Latest / Bloomberg Intelligence / Don’t Blame Market Turmoil On Machines: Salient’s Ben Hunt

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Don’t Blame Market Turmoil On Machines: Salient’s Ben Hunt · 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 Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Let's
• 0:33
  Speaker 1: find out what's real when it comes to markets. Ben
• 0:35
  Speaker 1: Hunt is chief investment strategist for Salient. They are based
• 0:39
  Speaker 1: in Houston, and he is also one of the bloggers
• 0:43
  Speaker 1: for a website it's called the Epsilon Theory and you
• 0:48
  Speaker 1: can follow them also on Twitter at Epsilon Theory. Ben Hunt,
• 0:51
  Speaker 1: maybe just tell people why is it called epsilon theory.
• 0:56
  Speaker 1: That's a great question. Tim, It's great to be here,
• 0:58
  Speaker 1: by the way, Thanks you and Lisa for having so.
• 1:00
  Speaker 1: It's called Epsilon theory after the standard formula that you
• 1:06
  Speaker 1: learned about. Well, what goes into a portfolio? Right? We
• 1:08
  Speaker 1: talked about a portfolio and its returns being a combination
• 1:11
  Speaker 1: of alpha. Everybody knows what alpha is, right, That's that
• 1:15
  Speaker 1: special sauce that you bring to to get better. It
• 1:20
  Speaker 1: is to be honest, and the execution is a unicorn.
• 1:27
  Speaker 1: That's that's that's well put, Lisa. And also everyone knows
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  Speaker 1: what beta is, which is, okay, I want to get
• 1:33
  Speaker 1: the market. I want to get the returns of the
• 1:35
  Speaker 1: world or the market gives to you. But if you
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  Speaker 1: if you look at that equation, right, and it's always
• 1:39
  Speaker 1: set up as an equation in your textbooks and the like,
• 1:42
  Speaker 1: which is a whole another thing. Yeah, yeah, well the
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  Speaker 1: equation is absolutely actually alpha plus beta plus this E
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  Speaker 1: term out there E for epsilon, which is E for error. Right,
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  Speaker 1: that that in all of econometrics, you've always got that
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  Speaker 1: error term that's sitting out there. And the point about
• 2:01
  Speaker 1: epsilon theory is that, well, actually, let's unpack that error
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  Speaker 1: term a bit, because it's not just all randomness and
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  Speaker 1: and um what they call stochastic error in statistics. That's
• 2:14
  Speaker 1: where market behavior lives. That's that's where game theory lives,
• 2:20
  Speaker 1: that's where history lives, that's where market behavior lives, and
• 2:24
  Speaker 1: there are patterns to that. It's not just random their patterns.
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  Speaker 1: There's a way to get real market information out of that.
• 2:33
  Speaker 1: So that's what I'm trying to explore all right. So
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  Speaker 1: that's a great place to start with understanding market behavior.
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  Speaker 1: In the past few weeks, a lot of people say
• 2:44
  Speaker 1: that it was the market behavior of computers, and that
• 2:47
  Speaker 1: they took over everything and created a big mass, and
• 2:49
  Speaker 1: then humans were left to try to darn these darn machines.
• 2:52
  Speaker 1: Why were they? Why were they so complicated? H and
• 2:55
  Speaker 1: other people were saying, well, people were just nervous, and uh,
• 2:59
  Speaker 1: stocks are a good And then we had a ton
• 3:01
  Speaker 1: of investment managers come on and we would ask them,
• 3:04
  Speaker 1: all right, so are you buying and they said, well,
• 3:06
  Speaker 1: not yet. What was The fundamentals are sound? Correct, correct,
• 3:11
  Speaker 1: the fundamentals are sound? Are you buying? Not so much?
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  Speaker 1: Exactly every single one? So what's going on here? Well,
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  Speaker 1: I'll say this first, a couple of points to quit. First,
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  Speaker 1: it ain't the machines, right, it really isn't. And I
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  Speaker 1: say that from a perspective of well, it's only we
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  Speaker 1: managed about thirteen billion, right, so you know, not a
• 3:31
  Speaker 1: huge fish. But we know what we're doing and we've
• 3:33
  Speaker 1: got a wide range of strategies. A chunk of those
• 3:35
  Speaker 1: strategies are these systematic strategies, including the boogeyman du jour
• 3:40
  Speaker 1: risk parity. Right. So we've been in this for a lot.
• 3:43
  Speaker 1: I know I know right, right, and and what I
• 3:46
  Speaker 1: think is important to tell everyone about risk parity. I'll
• 3:51
  Speaker 1: use that as the example here. These strategies are barges.
• 3:56
  Speaker 1: They're not speedboats, right, and they and they react, they
• 3:59
  Speaker 1: do react, and they react to volatility, but it's historical
• 4:03
  Speaker 1: volatility they look at. And so I will tell you
• 4:07
  Speaker 1: from our strategy and they say, we're not one of
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  Speaker 1: the giants here like in a q R or a Bridgewater,
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  Speaker 1: but the bones of all of these strategies are very similar.
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  Speaker 1: So I know what we're doing. I'm highly confident that
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  Speaker 1: I've got a strong sense of what those other risk
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  Speaker 1: parity strategies are doing. We're not selling on a on
• 4:25
  Speaker 1: a Monday when the markets declining. We don't even take
• 4:28
  Speaker 1: the VIX, which is what most people think of when
• 4:31
  Speaker 1: they think of volatility. That's a forward looking thing. We
• 4:34
  Speaker 1: don't even use that. We don't even use that. These
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  Speaker 1: strategies are barges. And that ain't it. What is it?
• 4:43
  Speaker 1: What is it? What is it? What was it? I'll
• 4:45
  Speaker 1: tell you what I think what I what I think
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  Speaker 1: it is, because this is what we're wrestling with with
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  Speaker 1: our own strategies and and asset management. In my conversations,
• 4:54
  Speaker 1: I think this is what everyone is wrestling with. How
• 4:58
  Speaker 1: how do you invest best in a world where inflation
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  Speaker 1: isn't going down, but it's starting to go up? How
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  Speaker 1: do you invest our our portfolios off sides for a
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  Speaker 1: world where inflation is increasing, not decreasing. That's a big change. Look,
• 5:18
  Speaker 1: you don't have to go back thirty years to really
• 5:21
  Speaker 1: be in in an inflationary environment. And even if you
• 5:23
  Speaker 1: were investing thirty years ago, and I certainly was, and
• 5:26
  Speaker 1: I don't know a many people who were. Even if
• 5:28
  Speaker 1: you were, those muscles they've atrophied a lot. So so
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  Speaker 1: I believe so strongly that every asset owner in the
• 5:40
  Speaker 1: world is wrestling with these questions. And when you get
• 5:43
  Speaker 1: an event like that kind of hot wage number we
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  Speaker 1: had on Friday, February of the two, those wheels start turning.
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  Speaker 1: You start thinking, well, am I off sides? Is my
• 5:54
  Speaker 1: portfolio right here? And when you've got a market that
• 5:57
  Speaker 1: has very low i'll call it volume to it, that
• 6:02
  Speaker 1: it has really quite thin liquidity to it. It doesn't
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  Speaker 1: take a lot of people changing their minds about where
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  Speaker 1: their portfolio sits to have an outsized impact in the market.
• 6:14
  Speaker 1: All Right, I'm gonna make you dig a little deeper. Good.
• 6:18
  Speaker 1: What is coyote math? Alright, that's something I've written about recently,
• 6:24
  Speaker 1: and it's I like to use these kind of examples
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  Speaker 1: from Yeah, I'm this dilettante farmer out in the wilds
• 6:30
  Speaker 1: of Connecticut, right, So we have coyotes out there, and
• 6:34
  Speaker 1: you are, well, I am, I am, and and the
• 6:39
  Speaker 1: I admire the coyotes, right because they're smart, they're clever,
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  Speaker 1: they're they're much smarter than my dogs, for example, My my,
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  Speaker 1: my dogs don't even know they exist. But they're too
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  Speaker 1: clever by half. They're too clever by half. And what
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  Speaker 1: I mean by that it's the same thing with Wiley
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  Speaker 1: coyote from the Looney Tunes, always scheming and planning. And
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  Speaker 1: that's the case with with real world coyotes. But it's
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  Speaker 1: also true for the coyotes in our business, because this
• 7:08
  Speaker 1: business of financial advice and financial management attracts people who
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  Speaker 1: are frankly too clever by half. All right, So real quick,
• 7:15
  Speaker 1: thirty seconds, what has been your biggest allocation shift concept
• 7:21
  Speaker 1: shift that you think investors should know based on the
• 7:24
  Speaker 1: signs of nascent inflation. So what you have to distinguish
• 7:28
  Speaker 1: between is inflation going up and interest rates going up.
• 7:33
  Speaker 1: There are two different things. They follow each other, but
• 7:37
  Speaker 1: that connection between inflation going up and interest rates going
• 7:41
  Speaker 1: up is the thing that everyone needs to be focused on.
• 7:44
  Speaker 1: And this is why, Lisa, to your question, people say, oh,
• 7:47
  Speaker 1: the fundamentals are sound, but I'm not investing. It's because
• 7:51
  Speaker 1: the fundamentals have not been a sufficient condition to invest
• 7:55
  Speaker 1: for eight or nine years. Now. What you have to
• 7:58
  Speaker 1: have is some notion of Okay, I like the fundamentals,
• 8:01
  Speaker 1: but what are the central banks going to do? What
• 8:03
  Speaker 1: are they going to do about interest rates? So we
• 8:07
  Speaker 1: can talk about inflation going up, but it's thinking about
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  Speaker 1: interest rates as well. Ben Hunt, a pleasure having you on.
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  Speaker 1: Thank you so much. Thank You'll let you go back
• 8:14
  Speaker 1: to your coyotes. Ben Hunt, chief investment strategist at Salient,
• 8:17
  Speaker 1: which is based in Houston, Texas and overseeing about thirteen
• 8:21
  Speaker 1: billion dollars of bassets. There has been so much focus
• 8:39
  Speaker 1: in the past few weeks on Russian interference in US
• 8:43
  Speaker 1: elections and UH their encroachments in the cyber world of
• 8:48
  Speaker 1: the US, but there are many other states sponsored actors
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  Speaker 1: out there trying to infiltrate UH the technological ecosystem of
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  Speaker 1: the U S. And here to talk about that is
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  Speaker 1: John halt Quist, director of intelligence analysis for fire Eye
• 9:02
  Speaker 1: based in Washington, d C. He joins US Now, John,
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  Speaker 1: thank you so much for being with US. I wanted
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  Speaker 1: to start with North Korea. Fire Eye has identified them
• 9:13
  Speaker 1: as behind a very sophisticated state sponsored cyber attacker. Can
• 9:17
  Speaker 1: you give us a sense of what that effort looks
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  Speaker 1: like and what they would or have or will target
• 9:24
  Speaker 1: in the US. So, we released recently released a report
• 9:29
  Speaker 1: on a group that we call APT thirty seven. They're
• 9:32
  Speaker 1: a North Korean hacking group that's been primarily focused on
• 9:37
  Speaker 1: South Korea carrying out espionage sort of a classic mission
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  Speaker 1: for quite a long time. But we've seen them since
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  Speaker 1: actually UH start developing missions outside of South Korea. They've
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  Speaker 1: shown up in Japan, Vietnam, in the Middle East. UH,
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  Speaker 1: and our concern is that this is another tool that
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  Speaker 1: could be used by the North Korean regime to project power. UM.
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  Speaker 1: They a lot of the activity that we hear about
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  Speaker 1: North three and hacking activity has actually been attributed to
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  Speaker 1: another group UH. This team has been able to remain
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  Speaker 1: relatively obscure, which makes them an ideal choice for attack
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  Speaker 1: operations or even crime because they're not as well known.
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  Speaker 1: What have they attacked so far that you've been able
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  Speaker 1: to trace? So most of their operations now appear to
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  Speaker 1: be uh focused on sort of classic intelligence operations, are
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  Speaker 1: classic intelligence collections, so uh things like defectors or sanctions
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  Speaker 1: or unification efforts. Even the Olympics have been have they've
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  Speaker 1: targeted individuals associated with the Olympics? Um, So they're right
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  Speaker 1: now doing a lot of the low and quiet activity,
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  Speaker 1: which is precisely the side type of activity we see
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  Speaker 1: most nascent capabilities first focus on. For instance, the other
• 11:00
  Speaker 1: acting groups that have been that are out of North
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  Speaker 1: three that they are very well known, first appeared to
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  Speaker 1: US as espionage operations mostly focused in South Korea. So John,
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  Speaker 1: I know, perhaps it's premature to talk about whether North
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  Speaker 1: Korea will be able to infiltrate the US cyber ecosystem,
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  Speaker 1: but I'm wondering, from your perspective, what areas are the
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  Speaker 1: most vulnerable in the US. And uh do any of
• 11:29
  Speaker 1: these sort of state sponsored actors work together? Do they? Uh?
• 11:34
  Speaker 1: You know, do you have a sense of how many
• 11:35
  Speaker 1: there are trying to infiltrate a system at any given time.
• 11:40
  Speaker 1: So UH, as far as working together, we're always concerned
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  Speaker 1: that lessons are being passed between some of these countries
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  Speaker 1: that have longs like Russia, uh Iran and North three.
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  Speaker 1: They have long standing relationships in military and move military
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  Speaker 1: armaments and the training which sween them. We haven't necessarily
• 12:01
  Speaker 1: seen that play out from our visibility. Um our biggest
• 12:05
  Speaker 1: concern is that they're actually learning from each other though
• 12:08
  Speaker 1: as far as their offensive actions go. So each time
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  Speaker 1: one of these actors carries out a major attack, a
• 12:16
  Speaker 1: disruptive attack, or um more of an influenced type of
• 12:20
  Speaker 1: attack that we saw during the elections, there each each
• 12:24
  Speaker 1: one of them is sort of pushing the edge for
• 12:26
  Speaker 1: the other and pushing the norms and the red lines
• 12:29
  Speaker 1: that the other other actor feels now more comfortable operating within.
• 12:33
  Speaker 1: So UH, in that in that regard, they are sort
• 12:35
  Speaker 1: of learning from each other. Would you would you say
• 12:39
  Speaker 1: that all heads of information technology or even the boards
• 12:44
  Speaker 1: of major corporations need to ask themselves are you happy?
• 12:48
  Speaker 1: And I use that term because that's what you describe
• 12:51
  Speaker 1: something tell people about are you happy? And why they
• 12:54
  Speaker 1: need to be particularly wary. So one of one of
• 12:59
  Speaker 1: the concerns that we've had with any North Korean actor is, um,
• 13:03
  Speaker 1: are they are they going to carry out some sort
• 13:06
  Speaker 1: of disruptive and destructive attack And uh, that's one of
• 13:09
  Speaker 1: the tools that we came across with regards to this actor.
• 13:12
  Speaker 1: They do have a destructive tool that could be used
• 13:15
  Speaker 1: in a wiper type attack. It's a fairly simplistic attack,
• 13:20
  Speaker 1: um and that's the name of the tool, and uh,
• 13:26
  Speaker 1: it's a fairly simplistic attack, but it can have a
• 13:28
  Speaker 1: lot of pretty strong effect on a on an organization
• 13:31
  Speaker 1: if they can wipe uh, you know, wipe important systems simultaneously.
• 13:37
  Speaker 1: And that's happened on several occasions already. From a lot
• 13:41
  Speaker 1: of that is the Russians, Russian actors that have done
• 13:44
  Speaker 1: that quite recently with a with a ransomware attack and
• 13:49
  Speaker 1: it actually caused billions of dollars and damages to the economy.
• 13:53
  Speaker 1: So it's a very real concern. So John, just real
• 13:56
  Speaker 1: quick here, which organization in the US is most vulnerable
• 14:01
  Speaker 1: at this point? Well, it's because they because a lot
• 14:06
  Speaker 1: of their it's of the incidents focus on critical infrastructure. Uh,
• 14:12
  Speaker 1: there's record that that recognized that represents often the biggest opportunity.
• 14:17
  Speaker 1: We anticipate that any sort of major disruptive or destructive
• 14:21
  Speaker 1: attack would focus on an area like that, and there's
• 14:24
  Speaker 1: been a lot of other incidents UM that have that
• 14:28
  Speaker 1: have played out like that. Uh. It's important to also
• 14:31
  Speaker 1: remember that critical infrastructure is not just utilities. I think
• 14:35
  Speaker 1: there's a lot of people to often focus on utilities,
• 14:38
  Speaker 1: but UM logistics and finance. UM. I want to thank
• 14:43
  Speaker 1: you John hould Quist, director of Intelligence Analysis or fire
• 14:47
  Speaker 1: Eyed talking about cyber attacks. Everybody wants it, but now
• 15:09
  Speaker 1: Apple wants to get it even more directly. Jack Farchie
• 15:12
  Speaker 1: is the senior Energy and Commodities reporter for Bloomberg is
• 15:15
  Speaker 1: based in London. Jack tell us the story about Apple
• 15:19
  Speaker 1: and why does it want its own direct supply of cobalt. Yes,
• 15:25
  Speaker 1: we've had this amazing shift in the cobalt market really
• 15:28
  Speaker 1: in a matter of a little over a year, where
• 15:32
  Speaker 1: the change in expectations for electric vehicles. You've seen almost
• 15:37
  Speaker 1: every major automaker come out with with forecasts for how
• 15:40
  Speaker 1: many electric vehicles they're going to build in the next
• 15:42
  Speaker 1: few years. Glen Core, who reported results today, had a
• 15:45
  Speaker 1: nice little toss up. They said it's going to be
• 15:47
  Speaker 1: there's a ninety billion dollars of investments announced by the
• 15:49
  Speaker 1: auto industry in electric vehicles, and that's had a huge
• 15:52
  Speaker 1: impact on the cobalt market because cobalt is an essential
• 15:56
  Speaker 1: commodity in the in most lithium ion batteries which are
• 15:59
  Speaker 1: used in electric vehicles, where cobalts also uses in licking
• 16:03
  Speaker 1: iron batteries in gadgets like smartphones and tablets and laptops
• 16:08
  Speaker 1: until now, in fact still now, Apple is probably one
• 16:11
  Speaker 1: of the largest end users of cobalt in the world.
• 16:14
  Speaker 1: Apple gadgets along with things companies like Samsung UH some
• 16:18
  Speaker 1: of the largest users of cobalt um As these car
• 16:22
  Speaker 1: companies are beginning to come out with huge forecasts for
• 16:26
  Speaker 1: how many electric vehicles are going to build over the
• 16:27
  Speaker 1: next five or ten years, they are going out into
• 16:30
  Speaker 1: the market, people like VW BMW going into the market
• 16:35
  Speaker 1: and seeking to sign big long term deals to buy
• 16:39
  Speaker 1: up supplies of cobalt to ensure they're gonna have enough
• 16:41
  Speaker 1: cobalt to build all the electric vehicles they want to
• 16:45
  Speaker 1: UH and now we're seeing Apple doing the same thing, essentially,
• 16:48
  Speaker 1: looking at what's happening in the in the car market
• 16:52
  Speaker 1: and what some of the car companies are doing, and
• 16:56
  Speaker 1: in our in our understanding, wanting to make sure that
• 16:58
  Speaker 1: they are going to have enough cobalt to UH to
• 17:00
  Speaker 1: build to carry on building iPhones and iPads into the future.
• 17:03
  Speaker 1: All right, So who does Apple currently buy cobalt from?
• 17:07
  Speaker 1: And basically who's going to be losing business as Apple
• 17:11
  Speaker 1: cuts out the middleman and goes direct to the miners.
• 17:14
  Speaker 1: It's not so much a question of Apple losing business
• 17:16
  Speaker 1: at the moment. Apple would go and buy batteries from
• 17:19
  Speaker 1: battery producers, who in turn are buying components of batteries
• 17:23
  Speaker 1: from people who produced those who in turn are buying
• 17:25
  Speaker 1: the WAW materials in a in a supply chain that
• 17:27
  Speaker 1: goes down the chain. So at the end of the day,
• 17:30
  Speaker 1: Apple is not gonna, we don't think, immediately start building
• 17:34
  Speaker 1: batteries of itself. They're just it's it's a question of
• 17:37
  Speaker 1: securing the supply of cobalt for their supply chain, for
• 17:39
  Speaker 1: the companies in their supply chain. Now, a cobalt is
• 17:43
  Speaker 1: a byproduct of mining for copper and nickel primarily, that's right,
• 17:48
  Speaker 1: Where does it come from? Well, that's one of the
• 17:50
  Speaker 1: main problems. The vast majority of it, about thirds uh,
• 17:55
  Speaker 1: and that's a number that's set to grow, comes from
• 17:57
  Speaker 1: the Democratic Republic of Congo, which is not the most
• 18:02
  Speaker 1: Even if it were the most stable country in the world,
• 18:05
  Speaker 1: that would be a pretty significant concentration risk for any
• 18:08
  Speaker 1: commodity UM. But uh, Democratic Republic of Congo is not
• 18:13
  Speaker 1: the most stable country in the world. They've just announced
• 18:16
  Speaker 1: a big planned increase in taxes on on minors uh,
• 18:21
  Speaker 1: and so that's a big concern. So I'm looking at
• 18:24
  Speaker 1: cobalt prices and they have skyrocketed in the past few years.
• 18:29
  Speaker 1: Wean just to give you a sense, from the end
• 18:31
  Speaker 1: of twenty sixteen, they've more than doubled uh. And I'm
• 18:35
  Speaker 1: just wondering it is the actual demand going to keep
• 18:39
  Speaker 1: up with the perceived demand that is driving prices now?
• 18:43
  Speaker 1: I mean, in other words, is applicant to lock in
• 18:45
  Speaker 1: prices that are much higher than which you might be
• 18:46
  Speaker 1: able to get later on. That's a very good question.
• 18:50
  Speaker 1: I think from what we have heard about the discussions
• 18:53
  Speaker 1: that are going on in the market, it's not so
• 18:55
  Speaker 1: much a question of locking in prices as locking in supply.
• 18:59
  Speaker 1: So probably believe the deals that have done. Not just
• 19:01
  Speaker 1: talking about Apple here, but v W, BMW, the big
• 19:04
  Speaker 1: car companies, some of the battery makers like Samsung, SDI
• 19:07
  Speaker 1: are also saying that they're seeking long term cobalt deals.
• 19:10
  Speaker 1: They're probably gonna have a floating price, so it will
• 19:12
  Speaker 1: be whatever the market price is. It's more a question
• 19:15
  Speaker 1: of of locking in supply. Whether the price stays at
• 19:18
  Speaker 1: this very high level is another question. If the shortage
• 19:22
  Speaker 1: that some people are looking at and fearing for the
• 19:24
  Speaker 1: future does materialize, then you'd have to say that prices
• 19:27
  Speaker 1: would go higher. But that's several years down the line.
• 19:30
  Speaker 1: I'm surprised that they're not lacking in a price for
• 19:32
  Speaker 1: a long term contract. It's very hard to lock in
• 19:35
  Speaker 1: a price in in the cobalt market where it's going.
• 19:39
  Speaker 1: It's gone through this kind of um real complete paradigm
• 19:43
  Speaker 1: shift because of electric vehicles. So the price has tripled,
• 19:47
  Speaker 1: as you said, in the past eighteen months. Who knows
• 19:50
  Speaker 1: what the right price is? Yeah, it's it's very it's
• 19:52
  Speaker 1: very hard to say, you know, you do you you take
• 19:54
  Speaker 1: five different forecasts for what electric vehicle production UH and
• 20:00
  Speaker 1: UH and and sales are going to be in UH,
• 20:04
  Speaker 1: and they're wildly different. UH so who can tell you
• 20:07
  Speaker 1: what the correct price for cobalt in five or ten
• 20:09
  Speaker 1: years time. Nobody can. Jack Fartie, thank you so much
• 20:11
  Speaker 1: for joining us. Jack Farchie, senior Energy and Commodities reporter
• 20:14
  Speaker 1: for a Bloomberg News coming to us from our London bureau.
• 20:18
  Speaker 1: You can find his story on the website Bloomberg dot
• 20:21
  Speaker 1: com or the terminal itself. Yes, let's talk about housing.
• 20:38
  Speaker 1: US existing home sales in the month of January falling
• 20:41
  Speaker 1: a little bit more than three percent. Here to help
• 20:43
  Speaker 1: us understand what's going on is Brad Hunter. He is
• 20:45
  Speaker 1: the chief economist of Home Adviser. They're based in West
• 20:49
  Speaker 1: Palm Beach, Florida. He can be followed on Twitter at
• 20:52
  Speaker 1: Bradley Hunter. Alright, at Bradley Hunter. What what's your view
• 20:57
  Speaker 1: of the of the housing market and this time that
• 21:00
  Speaker 1: we saw on the run rate of about five point
• 21:02
  Speaker 1: four million units morning, Pim. Well, Yeah, I think that
• 21:07
  Speaker 1: clearly the housing number was lower than expected, and I
• 21:10
  Speaker 1: think there are three different things that play. Number one
• 21:13
  Speaker 1: is the inventory and that's what everybody's talking about right now,
• 21:17
  Speaker 1: three point four months of supply of unsold inventory. And secondly,
• 21:22
  Speaker 1: uh in January mortgage rates were starting to edge up,
• 21:25
  Speaker 1: and of course they've gone up a lot more since then,
• 21:28
  Speaker 1: and I think they will go up a lot more
• 21:30
  Speaker 1: going forward. And the third factor is that prices were
• 21:34
  Speaker 1: up also in this reading, and uh, I think that
• 21:37
  Speaker 1: the rate of home price appreciation is going to slow.
• 21:42
  Speaker 1: So Brad Home Advisor helps homeowners figure out how to
• 21:47
  Speaker 1: renovate their homes in an effective manner. Correct. Yeah, we
• 21:51
  Speaker 1: connect where the marketplace that connects homeowners with the pros
• 21:55
  Speaker 1: that they need to get their projects done. So, just
• 21:58
  Speaker 1: can you give me a sense of what you're seeing
• 22:00
  Speaker 1: from that perspective and what it tells you about the
• 22:04
  Speaker 1: sort of mental state of homeowners? In other words, are
• 22:07
  Speaker 1: they looking to invest in their homes and expand them
• 22:09
  Speaker 1: because they don't want to move out? Or are they
• 22:12
  Speaker 1: investing in their homes in order to sell them at
• 22:15
  Speaker 1: a higher price. Can you get a sense of that? Yeah? Sure, Well, uh,
• 22:20
  Speaker 1: we just talked about the low inventory situation and it's
• 22:23
  Speaker 1: actually part of a vicious cycle. Um. Low supply of
• 22:26
  Speaker 1: homes for sale causes people to stay frustrated and I
• 22:32
  Speaker 1: have trouble getting the home that they want, So some
• 22:34
  Speaker 1: of them say, you know, I'm just gonna stay put
• 22:36
  Speaker 1: and remodel the house that I have. A lot more
• 22:40
  Speaker 1: people are looking to move because they are tired of
• 22:42
  Speaker 1: their current home, according to research from n A are
• 22:45
  Speaker 1: than people who are moving for a job that's in
• 22:48
  Speaker 1: a different area or what have you. So that further
• 22:52
  Speaker 1: reduces inventory because people stay put and then the cycle
• 22:55
  Speaker 1: just lather, rense, repeat, right. Um. The other thing that
• 22:59
  Speaker 1: I'm noticing is trend I'm calling nesting is investing. There's
• 23:04
  Speaker 1: all this stock market volatility, and I think it's going
• 23:06
  Speaker 1: to drive some people to say, you know what, instead
• 23:10
  Speaker 1: of staying fully invested in the stock market, up all
• 23:13
  Speaker 1: some of my chips off the table, and maybe go
• 23:15
  Speaker 1: ahead and reinvest in my home and you know, expand
• 23:19
  Speaker 1: or improve the property. And you know, that's a pretty
• 23:22
  Speaker 1: safe investment in terms of any risk. On the downside, Brad,
• 23:27
  Speaker 1: you note that the size of home improvement or renovation
• 23:31
  Speaker 1: projects is increasing. Expand on that, sure, we're seeing more
• 23:36
  Speaker 1: what we call major renovation projects. Our year end survey
• 23:40
  Speaker 1: actually showed that most home improvement companies and professionals saw
• 23:44
  Speaker 1: an increase in the size of their average job, whereas
• 23:47
  Speaker 1: only five point eight percent reported a decrease in the
• 23:50
  Speaker 1: average size of the job. So people are taking on
• 23:52
  Speaker 1: projects that they had deferred years ago. Now that the
• 23:57
  Speaker 1: economy is stronger, and more importantly, either equity in their
• 24:00
  Speaker 1: home is much higher. They're saying, Okay, you know what,
• 24:04
  Speaker 1: it's time to do that kitchen update that I've been
• 24:07
  Speaker 1: wanting to do, Or it's time to turn that basement
• 24:10
  Speaker 1: into a man cave or into a rental unit, or
• 24:14
  Speaker 1: redo the garage or the tile or whatever it is
• 24:16
  Speaker 1: that they've been wanting. So they're taking on more discretionary projects,
• 24:21
  Speaker 1: more of what I called lifestyle projects. I'm wondering bread
• 24:25
  Speaker 1: which parts of the country are seeing the fastest rates
• 24:29
  Speaker 1: of spending on home improvement. For the past few years,
• 24:34
  Speaker 1: it was the markets that we're seeing the greatest increases
• 24:39
  Speaker 1: in home prices and therefore homeowner equity, So San Francisco,
• 24:46
  Speaker 1: San Diego, New York, Miami, Seattle, Portland's and now it's
• 24:52
  Speaker 1: starting to shift. Those markets are starting to um kind
• 24:56
  Speaker 1: of slow down because they've had these very, very rapid
• 24:59
  Speaker 1: increases during the slowdown, and so now that some of
• 25:02
  Speaker 1: the interior markets and second tier markets are starting to
• 25:07
  Speaker 1: take off in a big way. So Milwaukee Columbus, Tampa,
• 25:12
  Speaker 1: markets like that are starting to see um very strong growth.
• 25:17
  Speaker 1: And uh I've been working with the Harvard Joint Center
• 25:20
  Speaker 1: on Housing studies and they are predicting strong growth in
• 25:25
  Speaker 1: those kinds of markets and and uh I can to
• 25:27
  Speaker 1: continue to watch those with them. So, Brad, does that
• 25:29
  Speaker 1: imply to you the prices in the big cities that
• 25:32
  Speaker 1: you mentioned are going to stagnate while they continue to
• 25:36
  Speaker 1: accelerate in the more central parts of the country. Right, So,
• 25:42
  Speaker 1: I think what we're going to see is um these
• 25:46
  Speaker 1: continued increases in homeowner equity. We've seen already at doubling
• 25:50
  Speaker 1: in equity in the country in the past five years.
• 25:52
  Speaker 1: That's huge, and so the markets that have already experienced
• 25:57
  Speaker 1: a big boom are going to just taper down. But
• 25:59
  Speaker 1: the the the rest of the country is now just
• 26:02
  Speaker 1: playing catch up and just quickly bred Any any change
• 26:06
  Speaker 1: in where people are going to be buying homes because
• 26:08
  Speaker 1: of changes in tax laws and the deductability of interest payments, Yeah,
• 26:14
  Speaker 1: I actually don't think that the tax law change is
• 26:17
  Speaker 1: going to have a huge impact on the aggregates home
• 26:19
  Speaker 1: sales numbers. It could shift the mix geographically or even
• 26:24
  Speaker 1: um across the different strata, for example, luxury home buying.
• 26:29
  Speaker 1: The luxury home buying population, if you will, will start
• 26:31
  Speaker 1: to enjoy higher after tax income, which will help home
• 26:35
  Speaker 1: buying and remodeling at the high end and in the
• 26:37
  Speaker 1: expensive markets, and the rest of the housing market won't
• 26:40
  Speaker 1: be affected very much either way in my opinion. Brad Hunter,
• 26:43
  Speaker 1: thank you so much for joining us. Bread Hunter chief
• 26:45
  Speaker 1: economist for Home Advisor, which is based in West Palm Beach.
• 26:50
  Speaker 1: We will continue attracking the housing data that we just received,
• 26:55
  Speaker 1: as well as the auctions later today of US Treasury.
• 27:00
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 27:03
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 27:07
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 27:11
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa
• 27:14
  Speaker 1: Abramo wits one. Before the podcast, you can always catch
• 27:17
  Speaker 1: us worldwide on Bloomberg Radio.