Latest / Bloomberg Intelligence / Trade Uncertainty Means Volatility Is Here to Stay: Clay Lowery

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Trade Uncertainty Means Volatility Is Here to Stay: Clay Lowery · Bloomberg Intelligence

• 0:06
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:09
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:12
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
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  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:21
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Our
• 0:34
  Speaker 1: next guest, Clay Lowry, is managing director of Irack Creek
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  Speaker 1: Global Advisors, based in Washington, d C. Mr Lowry previously
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  Speaker 1: was the Assistant Secretary for International Affairs at the US
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  Speaker 1: Treasury Department from two thousand and five to two thousand
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  Speaker 1: and nine. He also chaired the Committee on Foreign Investment
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  Speaker 1: in the United States. Now. This is the committee that
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  Speaker 1: takes a look at international mergers and acquisitions that may
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  Speaker 1: or may not affect national security interest. Clay Lowry, thank
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  Speaker 1: you very much for being with us. First, tell us
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  Speaker 1: what you're telling your clients, if you don't mind, because
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  Speaker 1: you advise multinationals as well as financial institutions and investors,
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  Speaker 1: what are you telling them about the on again, off again,
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  Speaker 1: on again trade dispute, trade tariff dispute and confrontation between
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  Speaker 1: the United States and China. Thanks for having me. And uh,
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  Speaker 1: the essential thing that we've been telling people is to
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  Speaker 1: keep your car seats buckled because and you see it
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  Speaker 1: every day. I mean, there's it's slightly different every day
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  Speaker 1: about um, how we're how the administration and to that matter,
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  Speaker 1: the Chinese are retaliating, how each of that is going
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  Speaker 1: to to work. And so this is actually just increased volatility. Um.
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  Speaker 1: We've see that in in in the markets, which um
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  Speaker 1: are not necessarily about the clients I have, but UM,
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  Speaker 1: but you see that also and just kind of how
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  Speaker 1: our sales going to be done, how is investment and
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  Speaker 1: trade flow is going to be affected, and all of
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  Speaker 1: this right now is there's a lot of uncertainty. And
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  Speaker 1: so that's all we've just basically been saying is just
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  Speaker 1: prepare for more uncertainty. And I think that you see
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  Speaker 1: that with even the rhetoric coming out of the White House.
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  Speaker 1: It kind of changes a little bit every other day.
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  Speaker 1: And so that's kind of there's nothing else to prepare
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  Speaker 1: for outside of uncertainty, because that's what you have, alright, Clay,
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  Speaker 1: So our s buelts are buckled. We are duly prepared.
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  Speaker 1: What I would want to know from you. You were
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  Speaker 1: formerly the Assistant Secretary of for International Affairs at the
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  Speaker 1: US Treasury Department. I'm wondering, can you offer us any
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  Speaker 1: insight into the mechanics of imposing tariffs and what that
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  Speaker 1: would entail so that we can have a better sense
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  Speaker 1: of what would have to happen for some of the
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  Speaker 1: proposals to be made a reality. Well to impose tariffs.
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  Speaker 1: I mean, they basically outlined, the administration, that is, has
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  Speaker 1: outlined what they would like to do in tariffs. There's
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  Speaker 1: going to be a public comment period, um. And if
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  Speaker 1: they decide to go forward with these tariffs, and they
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  Speaker 1: you know, I assume that they will listen to public comment, um.
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  Speaker 1: And uh they're obviously they say that they're trying to
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  Speaker 1: also have negotiations with the Chinese. UM. But if they
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  Speaker 1: put the tariffs on, then they basically it will be
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  Speaker 1: at tax I mean on imports from China on specific items. Uh.
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  Speaker 1: They've outlined items that they would put a tax on.
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  Speaker 1: And uh, once they do that, when they start coming
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  Speaker 1: over the border, they will have to put it. They
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  Speaker 1: have to pay a duty the importer and at least
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  Speaker 1: economically speaking, the importer would pass that on as it
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  Speaker 1: goes down the line. Presumably that would either affect businesses
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  Speaker 1: or consumers UM on those products that actually received that tax.
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  Speaker 1: Clay Lowry, what about the importation of Chinese investment dollars
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  Speaker 1: into the United States? Now, thank you for the that UM,
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  Speaker 1: So that one is a little more uncertain. So they
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  Speaker 1: UM in the President's memorandum basically outlining this, they said
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  Speaker 1: that they were going to give the Treasury Department sixty
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  Speaker 1: days to kind of report back on how they would
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  Speaker 1: like to do see investment restrictions, UM, and we assume
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  Speaker 1: their investments restrictions. Actually, the words they use the memorandum
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  Speaker 1: are concerns about Chinese investments. So these are not national
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  Speaker 1: security concerns. So national security concerns are handled through a
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  Speaker 1: different mechanism, which is called Scythius UM. This is about
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  Speaker 1: um in uh restrictions on specific investments that are outside
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  Speaker 1: of national security that the Chinese are making. Now that
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  Speaker 1: the issue here is this is not something the United
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  Speaker 1: States has really done much of effect. I can't remember
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  Speaker 1: an example in which we have done it, outside of
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  Speaker 1: maybe if it's like a kind of a rogue regime
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  Speaker 1: like Iran or something like that. So Because of that,
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  Speaker 1: I think it's become uh the Treasure Department and others
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  Speaker 1: in the administration are working on what a how do
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  Speaker 1: you do this? What's the AUTHORI do you use? Um? Uh,
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  Speaker 1: what are the legal implications if you use various authorities?
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  Speaker 1: This is very different than tariffs, because tariffs we've we've
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  Speaker 1: done throughout our history. Investment restrictions is a very different mechanism.
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  Speaker 1: Do you get the sense, based on your conversations with
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  Speaker 1: people who are in the administration or in the Treasury Department, uh,
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  Speaker 1: that President Trump has a lot of company in his
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  Speaker 1: sort of declarations of proposals for the tariffs. Do you
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  Speaker 1: mean support from from from people who are inside the administration,
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  Speaker 1: from people who are sort of uh career people and
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  Speaker 1: see this as possibly helping uh, sort of even the
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  Speaker 1: playing field. So I do think I think, actually, I
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  Speaker 1: mean go beyond the administration. I think that if you
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  Speaker 1: talk to a lot of people on Congress, within the administration,
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  Speaker 1: even the business community, and uh the kind of academic
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  Speaker 1: think tank community, I think that a lot of them
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  Speaker 1: would say that they have a lot of sympathy for
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  Speaker 1: what President Trump is trying to do. They believe that
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  Speaker 1: China has been a poor actor in a number of
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  Speaker 1: areas on trade and investment, and so um, there may
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  Speaker 1: need to be some there's a desire for some sort
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  Speaker 1: of uh more dramatic action. That being said, I think
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  Speaker 1: that you would also hear from a lot of people
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  Speaker 1: that that there's two major missing elements to what the
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  Speaker 1: president has tried to do. First is, um, there doesn't
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  Speaker 1: seem to be a strategy. What is it you want
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  Speaker 1: to achieve? Is it? Is it? I mean the President
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  Speaker 1: talks about lowering the trade deficit. That's kind of a
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  Speaker 1: strange way to look at things. Is the idea to basically,
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  Speaker 1: we want more market access for China, we want China
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  Speaker 1: to treat more fairly. What is it exactly they want
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  Speaker 1: to achieve? I think the Chinese are confused by that,
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  Speaker 1: but I actually think that by the way, the business
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  Speaker 1: community is totally confused by that. And then secondly, um,
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  Speaker 1: is it would have made more sense And in fact,
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  Speaker 1: you saw Larry Cudlow even saying this this morning, let's
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  Speaker 1: try to build a coalition around us. There's a number
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  Speaker 1: of countries around the world who are concerned about how
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  Speaker 1: China has been interacting on trade and investment. But the administration,
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  Speaker 1: which was warned about this over and over and over again,
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  Speaker 1: go out and build a coalition. There are others that
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  Speaker 1: are with you. What did they do? Instead? They attacked
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  Speaker 1: those same countries on steel in uh and aluminum tariffs
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  Speaker 1: which have which are supposed to be about national security,
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  Speaker 1: and yet they attacked the countries that actually help us
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  Speaker 1: on national security. And then secondly, they didn't go around
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  Speaker 1: building a coalition against China so that China got the message.
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  Speaker 1: It wasn't just the United States that had a problem
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  Speaker 1: with China, it was actually the international community at large.
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  Speaker 1: And for whatever reason, the administration decided not to take
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  Speaker 1: those tactics. But maybe maybe that maybe given what you
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  Speaker 1: saw from Larry Cudlo, maybe he's deciding that this is
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  Speaker 1: maybe they need to make a small change and how
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  Speaker 1: they're d to approach the president strategy. Clay Lowry, thank
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  Speaker 1: you so much for being with us. Clay Lowry, Managing
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  Speaker 1: director at Rock Creek Global Advisors, former Assistant Secretary for
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  Speaker 1: International Affairs at the US Treasury Department. In an era
• 8:27
  Speaker 1: when electronic trading is moving into everything from bonds to currencies,
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  Speaker 1: Goldman Sacks has been steadily trying to chart out a
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  Speaker 1: new identity for itself and the latest is a move
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  Speaker 1: into commercial banking. UH, territory frankly dominated by JP Morgan
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  Speaker 1: and other behemoth banks. Showing us now to talk about
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  Speaker 1: that is Brian klein Hansel. He's an equity research analystic
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  Speaker 1: managing director at Keith, Briette and Woods in New York. Brian,
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  Speaker 1: thank you so much for being with us. So I
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  Speaker 1: just first want to get a sense of what Goldman
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  Speaker 1: Sachs is trying to do with commercial banking and what's
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  Speaker 1: attractive to the bank about this business. Yeah, thanks for
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  Speaker 1: having me Sea. What Goldman is looking to do is
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  Speaker 1: really too deepen the relationships that they have with their
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  Speaker 1: corporate clients already. So the relationship that they have today
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  Speaker 1: is more from an advisory perspective when you think about
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  Speaker 1: advising on potential M and A UM, and what they're
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  Speaker 1: trying to do now is be more of a bank
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  Speaker 1: to these corporate clients. By that, I mean looking to
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  Speaker 1: do more lending with these corporate clients UM as well
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  Speaker 1: as capturing deposits that these corporations may have. So there
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  Speaker 1: really are trying to build out the bank around this
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  Speaker 1: existing relationship. So UH, one question is why. I mean,
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  Speaker 1: the other banks have such a toe hold into this,
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  Speaker 1: and notoriously, lending is a capital intensive business that kind
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  Speaker 1: of moves away from the M and A and the
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  Speaker 1: investment banking that Goldman sax is known for. Yeah, that's
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  Speaker 1: a good question. We also have as well. I mean,
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  Speaker 1: really point of time that this what Goldman laid out
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  Speaker 1: was a strategy to increase revenues. It was one environment
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  Speaker 1: when revenues were challenged, so this is one way to
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  Speaker 1: grow revenues. But it is a very competitive UM industry overall.
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  Speaker 1: In commercial banking. It's an area where Goldman Sachs themselves
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  Speaker 1: have little history relative to the other big banks that
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  Speaker 1: kind of dominate the space. So it is an area
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  Speaker 1: we could potentially see incremental revenues come through. It's just
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  Speaker 1: it's going to be a very hard, hard fought to
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  Speaker 1: win those type of revenues. So the other thing it
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  Speaker 1: does it helps UM act as a ballast relative to
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  Speaker 1: the trading business. Volatility over the last five years has
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  Speaker 1: been fairly low UM, so this is an area we
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  Speaker 1: could see recurring revenues come from with less volatility that
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  Speaker 1: you do in the trading business. So you can see
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  Speaker 1: how it could make sense longer term. It's as we
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  Speaker 1: do questioned their ability and executing the strategy long term.
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  Speaker 1: Can you speak specifically about David Solomon and what he
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  Speaker 1: things to this strategy. Well, he does have a background
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  Speaker 1: in a lot of the areas, so he comes up
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  Speaker 1: to the advisory side in the investment bank, so he
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  Speaker 1: does have a lot of relationships with the senior executives
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  Speaker 1: at these corporations. Um. Where it fails to see there's
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  Speaker 1: a bridge right now is that a lot of these
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  Speaker 1: decisions are made by treasurers. So we'll have to see
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  Speaker 1: if he can bridge that gap between the CEO down
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  Speaker 1: to the treasurer um. But he does have a background
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  Speaker 1: within the investment bank and have the relationships with the
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  Speaker 1: corporations themselves, so that's the positive. And a lot of
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  Speaker 1: the other new strategies, he does have a foot and
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  Speaker 1: a lot of those strategies, whether it was the Marcus initiative,
• 11:36
  Speaker 1: which is their kind of retail consumer lending platform, so
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  Speaker 1: he's been more of a key proponent for that platform.
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  Speaker 1: So a lot of the areas where the bank has
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  Speaker 1: been trying to grow outside of the traditional trading UM
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  Speaker 1: channels are areas that he's either helped to develop or
• 11:53
  Speaker 1: where he's worked previously, so he does have a good
• 11:56
  Speaker 1: background in these businesses. You know, Brian, I'm struck by
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  Speaker 1: this that Goldman Sachs is expanding into new territories, whether
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  Speaker 1: it's the markets platform that focuses on consumer lending, or
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  Speaker 1: whether it's commercial banking. And this sort of is echoed
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  Speaker 1: by Jamie Diamond over at JP Morgan with the investor
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  Speaker 1: letter that he put out, which basically says, we're expanding everywhere,
• 12:16
  Speaker 1: anywhere you can go, we want to be There is
• 12:19
  Speaker 1: there a concern at all on behalf of analysts like
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  Speaker 1: yourself that some of these banks are perhaps moving outside
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  Speaker 1: their wheelhouse and getting too diffuse and possibly could increase
• 12:29
  Speaker 1: the risks of underperforming more broadly as they expand. Yeah,
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  Speaker 1: I mean we think there is. I think Goldman is
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  Speaker 1: a fairly good example of expanding into the consumer business
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  Speaker 1: at a period where you've had generally what we consider
• 12:44
  Speaker 1: benign credit conditions, meaning that you're not taking a lot
• 12:47
  Speaker 1: of losses on the loans that you're making in the
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  Speaker 1: consumer business. Um, but that's been fairly you know, five
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  Speaker 1: years of low losses. That could change at any point
• 12:58
  Speaker 1: in time, and if you don't have a history in
• 13:00
  Speaker 1: that business, it could all of a sudden become very
• 13:03
  Speaker 1: challenged to matt manage credit managerings being its revenues in
• 13:08
  Speaker 1: those businesses. So it does seem to be what we
• 13:10
  Speaker 1: would call late cycle growth in the consumer business. It
• 13:14
  Speaker 1: does raise yellow flags at this point, not necessarily red
• 13:17
  Speaker 1: flags to us and to investors, but it is an
• 13:19
  Speaker 1: area where you're trying to grow um and we would
• 13:22
  Speaker 1: argue that they're trying to grow aggressively in an area
• 13:25
  Speaker 1: where there is little history for the company. So I mean,
• 13:27
  Speaker 1: certainly is a yellow flag at this point in time.
• 13:30
  Speaker 1: Just a quick point Brian that if we see increase
• 13:33
  Speaker 1: in interest rates, won't this help the bond trading business,
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  Speaker 1: And in a sense Goldman Sachs looking to expand in
• 13:40
  Speaker 1: areas that maybe it is a little too late to
• 13:44
  Speaker 1: the party and maybe just focus on what it does
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  Speaker 1: best and wait for the cycle to turn. I mean,
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  Speaker 1: it certainly could. So. A lot of the revenues are
• 13:53
  Speaker 1: generated in the bond trading business are based on the
• 13:55
  Speaker 1: steepness of the Yelk curve. So as long as the
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  Speaker 1: long end keeps moving, us the short term rates and
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  Speaker 1: that's generally a positive for the trading business. That also
• 14:03
  Speaker 1: could mean I think we want from a corporation perspective
• 14:08
  Speaker 1: is are they committed to this business? And that's exactly
• 14:11
  Speaker 1: to your point. If you see a big pick up
• 14:14
  Speaker 1: in trading revenues, are they going to still want to
• 14:17
  Speaker 1: maintain these lending relationships in this commercial banking relationship blogger
• 14:21
  Speaker 1: term or really simply switch back to being more focused
• 14:25
  Speaker 1: on trading. I think at this point in time, the
• 14:27
  Speaker 1: fact that they really haven't built out the commercial bank,
• 14:30
  Speaker 1: I think it's gonna be a challenge for them to
• 14:32
  Speaker 1: grow commercial banking clients as a result. And I think
• 14:35
  Speaker 1: that's the risk, and I think all the corporations will
• 14:37
  Speaker 1: be asking the same question, is you know how what
• 14:39
  Speaker 1: it are you to this business that you want to
• 14:41
  Speaker 1: take our um business from us. I want to thank
• 14:44
  Speaker 1: you very much for spending time with us. Brian Klein
• 14:47
  Speaker 1: Hazel Handel is equity research channelist for Keep Briette and Wood.
• 14:51
  Speaker 1: Speaking about Goldman Sachs right now, I want to turn
• 15:10
  Speaker 1: our attention to Hugh Son, Bloomberg Finance reporter. He just
• 15:15
  Speaker 1: wrote a phenomenal story for Bloomberg Markets Magazine which we're
• 15:17
  Speaker 1: gonna get to in a second. But before we go there, Hugh,
• 15:20
  Speaker 1: I know you've got a deep knowledge of JP Morgan,
• 15:24
  Speaker 1: and given the fact that they just had their annual
• 15:26
  Speaker 1: meeting and released their annual letter to shareholders, you know,
• 15:29
  Speaker 1: what's your big takeaway for what JP Morgan's goal is
• 15:33
  Speaker 1: in the year ahead? And this solidifies UM. Thank you
• 15:36
  Speaker 1: for having me. This solidifies UM something that I've been
• 15:39
  Speaker 1: that's been sort of coalescing in the back of my
• 15:41
  Speaker 1: mind for a little while now, which is UM. You know,
• 15:44
  Speaker 1: they're they're the aggressors in this space. UM. So for
• 15:47
  Speaker 1: an example, UM, JP Morgan. You know, they gave some
• 15:51
  Speaker 1: comments about what they were gonna do with UM online,
• 15:54
  Speaker 1: brookeradge and UM. This is on their investor day Febru
• 15:59
  Speaker 1: and all of a sudden you see Charles Schwab and
• 16:02
  Speaker 1: a few other UM sort of broken stocks UM move
• 16:07
  Speaker 1: up by five percent. And that's because the markets interpreted
• 16:10
  Speaker 1: that they weren't going to aggressively go into UM. You know,
• 16:14
  Speaker 1: UH free online robo advising just one example of you know,
• 16:21
  Speaker 1: of their impact in the market. So wherever you look
• 16:25
  Speaker 1: in finance, they are the aggressives, whether it's deposits, fixed income,
• 16:29
  Speaker 1: credit cards, Trust Advisory. I could go on and on,
• 16:33
  Speaker 1: and in my mind what was coalescing is just sort
• 16:36
  Speaker 1: of this idea that they are kind of becoming the
• 16:38
  Speaker 1: Amazon of of finance. Okay, they want to be the
• 16:44
  Speaker 1: Amazon of finance. Can we say that there are a
• 16:47
  Speaker 1: variety of competitors who might have a different view about
• 16:51
  Speaker 1: the um in the banking space, Well, I mean there
• 16:55
  Speaker 1: are City Bank there as well as Fargo. There's a
• 17:00
  Speaker 1: Bank of America, Morgan Stanley done very well with their
• 17:03
  Speaker 1: wealth management division, which is now trying to get to
• 17:06
  Speaker 1: commercial banking. I bring it up only because you know,
• 17:09
  Speaker 1: we've heard before about the one stop shop. Absolutely, and
• 17:12
  Speaker 1: you should be skeptical. Sure, yeah, And you know, I
• 17:15
  Speaker 1: note that one of the quotes from Jamie Diamond is
• 17:18
  Speaker 1: talking about bureaucracy, right, and he's not a seemingly not
• 17:22
  Speaker 1: a fan of bureaucracy. And I mean, I gotta say
• 17:26
  Speaker 1: you ever hear anybody say that they are a fan
• 17:28
  Speaker 1: of bureaucracy, that they think it's just wonderful and great
• 17:31
  Speaker 1: and it helps me wonderful businesses. Well, how are you
• 17:34
  Speaker 1: going to manage all these wonderful new initiatives if you
• 17:37
  Speaker 1: don't have a bureaucracy that can actually execute. Yeah, I
• 17:40
  Speaker 1: mean so a lot lots of good points. I would
• 17:42
  Speaker 1: say there's a reason why, um, other other members, other
• 17:48
  Speaker 1: financial players are watching Jamie Morgan and and and it
• 17:54
  Speaker 1: stems from a lot of the adventus they have. They
• 17:56
  Speaker 1: have the highest r o E, they have most deposits. Um,
• 18:00
  Speaker 1: they have Jamie Diamond, who's you know who doesn't He
• 18:04
  Speaker 1: doesn't deliberate before entering markets suggressfully at times as much
• 18:09
  Speaker 1: as others. Um as an analyst talk to relate to me,
• 18:13
  Speaker 1: you know, he says, other other banks are happy to
• 18:15
  Speaker 1: let JP Morgan go first in some instances. And so
• 18:19
  Speaker 1: you know, um, whether or not you know the other
• 18:23
  Speaker 1: the other banks, it's not as that they're going to
• 18:24
  Speaker 1: go away. But the JP Morgan, if you look at
• 18:28
  Speaker 1: you know, if you if you read the letter, they
• 18:30
  Speaker 1: see opportunity everywhere, even in places they're they're already number one.
• 18:34
  Speaker 1: What does that tell you? That tells me if they
• 18:36
  Speaker 1: want to rally their troops and have some ambition as
• 18:39
  Speaker 1: they plow forward and take over the world. I do
• 18:42
  Speaker 1: want to I do want to get a sense though
• 18:43
  Speaker 1: you know, they have brought ambitions in China or Asia
• 18:46
  Speaker 1: Born broadly, they have brought ambitions even in fixed income
• 18:48
  Speaker 1: currencies and commodities. UH, in wealth management they want to
• 18:52
  Speaker 1: manage money for very rich people. Who doesn't UM, But
• 18:55
  Speaker 1: I do want to talk a little bit about some
• 18:56
  Speaker 1: more fundamental challenges that JP Morgan faces along with the
• 19:00
  Speaker 1: rest of the banks. And this goes to really what
• 19:01
  Speaker 1: you wrote about, uh in the Bloomberg Markets article, which
• 19:05
  Speaker 1: is the technological infrastructure of these banks is becoming increasingly crucial.
• 19:10
  Speaker 1: And in that race, who's winning? So yeah, I mean
• 19:13
  Speaker 1: that the story we wrote, UM, you know, sort of
• 19:16
  Speaker 1: an epic tail UM and it's online right now about
• 19:20
  Speaker 1: the arms technological arms race in you know, arguably the
• 19:23
  Speaker 1: most iconic trading market UM in the world, which is
• 19:27
  Speaker 1: the stock market. UM. This is another instance in which
• 19:31
  Speaker 1: the advantages of scale become greater and greater over time. UH.
• 19:36
  Speaker 1: And and one reason why people are concerned about Japan
• 19:39
  Speaker 1: Morgan's entry into the space. UM when you have when
• 19:43
  Speaker 1: you have a leading you know, so it's sort of
• 19:46
  Speaker 1: top The thing that's said is that only people in
• 19:49
  Speaker 1: the top three inequities make any money. Why is that?
• 19:52
  Speaker 1: That's because if if you're not on the top three
• 19:54
  Speaker 1: you're essentially subsidizing the business. And in order to spend
• 19:58
  Speaker 1: enough money in enough money on technology to remain current, UM,
• 20:03
  Speaker 1: you need to be making a lot of money. And
• 20:05
  Speaker 1: if you're not in the top three, you're you're essentially
• 20:07
  Speaker 1: not clearing the hurdle to make enough money to invest
• 20:09
  Speaker 1: to be relevant tomorrow. And that's what you've seen happen
• 20:12
  Speaker 1: to a lot of players. Top players like Credit Sweets,
• 20:14
  Speaker 1: who was maybe number two or number one just a
• 20:16
  Speaker 1: few years ago, fallen a lot since then. UM. JP
• 20:20
  Speaker 1: Morgan is has you know, grown by leaps and bounds,
• 20:23
  Speaker 1: UM in this space. You know, Goldman Sacks was number
• 20:25
  Speaker 1: one just a few years ago. They had thirteen billion
• 20:28
  Speaker 1: in inequities revenue in two thousand and nine, I want
• 20:31
  Speaker 1: to say a high water mark. This last year they
• 20:34
  Speaker 1: had about half of that. What did Jamie Diamonds non
• 20:39
  Speaker 1: JP Morgan chase ambitions? You know, I mean every time
• 20:43
  Speaker 1: he he goes, he rattles off on these long, you
• 20:46
  Speaker 1: know letters about what the United States should do. UM.
• 20:50
  Speaker 1: You know you have to think and ask yourself, as
• 20:52
  Speaker 1: this guy eventually want to be president, and UM, you
• 20:55
  Speaker 1: know he said on the record, you know, look, I
• 20:57
  Speaker 1: I'd love to be President's never gonna happen. I'm not
• 20:59
  Speaker 1: gonna run. And so you know, you think he's going
• 21:01
  Speaker 1: to be involved in some way in in the public
• 21:04
  Speaker 1: discussion because he seems to be and it seems to
• 21:07
  Speaker 1: be genuine on some level that he's passionate about these
• 21:10
  Speaker 1: big picture problems that that the country faces. So just
• 21:15
  Speaker 1: just moving forward with respect of the technological arms race. UM.
• 21:20
  Speaker 1: Do you have a sense of who's winning? Yeah, look
• 21:22
  Speaker 1: so JP Morgan UM. In many ways, it's it's a
• 21:26
  Speaker 1: three way race between JP Morgan, Goldman Sachs, and Morgan Stanley.
• 21:28
  Speaker 1: Morgan Stanley has for the past few years been number
• 21:31
  Speaker 1: one because they have this lineage UM in essentially the
• 21:35
  Speaker 1: type of technology, the type of trading that has become
• 21:39
  Speaker 1: in vogue as you know, quants UH quant hedge funds
• 21:43
  Speaker 1: are really the only UM asset class taking in tons
• 21:46
  Speaker 1: and tons of money in the past few years to
• 21:48
  Speaker 1: signal rentech. Those guys have just amazing track records UM
• 21:52
  Speaker 1: and so Morgan Stanley was best position for that, and
• 21:56
  Speaker 1: JP Morgan came in a few years ago decided to
• 21:58
  Speaker 1: make a huge investment. You know, people talk about JP
• 22:01
  Speaker 1: Morgan like they're the army. You know, when they want
• 22:03
  Speaker 1: to invest, they're going to do so and come in
• 22:05
  Speaker 1: guns blazing. And then you know, golden sacks never count
• 22:08
  Speaker 1: golden sacks out right. Those guys are you know, or devious.
• 22:11
  Speaker 1: And when they decide to um turn around and and
• 22:15
  Speaker 1: and and strategically shift, they're going to commit to it.
• 22:19
  Speaker 1: And so between those three they're all making huge strides
• 22:23
  Speaker 1: right now. It's Morgan Stanley and JP Morgan who you
• 22:27
  Speaker 1: are priming with if you are a quantitedge fund. Thanks
• 22:30
  Speaker 1: very much for being with us. Hughs On, our finance
• 22:32
  Speaker 1: reporter for Bloomberg News. You can follow Hugh on Twitter
• 22:35
  Speaker 1: at Hugh Underscore on s o N. Peter Lynch, famed
• 22:56
  Speaker 1: investor from Fidelity whose book One Up on Wall Street
• 23:00
  Speaker 1: taught investors about something called invest in what you know.
• 23:04
  Speaker 1: Sir John Templeton, famed investor, described the maximum point of
• 23:10
  Speaker 1: pessimism as something as a psychological ally in his investing thesis.
• 23:17
  Speaker 1: Here to help us talk a little bit more about
• 23:19
  Speaker 1: these topics and how to apply them to your portfolio
• 23:22
  Speaker 1: and to making money or rather not losing money, is
• 23:25
  Speaker 1: Cole Smeed. He is managing director and co portfolio manager
• 23:28
  Speaker 1: of a SMED Capital Management. They are based in Seattle.
• 23:32
  Speaker 1: He helps to manage more than two point two billion
• 23:35
  Speaker 1: dollars of customer assets. Cole, thank you very much for
• 23:38
  Speaker 1: being with us. Maybe just draw on both of those
• 23:41
  Speaker 1: famed investors and their description of how to use what
• 23:46
  Speaker 1: some might describe as common sense without common emotion when
• 23:50
  Speaker 1: it comes to investing. Well, yeah, I mean and Lynch
• 23:55
  Speaker 1: and in Templeton are you well thought of, But there
• 23:57
  Speaker 1: are many other investors that have applied, um to your point,
• 24:01
  Speaker 1: PIM good psychological discipline in investing. Um, the most common
• 24:07
  Speaker 1: thing we would say as a firmer, I would say
• 24:09
  Speaker 1: it as as someone that that works in this field. Um,
• 24:13
  Speaker 1: you have to be willing to do something different. So
• 24:16
  Speaker 1: you know, even if you, as Lynch said, you know,
• 24:18
  Speaker 1: you invest in what you know, Um, you want to
• 24:20
  Speaker 1: get a good price and that usually has to be
• 24:22
  Speaker 1: something different. So um. So it's the beauty of it
• 24:26
  Speaker 1: today is in many ways the field is just as
• 24:28
  Speaker 1: new as it's ever been because of what most people
• 24:31
  Speaker 1: think are the roadblocks to be a successful stock picker,
• 24:35
  Speaker 1: as Templeton and Lynch were. Okay, so let's talk about
• 24:39
  Speaker 1: why you think it's successful or it's a good time
• 24:41
  Speaker 1: to be a stock picker despite some of the roadblocks. Yeah,
• 24:46
  Speaker 1: it's a great, great question, Lisa. I'm actually gonna, I'm gonna,
• 24:49
  Speaker 1: I'm gonna put a shameless PIM plug in here. I
• 24:51
  Speaker 1: was listening to the surveillance. I think this is about
• 24:54
  Speaker 1: six seven weeks ago. Pim. You'd recommended a book by
• 24:56
  Speaker 1: the title, uh it was called The Heart of the Matter, Okay,
• 24:59
  Speaker 1: and talked about kind of the risks the doctors had
• 25:01
  Speaker 1: taken in the in the fields and the study of
• 25:03
  Speaker 1: the Heart. And I read it and it was a
• 25:05
  Speaker 1: great book. I appreciate the recommendation. But one thing that
• 25:09
  Speaker 1: I pulled out of it, there's a great picture of today.
• 25:12
  Speaker 1: In the eighteenth century, one of one big problem was
• 25:15
  Speaker 1: when people get aneurisms, how to deal with those. In
• 25:18
  Speaker 1: the eighteenth century up until about seventeen eighty, we dealt
• 25:21
  Speaker 1: with those by two ways. We either um one blood
• 25:24
  Speaker 1: let or two. If it was aneurism you've got in
• 25:27
  Speaker 1: your leg, we just you know, we would effectively cut
• 25:30
  Speaker 1: off your leg. We'd amputate it. And that same thing
• 25:32
  Speaker 1: as going on in the investing field today. For example,
• 25:35
  Speaker 1: we are blood letting blood letting was done to reduce
• 25:38
  Speaker 1: pressure and effectively reduced workload. Welcome to passive investing as
• 25:43
  Speaker 1: its practice. It doesn't mean it's improving the the underlying
• 25:46
  Speaker 1: patient's health, but it's accepted much like blood letting was
• 25:50
  Speaker 1: in the eighteenth century. The other thing that we're doing
• 25:52
  Speaker 1: today is institutions have cut themselves off from public equities altogether.
• 25:55
  Speaker 1: I call it institutional amputation. The question, though, is is
• 25:58
  Speaker 1: it helping the underlying investors to meet their needs or
• 26:01
  Speaker 1: the institution to meet their goals? And and it doesn't
• 26:04
  Speaker 1: spell as though it is. Well Cole all right, First
• 26:07
  Speaker 1: of all, thanks thanks for the comment about the book,
• 26:10
  Speaker 1: and I'll give you a couple others. The Heart Healers
• 26:13
  Speaker 1: is another great book by James Forrester. Uh. The other book,
• 26:16
  Speaker 1: The Matter of the Heart, is by Thomas Morris. And
• 26:20
  Speaker 1: one of the things that I took take away from
• 26:22
  Speaker 1: both of those books is we're talking about people who
• 26:25
  Speaker 1: are mavericks and misfits because they are willing to do
• 26:30
  Speaker 1: something and to behave in a way that is not conventional,
• 26:36
  Speaker 1: because they are willing to take risks that then result
• 26:40
  Speaker 1: in some empirical response. In other words, it's tested in
• 26:44
  Speaker 1: the real world. And you know, we like to say
• 26:47
  Speaker 1: they eat their own you know, cooking. In that case,
• 26:50
  Speaker 1: it's meat capital. What are you people doing right now
• 26:54
  Speaker 1: perhaps to take advantage of all this volatility and the
• 26:58
  Speaker 1: downtrend that we're seeing recently in docks. Sure, So so
• 27:02
  Speaker 1: to what I call it, what I cavy out this
• 27:04
  Speaker 1: under is I put it under the heading of how
• 27:07
  Speaker 1: can we improve the health of the underlying patient, or,
• 27:10
  Speaker 1: as John Hunter did with aneurysms, how can we improve
• 27:13
  Speaker 1: the quality of life. So, for example, um, if blood
• 27:17
  Speaker 1: letting is what some people would do, let's examine blood
• 27:19
  Speaker 1: letting today. In effect, blood letting is nothing bigger than
• 27:23
  Speaker 1: a big tech bet. Okay, if big tech does not
• 27:27
  Speaker 1: do wealth for blood letters, returns will be very poor.
• 27:31
  Speaker 1: So there's kind of too risk one that they could
• 27:33
  Speaker 1: do poorly in returns. Uh. And in those big cap
• 27:35
  Speaker 1: tech stalks that are well liked, well adored, well followed,
• 27:39
  Speaker 1: well covered by the street, and something that is not unique,
• 27:42
  Speaker 1: as you pointed out, it's not different, um, But the
• 27:44
  Speaker 1: flip side would be that you'd have to be asking
• 27:46
  Speaker 1: for a greater encore than they've just had, the problem is,
• 27:49
  Speaker 1: if you look statistically speaking, Um, you know, they've had
• 27:51
  Speaker 1: quite a great run. And the question is how how
• 27:54
  Speaker 1: often does that happen? You know, these things are cycles.
• 27:56
  Speaker 1: Humans are humans. So I'd say from from that context,
• 27:59
  Speaker 1: it just doesn't look like it's improving the underlying health
• 28:02
  Speaker 1: of the patient or the quality of life versus. Hey,
• 28:05
  Speaker 1: let's go into places like retail in media, which is
• 28:08
  Speaker 1: getting excoriated in this environment despite the volatility you mentioned.
• 28:12
  Speaker 1: There's merit there, there's there's there's returns that could be had,
• 28:16
  Speaker 1: but you have to be willing to not blood let
• 28:19
  Speaker 1: in this market environment, which, as we can see, you know,
• 28:22
  Speaker 1: the flows are just horridly the opposite way that people
• 28:26
  Speaker 1: want to blood let. And the question is how often
• 28:27
  Speaker 1: does everybody want to do something does it benefit the
• 28:30
  Speaker 1: underlying client? I want to push back a little bit
• 28:33
  Speaker 1: because the underlying patient, frankly, has done brilliantly by investing
• 28:37
  Speaker 1: in e t f s and passive funds, the track
• 28:39
  Speaker 1: equities and risk your debt over the number of years.
• 28:43
  Speaker 1: So I'm just trying to figure out, you know, how
• 28:46
  Speaker 1: do you convince people that now is different when frankly,
• 28:49
  Speaker 1: active managers have been saying that for years. Yeah, well,
• 28:52
  Speaker 1: when we you can track. This is Dalbard produces studies
• 28:55
  Speaker 1: looking at what does the active investor do versus what
• 28:58
  Speaker 1: did the passive investor do over the same time periods
• 29:01
  Speaker 1: and the longer the time period. Dal Bar's work shows
• 29:04
  Speaker 1: that the active investor one when and that what they're
• 29:07
  Speaker 1: tracking is what did the underlying client do, not necessarily
• 29:10
  Speaker 1: what the funds did and or if they poured in
• 29:11
  Speaker 1: the top they pulled out the low that affects the
• 29:13
  Speaker 1: investor return. Um So, so the longer, according to dal
• 29:17
  Speaker 1: Bar study, the longer the duration of the investor, the
• 29:21
  Speaker 1: more alpha they gained over being a past investor when
• 29:25
  Speaker 1: they chose to be active. Okay, so we work in
• 29:27
  Speaker 1: long duration time periods. I know no one that is
• 29:30
  Speaker 1: trying to invest for the next three years to fulfill
• 29:32
  Speaker 1: their needs of their life. We're talking ten you know,
• 29:37
  Speaker 1: in my case, god willing fifty plus years. But I
• 29:40
  Speaker 1: say that because you know this idea that um you know,
• 29:43
  Speaker 1: oh it's for example, dal Bar studies show that it's
• 29:46
  Speaker 1: worked better to be a past investor last three years.
• 29:48
  Speaker 1: So my question is that that's just a placebo effect.
• 29:50
  Speaker 1: The old thing is, do not confuse uh, do not
• 29:53
  Speaker 1: confuse brains with a bull market, and I would argue,
• 29:56
  Speaker 1: much like you said, it's been great returns. The only
• 29:59
  Speaker 1: problem is wearing a bowl market. What does a tough
• 30:03
  Speaker 1: market look like? And the question is is the blood
• 30:05
  Speaker 1: letting going to be the appropriate thing for people to
• 30:07
  Speaker 1: do in a terrible market? Cold Smide, thank you so
• 30:10
  Speaker 1: much for being with us. Cole Smide, Managing director and
• 30:13
  Speaker 1: co portfolio manager at Smide Capital Management, with two point
• 30:17
  Speaker 1: two billion dollars under management, making the case for active investors.
• 30:26
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 30:29
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 30:33
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 30:36
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 30:40
  Speaker 1: It's one before the podcast. You can always catch us
• 30:43
  Speaker 1: worldwide on Bloomberg Radio.