Latest / Bloomberg Intelligence / Leverage 'Party' Is At Root of Fund Blowups: Ben Hunt

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Leverage 'Party' Is At Root of Fund Blowups: Ben Hunt · Bloomberg Intelligence

• 0:00
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
• 0:04
  Speaker 1: my co host Matt Miller. Every business day, we bring
• 0:06
  Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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  Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
• 0:15
  Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
• 0:18
  Speaker 1: at Bloomberg dot com slash podcast. Looking at the equity markets,
• 0:23
  Speaker 1: we are at or near all time highs, but there's
• 0:25
  Speaker 1: definitely some concerned building in this marketplace that maybe it
• 0:28
  Speaker 1: is overheated. You can look no further, maybe than some
• 0:31
  Speaker 1: of the blowups we've seen just recently, whether it's the
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  Speaker 1: Archegos from last week, Melvin Capital on all the Reddit stocks,
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  Speaker 1: and some others. Here to help us put it all
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  Speaker 1: on perspective, we welcome Ben Hunt. He's co founder and
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  Speaker 1: chief investment officer of Second Foundation Partners. He's also the
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  Speaker 1: creator and author for Epsilon Theory newsletter and website based
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  Speaker 1: in Reading, Connecticut. So Ben is, as you take a
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  Speaker 1: look at you know, whether it's Greensial or Archegos or
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  Speaker 1: Melvin Capital, what do you see when you see some
• 0:59
  Speaker 1: of those kind of blow ups in the market Yeah, well,
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  Speaker 1: thanks for having me on to talk about this, Paul, I.
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  Speaker 1: I appreciate that. You know, you know, I obviously all
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  Speaker 1: three of these, right, So Melvine Capital, as you mentioned,
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  Speaker 1: that's that's Gabe Plotkin's hedge fund that was at the
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  Speaker 1: epicenter of the Game Stop robin Hood debacle. Right. You've
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  Speaker 1: got Green Silk Capital with supposedly you know, supply chain
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  Speaker 1: financing uh, and then most recently you've got Archagos UH
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  Speaker 1: and and whatever that was. Right, And certainly these are
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  Speaker 1: all a little different. I mean, I guess it was,
• 1:38
  Speaker 1: I forget who it was, the Tolstoy. Every unhappy family
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  Speaker 1: is unhappy in its own way, right, so so you know,
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  Speaker 1: they're they're clearly differences in the situation of all three
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  Speaker 1: of these, but there's also really important similarity. And that similarity,
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  Speaker 1: I think is that all three of these institutions were
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  Speaker 1: levered to the hilt funded by other financial institutions. And
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  Speaker 1: I and I think that sort of leverage is at
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  Speaker 1: the heart of the demise, or, at least in the
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  Speaker 1: case of Melvin, the misfortune that that that all three
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  Speaker 1: of them have had ben Correct me if I'm wrong,
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  Speaker 1: and if I'm stepping out a line. But it is
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  Speaker 1: very easy in times like these to blame the Fed.
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  Speaker 1: They've pumped up this market with unlimited quei, unlimited stimulus.
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  Speaker 1: Everyone is fomo. We all have confetti emojis when we
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  Speaker 1: make trades. How much of this is a problem because
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  Speaker 1: money is too easy? Well, look, I mean this is
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  Speaker 1: always this issue, right, I mean, this is the punch bowl.
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  Speaker 1: And what happens when you've got uh an unlimited punch
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  Speaker 1: bowl with spite with with with pure grade alcohol. Well,
• 2:55
  Speaker 1: you know, people get drunk and and I think that's
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  Speaker 1: what we have being represented market today. But but look,
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  Speaker 1: it's it's yes, you're you're so right easy to blame
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  Speaker 1: the fat And frankly, I do think that zero interest
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  Speaker 1: rate policy for so long has to have these sort
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  Speaker 1: of consequences that we're seeing today. But but I think
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  Speaker 1: it also goes beyond the fat Taylor. Honestly, I think
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  Speaker 1: that one of the big reasons that that we are
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  Speaker 1: in this situation is that the lenders, the people who
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  Speaker 1: are extending the leverage that's being gobbled up by the
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  Speaker 1: bill loongs of the world or the gay Plotkins of
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  Speaker 1: the world. You know, it means something when we talk
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  Speaker 1: about too big to fail. It means something when we
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  Speaker 1: talk about these systemically import financial institutions. They can extend
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  Speaker 1: this leverage. They can take these losses without frankly, taking
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  Speaker 1: the consequences of bad risk management and bad decision making.
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  Speaker 1: All right, so the bullmarket been for this market is
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  Speaker 1: pretty clear for most investors. And then you know in
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  Speaker 1: whether it's the FED with low low interest rates, fiscal stimulus,
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  Speaker 1: the reopening trade, and we all know the bull case. Here,
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  Speaker 1: where is the risk in that bulk case? From your perspective,
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  Speaker 1: it seems it's pretty clear to a lot of investors.
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  Speaker 1: But where do you see the risk in that bull call? Well, look,
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  Speaker 1: the risk is is where the risk always is right,
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  Speaker 1: which is the uh can the party go on forever?
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  Speaker 1: The risk is always what happens as as we're seeing
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  Speaker 1: some examples today of the enormous losses that are made
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  Speaker 1: possible by the use of leverage. Uh. You know what
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  Speaker 1: we're experiencing today, I think is a reversal and a
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  Speaker 1: number of the I'll call them correlations, but but but
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  Speaker 1: really what they are these gigantic economic barges that have
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  Speaker 1: been sailing in the same direct action for like thirty
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  Speaker 1: or forty years. I'm talking about inflation expectations, moving from
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  Speaker 1: expectations of deflation to inflation. You're seeing that being reflected
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  Speaker 1: in interest rates. I'm talking about the reversal and globalization,
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  Speaker 1: this massive force for deflation, but also for these the
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  Speaker 1: supply chains, supply finance, trade finance. It's been a one
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  Speaker 1: way market in both inflation expectations and globalization for thirty
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  Speaker 1: or forty years, and I think we're clearly seeing signs
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  Speaker 1: that those one way bets are shifting. So that's why
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  Speaker 1: I think that that well, that's what I think could
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  Speaker 1: cause went to pay the piper. With the enormous amount
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  Speaker 1: of leverage that's being extended to so many of these
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  Speaker 1: investment firms, how much of this two comes down to
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  Speaker 1: the need for transparency. I just watched that great I
• 5:54
  Speaker 1: think it was a PBS documentary about Brooksley Born and
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  Speaker 1: long term capital management. And I met Taylor Riggs Capital Management,
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  Speaker 1: and I know what I've lent you, and Paul Sweeney
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  Speaker 1: at his Capital Management knows what he's lent you. But
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  Speaker 1: he and I have no idea what we have combined
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  Speaker 1: collectively lent you. And therein lies the problem. Well, I'll
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  Speaker 1: say that that's a problem in two respects. One, it's
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  Speaker 1: a problem that our regulators are are are not seemingly
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  Speaker 1: able to provide or capture that that sort of of transparencies.
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  Speaker 1: You're saying, that sort of visibilities that we can know
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  Speaker 1: what risks exist in the market. But but I'll also
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  Speaker 1: say it gets back to this this notion of being
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  Speaker 1: too big to sail. You know, you know you're never
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  Speaker 1: gonna stop investment banks or prime brokers from taking risk.
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  Speaker 1: We wouldn't want to. We wouldn't want to stop that, right.
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  Speaker 1: But I think it's very different. We live in a
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  Speaker 1: world of today where I don't know that we can
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  Speaker 1: have a Bear Stearns moment, right. I don't know that
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  Speaker 1: it's paul sable for a prime broker today too, you know,
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  Speaker 1: to extend so much leverage that that they get taken
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  Speaker 1: out in the street and shot. Huh and and and
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  Speaker 1: it's a yeah, right right, absolutely, we hope not. But
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  Speaker 1: what I would say is that if if that ultimate
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  Speaker 1: um penalty doesn't exist, then I think that takes away
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  Speaker 1: kind of the motivation of the banks to say, hey,
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  Speaker 1: let me let me do a little more digging here,
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  Speaker 1: and let me let me have a conversation with other
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  Speaker 1: banks about how much leverage they're extending to this guy
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  Speaker 1: or that guy. I think it comes back to that
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  Speaker 1: too big to sail notion. All right, Ben, thanks so
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  Speaker 1: much for joining so we appreciate your thoughts here on
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  Speaker 1: these markets. Ben Hunt, co founder and chief investment officer
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  Speaker 1: of Second Foundation Partners. Let's all recent news that Goldman
• 7:52
  Speaker 1: Sachs called quit on a dollar short the currency team
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  Speaker 1: closed it's recommended short green back position against a basket
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  Speaker 1: of G ten come any currencies, including the Aussie and Kiwi,
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  Speaker 1: in a note titled Tactical Retreat. Let's get some color
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  Speaker 1: on those currency markets. We do that with Dr Win Thin,
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  Speaker 1: global head Currency Strategy at Brown Brothers Harriman. Uh when
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  Speaker 1: thanks so much for joining us here. What do you
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  Speaker 1: make of that Goldman call there on the dollar? Oh,
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  Speaker 1: first of all, thanks for having me. It's always it's
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  Speaker 1: always a pleasure to be on here. Um. You know,
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  Speaker 1: I think they pretty much had to acknoledge the inevitable.
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  Speaker 1: Now I can't fault like the original call because think
• 8:29
  Speaker 1: about you know, this is anty history, but think about
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  Speaker 1: where we started the year. January one, the US virus
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  Speaker 1: numbers were exploding vaccines were nowhere being rolled out. Um,
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  Speaker 1: most of the con was closed. Um, we're looking at
• 8:42
  Speaker 1: it at a split government and all of a sudden
• 8:44
  Speaker 1: June six have even changed. And you know that if
• 8:47
  Speaker 1: a lot of things happened that day, but the main
• 8:49
  Speaker 1: thing that happened was that was the day after the
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  Speaker 1: Georgia send It runoffs and we got um, the Democrats swept,
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  Speaker 1: and we're seeing the fruits to that right now. We
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  Speaker 1: saw an aggressive fiscal package already, we're talking about another
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  Speaker 1: two trillion infrastructure spending, another one coming after that. So
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  Speaker 1: one onom line is that the US economic outlook is
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  Speaker 1: much much better than it was when we started the year. UM.
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  Speaker 1: The two twenty was clearly dollar negative. We did a
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  Speaker 1: terrible job with the pandemic. But really we've seen one
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  Speaker 1: eight over there over Q one, and I think the dollar,
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  Speaker 1: equity market, spawn markets are all reflecting this. This really
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  Speaker 1: a new outlook. UM. Effects is certainly part of that trade. Now,
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  Speaker 1: how are you thinking about the impacts on e M.
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  Speaker 1: Where we thought we were going to have big dollar weakness,
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  Speaker 1: we ended up not. We had some dollar strength. You
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  Speaker 1: have some rising yields here in the US. As you
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  Speaker 1: think about capital flows and relative attractiveness. How then, does
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  Speaker 1: this change the outlook for emerging markets. Yeah, that's a
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  Speaker 1: great question because you know it's it's I think that
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  Speaker 1: the drivers to e M are in stense constlickting right now.
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  Speaker 1: So the global growth story again it's not just the US,
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  Speaker 1: but you know, China is doing well, Japan is starting
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  Speaker 1: pick up um. The global growth outlook is is very
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  Speaker 1: positive for e M UM. You know, we're seeing strong exports,
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  Speaker 1: have Taiwan, Korea, high commodity prices, and that's all great,
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  Speaker 1: you know well and good for em UM. But in
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  Speaker 1: terms of currency, the strong dollar definitely, you know, throws
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  Speaker 1: a monkey you mentioned into it. You know, it's it's
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  Speaker 1: there are times when the dollar can diverge against the majors,
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  Speaker 1: against em but right now it seems to be sort
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  Speaker 1: of you know, full on dollar strength UM. And that's
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  Speaker 1: not to say that's bad for for em you know,
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  Speaker 1: some your currency UM exchange ways is actually not bad
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  Speaker 1: for e M. I think many of the policymakers in
• 10:35
  Speaker 1: the emerging markets were concerned about the week dollars strong
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  Speaker 1: local currencies, and I think they're sort of getting almost
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  Speaker 1: getting in a sweet spot. So I would say negative
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  Speaker 1: on EM currencies, but positive on EM equities and e
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  Speaker 1: M growth. All right, when how about you know, we
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  Speaker 1: talked about dollar strength. Where do you see opportunities in
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  Speaker 1: some G ten currencies here where some where are you
• 10:56
  Speaker 1: guys doing some work? Sure so, UM, I think the
• 11:00
  Speaker 1: all will will will really do best against sort of
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  Speaker 1: the big the big three. That would be a sterling, euro, yen,
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  Speaker 1: and we've seen that in the sort of the UH
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  Speaker 1: you know REU to date performance. But where I see
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  Speaker 1: some performance within the majors is the UM dollar block
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  Speaker 1: and scandies. And it goes back to what I just
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  Speaker 1: said about EM and that's the similar things would hold
• 11:18
  Speaker 1: for the sort of these growth sensitive major currency. You know,
• 11:21
  Speaker 1: obviously can the Cadian dollar, um naki are oil related
• 11:27
  Speaker 1: very positive there? Um you know, uh, Swedish krona um
• 11:32
  Speaker 1: AUSSI key we you know, kind of keyed into Chinese
• 11:35
  Speaker 1: and global growth. So those currencies can outperform. But again
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  Speaker 1: it's would be very hard sort of um you know,
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  Speaker 1: I think really gain against when the dollars is just
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  Speaker 1: on such a tear. Um you know, I think you know,
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  Speaker 1: the Q two outlook UH is really strong for growth
• 11:50
  Speaker 1: right now we're talking about seven percent. I think it's
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  Speaker 1: key senses carrying over to seven percent in two three,
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  Speaker 1: and that's when the rest of the you know, when
• 11:58
  Speaker 1: most of Europe is struggling. That you know, that's sort
• 12:00
  Speaker 1: of the other part of the equation. You know, France
• 12:02
  Speaker 1: just went back into lockdown, Germany Itaier extended there, you know,
• 12:05
  Speaker 1: the limited lockdown. So you know, the European outlook. Um,
• 12:08
  Speaker 1: you know x x UK is really quite poor right now,
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  Speaker 1: and so you know, I think that we can really
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  Speaker 1: see this performance against the euro and to lesser extent
• 12:17
  Speaker 1: agen sterling. But but you know, the growth sensitive majors
• 12:22
  Speaker 1: kind of holding up. Okay quickly here the yen hedge
• 12:26
  Speaker 1: funds boosting their short yen bets to the highest in
• 12:30
  Speaker 1: two years. Is this a traditional and still safe haven
• 12:33
  Speaker 1: or is there something else going on? Well no, I
• 12:36
  Speaker 1: think um really, uh, we're kind of unwinding that safe
• 12:39
  Speaker 1: haven right So the short sirred record high, So I
• 12:42
  Speaker 1: think people are so you know, I think we're seeing
• 12:44
  Speaker 1: similar price action in the swissy as well. We're moving
• 12:47
  Speaker 1: out of the safe havens and more into the sort
• 12:49
  Speaker 1: of you know growth um, you know, cyclical type currencies. UM,
• 12:52
  Speaker 1: so I think it's yen uh dollar yen rise again.
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  Speaker 1: Weakness can continue. We've got to march high the eleven
• 13:00
  Speaker 1: one eleven seventy. I wanna go even further. We're looking
• 13:03
  Speaker 1: at a two eighteen higher on one five. But you know,
• 13:06
  Speaker 1: let's take things one steparate time. UM, let's go a
• 13:08
  Speaker 1: quarter by quarter. But right now to me this I
• 13:10
  Speaker 1: think this, you know, today's weakness. Not notwithstanding, I think
• 13:13
  Speaker 1: it's more of a technical move. I think the fundamental
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  Speaker 1: drivers remain dollar positive. I should just add one quick thing, um.
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  Speaker 1: One thing that I've noticed is that the set funds
• 13:22
  Speaker 1: futures are starting to move up. The fet tightning expectations.
• 13:25
  Speaker 1: Uh hike in two three is about almost half priced
• 13:29
  Speaker 1: in and almost fully priced in by end twenty two UM,
• 13:33
  Speaker 1: which is very much of the Hodes with the dot
• 13:34
  Speaker 1: plots saying steady rates three. So that's at the margin
• 13:38
  Speaker 1: also very thirty dollar positive. So all these things are
• 13:40
  Speaker 1: you know, sort of falling in the place of the
• 13:42
  Speaker 1: dollar really sort of reversal what we saw in so
• 13:46
  Speaker 1: here we are, you know, taking back your dollars short.
• 13:48
  Speaker 1: Dr Winton, thank you so much for joinings. We always
• 13:51
  Speaker 1: appreciate your thoughts on the global currency market's global head
• 13:54
  Speaker 1: currency strategy of Brown Brothers Herriman. Let's talk about this
• 13:58
  Speaker 1: reopening trade. We've got lots and lots of evidence that
• 14:01
  Speaker 1: this economy here is reopened, but we're also seeing some
• 14:04
  Speaker 1: bottlenecks in supply chains, in logistics. Let's get a sense
• 14:09
  Speaker 1: of kind of what's going on out there in corporate America.
• 14:11
  Speaker 1: We could do that with Chris Dansbury, CFO Arrow Electronics.
• 14:14
  Speaker 1: They are based in where are they Centennial, Colorado? So
• 14:18
  Speaker 1: there dangerously close to some of the best skiing in
• 14:21
  Speaker 1: the world. Chris, thanks so much for joining us here. Briefly,
• 14:24
  Speaker 1: just describe Arrow Electronics for our listeners who may not
• 14:27
  Speaker 1: be aware of it, and then give us a sense
• 14:29
  Speaker 1: of kind of what you're seeing in your business. Yeah.
• 14:33
  Speaker 1: Great to be with you this morning. Thanks for having me.
• 14:36
  Speaker 1: Arrow is a distributor of semiconductor and electronic component products
• 14:43
  Speaker 1: around the world. You've got a really broad line card,
• 14:46
  Speaker 1: so we represent a broad swath of suppliers and we
• 14:50
  Speaker 1: help customers choose the right parts for their products. Uh.
• 14:53
  Speaker 1: And that can include engineering designs for you know, semiconductor
• 15:00
  Speaker 1: board assemblies and whatnot. That go into finished products, so
• 15:03
  Speaker 1: that can be everything from your toaster to your car.
• 15:06
  Speaker 1: Um and uh as as more and more electronic content
• 15:10
  Speaker 1: goes into into products, we we do see abroad view
• 15:16
  Speaker 1: of the overall economy. So what's interesting about where we
• 15:20
  Speaker 1: sit today is that as we went into two thousand nineteen,
• 15:24
  Speaker 1: if we wanted to clock back a couple of years,
• 15:27
  Speaker 1: the market went into just a cyclical decline and so
• 15:31
  Speaker 1: people leaned out inventories, our customers leaned out inventories. Uh
• 15:36
  Speaker 1: that looked like it was about to recover at the
• 15:38
  Speaker 1: beginning of last year, and then the pandemic hit and
• 15:41
  Speaker 1: inventories came down again. So where we find ourselves right
• 15:47
  Speaker 1: now is in a situation where people are sitting on
• 15:49
  Speaker 1: lean inventories and there's really high demand for those products.
• 15:53
  Speaker 1: You know, it's interesting. It's going back and reviewing the
• 15:56
  Speaker 1: transcript from your earnings call that was really just two
• 15:59
  Speaker 1: months ago, and lot of questions of course about the
• 16:01
  Speaker 1: chip shortage and how big the difference is between supply
• 16:06
  Speaker 1: and demand. What has changed in the last two months.
• 16:09
  Speaker 1: Has it gotten any better? Uh? Now, I would say
• 16:13
  Speaker 1: it's continuing to progress along those lines. Again, It's we're
• 16:18
  Speaker 1: in unstarted territory here where the business does go through cycles.
• 16:22
  Speaker 1: But we're we're starting this ramp up following a cyclical
• 16:28
  Speaker 1: slowdown and a pandemic. So I think that the biggest
• 16:32
  Speaker 1: example that we see and we all hear about is
• 16:35
  Speaker 1: on the automotive side, right. Car dealers would love to
• 16:38
  Speaker 1: have more cars on lots um, and the automotive sector
• 16:42
  Speaker 1: leaned out inventories as they went into the pandemic, you know,
• 16:46
  Speaker 1: expecting things to really soften and and really what we
• 16:50
  Speaker 1: saw happen was, uh, you know, people spend less on
• 16:53
  Speaker 1: the things that they just physically couldn't spend money on
• 16:56
  Speaker 1: travel leisure restaurants, and they started to spend end it
• 17:00
  Speaker 1: on other areas, uh, you know, home improvement, electronics, uh,
• 17:05
  Speaker 1: you know, for for not just consumer products, but for
• 17:07
  Speaker 1: the home and car sales actually remained fairly strong. So
• 17:11
  Speaker 1: we we ended up in the latter part of uh
• 17:15
  Speaker 1: last year and into this year with just broad demand
• 17:20
  Speaker 1: across all industrial categories and that continues. So it's interesting, Chris,
• 17:27
  Speaker 1: I'm just looking at your stock all time high today
• 17:32
  Speaker 1: up about two d four dollars um. What's the market
• 17:37
  Speaker 1: discounting your stock price? Are you viewed as a reopening trade. Yeah.
• 17:43
  Speaker 1: I think really we UM were looked at as First
• 17:47
  Speaker 1: of all, we were very strong from a counter cyclical standpoint.
• 17:50
  Speaker 1: The stock held up well through the pandemic because we
• 17:52
  Speaker 1: generate a lot of cash in a downturn, right, We
• 17:56
  Speaker 1: we have a lot of inventory and working capital that
• 17:59
  Speaker 1: we re reduce in those windows, and it allows us
• 18:02
  Speaker 1: to paint on debt and buy stock a good prices.
• 18:05
  Speaker 1: And so we've done that. But now I think investors
• 18:09
  Speaker 1: are really seeing the earnings potential the growth from the
• 18:13
  Speaker 1: business as the economies around the world recover and uh
• 18:17
  Speaker 1: and more and more consumption of semiconductor product takes place. UM.
• 18:22
  Speaker 1: You know where we fit as interesting because the underlying
• 18:25
  Speaker 1: product that we sell has a deflationary value to it,
• 18:28
  Speaker 1: which which is a headwind UM. The tail wind is
• 18:32
  Speaker 1: is that UM more than offsets. That is, is that
• 18:35
  Speaker 1: there's more and more electronic consumption in everything that we
• 18:39
  Speaker 1: consume and use, and and certainly with environmental pressures and whatnot, uh,
• 18:44
  Speaker 1: you know, that will continue. So that's a that's a
• 18:47
  Speaker 1: much bigger tail wind for us. And I think the
• 18:49
  Speaker 1: market recognizes that we only have about a minute left.
• 18:51
  Speaker 1: Wanted to get your thoughts on some of the comments
• 18:54
  Speaker 1: we heard from the President last week in the infrastructure plan.
• 18:56
  Speaker 1: There's a lot of production of chips and that nationalism, right,
• 19:01
  Speaker 1: bringing that back to the US. How does that impact you?
• 19:06
  Speaker 1: You know, it's we we um distribute product all over
• 19:11
  Speaker 1: the world. We're buying it from from multiple geographic locations
• 19:14
  Speaker 1: and shipping it to other geographic locations. So I don't
• 19:17
  Speaker 1: think it really changes what we do. Uh. You know.
• 19:21
  Speaker 1: The reality is is that for the last you know,
• 19:24
  Speaker 1: five to ten years, there's there's obviously been an increase
• 19:27
  Speaker 1: in nationalistic tendencies around the world. Um, you know, I
• 19:31
  Speaker 1: think that has its challenges with trade, but certainly from
• 19:34
  Speaker 1: a a you know what we do standpoint, if there's
• 19:39
  Speaker 1: more made here, then we'll just be shipping more from
• 19:42
  Speaker 1: here and less from other places. So we're quite happy
• 19:45
  Speaker 1: to shift as the market ships. We had to do
• 19:47
  Speaker 1: that with teriffs, we've had to do it with other things,
• 19:50
  Speaker 1: and uh, you know, being nimble is part of the
• 19:53
  Speaker 1: value we bring our suppliers and customers. Hey, Chris, thanks
• 19:56
  Speaker 1: so much for joining us. We really appreciate chatting with you,
• 19:59
  Speaker 1: getting some update on your company and on some of
• 20:02
  Speaker 1: these global supply chain issues, which you guys are right
• 20:04
  Speaker 1: smack in the middle of Christiansbury Cevo of Arrow Electronics.
• 20:08
  Speaker 1: They are based in any suburb of Denver, Colorado. One
• 20:14
  Speaker 1: of the key pillars underneath the equity bull call has
• 20:17
  Speaker 1: been the reopening trade, and we certainly be getting some
• 20:19
  Speaker 1: data points that support that, whether it's the airlines, whether
• 20:23
  Speaker 1: it's the gaming companies or the UH some of the
• 20:27
  Speaker 1: other leisure businesses. And also we got last Friday that
• 20:32
  Speaker 1: very very strong jobs reports, So again, the reopening trade
• 20:35
  Speaker 1: seems to be in play. UH. Is that enough to
• 20:38
  Speaker 1: push this market higher? Let's check in with Phil Orlando,
• 20:40
  Speaker 1: chief equity market strategist and head of client portfolio Management
• 20:44
  Speaker 1: at Federated Herme's. Phil, thanks so much for joining us
• 20:46
  Speaker 1: once again. You've been a consistently bullish call on this
• 20:50
  Speaker 1: equity market. Are you still there? I am absolutely still there?
• 20:54
  Speaker 1: Um this UH? I don't know if you read in
• 20:57
  Speaker 1: my market commentary on Friday. I was working Friday because
• 21:01
  Speaker 1: the Bureau of Labor Statistics thought they'd released the jobs
• 21:04
  Speaker 1: report on Friday. Numbers were astounding, you know, aside from
• 21:09
  Speaker 1: the nine hundred and sixteen thousand jobs added and the
• 21:13
  Speaker 1: hundred and fifty six thousand revisions positive for January and February.
• 21:18
  Speaker 1: Getting under the hood exactly puts an exclamation mark on
• 21:22
  Speaker 1: the point you just made. So you look at the
• 21:25
  Speaker 1: household survey adding six hundred nine thousand jobs, triple the
• 21:30
  Speaker 1: prior month. Leisure and hospitality added two hundred and eighty
• 21:34
  Speaker 1: thousand jobs. State and local education schools are opening up
• 21:38
  Speaker 1: now added another hundred and one thousand jobs. All of
• 21:42
  Speaker 1: this is because the pace of vaccination is improving. We're
• 21:46
  Speaker 1: now up to like what two point seven million vacs
• 21:48
  Speaker 1: is a day. Uh. And as a result, now schools
• 21:51
  Speaker 1: are reopening bars, restaurants, stores, and end. These these lower skilled,
• 21:57
  Speaker 1: lower wage workers who were forced to the sidelines because
• 22:01
  Speaker 1: of these you know, lockdowns, are now flooding back into
• 22:05
  Speaker 1: the labor market. And um, this one statistic is will
• 22:10
  Speaker 1: blow your mind. If you have less than a high
• 22:13
  Speaker 1: school diploma, UM, your rate of unemployment in February was
• 22:17
  Speaker 1: ten point one percent. It improved in March from ten
• 22:21
  Speaker 1: point one percent to eight point two percent, roughly a
• 22:24
  Speaker 1: two percentage point decrease in the rate of unemployment. That's
• 22:29
  Speaker 1: telling us these people are coming back into the labor market.
• 22:32
  Speaker 1: And that's good for the overall economy and for the
• 22:35
  Speaker 1: financial market. Phil I'm typically on in the afternoons and remain.
• 22:38
  Speaker 1: Bostick and I are having a huge debate every day.
• 22:42
  Speaker 1: We fight it out. He does not believe in inflation.
• 22:45
  Speaker 1: I firmly believe in inflation. We see the I S
• 22:48
  Speaker 1: M services in March now the highest on record, prices paid,
• 22:52
  Speaker 1: the highest since two thousand and eight. When are inflationary
• 22:56
  Speaker 1: problems going to be an issue? Though? For the equity market, well,
• 23:00
  Speaker 1: it's a question of nominal versus core Romaine is uh.
• 23:06
  Speaker 1: You know, for those who are looking at inflation, if
• 23:09
  Speaker 1: you're focused upon the nominal numbers, Copper prices have quadrupled
• 23:13
  Speaker 1: over you know, doubled over the last year. Lumber prices
• 23:17
  Speaker 1: have quadrupled, Oil has doubled h corn wheat uh soybeans
• 23:23
  Speaker 1: are up seventy eight percent. So all of those nominal
• 23:26
  Speaker 1: prices are up sharply as the economy has recovered. But
• 23:29
  Speaker 1: remember the core inflation, the consumer price Index and the
• 23:33
  Speaker 1: Personal consumption expenditure index. They strip out the increases and
• 23:38
  Speaker 1: the food and energy prices, so those numbers look relatively
• 23:42
  Speaker 1: more muted. But something's going to happen over the next
• 23:45
  Speaker 1: three months what the Federal Reserve refers to as a
• 23:48
  Speaker 1: procedural base effect. To go back and look at the
• 23:52
  Speaker 1: inflation in in this time last year. Uh, you know, February, March,
• 23:57
  Speaker 1: April May, those numbers were negative. Well, we're gonna roll
• 24:01
  Speaker 1: those numbers off now progressively over the next three or
• 24:04
  Speaker 1: four months, so it's gonna look like core inflation is spiking.
• 24:08
  Speaker 1: But basically all we're doing is lopping off a negative
• 24:11
  Speaker 1: number and adding on a positive number. So core PC,
• 24:15
  Speaker 1: for example, we could see that number of two and
• 24:17
  Speaker 1: a half percent um over the summer, which is exactly
• 24:20
  Speaker 1: where the Fed wants to see it. The question is
• 24:23
  Speaker 1: is it going to keep going up to three, four
• 24:25
  Speaker 1: or five. We think the answer is no. We think
• 24:29
  Speaker 1: it's gonna stay in sort of that two two and
• 24:30
  Speaker 1: a half percent neighborhood on a core level, even though
• 24:34
  Speaker 1: the nominal numbers have moved up pretty strongly here. Alright,
• 24:37
  Speaker 1: So given that inflation backdrop in your overall bullish call,
• 24:42
  Speaker 1: what are the sectors that are you guys are doing
• 24:44
  Speaker 1: the most work on right now? Well, we were sticking
• 24:47
  Speaker 1: to our guns here that that the cyclical trade is
• 24:50
  Speaker 1: the one that's working. We we we took the r
• 24:52
  Speaker 1: overweight in technology back to neutral last August, and we
• 24:57
  Speaker 1: felt that the catalyst was in place that categories like
• 25:01
  Speaker 1: financials and industrials and consumer discretionary and energy, that those
• 25:07
  Speaker 1: categories were ready to catch a bid here because the
• 25:11
  Speaker 1: economy was was out of recession and was gonna was
• 25:13
  Speaker 1: gonna rebound very strongly. That's that's played out, but the
• 25:17
  Speaker 1: valuation gap hasn't hasn't been fully closed. So so domestic
• 25:22
  Speaker 1: large cap value is going to continue to do well. International,
• 25:26
  Speaker 1: particularly emerging markets and international SMID and the small caps,
• 25:30
  Speaker 1: those are the areas that I think you're going to
• 25:32
  Speaker 1: continue to do well. Okay, Hey Phil, thanks so much
• 25:34
  Speaker 1: for joining us. We always appreciate chatting with you. For
• 25:36
  Speaker 1: the Little WINDA chief equity market strategist for Federated Hermes,
• 25:41
  Speaker 1: Thanks for listening to the Bloomberg Markets podcast. You can
• 25:44
  Speaker 1: subscribe and listen to interviews of Apple Podcasts or whatever
• 25:48
  Speaker 1: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
• 25:52
  Speaker 1: at Matt Miller in three and on ball Sweeney I'm
• 25:55
  Speaker 1: on Twitter at pt Sweeney. Before the podcast, you can
• 25:58
  Speaker 1: always catch us worldwide at Lumberg Radio m