A Big Risk to Internet Companies

she writes triffic columns. You definitely should read them Bloomberg dot Com slash god Fly Shira. I want to start actually with a development where you have big technology companies, namely Google and Facebook opposing a bill that was raised in US Congress to prevent child sex trafficking, which seems like not really that good of a thing to oppose, because it seems like you should want to oppose child

sex trafficking. What's going on? Right? So there there's this some bill circulating about ads on backpage dot com, which is a website that is sometimes used for nefarious purposes. And look the backdrop here why Google and Facebook are

opposing this and other measures and congresses. They are terrified of UH having legal responsibility for what their users do on their websites, and that can be child child sex trafficking or can be if I UM have Beyonce's latest album and post it on YouTube, right, Google doesn't want legal responsibility for that music piracy either. But this also raises a question of the access that government has to prevent some of these nefarious activities that are conducted via

Google via Facebook. UM. If you know the company themselves won't do it because they have are concerned about privacy, does that open up the door to the government saying we want to weigh in, we want to do that. Well, I mean, I'll just stipulate that Google and Facebook do not want child sex trafficking on their websites. That is not good for anybody. It is illegal. They have large groups of people that try to weed out this stuff UM from popping up on on their websites and apps.

So it's not like they're doing nothing. It's again they're trying to do something both because they want to be responsible and it's in their interest to do so to avoid UM regulation. Because that's what they're trying to prevent. Uh. And the regulation they're trying to prevent is not because of a child sex trafficking stuff, but it's for things

that are less nefarious. Again, um, piracy of music and videos, things that happen more common, that are do not have a negative consequences, but still have business ramifications for Google and Facebook. When you say business ramifications, you mean they still want to make a lot of money and they don't want to take any responsibility for what goes on their sites. Yes, they do not want to be in a position where they are blocking people from posting stuff

because it might have a clip from Beyonce's latest music. Right. Um, okay, so wait a minute here. The Internet was funded by the US tax pair when you pay your cable or your mobile bill, or any kind of bill that allows you access, whether it's WiFi or lte, whatever you want to talk about their attaxes in there, so we continue to subsidize the very platform that they use in order to make billions and billions of dollars selling ads to people. Right,

that's probably fair. I mean there, so they want but they want to make all the money, Yes, I sure, Yes, I mean they take a lot of risk of their on their business too, and they're creating a lot of Internet infrastructure that didn't exist before. But I hear what you're saying, but it's like you know, being you know, being able to have access to the public trunk system.

I mean, you used to have to have an FCC license in order to And look, the interesting phenomenon that's really happened in the last year or so is that you're seeing um political figures on the left and on the right, including people like Steve Bannon, making an argument for regulating these companies like telephone companies, basically like regulated

monopolies like phone companies. And this is this is a crucial point because you have people on the right like Steve Bannon, and you have people on the left also saying, you know what, these companies are getting too big and a little bit frightening and we need to impose more regulations. Does that make it more likely that there will be some sort of anti trust movement or at least something that would undermine some of the profitability of of these companies.

I think that's the biggest question for these Internet companies is what is the regulation um and potential anti trust or regulatory crackdown look like in coming years. I think that's the biggest potential risk if you're Google or Facebook or Amazon. So what are some of the ideas that have been stipulated to with respect to what that kind of regulates. Right, So there's the sort of Steve Bannon idea,

let's regulate these companies like utilities. Um. You know, there's this interesting academic argument that's been making the rounds this year about particularly around Amazon, applies to other companies too, of basically looking at US anti trust law and saying that this has become too narrowly focused on prices, on whether you know, our companies so big that they have the power to raise prices. If you look at a

company like Amazon, it's doing the opposite, right. So the academic argument that's making the rounds, um, a leftist academic argument is let's look at other aspects of how these companies are abusing their power beyond pricing. Um, are they squashing the ability of you know, smaller companies to compete or to sell their companies on platforms like Amazon at on the same terms as Amazon itself. So it's again

there's really thing things happening. I do not know if anything is really going to happen, but I agree that this kind of political and regulatory scrutiny is a huge business risk for Internet companies. Sure, do you feel that public utility commissions at the state level would like to be responsible for setting the rules and regulations about access to the Internet via these companies? I don't know. I don't know what professional regulators want. I mean, I mean

regulators like to regulate. Well, let me just ask it another way. Do you feel that these companies are public utilities? I don't know. I don't know. I mean, if you have a good argument, I mean, if you could, if you if someone pulled the plug on your Facebook or your Google, um, you'd miss them for sure, Okay, for sure. But I don't know if that's the definition of a utility. I'm not you know, I'm not going to try to make legal Yeah, I don't know. Is the fairest answer? Interesting?

All right, Well, obviously this is not a topic that's going away anytime soon. Um. Interesting how the intersection, as you said, Lisa, business government, particularly when it comes to the Internet. And we didn't even talk about the latest development, which is that Google is investing in lift uh, and they already have an investment in ubers. They're just you know, going towards world domination that way. Yea. I wonder if they'll pay taxes for using all those roads. Yeah. Um.

Shia Overday, thank you very much. Technology columnists for Bloomberg gad Fly. Follow her on Twitter at Shira Overday. I'm want to bring in Henry Peabody. He is a portfolio manager at Eaton Vance, helping to manage more than three hundred billion dollars. He is at the Harvard Science Lab today in Boston. And Uh, Henry, thank you for being

with us. I wonder if you could begin by just talking a little bit about the concept of liquidity and how that plays into what you believe people experienced investors and knowledgeable investors will do if, indeed, we do not get an interest rate increase this year from the Federal Reserve. Well, you know, liquidity, in our minds is not only what the Federal Reserve and central banks provide to the market, but it's also um a function of the ability to

get in and out of positions. And you know, when we think about the markets and the risk potentially to higher rates and really how crowded positioning has become UM in index like products in core bond in rates and

duration UM. It's something to consider. And what we're seeing today and over the past few days at least in the credit markets has been a big flood into new issue, which signals to us that there's a lot of demand out there for relatively high quality paper, which when turned the other way, UM, we're not really sure how the market is going to behave and it's important to maintain

a bit of a defensive posture against that. So Henry, Uh, you know, you're you're illuminating some issues that a number of big investors have been talking about recently. Gallop Capital chief executive officers said overnight in a Bloomberg television interview in Asia that investors are not getting paid for the

risks they're taking, particularly in US boardinated debt. I'm wondering, how do you maintain a defensive posture when you're seeing this kind of flood of cash going into in particular the highest quality paper, arguably pushing up values there more

than anywhere else. You know, you hit the nail, run the head, and I think that what you need to do is both maintain liquidity in the form of cash, and don't forget the cost of holding that cash in the form of drag or actually foregone income is relatively low today. UM. The other thing you need to do is stay very diversified. UM. There's a great opportunity today to spread risk out among various asset classes and taking

manage your flexibility. UM. Diversifying to local denominated, emerging and developed market debt depending on where you look, is an attractive place. Diversifying into, for example, folding rate loans or the high yield space when valuations are attractive, It's it's good to spread those bets out because benchmark like strategies have gone very far, and when the tide turns, you need to know where that liquidity is going to be demanded, who's demanding it, and what the net result on the

market is going to be. And it's it's wise to stay clear of much of that risk. Here. I just want to point out that you're eating vance Multi sector income fund, which you help to oversee. It's about five million dollar fund has performed better than ninety nine percent of its peers over the past year to date and including the past twelve months, so far this year, you're up almost ten percent UM. Interesting that you're saying to go more towards cash. What's your boldest bet right now?

Right now, the biggest level we have pulled is the non dollar space, and that's responsible for roughly half of that performance this year. UM. The dollar, you take, take, positioning, you take valuation, UM, you think about the influence that the U S has globally or or or sometimes lack thereof UM growth in Asia and synchronized global growth, and it all paints to our points to a weaker dollar. UM. We've moved a long way, and we could very well pause.

But if you're able to look at individual countries across the span of the globe, not necessarily allocate to those indices, because as many of your guests point out, there's a great deal of richness in some of those inducries and concentration. But look at reform stories, look at Asian growth, look at the lack of populism and Latin for example, and you can get exposure to very positive fundamentals away from

US credit and interest rate risk. So that flexibility to go across geographies and industries UM is fairly important in fixed income where things are valued very dearly, Henry, do you ever feel that you're whistling in the wind when it comes to talking about individual bond issues in a world where exchange traded funds and indexes seem to be the flavor of the year. It seems it more and

more these days. However, UM, we're getting to the point where we've shown with our results of active management as a is a powerful tool in fixed income where opportunities to differentiate yourself and take advantage of market and liquidity conditions can be a real lever to pulse. So we've shown that it works. UM. We also think that where the market is now, with that flood of capital into one way positioning UM is going to prove exceptionally beneficial

to investors when those positions are unwound. We don't want to be in the way of a great deal of capital looking for liquidity. Okay, so let's talk about that unwy. First of all, how much have you boosted your cash holdings recently? Uh? And and second of all, what would prompt that kind of reversal of the crowded positions? So we maintain UM, you know, roughly ten to fifteen percent cash UM in the fund and it's been that way

for the recent past. And as for what might cause that, looking historically, just look at, for example, the slope of the euro dollar curve against funds, and you see that the market tends to underappreciate the FED. That the market tends to project current conditions in the future. And today that's low ball, that's low rates, that's low inflation, that's crowded positioning. We like to project that into the future. Collectively,

the market will underappreciate the FED. Now, we don't need for hikes to get some ugly numbers in the tenure note. The tenure note has a nine year duration, it trades to twenty and it's traded in a hundred basis point range over the past couple of years, so you don't need much to get some negative numbers and the mark the market is not appreciating what the FETE is saying. Yellen wants to get the qui unlined up going before

she potentially loses office. That's a much harder thing to reverse, so she wants her legacy to be that to be starting to go. So when we see that move higher, it's not gonna take much. We could see some of this unlined. So right now I'm looking at a tenure treasury yield of two point How high would it have to go to it to cause some some serious pain and which as a class is most vulnerable? UM. Hard

to judge how high it needs to go to cause pain. UM. Probably I think there's probably some technical selling you know, north of to something like that. As I speculate, UM, the most vulnerable places are that high quality UM space. You've seen a flood of of high quality new issuance we've seen recent in recent days, focus on hold co issuance, focus on Carrie trades, to focus on relative value instead of total return preferred you know, coming to get some

equity treatments. This is very late credit cycle behavior. That doesn't mean growth can extend things, but you're starting to see behavior that shows UM that the market is getting a bit on the extended side. So it's that high quality area that is likely subject to some some some negative signs and investor disappointment. Henry Peatbuddy, thank you so

much for joining us. We love talking with you. Henry Peabody is a portfolio manager at Eaton Vance, which oversee these three hundred billion dollars of assets and is based in Boston. All right, let's turn our attention now to the US dollar. Have ad buying dollars, selling treasures and then waiting for the US Congress and the administration to

agree on tax cuts. Is that a strategy? Well, Vincent Signerella are FX strategist for Bloomberg News, joins us here in our studio eleven three oh, Vincent, So is that the strategy that you see a lot of professionals employing. No, not really the by dollar trade, the Trump trade that has been um revised, shall we say, with the with the excitement, they're trying to try, as David said, you're trying to breathe some life in it. There's optimism everywhere.

There's a hopium going on in the market right now that on September, we want to get a tax plan that the Trump administration can put forward and get bipartisan support, and we will see fiscal stimulus in two thousand eighteen, early in two thousand eighteen. The reality of the situation is, from what I've read of it so far, is there's a very small chance this is going to be revenue neutral, and without a revenue neutral budget, this will pass even Mitch McConnell is said he will not vote for a

budget that is not revenue neutral. Will never get the conservatives in the Republican Party on board, certainly won't get the Democrats on board. The thing is dead in the water.

So we'll see this old reverse. Okay, So since we've seen the Trump bet just totally destroyed earlier this year with the dollar plunging uh the most for a period on record in some in some ways, um, I just have to wonder, you know, people, you start to get conspiracy theorist saying that the dollar isn't going to be used as a reserve currency as much, it's not as much of a haven currency because of all the uncertainty.

We're not seeing that much of a surge in the dollar on the heels of the yet another nuclear test or another missile test anyway by North Korea. What's going on here. The reason for that is that every time we've seen the dollar rally and every time we have seen a treasury sell off this year, it's been a great trade to fade. So when you see the situation in North Korea and there there's there's not the appetite to buy dollars as there was before, because the trade

tends to revert and and it doesn't hold. So it's a very very it has been a very very short term game trade not a long term winner. As you mentioned this year, it's been a horrible in response by the debt. Yeah, I gotta move on just to ask you this this and move away from the Pavlovian response concept. You mentioned revenue neutral right, having to do with the tax reform plan that may or may not actually get past. How is it? Is it re election neutral as well?

I mean, because what I understand Mitch McConnell. You know sentiment jarity leader, what he says, but you know all these congressmen and women they have to run for re election and the president is still popular in the districts where a lot of these conservative Republicans represent. What if we do get some kind of tax reform plan, what does that do? Then you will see the doll rally I mean, and you will see a sell off and treasuries because there will be essentially a positive fiscal response

that will happen in two thousand and eighteen. And what follows on that is the assumption then that given you'll see fiscal stimulus that gives the Fed more room to take rates. Now, okay, and I'm just wondering, do you also see the possibility that companies will have to take the money that they have been using for buy backs and uh dividend increases and in order to get increased productivity rather than hiring more people. They're going to invest

it in technology. They're gonna spend it on capital projects. They may it depends on what their cost of capital is. And that's the whole story about bringing money back overseas. If you bring back money overseas, it has to be cheaper than your current cost of capital. Otherwise it doesn't pay to reinvest. I think that if the dollar does strengthen, it's going to tank markets because if you think about it, uh, there's exquies well yeah, equities, and wouldn't it also be um.

I mean, I don't know, I might might. Just I'm just seeing all the leverage trades that have been built on a week dollar, whether it's emerging markets, currency, emerging markets, whether it's oil and gold and things that are priced in the dollar. I mean, gold won't do well if the dollar rise is no will emerging markets because a lot of foreign A lot of the emerging market countries have dollar denominated loans, so as the dollar increases, the debt becomes more expensive. So e M tends not to

do well when the dollar relies. And also there's been so much money that goes into local currency emerging markets from hard currency investors, namely US investors. So if the dollar strengthens, that means that those emerging market currencies weekend and poof the go returns. Well, there wasn't There won't be an incentive to go into e M if the dollar strengthens, because you'll the dollar invested in assets will

will flourish. It'll be very interesting to see how this rolls. Vincent, thank you so much, and can you can you give us just really quickly what's your bet? I think it's going to weaken to the year end the dollar. Yeah, I don't like the odds of fiscal reform of passing, and I think, um, I think there are other things that are to hold the hand of the Fed. So we're not going to see us and interest rates the dollar higher. All right, Vincent sc Nerella, He is not

drinking the glass of opium. Vincent is our FX strategist for Bloomberg. Well, there is a big, big question right now among many investors, which is gold doesn't matter anymore? Is it a haven asset? And should you be buying it as a lot of people expect inflation to pick up and are concerned about inflated asset prices. Here to

give us his view, as Frank Holmes. He is the chief executive officer and chief investment officer of US Global Investors, which is based in San Antonio, Texas, but he joins US here in New York. Frank, you are bullish on gold, Gold, Go gold? Why? Well, I think if you looked back since this the two thousand, the year two thousand, gold is far row perform the SMP five D, which shocks people. Uh. And then there's these short term runs which we're experiencing again,

and that's predominantly because of negative real interest rates. And whenever negative has explained to your listeners is whatever the governments saying, bly, my bonds, my two year, my five year bonds. Take away the monthly CPI number gives you a positive or negative real rate of return. And whenever that is negative, gold goes up, dollar goes down. Whenever it's positive, dollar goes up, gold goes down. So gold is money for half of the world, and it shows

up in reserves, shows up a significant factor. China is not gonna be floating a Wan bond and it's backed by gold for them to make it, so the credibility internationally, people don't want to turn they can remember just their paper. They say, well, it's not gonna be collaterized with gold. So I think that's that's important. Um. And the other part is more a significant long term is the rise and I call the love trade the rise of g d P per capita in Hindia China, India affectually known

as the world's population. Their rising GDP has led to a continuous and it comes in waves of buying for gifts. They buy care of gold jewelry. Uh, it only has a ten markup, so you get to wear your wealth. Wearing your wealth, I guess wearing it on your sleeve is as well. You know you mentioned there is this idea about gold. But I'm wondering do people buy gold as investments because they think the world is going to come to an end or do they buy it because

they recognize something about the way that currencies operate. That make gold just a great investment that you can buy and sell and make some money on. I think there's there's two parties to that, and I think that as I said earlier, that the biggest buyers that really shocks you is the love trade, not the fear trade. The

short term spurts and rallies is the fear trade. Uh. And they're the more savvy currency players that are taking a look at what are the factors will drive a country's currency up or down, and they look at monetary policy, they look at CPI numbers, and they look at fiscal policy. So until there's really a pushback in fiscal policy that is streamlining all these regulations globally that are taking place, then you're going to have to live with cheap negative

interest race. Frank, when when did you get most bullish? Uh? On gold? Well? I grew up in coming from Canada, originally in Toronto. You study geology and mining at a young age, and uh so I became fascinated on those on those drivers at a young age. But I mean as far as recent events, I mean, is there something about what's going on right now that makes you bullish on gold or are you just generally bullish on He's Canadian exactly. I mean, it's in your Canadian flood. You

grew up learning about life hockey stick. Um. But I think the thing is I've always mentioned is that people should have a ten percent waiting in gold and rebalance each year because there's inherent volatility with currencies, and that's to protects you as an investor. So it's a form of insurance. Some people would say that bitcoin is the new gold with respect to that sort of uncorrelated asset class that does not have the same kind of correlations

of some currencies. Do you agree, No, I think that it's the most incredible exercise and crowdfunding. If you go to TED talks, which have readers, I mean a hundred eighty countries, two million people a day watch TED talks and the educational blockchain technology cryptocurrency, etherory and bitcoin. It's all over the world by very intelligent people are learning about this space and the crowdfunding that has taken place. In the funding, I think it's got a control. There's

eight hundred I c o s uh. There's no corporate governments with these these things. But the idea of bitcoin and etherorium and ripple. Uh, and there's about ten of them, but in particularly Etherorium, which is a contract. I think they're very significant and we're very early like we were in the Internet, of how you can do a transaction and have a contract and you can basically move money and you can do it every hour, uh twenty four seven.

Trade and stocks, the arbitrage with currencies when you go here to Canada, the banks are going to charge from four percent to twelve pc on your currency. It's gonna cost you two percent. If someone came to you, Frank and said, look, I buy your analysis. I think this is something that I want to invest in, but I don't want to lose my shirt. What would you recommend

that they do? Well, it's he just had to understand it's very cutting edge, as very volatile, especially what Jimmy Dan when he said, uh, the very aggressive statements that they've made. Uh. He's a great leader as a CEO, he's a phenomenal job. But at the same time, their bank and other banks have been charged and found in court system for manipulating the price of gold. So you hear from other people that write about this are saying, well, they must be short or they have another. But how

would you invest? Is there a way to invest just quickly? Well, I don't think there's a clear way where Hopefully I've invested in a company is going to go public next week. That's the first mining company, uh and it's with the company called Genesis Mining, and it is a pure mind and minds these uh mint coins new coins. I can tell that mining is a theme, right. Mining goes from gold to Frank has cuff links that's say buy and sell. Awesome,

you like that hunt. You know what the price of gold was in two thousand, two hundred and seventy three dollars announced today one dollars. Thanks very much, Frank Colmes. He is the chief executive chiefs investment Officer of US Global Investors based in San Antonio. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at

pim Fox. I'm on Twitter at Lisa Abramo wits one. Before the podcast, you can always catch us worldwide it on Bloomberg Radiom