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Bloomberg Intelligence: Berkshire Earnings Jump · Bloomberg Intelligence

• 0:02
  Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
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  Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
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• 0:25
  Speaker 3: Berkshire Hathaway people talking about this scene getting close to
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  Speaker 3: a one trillion dollar valuation.
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  Speaker 4: Find all I care about it?
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  Speaker 3: What are they gonna do with their cash? Matthew Palozola,
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  Speaker 3: he joins us here. He's from Bloomberg Intelligence. He covers
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  Speaker 3: all the insurance comes, including Berkshire. So, Matthew, how much
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  Speaker 3: cash do they really have on their balance sheet? And
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  Speaker 3: we've been asking the same question for years? What do
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  Speaker 3: they do with it? Anything new coming out of Omaha?
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  Speaker 5: No, So about one hundred and sixty eight billion of cash.
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  Speaker 5: We've been talking about this for a long time. They
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  Speaker 5: haven't had a ton to do with the cash. Buffett
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  Speaker 5: had said there's almost no targets outside of the US
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  Speaker 5: that he would be interested in, and the ones inside
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  Speaker 5: the US, the prices are getting driven up on competition.
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  Speaker 5: So it was it was a real I thought a
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  Speaker 5: kind of negative tone in the letter not only on
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  Speaker 5: that but on some of their operations as well.
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  Speaker 6: So a walkers through that, like, what were raised concerns
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  Speaker 6: for you?
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  Speaker 5: Yeah, So the beginning of last year at the annual meeting,
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  Speaker 5: Buffett had said, we think the energy business, in the
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  Speaker 5: railroad business, they're going to be he's gonna be lower
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  Speaker 5: in twenty twenty three versus twenty two. What happened was
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  Speaker 5: they were lower, but there was actually a couple of
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  Speaker 5: externalities as well that made them even worse and their
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  Speaker 5: their go forward concerns. The first one was labor costs
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  Speaker 5: in the railroad that they were having a labor shortage
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  Speaker 5: and they were paying their people more so the margins
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  Speaker 5: in that Burlington Northern Santa Fe seemed to be like
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  Speaker 5: they're going to underperform peers on a go forward basis.
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  Speaker 5: The second was in energy in the West Coast. There's
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  Speaker 5: a lot of litigation on wildfire, there's a lot of
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  Speaker 5: regulation on their profits, and the outlook there didn't look
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  Speaker 5: at you either.
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  Speaker 7: So but to that point, what I find interesting is
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  Speaker 7: that for the railroad, for example, that's why there's the
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  Speaker 7: cash pile, right because you make the argument that I
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  Speaker 7: have one hundred and sixty seven billion dollars in cash
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  Speaker 7: because when things don't go well, I don't have to
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  Speaker 7: go to a bank.
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  Speaker 6: I don't have to get a loan. I can manage that.
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  Speaker 5: So their cash pile is far in excess of what
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  Speaker 5: they would need, right, So they they want to keep
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  Speaker 5: a buffer of like twenty billion, and they have one
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  Speaker 5: hundred and sixty seven right, So they're not keeping it
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  Speaker 5: to support the businesses. They're keeping it because there's just
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  Speaker 5: nothing good to do with it.
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  Speaker 3: Historically, what is warrant said about dividends or lack their own?
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  Speaker 5: So he likes getting them, and he will and he'll
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  Speaker 5: never pay them, right, So I think in a post
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  Speaker 5: buffet Berkshire, maybe that's something that happens with greg Abel.
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  Speaker 5: I'm not one hundred percent sure, but it's never going
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  Speaker 5: to happen when he's in charge.
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  Speaker 4: That's just a philosophical thing with him.
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  Speaker 5: Yeah, he thinks we can do better with the cash
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  Speaker 5: than giving it back to you and letting you take
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  Speaker 5: the alternative.
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  Speaker 6: Ask a really down question, where is that cash?
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  Speaker 8: Like?
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  Speaker 6: Is it in a money market fund?
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  Speaker 4: Like?
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  Speaker 6: Is it in bomb?
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  Speaker 5: It's in money markets, bonds, short term securities? And what
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  Speaker 5: happened last year was the short term rates went up
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  Speaker 5: so much that they were earning a ton of money
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  Speaker 5: on it. I think that actually took they were they
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  Speaker 5: went from something earning like fifty million to like five
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  Speaker 5: billion or something just just on the cash. And I
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  Speaker 5: actually think that took a lot of pressure off, even
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  Speaker 5: them investing in equities.
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  Speaker 3: So how do people I mean, you're an insurance sannel,
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  Speaker 3: so you're an odd duct to begin with.
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  Speaker 4: Right, No, it's crazy accounting. You don't know what's going on.
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  Speaker 3: How do you how do you and other analysts really
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  Speaker 3: analyze this conglomerate or do you just say, hey, it's
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  Speaker 3: a GDP growth company and that's it a slap a
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  Speaker 3: GDP mop.
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  Speaker 5: But on it, I mean, I wouldn't say that it's tough.
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  Speaker 5: We try to look at it, you know, some of
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  Speaker 5: the parts you can value the company looking at the float.
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  Speaker 5: In the insurance business, there's there's a couple of different
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  Speaker 5: methods to do it, you know, even just on a
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  Speaker 5: simple pe right and what they're earning. It seems like
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  Speaker 5: generally the values of the businesses kind of fall in
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  Speaker 5: line with with peers. Like, I don't think there's a
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  Speaker 5: conglomerate discount me anymore. I would consistently argue that it's
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  Speaker 5: not a GDP company, that it's got best in class businesses,
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  Speaker 5: pricing power businesses. So you're not going to just see
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  Speaker 5: them growing, you know, two to three percent a year.
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  Speaker 5: But you know a ton of the the emphasis goes
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  Speaker 5: on their investments and you know what they can buy.
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  Speaker 6: What do you think they should buy?
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  Speaker 5: You know, something I was thinking of over the weekend.
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  Speaker 5: I was thinking they were gonna buy Occidental, right, and
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  Speaker 5: they threw cold water on that last year. He said
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  Speaker 5: it again in the letter this year they wasn't gonna
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  Speaker 5: buy it. But something I thought find fits into his
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  Speaker 5: niche would be maybe entertainment. Right, So if you think
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  Speaker 5: about the thing lot, you know, maybe you're.
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  Speaker 6: You're not looking at right now.
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  Speaker 5: I think that because look what does he look at.
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  Speaker 5: He looks at stuff that there's going to be consistent
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  Speaker 5: demand for.
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  Speaker 9: Right.
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  Speaker 5: Maybe it's a little old school like he still thinks that.
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  Speaker 5: He says Cole's not going anywhere anytime soon. You know,
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  Speaker 5: it's not He bought these Japanese trading houses, right. The
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  Speaker 5: investment there is around nineteen billion dollars in value, and
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  Speaker 5: if you look at them, they're not AYI they're not flashy,
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  Speaker 5: they're not tech, but they are steeply involved in these
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  Speaker 5: things that are just not going away. And I think that,
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  Speaker 5: you know, I don't cover entertainment, but I think you know,
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  Speaker 5: there you go, Paul, Maybe you have an idea going up,
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  Speaker 5: but the whole town's for sale. There's always going to
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  Speaker 5: be a market for entertainment.
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  Speaker 9: We always need to be entertained.
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  Speaker 5: So I don't know, maybe there's something in there.
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  Speaker 7: Well, I mean to your Oxy point, I mean it's
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  Speaker 7: not that he was he was offered a really good deal,
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  Speaker 7: Like he got a really good deal on some shares
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  Speaker 7: when Oxy was looking to buy In and Darko and
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  Speaker 7: they needed cash. They needed cash quickly because Chevron was
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  Speaker 7: also making a bid. So like, will things get dramatic
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  Speaker 7: enough or distressed enough for there to be a really
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  Speaker 7: good deal? Might not be buy the whole company, but
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  Speaker 7: get that good deal.
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  Speaker 6: What do you think?
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  Speaker 8: You know?
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  Speaker 5: He always says he buys he would love to own
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  Speaker 5: all of the companies he owns, like he would love
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  Speaker 5: to own Apple, right, but he can own the whole company.
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  Speaker 5: I mean, just say, we're not interested in necessarily running Occidental, right,
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  Speaker 5: So I could see them buying up more of it.
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  Speaker 5: I mean, they have the warrants that will increase their
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  Speaker 5: ownership given the strike price. But I don't again like
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  Speaker 5: they're not going they don't want to run it, but
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  Speaker 5: I think they would own as much.
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  Speaker 9: Of it as they could.
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  Speaker 4: Step back.
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  Speaker 3: Your P and C property and Casualty's what's the call here?
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  Speaker 4: Do we like it? Do we not like them?
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  Speaker 5: So for Berkshire's businesses specifically, they leaned into the Florida
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  Speaker 5: reinsurance market heavily last year. Okay, and that worked out well.
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  Speaker 5: And you know, I've been guilty of saying this, and
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  Speaker 5: you see it sometimes in the press that they quote
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  Speaker 5: bet on the market, right. They didn't bet on it.
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  Speaker 5: They didn't like place their chips on black and hope
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  Speaker 5: that it worked out right. It was a risk adjusted play.
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  Speaker 5: They said, if we have an average hurricane season in Florida,
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  Speaker 5: we'll still make a nice return. What happened is we
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  Speaker 5: had a far below average, so they made a lot
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  Speaker 5: of money. The other business for them that's kind of
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  Speaker 5: turning around is Geico. So if anyone here drives a car,
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  Speaker 5: has a car, you've probably seen auto insurance costs going
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  Speaker 5: up dramatically. You've probably also seen a lot less advertising,
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  Speaker 5: so they spent it. Did some back of the envelope
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  Speaker 5: calculations about one point five billion dollars less on advertising
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  Speaker 5: this year just in Geico. Then they wouldn't on a
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  Speaker 5: run rate basis, And why was it. They did that
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  Speaker 5: to protect the profitability of the business. So the combined
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  Speaker 5: ratio of the business is kind of the inverse of
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  Speaker 5: their profit margin. Right, they hoped to make about a
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  Speaker 5: four percent profit margin underwriting insurance. They were probably gonna
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  Speaker 5: make zero if they didn't cut their ads spend dramatically.
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  Speaker 5: So they cut the ad spend. They've cut policies to
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  Speaker 5: specifically on the West Coast, to kind of pair that down.
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  Speaker 5: So that business was actually a nice performer this year,
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  Speaker 5: but because they spend a lot less money on advertising.
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  Speaker 4: Really interesting, that's money on my companies.
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  Speaker 6: Yeah, that's dope. Sorry about that.
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  Speaker 7: Matt Halizoa, We appreciate it. Thank you very much. Joining
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  Speaker 7: us from Bloomberg Intelligence. He's the P and C Insurance
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  Speaker 7: senior analyst there and also covers all things of Berkshire Hathaway.
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• 8:46
  Speaker 7: Stocks are definitely still going up. Everyone's really confused about
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  Speaker 7: it and scratching their head. Yet no one's actually selling necessarily,
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  Speaker 7: like you cannot get a sell off in this rally.
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  Speaker 7: Kathy and Whistle is managing director at Morgan Stanley Private
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  Speaker 7: Wealth Management, and she joins us, Now, Kathy, why won't
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  Speaker 7: markets go down?
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  Speaker 10: That's a great question, Alex, You're always throwing those tricky
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  Speaker 10: ones at me. I would say basically that everyone is
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  Speaker 10: still enthusiastic about the opportunity of interest rates coming down eventually.
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  Speaker 10: So there was a little bit of a pullback a
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  Speaker 10: couple of weeks ago when we all realized that the
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  Speaker 10: Fed was not going to start cutting rates as soon
• 9:25
  Speaker 10: as they had originally thought. But now we know they're
• 9:28
  Speaker 10: going to cut eventually, so we want to get our
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  Speaker 10: money in and have a long term view and get
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  Speaker 10: some of the growth that's been going on. A little
• 9:34
  Speaker 10: bit of its FOMO, a little bit of it is
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  Speaker 10: long term thinking.
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  Speaker 3: So Kathy, we're pretty much through the earning season here.
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  Speaker 3: I'm not sure I've seen earnings rise as much as
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  Speaker 3: the market has. So what did you take away from
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  Speaker 3: this earnings cycle here?
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  Speaker 10: Yeah, we were expecting earnings to get hit somewhat because
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  Speaker 10: over the last year or so, companies have been still
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  Speaker 10: very positive with their expectation, and at some point they
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  Speaker 10: we're going to have to pull in because there are
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  Speaker 10: sales that are going down, the cost of goods is
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  Speaker 10: getting more expensive, and it's harder and harder to get
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  Speaker 10: that earnings number that they want in order to impress
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  Speaker 10: their shareholders. At the end of the day, there's only
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  Speaker 10: two ways to get the earnings to look good, and
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  Speaker 10: that's either to increase your sales and your revenue or
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  Speaker 10: to decrease your expenses. And a lot of companies are
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  Speaker 10: starting to decrease expenses. We're seeing that with the layoffs,
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  Speaker 10: and this is what we're thinking about of why companies
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  Speaker 10: are trying to reach those numbers by making those cuts
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  Speaker 10: and laying people off. And it's not necessarily the most
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  Speaker 10: healthy way to meet numbers.
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  Speaker 6: So, Kathy, what do you do? Then? Golden Sachs had
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  Speaker 6: a noubt.
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  Speaker 7: They talked about how hedge funds are selling tech last
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  Speaker 7: week and they're buying consumer staples for example.
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  Speaker 6: What do you do in this environment.
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  Speaker 10: Yeah, one of the things that I'm doing with clients
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  Speaker 10: actually is a very simple basic concept of asset allocation, right,
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  Speaker 10: which where you're starting with how much is the percentage
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  Speaker 10: you have in equities versus fixed income versus alternative investing,
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  Speaker 10: And I'm peeling back a little bit. For those clients
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  Speaker 10: that have stayed in the markets and have you done
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  Speaker 10: quite well, you can peel back a little bit from
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  Speaker 10: those names that have had a big run up and
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  Speaker 10: start going more into that whole fixed income arena because
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  Speaker 10: you are getting paid now for fixed income, which we
• 11:21
  Speaker 10: haven't gotten paid in years for fixed income. So there's
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  Speaker 10: opportunities there. If the FED does go ahead and reduce
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  Speaker 10: rates at some point in the future, there's a chance
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  Speaker 10: for a little bit of a pop up too. So
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  Speaker 10: I think just looking at allocation is the first step,
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  Speaker 10: and the second step is looking at different areas of
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  Speaker 10: the market that we think will do well. We've liked
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  Speaker 10: consumer staples, We've liked you know, everyone has to buy toothpaste, right,
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  Speaker 10: everybody's got to buy the basic products. So you can
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  Speaker 10: still go there. You can go healthcare. Healthcare should do well.
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  Speaker 10: We've seen some good numbers over this last earning season
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  Speaker 10: two with healthcare, and we think we'll do, you know,
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  Speaker 10: continue to do well there. And I think the financials
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  Speaker 10: still have a nice opportunity to recover in this market
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  Speaker 10: as well. So those are some of the areas that
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  Speaker 10: we're looking at.
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  Speaker 4: Kathy.
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  Speaker 3: On the fixed income side, how much credit risk are
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  Speaker 3: you suggesting your clients take. Do they stick with the
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  Speaker 3: treasures where you can still get very nice yields or
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  Speaker 3: do you go out into the credit space and maybe
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  Speaker 3: take a little bit more risk for a little bit
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  Speaker 3: more return.
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  Speaker 10: Well, that's a great question, and it's something I've been
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  Speaker 10: having a conversation with my clients about. I don't think
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  Speaker 10: if we're going to have, you know, the Fed raise
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  Speaker 10: rates sometime this year, these higher short term rates are
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  Speaker 10: going to eventually go away and then it's going to
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  Speaker 10: be too late to lock into the longer higher rates.
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  Speaker 10: So I've been slowly legging clients out of these short
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  Speaker 10: term rates the Treasury bills and things like that, and
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  Speaker 10: going a little bit longer. If it's a taxable account
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  Speaker 10: and they're in a higher tax bracket. We're looking at
• 12:45
  Speaker 10: municipal bonds. I really like municipal bonds for those clients,
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  Speaker 10: so does Paul. Great, Thanks Alex. So the second piece
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  Speaker 10: of that is where are taxes going? They are definitely
• 12:57
  Speaker 10: not going down. I don't know if they'll go up,
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  Speaker 10: maybe they'll stay the same, but they are definitely not
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  Speaker 10: going down. The chances with a deficit and different things
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  Speaker 10: that are going on, we may see taxes at some
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  Speaker 10: point go up.
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  Speaker 8: There.
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  Speaker 10: It wasn't that many years ago or decades ago that
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  Speaker 10: we were in a much higher tax bracket in this
• 13:15
  Speaker 10: country for the highest earners. And if that happens, municipals
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  Speaker 10: will be extremely valuable in your portfolio as well.
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  Speaker 7: This is also sort of a basic but yet silly question.
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  Speaker 7: So when you're taking a look at your asset allocation,
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  Speaker 7: your barbells and all of that, what do you pay
• 13:29
  Speaker 7: attention to, Like, is it when the earnings cross the tape?
• 13:32
  Speaker 6: Is it going to be the PCE on Thursday? Is
• 13:35
  Speaker 6: it going to be the Fed?
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  Speaker 8: Like?
• 13:36
  Speaker 7: We all know where this is going, right, So do
• 13:38
  Speaker 7: you just kind of like do your thing and check
• 13:39
  Speaker 7: back in six months later?
• 13:42
  Speaker 10: I try, you know, I do look at the different
• 13:45
  Speaker 10: data that comes across, you know, whether it's you know,
• 13:48
  Speaker 10: PMI or housing starts or things like that. I think
• 13:51
  Speaker 10: it's interesting that we're starting to see the numbers look
• 13:54
  Speaker 10: a little bit more positive for home buyers, right And
• 13:58
  Speaker 10: it's probably because sometimes when when people are waiting too long,
• 14:01
  Speaker 10: it kind of compresses that demand up, so then eventually
• 14:04
  Speaker 10: they have to start I know a lot of investors
• 14:08
  Speaker 10: are starting to think about purchasing because they just can't
• 14:11
  Speaker 10: wait any longer. And there's also the idea that you
• 14:13
  Speaker 10: can always refinance in a few years if rates to
• 14:16
  Speaker 10: go down. So I think that you have to look
• 14:18
  Speaker 10: at what your priorities are when it comes to your
• 14:20
  Speaker 10: values and goals and how you want to live your life,
• 14:22
  Speaker 10: and then try to find the best way possible to
• 14:24
  Speaker 10: do that. In terms of looking at all these different numbers.
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  Speaker 10: When I think about clients, it's a little bit easier
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  Speaker 10: for me in the sense that we have a longer
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  Speaker 10: term view. We don't have a day to day We're
• 14:33
  Speaker 10: not traders, you know. I don't have institutional clients. I
• 14:37
  Speaker 10: have private wealth clients, individual clients, business owners, entrepreneurs, c
• 14:42
  Speaker 10: SPIT executives that are trying to figure out what to
• 14:44
  Speaker 10: do with their money and how to make it, you know,
• 14:47
  Speaker 10: build and last. I've had conversations with a lot of
• 14:49
  Speaker 10: clients in their late fifties. Their whole life, they've been
• 14:52
  Speaker 10: in the accumulation phase, right, They're growing, they're adding money
• 14:55
  Speaker 10: to their portfolio, and it's pretty you know, pretty low key.
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  Speaker 10: Now they're starting to think about retirement, and I can
• 15:02
  Speaker 10: tell you people get stressed when they start thinking about, oh,
• 15:05
  Speaker 10: now I have to take this money and put put
• 15:07
  Speaker 10: you know, I'm in the distribution phase, like how am
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  Speaker 10: I going to start using that money for the rest
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  Speaker 10: of my life? And it's a little scary, which is
• 15:14
  Speaker 10: why I also think, you know, clients can do a
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  Speaker 10: financial plan which gives you a really great roadmap year
• 15:19
  Speaker 10: to year about what kind of money you'll come in
• 15:21
  Speaker 10: into your portfolio and how to you know, spend it
• 15:24
  Speaker 10: throughout each year so that you have it for the
• 15:26
  Speaker 10: rest of your life. So these are like the longer
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  Speaker 10: term themes and topics I'm thinking about when I think
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  Speaker 10: about clients, and I'm also looking for you know, earlier
• 15:34
  Speaker 10: people were talking about how you know, there's a strategy.
• 15:37
  Speaker 10: You know, Buffett takes the strategy of trying to find
• 15:39
  Speaker 10: dislocations in the market. I've always thought that that is
• 15:43
  Speaker 10: the best way to think about clients' portfolios, their individual portfolios,
• 15:48
  Speaker 10: like when is there a dislocation in the market, and
• 15:51
  Speaker 10: can we take advantage of that. So when we see
• 15:55
  Speaker 10: the interest rates change favorably for individual investors and their
• 15:59
  Speaker 10: yields are getting higher, that's a great time to say that,
• 16:01
  Speaker 10: you know, we have a little money on the sidelines,
• 16:03
  Speaker 10: let's start putting that to work.
• 16:05
  Speaker 3: Kathy, to what extent do you guide your clients into
• 16:08
  Speaker 3: alternative investments, whether that's private equity, private credit, hedge funds.
• 16:13
  Speaker 4: How does that work?
• 16:14
  Speaker 8: Yeah?
• 16:14
  Speaker 10: Absolutely so. Of course alternative investments, you know, you need
• 16:18
  Speaker 10: to qualify for it, so you have to be like
• 16:19
  Speaker 10: a certain level of investor. However, they're becoming more and
• 16:23
  Speaker 10: more democratized and becoming more available to more investors than
• 16:29
  Speaker 10: in the past. So the way I think about it
• 16:31
  Speaker 10: is this equities they've had a run. We had like
• 16:34
  Speaker 10: a ten year you know, double digit return. I think
• 16:37
  Speaker 10: it was like, what was it, twenty ten or so
• 16:40
  Speaker 10: to twenty twenty, something like that. We think alternatives are
• 16:44
  Speaker 10: an area where we can see double returns for the
• 16:46
  Speaker 10: next ten years, so we definitely want our clients in there.
• 16:48
  Speaker 10: And so I'm looking at an asset allocation of anywhere
• 16:51
  Speaker 10: on equities from like fifty to sixty. Now that fixed
• 16:53
  Speaker 10: income is back in the game, we can peel back
• 16:56
  Speaker 10: from the equities and add more to fixed InCom because
• 16:58
  Speaker 10: we were kind of avoiding a fixed income for a
• 17:00
  Speaker 10: larger portion of the portfolio in the last So you know,
• 17:03
  Speaker 10: a few years, so you've got like fifty to sixty
• 17:05
  Speaker 10: percent equities, maybe you've got like twenty to thirty percent
• 17:08
  Speaker 10: fixed income, and fifteen to twenty. You know, you can
• 17:11
  Speaker 10: go depending on the size of the clients net worth.
• 17:13
  Speaker 10: He goes high as thirty percent and alternatives, but fifteen
• 17:16
  Speaker 10: to twenty is really like a good number, and when
• 17:19
  Speaker 10: we're looking at it, we're looking at trying to level up,
• 17:22
  Speaker 10: you know, sort of what the client is looking for
• 17:24
  Speaker 10: versus their time frame, the liquidity needs and all those
• 17:28
  Speaker 10: things that need to be considered.
• 17:31
  Speaker 6: Really interesting. Yep, that's a lot though. Fifteen to twenty.
• 17:33
  Speaker 4: Yeah, that's what I hear. I mean, we I hear
• 17:35
  Speaker 4: that from the retail it's very typical.
• 17:37
  Speaker 10: Now it's like I would say, that's what's typical for
• 17:40
  Speaker 10: the you know, the high networth investor.
• 17:43
  Speaker 4: All Right, Kathy, thank you so much for joining us.
• 17:44
  Speaker 3: Really appreciate that as always, Kathy at and Twistle Managing
• 17:47
  Speaker 3: Director Morgan Stanley Private Wealth and Management joining us on
• 17:51
  Speaker 3: a zoom calf from lovely.
• 17:52
  Speaker 4: Ridgewood to New Jersey. They love me and Ridgewood. That's
• 17:54
  Speaker 4: a great tent.
• 17:55
  Speaker 6: They love you, Eymer in Jersey.
• 17:57
  Speaker 1: They let you go to Ridgewood.
• 17:58
  Speaker 4: Yeah, I know exactly.
• 18:00
  Speaker 3: I slipped in there the country club. You know, I
• 18:03
  Speaker 3: made it once a Ridgewood country club. Lost many golf
• 18:05
  Speaker 3: balls there. It's a great, great old course.
• 18:08
  Speaker 4: I love it there, you know.
• 18:09
  Speaker 3: But we were at a remote for one of our
• 18:13
  Speaker 3: ria folks, retro investment advisors, And that's what the advisors
• 18:16
  Speaker 3: are saying. They have a ton of demand from their
• 18:18
  Speaker 3: clients for alternative investments.
• 18:20
  Speaker 4: Is much harder than I thought.
• 18:21
  Speaker 7: Yeah, it's like with bitcoin, it's like is it gonna
• 18:23
  Speaker 7: be ten percent or one percent? And that really makes
• 18:26
  Speaker 7: quite a big difference.
• 18:28
  Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
• 18:32
  Speaker 2: weekdays at ten am Eastern.
• 18:34
  Speaker 9: On Apple car Play and then broud Otto with the
• 18:36
  Speaker 9: Bloomberg Business app.
• 18:37
  Speaker 2: Listen on demand wherever you get your podcasts or watch
• 18:40
  Speaker 2: us live on YouTube.
• 18:43
  Speaker 3: Amazon, that's another big name now that is now in
• 18:46
  Speaker 3: the dal Jones industrials.
• 18:48
  Speaker 4: Good for them, it's a big day for them. But
• 18:50
  Speaker 4: the question is kind of where do we go from here?
• 18:52
  Speaker 3: What are the drivers here for our good friends at Amazon,
• 18:56
  Speaker 3: because they are the biggest play on retail, but they're
• 19:00
  Speaker 3: also one of the big plays on the cloud and
• 19:02
  Speaker 3: all that kind of stuff. So put them Goile It's
• 19:03
  Speaker 3: her job to figure all that stuff out. She's a
• 19:05
  Speaker 3: senior anos covering all the retail stuff for Bloomberg Intelligence.
• 19:08
  Speaker 3: Put them what's the if you go talk to your
• 19:11
  Speaker 3: clients out there, your institutional investor clients. What's kind of
• 19:14
  Speaker 3: the play on Amazon? Is it just shut up, I
• 19:16
  Speaker 3: got to own it, or I own it only for
• 19:19
  Speaker 3: the cloud? Or what's kind of the story behind the
• 19:22
  Speaker 3: Amazon play right now?
• 19:24
  Speaker 8: Yeah, I think it's all about profits. For a long time,
• 19:26
  Speaker 8: Amazon was all about marketshare, and today the story is
• 19:29
  Speaker 8: really a profit story. It's the profitability that's about to
• 19:33
  Speaker 8: unfold at Amazon that's really getting people excited and interested.
• 19:37
  Speaker 8: We wrote about this a few months ago, where you know,
• 19:39
  Speaker 8: if you look at their most lucrative businesses. And everyone
• 19:43
  Speaker 8: knows of the cloud, which generates thirty percent EBIT margins,
• 19:46
  Speaker 8: which we think can go to forty percent. That could
• 19:49
  Speaker 8: be a two hundred billion dollar business. So you're looking
• 19:51
  Speaker 8: at sixty to eighty billion dollars in profits in the
• 19:54
  Speaker 8: coming years. But then if you add advertising to then, Paul,
• 19:58
  Speaker 8: you know the space, well, they have fifty percent EBIT margins,
• 20:02
  Speaker 8: and we can see advertising growing to one hundred billion
• 20:05
  Speaker 8: dollars in just a few years. So you're talking about
• 20:07
  Speaker 8: fifty billion in advertising, plus if you add another sixty
• 20:11
  Speaker 8: seventy of cloud, you're talking a big profit number here,
• 20:16
  Speaker 8: and I think that's what's getting people excited. Aside from that,
• 20:20
  Speaker 8: retail is growing. And part of the reason that advertising
• 20:23
  Speaker 8: is doing so well is because you talked about search
• 20:26
  Speaker 8: a little earlier. You know, people go into Amazon as
• 20:28
  Speaker 8: if it was a search engine. Right, You go in
• 20:30
  Speaker 8: and you search for something. But the difference with Amazon
• 20:33
  Speaker 8: versus a search engine is you go with the purchase intent.
• 20:37
  Speaker 8: People go into Amazon looking for something and to colleck
• 20:39
  Speaker 8: that buyba and they already know they want it. They
• 20:41
  Speaker 8: just want to find it and get it there in
• 20:43
  Speaker 8: two days or less.
• 20:44
  Speaker 7: That is such a good point. And this is a
• 20:45
  Speaker 7: great example of this story of Amazon replacing Walgreen. So
• 20:48
  Speaker 7: I was talking to an anchor who's been struggling with
• 20:51
  Speaker 7: feeling sick and feels like that winter, like you're just
• 20:53
  Speaker 7: sick all the time. And I was telling about airborne,
• 20:55
  Speaker 7: which you take if you feel a coming on of
• 20:58
  Speaker 7: a cold. She's like, oh, where do I buy it?
• 20:59
  Speaker 6: Amazon?
• 21:00
  Speaker 7: I'm like, no, go to your local drug store. It's
• 21:01
  Speaker 7: two blocks away. But that idea, right, like walking those
• 21:04
  Speaker 7: two blocks isn't going to happen. And I have to
• 21:06
  Speaker 7: go to Amazon to buy the thing because it'll come
• 21:08
  Speaker 7: in two days. And I'm not even worried about it.
• 21:11
  Speaker 7: Where is the downside?
• 21:12
  Speaker 9: Though?
• 21:12
  Speaker 6: Who know?
• 21:12
  Speaker 7: I mean, you laid out a pretty convincing case, So
• 21:15
  Speaker 7: how do I I don't know what do I worry about?
• 21:18
  Speaker 8: So I think you know the downside? If we enter
• 21:21
  Speaker 8: a consumer recession, clearly Amazon will be impacted, right, so
• 21:24
  Speaker 8: we'll the rest of retail. But I think that's near term,
• 21:27
  Speaker 8: and as we've seen in past cycles, what goes down
• 21:30
  Speaker 8: comes up eventually. Amazon is one of those places where
• 21:32
  Speaker 8: we think if you view it for the longer term,
• 21:35
  Speaker 8: there's just a lot of opportunity across all its businesses.
• 21:38
  Speaker 8: We can't control the macro, but with the logistics platform
• 21:42
  Speaker 8: in place, and even this example that you gave. You know,
• 21:46
  Speaker 8: you need cold medicine, or you need anything and you
• 21:48
  Speaker 8: have to go to CBS or somewhere else because you
• 21:51
  Speaker 8: need it. Now you can't wait six hours, twelve hours,
• 21:54
  Speaker 8: twenty four hours for it. But I'll tell you that
• 21:56
  Speaker 8: Amazon's delivery has gotten much faster. I mean, I'm seeing
• 22:00
  Speaker 8: stuff at my door that I ordered today in less
• 22:03
  Speaker 8: than twenty four hours, sometimes eight to twelve hours. And
• 22:06
  Speaker 8: that's pretty incredible. And that's really a part due to
• 22:09
  Speaker 8: their realignment of their distribution centers, which they were able
• 22:12
  Speaker 8: to infuse and even faster delivery.
• 22:15
  Speaker 3: See it now, I have a general idea where Punham
• 22:17
  Speaker 3: and her family live. It's literally amongst or very close
• 22:20
  Speaker 3: to like I think all these distribution centers in Central Jersey.
• 22:24
  Speaker 4: It's unbelievable.
• 22:25
  Speaker 3: I think we've got to be like the Central we
• 22:27
  Speaker 3: have to be like the distribution hub of the East Coast.
• 22:30
  Speaker 6: It seems like I feel like a Jersey primo.
• 22:33
  Speaker 3: Oh yeah, why yeah, I am so. When I see
• 22:35
  Speaker 3: the Gove, I tell them you know, so put them.
• 22:39
  Speaker 3: Let's let's back away from Amazon. Talk to us about
• 22:41
  Speaker 3: just retail in general. Here.
• 22:43
  Speaker 4: How's the consumer doing out there? How do you what
• 22:46
  Speaker 4: are you hearing from your companies?
• 22:48
  Speaker 8: I think the consumer is very focused on value today.
• 22:51
  Speaker 8: If you're seeing the retailers that are actually being able
• 22:53
  Speaker 8: to drive the share gains, you'll see that they offer
• 22:56
  Speaker 8: some sort of value in their proposition. Whether it was
• 22:59
  Speaker 8: from Walmart that you heard from earlier, you know, that's
• 23:01
  Speaker 8: doing well. But then we hear from the other retailers,
• 23:04
  Speaker 8: the more discretionary ones, and they're struggling. Even the at
• 23:08
  Speaker 8: leisure companies. We heard, you know, from Puma and Adidas.
• 23:11
  Speaker 8: We heard from some of the other companies where they
• 23:14
  Speaker 8: may have done well in four Q because holiday was
• 23:16
  Speaker 8: really strong last year, but when they look out for
• 23:19
  Speaker 8: their guidance, it's been conservative for the most part from
• 23:22
  Speaker 8: most of the retailers that I've heard from, And I
• 23:25
  Speaker 8: think that just goes to show you that you have
• 23:27
  Speaker 8: to have what the consumer wants, and you have to
• 23:29
  Speaker 8: have it at the price that the consumer wants it
• 23:31
  Speaker 8: at for you to actually succeed in today's environment.
• 23:35
  Speaker 7: Macy's comes out tomorrow, we have to wait for next
• 23:37
  Speaker 7: week for like Colds and Target and all those guys.
• 23:39
  Speaker 7: But Macy's comes out tomorrow. I mean, that's a fine
• 23:43
  Speaker 7: line to walk for Macy's.
• 23:44
  Speaker 6: What are you expecting?
• 23:46
  Speaker 8: Yeah, I think I think holiday was really really strong
• 23:49
  Speaker 8: last year. So I think when these companies report four
• 23:51
  Speaker 8: Q results, you will see some reflection of that even
• 23:54
  Speaker 8: across the department stores. But the question is really once
• 23:57
  Speaker 8: again on the longer term, right where they stand in
• 24:00
  Speaker 8: the longer term is the surviable business model? How many
• 24:03
  Speaker 8: stores should they have? How oh do we lose? You
• 24:07
  Speaker 8: kind of grappling with right now. And we are in
• 24:10
  Speaker 8: an environment where the consumer is spending on needs over
• 24:14
  Speaker 8: once and if it is un once they're traveling, that's
• 24:17
  Speaker 8: where they're going.
• 24:18
  Speaker 4: Yep, So we're you know, we talk about inflation.
• 24:20
  Speaker 3: Putum prices buy and large in the supermarket don't come
• 24:25
  Speaker 3: down after they shot up. However, many percent here that's
• 24:28
  Speaker 3: just the inflation rate of growth is slowing. How about
• 24:31
  Speaker 3: for like Adidas, do they ever cut the price of
• 24:35
  Speaker 3: a shoe because inflation's declining?
• 24:39
  Speaker 4: Does that wrappen?
• 24:40
  Speaker 8: No, they had discounts, right, So if you want to
• 24:42
  Speaker 8: bring prices down, retailers use discounts as a medium to
• 24:45
  Speaker 8: do that. But once prices go up, they don't come down.
• 24:49
  Speaker 3: See that's that's a problem with inflation. That's why inflation
• 24:53
  Speaker 3: is insidious.
• 24:54
  Speaker 6: Yeah.
• 24:54
  Speaker 7: But so to kind of Paul's question, but really to
• 24:57
  Speaker 7: my question, are we going to see a lot of
• 25:00
  Speaker 7: discounting from retailers?
• 25:01
  Speaker 9: So?
• 25:01
  Speaker 6: I don't know if you guys know this.
• 25:02
  Speaker 7: Have we talked about Alex's a counter indicator?
• 25:04
  Speaker 8: No?
• 25:05
  Speaker 7: I only shop on sale, Okay, so where I'm shopping,
• 25:08
  Speaker 7: you should be shorting the stocks. So this is a
• 25:10
  Speaker 7: joke that winds up happening because I'm shopping there because
• 25:12
  Speaker 7: their inventory is bloated and because the sales are so good.
• 25:16
  Speaker 7: So am I going to be going to Bluemi's in
• 25:18
  Speaker 7: the next couple weeks or they finally have their pricing
• 25:20
  Speaker 7: power in inventory in check?
• 25:23
  Speaker 8: I think inventory is getting more in check as we
• 25:26
  Speaker 8: move into the spring. So I was in stores actually
• 25:28
  Speaker 8: on Friday, and the discounts were pretty reasonable. They weren't
• 25:32
  Speaker 8: too aggressive. There were some clearance wracks across them all,
• 25:35
  Speaker 8: but I can tell you the stores were quiet. There
• 25:37
  Speaker 8: was no one in there on a Friday afternoon. It
• 25:40
  Speaker 8: was very, very quiet. So It's interesting because there's new
• 25:44
  Speaker 8: inventory that's flown in for the spring, and as stores
• 25:48
  Speaker 8: put this new inventory out, they're going to be a
• 25:50
  Speaker 8: little careful with their discounting, and we could see more
• 25:53
  Speaker 8: discounts come in in April on the spring inventory before
• 25:56
  Speaker 8: now they're being steady and careful with them.
• 25:58
  Speaker 3: I bought a new sport code over the weekend and
• 26:01
  Speaker 3: maybe i'll break it out for you guys on Friday.
• 26:03
  Speaker 4: Something looking forward to. Oh I can't wait.
• 26:07
  Speaker 6: This is the long cell. This is this is sort
• 26:09
  Speaker 6: of a.
• 26:12
  Speaker 4: Actually walked into a local retailer. Shopping local.
• 26:16
  Speaker 3: That's how you go because guess what the Brooks Brothers
• 26:20
  Speaker 3: and the Shrewsbury Mall done.
• 26:21
  Speaker 4: Close kidding, Yes, actually I've been there any number of times.
• 26:25
  Speaker 4: It's just a crushing blow, crushing blow.
• 26:28
  Speaker 3: Uh so put them what's the Is there a fashion
• 26:31
  Speaker 3: thing out there that that's moving the market, moving the needle,
• 26:35
  Speaker 3: that's maybe getting one of your names kind of outperforming
• 26:37
  Speaker 3: the others.
• 26:39
  Speaker 8: I think across fashion it's the same trend that we've
• 26:41
  Speaker 8: been seeing. You know, denim is still in in terms
• 26:45
  Speaker 8: of at leisure. People are dressing down still, but there
• 26:49
  Speaker 8: are more drops, are more balanced I think we're seeing
• 26:51
  Speaker 8: a little bit more of the work attire come back
• 26:53
  Speaker 8: into play since people are returning to work in a
• 26:56
  Speaker 8: more normal fashion, so we will start to see the
• 27:00
  Speaker 8: career part of the business is probably outperformed this year.
• 27:03
  Speaker 6: That's really interesting. Who said to benefit from something like that?
• 27:07
  Speaker 8: I say the Department stories, really any Amazon, any of
• 27:12
  Speaker 8: the retailers that have a more formal offering, and not
• 27:16
  Speaker 8: to say suits, right, you don't need to be wearing
• 27:18
  Speaker 8: suits to work anymore, but you do need to come
• 27:22
  Speaker 8: out of your comfort where whether it's joggers or leggings,
• 27:25
  Speaker 8: and really put on some dresses or some slacks to
• 27:29
  Speaker 8: get it to the work.
• 27:30
  Speaker 6: But John, take off those at leisure pants.
• 27:34
  Speaker 7: The fashion police Paul of yelling at some guy who
• 27:38
  Speaker 7: was like wearing jim shorts in the office.
• 27:40
  Speaker 3: Well, the one the sandals is almost a change that
• 27:44
  Speaker 3: could have been I'm taking your lanyard and your.
• 27:47
  Speaker 6: Badge and keep your toes in your shoes.
• 27:49
  Speaker 4: Yes exactly, I mean I'll go.
• 27:50
  Speaker 3: I'll sit there on the sixth floor on some of
• 27:52
  Speaker 3: these days and check people, give them some advice. Put
• 27:55
  Speaker 3: them goil thanks so much for joining us. Put them
• 27:57
  Speaker 3: Goyle Senior retail analyst for Bluemberg Intelligence. She was joining
• 28:02
  Speaker 3: us to via zoom from the Princeton, New Jersey headquarters
• 28:05
  Speaker 3: of a Bloomberg Intelligence, even though we fought for years
• 28:07
  Speaker 3: to get to New York.
• 28:10
  Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 28:14
  Speaker 2: weekdays at ten am Eastern on applecar.
• 28:16
  Speaker 9: Play and Android Auto with the Bloomberg Business.
• 28:19
  Speaker 2: You can also listen live on Amazon Alexa from our
• 28:22
  Speaker 2: flagship New York station, Just Say Alexa playing Bloomberg eleven thirty.
• 28:28
  Speaker 7: We just had a headline crossing this is according to Semaphore,
• 28:31
  Speaker 7: that the FTC is going to sue a block the
• 28:33
  Speaker 7: Kroger Albertson's merger today. And this comes across as a
• 28:37
  Speaker 7: ton of M and A has taken place in many
• 28:39
  Speaker 7: different industries, and a lot of them going up against
• 28:41
  Speaker 7: the DOJ. Capital One Discover last week. There's been a
• 28:44
  Speaker 7: ton of oil mergers as well. So there's literally no
• 28:46
  Speaker 7: one else to talk to but Jennifer Ree. She's a
• 28:48
  Speaker 7: senior litigation analyst at Bloomberg Intelligence. In my mind, the
• 28:52
  Speaker 7: best person on this topic pretty much out there on
• 28:54
  Speaker 7: the street. Oh yeah, for sure, Hey, Jen, there's a
• 28:57
  Speaker 7: lot to kind of get through right now, but in
• 28:59
  Speaker 7: terms of capital one and discover what's your prediction here?
• 29:04
  Speaker 1: This one is such a tough one.
• 29:05
  Speaker 3: You know.
• 29:06
  Speaker 1: I think that the Department of Justice is kind of
• 29:09
  Speaker 1: in a conundrum with this one, right because they're under
• 29:11
  Speaker 1: a directive to get tougher on deals, and in particular
• 29:14
  Speaker 1: get tougher on bank deals. I mean, this has come
• 29:16
  Speaker 1: from back in twenty twenty one when President Biden issued
• 29:20
  Speaker 1: an executive order saying, look, you know, we can't just
• 29:22
  Speaker 1: rubber stamp these bank deals. We've got these huge banks,
• 29:24
  Speaker 1: We've had problems with banking, and we need to get
• 29:27
  Speaker 1: more aggressive. And the Department of Justice is on board
• 29:30
  Speaker 1: with that, you know, we've heard their statements saying that
• 29:32
  Speaker 1: they're on board with that. But you also have a
• 29:35
  Speaker 1: market that simply hasn't been competitive for many, many, many years,
• 29:39
  Speaker 1: and that's in credit card processing.
• 29:40
  Speaker 11: Right.
• 29:41
  Speaker 1: We really have just two biggies, Visa and MasterCard, and
• 29:44
  Speaker 1: this deal provides an opportunity to really bolster competition in
• 29:48
  Speaker 1: an area that's been problematic ever since. I can remember.
• 29:52
  Speaker 1: When I started Anti trust, the very first lawsuit I
• 29:54
  Speaker 1: worked on was the Department of Justice versus Visa and
• 29:57
  Speaker 1: MasterCard alleging that they were engaging in con that was
• 30:00
  Speaker 1: blocking out Discover and American Express. And ever since then, right,
• 30:04
  Speaker 1: we've had allegations of or private litigation public litigation against
• 30:09
  Speaker 1: those two companies for antitrust violations, and we've had regulation.
• 30:13
  Speaker 1: So this is an oper This deal does have these
• 30:16
  Speaker 1: strong pro competitive benefits, but you've also seen massive political
• 30:20
  Speaker 1: reaction against it. So you really have two very strong
• 30:24
  Speaker 1: opposing sides. And I think it's just going to come
• 30:27
  Speaker 1: down to the investigation and how the Department of Justice
• 30:30
  Speaker 1: views the credit card issuing market and the overlaps in
• 30:33
  Speaker 1: the credit card issuing market between these two companies, and
• 30:36
  Speaker 1: how it weighs out any potential for harm it might
• 30:39
  Speaker 1: find against this pro competitive aspect.
• 30:43
  Speaker 3: So, but it seems like a reasonable argument that putting
• 30:46
  Speaker 3: Capital One and Discovered together does in fact create a
• 30:49
  Speaker 3: viable competitor to Visa master Card.
• 30:52
  Speaker 4: Otherwise there will never be a viable competitor.
• 30:55
  Speaker 1: Actly Yeah, No, that's exactly right. And that's why this
• 30:59
  Speaker 1: is an unusual deal, because you know, all companies with
• 31:02
  Speaker 1: deals come in and say, oh, they're all sorts of
• 31:03
  Speaker 1: pro competitive benefits that are going to benefit consumers and innovation,
• 31:06
  Speaker 1: et cetera. And usually, you know, sometimes they're kind of
• 31:10
  Speaker 1: lawyer created, sometimes they're really you know, it's unclear whether
• 31:14
  Speaker 1: they're going to come to fruition. And most of the
• 31:17
  Speaker 1: time the Department of Justice or Federal Trade Comission are
• 31:19
  Speaker 1: going to be very skeptical about those claims. They say
• 31:22
  Speaker 1: they don't really ever bear fruit. But in this case,
• 31:25
  Speaker 1: it's much it's a much stronger claim, and it is
• 31:28
  Speaker 1: kind of obvious to see how there really truly could
• 31:31
  Speaker 1: be a very significant pro competitive benefit here, and so
• 31:35
  Speaker 1: it could be one of these unique deals where that
• 31:37
  Speaker 1: aspect is given more weight than usual by the Department
• 31:41
  Speaker 1: of Justice and possibly be considered important enough to allow
• 31:45
  Speaker 1: the deal to go through even if there might be
• 31:47
  Speaker 1: some other issues.
• 31:48
  Speaker 7: Jen couldn't I have made the same argument with say
• 31:50
  Speaker 7: Spirit and Jet Blue, and that definitely didn't work out.
• 31:54
  Speaker 1: You know, it's so interesting you bring that up, because
• 31:56
  Speaker 1: I see so many parallels between that case and this case,
• 31:58
  Speaker 1: even though completely different intries. Because there was a very
• 32:01
  Speaker 1: strong argument that those two combined could have bolstered competition
• 32:05
  Speaker 1: against the legacy airlines Delta United, et cetera. But the
• 32:09
  Speaker 1: problem there was that there was a small set of
• 32:11
  Speaker 1: consumers that really depended on the unbundled low fares that
• 32:15
  Speaker 1: were offered by Spirit, and we're going to lose out
• 32:17
  Speaker 1: where Jet Blue took over those routes and retrofitted the
• 32:19
  Speaker 1: planes and created more space but raised fares and a
• 32:23
  Speaker 1: weird way, you kind of have the same dynamic here.
• 32:25
  Speaker 1: You can create a lot more competition as against the incumbents,
• 32:29
  Speaker 1: the big legacies Visa and MasterCard, but you might have
• 32:33
  Speaker 1: some sort of a negative effect on underserved consumers because
• 32:37
  Speaker 1: Capital wanted to discover when they issue credit, they tend
• 32:40
  Speaker 1: to focus more on underserved populations than do some of
• 32:43
  Speaker 1: the other big issuers of credit. So people who are
• 32:46
  Speaker 1: new to credit, people who carry a revolving balance, subprime borrowers.
• 32:52
  Speaker 1: And it may be that there's a view that this
• 32:54
  Speaker 1: impacts that a smaller group of subprime borrowers, and in
• 32:57
  Speaker 1: Jet Blue and Spirit, at the end of the day,
• 33:01
  Speaker 1: that one out the doj one because of that harmful
• 33:04
  Speaker 1: impact on a small set of particular consumers. You have
• 33:07
  Speaker 1: the same thing here, But what you might have here
• 33:10
  Speaker 1: is a stronger argument on the pro competitive side than
• 33:13
  Speaker 1: you had in that case.
• 33:15
  Speaker 3: Well, how about as Alex was just reporting here the
• 33:17
  Speaker 3: FTC to sue to block Kroeger Albertson's merger today it's
• 33:21
  Speaker 3: according to summerfor Ken, Isn't that an easy fix?
• 33:25
  Speaker 4: We just sell some stores where they overlap, You know.
• 33:28
  Speaker 1: That part of it is the easy fix. But remedies
• 33:30
  Speaker 1: have two pieces. It's what are you going to sell?
• 33:32
  Speaker 1: And who are you going to sell it to? And
• 33:33
  Speaker 1: both of those pieces have to pass muster. So I
• 33:36
  Speaker 1: think on the what are you going to sell? That's
• 33:38
  Speaker 1: probably an easy fix because ultimately the companies that they
• 33:41
  Speaker 1: can squabble over twenty stores or so, but if they
• 33:44
  Speaker 1: can sell them, if they have to sell them, The
• 33:46
  Speaker 1: issue here, I think is going to be all about
• 33:48
  Speaker 1: the buyer. This is CNS full sale, that is the
• 33:50
  Speaker 1: proposed divestiture buyer of all the stores the companies plan
• 33:53
  Speaker 1: to divest in order to get clearance, and it's just
• 33:56
  Speaker 1: not really clear whether they're going to be able to
• 33:58
  Speaker 1: take up to six hundred and fifty stores and actually
• 34:01
  Speaker 1: compete with those stores viably and keep those stores open
• 34:04
  Speaker 1: and maintain competition in each of these regions where there's
• 34:07
  Speaker 1: too much concentration by virtue of this deal. So I
• 34:11
  Speaker 1: think in court, what This is really going to come
• 34:13
  Speaker 1: down to is vetting that buyer and the companies are
• 34:16
  Speaker 1: going to have to produce a lot of evidence that
• 34:18
  Speaker 1: that's a good buyer that's motivated, motivated to compete, and
• 34:22
  Speaker 1: motivated to keep these stores open. And it's they're going
• 34:25
  Speaker 1: to have to convince the judge. And if they can
• 34:26
  Speaker 1: convince the judge of that on the buyer side, I
• 34:29
  Speaker 1: think the deal will get cleared. If they can't, then
• 34:32
  Speaker 1: I think the FTC will win.
• 34:33
  Speaker 7: There is there an argument you made for some of
• 34:37
  Speaker 7: these potential deals that are getting a hard time from
• 34:40
  Speaker 7: the DOJ or FTC to kind of bide time till No.
• 34:43
  Speaker 6: Number Six of this year.
• 34:46
  Speaker 1: Absolutely, like we're off the clock.
• 34:48
  Speaker 6: Like is this part of a strategy?
• 34:51
  Speaker 1: I mean absolutely, And look at capital want and discover
• 34:53
  Speaker 1: they very well are probably going to bleed into the
• 34:55
  Speaker 1: next administration, whether it's Democrat or Republican. There is no
• 35:00
  Speaker 1: no doubt, Alex. I mean historically Republican administrations have the
• 35:04
  Speaker 1: reputation in the merger world of being more business friendly
• 35:07
  Speaker 1: and also being far less skeptical of claims of efficiencies,
• 35:10
  Speaker 1: giving them a lot more weight. And that's going to
• 35:12
  Speaker 1: be important, as I mentioned in this deal. Right now,
• 35:15
  Speaker 1: it's a little bit of a wildcard. It used to
• 35:18
  Speaker 1: be ten years ago that whoever came in to run
• 35:21
  Speaker 1: the FTC, if we had a Republican president, whoever got
• 35:25
  Speaker 1: appointed as chair, the Republican majority there, and whoever came
• 35:28
  Speaker 1: in on the DOJ side, we're likely to be more
• 35:31
  Speaker 1: business friendly or likely to look at efficiencies in a
• 35:34
  Speaker 1: more friendly manner. Right now, though, we have kind of
• 35:38
  Speaker 1: two different kinds of Republicans. You have sort of a
• 35:40
  Speaker 1: Josh Holly type and that you guys may have seen
• 35:42
  Speaker 1: in the news that he's already come out and complained
• 35:44
  Speaker 1: about this deal, said the Department of Justice should block it.
• 35:47
  Speaker 1: And then you kind of have the Joe Simon's type,
• 35:49
  Speaker 1: who was the chair of the FTC in the previous
• 35:52
  Speaker 1: Trump administration, a little bit more traditional in the way
• 35:55
  Speaker 1: we think of Republicans in the anti trust world. And
• 35:58
  Speaker 1: so I think to some extent it might depend on
• 36:00
  Speaker 1: who you get at the DOJ, but I would still
• 36:03
  Speaker 1: say that it ticks higher. The chances of getting cleared
• 36:07
  Speaker 1: probably tick higher. We have a change of administrations next year.
• 36:11
  Speaker 3: So Jen, do you think this current administration, the fact
• 36:15
  Speaker 3: that it is tougher on consolidation on deals. Has that
• 36:18
  Speaker 3: had an impact on M and A activity or a
• 36:20
  Speaker 3: lot of companies just saying that it's not worth it.
• 36:23
  Speaker 1: You know, Paul, It's been a really strange cycle.
• 36:25
  Speaker 8: In my mind.
• 36:26
  Speaker 1: I think in the beginning, when deals started getting a
• 36:30
  Speaker 1: lot of pushback and a lot of more lawsuits than
• 36:32
  Speaker 1: were expected, it sort of slowed things down, right. I
• 36:36
  Speaker 1: feel like there was a period last year where in
• 36:38
  Speaker 1: the M and A slowed down, and now I feel
• 36:40
  Speaker 1: like it's really picking back up again. And so I
• 36:42
  Speaker 1: think there might be two reasons that it's picking back
• 36:44
  Speaker 1: up again a lot, at least from the antitrust side.
• 36:47
  Speaker 1: One is Alex mentioned maybe at this point, if you file,
• 36:50
  Speaker 1: you're going to bleed into the next administration. There might
• 36:53
  Speaker 1: be some expectation it's going to change, it'll be easier
• 36:56
  Speaker 1: to get a closed. But Paul, the other thing is
• 36:58
  Speaker 1: that the agencies haven't been that success court. So I
• 37:01
  Speaker 1: think there is sort of a feeling, Hey, if you're
• 37:03
  Speaker 1: willing to put in the time and the money and
• 37:05
  Speaker 1: you're willing to litigate, you have a really solid chance
• 37:07
  Speaker 1: of winning at court, even if you face this really
• 37:09
  Speaker 1: hostile aggressive FDC or DOJ and I think that could
• 37:12
  Speaker 1: also be contributing to more of these deals getting.
• 37:15
  Speaker 7: Signed now as well, Jenmy have like maybe a minute left,
• 37:18
  Speaker 7: but what about energy? All the energy deals, any one
• 37:21
  Speaker 7: of them not going to happen.
• 37:23
  Speaker 1: Yeah, you know what I think. My feeling and I
• 37:26
  Speaker 1: know it's surprising, my feeling on those is that they're
• 37:29
  Speaker 1: all going to get done. I think that there are
• 37:31
  Speaker 1: just reasons where if you look at those markets, and
• 37:34
  Speaker 1: you look at the permium basin, and you look at
• 37:36
  Speaker 1: the number of producers that are in the permium basin,
• 37:38
  Speaker 1: which I think is going to be the area that's
• 37:39
  Speaker 1: going to be of most concern, I think all those
• 37:42
  Speaker 1: deals get done. And mostly Alex. I'm saying that because
• 37:45
  Speaker 1: when I looked at the history of FTC action against
• 37:48
  Speaker 1: these kinds of deals, I didn't see anything that far upstream.
• 37:52
  Speaker 1: All of the divestitures, consent orders, attempts to block deals
• 37:56
  Speaker 1: were all downstream and not upstream. And so that's the
• 37:59
  Speaker 1: reason I think these deals get done.
• 38:01
  Speaker 7: This is our water cooler talk, by the way, Like
• 38:03
  Speaker 7: when I see jennif stare at the coffee, we're like, hey, man,
• 38:05
  Speaker 7: let's talk about that.
• 38:06
  Speaker 6: Oil deals just don't work clear?
• 38:08
  Speaker 4: Are they going to get? Jenry, thanks so much for
• 38:10
  Speaker 4: joining us. Jenniferree.
• 38:11
  Speaker 3: She is a senior litigation analyst for Bloomberg Intelligence, joining
• 38:14
  Speaker 3: us via zoom And she is the go to person
• 38:18
  Speaker 3: on antitrust and I'll tell you institutional investors.
• 38:20
  Speaker 4: Her phone rings off the.
• 38:21
  Speaker 3: Hook when there's a big deal being litigated because she
• 38:25
  Speaker 3: has the goods.
• 38:25
  Speaker 2: Here, you're listening to the Bloomberg Intelligence Podcast. Catch us
• 38:31
  Speaker 2: live weekdays at ten am Eastern on applecar.
• 38:34
  Speaker 9: Play and Android Auto with the Bloomberg Business.
• 38:37
  Speaker 2: You can also listen live on Amazon Alexa from our
• 38:40
  Speaker 2: flagship New York station just say Alexa playing Bloomberg eleven thirty.
• 38:46
  Speaker 4: Love talking ETFs because that's where all the money's going.
• 38:49
  Speaker 4: It's just an amazing, amazing development.
• 38:51
  Speaker 3: In financial services over the last ten years or so
• 38:53
  Speaker 3: to see how the funds have just really just gone
• 38:56
  Speaker 3: into the ETFs, both passive and active. So it's why
• 39:00
  Speaker 3: we like to check in with our next guest, Sean O'Hara,
• 39:02
  Speaker 3: President of Pacer et FS. Sean, thanks so much for
• 39:05
  Speaker 3: joining us here. Talk to us about kind of where
• 39:08
  Speaker 3: you're seeing the flows these days. Is everybody trying to
• 39:12
  Speaker 3: chase the AI trade. Is it folks looking at tech?
• 39:16
  Speaker 3: Where are you seeing kind of the flows these days?
• 39:18
  Speaker 11: Yeah, good morning, Thanks guys for having me. I think,
• 39:20
  Speaker 11: you know, it's still the same, you know, as it
• 39:22
  Speaker 11: was last year. I think that there's real diverse spreading around.
• 39:27
  Speaker 11: If you will have the assets. Obviously there's people, you know,
• 39:29
  Speaker 11: chasing tech. I don't think you necessarily need to chase tech.
• 39:33
  Speaker 11: You could buy a broad market etip like the S
• 39:35
  Speaker 11: and P five hundred and still get pretty good tech exploriture,
• 39:37
  Speaker 11: but not have all your eggs in that basket. Our
• 39:40
  Speaker 11: flows continue to be leaning towards value. Small cap has
• 39:43
  Speaker 11: been a real being surprised for us here lately. We
• 39:46
  Speaker 11: do have the tech side of things. We've got a
• 39:48
  Speaker 11: data and infrastructure product. So I think we're sort of
• 39:51
  Speaker 11: where we were last year, which is a little bit
• 39:54
  Speaker 11: puzzling to me because last year, at least we were
• 39:57
  Speaker 11: coming off of really an obliteration in the tech name.
• 40:00
  Speaker 11: We're still stuck in the same place where we're looking
• 40:02
  Speaker 11: at interest rates and what the Fed's going to do.
• 40:04
  Speaker 11: We're trying to figure out whether they've actually done their
• 40:06
  Speaker 11: job and destroyed the US economy. I'm sorry, not destroyed.
• 40:09
  Speaker 11: The US economy but cooled things down inflation wise, and
• 40:13
  Speaker 11: then you know, earnings are always going to be the
• 40:14
  Speaker 11: issue going forward. You know, I'm not as impressed with
• 40:18
  Speaker 11: people beating their earnings as I am and what they're
• 40:20
  Speaker 11: forecasting is going to happen. And when you have these
• 40:22
  Speaker 11: reports like you got out of Palo Alto last week
• 40:25
  Speaker 11: where they sort of tamper things down, I think we're
• 40:27
  Speaker 11: at a level right now where the market's priced overall
• 40:29
  Speaker 11: a little bit on the high end, and so you know,
• 40:32
  Speaker 11: we have to be very very careful about bad use.
• 40:34
  Speaker 7: I mean, you made the joke about destroying the economy,
• 40:36
  Speaker 7: but man, that data continues to hold up really really well.
• 40:39
  Speaker 7: Is there a reactive sense to ETF flows like big
• 40:43
  Speaker 7: reversals that are happening? And I guess I'm just trying
• 40:45
  Speaker 7: to understand where the biggest miss price is. If inflation
• 40:49
  Speaker 7: kind of eventually keeps coming down and the data still
• 40:52
  Speaker 7: stays okay.
• 40:54
  Speaker 11: You know that could be what happens, Alex. You could
• 40:56
  Speaker 11: actually you know, they might not actually destroy the US economy,
• 40:59
  Speaker 11: might do up perfectly right. They may have gotten inflation
• 41:02
  Speaker 11: under control without you know, having unemployment spike and without
• 41:05
  Speaker 11: having a major impact on you know, everybody's earnings. I
• 41:08
  Speaker 11: think the interesting thing that's happening right now is that,
• 41:11
  Speaker 11: and I think you need to keep an eye on that,
• 41:13
  Speaker 11: is look at layoffs. I mean, we're starting to see
• 41:15
  Speaker 11: somewhat of an acceleration. So I think companies are starting
• 41:18
  Speaker 11: to think to themselves going forward, how do I increase
• 41:20
  Speaker 11: my earnings. Well, one way to do that would be
• 41:23
  Speaker 11: on the cost side of the ledger. And so as
• 41:26
  Speaker 11: we came out of COVID, you know, that was the
• 41:28
  Speaker 11: big spurt that got the big tech names going. Is
• 41:31
  Speaker 11: they were over you know, waight if you will employees
• 41:34
  Speaker 11: and they started to cut back and that's sort of
• 41:35
  Speaker 11: what juice their returns. And I think you're starting to
• 41:38
  Speaker 11: see that go sort of a little bit more broadly
• 41:40
  Speaker 11: across the board.
• 41:41
  Speaker 3: Hey, Sean, you say maybe one of the ways to
• 41:44
  Speaker 3: play AI is through the picks and shovels strategy.
• 41:48
  Speaker 4: Talk to us about how you'd get exposure that way.
• 41:50
  Speaker 11: Well, we have two strategies there. We own the data
• 41:53
  Speaker 11: centers and the cell phone towers, and so you can't
• 41:55
  Speaker 11: have AI streaming our Internet of things, e commerce and
• 41:59
  Speaker 11: online ge mean, you can't have that without the buildings
• 42:02
  Speaker 11: that essentially allow for all of the transmission of the data.
• 42:05
  Speaker 11: So that's one way to play it would be to
• 42:07
  Speaker 11: buy data centers and cell phone towers. We have an
• 42:09
  Speaker 11: ETF that does that the tickers sr V of our server.
• 42:13
  Speaker 11: And then the other way to do it is to play,
• 42:15
  Speaker 11: if you will, the software names and the chip makers
• 42:19
  Speaker 11: and those names are you know, basically in videos in
• 42:22
  Speaker 11: that mix. But it's not all about Nvidia. There are
• 42:24
  Speaker 11: a lot of companies in that space. So we have
• 42:26
  Speaker 11: an ETF that uh t r FK traffic that basically
• 42:30
  Speaker 11: takes everything out of the data centers and says that's
• 42:32
  Speaker 11: what we own.
• 42:34
  Speaker 7: When you talk about alternatives, we were talking to a
• 42:35
  Speaker 7: cat the entwhistle in the last hour about alternatives and stuff.
• 42:40
  Speaker 7: I'll throw bitcoin in there. Let's are some reads in
• 42:42
  Speaker 7: there too. What other kind of alternative ETF flows are
• 42:45
  Speaker 7: you seeing?
• 42:47
  Speaker 11: Well, we have an income story that we like that's
• 42:49
  Speaker 11: starting to pick up some steam. Essentially, its target is
• 42:52
  Speaker 11: to get four times to dividend of the S and
• 42:54
  Speaker 11: P five hundred. We do four times. Yes, the tickers
• 42:59
  Speaker 11: QDPO get it quadruple. Anyway we do that. The way
• 43:04
  Speaker 11: we do that is about eighty six percent of the
• 43:06
  Speaker 11: money is basically in the S and P five hundred
• 43:08
  Speaker 11: and fourteen percent of it's in T bills, and those
• 43:10
  Speaker 11: te bells are used to enter into futures contracts on
• 43:13
  Speaker 11: the dividends, and so we're able to pull forward three
• 43:15
  Speaker 11: times or a little bit more than three point one
• 43:17
  Speaker 11: four times this year's dividend by using those futures. And
• 43:20
  Speaker 11: so it's really done exactly what we've expected it to do.
• 43:24
  Speaker 11: And with all the emphasis, for example, on covered calls,
• 43:27
  Speaker 11: you know, with the success of some of the big
• 43:29
  Speaker 11: players in that space, we think the limitation on covered
• 43:31
  Speaker 11: calls is that you're selling away your upside, and with
• 43:33
  Speaker 11: the strategy like this, you don't sell your upside away.
• 43:36
  Speaker 11: So we're starting to see some interesting flows in that
• 43:38
  Speaker 11: area as well.
• 43:40
  Speaker 3: Sean, how do you compete in this market that's so
• 43:42
  Speaker 3: dominated by just literally a couple of three or four
• 43:46
  Speaker 3: kind of ETF providers here? How do you kind of
• 43:50
  Speaker 3: compete and set yourself apart?
• 43:52
  Speaker 11: We like to say innovative, disruptive, and unique. That's what
• 43:55
  Speaker 11: we build. So our neighbor at home in Malvern, Pennsylvania standguards.
• 43:58
  Speaker 11: You know who they are, we know what they do,
• 44:00
  Speaker 11: and we know that we're not ready to stand toe
• 44:02
  Speaker 11: to toe with them if you will invit it out
• 44:04
  Speaker 11: on costs or let State Street do that. So we
• 44:07
  Speaker 11: build strategies. We built an end user in mind or
• 44:10
  Speaker 11: an outcome in mind. Maybe that's extras return, or maybe
• 44:13
  Speaker 11: that's risk management, or maybe it's something like the count
• 44:15
  Speaker 11: series that just takes a completely different look at the
• 44:18
  Speaker 11: way you define value in this world. Instead of using
• 44:21
  Speaker 11: traditional price to book, we use free cash flow yield
• 44:24
  Speaker 11: because the stock market is primarily intangible assets today, and
• 44:28
  Speaker 11: so that's what we do. And so we've been able
• 44:31
  Speaker 11: to accumulate I think our reasonable amount of assets around
• 44:33
  Speaker 11: forty billion right now. I think there's a lot of
• 44:36
  Speaker 11: room for us to grow. And you know, if you're
• 44:38
  Speaker 11: innovative and you're disruptive and unique, and you have a
• 44:41
  Speaker 11: salesforce like we do that focuses on the financial advisors,
• 44:45
  Speaker 11: you can continue to build a nice business. I don't
• 44:47
  Speaker 11: have to have a five trillion dollar business. I just
• 44:50
  Speaker 11: keep growing it like we have it, and we'll continue
• 44:52
  Speaker 11: to do that without I.
• 44:53
  Speaker 7: Really want to have the job where you get to
• 44:55
  Speaker 7: come up with the names for these things, like the
• 44:56
  Speaker 7: tickers for us.
• 44:57
  Speaker 6: I want to do that.
• 44:58
  Speaker 7: That sounds like a good time before we let you go.
• 45:01
  Speaker 7: It's not just us that have been doing really well, right.
• 45:03
  Speaker 7: Japanese equity is ni K record high, the CAC, the
• 45:06
  Speaker 7: Dacks record highs. What opportunities are you seeing internationally?
• 45:10
  Speaker 11: Well, we missed Japan. We probably should have had a
• 45:12
  Speaker 11: product there because whenever Lauren Buffett starts to move in
• 45:15
  Speaker 11: an area, it's probably good to pay attention, and so
• 45:17
  Speaker 11: he's increasing his exposure there. So he's probably right. We've
• 45:20
  Speaker 11: seen a pretty big increase in our global and international.
• 45:25
  Speaker 11: My favorite story, and it may take patients. I'll just
• 45:28
  Speaker 11: warn all the viewers and listeners is emerging markets. I mean,
• 45:31
  Speaker 11: you know, we have an emerging market product that has
• 45:33
  Speaker 11: like a nine percent current dividend and it's one hundred
• 45:37
  Speaker 11: profitable emerging market names. And I think that cycle has
• 45:40
  Speaker 11: gone on too long. It could continue for a while,
• 45:43
  Speaker 11: but sooner or later, the emerging market cycle will change.
• 45:46
  Speaker 11: And if you think about historically how they do reletive
• 45:48
  Speaker 11: to us, over time they do better. It's just been
• 45:50
  Speaker 11: a currency problem here lately, and so for long term investors,
• 45:54
  Speaker 11: maybe you talk a little bit of money in emerging markets.
• 45:57
  Speaker 6: All right, Sean, great stuff.
• 45:59
  Speaker 7: Really appreciate O'Hara, President of Pacer ETFs, joins us really
• 46:03
  Speaker 7: appreciate that on the ETF inflows, outflows and where all
• 46:06
  Speaker 7: the action is.
• 46:07
  Speaker 2: This is the Bloomberg Intelligence Podcast, available on Apples, Spotify,
• 46:11
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• 46:15
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  Speaker 2: iHeartRadio app tune In, and the Bloomberg Business app. You
• 46:22
  Speaker 2: can also watch us live every weekday on YouTube and
• 46:25
  Speaker 2: always on the Bloomberg terminal