Big Tech Dominance May Trigger New Antitrust Legislation: Strauss

value investing, and artificial intelligence. We have David Pearl. He is the co chief investment officer of Epic Investment Partners, helping to manage more than forty seven billion dollars in a variety of funds, and I believe also well. First, David, thanks very much for coming into the studio. Thanks for having them. I just should mention overall t D Bank, I think is the big parent companies that correct Yes, okay, just so set that stage. I want you to offer

this idea, uh and analyze it for us. That free cash flow is a very important metric, a very important bit of information that may not be reflected necessarily in the earnings of a company. And I'm wondering if you could explain why that would be so and why that is attractive. Right, when you make an investment in an equity, you own a company. The company gives you your return through only three things. It generates profit, and that's what we're going to talk about free cash flow. It pays

you back some of the money. That's return of capital, dividends and share buy back and even debt pay down, and then valuation. And you know those three are the only determinants of return. Uh. The markets for the last five years up until this year were driven by pe expansion evaluation, not by the growth of profits, and only by a small amount. And this is surprising to people about dividends. Dividends have been four percent a year, but the markets were up double digits every year, so the

rest of it was valuation. This has started to change now and it is a profit driven market, which is better for active managers because what we do is trying to find the companies that are growing, to grow profits faster than their competitors, and use the money more wisely, including share by backward growing the dividend, and p will be less of the metric that determines return going forward, because as rates go up, valuations are liable to be flat or even down. But the good news is if

the economy is growing, you're going to find earnings growth. Now, the difference between earnings and profits, this is the question. Accounting is a game. People think it's like physics, it's a law of nature, can't be changed. It's not so. As long as everyone plays by the same rules. You can compare company A to company B. Well, company A changes the rules every year. That's more than half the companies that are publish don't use standard accounting UH and

many many many more UH. And what they do is call it pro forma earnings adjusted earnings. We call it earnings before expenses. Because they throw out anything they feel like, and they change it every year. You can't compare even their own history anymore. Whereas cash much harder to manipulate. You can sort of do it, but it's much harder. And if you've ever worked in a company as a treasurer bookkeeper, companies run on cash. That's how you pay

everyone's salary, pay the rent, build a factory. Once a quarter. They translate from cash to this game of accounting and earnings. So companies say we're going to do a dollar and everyone's happy if they do a dollar five and they don't care how it happened. Okay, So so cash is the dependable metric to look at on balance sheets. I want to get to the point that you made saying that active management will be increasing really relevant going forward.

Not everybody agrees with you. Uh. Certainly, investors have been voting with their money and pouring into index funds. David Einhorn, who is the founder of green Light capit All, said earlier this year value investing may be dead, and Amazon and tests like killed it. Meanwhile, you have, for example, Mainstay Epoch Global Equity Yield Fund, which is a fund that is co managed by your your firm, and it has an expense ratio of uh, you know, pot six percent,

which is a pretty significant one. And how I mean our our investors buying what you're saying. Yeah again, during the period of quantitative easing over the last five years, returns were driven by valuation, and that is hard for most active managers because what we're trying to do is find a company that's going to grow faster, grow earnings faster,

be at a discounted valuation. And what was happening is the whole boat, the tide was lifting all the boats, and index funds were actually making it worse because they their market cap weighted, so they're buying the largest stocks

which looked more and more overvalued. And the last thing that happened the perfect storm was that when you bring rates to zero, people who would have kept their money in the bank or in bonds were forced by equities, and they only wanted equities that acted like bonds that paid big dividends, which happened to be the largest ones. So managers who are looking for the better stocks were under owning the biggest names, which kept getting bigger and bigger.

Now what's changed is rates are beginning to go up. That is putting a crimp on pe expansion correlations. If you look at the market this year, correlations have really widened, meaning that you know, the difference between a good stock and a bad stock is a big difference. Stock picking can work this year, and actually active managers are beginning to outperform this year. This has been clearly a better year.

And I would have used the word frustrating over the last few years because stocks that I thought were overvalued. Take a utility or you know it has a four percent dividend, but can't really beat anyone's not Bird's regulated went to all time highs, and they were trading at a huge premium to a market that had gone from twelve times earnings to nineteen. Utilities were so so it

was a terrible environment for stock picking. We're finally moving to one where your return is going to be determined by earnings or in our case, free cash flow and the return of cap. David Pearl, thank you so much for joining as David Pearl co Chief investment Officer of Epoch Investment Partners, which overseas forty seven point two billion dollars.

The rise in Amazon's market cap this year alone is bigger than the combined total market values of virtually every familiar chain that is to be found in US malls. Jeff Bezos, the founder of Amazon dot Com, His wealth searched past one hundred billion dollars on Friday. Is Amazon dot Com benefited yet again from another shopping holiday, at

this time Black Friday to day Cyber Monday. Here to talk about the implications of the rapid rise of these big tech companies and uh the possibility or uh sort of rationale behind breaking them up is Steven Strauss He is the John Weinberg Goldman Sacks Visiting Professor at the Woodrow Wilson School at Princeton University. He is joining us from our Boston studio today. Uh, Stephen, thank you so much for joining us. I just want to get first of all, your take. Do you think that there is

a sufficient rationale for breaking up companies like Amazon dot Com? Um? I think there's a sufficient rational to look at what needs to be done about them. Um. Amazon, Alphabet, which is apparent to Google, Apple, Facebook, They basically have a few things in common. They are all in high fixed cost businesses. If you want to go after you know, Facebook or Google, you're literally talking about spending billions. Um. I think when Microsoft want to enter search, it was

a five billion dollar fixed cost investment upfront. These are businesses with very low marginal costs. I mean the actual cost when you log into Facebook or use um, you know Alphabet or even Amazon is almost nothing to the company is just server time. So there's very low marginal costs.

And there's network effects. Um. You know you want to be part of a community, you want to share on Facebook, Uh, because that's where other people are sharing and all of these companies have to varying degrees those three characteristics, and those are the classic recipe for a monopoly or an oligopoly. And it's not just their size and profitability. I mean, Google has been on sevent share of the search market, um Amazon of the incremental sales growth each year, and

online sales goes to Amazon. They've also got something like a by revenues share of the book sales market and so on for this group. So you know, the classic recipe for dealing with that is break it up regulated as a platform or in some way force a leving level playing field. Exactly what the mix of solutions UH is or how it should be approached, I'm not as sure, but it certainly needs to be, you know, focus of

legislation and focus of regulatory work, Professor Strauss. I'm just gonna throw a couple of legal UH statutes at you. The Interstate Commerce Act, the Sherman Any Trust Act, the Clayton Any Trust Act, Robinson Patment Seller to Father. We have a lot of laws that deal with any trust situations.

And I'm wondering, do you believe that the laws as they exist offer the government the power and authority to do whatever it is, you might suggest, store alleviate the situation, or is it is something in the legal framework that needs to be changed. Um, I'm almost well first among my I have a number of different qualifications of degrees. But how how let me just give you more of a you know, a public policy person's perspective. There's probably gonna be a need for new legislation or at least

new ways of thinking about this. The current classic view of antitrust in the US is so long as sort of in the short intermediate term, the consumer is benefiting, the antitrust authorities don't really get involved. And since most of these services are offering things to the public for free or at very low prices, um, there isn't that much of an interest. Now again you get into the

question of what is the public who is benefiting? Uh. If you look at the media landscape, for example, there's a fairly strong argument that you know, Facebook, Google, et cetera ability to distribute news media and content online. Um that basically the diverting advertising revenues that were used to be going to newspapers used to be going to news media to themselves. That's probably one avenue for an antitrust approach saying you know that this other industries being damaged.

There's already been one successful case of litigation um. It was I believe Apple and Google had entered into a collusive agreement to try and to press wages in Silicon Valley, that they had agreed not to poach each other, and they were challenged by that already on the Justice Department. By the Justice Department had to settle. In Europe, Google has paid about two point four billion dollars in an

antitrust um challenge. So there are certainly things you can do under the existing frameworks, but I wouldn't be surprised if new frameworks need to be developed. Stephen, have you had any conversations with public policymakers about yes, I completely sure.

I want to say who or what? Mean? Yeah? I mean my point is, I mean, is this something that policymakers are actively thinking about or is this something that people sort of nervously whispered to one another if they're invested in these companies, and that's sort of you know, argue if their investors in the brick and mortar companies someplace in between. With my answer, I mean, one of the problems we go off on a whole different discussion

about dysfunction in Congress. But one of the challenges you've currently got at this point, I would say, is a bit of overload in Washington, d C. And just getting people's banned with Uh. Sure you're aware FCC has come out with or is trying to come out with new rules doing away with that neutrality. We could have a separate debate and one of that's a good idea or a bad idea, But that's absorbing a using amount of bandwidth just in terms of people's ability to think about issues.

You know, more generally, you've got very substantial changes being proposed to the tax code. So, yes, this is on people's radar screens. I mean, certainly it's there, but you know, to the extent that you want to get anyone in Congress to think about it, you know, there are twenty seven other crises at the moment which are ahead of it. Uh. What's the expression the urgent crowds out the important? Well, I mean I guess that the next question is is

there a point of no return? I mean, is there some kind of urgency to this matter or is it just sort of hanging out? There is something to address at some point someday. Maybe I'm not a believer that much. In the otherit you get to points of no return. I mean the h and by the way, interesting analog is sort of the late seventies and early eighties, a number of factors came together. IBM was challenged as monopoly. Uh in the sale of mainframe computers, A T and

T was broken up. And you know, the A T and T monopoly had lasted, you know, quasi monopoly had lasted seventy or eighty years. UM, so it maybe a while before this hits, you know, the boiling point and people focus, Uh may not. And I just flagged that. You know, one of the advantage of breaking up these companies is it may stimulate a lot of entrepreneurship, a lot of opportunities. I mean. One of the issues at this point with you know, Facebook or Google or Amazon,

it's the extent that you try to challenge them. If you're a tech entrepreneur, you are on a real risk that if you don't sell out to them, Uh, they're simply going to drive you out of business, because you know, they have enough money to undercut and over and outspend just about any competitor. Thanks very much for joining us. Steven Strauss is the John Weinberg Goldman Sachs Visiting Professor at the Woodrow Wilson School of International Affairs and Public

Policy at Princeton University. Well, the bitcoin curve has just gone vertical. Bitcoin up almost just so far today. Here to talk about what it is that we're seeing. Here is Chris Perniski, partner at Placehold, our an advisor to our investment management, also author of a new early out book, Crypto Assets, The Innovative Investors Guide to Bitcoin and Beyond. Chris, thank you so much for joining us. I want to just start by asking what are we seeing right now

with respect to the action in bitcoin? Is this mass speculation or real money flowing into the asset class. Well, we're definitely seeing a lot of activity, and I think to quantify that activity it's best to look at how much new fiat currency is slowing into the bitcoin ecast of some versus how much is the network value, which which many people think of as the market capitalization is increasing. So we know over the last month, bitcoin has appreciated

roughly sixty billion in total value. So a month ago it was at a hundred billion, and today it's around a hundred sixty billion. Uh So then we have to ask, well, how how much of that is is new dollars? And so if we look at coin base, one of the largest retail platforms where people can buy new bitcoin, they're adding roughly a hundred twenty five thousand new users a day. Uh If you assume, you know, that's one fourth of the global totals, then we would have roughly five hundred

thousand new bitcoin users a day. And if we assume they buy roughly, say a hundred thousand per new user, then over thirty days, that would suggest fifteen billion new dollars have entered the bitcoin ecosystem over the last thirty days. And that doesn't even account for institutional Chris, it's always go to speak with you, and I just want to reference your book Crypto Assets, The Innovator Innovative Investors Guide

to a Bitcoin and Beyond. Because if you look on Amazon, it says on the one hand, it's temporarily out of stock. Yet if you want the hardcover it will cost you twenty five. The kindle version is fifteen. You can get a collectible version of the book for over a thousand dollars. My point being that you have all of these different suppliers offering a product at various prices. Is that similar

to what bitcoin could experience? Because if you don't have any central clearing, how do you know or how does any buyer know that the person that just sold you the asset will buy it back for a similar price. Well, it's interesting you mentioned the book because there has been an aftermarket for it UM, which is interesting in and of itself. It shows there's a uh, definitely a thirst for knowledge. In terms of the bitcoin markets, you know there are you can think of the different exchanges as

some way isolated liquidity pulse UM. But if you if you look globally UM, because you know there are over fifty exchanges globally that trade seven three sixty five days a year UM, there are some arbitrary some some arbitrage opportunities, But as more and more professional market makers come in, we're seeing some of those opportunities get squashed. So I would I would think of it as UM still a somewhat immature market, but we're definitely seeing a tightening of

the spreads across all the different exchanges. So what could happen to sort of puncture this rally. Considering the fact that so many people are calling it a massive bubble, I think that, UM, you know, there's there's any number of things that could happen UM and learning from from the past. You know, in late we also had a similar ascent that was the first time bit clan crossed

a thousand dollars UM. Following that ascent, there was a big hack on an exchange called mount Box, which had nothing to do with the underlying bitcoin protocol that wasn't compromised. It was just a poorly run exchange that was compromised that threw people off. At that time, there was also commentary from from China around bitcoin not being a real currency with real meaning in in you know, we've seen

different scares. We've seen a few small hacks. We've seen China come in with new commentary around its regulation and banning i ceas, and while that has temporarily dampened bitcoins ascent, it has recovered, which shows stronger hands. So right now it's an extremely strong bowl market. UM. I can't say for sure what what would stop this UM, but we do have a few things to learn from in the past.

All right, let's just talk about short term. If you're an investor or speculator that is long any kind of bitcoin or cryptocurrency and you've got a significant gain, would you sell it? So I don't give public investment advice. It's it's a very very tricky thing to do in the in the bit clin space, I definitely think people

need to UM exercise caution in these markets. You know, over the last twenty four hours, we've traded over six billion dollars in the bitclin markets, which is about three three x what we've seen as the average over the last fifty days. So things are are getting hot UM. You know, if if you're entering the market, always good to average in UM, and it really depends on what your risk profile is in terms of UM if you're a holder or seller right now, Chris, real quick, are

there more retail establishments actually accepting bitcoin as currency? There was a famous article that came out this year that actually showed fewer merchants were accepting bitcoin UM this year than than the year past. I believe it was UM. So we're we're not seeing um B two B or or or or C two B UM use increase some merchants were more se B two B, and you can track that through um bitcoin's transaction volume on change transaction volume which is um right around two billion dollars right

now or one point million dollars a minute. So that's using bitcoin as a means of exchange, which is very different from the trading volume we see. Thank you very

much for being with us. Chris Berniski is a partner and at placeholder and adviser to ARC Investment Management, and he is the author co author of Crypto Assets, The Innovative Investors Guide to Bitcoin and beyond the shares of Time Incorporator they are higher right now by a little bit more than nine percent after a deal has been announced that Meredith Corporation would like to buy Time Inc.

Along with the financial backing from the Koch Brothers. Here to help us understand why this is taking place and the price implications is our media and entertainment guru, Porter Bib of Media Tech Capital Partners Porters. So go ahead, answer your own question. How does Meredith justify a forty six percent premium for Time? This is there? What is this is like the lucky charm? Right? The third time

is the price that's exactly right. And they think that they're going to be able to say nearly a half a billion dollars in operating expenses and overhead by combining Time Ink with their existing publications. But the key here is twofold one. The Koch Brothers put a half a billion dollars into this deal. There are ostensibly not going to interfere with editorial. They're also not taking a board

position on Meredith. However, no one has said in the Coke camp that Coke at some point, if Meredith can't make a go of Time Magazine or Fortune or any of the other key titles, that the Cokes won't be able to buy those from Meredith. Uh. The interesting thing that Meredith is is positing right now is the fact that they're the seventh largest digital publisher in the country, maybe maybe even in the world. Uh. And that's the

future of print. Even though there are now seven hundred magazine publishing companies in the United States, almost maybe maybe significantly more is controlled by just four companies. It will be Meredith, Hearst, Conde Nast in American media, and the value of pure print standalone magazines is plummeting. Timing for Examp double lost to billion dollars in revenue for the

first nine months of this year. Meredith is hanging a lot better in terms of the print side, but they are really doing a good job on monetizing the digital assets. Go ahead, well, Porter, I guess that what the backdrop that you're painting of an industry and decline, which we know the magazine industry is what would the Koch brothers

motivation be to get into this. I mean, obviously there's been quite a bit of speculation that they have political interests in controlling these magazines, although they've said that they won't necessarily exert editorial control. So if that's not what they're doing, what are they trying to do? Well? One of the hidden assets of Timing is uh it's database

of consumer information. They have tens, maybe even hundreds of millions of names and customer and consumer profiles on on their database, and that really fits right into what the Cokes are doing in terms of their own political uh persuasion in terms of media analyzing and adding the Timing customer base to their own existing database is a very very valuable political asset, and no one at Meredith or Coke has said We're not going to touch the database. There.

There's some other significant assets that I don't think interest the Cokes, But the archives of Tim Inc. Are very very valuable, all of the including magazines that they no longer published, like Life magazine. UH. They also have a very prosperous conference business with Fortune Magazine and a huge consumer aspect in the whole Sports Illustrated swimsuit concept that they have turned into a very very valuable franchise, and

it's mostly all digital these days. So porta would the archives for example, they could even almost be a standalone business such as a Shutterstock right, a commercial digital image business. They Time Inc. Has one of the largest photo files and archives in the world going back to when Henry Loose and Britain hadn't founded Time magazine, and all of the fabulous pictures that they got from Life, from Sports Illustrated and from Time as well as there dozens of

other magazines create a very very valuable digital asset. Okay, So is it possible to actually borrow or use that digital asset is collateral for even more borrowing and more money. Well, according to UH statements that the Meredith managed and has said they could not do this deal without Coke's money, because no banks and and and no uh private equity lending funds would would believe that the Meredith is going to be able to turn a profit in this deal and pay back any money. So the the the funds

that that Coke has provided um. Coke actually made a statement this morning and said, we're acting like a bank and technically they're they're lending a half a billion dollars to Meredith to make this deal happen. Meredith is right about the savings that they think the combined entities will will generate. Uh, they'll they'll save almost as much as the Cokes are investing in the deal. Thank you so

much for joining us. Quarter Bid managing partner of Media Tech Capital Partners, also the first publisher of Rolling Stone magazine. 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 on Bloomberg Radio