically stopped flying,
44:13
Speaker 1: Cruise ships like basically couldn't take paslengers on. So the
44:17
Speaker 1: economy literally came to a stop. And we you know,
44:20
Speaker 1: the economy was rescued with with stimulus and it it
44:25
Speaker 1: there was kind of a very strong rebound, particularly in
44:27
Speaker 1: certain sector of the economy, the stay at home, the
44:30
Speaker 1: technology stocks, and what you're seeing now is kind of
44:33
Speaker 1: like the this is I don't want to say it's
44:35
Speaker 1: the hangover, but you know, we're seeing a lot of repercussions.
44:38
Speaker 1: You know, so like the US economy is actually very healthy,
44:42
Speaker 1: but like we're seeing a bit of a reversal in
44:44
Speaker 1: some of the corporate earnings. I don't think it's a surprise.
44:47
Speaker 1: I think this is all given. This is what I
44:49
Speaker 1: just mean. We're pricing uh eighteen times earnings is great.
44:54
Speaker 1: You know, that's not a hangover. This is if No,
44:56
Speaker 1: it's not love that kind of hangover. No. No, well
44:59
Speaker 1: it was even or during in twenty you know, after
45:02
Speaker 1: post COVID, right, I mean when everything was up. I mean,
45:04
Speaker 1: just look at the total return of the market post COVID.
45:07
Speaker 1: It was phenomenal from the bottom to the top. Was like,
45:10
Speaker 1: it was an amazing It was an amazing thing. Now
45:13
Speaker 1: there are parts of the economy that move a little slower,
45:15
Speaker 1: like housing. Right. Like housing, we saw prices, you know,
45:18
Speaker 1: dramatically change over the course of over the course of COVID.
45:22
Speaker 1: That's going to take longer. Housing market just does not
45:24
Speaker 1: adapt that quickly. But the US economy is very healthy.
45:28
Speaker 1: It's just that equities are expensive. I am a little
45:31
Speaker 1: concerned that the FED is going to have to continue
45:33
Speaker 1: raising rates. As I said, I'm a rocket scientist and
45:37
Speaker 1: not an economist by trees training. But every indication we've seen,
45:41
Speaker 1: apart from a handful of senior apart from a handful
45:44
Speaker 1: of large tech companies that have announced some layoffs, it's
45:46
Speaker 1: still hard to find good people. I think companies want
45:49
Speaker 1: to hold on to their employees. All right, good stuff,
45:52
Speaker 1: George Patterson. We really appreciate getting your thoughts there. George Patterson.
45:55
Speaker 1: He's a chief investment officer for PJIM Quantitative Solutions. Joining
46:01
Speaker 1: us live here in our Bloomberg Interactive broker's studio. Church
46:04
Speaker 1: are based in Boston, Boston and Newark, New Jersey. Here
46:08
Speaker 1: we go, boom, all right, Boston, only the nicest, only
46:11
Speaker 1: the nicest towns on the East Coast exactly. I love Newark,
46:14
Speaker 1: the Iron Bound, all that good stuff, great restaurants. George,
46:17
Speaker 1: thanks so much for joining CHERL. I want to get
46:22
Speaker 1: over to someone who knows what's going down in commodities
46:27
Speaker 1: and from a city that has been historically an amazing
46:33
Speaker 1: commodities hub. I'm Goola. Zeidler joins US vice president Investor
46:37
Speaker 1: Relations over at Arubis. They are the largest copper producer
46:41
Speaker 1: in Europe, the largest copper recycler worldwide, and they're based
46:45
Speaker 1: in Hamburg. I'mngola, thanks so much for joining us. First
46:49
Speaker 1: of all, is your family historically from Hamburg? Because Seidler
46:56
Speaker 1: sounds to me like someone who makes things out of
46:58
Speaker 1: silk and I think of Hamburg as this commodities hub.
47:03
Speaker 1: So is this is this where it comes from? No?
47:06
Speaker 1: Actually not, I'm sorry for bath And actually it's the
47:09
Speaker 1: name of my husband, so I don't really know where
47:11
Speaker 1: it comes from. As you said, As you said, I'm
47:16
Speaker 1: located in Hamburg. It's almost evening here, so good morning
47:19
Speaker 1: to you. Ah, yes, yeah, you've you're later in the
47:23
Speaker 1: day there. Um, let's talk about the commodities that that
47:27
Speaker 1: you move around, make and move around. I would have
47:32
Speaker 1: expected the China reopening, and Paul and I have been
47:35
Speaker 1: talking about this for months now since the COVID zero
47:40
Speaker 1: kind of pivot that they made. I would have expected
47:43
Speaker 1: that to drive up commodities prices across the board. What
47:46
Speaker 1: does doctor Copper look like right now? What does doctor
47:48
Speaker 1: Copper telling us? Well, actually, I think we have to well,
47:54
Speaker 1: I first of all want to talk about a Europea
47:56
Speaker 1: view another that come to a Chinese view, because of
47:59
Speaker 1: course we're looking at the market globally. So the European
48:03
Speaker 1: demand for copper is very healthy. You know, we are
48:07
Speaker 1: one of the leading copper producers in Europe and globally.
48:11
Speaker 1: So here and driven by the energy green energy transition,
48:16
Speaker 1: the electronic vehicles and all of this, the copper is
48:20
Speaker 1: really copper demand in Europe is really healthy. We see
48:24
Speaker 1: today that the copper price again goes went up over
48:28
Speaker 1: nine thousand US tolop ton, meaning that the mind supply
48:32
Speaker 1: of concentrate materials where we generate our copper from, is
48:37
Speaker 1: in a good situation. And also the recycling markets here
48:42
Speaker 1: in Europe, where we of course are engaged also all right,
48:45
Speaker 1: So when you're when you're when you go to visit
48:49
Speaker 1: Oliver Bloomer and Wolfsburg, is he putting in orders for
48:54
Speaker 1: copper that he can now afford to pay for because
48:56
Speaker 1: he doesn't need to fork out so much cash for gas.
48:59
Speaker 1: I mean, there is an expectation that that would be
49:01
Speaker 1: a huge problem. Now it's not. And Folkswagen nimes to
49:05
Speaker 1: be the biggest maker of electric vehicles in the world.
49:08
Speaker 1: I think that that is counting in for them as well.
49:11
Speaker 1: But from our point of view, we see that the
49:14
Speaker 1: construction industry is demand is increasing, and automotive from our
49:19
Speaker 1: today's perspective, is stable. But you are right, energy prices
49:24
Speaker 1: are coming down in Europe. We had a mild winter
49:26
Speaker 1: here for God's sake, so energy prices are going down
49:30
Speaker 1: and this of course will given tailwind to all the
49:36
Speaker 1: let's say commodities consuming companies. But on the other hand side,
49:43
Speaker 1: if you look at it globally, and we've got a
49:46
Speaker 1: lot of customers which which have maybe facing supply chain disruptions.
49:52
Speaker 1: So currently we don't see it. But I'm we are
49:57
Speaker 1: happy here in our European market. Demand is still a
50:01
Speaker 1: stable and healthy For US, situation might be different than
50:04
Speaker 1: you mentioned that at the beginning. In China, we see,
50:07
Speaker 1: as you mentioned that the demand didn't pick up as
50:11
Speaker 1: we earlier the year expected. That that might be because
50:16
Speaker 1: of we had a long Chinese New Year and after
50:20
Speaker 1: COVID the markets are slowly picking up, but not in
50:25
Speaker 1: that direction which we maybe earlier the year expected. I'm
50:29
Speaker 1: going to talk to us about the recycling business, the
50:32
Speaker 1: copper recycling marketplace, if you could just kind of lay
50:34
Speaker 1: out the primers, what that market looks like, kind of
50:38
Speaker 1: in kind of how you see that developing. Actually, we
50:43
Speaker 1: last year and announced that we are doing a huge
50:47
Speaker 1: recycling investment for US and we huge recycling investment in
50:50
Speaker 1: the US and Augusta in Georgia. We will invest six
50:54
Speaker 1: hundred forty million euros in a big plant of recycling materials,
50:59
Speaker 1: and we are doing this not because of the lower
51:04
Speaker 1: energy prices in the US. That's nice as well, but
51:08
Speaker 1: the market for recycling material is extremely growing in the
51:12
Speaker 1: United States and Arugus will be the first recycling company
51:16
Speaker 1: investing there and building the first recycling plant in the US.
51:21
Speaker 1: So big opportunity for us in a fast growing market.
51:26
Speaker 1: What kind of energy usage does it take to recycle
51:29
Speaker 1: copper actually doesn't matter. Well, we have different energy. We
51:37
Speaker 1: have a gas, we have what everything you can imagine
51:43
Speaker 1: we do have and we were facing at the beginning
51:46
Speaker 1: of the year high energy increase, especially price increase, especially
51:51
Speaker 1: in Germany situation in other European countries where we produce
51:55
Speaker 1: as well, we're different. But in the US, of course,
51:59
Speaker 1: this is much more competitive for us, the energy situation
52:02
Speaker 1: than we have it here because you are using nuclear
52:05
Speaker 1: power plants as well, and this is something which you
52:09
Speaker 1: know probably don't want to have here in Germany anymore.
52:13
Speaker 1: So I'm gona. I know your first quarter earnings profit
52:16
Speaker 1: fellos doing part too inflation and higher energy prices. Talk
52:20
Speaker 1: to us about the cost side of your business. What
52:23
Speaker 1: are the big costs and kind of what are the
52:26
Speaker 1: trends there well. Costs, of course is personnel costs is
52:33
Speaker 1: the biggest factor here and as we are facing high
52:36
Speaker 1: inflation rate even in Germany they announced just that we
52:39
Speaker 1: are at eight point seven percent, so all over Europe
52:45
Speaker 1: this is something we have to face. But energy costs
52:48
Speaker 1: our highest factor. And if you look at last year,
52:52
Speaker 1: our fiscal year of September, the energy cost almost doubled.
52:57
Speaker 1: We see now that it is coming up and we
53:00
Speaker 1: had in our forecast a little bit room here. So
53:04
Speaker 1: currently the situation is better and we are very well
53:08
Speaker 1: supplied with energy with long term contracts and it is
53:12
Speaker 1: not at that with position as we've seen it before.
53:15
Speaker 1: And I talked to a lot of investors last year
53:18
Speaker 1: about the situation of energy in Germany and I can
53:21
Speaker 1: say we are now much more relaxed on that side.
53:24
Speaker 1: In China, the reopening we were going to we put
53:27
Speaker 1: a pin in that. So let's go back. Is it
53:29
Speaker 1: expected to be drive demand in a big way? Actually,
53:34
Speaker 1: I would say of course it will. Our Rubis is
53:37
Speaker 1: not engaged in any kind of direct business to China,
53:41
Speaker 1: but we are, of course depending because fifty percent of
53:44
Speaker 1: the global demand and copper is in China is coming
53:48
Speaker 1: from China. So the Chinese are of course driving the
53:52
Speaker 1: copper price, and we and the mining industry especially, we
53:56
Speaker 1: don't have any minds. It's if they earn good money
54:01
Speaker 1: by a high copper price, it is good for us.
54:03
Speaker 1: They create a lot of copper concentrate and this is
54:06
Speaker 1: perfect for us on the other hand. Site so we
54:09
Speaker 1: are we are looking at China very closely, have good
54:11
Speaker 1: contact over there, but currently we see that the demand
54:16
Speaker 1: is still weak and the premium before we find copa allow.
54:20
Speaker 1: All right, I'm gla. Thank you so much for joining us.
54:22
Speaker 1: Really appreciate you taking the time. Angola Seidler, vice president
54:25
Speaker 1: of invest Relations for a Rubis. It is the largest
54:28
Speaker 1: copper producer in Europe and the largest copper recycler worldwide.
54:31
Speaker 1: They're based in Hamburg, Germany, so excellent getting the European
54:35
Speaker 1: perspective on that commodities. Thanks for listening to the Bloomberg
54:41
Speaker 1: Markets podcast. You can subscribe and listen to interviews of
54:44
Speaker 1: Apple podcasts or whatever podcast platform you prefer. I'm Matt Miller.
54:49
Speaker 1: I'm on Twitter at Matt Miller nineteen seventy three. I'm
54:53
Speaker 1: fall Sweeney. I'm on Twitter at pt Sweeney before the podcast.
54:56
Speaker 1: You can always catch us worldwide at Bloomberg Radio