Latest / Bloomberg Intelligence / Minsky Moment Is Real Possibility: Economist Bob Barbera

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Minsky Moment Is Real Possibility: Economist Bob Barbera · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you.
• 0:05
  Speaker 1: Along with my co host Lisa Brahma Waits. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
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  Speaker 1: you and your money, whether at the grocery store or
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  Speaker 1: the trading floor. Find a Bloomberg penl podcast on Apple
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  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. From Davos, we also heard Bob
• 0:21
  Speaker 1: Prince k c io of Bridgewater saying that we are
• 0:24
  Speaker 1: seeing the end of the boom and bust cycle, which
• 0:27
  Speaker 1: is particularly relevant for our next guest. Uh our guests,
• 0:31
  Speaker 1: I should say plural who have been sort of honing
• 0:35
  Speaker 1: in on this concept of a Minsky moment, and I'm
• 0:37
  Speaker 1: really glad to say we have John Authors with a
• 0:39
  Speaker 1: senior editor from Bloomberg Markets, as well as a special guest,
• 0:43
  Speaker 1: Bob Barbara, who wrote a book on the Minsky moment
• 0:48
  Speaker 1: that a lot of people talk about and are waiting for.
• 0:51
  Speaker 1: It is also a professor at John Hopkins. So I'm wondering, John,
• 0:55
  Speaker 1: just can you give us a sense of why you
• 0:58
  Speaker 1: wanted to take a closer look at the concept of
• 1:00
  Speaker 1: a Minsky moment right now. Well, I did decide this
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  Speaker 1: before somebody in a control of a very large amount
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  Speaker 1: of money declared that the boom bust cycle was over,
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  Speaker 1: which would appear to be one of the classic moments
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  Speaker 1: that Minsky would worry about. But even a month or
• 1:16
  Speaker 1: so ago, when we started on the Boom bog book
• 1:19
  Speaker 1: club saying read Minsky and read Bob's book on Minsky,
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  Speaker 1: there was obvious concern that the key notion of Hyman
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  Speaker 1: Minsky that we were trying to get at is that
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  Speaker 1: stability breeds instability, that when people are calm and relaxed
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  Speaker 1: and confident, they will inevitably take things too far, and
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  Speaker 1: that will lead to over expansion of credit, a Ponzi cycle.
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  Speaker 1: And then the Minsky moment is when the coyote looks
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  Speaker 1: down to mix my metaphors and realize that there is
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  Speaker 1: that there is nothing to support that debt. Dr Barbera,
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  Speaker 1: do you believe we are at a Minsky moment currently? Well,
• 2:02
  Speaker 1: I like to say that the difference between me and
• 2:04
  Speaker 1: Ray Dalio is that he had the timing precisely right,
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  Speaker 1: and therefore he has fifty billion and I don't. So
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  Speaker 1: I can't tell you I know we're at a Minsky
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  Speaker 1: moment right now, but I can tell you that we
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  Speaker 1: we have the preconditions falling into place, and and certainly
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  Speaker 1: on the death side. I mean, just think about the
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  Speaker 1: fact that junk bonds yielded sixteen percent in two thousand nine.
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  Speaker 1: In other words, no one was willing to to lend
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  Speaker 1: to a risky company, and now you're seeing them at
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  Speaker 1: less than five percent. So there's no margin for error
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  Speaker 1: there now. If a company is offered an extraorin and
• 2:45
  Speaker 1: extremely easy credit term, they're going to borrow more. And
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  Speaker 1: that's what we're seeing right now. Well, although you could
• 2:52
  Speaker 1: argue people have been trying to make this bet for
• 2:55
  Speaker 1: a long time since the crisis. Everyone's been worried that
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  Speaker 1: we're sewing the seeds for the next crisis. But there's
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  Speaker 1: the Federal Reserve, in the ECB and the b o
• 3:02
  Speaker 1: J sticking their thumb on the scales. Here to Bob
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  Speaker 1: Prince's point, you know, a lot of people are saying
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  Speaker 1: he's crazy, this sort of heralds the next Minsky moment.
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  Speaker 1: Other people saying he's right. The idea that the central
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  Speaker 1: banks are coming in and suppressing volatility, suppressing yields changes
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  Speaker 1: the equations fundamentally. Okay, So um, I think that if you,
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  Speaker 1: if you, if you were to watch what the Fed
• 3:22
  Speaker 1: is doing. Let's pick one central bank, the one we
• 3:24
  Speaker 1: watch most of the time. What they're saying is the
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  Speaker 1: inflation backdrop is quiescent, and as a consequence, they'd have
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  Speaker 1: to see a meaningful change in inflation before they would
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  Speaker 1: begin to tighten credit. A right, that's been the movie.
• 3:38
  Speaker 1: The movie has been you watch the wrong arena. So
• 3:42
  Speaker 1: you're watching a side show the price of corn and
• 3:46
  Speaker 1: what you a w wages are doing, and you're ignoring
• 3:49
  Speaker 1: the main event, which is what's going on in asset markets.
• 3:52
  Speaker 1: So you're staring staring at the price of corn the
• 3:55
  Speaker 1: asset markets because you've said, I'm not going to do anything,
• 3:59
  Speaker 1: get progressively risk here. At some point you get a modest,
• 4:04
  Speaker 1: unimportant rise for inflation, but you dutifully respond to it,
• 4:08
  Speaker 1: and you let everybody know. It's a small inflation, it'll
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  Speaker 1: be easy to take care of. But what happens You
• 4:14
  Speaker 1: bust the bubble, and then you discover that the cost
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  Speaker 1: of that modest tightening is much larger than you anticipated.
• 4:22
  Speaker 1: So Greenspan talks about secular head wings in two thousand.
• 4:28
  Speaker 1: Bernankei says, we need helicopter money, and you're watching the
• 4:32
  Speaker 1: wrong movie. And it's not that that they have ended
• 4:37
  Speaker 1: the cycle, it's that they're not looking at what matters. Hey,
• 4:41
  Speaker 1: John tell us about the upcoming book club live chest
• 4:45
  Speaker 1: So this is a part of our ongoing book club
• 4:48
  Speaker 1: with the screamingly clever clever name of Author's Notes, Authors
• 4:52
  Speaker 1: with an E get it? Yeah good, And we'll be
• 4:56
  Speaker 1: live blogging on the terminal. So anybody on the who
• 5:00
  Speaker 1: has access to a terminal who wants to multimedia Bloomberg
• 5:04
  Speaker 1: experience this morning can keep listening to radio while following
• 5:08
  Speaker 1: our live blog on T live t l i V
• 5:12
  Speaker 1: go on the terminal starting at eleven carry on till
• 5:15
  Speaker 1: twelve thirty. If you have any questions for me or
• 5:17
  Speaker 1: particularly Bob Barbara emailed them to Author's Notes Authors with
• 5:22
  Speaker 1: any Notes Bloomberg dot nets. John Author's thanks so much
• 5:25
  Speaker 1: for joining us, really appreciated. John Author's senior editor Bloomberg Markets,
• 5:29
  Speaker 1: and Dr Barbara from JOHNS. Hopkins, who is the author
• 5:32
  Speaker 1: of the Cost of Capitalism, Understanding Market Mayhem, and Stabilizing
• 5:35
  Speaker 1: our Economic Future. Have we had estabilization or we face
• 5:41
  Speaker 1: right exactly. One of the top stories that it really
• 5:54
  Speaker 1: caught my attention was the FTC, the Federal Trade Commission
• 5:58
  Speaker 1: antitrust officials are looking into the top index fund providers
• 6:03
  Speaker 1: that have seen incredible inflows and surge to to sort
• 6:07
  Speaker 1: of record power and scope Black Rock, Vanguarden, State Street
• 6:11
  Speaker 1: in particular. And one kind of statistic that caught my
• 6:14
  Speaker 1: eye here is that the Big Three, which is what
• 6:16
  Speaker 1: they're called, collectively owned about two of the typical SMP
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  Speaker 1: five hundred company, which could potentially give them significant influence
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  Speaker 1: over major decisions like mergers. That is the theory and
• 6:28
  Speaker 1: chopping at the bit to weigh. And here is Barry
• 6:30
  Speaker 1: rid Holes. I have to even introduce you. Yeah, come on,
• 6:33
  Speaker 1: Barry rid Holts whose founder of Ridholes Wealth Management and
• 6:36
  Speaker 1: a Bloomberg opinion columnist who has opinions. Yeah, he's got
• 6:40
  Speaker 1: he's got some strong opinions. Let's hear it. I'm confused.
• 6:44
  Speaker 1: You have to break it down. So what you you
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  Speaker 1: understand how passive indexes work? Right? A third party index
• 6:54
  Speaker 1: provider like let's say the SMP creates this index and
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  Speaker 1: you passively own it. Well, no, but hold on a second.
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  Speaker 1: The theory here is a black Rock, particularly black Rock
• 7:05
  Speaker 1: where you had Larry Fink come out and say, we
• 7:07
  Speaker 1: are such a huge owner of stocks, we are going
• 7:10
  Speaker 1: to have a more activist approach in our shareholder. Okay,
• 7:14
  Speaker 1: he's he's making hand motions that I wish we could.
• 7:16
  Speaker 1: He could write whatever he wants letters and he could
• 7:20
  Speaker 1: send those letters out to whoever he wants, and he
• 7:22
  Speaker 1: could go on TV and he could talk about it.
• 7:24
  Speaker 1: But at the end of the day, Larry Rock, that's
• 7:27
  Speaker 1: what the president calls him. No, Larry black Rock, like
• 7:30
  Speaker 1: Tim Apple, Uh, Larry Fink of black Rock is going
• 7:35
  Speaker 1: to own funds that own indexes, and if he doesn't
• 7:39
  Speaker 1: like the companies that are in those indexes, well it's
• 7:43
  Speaker 1: too bad. That's how he got to be a seven
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  Speaker 1: trillion dollar company. He is not going to advise companies
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  Speaker 1: about their mergers and acquisitions. He's not going to advise
• 7:51
  Speaker 1: them about their strategy. He could write a very lovely
• 7:55
  Speaker 1: annual letter saying, hey, we should all be green and
• 7:57
  Speaker 1: we should be concerned about the future, bah blah blah,
• 8:00
  Speaker 1: and then he's going to go back to his office
• 8:02
  Speaker 1: and he's going to count the seven trillion dollars in
• 8:05
  Speaker 1: passive indexes he has and do nothing else. And we
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  Speaker 1: could see this in how these companies vote their proxies
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  Speaker 1: in what they actually do. All three of these companies
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  Speaker 1: are on average of um U S companies. That means
• 8:20
  Speaker 1: seventy of those holdings are other owners who actually vote
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  Speaker 1: their proxies, who elect the board of directors of these companies,
• 8:30
  Speaker 1: and they don't really care what Larry think thinks about
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  Speaker 1: the companies in their indexes. So if I'm company A
• 8:36
  Speaker 1: thinking about buying company B, and company B is has
• 8:40
  Speaker 1: a terrible E s G score and is a polluter
• 8:43
  Speaker 1: or whatever, and I know Larry finks index Blackrock owns.
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  Speaker 1: You know X percent of this company is the biggest
• 8:50
  Speaker 1: sharehold of this company, I don't care. Well, actually, Mary,
• 8:53
  Speaker 1: thing you almost out there. It's not Larry think. What
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  Speaker 1: we know about E s G indexes is on average
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  Speaker 1: they've been out performing the broader indexes. And we also
• 9:03
  Speaker 1: know that E s G as a screen is a
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  Speaker 1: fantastic risk management tool. When it turns out that you
• 9:09
  Speaker 1: have a diverse board of directors and you have fairly
• 9:13
  Speaker 1: gender parity and pay, you're much less likely to get
• 9:17
  Speaker 1: hit with the sort of compliance problems. And we meet
• 9:20
  Speaker 1: two problems that have afflicted other companies. But let's get
• 9:23
  Speaker 1: back to the real core of this issue here, which
• 9:25
  Speaker 1: is what kinds of power do the big index providers
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  Speaker 1: have with the companies that they own shares and given
• 9:34
  Speaker 1: the fact that they are owned in passive companies in
• 9:37
  Speaker 1: passive indexes, and they really are not able to sell
• 9:40
  Speaker 1: the shares if they want to protest that is the
• 9:44
  Speaker 1: powers to sell. Active managers have the power because they say,
• 9:48
  Speaker 1: you know what, I've had it with you, Jack Dorsey,
• 9:51
  Speaker 1: You're not running Twitter. But look at professor Scott Galloway
• 9:54
  Speaker 1: owns ten million shares of Twitter and said, the guys
• 9:57
  Speaker 1: a part time CEO, he's also CEO Square is going
• 10:00
  Speaker 1: to Africa for three months. I'm gonna I'm gonna sell
• 10:04
  Speaker 1: my show. But then there's a question sort of embedded
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  Speaker 1: in this is the only check and balance that a
• 10:09
  Speaker 1: shareholder has, this sell option? Where are there other options?
• 10:14
  Speaker 1: You can vote? And black Rock has a lot of votes. Yeah,
• 10:17
  Speaker 1: but they don't really use them. But they could Why
• 10:20
  Speaker 1: what What's What's what's keeping them from using them? Because
• 10:24
  Speaker 1: they operate on behalf of their clients, the investors, and
• 10:28
  Speaker 1: if they want to diverge their activity and their belief
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  Speaker 1: system from the trust that investors have put with with them.
• 10:37
  Speaker 1: So hypothetically, there are three companies. Let's say one of
• 10:41
  Speaker 1: these companies decides to become much more activist as a
• 10:45
  Speaker 1: passive investor. I know that it's a little bit of
• 10:47
  Speaker 1: a contradiction in terms the other two companies are gonna
• 10:50
  Speaker 1: then start advertising, Hey, listen, we're here to invest your money.
• 10:55
  Speaker 1: We're not trying to change the world. We're not trying
• 10:57
  Speaker 1: to run a political campaign. Trust to us to manage
• 11:00
  Speaker 1: your money appropriately. Who wants to take that risk with
• 11:04
  Speaker 1: six or seven trillion dollars in client assets? So the
• 11:08
  Speaker 1: the whole argument. Let's let's step back and look at
• 11:11
  Speaker 1: where this argument came from. So as passive has written
• 11:15
  Speaker 1: from a relatively insignificant part of mutual funds and e
• 11:19
  Speaker 1: t f s to now over half. Now, admittedly mutual
• 11:22
  Speaker 1: funds is still a small part of the total world
• 11:26
  Speaker 1: of investing, but fifty of that call it of the
• 11:30
  Speaker 1: world is passive. As that's taken place, as that's risen,
• 11:36
  Speaker 1: the active world has responded aggressively. We saw research papers
• 11:42
  Speaker 1: that said it's it's Marxist, it's an American it's gonna
• 11:46
  Speaker 1: crash the market. It's going to destroy the economy. Every
• 11:49
  Speaker 1: hair brained our argument against passive investing, very efficient, very
• 11:56
  Speaker 1: low cost, very unemotional, has been mustered. This, Oh my goodness,
• 12:02
  Speaker 1: the big index ers are now you know they're gonna
• 12:05
  Speaker 1: they might theoretically, in some alternative universe, collaborate to stop
• 12:11
  Speaker 1: um stop competition is the latest stupid to roll out.
• 12:15
  Speaker 1: And by the way, the underlying academic research is based
• 12:19
  Speaker 1: on looking at airline stocks and banking stocks, two areas
• 12:24
  Speaker 1: that have been wildly aberrational compared to the rest of
• 12:28
  Speaker 1: the market. Yes, of course we've we've seen total deregulation
• 12:32
  Speaker 1: in the airline industry. Of course that looks different than
• 12:35
  Speaker 1: the rest of the world. And banks, in case you
• 12:37
  Speaker 1: haven't noticed, received a giant bail out over a decade ago.
• 12:41
  Speaker 1: So when we look at these things, those are not
• 12:44
  Speaker 1: the right sectors. If there's really coordination amongst the big companies,
• 12:49
  Speaker 1: show me how that's impacting competition. In the tech space,
• 12:53
  Speaker 1: where there are a lot of monopolies, it turns out
• 12:55
  Speaker 1: it's not happening. Barry ri Hilts, thank you so much,
• 12:58
  Speaker 1: Barry Hults. Guess what people he is a Bloomberg opinion
• 13:03
  Speaker 1: I wonder what his opinion was on this issue. It
• 13:05
  Speaker 1: really seemed a little bit opaque to make exactly a
• 13:08
  Speaker 1: host of Masters and business on Bloomberg Radio. Great podcast,
• 13:12
  Speaker 1: also founder chairman, chief investment officer Vert Holds Wealth Management.
• 13:15
  Speaker 1: We love having Barry here talking about the all things
• 13:18
  Speaker 1: financial markets. Our next guest really has a unique view
• 13:35
  Speaker 1: on the market. Michael Son and Felt, chairman and founder
• 13:37
  Speaker 1: of Tiger twenty one. Tiger twenty one is a peer
• 13:40
  Speaker 1: membership organization for high net worth investors. Tiger twenty one
• 13:45
  Speaker 1: has seven seventy members with more than seventy seven billion
• 13:49
  Speaker 1: dollars in assets, so really a unique view on the market. Michael,
• 13:52
  Speaker 1: thanks so what for joining us here in our Bloomberg
• 13:54
  Speaker 1: eleven three oh studios right now? After the move we
• 13:57
  Speaker 1: had in the market in what are you are members
• 14:01
  Speaker 1: saying about the market? Are they running out on that
• 14:03
  Speaker 1: risk curve? Are they saying, gee, maybe I'm going to
• 14:05
  Speaker 1: pull it in a little bit? So, uh, I think
• 14:07
  Speaker 1: sentiment to shifting. People who weren't concerned a year ago
• 14:11
  Speaker 1: or a little more concerned today. People who were concerned
• 14:14
  Speaker 1: are even more so. But our members are looking for
• 14:17
  Speaker 1: an all weather portfolio, and the way they do that
• 14:21
  Speaker 1: is sort of barbell. They have risk assets in public,
• 14:24
  Speaker 1: private equity, and real estate, and then they have large
• 14:26
  Speaker 1: reserves of cash at about twelve percent, so they're not
• 14:30
  Speaker 1: forced to liquidate if there's a market downturn. The very
• 14:33
  Speaker 1: best assets they want to hold onto. Rad Dalio said,
• 14:36
  Speaker 1: cash is trash, what's the argument for holding it? So
• 14:39
  Speaker 1: the argument for holding it is, if you're an entrepreneur.
• 14:42
  Speaker 1: ARE members have built great businesses and they've done it
• 14:45
  Speaker 1: sort of step by step by rolling up their shirt sleeves,
• 14:48
  Speaker 1: you want to have count cash to pounce on an opportunity.
• 14:51
  Speaker 1: If you're a pure investor like Ray, he has different
• 14:54
  Speaker 1: ways of looking at a fully invested portfolio. But for
• 14:58
  Speaker 1: our members who are individual they want to make sure
• 15:01
  Speaker 1: that if there's a tremendous downturn, they can live through it.
• 15:05
  Speaker 1: So they have twelve percent in cash, which is about
• 15:07
  Speaker 1: six years living expenses by historic standards. ARE members live
• 15:11
  Speaker 1: on about two percent of their assets. And more importantly,
• 15:15
  Speaker 1: they don't want to be forced to liquidate assets at
• 15:17
  Speaker 1: just the wrong time at low prices. They want to
• 15:20
  Speaker 1: be able to weather through any potential storm. Michael, I
• 15:23
  Speaker 1: know many of your members and you as well, have
• 15:26
  Speaker 1: a background in real estate. How are they looking at
• 15:29
  Speaker 1: real estate right now? Sure? So real estate is king.
• 15:32
  Speaker 1: It's the number one asset within our members portfolio about
• 15:37
  Speaker 1: I think they look at it as the great anchor.
• 15:40
  Speaker 1: It's the income producing, the reoccurring UH income that comes
• 15:44
  Speaker 1: from real estate that a lot of our members count on. UH.
• 15:47
  Speaker 1: They've taken some trips off the table a year or
• 15:49
  Speaker 1: two ago, it was in the mid thirties, so they've
• 15:52
  Speaker 1: taken low hanging fruit. And you have such transformation in
• 15:55
  Speaker 1: real estate, particularly in the United States. You have the
• 15:58
  Speaker 1: Gateway twenty force evan cities which are very strong, but
• 16:02
  Speaker 1: even there's some weakness there in the upper end here
• 16:05
  Speaker 1: in New York. And then you get out of those
• 16:07
  Speaker 1: gateway cities where technology companies are thriving and there's growth,
• 16:11
  Speaker 1: and you have a heap of heartache out there. So
• 16:14
  Speaker 1: it's not just the one size fits all. But that's
• 16:17
  Speaker 1: where our members expertise is and that's why they want
• 16:20
  Speaker 1: to continue investing. When we talk about private equity, so
• 16:22
  Speaker 1: that that was one area that they have been increasing
• 16:25
  Speaker 1: allocations too. There's been record amounts of money raised record
• 16:30
  Speaker 1: amounts of dry powder to put to work. Valuations near
• 16:33
  Speaker 1: or at record highs. How concerned are the members that
• 16:36
  Speaker 1: they're perhaps getting in at the top, even though this
• 16:39
  Speaker 1: has been an asset class that has been delivering outside returns.
• 16:43
  Speaker 1: So our members are entrepreneurs who have built businesses from scratch,
• 16:47
  Speaker 1: and so they tend to want to look at private
• 16:50
  Speaker 1: equity as a direct shareholder in a small company that's growing.
• 16:54
  Speaker 1: They understand that there's lots of cash, but they're playing
• 16:58
  Speaker 1: into that trend by growing very small businesses into large
• 17:01
  Speaker 1: They're not putting huge amounts of money in the big
• 17:03
  Speaker 1: mega funds. They've had their day. Our members are helping
• 17:07
  Speaker 1: to create the businesses that are going to take advantage
• 17:10
  Speaker 1: of that cash that you're talking about. So in order
• 17:13
  Speaker 1: to be a seller into a seller's market, you have
• 17:16
  Speaker 1: to create companies that are the stuff of legends. And
• 17:19
  Speaker 1: that's why at the other end of the spectrum, they're
• 17:21
  Speaker 1: staying away from the I p o s. Those were
• 17:24
  Speaker 1: over priced. Last year, whether people got greedy or whatever
• 17:27
  Speaker 1: it was, most of the I p o s traded down.
• 17:29
  Speaker 1: So our members have shifted from looking at I p
• 17:32
  Speaker 1: O opportunities to venture capital and private equity opportunities. How
• 17:37
  Speaker 1: concerned are your members about, you know, some of that
• 17:39
  Speaker 1: geopolitical risk, whether it's impeachment or whether it's trade issues.
• 17:42
  Speaker 1: And they try to take a longer term view and
• 17:45
  Speaker 1: not let that noise get in away. So um, for
• 17:49
  Speaker 1: the long term, our members are risk on. They have
• 17:52
  Speaker 1: seventy plus percent in public equity, private equity, and real estate,
• 17:56
  Speaker 1: so they have a long term bet on the economy
• 17:59
  Speaker 1: that is almost doesn't look at the short term, if
• 18:03
  Speaker 1: you will. But because they know that unexpected things are
• 18:07
  Speaker 1: what trash markets, You're gonna come in one day in
• 18:10
  Speaker 1: the market's going to be dramatically down. That's why they're
• 18:12
  Speaker 1: carrying large amounts of cash. They want to have that balance.
• 18:17
  Speaker 1: When you sell a business, you have to come together
• 18:20
  Speaker 1: with a strategy, and when you meet every month with
• 18:22
  Speaker 1: people who have been doing this, in particular, people who
• 18:25
  Speaker 1: lived through the two thousand and eight crisis and said
• 18:28
  Speaker 1: what worked. When you can learn from your peers in
• 18:30
  Speaker 1: a confidential setting, you can get an edge and figure
• 18:34
  Speaker 1: out where your place is in that In that egosistem
• 18:38
  Speaker 1: just real quick here, I'm wondering whether you have a
• 18:40
  Speaker 1: sense of the appropriate returns to expect in an all
• 18:43
  Speaker 1: weather portfolio through the cycle. So last year, I'd say
• 18:48
  Speaker 1: most of our members were in the high single digits
• 18:51
  Speaker 1: and low double digits, and many of them watch the
• 18:55
  Speaker 1: markets up twenty eight or but they had much higher
• 18:59
  Speaker 1: return than the market over their career. Last year was
• 19:02
  Speaker 1: an anomaly. So we'd like to be long term greedy,
• 19:06
  Speaker 1: not short term greedy. We'd like to be able to
• 19:08
  Speaker 1: weather through the storms. I think if you could get
• 19:11
  Speaker 1: on a passive portfolio anything in the high single digits
• 19:15
  Speaker 1: over the long term, that would be pretty great. Michael
• 19:17
  Speaker 1: sonon Felt, thank you so much for being with us.
• 19:19
  Speaker 1: Michael sonnon Felt, chairman and founder of Tiger One. With
• 19:24
  Speaker 1: members who have the dollars really really interesting to hear
• 19:28
  Speaker 1: how they're thinking what it means to be cautious right
• 19:31
  Speaker 1: now and the bright teck Away living on two percent
• 19:34
  Speaker 1: of their assets twelve percent being in cash, so much
• 19:38
  Speaker 1: for cash as trash. California's the biggest utility is finally
• 19:53
  Speaker 1: working through or getting closer to working through UH some
• 19:56
  Speaker 1: of its liabilities after wildfires put it on the for
• 20:00
  Speaker 1: billions of dollars, throwing it into bankruptcy from having been
• 20:03
  Speaker 1: an investment grade rated company. Joining us now is Phil Brandall,
• 20:07
  Speaker 1: senior credit analyst from Bloomberg Intelligence joining us from Skullman,
• 20:10
  Speaker 1: New Jersey. And I'm wondering where we are if you
• 20:12
  Speaker 1: could just bring us up to speed in the whole
• 20:14
  Speaker 1: court process and uh this sort of resurrection of p
• 20:18
  Speaker 1: G and E to a solvent company utility one more time, Hi, Lisa,
• 20:23
  Speaker 1: thanks a lot. Yeah, and no, So, Pacific s and
• 20:26
  Speaker 1: Electric announced through an a K that they've reached a
• 20:30
  Speaker 1: deal with note holders and that's about twenty two billion
• 20:33
  Speaker 1: dollars of notes and what they're going to get back
• 20:38
  Speaker 1: is some some bonds will be reinstated, some will get
• 20:41
  Speaker 1: a mix of longer dated notes and shorter dated notes.
• 20:44
  Speaker 1: But the bottom line is is this is a tremendously successful,
• 20:49
  Speaker 1: uh you know, progress for the company. Uh you know,
• 20:54
  Speaker 1: first they kind of deal with the torque claimants, the insurers, uh,
• 20:58
  Speaker 1: the shareholders are getting some in here. So uh, you know,
• 21:01
  Speaker 1: we're seeing all the pieces come together for a deal.
• 21:05
  Speaker 1: So Phil, we understand, however, that Governor Gavin Newsom of
• 21:09
  Speaker 1: California is not supportive of the deal. What's the status
• 21:13
  Speaker 1: of that and what needs to happen? Right? So for
• 21:17
  Speaker 1: a while there it was the company and the UH
• 21:20
  Speaker 1: and the shareholders on one side, you had the governor
• 21:23
  Speaker 1: on another side, and then you had a three way
• 21:25
  Speaker 1: standoff with the note holders. Uh. And you know, one
• 21:29
  Speaker 1: of our thesis was that if two of those parties
• 21:32
  Speaker 1: get together, the other the thirds in trouble. And and
• 21:35
  Speaker 1: I think that's what we're seeing now by and large,
• 21:37
  Speaker 1: the governor's moment to impact the plan in bankruptcy court
• 21:41
  Speaker 1: has passed. They arguably could have been more forceful when
• 21:44
  Speaker 1: the tour climates and subrogation claimants that they had a
• 21:48
  Speaker 1: restructuring support agreement that was up for court approval, but
• 21:52
  Speaker 1: they chose to be fairly silent. So, Uh, it might
• 21:55
  Speaker 1: be a little bit late in the game to impact
• 21:57
  Speaker 1: things in the bankruptcy court. But uh, there is the
• 22:01
  Speaker 1: there there. The trump card that they hold is, uh,
• 22:05
  Speaker 1: the CPUC needs to approve this plan and so they'll
• 22:10
  Speaker 1: have an impact there obviously that the Public Utility Commission.
• 22:13
  Speaker 1: Can we just take a step back for a second.
• 22:15
  Speaker 1: I remember when the wildfires first were in the news
• 22:20
  Speaker 1: and when pc n G ended up filing for bankruptcy
• 22:24
  Speaker 1: in short order because of these liabilities. There was a
• 22:27
  Speaker 1: larger discussion about what California should do with its utilities.
• 22:30
  Speaker 1: Who should be on the hook for this, you know,
• 22:33
  Speaker 1: whether or not this was mismanagement or just an increasing
• 22:36
  Speaker 1: issue that was going to occur. And I'm wondering has
• 22:40
  Speaker 1: there been any broader conversation on that front. Right So,
• 22:46
  Speaker 1: and it's all about who made money here, who lost money?
• 22:50
  Speaker 1: And I think the winners and losers. I think the
• 22:53
  Speaker 1: shareholders obviously were big losers. But at the end of
• 22:57
  Speaker 1: the day, they're probably going to walk away with twenty
• 23:00
  Speaker 1: thirty five percent of the reorganized company on behalf of
• 23:05
  Speaker 1: their old stock. They are also going to be on
• 23:07
  Speaker 1: the hook to put in twelve billion dollars more here,
• 23:10
  Speaker 1: So they there definitely has been you know that I
• 23:13
  Speaker 1: think most of their pain was taken up front. Uh
• 23:16
  Speaker 1: and and and that twelve billion dollar equity investment. So
• 23:20
  Speaker 1: there's they really uh you know, I think that's where
• 23:24
  Speaker 1: the bulk of the losses were suffered. Um. As far
• 23:27
  Speaker 1: as the bond holders, the bond holders are coming away
• 23:31
  Speaker 1: pretty nicely here. They're getting a full recovery, and on
• 23:35
  Speaker 1: top of that, the terms of that debt look to
• 23:38
  Speaker 1: be pretty attractive given where the market is right now.
• 23:42
  Speaker 1: So I to some extent, the helpful credit markets right
• 23:47
  Speaker 1: now are providing UH is providing value to some of
• 23:51
  Speaker 1: the stakeholders here that otherwise wouldn't be there in a
• 23:55
  Speaker 1: in a different market. So at this point now with
• 23:58
  Speaker 1: the with the holders signing up and saying yeah, we'll
• 24:01
  Speaker 1: take these notes back at four nine for thirty years. Uh,
• 24:06
  Speaker 1: they're effectively taking the market risk from this point forward.
• 24:09
  Speaker 1: And so you know, if the markets did go against them, Uh,
• 24:13
  Speaker 1: this state and the state and t g N have
• 24:17
  Speaker 1: that deal already. Yeah, nailed down, Phil Brenda, thank you
• 24:20
  Speaker 1: so much for being with us. Phil Brendel, senior credit
• 24:22
  Speaker 1: analyst with Bloomberg Intelligence, ruining us from Skillman, New Jersey.
• 24:26
  Speaker 1: You know, bigger issue, especially for people like yourself with
• 24:29
  Speaker 1: homes in California. Uh, you really waiting to figure out
• 24:33
  Speaker 1: what the longer term ramification because I mean, these fires
• 24:37
  Speaker 1: aren't going away. So it's how do you, year after year,
• 24:39
  Speaker 1: season after season deal with it. Thanks for listening to
• 24:42
  Speaker 1: the Bloomberg Penl podcast. You can subscribe and listen to
• 24:45
  Speaker 1: interviews at Apple Podcasts or whatever podcast platform you prefer.
• 24:48
  Speaker 1: Paul Sweeney, I'm on Twitter at pt Sweeney and Lisa
• 24:51
  Speaker 1: bram Woyds. I'm on Twitter at Lisa bramwo wits one
• 24:54
  Speaker 1: before the podcast. You can always catch us worldwide on
• 24:57
  Speaker 1: Bloomberg Radio