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Politics Are Sideshow to Stock Valuations, Lieberman Says · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
0:08
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
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Speaker 1: or the trading floor. Find the Bloomberg p m L
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. There's
0:32
Speaker 1: been a question hovering over markets these days, how much
0:36
Speaker 1: political upheaval can there be without any real, substantial and
0:40
Speaker 1: prolonged reaction from markets. Chuck Lieberman has perhaps some answers.
0:44
Speaker 1: He's chief investment officer and managing partner of Adviser's Capital Management,
0:48
Speaker 1: which oversees about one point three billion dollars. Also, he
0:51
Speaker 1: is a Bloomberg View columnist through the Bloomberg Profits Group. Charles, Chuck,
0:56
Speaker 1: thank you so much for joining us. You raised an
0:58
Speaker 1: interesting reality check, basically saying that all of this political
1:02
Speaker 1: noise only matters so much as it affects underlying growth.
1:07
Speaker 1: Can you explain sure? Um, Well, obviously the news is
1:11
Speaker 1: full of politics. Um, this stuff happening seemingly almost every day,
1:17
Speaker 1: and Washington is obviously dysfunctional. But how that relates to
1:21
Speaker 1: the stock market depends on whether or not it UH
1:24
Speaker 1: actually affects corporate profits. If companies are doing well, If
1:28
Speaker 1: the economy is growing, and the economy is certainly growing,
1:31
Speaker 1: and corporate profits are actually doing quite well, then stock
1:34
Speaker 1: valuation should rise over time to reflect that rise in profitability. Um. Yes,
1:40
Speaker 1: we pay attention to the politics. It certainly captures our attention,
1:45
Speaker 1: but it's a side show to the valuation of stocks. Well, Chuck,
1:49
Speaker 1: maybe you could talk a little bit more detail about
1:51
Speaker 1: corporate profits in light of shared buy backs and the
1:55
Speaker 1: ability to discern what is a real profit and what's
1:58
Speaker 1: not a real profit. Since company these use gap and
2:00
Speaker 1: non gap results, it's it's just increasingly difficult. Well, look,
2:06
Speaker 1: there are different ways to measure profits. UM, we have
2:09
Speaker 1: a system in the US gap accounting. International companies use
2:14
Speaker 1: a different methodology, but our methodology is what it is, UH,
2:19
Speaker 1: and over time, what it has shown is that corporate
2:21
Speaker 1: profits rise pretty substantially over time. Uh. There were five
2:25
Speaker 1: consecutive quarters in which US corporate profits fell and bears
2:30
Speaker 1: on the market use that as a justification to argue
2:33
Speaker 1: that stocks were overvalued. But at the same time, if
2:36
Speaker 1: you actually look at what was going on. All of
2:39
Speaker 1: the decline in profits came about because of the energy sector,
2:43
Speaker 1: where oil prices dropped from a hundred ten bucks barrel
2:46
Speaker 1: to about twenty five. That was a huge decline in
2:49
Speaker 1: the profitability of very large companies like Exxon and Chevron
2:53
Speaker 1: and others. Uh. Everyone else, however, on average, was actually
2:57
Speaker 1: growing profits and their stocks went down to uh. So
3:01
Speaker 1: stock valuations look attractive. And and now we have the
3:04
Speaker 1: energy sector actually coming back. Oil prices are still volatile,
3:08
Speaker 1: but the underlying profitability of companies is doing fine. You know, Chuck,
3:12
Speaker 1: I'm struck by the fact that stocks rallied tremendously after
3:17
Speaker 1: the November election of President Donald Trump. Uh. And a
3:21
Speaker 1: lot of this was because people were baking in the
3:23
Speaker 1: expectation of tax cuts for corporations as well as reduced
3:27
Speaker 1: regulations that directly was baked into the prices of stock.
3:31
Speaker 1: So this is a fundamental change. Have we washed that out?
3:35
Speaker 1: And you know, if we haven't, this goes to something
3:38
Speaker 1: more than just you know, people's feelings. This is a
3:41
Speaker 1: fundamental issue, and it is driven directly by policy. Uh.
3:45
Speaker 1: Fair enough, but keep in mind, a number of things
3:48
Speaker 1: have all other things have also happened so yes, I
3:51
Speaker 1: think the market is hoping that Trump will get some
3:55
Speaker 1: tax cuts through. But that's not the only variable involved.
3:58
Speaker 1: It's also less regulation. It's also more spending on infrastructure.
4:02
Speaker 1: So there are a lot of ways in which policies
4:05
Speaker 1: that he advocates could in fact benefit corporate profits in
4:09
Speaker 1: the US. Well, hold on a second, how many of
4:11
Speaker 1: those policies have to get through in order to justify
4:14
Speaker 1: a current value valuations? Well, I think I would argue
4:18
Speaker 1: any at this point, people believe that Trump is going
4:21
Speaker 1: to get nothing um, and that's one of the reasons
4:24
Speaker 1: why stocks having continued to rise. Uh. In the meantime,
4:27
Speaker 1: corporate profits have We just had the strongest quarter since
4:31
Speaker 1: two thousand and eleven. So corporate profits continue to march on.
4:36
Speaker 1: The politics is just a constant show, Chuck, when do
4:39
Speaker 1: you sell? Uh? Well, you sell if you start to
4:43
Speaker 1: think that the economy is at risks. Uh. Recessions are
4:47
Speaker 1: never good for stock valuation. Corporate profits invariably go down.
4:51
Speaker 1: You sell if you think that the government is going
4:54
Speaker 1: to somehow inhibit corporate profits. Well, when does Chuck Lieberman sell?
4:59
Speaker 1: I guess that I mean to be more pointed about it,
5:01
Speaker 1: because all right, you know, when you see a decline,
5:04
Speaker 1: let's say in stock prices, you can make the argument
5:06
Speaker 1: that that's the time to buy, not when they are
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Speaker 1: at records. Fair enough, and uh, what we do is
5:12
Speaker 1: we continue to watch what they're doing, what the government
5:15
Speaker 1: is doing, because it does matter. And when I say
5:18
Speaker 1: the government, I don't mean just the administration. I also
5:20
Speaker 1: mean the federal Reserve and foreign governments. All of those
5:23
Speaker 1: variables matter as long as the economy continues to grow,
5:27
Speaker 1: and right now we see no reason why it shouldn't
5:30
Speaker 1: continue to grow at a at a solid clip, not
5:33
Speaker 1: a rapid clip. And because of leverage in the corporate
5:37
Speaker 1: sector as well as how lean they are, I expect
5:40
Speaker 1: corporate profits to continue to grow in the in the
5:43
Speaker 1: ballpark of per year. As long as that's happening, I
5:47
Speaker 1: don't want to sell unless the economy looks like it's
5:51
Speaker 1: really at risk. Chuck. One thing that you pointed to
5:53
Speaker 1: in your recent column was that there is so much
5:56
Speaker 1: cash still out there that has not been invested yet.
6:00
Speaker 1: How much cash are you looking at? Where is it?
6:03
Speaker 1: Because if I look at mutual funds, for example, particularly
6:05
Speaker 1: equity mutual funds, they're pretty heavily invested, there isn't a
6:09
Speaker 1: lot of cash there. Well yeah, well that's one of
6:12
Speaker 1: the reasons why I was very vague with that statement, Uh,
6:16
Speaker 1: because it is difficult to measure. So start off with
6:18
Speaker 1: mutual funds, the amount of cash they hold varies over
6:21
Speaker 1: time and fun to fund. On average, they look like
6:24
Speaker 1: they're a little bit heavy now. But we're not talking
6:27
Speaker 1: about a huge amount of three But then when you
6:30
Speaker 1: look at the billions that have flowed into both money
6:34
Speaker 1: funds and in the CDs and bank accounts, all because
6:38
Speaker 1: people are nervous about the market. There are a lot
6:41
Speaker 1: of people who pulled out of equities back in two
6:44
Speaker 1: thousand and two thousand nine and still haven't gotten in.
6:48
Speaker 1: And I'm still reading about people who are hoping that
6:51
Speaker 1: the market sells off in order to give them an
6:53
Speaker 1: opportunity to get in. So I think there's a lot
6:56
Speaker 1: of money on the sidelines. And you can see that
6:59
Speaker 1: I think from the aavior of the market. Uh, the
7:01
Speaker 1: market really has not been able to sustain any material
7:05
Speaker 1: decline of any size for any prood of time in
7:08
Speaker 1: the last several years. Um. And in fact, people look
7:12
Speaker 1: at that and comment, how that's a negative. I think
7:15
Speaker 1: of it as a reflection of a positive which is
7:17
Speaker 1: all of that cash sitting on the sidelines by people
7:20
Speaker 1: have missed the market. Chuck, They've been quick question for you.
7:22
Speaker 1: What was the biggest mistake you've made? Look and you
7:25
Speaker 1: look at the market over the last twelve months, over
7:29
Speaker 1: the last twelve months. Thanks for throwing me a curveballpin
7:34
Speaker 1: um not being more aggressive? Um. I think this market,
7:40
Speaker 1: there's so much fear out there and there's so much caution.
7:45
Speaker 1: I think this that creates an environment in which people
7:48
Speaker 1: are looking for opportunities to get in if they can.
7:52
Speaker 1: And I think you have to be aggressive until conditions
7:55
Speaker 1: turn less favorable. All right, I'm gonna leave it there,
7:58
Speaker 1: Thanks very much, Chuck Lieberman. He is that investment officer
8:00
Speaker 1: managing Partner Advisors, a capital management He helps manage more
8:06
Speaker 1: than a billion dollars of assets under management. But we
8:21
Speaker 1: have a massive trade deficit with Germany. Plus they pay
8:24
Speaker 1: they pay far less than they should on NATO and
8:27
Speaker 1: the military. This is according to President Donald Trump posting
8:31
Speaker 1: this message on Twitter and here to tell us. Morris
8:34
Speaker 1: Patrick donohue. He is a government reporter for Bloomberg and
8:37
Speaker 1: he joined us from ber Lynn Patrick thanks for being
8:40
Speaker 1: with us. Maybe you could just set out for us
8:42
Speaker 1: what is the fact and what is the rhetoric when
8:46
Speaker 1: it comes to trade between the United States and Germany. Well,
8:50
Speaker 1: there's definitely a big trade UH surplus that Germany has,
8:54
Speaker 1: not just with the US, but with most European countries.
8:58
Speaker 1: It's it's sort of in the euro Zone and so UM.
9:02
Speaker 1: And if you look, if you look back at the
9:04
Speaker 1: imbalances that were triggered through the creation of the euro
9:07
Speaker 1: and the succession the crisis, UH, these are imbalances that
9:10
Speaker 1: are sort of built in. UM. It's true that there
9:15
Speaker 1: is a pretty staggering surplus. And it's not just Trump
9:20
Speaker 1: the U. S administration who who like to talk about this,
9:22
Speaker 1: but also the European Commission, UH, the O E C D,
9:26
Speaker 1: the I m F have criticized Germany for doing too
9:29
Speaker 1: little to address the surplus. Patrick, how new is this conversation?
9:34
Speaker 1: I mean, is this something that has been discussed in
9:36
Speaker 1: back rooms for years and now we're just seeing it
9:40
Speaker 1: in a very different light sort of aired through uh.
9:44
Speaker 1: I guess campaign speeches and Twitter. Uh. The trade issue
9:49
Speaker 1: is not new. I think even in the Obama administration
9:53
Speaker 1: there was plenty of criticism about Germany's deficit, I think
9:57
Speaker 1: a surplus sorry UM. With the tru administration, it's taken
10:01
Speaker 1: a completely different tack. If you listen to somebody like
10:04
Speaker 1: um Trump's top trade advisor, Peter Navarro, uh the way
10:08
Speaker 1: he discussed his trade um, he lays blame to Germany
10:14
Speaker 1: for most of it and says that Germany's hiding behind
10:17
Speaker 1: its membership in the euro to take advantage of its
10:20
Speaker 1: position UM, which sounds strange to German ears because it's
10:24
Speaker 1: not something you can really undo. Patrick. The automobile industry
10:29
Speaker 1: and automobile exports money. If you could just speak about
10:32
Speaker 1: the German role there and also about their role in
10:34
Speaker 1: manufacturing in the United States. Auto exports are the backbone
10:39
Speaker 1: of German of Germany's export economy, it's export might um.
10:44
Speaker 1: And when Donald Trump, for example, talks about all of
10:46
Speaker 1: the Mercedes and BMW's on history in New York, UM,
10:50
Speaker 1: it's true, Americans by a lot of German cars. Americans
10:53
Speaker 1: like German cars. But at the same time, a lot
10:55
Speaker 1: of those German cars are built in the US, and
10:58
Speaker 1: so it's not simply a matter of Americans buying German
11:02
Speaker 1: cars that are shipped overseas from Germany. It's more complicated
11:05
Speaker 1: than that, You know, Patrick, I'm really struck by what
11:09
Speaker 1: Angela Merkel said over the weekend where she said, you know,
11:12
Speaker 1: we Europeans cannot rely on the US the way that
11:16
Speaker 1: we have. I was struck. Two. I was in the
11:18
Speaker 1: beer tent with her. Did not expect her to talk
11:20
Speaker 1: about geopolitics at a campaign rally. So you were there,
11:23
Speaker 1: What was the response like, What was the mood like
11:26
Speaker 1: when she uttered those words? Um, those words were uttered
11:30
Speaker 1: at the beginning of a little long sentence that continued
11:33
Speaker 1: with this idea that well, we Europeans have to go
11:35
Speaker 1: our own way, we have to take our destiny in
11:37
Speaker 1: our own hands. That sort of rhetoric coming from America
11:41
Speaker 1: was not entirely new. Uh. This reliability comment is rather new,
11:46
Speaker 1: and in the context of the the breakdown at the
11:50
Speaker 1: G seven summit, when the administrative US administration Trump would
11:55
Speaker 1: not commit to remaining in the Paris Climate Accord, it
11:59
Speaker 1: took a whole new meaning. And so when you when
12:01
Speaker 1: you place the reliability of your closest post World War
12:06
Speaker 1: two ally in doubt, then that's a big deal. The
12:10
Speaker 1: question here is did she mean to cause such a
12:14
Speaker 1: stir was she's delivering this to the German electorate. Um,
12:22
Speaker 1: I don't know, we haven't. We have a Twitter response
12:25
Speaker 1: from President Trump today. Uh, clearly this is royal things
12:30
Speaker 1: across the Atlantic. Patrick. When I look at the exports
12:34
Speaker 1: as a percentage of GDP and you look at various countries,
12:37
Speaker 1: Germany comes out as a really top of the list.
12:40
Speaker 1: Forty more than fort of GDP is accounted for as exports.
12:45
Speaker 1: What does Germany do that the other countries in Europe
12:48
Speaker 1: or even in the United States, which is just around
12:50
Speaker 1: ten percent, don't do well. One thing Germany does it
12:54
Speaker 1: manufactures um quality products and exports them, and it has
12:59
Speaker 1: done that very well for a long time. On the
13:02
Speaker 1: other side, it's a question of what Germany has not done.
13:05
Speaker 1: Um An export surplus is you know what Germany exports
13:11
Speaker 1: minus what it's what it's not importing. So the criticism
13:14
Speaker 1: for Germany, obviously it's impossible to say stop making such
13:18
Speaker 1: great cars. It's rather Germany should do more to um
13:23
Speaker 1: boost domestic demand domestic spending to raise imports. This has
13:28
Speaker 1: been a classic criticism of German policy, and there's a
13:32
Speaker 1: back and forth about that. The Germans say they're doing plenty. Um,
13:37
Speaker 1: I mean, leave aside Trump, but as I said, the
13:39
Speaker 1: European Commission i m F have come down pretty hard
13:42
Speaker 1: on Germany for not addressing the issue and creating imbalances
13:46
Speaker 1: within the Eurozone and globally. You know, Patrick, I'm struck
13:49
Speaker 1: by what you're saying that there are Europeans that agree
13:52
Speaker 1: with President Trump at least on with respect to Germans
13:57
Speaker 1: role in trade and their trade surplus. That might be
14:01
Speaker 1: taking it too far. Okay, Well that was what I
14:02
Speaker 1: was going to ask. Is that taking it too far?
14:04
Speaker 1: You know, because it really has been created as sort
14:07
Speaker 1: of a Trump versus Merkel kind of a kind of
14:10
Speaker 1: situation right now. Well, I mean, when you talk about
14:13
Speaker 1: trade policy and trade arrangements, things get complicated, as with
14:17
Speaker 1: lots of other things. Trump's um view of the problem
14:23
Speaker 1: is somewhat crude compared to how, you know, the chief
14:27
Speaker 1: economist at the i m F might criticize Germany's UH surplus.
14:31
Speaker 1: So that is just to say that when Donald Trump
14:35
Speaker 1: or Peter Navarro or somebody else I don't know, Steve
14:37
Speaker 1: benn And starts talking about the German exports, it's it's
14:40
Speaker 1: not the same thing, but it's all it's there's addressing
14:45
Speaker 1: an issue that has been on the table for a while,
14:48
Speaker 1: but there's a there's something else going on there. Patrick Donahue,
14:52
Speaker 1: thank you so much for joining us. Patrick donahue is
14:54
Speaker 1: a Berlin reporter for a Bloomberg News and he comes
14:57
Speaker 1: to us from Berlin, Germany, very diplomatically, saying that the
15:01
Speaker 1: tone of President Trump's comments perhaps does not jibe in
15:03
Speaker 1: any way, shape or form with the Europeans, regardless of
15:06
Speaker 1: their views on Germany's policies. A collective ignorance, a mistrust
15:22
Speaker 1: of finance today, it's detrimental to our personal and national
15:26
Speaker 1: financial security. And here to help us reimagine what the
15:29
Speaker 1: finance industry could be is me here Decide. He is
15:32
Speaker 1: the Miszooho Financial Group Professor of Finance at the Harvard
15:36
Speaker 1: Business School, and he's also a professor of Law at
15:39
Speaker 1: Harvard Law School and the author of a new book
15:41
Speaker 1: entitled The Wisdom of Finance, Discovering Humanity in the World
15:45
Speaker 1: of Risk and Return. Professor Decide, thanks very much for
15:48
Speaker 1: being here. It's a pleasure. Thanks for having me. What
15:51
Speaker 1: what prompted you to write this book? Well, it got
15:54
Speaker 1: started by accident, which I was asked to give a
15:56
Speaker 1: talk to graduating students, and I realized that what I
16:00
Speaker 1: wanted to do was take finance and both humanize it
16:03
Speaker 1: and demystify it. I think finance is broken in some ways,
16:06
Speaker 1: and certainly it's perceived as broken, and so I think
16:08
Speaker 1: the path forward is first to make it accessible to
16:10
Speaker 1: people everywhere. Finance kind of cloaks itself in complexity, and
16:14
Speaker 1: we need to demystify it. So the book does that
16:16
Speaker 1: by telling stories. And then the second piece is to
16:18
Speaker 1: humanize it, which is to tell the stories that make
16:21
Speaker 1: people realize that underlying ideas of finance are humanistic, they're
16:24
Speaker 1: not crass, and they actually can be used in a
16:27
Speaker 1: humanistic way. You know, when you talk about demystifying financial concepts,
16:32
Speaker 1: part of the problem is that finance can be complicated.
16:36
Speaker 1: It's not just jargon. It's when you're talking about derivative
16:39
Speaker 1: concepts and you're talking about, you know, high theory that
16:43
Speaker 1: is based on the transfer of money that a lot
16:45
Speaker 1: of people just simply don't even understand to begin with.
16:48
Speaker 1: How do you go about doing that? Well, So there's
16:50
Speaker 1: no doubt that you know, the intricacies of the c
16:52
Speaker 1: d O are fairly complex. But the underlying ideas of
16:55
Speaker 1: what a derivative instrument, for example, are UM. The way
16:58
Speaker 1: I try to explain it is by going back to
17:00
Speaker 1: the first person who pioneered the use of options, which
17:02
Speaker 1: is Bailey's the father of Greek philosophy. He's the first
17:05
Speaker 1: option contract writer. He put down a deposit to rent
17:08
Speaker 1: out all of presses, and so you can tell the
17:10
Speaker 1: stories that actually undergird a lot of these financial technologies
17:14
Speaker 1: UM in a way that makes it a lot more
17:15
Speaker 1: easy to understand. Why do you think that finance has
17:18
Speaker 1: such a bad reputation, Well, I think partly because it's
17:21
Speaker 1: well learned, and I think there's been problems, and I
17:23
Speaker 1: think there are areas where finance has become somewhat extractive
17:26
Speaker 1: rather than value creating. But the larger point is that
17:29
Speaker 1: people are looking for something to blame today. They're upset
17:32
Speaker 1: with their economic prospects, and finance is an easy and
17:35
Speaker 1: um attractive target to them. And as a consequence, we
17:38
Speaker 1: have a profession which has gotten demonized, which has really
17:41
Speaker 1: bad consequences. It's bad because people within the profession actually
17:45
Speaker 1: don't have as much to aspire to. So in the book,
17:47
Speaker 1: I wanted to say, look the underlying ideas are actually
17:50
Speaker 1: quite noble. We should make finance aspirational, as opposed to
17:53
Speaker 1: defining it downward and expecting less and less. I wonder
17:57
Speaker 1: if you could tell us what does Jane Austen have
17:59
Speaker 1: to with risk management? Well, it turns out everything. So
18:03
Speaker 1: in the second chapter on risk management, I try to
18:06
Speaker 1: use Anthony Trollop and Jane Austin Pride and Prejudice to
18:08
Speaker 1: talk about risk management because underneath most of those novels
18:12
Speaker 1: is the problem of a young woman in the marriage
18:14
Speaker 1: market who has to manage risks. Right, So if you
18:17
Speaker 1: think about Mr Collins's proposal to Lizzie, he's playing off
18:20
Speaker 1: her risk aversion. It's one of the worst proposals ever. Basically,
18:24
Speaker 1: you know, you're not that attractive, you're not that rich.
18:26
Speaker 1: You better take my bid before you kind of become
18:28
Speaker 1: too old and she has to kind of gamble by
18:31
Speaker 1: waiting for Mr Darcy. And the really interesting part about
18:34
Speaker 1: that risk managing problem. In Phineas Finn by Anthony Trollop,
18:38
Speaker 1: the character Violet Effingham actually divines both diversification and options.
18:42
Speaker 1: She doesn't call it that, but she uses it. So
18:44
Speaker 1: she says, for example, you know she's bemoaning the lack
18:47
Speaker 1: of being able to unable to pick among suitors, and
18:50
Speaker 1: she says, you know, if one, I could marry ten,
18:52
Speaker 1: which is the way of saying diversification. And then she
18:54
Speaker 1: finally says, um, you know what I'm gonna do. She's
18:57
Speaker 1: not a fan of romantic love. She basically says, I'm
18:59
Speaker 1: just gonna sort. I'm going to pile up a few
19:02
Speaker 1: different possibilities, and then when I'm ready, I'm going to
19:04
Speaker 1: get married, which is kind of acquiring a portfolio of
19:07
Speaker 1: options and then exercising one when you're ready. So she
19:10
Speaker 1: actually got risk management in a deep way before you know,
19:13
Speaker 1: we had the equations to prove it. Mayor, you teach
19:17
Speaker 1: finance at Harvard, and I imagine that you have seen
19:20
Speaker 1: many students and you've seen, uh, perhaps a change in
19:23
Speaker 1: them and and concern, especially since the two thousand and
19:27
Speaker 1: eight financial crisis, about the reputation that finance has had.
19:31
Speaker 1: Can you explain, Yeah, No, I think it's been um,
19:34
Speaker 1: you know, really problematic. So finance has become less and
19:36
Speaker 1: less viewed as an aspirational profession. Recently, I was speaking
19:40
Speaker 1: to about forty or fifty of them, and I asked
19:42
Speaker 1: them how many of them were going into finance. A
19:44
Speaker 1: whole bunch raised their hand, and I said, how many
19:46
Speaker 1: of you expect to be in finance in ten years?
19:48
Speaker 1: And the number was a quarter of that, which is
19:50
Speaker 1: a way of saying they kind of did it for now,
19:52
Speaker 1: but they don't feel it's part of their identity. In
19:55
Speaker 1: other words, are doing it for the money so they
19:56
Speaker 1: can go on and do it they really believe And no,
19:58
Speaker 1: I think if they're doing it because they like it
19:59
Speaker 1: and then are ashamed of it because it's looked at
20:02
Speaker 1: in a way, that is problematic. UM, and that's terrible. Why,
20:05
Speaker 1: because you know, finance is hugely important to the economy.
20:08
Speaker 1: If we don't get finance right, we've seen what happens,
20:11
Speaker 1: and so we want really good people going into it,
20:13
Speaker 1: who who aspire to be doing great things. And so
20:15
Speaker 1: what the book says is actually finance is central. If
20:18
Speaker 1: you think about the two big solutions to the world's
20:21
Speaker 1: problems today in finance, one is regulation and the second
20:24
Speaker 1: is outrage, you know, just occupy. I think both of
20:27
Speaker 1: those are unproductive. UM. Outrage isn't going anywhere, and regulation,
20:32
Speaker 1: we know has counterproductive consequences. So the idea in the
20:35
Speaker 1: book is to say, let's really just get back to
20:37
Speaker 1: the nobility of the ideas, because if we get back
20:39
Speaker 1: to the nobility of the idea, is that, in the
20:41
Speaker 1: long run, is the way people start behaving better? Is
20:45
Speaker 1: the nobility Uh, your referenced nobility of ideas? Does that
20:48
Speaker 1: include personal accountability? Because it's one thing if you're playing
20:52
Speaker 1: with other people's money, and it's another one you're playing
20:55
Speaker 1: with your own reputation and your own money. Absolutely, So
20:58
Speaker 1: there are several times in the book where I use
21:00
Speaker 1: the ideas of for example, leverage UM to talk about
21:03
Speaker 1: reputation and to talk about personal accountability. So leverage is
21:06
Speaker 1: a good example. UM. Of course, I use a variety
21:09
Speaker 1: ways to talk about it, but one of them is
21:11
Speaker 1: The Merchant of Venice, you know, which is just a
21:13
Speaker 1: way of saying people think that's a play about debt,
21:15
Speaker 1: there's a debt contract between Antonio and and Shylock. And
21:19
Speaker 1: the answer, of course is if you look at the text,
21:20
Speaker 1: it's actually about commitments, right, It's all about commitments between people.
21:24
Speaker 1: That's what most scholars think that play is about. So
21:26
Speaker 1: I try to use that to kind of say that's
21:28
Speaker 1: what leverages it's a commitment and leverages fantastic. People in
21:32
Speaker 1: finance know that you get to do things you have
21:34
Speaker 1: no right to do. That's why people in financial get
21:36
Speaker 1: to create money. You get to create money. And the
21:38
Speaker 1: same thing is true, um if you think about it
21:40
Speaker 1: in a variety of other ways. So the great quote
21:42
Speaker 1: from Jefferson is that you know, your reputation is the
21:46
Speaker 1: most important lever because people will allow you to do
21:48
Speaker 1: things you have no right to do, and protecting that
21:51
Speaker 1: reputation and behaving in that way is really really critical.
21:53
Speaker 1: So you started out by saying that finance used to
21:56
Speaker 1: be thought of as a noble profession. But I can
21:59
Speaker 1: think of a lot of times during history where finance
22:02
Speaker 1: or debt was considered somewhat dirty and people wanted to
22:05
Speaker 1: have it somewhat removed from themselves. What's the golden era
22:07
Speaker 1: that you would like to see some kind of resurrection
22:11
Speaker 1: of Well, you know, that's a great question. I think
22:13
Speaker 1: there's always been problematic because debt has always been problematic,
22:16
Speaker 1: but that was born of real ignorance, right, you know,
22:18
Speaker 1: money is barren? How can you do these things? Um?
22:22
Speaker 1: And also sometimes anti Semitism was associate with that as well. Um, so,
22:25
Speaker 1: I don't know if there really has been a golden era.
22:27
Speaker 1: What I'm trying to just suggest is let's get back
22:29
Speaker 1: to the ideas, because we are so far removed from them.
22:32
Speaker 1: And this is why the practice of finance has got
22:34
Speaker 1: to wake up. They can't just say, you know, I'm
22:37
Speaker 1: doing God's work and I'm great. You've got to be
22:39
Speaker 1: able to say, we have problems, but we can actually
22:42
Speaker 1: do something really important, and we can get back to
22:44
Speaker 1: things that are actually really value creating. Ma Here, Decai,
22:47
Speaker 1: thank you so much for joining us. But here Desai
22:49
Speaker 1: is Missouho Financial Group, Professor of Finance at Harvard Business
22:53
Speaker 1: School as well as a professor of law at Harvard
22:55
Speaker 1: Law School, and he joins us here in our Bloomberg
22:58
Speaker 1: eleven three oh studios. You just wrote a new book,
23:01
Speaker 1: The Wisdom of Finance, Discovering Humanity in the World of
23:04
Speaker 1: Risk and Return, really fascinating. Up until now, Intel has
23:19
Speaker 1: really been the only game in town when it comes
23:22
Speaker 1: to computer chips. It's in a league of its own.
23:24
Speaker 1: It has dominated the industry. But suddenly it finds itself
23:28
Speaker 1: fending off competition, a non stream of us and is
23:31
Speaker 1: here with us. He is the senior semiconductor and hardware
23:34
Speaker 1: analyst for Bloomberg Intelligence, and he comes to us in
23:37
Speaker 1: our Bloomberg eleven three studios in New York City, and
23:40
Speaker 1: then you know, I'm struck by, uh, sort of the
23:43
Speaker 1: idea that somebody who is so so in the in
23:47
Speaker 1: the lead all of a sudden finding that that someone
23:50
Speaker 1: else is catching up to them. Can you explain how
23:52
Speaker 1: this is sort of the situation with Intel right now? Sure?
23:54
Speaker 1: I mean m D has lagged from both the performance
23:57
Speaker 1: perspective and the market share perspective over time in the
24:00
Speaker 1: CPU business, in the in the computer projects being advanced
24:04
Speaker 1: micro devices, and that's the new competitor that's kind of
24:07
Speaker 1: coming up for the newly dominant competitor. It's coming on right.
24:10
Speaker 1: M D does go through some cycles. It's been around
24:12
Speaker 1: in the business for a long time, but it's market share,
24:16
Speaker 1: both on the PC side as well as in the
24:18
Speaker 1: server chip side, has wayne pretty substantially. And over the
24:24
Speaker 1: last two years, m D has sort of reinvented itself,
24:27
Speaker 1: refocused itself, um cleaned up its act both literally from
24:32
Speaker 1: a product perspective as well as from a financial perspective.
24:35
Speaker 1: And at its Handalyst Day launched several chips over there.
24:40
Speaker 1: In the first part of the year, they launched their
24:42
Speaker 1: desktop chips uh and they will be launching UM notebook
24:45
Speaker 1: chips and server chips now. The interesting thing is that
24:49
Speaker 1: these chips are built off of a new architecture are
24:53
Speaker 1: meant to UM compete with Intel all the way from
24:57
Speaker 1: the low end to the high end. Historically, m D
25:00
Speaker 1: has been pretty competitive at the lower end of the
25:02
Speaker 1: product spectrum, so low end notebooks, low end desktops, low
25:06
Speaker 1: end servers. It has had a product that has been
25:10
Speaker 1: competitive with Intel predominantly on price with a performance match.
25:14
Speaker 1: Right now it's coming out with products that are suddenly
25:18
Speaker 1: performance competitive, right and they still retain their price edge,
25:23
Speaker 1: which is priced lower than Intel. So Intel finds itself
25:27
Speaker 1: in an unusual position of having to either seed UM
25:31
Speaker 1: price dominance UM or um We'll give up some share. Now,
25:36
Speaker 1: if you're a customer of Intel, you're going to definitely
25:39
Speaker 1: use this as a bargaining chip to try and lower
25:41
Speaker 1: the price for Intel's chips, for sure. But you're you're
25:44
Speaker 1: going to be looking at m D chips more closely.
25:48
Speaker 1: Now that's the product starg am D versus Intel. What's
25:52
Speaker 1: been happening with the PC market is the PC market
25:55
Speaker 1: doesn't suck as badly as it did before, so well said,
25:59
Speaker 1: Well said down, thank you. So it is um low
26:04
Speaker 1: single digit decline. So we could have a year potentially
26:07
Speaker 1: in the minus two plus two percent range, and we
26:10
Speaker 1: could have this sort of um less badness continue for
26:16
Speaker 1: for an extended period of time. So PCs are going
26:19
Speaker 1: to be an okay place to be and in that
26:21
Speaker 1: unit volume environment. One of the things one of the
26:24
Speaker 1: segments that has emerged is the gaming market. The gaming
26:27
Speaker 1: market is a particular breed of devices that sell for
26:32
Speaker 1: anywhere between two thousand and five thousand dollars per PC.
26:35
Speaker 1: I thought you were going to say a different breed
26:37
Speaker 1: of customer because they're willing to pay this kind of money. Absolutely,
26:41
Speaker 1: and these are you talk about these with the same
26:43
Speaker 1: sort of reverence that you talk about with autos. You
26:46
Speaker 1: sort of use liquid cooled, you use air cooled. You
26:49
Speaker 1: use um high end CPUs from Mentel and now or
26:54
Speaker 1: m D and I almost looked like cockpits of of
26:57
Speaker 1: advanced fighter jets. Now, I mean gaming paraphernale that has
27:01
Speaker 1: emerged is much greater than just the steering wheel for
27:04
Speaker 1: let's say Xbox and you know driving you certainly wan't
27:09
Speaker 1: Hemmy or two that drives your engine for sure. Well,
27:11
Speaker 1: so this means that if you want to play games
27:13
Speaker 1: like Galactic Civilizations or you want to play Halo, right,
27:18
Speaker 1: I just want to point out him. I somehow do
27:21
Speaker 1: not think that this is like at a personal knowledge
27:23
Speaker 1: that you're I have a feeling you looked out some
27:25
Speaker 1: of the popular games. Actually, actually, I have to have
27:28
Speaker 1: to say that I come from the generation that's put
27:30
Speaker 1: quarters into video game machines, so I've kind of lived
27:35
Speaker 1: with this. You need a lot of quarters for this
27:37
Speaker 1: kind of system. This is where I wanted to go
27:39
Speaker 1: with this, which is that what kind of price point
27:41
Speaker 1: are we talking about? I mean, we're talking about the
27:44
Speaker 1: recent Intel chips that have been launched vary in range
27:47
Speaker 1: between the thirteen for the CPU alone at the at
27:52
Speaker 1: the high end two thous dollars just for the CPS
27:55
Speaker 1: for the CPU, and at the low end could range
27:58
Speaker 1: between the three ninety nine Torice points. So these are
28:02
Speaker 1: very very high end chips meant to do a few
28:06
Speaker 1: things really really well. Now you're not you're not convincing
28:09
Speaker 1: Lisa though, by the way, just to go out and
28:11
Speaker 1: spend you know, five grand on a computer. Here. Look,
28:14
Speaker 1: I look, I'm the mom of two boys, right, so
28:16
Speaker 1: if one of them came to me and said, Mommy, mommy,
28:19
Speaker 1: can I have some pocket change so I can buy
28:20
Speaker 1: a two thousand dollar cpu? I would laugh at them, right, So,
28:24
Speaker 1: I mean, I'm just thinking, who is the customer here?
28:27
Speaker 1: These are high end gamers in China is a particularly
28:31
Speaker 1: interesting country in so far as from a gaming experience
28:34
Speaker 1: part of the world that they've there's a lot of
28:37
Speaker 1: gamers there um. And also the e gaming has helped
28:42
Speaker 1: drive this gaming phenomenon where e sports where you watch
28:45
Speaker 1: other people compete and go to arenas and you actually
28:48
Speaker 1: watch other people play video games there. There there is
28:53
Speaker 1: a substantial demographic out there, and this is part of
28:56
Speaker 1: the reason why the PC market there's also a divergence
28:59
Speaker 1: between a small divergence between PC revenues and PC units.
29:03
Speaker 1: The units may still be in the minus two to
29:06
Speaker 1: plus two percent range, but the revenues could be slightly
29:10
Speaker 1: better if the gaming segment does well. All right, so
29:13
Speaker 1: just quickly, Intel going into this market, they're going to
29:16
Speaker 1: make a big splash, is just gonna work for them,
29:18
Speaker 1: help the stock. This is going to be this. This
29:20
Speaker 1: is in part a defensive strategy against m D. They
29:23
Speaker 1: want to show that we are the best game in
29:25
Speaker 1: town at the high end and at the low end
29:28
Speaker 1: um and they want to relegate a m D as
29:30
Speaker 1: much as possible to the lower end, where's where it's
29:32
Speaker 1: always been. All Right, well, thank you very You know.
29:34
Speaker 1: I want to know maybe Brian Crecentage, the chief executive officer,
29:37
Speaker 1: maybe he's a PC gamer and that's why they're also
29:39
Speaker 1: interested in this. Thanks for listening to the Bloomberg P
29:44
Speaker 1: and L podcast. You can subscribe and listen to interviews
29:47
Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
29:52
Speaker 1: I'm Pim Fox. I'm on Twitter at pim Fox. I'm
29:55
Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
29:59
Speaker 1: You can always catch us worldwide on Bloomberg radioh