Latest / Bloomberg Intelligence / ISM Non-Manufacturing Data, Markets, Argentina Debt

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ISM Non-Manufacturing Data, Markets, Argentina Debt · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul Swinge. 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. For months, a lot of economists
• 0:21
  Speaker 1: and traders have been saying, it's just manufacturing. It is
• 0:25
  Speaker 1: a specific sector that is suffering specific pain. Today we
• 0:29
  Speaker 1: get data showing that a U S services gauge dropped
• 0:32
  Speaker 1: to a three year low. A gauge of employment in
• 0:35
  Speaker 1: the U S services sector fell into contraction for the
• 0:38
  Speaker 1: first time since two thousand ten. This is beyond manufacturing.
• 0:43
  Speaker 1: Joining us here, Lena Shilietieva in our senior US economist
• 0:46
  Speaker 1: for Bloomberg Economics, Joining us in our Bloomberg Interactive Broker Studios.
• 0:50
  Speaker 1: How concerned should we be so? Uh? Today's numbers a
• 0:55
  Speaker 1: clear sign that worries you know that we saw in
• 0:59
  Speaker 1: the manufacturing sector are spreading beyond into a broader economic activity. However,
• 1:05
  Speaker 1: I would question against you know, saying, Okay, this is
• 1:08
  Speaker 1: a recession signal, it's not. You know, the sector is
• 1:12
  Speaker 1: still expanding, expanding although slower pace. You know. I think
• 1:18
  Speaker 1: this kind of number is comparable to what happened back
• 1:23
  Speaker 1: into thousands sixteen. Remember when we had China devaluation and
• 1:27
  Speaker 1: a market route on the back of it, and that
• 1:30
  Speaker 1: affected business sentiment to quite a significant degree. But we
• 1:34
  Speaker 1: were not talking about recession. So we're not talking about
• 1:37
  Speaker 1: the recession now. We think the probability still remains relatively low. Elena,
• 1:43
  Speaker 1: when we saw the manufacturing side of the economy turned
• 1:47
  Speaker 1: negative and actually into contraction, I think a lot of
• 1:50
  Speaker 1: people felt like it was primarily driven by uncertainties associated
• 1:54
  Speaker 1: with the trade tensions. Is that you think that's also
• 1:57
  Speaker 1: impacting the service society economy as well? Uh? Sure, So
• 2:01
  Speaker 1: if you read some comments, you know, not only look
• 2:04
  Speaker 1: at the numbers, but if you read the comments in
• 2:06
  Speaker 1: the actual ism report, Uh, there's a lot of discussion
• 2:10
  Speaker 1: all across the manufacturing and non manufacturing industries about how
• 2:15
  Speaker 1: tariffs are impacting the businesses. So, but what I found
• 2:19
  Speaker 1: very interesting in today's report actually is that, uh, some
• 2:23
  Speaker 1: some people are talking about how they are substituting how
• 2:27
  Speaker 1: they are working to substitute some imports from China with
• 2:31
  Speaker 1: UH imports from other countries. So I think eventually this
• 2:35
  Speaker 1: will work and we will be just okay. But right
• 2:39
  Speaker 1: now is just creating a lot of uncertainty. So how
• 2:42
  Speaker 1: much of a concern just sort of raise ahead of
• 2:44
  Speaker 1: tomorrow's jobs number. I think it's a significant indicator, you know,
• 2:50
  Speaker 1: along with other labor market indicators. I think it's telling
• 2:54
  Speaker 1: us we will see another relatively weak number, but again
• 2:59
  Speaker 1: not something that will be able to push the unemployment
• 3:03
  Speaker 1: rate higher. In fact, we expect the unemployment rate to
• 3:07
  Speaker 1: go down by attempts to three point six percent, so
• 3:10
  Speaker 1: a one thirty five thousand number that we are forecasting
• 3:15
  Speaker 1: would be just enough to do that. So, given that
• 3:19
  Speaker 1: we are starting to see a little bit of weakness
• 3:21
  Speaker 1: creep into the consumer of the services side um and
• 3:25
  Speaker 1: will certainly wait for the jobs data tomorrow, how do
• 3:28
  Speaker 1: you think that the FED will react for the remainder
• 3:31
  Speaker 1: of this year? Interesting you mentioned that because we already
• 3:34
  Speaker 1: heard today after the week, same number, and you know
• 3:38
  Speaker 1: other indicators. We heard from UH Charlie Evans overnight he
• 3:44
  Speaker 1: was speaking in Madrid and he actually said that he's
• 3:48
  Speaker 1: still not convinced they need to act at the October meeting.
• 3:53
  Speaker 1: He thinks that fundamentals remain solid, but I think if
• 3:57
  Speaker 1: we continue to get weak data like we did today,
• 4:01
  Speaker 1: especially the unemployment Rade report, this will push the fits
• 4:05
  Speaker 1: And at the end of the months, let's say there
• 4:07
  Speaker 1: are some optimists out there saying, let's buy this deep.
• 4:10
  Speaker 1: We think that the market is going to turn around
• 4:13
  Speaker 1: and that either the feder will come in with stimulus
• 4:16
  Speaker 1: or we'll see strength from somewhere else where in the economy.
• 4:19
  Speaker 1: Could we see strength, well, you know it's it's the consumer.
• 4:24
  Speaker 1: We've been talking about it for quite some time, right,
• 4:26
  Speaker 1: So that doesn't this directly feed into consumer spending? And
• 4:30
  Speaker 1: it isn't consumer spending essentially a lagging indicator, and employment
• 4:33
  Speaker 1: kind of procedes that it depends on how much wages grow, okay,
• 4:38
  Speaker 1: and how much will consumers feel optimistic about the outlook
• 4:43
  Speaker 1: and will they spend it. So we are heading into
• 4:47
  Speaker 1: a holiday season pretty soon, so we'll see how that
• 4:50
  Speaker 1: plays out. So that, like early indicators are saying that
• 4:53
  Speaker 1: the holiday season will be a good one. So, Lena,
• 4:56
  Speaker 1: are you guys at Bloomberg Economics in the camp that UM,
• 5:00
  Speaker 1: there could be a recession in or maybe just more
• 5:04
  Speaker 1: like the new normal, which might be one and a
• 5:07
  Speaker 1: half to two growth, and that might be kind of
• 5:10
  Speaker 1: what we have. So we don't see a recession within
• 5:12
  Speaker 1: the next twelve months. We think the probability is relatively low.
• 5:16
  Speaker 1: We just published some research. Actually our recession indicator is
• 5:22
  Speaker 1: that for the next twelve months, and we think that
• 5:26
  Speaker 1: we will see a significant slow down in the second
• 5:29
  Speaker 1: half of the year uh to something like one percent
• 5:32
  Speaker 1: on average from two point six percent in the first
• 5:34
  Speaker 1: half of the year. But that by no means means
• 5:38
  Speaker 1: recession is coming. I'm just trying to understand going forward.
• 5:43
  Speaker 1: It seems like the market is saying the federal reserve
• 5:45
  Speaker 1: or cut rates it will be insufficient to fuel economic
• 5:50
  Speaker 1: growth real quick. That accurate, I think it is. I
• 5:54
  Speaker 1: think you know, the market is thinking the FIT might
• 5:58
  Speaker 1: not have enough ammunition to act. They will obviously do
• 6:02
  Speaker 1: what they can, but this might require some sort of
• 6:05
  Speaker 1: a fiscal stimulus. The chances I don't know. I cannot
• 6:09
  Speaker 1: talk about the chances of that, but it seems like
• 6:11
  Speaker 1: that's what we need UM at this point. Elena Chila Tieva,
• 6:15
  Speaker 1: thank you so much. Senior US economists for Bloomberg Economics,
• 6:18
  Speaker 1: joining us here on our Bloomberg Interactor broker studio. George Young,
• 6:34
  Speaker 1: partner and portfolio manager at Villary Funds, joins us to
• 6:38
  Speaker 1: talk about volatility and trading in this market. Villary Funds
• 6:41
  Speaker 1: they are based in the great City of New Orleans,
• 6:44
  Speaker 1: but George joins us here live in our Bloomberg Interact
• 6:46
  Speaker 1: their broker studio. So, George, I was just talking about,
• 6:49
  Speaker 1: you know, these past couple of days, this week has
• 6:51
  Speaker 1: just been you know, a sell off on some weekending
• 6:53
  Speaker 1: economic news. How are you guys viewing the market right here. Well,
• 6:57
  Speaker 1: we're long term investors and I think that's import and
• 7:00
  Speaker 1: for people to keep in mind because this is not
• 7:02
  Speaker 1: a short term event. It's not like going to the
• 7:04
  Speaker 1: casino where you need to cash out at the end
• 7:06
  Speaker 1: of the day. So if you can put on some
• 7:08
  Speaker 1: blinders and look out into the future again, I'd like
• 7:12
  Speaker 1: to think that our investors are investing for retirement, for
• 7:15
  Speaker 1: specific goals, whether it's education for the kids, whatever it
• 7:18
  Speaker 1: may be. Uh, you need to look at the fact
• 7:21
  Speaker 1: that the economy is basically healthy. Yeah, there's some ripples
• 7:24
  Speaker 1: out there worried about the manufacturing index, But I think
• 7:27
  Speaker 1: that is a short term indicator. Uh, when I say
• 7:29
  Speaker 1: the economy is healthy, We've got good g d P numbers,
• 7:33
  Speaker 1: we've got low unemployment, we've got not overly strong valuations
• 7:37
  Speaker 1: in the stock market. So it's still attracted from a
• 7:40
  Speaker 1: pe base, especially in the light of the fact that
• 7:41
  Speaker 1: you've got one point six percent yields on the ten
• 7:44
  Speaker 1: year treasury. Got to keep all that in mind. So
• 7:47
  Speaker 1: this is something people say, we're long term investors, buy
• 7:50
  Speaker 1: and hold. The U S. Economy isn't going to collapse entirely.
• 7:55
  Speaker 1: It's a good time to just stay invested and stay
• 7:58
  Speaker 1: the course. What happened. And if someone is sixty four
• 8:02
  Speaker 1: years old, they're going to retire in the next three years,
• 8:06
  Speaker 1: and they want to know where should they be hiding
• 8:08
  Speaker 1: right now? You know, should they basically shift away from
• 8:12
  Speaker 1: all their stocks and just go to cash because there
• 8:14
  Speaker 1: is sort of an imminent crash being signaled by weakening
• 8:17
  Speaker 1: services and on the heels of manufacturing and then talk
• 8:21
  Speaker 1: of trade wars and forget about it. Well, I'll give
• 8:24
  Speaker 1: you two answers on that one. If you're sixty four
• 8:27
  Speaker 1: years old, that means that you're retiring possibly, but that
• 8:30
  Speaker 1: doesn't mean you're going to die tomorrow. So you've got
• 8:32
  Speaker 1: to think that you've got another twenty years to live.
• 8:35
  Speaker 1: And if that's going to happen on a statistical basis,
• 8:37
  Speaker 1: you've got to buy stocks one point six percent and
• 8:40
  Speaker 1: a government bond is not going to cut it. So
• 8:42
  Speaker 1: you really need to be prepared to invest for a
• 8:44
  Speaker 1: longer term. And that's not going to be fun. But again,
• 8:47
  Speaker 1: it's very easy to look backwards and see what the
• 8:50
  Speaker 1: cell signals were. Again, if you look back at the
• 8:53
  Speaker 1: fourth quarter of last year, a lot of people are remembering, oh,
• 8:56
  Speaker 1: fourth quarter last year, that was a problem. We're entering
• 8:59
  Speaker 1: the fourth quarter or now October, i'm told is a
• 9:01
  Speaker 1: bad month. All those things are true, And I have
• 9:04
  Speaker 1: no aversion to a sixty four year old having a
• 9:07
  Speaker 1: certain amount in cash or certain amount in bonds. But
• 9:09
  Speaker 1: I think they've still got to have a preponderance in
• 9:11
  Speaker 1: stocks because that's what's going to keep them for the
• 9:13
  Speaker 1: long term. I'd say a different answer if you were
• 9:15
  Speaker 1: talking about an eighty year old. Life expectancy isn't as long.
• 9:18
  Speaker 1: Different needs, different reaction to volatility. Uh. And there's one
• 9:23
  Speaker 1: of our old aphorism. Uh, no safe haven for capital
• 9:26
  Speaker 1: or capitalists. So you've got to be a little cautious.
• 9:30
  Speaker 1: But again, you you enter the stock market assuming there's
• 9:34
  Speaker 1: gonna be a certain amount of risk, and you have
• 9:35
  Speaker 1: to be willing to take that. So here we are, George,
• 9:39
  Speaker 1: ten plus years into this economic cycle. We have signs of,
• 9:43
  Speaker 1: you know, a weakening economy, still growing in the US,
• 9:46
  Speaker 1: but but weakening. What are the sectors that you think
• 9:49
  Speaker 1: that you're recommending to your clients that they pay attention to. Well,
• 9:52
  Speaker 1: I think you've got good opportunities in technology. And again
• 9:55
  Speaker 1: technology dominates the S and P five. But one common
• 9:59
  Speaker 1: characteristic technologies whatever software, for instance, that you buy, you
• 10:03
  Speaker 1: as a user, tend to re up that same software,
• 10:06
  Speaker 1: and so they've got very visible cash flow streams. The
• 10:09
  Speaker 1: other thing that's attractive as most technology companies have very
• 10:12
  Speaker 1: little debt, and that's obvious the way that you get
• 10:14
  Speaker 1: in trouble nowadays if you have too much debt, and
• 10:18
  Speaker 1: as we all know with a lot of corporations, any
• 10:21
  Speaker 1: debt that is on a company's books can be refinanced
• 10:24
  Speaker 1: at these historically low rates. So I think technology is
• 10:28
  Speaker 1: a good area to look at. I want to go
• 10:30
  Speaker 1: back to the sort of age issues I'm having. My head,
• 10:35
  Speaker 1: of course went on succeed four. I'm not going to
• 10:38
  Speaker 1: say it. I'm wondering, do you think then that, for
• 10:42
  Speaker 1: no reason, should people change their allocations? In other words,
• 10:46
  Speaker 1: let's just say, I mean, should they reduce their allocations
• 10:49
  Speaker 1: to equities in a situation where they're needing to preserve
• 10:52
  Speaker 1: cash and focus on the income level, or should they
• 10:55
  Speaker 1: look to stocks as the new income providers. I think
• 10:59
  Speaker 1: that people need to understan and the total return concept,
• 11:01
  Speaker 1: and I think most people do that. As you shift,
• 11:04
  Speaker 1: and let's say we're talking about i RA, so for
• 11:06
  Speaker 1: the argument's sake, you don't have to worry about taxes.
• 11:08
  Speaker 1: You can make that shift, and you should as you
• 11:11
  Speaker 1: move from let's say the sixty four year old to
• 11:13
  Speaker 1: the eighty year old. The other thing to keep in
• 11:15
  Speaker 1: mind is that if you do make an abrupt decision
• 11:18
  Speaker 1: to liquidate your portfolio and go fifty into cash, what's
• 11:22
  Speaker 1: going to be the sign that's going to tell you, Okay,
• 11:24
  Speaker 1: now it's quote safe to get back in. It does
• 11:27
  Speaker 1: not ring a bell. You never know when that's going
• 11:29
  Speaker 1: to happen. So I think it's much better to adopt
• 11:31
  Speaker 1: a constant um uh investment policy statement for yourself. Endowment
• 11:36
  Speaker 1: funds mutual funds have an investment policy statement and they
• 11:40
  Speaker 1: adhere to those with good reason. So if you think
• 11:42
  Speaker 1: back about the fourth quarter of last year, think back
• 11:46
  Speaker 1: to the first quarter of two thousand nine, when the
• 11:49
  Speaker 1: market was hitting loads, it's good that you would have
• 11:52
  Speaker 1: stuck to your investment policy statement to maintain the proper
• 11:55
  Speaker 1: asset allocation. Well, certainly people who stuck to their allocations
• 11:58
  Speaker 1: today in equities are actually going to be pleasantly surprised
• 12:01
  Speaker 1: because what looked like it was going to be a
• 12:03
  Speaker 1: very down day has turned surprisingly positive with the nastac
• 12:07
  Speaker 1: opp nearly six tenths of a percent. George Young, thank
• 12:09
  Speaker 1: you so much for being with us. George Young, portfolio
• 12:12
  Speaker 1: manager of the Villary Balanced Fund, which trades under the
• 12:14
  Speaker 1: ticker v I l l X, joining us now. We
• 12:35
  Speaker 1: are so happy to have Damien Sassaur Fixing come Strategistic
• 12:37
  Speaker 1: focused on the emerging markets for Bloomberg Intelligence and UH.
• 12:42
  Speaker 1: I want to look first at Argentina because it's hundred
• 12:45
  Speaker 1: year bonds that were sold just a couple of years ago,
• 12:47
  Speaker 1: trading at forty three cents in the dollar trading a
• 12:50
  Speaker 1: par not so long ago. What is the implication here, Well,
• 12:53
  Speaker 1: I think you want to talk about Argentina, because I
• 12:55
  Speaker 1: just returned from Buenos Ayres last week, So let's talk
• 12:58
  Speaker 1: about Argentina. Argentina, and I've met with quite a bunch
• 13:01
  Speaker 1: of people on the ground, and it's certainly a deflating
• 13:03
  Speaker 1: a sentiment down there. But three hundred fifty billion dollars
• 13:07
  Speaker 1: of debt outstanding, of which two hundred sixty billion dollars
• 13:10
  Speaker 1: is in hard currency, so they will have to undergo
• 13:13
  Speaker 1: a major restructuring. I mean, this isn't just gonna be
• 13:15
  Speaker 1: a reprofiling maturities such as they've led us to believe.
• 13:18
  Speaker 1: This is gonna be led by the I m F, which,
• 13:20
  Speaker 1: by the way, forty four billion dollars of that hard
• 13:22
  Speaker 1: currency debt is owed to the I m F. And
• 13:25
  Speaker 1: so there's gonna be a lot of interplay there. I mean,
• 13:27
  Speaker 1: certainly with the Guard moving to the e c B
• 13:29
  Speaker 1: and now Krystalina Georgieva ascending to the head of the
• 13:31
  Speaker 1: I m F. You know, she's a Bulgarian economist. The
• 13:35
  Speaker 1: Bulgaria was bailed out by the I m F BA.
• 13:38
  Speaker 1: But really, you have to look back to to know
• 13:41
  Speaker 1: why Argentina is in the current situation. It's in Lisa
• 13:44
  Speaker 1: and the fact remains, you know, they've got a lot
• 13:46
  Speaker 1: of debt outstanding. They need short term relief. It's going
• 13:48
  Speaker 1: to be led by the I M F and how
• 13:51
  Speaker 1: RGIVA and UM whoever is in office after the elections
• 13:54
  Speaker 1: on the seven is. You know, however they play and
• 13:57
  Speaker 1: however those negotiations go. We can only hope from the
• 14:00
  Speaker 1: back of an external U. S Dollar creditor that they
• 14:02
  Speaker 1: go smoothly and then they go quite frankly, quite quickly,
• 14:05
  Speaker 1: because in addition to you know, the bonds that are outstanding,
• 14:08
  Speaker 1: there's also CDs twenty a billion notional of CDs outstanding,
• 14:12
  Speaker 1: of which five billion is net not gross notional outstanding.
• 14:16
  Speaker 1: So someone's gonna have to eat that loss if indeed
• 14:18
  Speaker 1: money changes his hands and there's a CDs trigger which
• 14:21
  Speaker 1: is hit. So you know, there's a lot to look at.
• 14:23
  Speaker 1: I mean, certainly, I mean, but you know, just looking
• 14:25
  Speaker 1: back at what's in the best interest of Argentina. You know,
• 14:29
  Speaker 1: if before my trip down there last week, I would
• 14:31
  Speaker 1: have said, you know, most people would have thought that
• 14:33
  Speaker 1: you know, a Fernandez Kirshner government would have been deemed
• 14:37
  Speaker 1: um bad for the market. I don't think you can
• 14:39
  Speaker 1: make that claim anymore. I mean, certainly some of the
• 14:41
  Speaker 1: capital controls, and not all capital controls are bad, but
• 14:43
  Speaker 1: the Macaree administration, some of the capital controls they just
• 14:46
  Speaker 1: put into place. I mean basically what they did was
• 14:48
  Speaker 1: they they they basically um wouldn't let local paceol denominated
• 14:54
  Speaker 1: money market funds which are holding the salaries for local
• 14:56
  Speaker 1: workers basically pay back that money. So you know, I
• 14:59
  Speaker 1: mean corporates, local corporates who are using money markets to
• 15:01
  Speaker 1: stash their cash couldn't access it to pay salaries last
• 15:04
  Speaker 1: month because of a lot of these capital controls. So
• 15:07
  Speaker 1: I mean McCree is not well loved locally on the ground,
• 15:09
  Speaker 1: and certainly that was probably a very hasty and cumbersome
• 15:11
  Speaker 1: move in my opinion. So what's what would be a
• 15:14
  Speaker 1: quick resolution here? What kind of timing are we looking for?
• 15:17
  Speaker 1: I mean, most I am a you know kind of
• 15:19
  Speaker 1: negotiations probably take about six months, um. So anything before
• 15:23
  Speaker 1: that would be very very quick, because this is a
• 15:25
  Speaker 1: very very complicated restructuring that needs to take place. I mean,
• 15:28
  Speaker 1: you know, Paul, I mean we have marketable and non
• 15:30
  Speaker 1: marketable debt. We have hard currency and local currency that
• 15:33
  Speaker 1: we have different creditors. We have pars, we have discoes,
• 15:36
  Speaker 1: we have bonars, we have leleaks. I mean, we have
• 15:37
  Speaker 1: so many different structures that form that debt stack that
• 15:40
  Speaker 1: to kind of go through it all and kind of
• 15:42
  Speaker 1: i mean different covenants, different um um, it's just so
• 15:46
  Speaker 1: much stuff that you need to go through. But the
• 15:48
  Speaker 1: good thing is you do have collective action clauses and
• 15:50
  Speaker 1: most of the foreign law debt, so they should be
• 15:52
  Speaker 1: able to kind of push things forward a little bit
• 15:54
  Speaker 1: more quickly than we've seen in the past. Just in
• 15:55
  Speaker 1: a minute, I'm wondering how representative is Argentina of other
• 15:59
  Speaker 1: potential potholes in emerging markets. Well, Argentina is very unique.
• 16:03
  Speaker 1: I mean this has been going on for years. I
• 16:04
  Speaker 1: mean they've defaulted twice in the last twenty years already.
• 16:07
  Speaker 1: I mean again, a lot of us started with with
• 16:09
  Speaker 1: with in ninety nine when Russia defaulted on its debt
• 16:12
  Speaker 1: and basically that pushed a great recession into Latin America.
• 16:14
  Speaker 1: If you look at OTWO, Brazil emerged from that, and
• 16:17
  Speaker 1: there was a similar politician that was actually um running
• 16:20
  Speaker 1: under a very kind of populous platform in Braziliano two
• 16:23
  Speaker 1: and that was Lula and so Lula, which was the
• 16:25
  Speaker 1: market thought he would be very market unfriendly going into office,
• 16:28
  Speaker 1: actually wound up being very friendly in terms of the market.
• 16:31
  Speaker 1: And actually, you know, the economy, look at where it
• 16:33
  Speaker 1: is now relative to our to where it once was. Um,
• 16:36
  Speaker 1: you can only hope that Alberta Fernandez might kind of
• 16:39
  Speaker 1: fit into that category. I mean, the verdict is still
• 16:41
  Speaker 1: out because he's not saying anything until he's elected, and
• 16:43
  Speaker 1: we don't know what it was cabinet is going to
• 16:45
  Speaker 1: be comprised of. But I think that's gonna be really
• 16:47
  Speaker 1: key after the election. Who does he pick to be
• 16:49
  Speaker 1: in his cabinet? From an economics perspective, that is the
• 16:52
  Speaker 1: most important thing that we're looking at right now. Paul,
• 16:54
  Speaker 1: all right, well, have you back on to give us
• 16:55
  Speaker 1: some colors. This plays out big, big numbers for Argentina.
• 17:00
  Speaker 1: Hopefully sooner ra the later they get a resolution there.
• 17:02
  Speaker 1: Damien sass Our, chief Emerging markets credit strategist, joining us
• 17:05
  Speaker 1: in a Bloomberg Interactive broker's studio. People don't want to
• 17:23
  Speaker 1: pay to trade stocks. That has been the resounding message
• 17:27
  Speaker 1: behind the success of apps like robin Hood, which allows
• 17:30
  Speaker 1: people to do just that. Joining us down to talk
• 17:32
  Speaker 1: about the shift to no fee trading is Bill Capuzzi.
• 17:36
  Speaker 1: He's chief executive officer of APEX Clearing, joining us on
• 17:40
  Speaker 1: the phone from Chicago. Bill, I want to talk a
• 17:42
  Speaker 1: little bit about Charles Schwab's decision announcement earlier this week
• 17:46
  Speaker 1: to abandon commissions for their brokers and move into a
• 17:51
  Speaker 1: model that more closely resembles robin Hood. What was your reaction. Yeah,
• 17:57
  Speaker 1: I'm not surprised. I'm not surprised at all that that happen,
• 18:00
  Speaker 1: and it's just a matter of time. Uh. You know,
• 18:03
  Speaker 1: as you mentioned robin Hood, which we helped as a
• 18:06
  Speaker 1: custodial uh partner to robin Hood back when we helped
• 18:10
  Speaker 1: them launch of the free app. We also helped since
• 18:13
  Speaker 1: then a couple of dozen others offer free trading solutions,
• 18:18
  Speaker 1: and uh, there's there's demand right look at robin and
• 18:21
  Speaker 1: they have, you know, close to seven million users today
• 18:25
  Speaker 1: and and the reason for it is people are looking
• 18:29
  Speaker 1: for yield, looking for opportunities and lowering barriers to investing.
• 18:36
  Speaker 1: So I'm not surprised at all, and I'm certainly not
• 18:38
  Speaker 1: surprised that TV and the trade followed suit. And my
• 18:42
  Speaker 1: expectation is somewhere in the next twenty four hours we'll
• 18:45
  Speaker 1: hear from from Fidelity as well. So, Bill, we've seen
• 18:49
  Speaker 1: in the asset management business, uh, you know, rates UM
• 18:52
  Speaker 1: fees continuing to go lower. Where does just give us
• 18:56
  Speaker 1: a sense of like the economic model for like a
• 18:59
  Speaker 1: robin head for robin hood, for example, how did they
• 19:01
  Speaker 1: make money? Yeah, that's a great question. You know, there's
• 19:05
  Speaker 1: there's lots of pressed out over the last twenty four
• 19:07
  Speaker 1: hours around this and and the reality is there's there's
• 19:10
  Speaker 1: a few different levers I'll say that are that are
• 19:13
  Speaker 1: pulled in terms of how to monetize you know, a
• 19:17
  Speaker 1: free uh you know from an explicit the perspective of
• 19:21
  Speaker 1: free solution UM one is payment for order flow, right,
• 19:25
  Speaker 1: so to they send people are trading actively in stocks
• 19:29
  Speaker 1: those orders. Retailers are routed to market makers UM, and
• 19:33
  Speaker 1: there's spread in the name UM and there's an opportunity
• 19:37
  Speaker 1: to make make money off of the trading UM. And
• 19:41
  Speaker 1: what I would say is, uh, you know, for retail investor,
• 19:46
  Speaker 1: the friction lists way of trading today, it's probably never
• 19:51
  Speaker 1: been better as a matter of fact, I want to say,
• 19:53
  Speaker 1: probably it's never been better than this today, and the
• 19:56
  Speaker 1: spreads are so tight. Uh you know, there's some opportunity there,
• 20:00
  Speaker 1: but I think you know, in terms of the win
• 20:02
  Speaker 1: win for an end investor, it's a it's a tremendous
• 20:05
  Speaker 1: time in just in terms of trading friction. The second
• 20:09
  Speaker 1: is interest, right, So you know, if you look at
• 20:11
  Speaker 1: schwabing what they came out with, they said, hey, look,
• 20:14
  Speaker 1: three to four percent of our top line revenue came
• 20:17
  Speaker 1: from commissions. The vast majority of their uh you know
• 20:22
  Speaker 1: there revenue today is either interest income or fee based revenue.
• 20:28
  Speaker 1: And then the last thing that's not talked about a
• 20:30
  Speaker 1: lot is just traditional brokerage is um stock loan al Right,
• 20:36
  Speaker 1: So every anytime someone is buying a stock, there's an
• 20:40
  Speaker 1: opportunity on the street where someone wants to short the
• 20:43
  Speaker 1: stock and is looking for the ability to loan the
• 20:47
  Speaker 1: stock and has money made in terms of stock loan.
• 20:50
  Speaker 1: So despite all of those areas to possibly make money,
• 20:53
  Speaker 1: we are looking at charl Schwab shares down an additional
• 20:57
  Speaker 1: three point two today following a three three point three
• 21:00
  Speaker 1: percent loss yesterday and a nine point seven percent loss
• 21:04
  Speaker 1: the day that they made this announcement, So it does
• 21:07
  Speaker 1: seem like people will view this in a negative light
• 21:10
  Speaker 1: in terms of earning his profitability. There is a saying
• 21:13
  Speaker 1: there's no such thing as free lunch. For individual investors
• 21:18
  Speaker 1: who are looking at potential brokers, what should they be
• 21:21
  Speaker 1: looking for for truly a good deal and not perhaps
• 21:24
  Speaker 1: some fees that are gonna be baked in on the
• 21:26
  Speaker 1: back end. Yeah, that's a that's a great question. And
• 21:30
  Speaker 1: I think that there are some things right. So, uh,
• 21:32
  Speaker 1: you know the fine print you talked about the free launch, right,
• 21:36
  Speaker 1: make the analogy to you know, the ads for Verizon
• 21:39
  Speaker 1: where it's a free you get a free iPhone? Right,
• 21:41
  Speaker 1: it's not free, it's baked into a longer term contract,
• 21:45
  Speaker 1: and the same those for brokerage. Like people made to
• 21:47
  Speaker 1: look at things like is there a minimum balance that's
• 21:51
  Speaker 1: required in the account? Is there a certain trade size
• 21:55
  Speaker 1: that I have to do in order to to to
• 21:57
  Speaker 1: get that quote unquote free? Um, what's the interest that
• 22:01
  Speaker 1: I'm going to receive on the cash that's that's that's
• 22:05
  Speaker 1: in these accounts? Um? What what my pain for options? Right?
• 22:09
  Speaker 1: If I'm going to trade an option, what's the cost
• 22:11
  Speaker 1: of an option? And then the last one and kind
• 22:14
  Speaker 1: of the last fontira is mutual funds. Um. You know,
• 22:17
  Speaker 1: are are the fees for mutual funds free or is
• 22:21
  Speaker 1: it close to free? Um um? I do think sort of.
• 22:25
  Speaker 1: The one of the consequences of of this is that
• 22:28
  Speaker 1: there's they're going to be further pressure on the mutual
• 22:31
  Speaker 1: fund industry, right because ets look at Schwab's announcement, equities
• 22:36
  Speaker 1: and e t s are free. Well, mutual funds aren't, uh,
• 22:39
  Speaker 1: And it's just gonna put more and more pressure on
• 22:42
  Speaker 1: the mutual fund industry and you know, drive more into
• 22:45
  Speaker 1: the etf world. Bill Capozzi, thanks so much for joining us.
• 22:48
  Speaker 1: Really really appreciate your thoughts on this move. We're seeing
• 22:51
  Speaker 1: an asset management business towards zero fees. Chief executive officer
• 22:55
  Speaker 1: of APEX Clearing Bill joined us on the phone from Chicago. Again.
• 22:59
  Speaker 1: Just really amazing using change to the asset management business. UH.
• 23:03
  Speaker 1: With Charles Schwab announcing going to zero costs for many
• 23:07
  Speaker 1: of their equity trades, just a real change in the industry.
• 23:11
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 23:14
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
• 23:16
  Speaker 1: or whatever. Podcast platform you prefer Paul Sweeney, I'm on
• 23:19
  Speaker 1: Twitter at pt Sweeney. I'm Lisa Abram Woyd's I'm on
• 23:22
  Speaker 1: Twitter at Lisa Abram Woyds One. Before the podcast, you
• 23:25
  Speaker 1: can always catch us worldwide on Bloomberg Radio