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Bond Selloff Leading the Rotation on Equity Front · 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
• 0:10
  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor, find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Stocks are up, giving a little
• 0:23
  Speaker 1: bit of a pop, although you know, really the action
• 0:27
  Speaker 1: is underneath the surface. There has been a rotation out
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  Speaker 1: of those momentum names tech for example, and into value
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  Speaker 1: led by banks. Interestingly enough, we are getting a little
• 0:37
  Speaker 1: bit of yield curve skeepening, but not not a whole
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  Speaker 1: lot to justify the move that we have seen. We
• 0:42
  Speaker 1: are so lucky to have with us on Wheti Bajugana.
• 0:45
  Speaker 1: She is senior portfolio manager and a head of multi
• 0:47
  Speaker 1: asset Strategy at Columbia thread Needle Investments, which oversees almost
• 0:52
  Speaker 1: five hundred billion dollars on wheat. Thank you so much
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  Speaker 1: for being with us. I want to just start with
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  Speaker 1: what's getting you excited right now? I mean this sort
• 1:00
  Speaker 1: of trade out of momentum and into value. Do you
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  Speaker 1: think of this is something that has legs very short
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  Speaker 1: term Li Sa I have been watching this rotation as well,
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  Speaker 1: and on the equity front, it's value versus growth. But
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  Speaker 1: if you look at the bond market, it's really quite
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  Speaker 1: correlated to what's happening to rate. And we have seen
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  Speaker 1: a few days now of sustained sell off in UM bonds,
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  Speaker 1: which is leading this rotation UM in the stocks also,
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  Speaker 1: and really the drivers for both markets is the same.
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  Speaker 1: It is some sense um in the markets of reduced risk,
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  Speaker 1: the escalation of some of the issues that had dominated
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  Speaker 1: UM folks mindset in August. So and we we've seen,
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  Speaker 1: as you mentioned, some rotation driven by rates. What is
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  Speaker 1: your kind of economic backdrop in your base case, We've
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  Speaker 1: seen the consumer really kind of supporting in this economy
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  Speaker 1: in the face of kind of what some weakening manufacturing data.
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  Speaker 1: Right So that's why I'm a little uh skeptical of
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  Speaker 1: the rotation that we are seeing right now. It's definitely
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  Speaker 1: worth watching. But what would get me really excited to
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  Speaker 1: answer Lisa's question, would be if we begin to see
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  Speaker 1: some improvement on the economic front, and that Paul still
• 2:33
  Speaker 1: remains to be seen In fact, if you look at
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  Speaker 1: the data that's been released in September so far, we're
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  Speaker 1: beginning to see cracks on the consumer side of the economy. Also,
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  Speaker 1: we saw a leg down in the consumer sentiment in
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  Speaker 1: the Michigan survey for August, and if we look at
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  Speaker 1: the payroll report, we're seeing slow down in hiring also.
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  Speaker 1: So I would be super excited if we see improvement
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  Speaker 1: in economic data. That would give me confidence that the
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  Speaker 1: movie you're seeing in Rapes is sustainable, and that would
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  Speaker 1: make more sense to me than one that's probably based
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  Speaker 1: more on um, you know, a sense of the escalation,
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  Speaker 1: even though none of the underlying issues in my mind
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  Speaker 1: have been resolved. Okay, So, given the fact that you
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  Speaker 1: don't necessarily see a sea change underpinning the move that
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  Speaker 1: we have seen, are you selling, for example, bank stocks
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  Speaker 1: into the rally and are you buying bonds? We are
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  Speaker 1: maintaining very much the mindset we had in August, which
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  Speaker 1: is that we are slightly underweight equities and for us
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  Speaker 1: Lisa at an aggregate level, that would be selling equities
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  Speaker 1: on rallies and buying bonds. So that's what that's that's
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  Speaker 1: what you've been doing. For example, yes, that's right. So
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  Speaker 1: and we just you know, we talked about, you know,
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  Speaker 1: what are the key drivers for this market, and you know,
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  Speaker 1: we can't escape the fact that global trade tensions discussions
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  Speaker 1: between the US and China more likely than not, are
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  Speaker 1: you know, kind of influencing day to day moves in
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  Speaker 1: the market. How are you discounting kind of in Europe
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  Speaker 1: base case outlook kind of what is a very uncertain
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  Speaker 1: trade environment between US and China. UM, it happened very
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  Speaker 1: difficult to get that call, right, Paul Um. So we
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  Speaker 1: are staying out of it. We don't see any improvement
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  Speaker 1: other than really just the mood music on on the
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  Speaker 1: trade front. That it's no real substantial movement on the
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  Speaker 1: trade front. There's a lot of back and forth. We
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  Speaker 1: don't believe we would see a substantial deal anytime soon,
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  Speaker 1: and so we are staying on the way risk affettes
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  Speaker 1: in our portfolios. It would be helpful if um we
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  Speaker 1: see the breaksit issues get resolved. But you know, even there,
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  Speaker 1: the only positive that I've seen is that there is
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  Speaker 1: some lowering of the risk of UM no deal hard brexit.
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  Speaker 1: But by and large, the thing that's giving us most
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  Speaker 1: confidence really is the fact that the FED is thing
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  Speaker 1: accommodative threads, not of its not complete pivot on their
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  Speaker 1: strategy since the beginning of the year, and is um
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  Speaker 1: maintaining a policy stance which is supportive of risk that
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  Speaker 1: prevents us from getting up two nervous about the market
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  Speaker 1: because there is a backstop. So, given the fact that
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  Speaker 1: the FED is likely to remain accommodative and perhaps provide
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  Speaker 1: even more accommodation in the very near near term, I'm
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  Speaker 1: wondering how you feel about credit right now. You talked
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  Speaker 1: about buying bonds. Does that extend to risk your bonds
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  Speaker 1: at a time when companies such as for example today
• 5:48
  Speaker 1: Kraft Heins is looking to push out their maturities so
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  Speaker 1: longer dated debt and lock in these lower borrowing costs. Yes,
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  Speaker 1: I think completely so doing a really good UM, you
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  Speaker 1: know the job taking advantage of the yield environment. I
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  Speaker 1: think we still don't really like the risk are segments
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  Speaker 1: of the credit market such as high yield was staying
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  Speaker 1: in the investment grade and securitized space and reyn old
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  Speaker 1: treasury bonds, mainly because we can see more accommodation this
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  Speaker 1: year and even more next year. But that would really
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  Speaker 1: just mean that the economic conditions continue to deteriorate and
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  Speaker 1: the trade issues continue to escalate, So that is not
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  Speaker 1: really a very encouraging environment for longer term health of
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  Speaker 1: the economy. UM in that scenario, you know, spread easing
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  Speaker 1: even more aggressively or getting even more accommodative. That is
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  Speaker 1: likely because the other two issues have not been resolved,
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  Speaker 1: and that's not a great environment for the risk are
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  Speaker 1: segments of the board market. So I was that's kind
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  Speaker 1: of where I was going to go. Unwitty emerging markets.
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  Speaker 1: There's been some debate whether you know, the the that
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  Speaker 1: the lower rate environment we had been experiencing was conducive
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  Speaker 1: to emerging markets, but the performance just hasn't been there.
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  Speaker 1: What is your view on emerging markets? Very similar views
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  Speaker 1: as in high yield pole. I would also be uh
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  Speaker 1: cautious on emerging markets. You know, they are actually bearing
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  Speaker 1: the brunt of this trade trade escalation. Uh there is
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  Speaker 1: this location in their export and what's happening UM with
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  Speaker 1: the global trade flowdown, So there is no reason to
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  Speaker 1: uh take a lot of risk in that space. Also
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  Speaker 1: at this point in the cycle, we're speaking with Anuti Bahuganas,
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  Speaker 1: senior portfolio manager and head of multi asset strategy at
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  Speaker 1: Columbia thread Needle Investments, which overseas four hundred and sixty
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  Speaker 1: eight billion dollars based in Boston, Massachusetts. Uh and today
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  Speaker 1: is quite a day on Wall Street. We're remembering nine
• 7:52
  Speaker 1: eleven and the interspersed throughout the day, we are having
• 7:55
  Speaker 1: moments of silence that are incredibly appointed for everybody who
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  Speaker 1: experien arians what happened eighteen years ago. Hard to believe
• 8:03
  Speaker 1: it was eighteen years ago and we did. I want
• 8:05
  Speaker 1: to shift gears a little bit away from just sort
• 8:08
  Speaker 1: of allocations to the ECB because everyone is on high
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  Speaker 1: alert for what the what the e c B is
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  Speaker 1: willing to do in terms of accelerating their stimulus, whether
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  Speaker 1: they're going to cut the deposit rate further, whether they're
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  Speaker 1: going to add some to their quantity of easy or
• 8:23
  Speaker 1: purchase even stocks. What are you expecting out of the
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  Speaker 1: e c B. Um, not as much as I think
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  Speaker 1: the market is expecting. I think, you know, they will
• 8:35
  Speaker 1: do some rate cards and maybe a little bit more queue.
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  Speaker 1: And I've seen lea a very different estimates of the
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  Speaker 1: range of QUEUEE deposit cuts of twenty basis points is
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  Speaker 1: quite likely. I think if they do a little more
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  Speaker 1: quee uh, that would be supportive of risk assets in Europe.
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  Speaker 1: But if you look at risk assets in Europe, and
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  Speaker 1: I mean away from bomb looking at European equities, they've
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  Speaker 1: been performing quite well, in fact, their neck to neck
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  Speaker 1: with the U S stock markets. So I think risk
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  Speaker 1: efforts are pricing in more accommodation from ECB, and that
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  Speaker 1: would be sort of druggs foreign gifts to UM monetary
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  Speaker 1: policy in that space. But what happens actually this raise
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  Speaker 1: is a good question, what happens if the ECB disappoints.
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  Speaker 1: I mean, how big of a sell off could we
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  Speaker 1: be looking at? Well, it's I wouldn't be able to
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  Speaker 1: give a sense of the sell off, but I really
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  Speaker 1: really doubt that they would disappoint enormously. I think they
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  Speaker 1: would still go through about thirty billion or so per
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  Speaker 1: month in QUEI, and I think that we would see
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  Speaker 1: deposit cut rate cuts, which is, you know, perhaps given
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  Speaker 1: the noise of some opposition by some of the shadow
• 9:57
  Speaker 1: policymakers UM and a fair amount of debate within e
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  Speaker 1: CD on whether they should be doing this or not
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  Speaker 1: is not fully priced in. So and we you know,
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  Speaker 1: we seem to be having a global race to lower
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  Speaker 1: rate to the bottom. How effective do you think continued
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  Speaker 1: rate cuts are to address what could be slowing economies?
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  Speaker 1: So so there are they are small bandids, small and
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  Speaker 1: they can help if broader economic health remains um you know,
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  Speaker 1: well maintained. In other words, we are seeing this the
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  Speaker 1: deceleration of growth even in the US from where we
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  Speaker 1: were at three percent to now to do too in
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  Speaker 1: a quarter or so and you know, back to sort
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  Speaker 1: of trend growth around the best performing economies of the
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  Speaker 1: world are seeing below trend growth or trend trend growth,
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  Speaker 1: but we are not in recession and that sort of
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  Speaker 1: the support all this accommodation is providing. While at the
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  Speaker 1: same time we are seeing change, see change in how
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  Speaker 1: global trade is conducted. So there is to your point,
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  Speaker 1: limits to how much help they can give, they can support.
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  Speaker 1: They can be there with lower rates. Lower rates are
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  Speaker 1: not really holding back businesses. It's the uncertainty around the
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  Speaker 1: bigger question of trade that's holding back businesses. And who
• 11:20
  Speaker 1: gonna thank you so much for joining us on what
• 11:23
  Speaker 1: he is Senior portfolio manager and head of multi asset
• 11:25
  Speaker 1: strategy for Columbia Threadneedle Investments, based in Boston, Massachusetts right now.
• 11:45
  Speaker 1: It's interesting to just to remember that over the trailing
• 11:48
  Speaker 1: twelve months, Uh, the SMP five hasn't really moved that much.
• 11:53
  Speaker 1: We've had a tremendous amount of oility at that time,
• 11:55
  Speaker 1: but essentially unchanged of the trailing twelve months. What But yeah,
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  Speaker 1: we are better a one and a half percent from
• 12:01
  Speaker 1: the all time high. So the question is kind of
• 12:03
  Speaker 1: where do we go from here and can we expect
• 12:05
  Speaker 1: more volatility going forward? There's no one better to discuss
• 12:08
  Speaker 1: some of those market issues. And Ken Fisher Ken as
• 12:11
  Speaker 1: a founder, executive chairman and co c IO of Fisher
• 12:14
  Speaker 1: Investments with one and seven billion dollars under management based
• 12:19
  Speaker 1: on Whatside, California, but joining us here in our Bloomberg
• 12:21
  Speaker 1: Interactive Broker studio. Thanks so much for being here. So
• 12:24
  Speaker 1: there's a lot of folks, I think, trying to figure
• 12:27
  Speaker 1: out what the next step is for the equity markets.
• 12:30
  Speaker 1: For example, we've had trade issues, we've got an easing FED,
• 12:34
  Speaker 1: we were ten plus years into an economic cycle. What
• 12:37
  Speaker 1: are you advising your clients? Well, I certainly don't think
• 12:39
  Speaker 1: we have an easy FED. I don't believe that for
• 12:41
  Speaker 1: a heartbeat. I mean, the FED is um idiotic at best,
• 12:48
  Speaker 1: uh and and always has been. I learned that for
• 12:50
  Speaker 1: Milton Friedman when I was very young. He always said
• 12:52
  Speaker 1: they always would be, and I'm gonna stick with that.
• 12:56
  Speaker 1: But the fact is that right now it's fairly obvious
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  Speaker 1: if you think about it on a Bloomberg terminal, that
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  Speaker 1: the non US world for the first time is leading
• 13:06
  Speaker 1: the American market. And if we think of what's going
• 13:08
  Speaker 1: on overseas, what you were saying, which is true when
• 13:12
  Speaker 1: we think of the American market, becomes more visibly directional
• 13:18
  Speaker 1: if we think overseas, so whether it's Sweden, whether it's um, Germany,
• 13:25
  Speaker 1: whether it's Britain, I mean Britain with all our bricks stuff,
• 13:28
  Speaker 1: the UK markets doing better than the US market is right.
• 13:31
  Speaker 1: Hold on, let's let's translate this basically. Basically, it's leading
• 13:35
  Speaker 1: US in terms of the ECB, the Bank of England,
• 13:38
  Speaker 1: the Swedish all The direction is easy. The direction of
• 13:43
  Speaker 1: the market is positive and upward overseas more so than here.
• 13:48
  Speaker 1: Here it looks like you're in that trading channel there
• 13:51
  Speaker 1: it looks like it's broken out, because it's not that
• 13:54
  Speaker 1: the economy is so much better there. Oh, I think
• 13:56
  Speaker 1: it's because just simply there's this fairly st andrew economy
• 14:01
  Speaker 1: being better. G Who in the heck needs a better economy?
• 14:04
  Speaker 1: We have a near Goldilocks economy as it is. If
• 14:06
  Speaker 1: you could grow the global economy at two percent with
• 14:08
  Speaker 1: no inflation, that's kind of what in the nineties we
• 14:10
  Speaker 1: thought Goldilocks should look like. The fact of the matter
• 14:13
  Speaker 1: is they've been having enough problems over there that at
• 14:17
  Speaker 1: every place you've got the almost equivalent of having recognized
• 14:22
  Speaker 1: a recession. It's not a recession, but it's that quasi
• 14:28
  Speaker 1: growth recession, which is almost as positive for stocks after
• 14:33
  Speaker 1: that as an actual recession. The history of big slowdowns
• 14:37
  Speaker 1: grinding through what what are what are recessions and bearer
• 14:42
  Speaker 1: markets supposed to do. They're supposed to overcome and fix
• 14:45
  Speaker 1: the excesses of the prior boom. That's what's supposed to happen.
• 14:49
  Speaker 1: Right now, We've got a comparable period where we're doing
• 14:52
  Speaker 1: the same thing over there. How about here in the U.
• 14:55
  Speaker 1: S are you in the camp that it feels like
• 14:57
  Speaker 1: a recession is av for the US? I would be
• 15:02
  Speaker 1: stunned if we have a social care uh in that timeframe. Okay,
• 15:06
  Speaker 1: The fact of the matter is that there's really other
• 15:11
  Speaker 1: than the fact that things are going along pretty darn well.
• 15:14
  Speaker 1: For example, folks point to uh manufacturing p m s,
• 15:19
  Speaker 1: but if you think about its services are three times larger,
• 15:22
  Speaker 1: and service p m I is are just fine, thank you.
• 15:25
  Speaker 1: When if we're up to me and I would have fed,
• 15:30
  Speaker 1: I would dump all those stupid bonds that they bought
• 15:32
  Speaker 1: that they never should have bought in the first place. Well, okay,
• 15:34
  Speaker 1: well let's let's let's talk about what you're actually doing
• 15:36
  Speaker 1: or what you're actually advising your clients to do. And
• 15:38
  Speaker 1: it sounds like you're bullish on Europe right now, given
• 15:40
  Speaker 1: the fact that they're they're cheaper than the U S. No,
• 15:42
  Speaker 1: I didn't say cheaper, that they that they're basically they
• 15:45
  Speaker 1: have more bearishness sort of built into them. Uh so,
• 15:48
  Speaker 1: therefore there's more potential upside the US maybe less so
• 15:53
  Speaker 1: in terms of where we are in that cycle is
• 15:56
  Speaker 1: right here, right now, And we're also with a stage
• 15:58
  Speaker 1: in the American political cycle were normally the market slows
• 16:01
  Speaker 1: down for a little bit in America. Okay, so then
• 16:03
  Speaker 1: how much are you advising clients to overweight Europe over
• 16:07
  Speaker 1: the US. You know, I'm not that extreme. So you know,
• 16:10
  Speaker 1: I kind of have a overweight view. I don't want
• 16:14
  Speaker 1: to be extreme. I don't have a you know, hit bigger,
• 16:17
  Speaker 1: go home better in me, because too often you go
• 16:19
  Speaker 1: home and you're wrong too often. I mean, I live
• 16:21
  Speaker 1: in a world where it's a world of probabilities, not certainties,
• 16:24
  Speaker 1: and I got to be able to live through mistakes,
• 16:27
  Speaker 1: which I know I'm going to make a lot of.
• 16:28
  Speaker 1: If I could, if I could be right seventy percent
• 16:31
  Speaker 1: of history, which I can't, i'd be become a living legend.
• 16:35
  Speaker 1: And so I got to be prepared to be wrong
• 16:37
  Speaker 1: at least thirty percent of the time and lived through it. Okay,
• 16:41
  Speaker 1: so close to a living legend, one could argue, certainly,
• 16:44
  Speaker 1: giving your performance and the assets under management. But so
• 16:48
  Speaker 1: the question, one of the questions is simply, we've had
• 16:50
  Speaker 1: it just this week. It seems, at least on Bloomberg
• 16:52
  Speaker 1: Radio a discussion and on Bloomberg News about maybe a
• 16:55
  Speaker 1: little bit of rotation going on underneath the surface kind
• 16:58
  Speaker 1: of what is your sent is that? Just to me,
• 17:01
  Speaker 1: it seems like boy people are making a big deal
• 17:04
  Speaker 1: about what might just be some anomalous trading over a
• 17:06
  Speaker 1: couple of days. But that's something more and that might
• 17:09
  Speaker 1: be true. But pretty often after you've had a trading
• 17:12
  Speaker 1: range like this, where the prior leadership has stalled, you
• 17:17
  Speaker 1: get a bounce back effect that's not extraordinary. And that
• 17:20
  Speaker 1: bounce back effect in this case would be value over growth,
• 17:24
  Speaker 1: smaller over big. That's been what's been going on in
• 17:28
  Speaker 1: that rotation. My guess is, however, usually if we assume
• 17:32
  Speaker 1: the bull market continues, usually the girl that brought you
• 17:36
  Speaker 1: to the dance stays with you, and that probably is
• 17:40
  Speaker 1: what happens, which is the leadership then eventually reverts back.
• 17:44
  Speaker 1: I mean, normally, as you move towards the end of
• 17:46
  Speaker 1: a bull market, you get what is referred to as
• 17:48
  Speaker 1: narrowing breadth. Fewer and fewer big stocks lead the market
• 17:51
  Speaker 1: higher and higher, typically of the same categories that led earlier.
• 17:55
  Speaker 1: So I'd expect over the course of the rest of
• 17:57
  Speaker 1: the year for that process to eventually revert. One thing
• 18:01
  Speaker 1: I've been in wondering how often do you trade? How
• 18:04
  Speaker 1: often do you trade? How often as little as I can?
• 18:07
  Speaker 1: So when when I was young, there was a great
• 18:09
  Speaker 1: columnist for Forbes magazine named Lucian Hooper. He was the
• 18:12
  Speaker 1: third longest running columnists in Forbes History. Uh, and he
• 18:16
  Speaker 1: had a lot of great he was in New England
• 18:17
  Speaker 1: or he had a lot of great lines. And one
• 18:19
  Speaker 1: of them is, you know, you make more money sitting
• 18:21
  Speaker 1: on your hands and you do dancing on your feet.
• 18:23
  Speaker 1: And there's a lot of truth to that. You you
• 18:26
  Speaker 1: make your bets and unless you come to the realization
• 18:28
  Speaker 1: that you were wrong in the first place, which should
• 18:30
  Speaker 1: have some fundamental arguments to it, you let the volatility
• 18:33
  Speaker 1: dance through you. So when was the last time that
• 18:35
  Speaker 1: you traded? Oh? Well, we trade little bits all the
• 18:37
  Speaker 1: time because we got a lot of money. But but yeah,
• 18:41
  Speaker 1: big trades. You know, we haven't done anything other than
• 18:43
  Speaker 1: trimming little things for months. Is it less than usual? Yeah,
• 18:48
  Speaker 1: because the market is not that volatile. People think the
• 18:50
  Speaker 1: markets volatile, but the markets volatility this year is actually subnormal.
• 18:54
  Speaker 1: If you actually look at the markets, volatility this year
• 18:56
  Speaker 1: is not high. How about I P S. Do you
• 18:58
  Speaker 1: guys look at No. When I wrote a book thirty
• 19:02
  Speaker 1: two years ago where I had a chapter that I
• 19:05
  Speaker 1: P O S. I mean, it's probably overpriced, and I
• 19:08
  Speaker 1: still believe that's true. The fact of the matter is
• 19:10
  Speaker 1: I P O S or priced for the issuer. They're
• 19:11
  Speaker 1: not priced for the consumer. And the fact is if
• 19:17
  Speaker 1: if they want the history of I p o s
• 19:18
  Speaker 1: is a short term pop. And you know, if you're
• 19:21
  Speaker 1: gonna try to create a short term pop, usually that's
• 19:23
  Speaker 1: going to go against you. Look at what happened with Uber,
• 19:24
  Speaker 1: Look what happen would lift. Uh. The good part about
• 19:28
  Speaker 1: I p o s right now is that we have
• 19:30
  Speaker 1: not gotten to that part where we're floating garbage on
• 19:35
  Speaker 1: top of the water like it's gold. Uh, the garbage
• 19:39
  Speaker 1: in there. You know, we're not having manufactured i p
• 19:42
  Speaker 1: o s for the purpose of going public in volume
• 19:44
  Speaker 1: like you know we do when we have exuberance. The
• 19:46
  Speaker 1: lack of that as a sign of a lack of exuberance,
• 19:49
  Speaker 1: which is healthy. Ken Fisher, thank you so much for
• 19:52
  Speaker 1: being with us. Thanks for having me. Ken Fisher is founder,
• 19:55
  Speaker 1: our executive chairman, and co chief investment officer of Fisher Investments,
• 19:58
  Speaker 1: which overseas a hundred and seven million dollars from Woodside, California.
• 20:01
  Speaker 1: But he joins us here in our Bloomberg Interactive broker's studios. Well,
• 20:23
  Speaker 1: we woke up to a surprise deal in financial services
• 20:27
  Speaker 1: this morning. Hong Kong Exchange has made an unexpected thirty
• 20:30
  Speaker 1: six point six billion dollar bid for the London Stock Exchange,
• 20:34
  Speaker 1: a move there that would upend the UK Borses combination
• 20:38
  Speaker 1: just announced recently with definitive. So to get the latest
• 20:41
  Speaker 1: on what this means in the world of global exchanges,
• 20:43
  Speaker 1: we welcome Sarah Siad. Sarah's a Bloomberg News reporter, UM
• 20:47
  Speaker 1: to get her sense. Sarah, thanks so much for joining us.
• 20:50
  Speaker 1: Just give us kind of the background and what happened here.
• 20:52
  Speaker 1: This was really an unexpected announcement, wasn't. Yeah. I mean
• 20:56
  Speaker 1: we're saying, UM, the words that are being used is
• 20:58
  Speaker 1: the unexpected, the shark, the surprise. I mean definitely had
• 21:02
  Speaker 1: London scrambling around. UM this morning. Certainly the deal's team
• 21:07
  Speaker 1: woke up to to some big news this morning. I mean,
• 21:10
  Speaker 1: as you mentioned, it is a bit of a shock.
• 21:12
  Speaker 1: UM announcement. It wasn't one that any of us or
• 21:17
  Speaker 1: our competitors broke. It was. It was an announcement that
• 21:19
  Speaker 1: came directly from from the Hong Kong Exchange UM itself.
• 21:23
  Speaker 1: I think, UM, the timing is quite interesting. It comes
• 21:29
  Speaker 1: on the off the back of the the announcement about
• 21:32
  Speaker 1: of the LSE refinitive deal. I think what's indicative of
• 21:38
  Speaker 1: the timing of the announcement is UM. Had the refinitive
• 21:43
  Speaker 1: LSE deal gone through, it would have made the LSE
• 21:47
  Speaker 1: pretty much unaffordable for many other interested parties UM. But
• 21:54
  Speaker 1: whilst the deal is still UM not completely through, buying
• 21:59
  Speaker 1: else by itself makes it a more affordable play than
• 22:02
  Speaker 1: with together with refinitive. What's the what's the larger here
• 22:06
  Speaker 1: for the Hong Kong exchanges? Well, I think you know
• 22:09
  Speaker 1: Hong Kong. These are two of the world's most significant
• 22:15
  Speaker 1: UM exchanges, and it really depends on what I mean.
• 22:19
  Speaker 1: It's clear what Hong Kong wants to do. They want
• 22:21
  Speaker 1: to create an exchange powerhouse. The question is what does
• 22:27
  Speaker 1: Elsie want to do. I mean the deal with refinitive
• 22:31
  Speaker 1: meant would have meant that UM the London Exchange was
• 22:37
  Speaker 1: not only reliant on on the exchange but diversifying into
• 22:42
  Speaker 1: more data driven a more data driven business. They need
• 22:47
  Speaker 1: to now ask themselves, do we want to continue on
• 22:51
  Speaker 1: that path and and this strategy that we had in
• 22:54
  Speaker 1: play to diversify into more data or do we want
• 22:57
  Speaker 1: to grow and become a exchange powerhouse by by by
• 23:06
  Speaker 1: being acquired by the Hong Kong Exchange. We should note
• 23:10
  Speaker 1: that refinitive is the old Thompson Reuter's business, the icon
• 23:14
  Speaker 1: terminal neck competed directly with Bloomberg LP. Uh, sir, give
• 23:20
  Speaker 1: us the sense of what the political overtones maybe here,
• 23:24
  Speaker 1: because this is, you know, the London Stock Exchanges a
• 23:26
  Speaker 1: in a national treasure if you will, for the UK
• 23:30
  Speaker 1: and Hong Kong coming in and maybe even by extension,
• 23:33
  Speaker 1: China coming in and buying such an iconic UK asset.
• 23:37
  Speaker 1: How do you think that's going to play up? It's
• 23:39
  Speaker 1: definitely and it would be an understatement to say that
• 23:42
  Speaker 1: it is a politically sensitive um UM scenario. For sure.
• 23:49
  Speaker 1: Hong Kong Exchange is interestingly UM pitting itself as a
• 23:54
  Speaker 1: global exchange, trying to move away from being a pure
• 23:58
  Speaker 1: Hong Kong or Chinese UM entity. And I think that
• 24:03
  Speaker 1: is to UM an extem placate London and the government
• 24:08
  Speaker 1: UH here for any concerns there may be about UM
• 24:12
  Speaker 1: there being a Chinese bidder for UM. I guess this
• 24:16
  Speaker 1: gem of in London. You know, the UK Government's Andrea
• 24:21
  Speaker 1: Ledson said this morning um On on bloom Vegta TV,
• 24:24
  Speaker 1: just as the announcement was breaking that it's something that
• 24:27
  Speaker 1: they would look into and most likely scrutinized. So it's
• 24:31
  Speaker 1: certainly not without any political issues or involvement. I think
• 24:37
  Speaker 1: that there could also be a US angle with with
• 24:39
  Speaker 1: with Cyphius um Um coming into place. So yeah, from
• 24:43
  Speaker 1: a political perspective, there's certainly it would not It's not
• 24:45
  Speaker 1: a straightforward deal. It would not be a straightforward deal.
• 24:49
  Speaker 1: It just is a rabid up. But with the three
• 24:51
  Speaker 1: six point five billion dollar offer, how does it sort
• 24:54
  Speaker 1: of sit with analysts? They think it's expensive? Do they
• 24:56
  Speaker 1: think it's cheap? Um? I mean a lot of the
• 24:59
  Speaker 1: analysts report that we have read today have suggested that
• 25:03
  Speaker 1: it's a deal that they don't think we'll go through
• 25:06
  Speaker 1: for a number of reasons, politically, um being one of them.
• 25:10
  Speaker 1: But you know they have also said, um, you know
• 25:13
  Speaker 1: that the UK is an attractive market for some foreign
• 25:17
  Speaker 1: investors at the moment, particularly with the drop in in Sterling.
• 25:23
  Speaker 1: But the Hong Kong exchanges um. Charles leaves that made
• 25:28
  Speaker 1: an interesting metaphor earlier today, describing the potential tie up
• 25:32
  Speaker 1: between Hong Kong and London as a corporate Romeo and
• 25:35
  Speaker 1: Juliet But I think we all know how that story ended. Yeah,
• 25:40
  Speaker 1: not not exactly auspicious. No, it's a bizarre it was
• 25:42
  Speaker 1: a bizarre connection to make. So yeah, let's see narrator.
• 25:47
  Speaker 1: They both died. Sarah's said, thank you so much for
• 25:49
  Speaker 1: being with us, Sarah said. Bloomberk News reporter are joining
• 25:52
  Speaker 1: us to talk about the Hong Kong Exchanges surprise, a
• 25:55
  Speaker 1: proposal to combine with the London Stark Exchange. Generalist saying
• 26:00
  Speaker 1: it's unlikely, uh to see it come to fruition, but
• 26:02
  Speaker 1: nonetheless definitely shocking markets this morning and sort of making
• 26:06
  Speaker 1: them imagine the possibility. Is interesting to know what the
• 26:09
  Speaker 1: business cases for a lot of these exchanges. It has
• 26:11
  Speaker 1: increasingly become a data one, UH in terms of feeds
• 26:15
  Speaker 1: and UH and and an other market intelligence. We've been
• 26:33
  Speaker 1: focusing on financial technology this week. We were earlier in
• 26:36
  Speaker 1: Boston at the Boston's Fintech Week, which was really interesting
• 26:41
  Speaker 1: as people sort of try to reimagine, uh, the way
• 26:43
  Speaker 1: that the financial industry will look in the years to come.
• 26:46
  Speaker 1: Joining us now in that theme as Michael Tannenbaum. He
• 26:49
  Speaker 1: is chief financial Officer of Brex based in San Francisco.
• 26:53
  Speaker 1: Michael thank you so much for being with us. Why
• 26:55
  Speaker 1: don't you just start by telling us what Brex is. Sure,
• 26:59
  Speaker 1: Brex is a credit card for early stage businesses like
• 27:04
  Speaker 1: tech startups, life sciences companies, and e commerce businesses. So, Michael,
• 27:09
  Speaker 1: what are kind of what is your product your card
• 27:11
  Speaker 1: designed to do? Is there is there a problem or
• 27:14
  Speaker 1: a need in the marketplace for some of these startup
• 27:16
  Speaker 1: companies that your card in your service tries to address. Yeah,
• 27:20
  Speaker 1: I think it's really around both products, underwriting, and text,
• 27:23
  Speaker 1: so all three of those. On the product side, I
• 27:26
  Speaker 1: think we're offering innovative rewards and technology and expense management
• 27:32
  Speaker 1: that is targeted to these businesses. On the underwriting side,
• 27:36
  Speaker 1: unlike most credit cards, we underrate based on bank account
• 27:39
  Speaker 1: rather than personal FICO or credit scores um and the
• 27:44
  Speaker 1: combination of that delivers a really high quality product experience
• 27:48
  Speaker 1: for these customers, often who are fast growing but have
• 27:52
  Speaker 1: limited credit or operation history. So talk a little bit
• 27:56
  Speaker 1: about the creation of BRAX. I know that you have
• 27:57
  Speaker 1: the support of some pretty significant play ayres in Silicon Valley. Yeah. So,
• 28:02
  Speaker 1: the it's backed by Peter Thiel and Mac Lection, the
• 28:06
  Speaker 1: two co founders of PayPal. We also had a bunch
• 28:09
  Speaker 1: of investments from Silicon Valley and tech investors including y Combinator,
• 28:15
  Speaker 1: d st Um, Kliner, Perkins, so a lot of big
• 28:19
  Speaker 1: names that really saw the opportunity for credit cards to
• 28:24
  Speaker 1: deliver more um to these these fast growing segments of
• 28:28
  Speaker 1: the economy. So, Michael, I'm just looking at the brex
• 28:32
  Speaker 1: website here, and it talks about higher limits um, you know,
• 28:35
  Speaker 1: ten to twenty times higher than any competing card for
• 28:39
  Speaker 1: a corporate card. So how do you get there? How
• 28:42
  Speaker 1: do you get comfortable? What's your process your underwriting process
• 28:44
  Speaker 1: to get there. Yeah, it's interesting because when you think
• 28:48
  Speaker 1: about counterparty risk as a lender, which ultimately we are
• 28:52
  Speaker 1: in that respect, you want to look at the business
• 28:56
  Speaker 1: rather than the person. So if you think about traditional
• 28:58
  Speaker 1: credit card businesses in the small small business space, they're
• 29:02
  Speaker 1: underwriting the founder or some executive as a person and
• 29:06
  Speaker 1: using that personal credit score to make that decision breakfast
• 29:09
  Speaker 1: saying no, We're going to look at the business and
• 29:12
  Speaker 1: underwrite the cash that is in the business bank account.
• 29:15
  Speaker 1: And because we're doing that, we can actually offer much
• 29:18
  Speaker 1: higher limits than competitive cards which are just underwriting people.
• 29:22
  Speaker 1: So the business is our counterparty and that's why we
• 29:24
  Speaker 1: can offer higher limits. This is such an interesting conversation
• 29:27
  Speaker 1: to be having at a time when a lot of
• 29:29
  Speaker 1: cash burning unicorns are trying to I, P O and
• 29:34
  Speaker 1: and and come to market to raise more money. And
• 29:37
  Speaker 1: I have to wonder, if you're looking at the actual
• 29:39
  Speaker 1: cash of a company, how do you factor in potential growth?
• 29:44
  Speaker 1: I mean, how do you sort of extrapolate out to
• 29:46
  Speaker 1: see what this company may look like if you do
• 29:48
  Speaker 1: extend them alone and they're able to do something legitimate
• 29:51
  Speaker 1: with it totally? I think, Well, one of the nice
• 29:54
  Speaker 1: things about what we do is we have thirty day
• 29:58
  Speaker 1: statement periods, So from our perspective, if you think about
• 30:02
  Speaker 1: the way you know financial markets work, it's a very
• 30:05
  Speaker 1: short term product. We're repricing it to some extent each
• 30:09
  Speaker 1: thirty days because each thirty days opens a new statement
• 30:12
  Speaker 1: cycle and I think broader when you think about the industry.
• 30:17
  Speaker 1: What we do is we look at it two ways.
• 30:19
  Speaker 1: One is on a cash basis, do you have money
• 30:22
  Speaker 1: in your bank account? We have real time access to
• 30:24
  Speaker 1: that bank account, so we always know if the company
• 30:26
  Speaker 1: can make their payment within thirty days. And then we
• 30:29
  Speaker 1: also look at for those companies that are further along
• 30:32
  Speaker 1: and do have revenue. We look at forecasts and sales,
• 30:35
  Speaker 1: particularly in the e commerce space, as a way to
• 30:37
  Speaker 1: determine ability to pay. So, Michael, it give us a
• 30:41
  Speaker 1: sense of kind of how you're doing in the marketplace,
• 30:44
  Speaker 1: why don't you kind of enter this marketplace, and how's
• 30:46
  Speaker 1: Brex doing relative to competitors in terms of market share?
• 30:50
  Speaker 1: Got it? So? We have started. We started in early
• 30:54
  Speaker 1: two thousand seventeen. We launched publicly in mid two th eighteen.
• 30:59
  Speaker 1: We've had really tremendous growth. We've been one of the
• 31:02
  Speaker 1: fastest growing companies in Silicon Valley. If you look at
• 31:07
  Speaker 1: the market today, as you've already indicated, there's a bit
• 31:10
  Speaker 1: of a bifurcation between consumer and consumer facing businesses and
• 31:14
  Speaker 1: those in the B two B space. We're serving businesses,
• 31:17
  Speaker 1: and I think that the soft the financial software and
• 31:20
  Speaker 1: underwriting that we've built in that space has been really,
• 31:24
  Speaker 1: really attractive, especially as we've added newer markets outside of
• 31:28
  Speaker 1: our core startup market to include the life sciences and
• 31:31
  Speaker 1: the e commerce sector. Who do you partner with for
• 31:33
  Speaker 1: the capital? Got it? So? Our card is a MasterCard product,
• 31:38
  Speaker 1: So anywhere master cards accepted um you can use Brex
• 31:42
  Speaker 1: on the capital side. We actually have a warehouse line
• 31:45
  Speaker 1: UM with far Plays where UM we use funds there
• 31:50
  Speaker 1: um to help expand our balance sheet and in terms
• 31:54
  Speaker 1: and so I think that's one of the ways that
• 31:56
  Speaker 1: we can continue to grow but also do so in
• 31:58
  Speaker 1: a low cost way that does that require as much equity.
• 32:01
  Speaker 1: So what are some of the unique needs from a
• 32:03
  Speaker 1: corporate credit perspective for some of these startup companies that
• 32:07
  Speaker 1: you're targeting. Sure, I think it's one being able to
• 32:11
  Speaker 1: get a card instantly and online. It's actually still a
• 32:15
  Speaker 1: paper based process. When you think about UH applying for
• 32:19
  Speaker 1: a credit cards, you're usually even if you're applying online,
• 32:22
  Speaker 1: you're typically receiving something in the mail that lets you
• 32:25
  Speaker 1: know whether you're approved. That's one. Two is the ability
• 32:29
  Speaker 1: to scale with your businesses with your business Brex because
• 32:32
  Speaker 1: we underwrite based on a bank account with which we
• 32:35
  Speaker 1: have real time access our credit limits dynamically as just
• 32:38
  Speaker 1: as the business grows. And I think the last is
• 32:41
  Speaker 1: on rewards, which is always a popular topic among UH
• 32:46
  Speaker 1: you know credit cards, and the reality is Brex has
• 32:48
  Speaker 1: built a rewards program that has not only rewards UM
• 32:53
  Speaker 1: and accelerators on categories that the people in this industry
• 32:57
  Speaker 1: spend on but it also has a lot of high
• 33:00
  Speaker 1: quality sign up offers on UM the goods and services
• 33:04
  Speaker 1: that these businesses use, one example being Amazon Web Services.
• 33:08
  Speaker 1: Brex offers five thousand dollars of credits on a WUS
• 33:11
  Speaker 1: for all of its cardholders. Michael Tannebaum, thank you so
• 33:14
  Speaker 1: much for joining us. Michael's the chief financial officer of
• 33:17
  Speaker 1: Brex Incorporated, based in San Francisco, with kind of a
• 33:21
  Speaker 1: new take on the corporate credit card, targeting UM, the
• 33:25
  Speaker 1: start up community and some of the unique needs that
• 33:27
  Speaker 1: some of these early stage companies have from a credit perspective.
• 33:31
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 33:34
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
• 33:36
  Speaker 1: or whatever podcast platform you prefer. Paul Sweeney, I'm on
• 33:39
  Speaker 1: Twitter at pt Sweeney. I'm Lisa bramoy It's I'm on
• 33:42
  Speaker 1: Twitter at Lisa A. Bram woyds one. Before the podcast,
• 33:45
  Speaker 1: you can always catch us worldwide on Bloomberg Radio.