This is Bloomberg Business Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
So we talk a lot about inflation, Jess, We know that, right. It's kind of almost like a ping pong game, don't you feel like, because there's people who have some really strong thoughts about it and where it's going.
Right, whether it's not going to come dramatically down to that two percent target for the Fed or the sticky word everybody likes to keep mentioning for stagflation.
Darren say, all right, so let's get to it into a most read story in the Bloomberg A team of Bloomberg reporters covering how trillions of dollars are at stake as Wall Street is super split over the path of inflation. With us as Bloomberg News chief correspondent for Global Macro Markets, A favorite here at Bloomberg, Liz McCormick, she's with us via zoom in New York City. Hey Liz, so good to have you here with Jess and myself love this story.
It is show a story of our times. It isn't unusual, though, I feel like that there's disagreement between economists or market strategists on Wall Street, and yet this is a pretty big one. Walk us through it.
Yeah, true, we always kind of have a lot of disagreement. But what I think Carol gets to why this is even more important now? This like just says, is it sticky? Is inflation going to keep coming down? Is we're, you know, seemingly getting at a pivotal point with the Fed because supposedly they're getting close to done. Let's say, we can't call when, but maybe they hike next week, they might
hike in June, but nonetheless they're close. So after that what happens And a lot of that depends on inflation, right, So I think what the divide is and the views on inflation is kind of even more important now because we're close to the end, and that means does the f stay there or do they ease? Like you know, you guys have talked the market is pricing that, so I think, you know, and like I said, there's lots
of big investors here in this story. Like I said, there's a swath of US reporters, and they don't all agree, but I think it's kind of compelling. There's that strong views by several of them that say, you know, inflation's come down pretty fast, but it's going to be slow moving from here.
The FED is not going to be able.
To pivot to easing even if the economy falters a little bit, because they're just there, you know, enemy number one remains inflation, and there's the other side that just says, you know, hey, it's going to go on and the economy is going to creter.
FED has to ease. So there you go in a nutshell.
Hey, Liz, break it down as far as when it comes to these specific firms, because you have double Line thinking that inflation is still going to be sticky, but then you have Alliance, you have TCW in a different type of camp. Who's on which sort of team at this point?
Yeah? Right, So like it's funny Like TCW. I spoke to Steve Kane and he was saying, you know.
And it's funny because in Palells one of his pressers, someone was saying, how many times it said he said disinflation or whatever.
Steve, it's the new drinking game should be anyway.
Yeah, but Steve Gay was saying we're seeing a lot of disinflationary forces already and that that's going to carry momentum plus, like you know, bearing in mind that there is this sting still to come of all the FED tightening they've already done, which we know there's those long and variable lags we've started to see, like people say the FED started to break some things, like you were talking about what the issues in the regional banks and that they feel like this is just going to kind
of keep coming in force that you know, I don't know if if you was just mentioning Carol that about the consumer, like when the consumer like people have had a job, so they're doing okay, But you see, I saw a consumer confidence go on when the consumer really says I'm not going to spend more and my prices aren't down that much, you know that maybe then the momentum on inflation keeps coming. And I think that's like TCW is saying, it's going to build.
You know.
So I do think about as as a consumer, if I look at prices still staying high, I'm going to start making choices about where I'm going to have to like in terms of where I spend my money my money. I want to go back for a second when it comes to FED policy, Liz, what is the lag? Officially? Is it a year? Like when do we really feel the punch from this past year of FED heightenings? You know, in raising of rates?
Well, that's another one, and economists they all have their different particular views, but let's say they're saying usually it's twelve months.
I remember in the beginning of the tightening there were.
Some saying the lag would be less this time around, but I don't think it was. So. I mean, the FED started in March of twenty twenty two. That's last year, right, it was that we're about a little over a year from there, and they went faster than they've ever gone, at least in my era of watching FED.
So I think you're going to start continuing.
To feel it more. I think we've talked about this before. You know, you say, ah, dude, I want to fix my deck. Maybe not because my heelock is it's seven percent now, right, you know what I mean? So I think on the margin, people are going to start saying things like that more and more, Like you can choose. I don't really need this new thing, even though I want it, because it's more expensive.
There's no like free money anymore, unfortunately.
Right, Yeah, Liz, what is the bond market telling us? Because we did see a record short position when it came to hedge funds against the tenure treasury. So does that mean the bond market isn't positioned correctly for potential posites here.
Well, that's a great question, Jess, because you know, my colleague Garfield Reynolds had written a story about that. And what's interesting is you have this kind of hot hedge fund money that's leaning very hard into being short. But you know, so that's in some of the CFTC data we can look at. They're like the leverage funds and then I'm I'm kind of like a little surprised because they got a big burned in March when the banking crisis broke and yields tumbled.
But I think they have a strong conviction.
But on the other side, because you can look at in the other parts of the data, there's some of the kind of call it asset managers, kind of regular money, they're still long. So there's a bit of a divide there. There's also some kind of arb trading you can do. But I do think the kind of the trend followers, the quants are still leaning too short, and that means, like you're.
Right, it depends what happens.
They kind of think inflation is going to stay around. Fed's going to stay, you know, at least high, even if they stop tightening. But if this stuff unravels, and there's so many uncertainties. I hate to even bring up the debt ceiling because it's the thing we all love to hate.
To revisit every couple of years. But but it's fair, right, Yeah, we have to right that risk is looming. You know, Kevin McCarthy's supposed to have a vote tomorrow.
They don't know the votes, and you know, Biden says I don't want anything with spending cuts. So we're a long way from a deal on the debt ceiling. And you know, treasury is are my thing. I'm not saying there's going to be a default, but I'm just saying it's going to slowly create more angst. And you have other things like we're watching the banking sector.
Is it over? Is it the worst? So there's just so much unknown.
Liz, I want to jump in. I'm thinking, you know, I feel like those who are trading on Wall Street or working at Wall Street for you know, in a lot of our audience, like they get why we are having this discussion. I think there's folks out there, like, you know, their eyes glaze over when it's the deat sailing conversations, or you know, whether or not we get to two percent versus you know, maybe a three or four percent you know target ultimately in terms of inflation
by the FED. What's the significance of you know, whether we go back to normal and the FED gets it right, whether we end up higher on a FED rate, you know, and we don't go back to normal. What are the implications because it feels like if we end up at a higher rate environment right, we're talking about things costing more, maybe higher wages at companies, you know, rethink on you know, asset valuations. I mean there are implications right.
Right exactly.
I mean just think for like regular people who don't live and breathe this stuff. Luckily for them like us all day is that Number one is jobs. Like we've talked about, let's not get into my family, but young college students graduating there. You know, we've seen less job opening, so that, you know, if the economy slows, that's not good for any young person starting their career. If it's harder to find a job, or anyone working who's kind of saying.
I want to make a change.
If there's less job opportunities, that's never good for the regular person. I always come back to everyone in their retirement and their four to one k if they're being good and not you know, market timing and moving around, they do get worried and say, oh my goodness, if the value of my funds are down. It it's like, I guess it's I'm not consumer confidence, but personal confidence. How do I feel that wealth effect that you don't feel too good if the value of your stuff is down.
And if the FED keeps going on, it has to go tighter and tighter.
That's going to hurt financial assets and that's going to make people opening their quarterly retirement accounts saying oooh, what happened?
You know?
Yeah, and Liz, as you know, this is the blackout week for the FED, so we won't have any FED speakers on the calendar, but on Friday we do have the PCE, the feds preferred gauge for inflation, as well as the Employment Cost Index, which we all know Pale watches very closely for wages. How much of an impact does this inflation data actually have on the bond mark? Is it less so at this point than last year or do you expect there to be any sort of meaningful move so when it comes out.
Yeah, well, I actually think it still really does matter because again we're getting at like we said, we've gone some decent ways of inflation falling, but are we're going to plateau? You know, I think those numbers are like four point one and four percent, whether it's you know, the deflator or the core number, and you know, if it's higher, then it's like then we might have some answers to are we going to have a bit more move from the Fed and a pause if it tumbles
below a freak fore handle which is not forecast. I'm not predicting, but I think that will take notice. And with the bond market, it's been like insane volatility all year. We've had a bit of calm lately, but I would never underestimate that the market can't react in size, especially to the Fed's favorite inflation gauge.
Hey, twenty thirty seconds left here. I mean we need to be fair to the Fed. That monetary policy not an exact science.
Liz, absolutely, and you know they're doing the best they can. Clearly they don't want to implode the economy. Pal is always hopeful trying to have a soft landing if possible, but he knows that if if there's no price stability, as he always says, it's not good for anyone. So they're clearly trying their best.
All right, So glad we could check in with you. As we said, folks, this is one of the most read stories on the Bloomberg And as Liz just detailed, you understand why Liz McCormick, she's chief correspondent for Global macro markets, really does have global macro market perspective here at Bloomberg News. Joining us via zoom from New York City, you're.
Listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business App, or watch us live on YouTube.
All right, folks, So a few companies as you know, as we've been reporting, Charlie included companies reporting in the consumer space making the stuff we eat and buy or moving it around. They are out with earnings, so we're talking McDonald's, PepsiCo Ups also three am. So with our consumerie earnings round up, let's get to Bloomberg News anchor Markets correspondent Cretygupta and Bloomberg News reporter Simone Foxman, both in our Blue Interactive Broker studio. So great to have
you guys here. We want to get into the pacifics, but I want to start big picture first if I could. Is there a theme or trend that we are seeing Cretty, and I want to start with you when in this kind of space, if you.
Will, Yeah, it's it's pretty clear. And I think all four earnings stories are telling you the economic data slow down, that we're seeing that recession that we feared it is coming, So you are starting to see this show up in corporate earnings. I think the difference here is that a lot of these companies.
Have weathered it quite well, and.
I think that's a real testament to the management that's in some of these companies. The idea that they are tackling it through layoffs, through in some ways through cutting.
Amazing how layoffs has become the thing, like we're on it, fos it.
Is, and you know, it's also interesting how they're received differently. We can dive into the specifics of it, but the big picture takeaway is that slow down that we thought was coming, it's here. You're seeing it in the data.
It's just not showing up in these earning.
Speeds because companies are adapting, and they're adapting way faster.
Than they have in the past, and in some cases past on those higher costs. Yeah, some of your thoughts on the big picture.
Yeah, certainly.
Well, you know, I think there's a difference between today and six months from now, and that's the same kind of detail that we got in the consumer confidence numbers from the Confidence Board today. You know, the half of consumers said jobs were plentiful right now, and only twelve point five percent expect more jobs than six months.
That's the worst than seven years.
But if we go back to twenty sixteen, twenty sixteen wasn't that bad, And maybe that's what's showing up in some of these earnings. You know, consumers not really changing their behavior so much at the moment and just concerned about what's to come. But I mean, and who can tell the future.
You know, right now they still feel confident.
I wanted to get your thoughts on the margin picture because that's been such a focus when it comes to these consumer type names. What are you seeing in some of these names and do you think that those indications there of some glimmers of hope because it seems like it's coming better than expected from guys.
Mean you hear that, I'm going to start counting.
I love it.
I feel the way I feel right at home.
Yeah.
But to answer your question about the margin story, look, I think I mean, I'm going to go with PepsiCo as my favorite example of this because and you can see it in ups. You actually see it in all four earning stories. I mean these Pepsco as an example because look, food is expensive and it has been expensive. Commodities have been expensive, and it's something that a lot
of these consumer companies have had to hedge. Coca Cola talked about it yesterday, PepsiCo has talked about it today on Bloomberg Television as well, And the way that they dealt with that is simply by increasing their prices, and they've done that for about a year now, and prices increased I think something like sixteen percent on lot beverages and chips, and nobody noticed. I mean, I certainly if I will go and grab a can of PEPSI I'm not checking the price to do that. And that has
really worked in their favor. But it has also just kept those margins steady. It hasn't created this massive improvement, but at a time where margins a steady, okay, right exactly, so, at a time when margins are getting squeezed, steady is actually an accomplishment to your point, and I think PepsiCo is a great example of that because they were doing that by price hikes. The CFO was on Bloomberg TV earlier and also said productivity is also helping with the
margin story a little bit. But when it comes to consumer goods, and we're going to hear this with I think you brought this up earlier, Procter and Gamble and Church and Dwight all reporting next week about them and whether they're going to do price hikes.
Right.
The labor part of this equation is really interesting, and we saw that come out in various threads today in these earnings ups, mind you, has to renegotiate its contract with its teamsters, some three hundred and thirty thousand unionized workers by the end of July. They are pushing for price hikes or sorry for wage hikes, and so that may end up featuring into this story. I mean we saw that to a degree. I mean maybe we didn't.
We didn't see it with the market reaction to three m cutting six thousand jobs, you.
Know, but there's a bigger story. Yeah, it's a restructuring where they keep brook Sutherland was out on TV earlier and just this whole idea of they keep throwing stuff out there, right, and it's supposed to be kind of improving more, but it hasn't quite happened yet. So I think the bet or the street is still kind of like, well, we're waiting to see.
But I mean, if more and more companies have to start dealing with these wage increases, because I think all these executives were out there talking about how the labor market remains pretty tight for them, and you know, heck, we have some of the restaurant brands with Starbucks coming out next week. I mean, how much do they see these price increases. We heard about it from the airlines. Does is this a theme we start hearing more of as earning season.
And Chipotle after the close? Can we talk attle bit more about UPS? It is down the most in more than eight years. We're talking about a nine percent drop, and I guess I just need some context.
Is this just a.
Case of still writing this ship from the pandemic? Or is it a case of folks, things are slowing down.
This is a case of things are slowing down. And the reason is because the story of the comp sales, which is I think we're referring to the case of the pandemic when everyone was at home, everyone was getting these packages. That was the story of twenty twenty one, arguably twenty twenty to and UPS and FedEx took two very different approaches when it came to tackling those comps. FedEx said, We're going to hire a bunch of people.
We're going to make sure our network and our delivery systems are just airtight, and we're going to do and that's how we're going to make sure that people we don't lose our consumer base. UPS took a very different strategy. They said, look, we know eventually the recession is going to come around the corner. Whenever that may be, we're going to take a different strategy. Instead of hiring a
bunch because inflation is high, wages are high. As Simone just pointed out, we're going to target the small businesses. Here's the problem if there's a recession around the corner. Who were the first people who pull back on that medix into small businesses. So that strategy has completely kind of worked against them at a time when UPS actually was outperforming the market because people were saying FedEx spent so much on their employees, they're the ones taking the
bigger cost. And then FedEx laid off a bunch of people, and the market is now changing their tune. So now we're worried a little bit more about the actual package decline. And that's where UPS is I think a really great example for the broader economy, which is economic activity is slowing down.
I just feel like this is a tale of these companies because about six months ago is when FedEx had warned about their outlook, but then last month we saw them boost their outlook for this year. So you don't see them necessarily going in the same direction at this but.
They're two different models. I remember that FedEx and FedEx is moving increasingly towards the UPS model. But UPS everything is in house. Everybody is a UPS driver. FedEx, that hasn't been the way, although they're starting to shift that.
Yeah, FedEx has had that independent contractor. And I think to your point about that profit outlook, the reason they said that is they said they're again going to eliminate all those independent contractors because of that restructuring. And I want to get the most take on this in a second. But like one of the other things you have to keep in mind with a lot of these companies is that when you talk about price hikes, which seems to be the kind of method du jour of staying alive,
Basically in this environment, prices are sticky. So if you have a price hike, you're not going to have a price cut on a can of pepsi or a price cut on a package. And that's from an economic perspective. What's scary for kind of carol? You always say, what's the so what? For our listeners? This is the so what one? Corporate America hops on the price hike train. Yeah, they don't come down and that's the problem.
And the thing is, what I would say is things like a can of pepsi or some Friedo's, which I would consider a staple and must have. No but I mean there's small indulgences and you always hear, like economists or market watch er say these are the things that hold up smoke kamone.
Yeah, but I mean, I think when we start hearing, you know, questions even asked about our consumers switching to cheaper products, and we did hear that today, both with McDonald's as well as with pepsi and you know pepsi. The message from the CFO was, you know, it's never that much of a hit to our business.
These numbers stay pretty low.
But I you know, McDonald's, it's not really it doesn't seem to be really showing up yet. But perhaps that's part of why we saw such a decent outlook from them, and decent you know moving forward.
Although the stock was a little lower, right, yeah, but.
You know, the market's down a little bit.
But overall McDonald's stock is still around records. If you look at the fifty two week high list in the terminal underweb. I mean, these names you have McDonald's on there, you have Pepsi Co on there, You have Kimberly Clark that reported this morning on there as well. You have Starbucks on there, you have Mandoli's on there. There's are very consumer oriented type companies that are trading around these fifty two week high and don't forget.
The dollar exposure on all of good points exactly do they hedge still?
McDonald's I don't think they've hedged for a couple of years now, but PepsiCo hedges. They talked about that today.
McDonald's, you know, still gets a lot of its business internationally hot. Strong earnings there too. I mean, you know whether that's consumer switching to a degree not everyone is seeing so much strength in their their foreign business. Three ams certainly not.
Okay, good point, right, It's not all the same story, even if you're looking at companies in a certain category creating up DA anchored markets. Course me at Bloomberg News, Simone Foxman, reporter at Bloomberg News. Thank you so much.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to Easter on Bloomberg Radio, the Bloomberg Business App and YouTube. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Continuing to follow some of the earnings momentum. Having said that, you do wonder how it all factors into what's going on in terms of the venture capital world and where venture capitalists want to invest their money. And it's interesting on a day where we are definitely focusing on artificial intelligence, whether it was in Microsoft's report, whether it's what Google wants to do, and specifically we talked a little bit earlier about Apple planning an AI powered health coaching service
and mood Tracker. So jess there's a lot going on. As our next guest sees it, twenty twenty three will be the year that AI truly breaks into the general population's awareness. In particular, he's focusing on healthcare. So let's get back to a guest that is joining us once again. Lonnie Jaffe is Managing director at Insight Partners via zoom from New York City. Lonnie, nice to have you back with us. AI this year a big one. Explain why you think that's the case.
So it has been a wild year in AI.
So far already.
Already, and from what we're seeing, things will continue to accelerate for the rest of twenty twenty three, including in healthcare. I think the best way to get a sense of the pace of improvement of AI and healthcare is through some real world examples of health tech companies that are have AI products that are working so like one example
our portfolio company, Iterative Health. So colon cancer is the second most common cancer cause of death in the United States, and they have this ability to use computer vision AI and their FDA cleared product called Scout, and it significantly reduces the number of cancer's pollups that a gasnerentrologists would miss, and this can decrease the risks of a bad outcome
in all sorts of different ways. But then their technology can use some of the new generative tech that's come out, similar to something like chat GPT to handle the medical documentation work at the end of the day, sort of like a copilot for medical documentation, making suggestions and saving the doctor enormous amount of time and increasing the accuracy
of the documentation. And then they can also identify patients who would be good candidates for clinical trials for promising biologics for diseases like IBD.
So how specifically, because AI, as we've been talking about such a hot topic, now, how exactly does this end up reshaping healthcare in particular because you did mention some of the companies that are in your portfolio book more specifically, is this a way to really reshape all of that in that sector.
Yeah. One healthcare AI area in which we've invested a lot, least recently is this applied computer vision AI capability. So this is a little different from the generative AI tech that's been getting a lot of attention since the release of CHATCHPT. But some of these computer vision systems may soon match or even exceed human expert physician performance across certain domains. And if an AI system starts to exceed human expert performance in healthcare, domean it's not just a
minor efficiency improvement anymore. It can be more of a phase change, like ice turning to water, and it allows you to reimagine the way care is delivered. Vision is absolutely instrumental in healthcare. So a huge portion of healthcare data is made up of pictures and videos.
You know, Well, I have to say I've been thinking about AI a lot lately and how it can help us. And I know there's been this fear of, oh my god, we're all going to be replaced. But I thought, even as a journalist, wouldn't it be great if I don't have to write introductions to my guests, as much as I love to do it, but if somebody else does it, I can spend more time just prepping and researching, you know,
for the actual conversation. So I do wonder in terms of the smart way for all of us to be thinking putting our fear aside to some extent till we know more, but about how it can be AI particularly be an assist like you were talking about in healthcare, freeing doctors up to actually care for patients rather than doing all of the jotting and noting down and so on and so forth.
That's really well put. And in healthcare, prices have been increasing much faster than inflation. I mean, all prices have been increasing faster than our inflation target. But one way we can help to address the problem of provider shortages or in some geographic areas, patients with needs are not close enough to the doctors who have the relevant skills
and agent population. So one way we can help to address this price challenge is to dramatically improve healthcare productivity and quality, to pull forward investments in AI and automation that you would otherwise make many years into the future, and to do it now, sort of like what we did with collaboration technology during the pandemic. So it could be that healthcare AI is a little bit of the unsung hero of some of the recent inflation crisis that we've been dealing with.
Do you think Apple is going to be someone who's very innovative in this space when it comes to healthcare and merging combining that with AI.
One thing we've seen with some of the newer AI technologies is that there's been this big democratization effect of how much easier they are to use than prior generations of technology. It used to be that you needed to hire one hundred mL engineers and build out enormous data pipelines and systems like that, but now so much of the capability is being provided via as a service over the Internet via what are called APIs and can be
incorporated into other technology. And so I think the vendors who have a real focus on privacy security, who understand the difference between correlation and causality. Who are able to make systems that are reliable and craft beautiful products will have a huge advantage.
Hey, Lonnie, can you take a step back and explain to us exactly how the technology works, Say, because when it comes to some of these companies that you're working with, when it comes to screening for mammograms or breast cancer or detection in colonoscopies, how does that tech work?
Yeah, So, like one example, we have a portfolio company Overjet, which is led by CEO Warda and our team, and they can use AI to analyze dental X rays to assist dentists and deciding whether two needs like a filling or a crown. So this improves patient outcomes. But then you can also use their AI platform as a dental insurer to detect fraud or speed up the claims adjudication process. And then by using the technology on both the dentist and the insurer side, you can re imagine the whole
dental care process. For example, you can use the AI for instant insurance pre approvals, so the dentist can do an important procedure right away instead of having to send a patient home and then wait until an insurance approval comes in, like often happens today.
Hey, Lonnie, Oh go ahead, go ahead, please got about thirty forty seconds left.
Yeah. One other example is we have this company Profluent that has large language model like technology similar to chat chept, and it can suggest novel protein sequences that will fold into non structures. So it has a deep understanding of patterns and amino acid sequences. It's a little bit like words and a text generation AI, and so it opens up all sorts of new opportunities in drug discovery and protein engineering.
Lonnie, fifteen seconds. You guys invest in some for how much of what you are doing is AI healthcare related? What percentage of your investing at this point?
Just quickly, And we have dozens of investments that we've made just over the last couple of years, and that the piece of improvement has been increasing significantly. It's amazing what the big change in the technology is that it started to work.
But the majority of your investing in startups and so on, is it healthcare ANDAI related?
Just quickly. It's not a majority, but it's a significant portion, and it's been increasing over time.
All right, So good to check in with you, especially on today when we continue to hear about AI from the big tech Lonnie Jaffy at Inside Partners.
This is Bloomberg Business Wait Inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
All right, we're gonna switch gears a little bit. Bitcoin continue to trade well above, well below, excuse me, thirty thousand, which it recently wet above. So we continue to see, right, you know, just a pushing up against that level definitely and backing off of it.
It has and especially last month we were talking about this with with what was happening with the banks under pressure, but then you saw Bitcoin continuing to get closer and closer to that threshold and eventually eclipsing it.
All right, so we're looking at the cryptocurrency world, and you know, you've got to remember that there's a lot when it comes to that world. It's not just about bitcoin. And this next story that is in the upcoming issue of Bloomberg Business Week, which is out later this week. On newstands already on the Bloomberg terminal and online at Bloomberg dot com. Slash BusinessWeek has to do with what's going on with some of those other areas of the crypto world. So let's get to it with Bloomberg News
bankruptcy reporter Stephen Church. He joins us on Zoom from our Wilmington, Delaware bureau. Hey, Steve Stephen, it's great to have you here with us. The headline on your story is about crypto quest for freedom ends in bankruptcy bureaucracy. There are a lot of bankruptcy cases going on right now. Set this stage for us and tell us exactly what's going on.
Well, we looked at some of the crypto investors, some of the customers, and it turns out that they have been way more active than your average creditor in a bankruptcy case. They've raised a lot of specific issues, they fought with the judges. One guy got thrown out of a Zoom hearing because most of the hearings for these bankruptcy cases are happening on Zoom nowadays. There's just been a lot of emotion, a lot of anger and frustration among the hundreds of thousands of creditors in these cases.
So which ones are at the heart of the issue when we're talking about these digital asset makers.
Well, there are three that I'm mostly following. One is Voyager, the other one is Celsius, and then the big one which hasn't yet exploded, is FTX. We've heard a lot about FTX before it went bankrupt, but there's been kind of quiet the last few months. The first two cases are the ones that are generating the most active in court.
Interesting Well, and you know what I think is interesting too, And why don't you go into those cases that are generating the most interest and maybe engagement. Tell us a little bit of what's been going on. Especially I love the idea that's happening in Zoom.
Yeah, well, that's that's a product of the pandemic. A lot of lawyers and judges got used to using Zoom. They've been doing it for the last few years. But it's perfect for these crypto investors. They're very tech savvy. They know how to cruise right on too zoom without any problems. But that opens up a world of difficulty for some of these judges and some of the lawyers.
They're used to moving through using the bankruptcy jargon, talking in very shorthand with the legal lees, and then all of a sudden, you have sometimes hundreds of people on these cases asking very blunt, basic questions and being confused. The biggest confusion is about what are they going to get their back? What are they going to get back? Why can't they just get their coins back? Why do they have to wait? Why is this case going on and on? And why are the lawyers making so much money?
What I find fascinating about your story is this whole idea of wait. Crypto in some cases, as are in some regards as these bankruptcy cases are showing that it's not that much different than bank deposits, and then in other regards, yeah, wait, it is really different than bank deposits. So it's it feels like it's got to be very frustrating for folks who bought some kind of cryptocurrencies on whatever platform and it was supposed to be kind of powerful.
They owned it, there's no middlemen, this is mine, and then to see it play out this way exactly.
There were two kinds of basic accounts that were that are at issue. What does a custodial account that's like a safety deposit box in a bank. You put your coins in it, and when you want them, you go in and you take them back out. There's less dispute about that. Then there's the kind of deposit where you gave your crypto to an institution Voyager or Celsius or FTX, and then you allowed that company to then lend it out. You made interest, great, you make a higher return than
you could get anywhere else. But it turns out that in the fine print, you don't own that crypto anymore. It's like a bank deposit. You don't own the money that you give to the bank. You own the credit for that money, You own the right to get that money back whenever you ask for it.
But then also it's not fdic assured, like when say you have money in a bank versus when it's crypto. And how many people do you think ended up making that mistake.
I think hundreds of thousands made that mistake. We're waiting on the biggest problem to crop up, and that's nine point six million customers of FTX. FTX hasn't decided whether they're going to claim that all of those customers' deposits are actually owned by FTX, and therefore you can't get your specific coins back. You can only get a share of them whatever happens to be available. Fight if it happens, will make these other two cases look small and insignificant by comparison.
Now, I know you know what you do as you follow the bankruptcy situations, but I do understand and like what comes out of this, the rulings and how it plays out, how that might ultimately shape what we get in terms of regulatory oversight, because there's just you know, trying to figure out exactly what it is. As part of the problem.
Well, I think part of what will happen is less influence on the regulators. They're going to do something separate, but it might influence investors, especially professional investors, because now you're going to see what the courts will do in the worst case scenario if you put your money on one of these platforms. Now we know the judges will say in some cases for specific types of investments, it's
like a bank. You don't own it, it's pooled with everyone else's assets, and you have to wait in line, just like any creditor, bond holder, supplier in any old fashioned bankruptcy case.
Welcome to the new world of disruption. Not exactly.
It's kind of crazy.
What about all the marketing that went on And I feel like that's something too where really looking into when it comes to the crypto world.
Yeah, it was sold to appeal to certain kinds of investors that investors were trying to get away from the traditional banking system. They promised that crypto for all would become a reality, or you can unbank yourself, was the way one company put it. In other words, they appealed to the idea that you wouldn't be part of the
traditional system, so you might have some benefits there. It turns out when you're not part of the traditional system, you're not protected the way the traditional system is.
Can you talk about the customer agreements that people were signing where they maybe they signed it and they assumed they could be able to have their money back leader if they were going to lose it, but then that's not exactly how things played out.
Oh well, how many of us read the customer agreements where see when they pop up online, it's like.
The its thousands of pages.
Life and that fine print is a line that says you are if you are making interest and this is in one of the cases. If you're making interest on this deposit, we technically own the deposit. Therefore, if things go bust, you may not have access to it.
So Stephen, as you follow this process and the bankruptcy proceedings, kind of what jumps out for you? I mean, not everybody is in it like you are, but I do think you know, we're all just looking back at the last two year or so of crypto and trying to understand the way forward. So as you watch this bankruptcy process, what jumps out for you when you think about maybe what happens next in the world of crypto?
I think the I think the people who are running this system, because we're talking about two very different systems and two very different philosophies. The people in the courthouse, the judges and the traditional lawyers who are now in charge of these companies, especially FTX. They're grappling with how do you deal with millions of people who are not going to get all their money back and they're going to want to understand why and how do you explain
that to them? And you also have to make sort of I don't mean make up rules but they have to create a whole new system of dealing with these crypto investments because it's very difficult. There's some perplexing questions. How do you value crypto today? You were talking about what the price of bitcoin is? Well, can you value my coins based on what they were when I deposited them? Or is it worth what it is today? Very different things. Lots of complications that have come up that have not
been seen in the past. So the system is trying to respond and so far it's done an adequate job. But the real test is coming on.
Hey, because we're lucky that we have you, and you had another story on the Bloomberg about Binance ending a deal to buy bankrupt crypto firm Voyager, right, which is in your story just real quickly forty seconds. What do we need to know about that?
The Voyager customers are going to have to find a way to get their money out without transitioning to new platform. That means that Voyager is going to have to go before to judge and figure out how to get this money back in a more complicated way. Finance was an easy way for them to deliver the money, deliver what they could to customers. They've got to come up with something new.
All right, Well, brilliant take on all of this and a great perspective, Stephen, Thank you so much. Glad you could take us there. Stephen Church. He's bankruptcy reporter at Bloomberg News. The story in the upcoming new issue at Bloomberg BusinessWeek, but already on the Bloomberg and online. You're listening and watching Bloomberg.
Bromac a journal.
No, how about you let me drive?
No, no, no, no, who's going to drive?
Honey? Please, I'll do the gravels.
Let's I want to try it. It's a good question that drives us.
This is the drive to the globe dot com for me. Think well by it on Bloomberg rat.
All right, everybody, we've got just under eighteen minutes left in today's trading session. It is time for our drive to the close and back. With us is Alan Zaffron, founding partner and co CEO at IQ Capital. He joins us on zoom once again from Foster City, California. Allen, nice to have you here with Jess and myself. There's a lot going on. It's pretty dense. The environment earning so far are telling you what story.
Jess and Carol, thanks for having me on your program again. Earnings are telling me that the economy is indeed going to slow over the course of the year. The economy probably doesn't bottom until late this year or the first quarter of next year, and inevitably all the rate hikes put a little bit of concerned consumers who are two thirds of the economy, and as result to get a little more cautious. We saw that with consumer confidence dropping
again this month. Spending drops, revenues drop, earnings drop a bit, and stocks drop a bit as a result of that environment. It's not a doomsday scenario, but we are grinding into a slow, modest recession. Stocks don't do so well to the economy bottoms. That's what we're seeing and that's what the earnings are telling us.
Alan So what exactly is missing from this turning into a bull market? At this point, there.
Isn't a catalyst yet. So if you look over the last twelve recessions, stocks tend to bottom about three or four months before the actual bottom and economic activity. And given that on average the full impact economically from a rate hike takes about twelve months to work through the system. If you work in the math, it tells you the bottom of this economy is probably the first quarter the
next year. That tells you that investors aren't going to be really looking forward to a change in FED policy and stocks moving back up until you get until very late this year, if not early next year. There's a lack of a catalyst right now, and in the absence of that, we're just going to be grinding here. Valuations are modestly above long term averages or trading right now at roughly eighteen and a half times consensus estimates for
this year. If you believe them, and if you think earnings are a little too high, maybe stocks fall about ten percent to reflect earnings being cut a little bit and multiple stropping a little bit. But it's not catastrophic. It's not like a deep recession with a thirty percent declimb. We do not see that in the forecast.
Do you think earnings estimates are too high?
Still?
We had we shared with our TV colleagues in our simulcaster cross platform Sarah Hunter, you know, and she at Alpines. She talked about that the markets haven't yet really priced in some of the earnings slow down.
I concur completely with that. Our guess here is estimates still are somewhere between five to ten percent too high for this calendar year and arguably about the same magnitude for next year, which tells you that markets themselves are probably about five to ten percent overvalid if you're using long term historical averages as a gauge for where stocks should trade. But we're also looking for something like twelve
percent and earnings growth in the subsequent year. So what goes down is going to come back up, and it's not enough to date. If you're a long term investor, it isn't enough to make a meaningful shift in allocation. We could be wrong. Timing markets is fraught with risk, and the magnitude here isn't big enough to problem make a lot of strategic changes. So we're just guiding people if you want to enter the market goes slower than average dollar cost average. If prices fall, it is the
proverbial buying opportunity. Be patient. The economic impact hasn't been fully reflected in earnings estimates yet.
I just want to mention. I just want to mention First Republic extending it's plunged to fifty percent in today's session. We know the trouble Bank out with it's led as results last night, but exploring maybe possibly selling some one hundred billion dollars in asset sales. So I just wanted to put that out for everybody.
So, Alan, how are you positioning at this point when we were just talking about all these different backdrops with the macro.
Well, from a starting standpoint, diversification is your greatest risk mitigant, So stay well, diversify though.
We come on, I feel like everybody says that.
Right exactly, like what specifically how do we diversify?
Okay, So what that means is a broad set of equities. Don't put your eggs in one basket if you're not built to deal with the swings that go up and down the markets. Make sure of ample amounts of high quality bonds. And if specifically to your question right now, we're sitting in high quality bonds. When markets decline, credit spreads wideen, so corporate bond prices and especially high yield
public bonds fall in value as stocks fall. Historically, so we are largely avoiding anything that looks like non investment grade bonds. We're sticking with treasuries and very high quality corporates to in the public markets, there are opportunities. Selectively, in non publicly traded areas, we think there are compelling opportunities, and things like high quality real estate. Apartments have such a long term secular trend that ownershouldn't have in ownership
of income generating apartment units or warehouses. With e commerce's growth is a sustainable trend, so there are ways to play it if you're looking for income with a long term perspective.
I'm glad you brought up real estate. That's what I was going to ask you about. So you talked about the apartment side of things and some other corners, but what about when it comes to offices, and are there particular corners in real estate you think are still too risky at this point.
Yeah. We actually are not big fans of real estate assets that are either in a cyclical risk that tends to be things like hotels that when the economy slows through, when people show up at hotels and vacancies escalate, which is not good. And we like to avoid things that are in secular decline. And example is retail in general real estate, there's still far too many retail building buildings
relative down much space retailers need. We would argue that many office buildings are in a secular decline, so on balance, we are avoiding office building exposure as well. We prefer areas that are more commonplace apartment buildings, single family homes for rent, self storage units, industrial warehouses. Those are the secular trends that are going to take you through this recession, generate attractive income, and get you to the next cycle.
Do you think real estate is the next shoe to drop?
Though?
Maybe office?
Yes, but selected airs. I don't think it's too You can't broad brush it. If you have a type A office building, even in a centralized business district, a class A office space, it's still in demand. You can't. Not everybody's going to be remote in this economy. But sure, if you're in a tertiary city with a old office building, you're in your land order. You're in a lot of pain right now.
We only have about thirty seconds left. But what do you think credit spreads are telling us at this point?
Credit spreads are telling us a recession is coming, but they haven't widened out enough yet. And that's why we're avoiding publicly traded non investment grade bonds. They're not yet wide enough. But the bond mark, the treasure market is telling you a weakening is coming. That's why six months he bills at five percent and at ten your treasure right now is at three point four percent. It tells you every recession's coming.
All right, Well, there you have it, but it sounds like it's not going to be too difficult ultimately to get through it. We really appreciate Allan always checking in with you. Alan Zaffron, who's founding partner and co CEO of at IQ Kapital, joining us via zoom from Foster City, California. I feel like we hear that a lot, right that it's kind of almost a touch and go with a recession to some extent, and.
You have other people arguing that maybe the worst has already parents does when we're looking at some other models.
So look at the chart you had up about right earnings estimates, right.
Right, So basically that recession with earnings started in the second quarter of last year when excluding energy.
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