Bridgewater, Coinbase, China, and Commodities (Podcast)

Eric Schatzker is in the studio. I guess Paul Singer is an active guy, right, But I always thought of Elliott as a distressed investor because Hans Humes like cut his teeth there with Argentina. Elliott certainly started out that way. I'd say Elliott is highly opportunistic more than anything else. They make long only bets as well. Yes, they function, they have an activist profile. They certainly throw their weight around. But yes, I would say that bare knuckled distressed investing

is one of their specialties. It's not why you're in here, though, It's not. It's not you got something else to talk about. So, Ray Dalio, you broke the story when he officially announced he was back in October. Yes, Ray Dalio, after twelve years of trying finally let go of the rains at Bridgewater. And we've been waiting for five months to find out what the new generation of leadership under the CEO near Bardaa, former Israeli military guy, really was going to do. And

now we know. So what are the details? Let us in. There is a lot happening, and it is happening on a very accelerated timetable. The first thing people are going to notice and find surprising is that Bridgewater is cutting some jobs. The firm employees about thirteen hundred people and it's getting rid of about one hundred and not all of those people are junior folks. That will be some senior people as well. Why because it wants to deploy

those resources. There isn't an infinite amount of money, even though Bridgewater is a big and very profitable firm, into new initiatives and we'll talk about those. The other thing that's really worth mentioning is that Bridgewater is capping the size of its so called flagship hedge fund strategy. This is it has a name Pure Alpha, and it is the product, the hedge fund product that Bridgewater offers its clients. The idea is that it will over time generate excess

return in other words alpha hence pure alpha. Bridgewater for so many years defied the laws of hedge fund gravity. The conventional wisdom was always that strategies outside of equities were capacity constrained. Some strategies and things like distressed credit are very capacity constrained. There just isn't that much to do. So that macroso pretty big, but too much money. They

can't put it to work. They can't generate high enough returns. Yet, as I say, Bridgewater defied gravity because it's two principled strategies, pure alpha and the risk parity strategy called all Weather. Hoovered up assets at an unbelievable pace. In two eleven it crossed one hundred billion dollars in total assets, and then more recently it has been north of one hundred and fifty. Wow, and now you know, the natural laws

of the universe appear to be taking hold. Bridgewater's performance during the twenty tens was you know, this is an understatement, uninspiring, and they've gone back to the well look, gave themselves a hard look in the mirror and recognize that things had to change. The inference I can draw from my reporting is that it was harder to change. While Ray

was still there. He'd built the firm, He'd created its unusual, some would say odd culture, transparency, and he was, as any founder would be, very attached to a certain way of doing things. Now he's gone, a much younger generation of leadership is in charge, and you can also infer that they've been chomping at the bit because here are some things that they're doing that it would have been very difficult to see Bridgewater do if Ray were still

in command. All right, Eric, so we have, as you mentioned, the new chief executive officer near Bardea. That's correct, former Israeli military guys I mentioned he was a contoon leader. Interesting, what does a new team? What are they looking to do in terms of new initiatives changes? Yes, we need to get into this. There's four areas they're pushing ahead. In one is Asia. They want a bigger footprint in Asia. They're adding people. In Singapore, they want to get closer

to some of the institutional clients there. You can draw some conclusions about who those might be. Gic, for example, Tamask both like in love with China as well. Ray said some controversial things about China and I talked to Near about China. Their position on China is not ideological. They want to be able to invest in China and

to be able to offer clients exposure to Asia. Why because half of the world's economy is driven by Chinese monetary policy in Chinese credit creation and China and Asia more broadly are generating are adding to global GDP at double the rate the US and Europe are. So it's a place to simply have to be. Forget about anything that Ray may have said or things that people might believe have believed about his views on China. So Asia is number one. They want to be much bigger in equities,

specifically long only equities. This is something their clients want and it's not a long short equity fund. What they're doing is taking their macro views. This is the specialty at Bridgewater, the so called compounded understanding that they've built

over forty seven years and expressing it through equities. So if pure alpha again the flagship strategy would have shorted bonds, shorted treasuries in if it anticipated a rising rate environment, a long only equity strategy would have minimized its exposure to interest rate sensitive stocks or similarly, if pure alpha was going to go long copper because it believed copper prices were going to rise and industrial production was going to boom, the long only equity strategy, again expressing a

macro view, would buy copper miners. The third area machine learning and artificial intelligence. This is not a chat GBT thing. Bridgewater has been experimented for a decade with these tools, but it now wants to build them out, engineer something that it can put to work making investment decisions. Again,

humans still part of the picture. And finally, sustainability. You'll recall that Karen Carnial Tambour, only thirty seven years old, was recently elevated from co chief of Sustainability to co CIO at Bridgewater, and clearly you know her hand. Her fingerprints are on some of this. Bridgewater is has to respond to client demand for more products and sustainability, and they want to do sustainability and equities and they want to generate. Up until now, their sustainability product has been

BEATA driven. They they want alpha strategies in sustainability and they want to express their views on sustainability. Similarly, inequities four areas in which Bridgewater believes it can amass billions upon billions of dollars, and if it's successful, they'll ultimately be less reliant on what we were talking about before

pure Alpha and always that's interesting. Vanguard just did a study on its ESG products and showed they had no outperformance versus I guess, well, Vanguard is let's not forget apart from the subadvised funds at Vanguard, Vanguard is a beta shop, right. Vanguard is the pioneer of indexing, and I'm not disputing Vanguard's conclusions right. What I am saying, and what's clear to me is that clients, for better or for worse, want Bridgewater to offer them more in sustainability.

The clients might be wrong, that's for us. It doesn't matter. That's fascinating that people want to put their money there. Still, after the backlash that we've seen, you know against uh, you know, Larry Fink and black Rock, what about the radical transparency that to me defined Bridgewater's culture. I only know it obviously through reading your reporting for the most part.

But that's changed. Is that going to change? Because it seems like they weren't terribly transparent about Dahlia's fight for more money on his way out. Well, there are people in Bridgewater who would dispute the account that you've you're referring to in another publication. Yes, but the culture is changing, of Horse, it's changing. They're younger people in charge now.

They're no longer so attached to the pain buttons that you know, these these these apps, if you will, that Bridgewater developed under Ray the baseball cards that you know, tried to capture, you know, somebody's entire personality in every decision he might make in the years ahead. Those things still exist. Are they as popular as as frequently utilized today?

Hard for me to know. I'm not inside the firm, But the distinct impression I get is that Bridgewater has moved on from some of that stuff, and they were definitely softening the approach that they took to designing things like the baseball cards even before Ray left the firm. All right, Eric, great, great stuff. One of the top red stories on the Bloomberg terminal will be for the entire day, I predict Eric Schatzker, Bloomberg News. Excellent reporting Greenby.

For those who know about Bridge Ray Dalio, the changes, they're good stuff. We appreciate Eric being in on our studio. All right, we want to get into the private equity space, one of my favorite spaces. And quite frankly, I've been on Wall Street for thirty years. I kind of feel like it's the last place where you can make outsized returns. That's just my personal opinion. Hedge fund business game over traditional Wall Street game over in terms of making outsized returns.

And that's why I like it. If I were a young person, I'd be going into private equity right away. Andrea Auerback joins us. She's head of private Investments at Cambridge Associates. She gets a gold star because she is Live and our Bloomberg Interactive Brooker's studio. Andrea talked to us about the last I don't know, three or four years. The whole world's been upside down, markets all over the place. Now we've got a Federal Reserve raising rates and all

this kind of stuff from the private equity space. Just give us when you go talk to clients, how do you frame up the last few years? Wonderful question typically, and good morning, by the way, big question, good morning to you as well. Typically, when folks are asking us about what's happening in the private equity space. I kind of roll it back a few decades, okay, right, So, as you started out with your morning comments, private equity

has only been institutionalizing since the eighties. It's basically forty years old. I wish I were forty years old again, and so it's constantly evolving, and so what you've been seeing in the last couple of years is really building off of a lot of phases that the industry has

already moved through. Leveraged buyouts are now referred to fondly as private equity, and right, little euphemism twists there, but part of the reasons for that is that private equity isn't just about applying a lot of leverage to a company anymore. It's immensely diversified space and ecosystem. So it's

not just the one thing people tend to think about. Well, one thing I think about, and I've spent the last six years going to the super Return conference in Berlin, is just how much money private equity has a mass. You know, every year that I went it was a new impossible to understand figure like one point seven trillion, and then it was two point three trillion, and just so much dry powder that I always wondered, you know, with that much money chasing the same assets, is it

possible to get a decent price? Is that still the case that private equity has so much cash and is just impossible for them to put it to work. So the answer to that, so the big, the big headline number that you just mentioned is immense, but it breaks

down pretty quickly into different categories. Right. So, as we mentioned, private equity has been evolving over decades, and so there are five thousand gps walking around who have raised some part of that one point trillion number that you gave us, and they're trying to deploy it within the space that they're occupying. Right. So when you break down that overhang that you talk about and we define that, i'd like to think we're the first to define it actually being honest.

Amage Associates, Yes, many moons ago. Half of that belongs to funds that have five million or more in capital under management, right, And so a lot of the larger funds have the big money, the more money more problem problem, which is they're all maybe looking for a smaller group of assets, whereas there's another cohort which might have less than a billion in capital, under management and they have a broader ecosystem to play in and go find a company,

and don't forget there's something like six million private businesses in the US. They're not all private, private equity owned yet, right, all right, So twenty twenty two, the sixty forty portfolio for most investors crushed. He couldn't make money anywhere this year. Well, you could make money if you owned oil in alternative assets. Well, Welisha Brahmas has apartment. Yeah, I mean there's there were places where people knocked it out of the park, right, yeah,

but most sixty forty folks, most it did not. So tough times. You come here to twenty twenty three. Now we've got a FED reserve kind of reversing raising ray. People are concerned, what's the private equity market like today? What are you telling clients? What are you hearing from your clients? As you'd asked, right now, the private equity market is sort of on pause, right, just like most markets.

Most folks who want to do a transaction, like I don't know how to forecast what's about to happen and it's impact on the companies I want to buy, and if I can't, if I can't forecast. I can't come up with an accurate valuation that I'm willing to pay. And I also don't know how these companies are going to perform because a lot of unknowns just became known over the last year or so, right, And so the market itself, transaction volumes have been on pause, waiting to

sort of sort itself out. I think there's a lot of pent up transaction volume that will start to come to market once folks decide and settle out like this is our go forward operating environment. So it's been on pause right now, and it's sort of like, you know, you check your belongings. Do I have my wallet, my keys? Are the companies that I own currently? Are they performing okay?

Given a lot of the changes that have been coming at us all right, higher inflation, higher interest rates, you know, difficulty finding good labor, difficulty getting your supply chain moving, all those things. So I think the industry itself has been a little bit on pause. Check your belongings before maybe moving forward into this environment with a plan. But sixty forty people for the most part are like you know, me and Eric, retail guys who until recently haven't had

access to alternative assets. Paul is probably an incredited investor, so he could. We've had more and more guests on their giving access to private investments to retail investors in various ways, with various platforms. Is that growing in private equity as well? Yes. And one of the reasons for this is there's a long term there's a long term trend. Right.

So when my dad, if you will, was actively working, he was receiving a pension right now, lucky I know exactly, and a lot of pensions because they were more institutionally managed by a centralized, centralized tea. They were pursuing private investments, and so a lot of our dads, I guess and moms could benefit from having some exposure to alts in

their retirement program. Now I'm of a different generation. I'm in the four o one K class, right, and so four oh one k's typically don't have access to privates. One of the classic k I want some of that is the returns of privates have stood the test of time over a forty year period, still a very productive

returning asset class. And I think a lot of folks who don't have access to pensions anymore would like some access to the sasset class and then enter stage left private equity firms and others trying to figure out how to provide exposure to private investments in an appropriate way to a four oh one K investor or to a

retail investor. And that's regulators must and regulators must want to help out as well, because it's just really not fair if you're a Now we're a whole generation of four oh one k people, right, so all of a sudden that exposure is gone for retirement accounts, meaning the returns are going to be smaller for us than they were maybe for pension people. I wonder if you'll see changes in regulation or new products that allow retail investors to get in in a safe way. It's been interesting

to watch this. So at Cambridge Associates, we're globally focused, right, so we're glad explain to us, really what Cambridge Associates does. I mean, you've been there for quite a while, yes, quite a while. Thank you, Thank you for being gracious there Cambridge Associates. So we advise and manage capital on behalf of endowments and foundations, pensions, sovereign wealth funds, and families. So we really advise and invest on behalf of a

broad swath of family office people. Yeah, family offices, and we operate globally. One of the fun things about being able to operate globally is you can watch to your retail exposure to private equity in different parts of the world. They're trying to crack this not themselves, in different ways, and so depending on where you are, there is opportunity to participate in publicly traded private equity funds or be able to participate in a slice of private equity as

provided to you by a government entity. So they're interesting things that I think US investors are looking at for ways to innovate and bring that here or to sort it out in a way that's American. Can you talk to just briefly about private credit, Matt, and I hear a lot more about that than we did. It's just so hot, yeah, yeah, yeah. Private So private credit. As you're probably aware, the area exploded after the GFC right and really became quite significant, and the amount of direct

private direct lending exploded tenfold. I think it was one hundred and thirty billion in volume back into eight it's now upwards of one point three trillion in volume today, so it's definitely a blooming space, right And one of the reasons for that is because of the GFC, you had some of the changes in the regulations that really had to move lending out of banks into where into private credit and here comes the growth of that particular

swath of industry. So private credit has been around for a while, it's gotten much more interesting right now, obviously because interest rates. Yep. Right, all right, Andrea, thank you so much for joining us. Really appreciate that very fascinating story. Andrea our backhead of private Investments at Cambridge Associates, joining us live here in our Bloomberg Interactive, a broker studio. We welcome now our Bloomberg TV viewers and radio listeners

on Shinnali Bathik. And joining me now is Brian Armstrong coin Base, the CEO. Brian, thank you so much for joining us. You recently made this big interesting bet as a centralized exchange on decentralization a year or so ago. You know, decentralization was a big worry for traditional financial players, but more so now there are a lot of concerns about the space. So what is the case for traditional

financial players to care about Defy. Yeah, well, we're definitely excited about a coin base, and we want to make sure we help build the future of this technology here in America. Actually, a lot of traditional financial services firms are integrating this technology. I mean everybody from you know, JP, Morgan, Visa and MasterCard, Franklin, Templeton, They're all they have projects and teams internally working on how to integrate crypto into

their services. And I think the reason for that is that, you know, eighty percent of Americans are not happy with the current financial system as it is today. They think it's it's too slow, the fees are too high, it doesn't serve everybody equally, and a lot of the technology was built forty years ago. The laws we're one hundred years ago, and so people are really excited about how crypto as a technology can help improve and update the financial system, and that's why that's why we're here at

coin base. We want to make sure that we enable that as well. But there are still near term challenges and which are the biggest among them. Are they the idea of hacks and any vulnerabilities in the system, or is it the regulatory environment in the United States. Yeah, I mean, my number one priority this year is the policy environment, so we need to make sure that gets to a good place in the US. You know, the

rest of the world has actually embraced crypto. We've seen all the your financial hubs Singapore and Hong Kong and London, and you know, the EU just passed comprehensive crypto legislation. So really, what I believe should happen in the United States is that we need a clear rule book so that this industry can be built here. You know, we don't want it to be like five G or semiconductors that went offshore. It's actually a matter of national security.

We get the future of the financial system built here inside the United States. And so I've been spending more time in DC here in New York, but in DC in particular, we're trying to meet with the relevant folks that could help draft legislation so Congress can come in and pass comprehensive legislation before we get to the Washington of it all. I want to still look out five years from now, because there are a lot of financial players,

as you say, that are looking at tokenization. A lot of it's happening in the private markets to the extent that you think traditional securities can be tokenized five years from now. Are you working with collaborating with any banks to get to that point. Yeah, So crypto is many different things. Right There are crypto securities, which we believe there should be a robust market for that in the US.

In fact, we acquired a broker dealer license that it's still dormant right now, but we'd like to work with the sec to activate that and create a healthy market structure to trade crypto securities. Now, you know, of the thousand assets we've looked at coin base, you know, eight hundred of them we've rejected. We don't think we have maybe their securities. Two hundred or so of them we have listed on our platform. We believe those are commodities, and so we're going to continue to build that piece

of our business. We're regulated by the CFTC for instance, and make sure we grow that piece as well. But cryptos many things. It's commodities, it's securities, it's stable coins, it's artwork, it's decentralized identity systems, and so it's tough for people to wrap their head around, but it's ultimately going to have many different regulators, you know, before we get to the regulatory part of this too, we were talking kind of about traditional financial players and what role

they have in this place, in this system. What kind of relationship do you have to high frequency trading firms prior to the implosion of FTX, who saw them working, for example, with IEX. Have you had any conversations with them or any others. Well, we're always talking with different firms out there and other exchanges that may want to trade crypto in various ways. You know, we can act

as a brokerage or exchange, a custodian. We can play different roles in different market structures and in financial services. You often see, you know, a company that may compete on one product, they're actually collaborators on another product. And so we want to make sure that we're helping integrate crypto and all aspects of the financial system so we can update the financial system. So you were talking about the SEC, the CFTC, the SEC's crackdowns as of late.

In particular, you work with a lot of institutions. Hedge funds had been very much getting into crypto prior to last year. I'm wondering if the SEC's crackdown is starting to scare any of them away. Well in a way, actually, I think Coinbase has been a net beneficiary of this because there's essentially a flight to quality, you know, a coin Base. We're a public company, we have audited financial statements,

we're a qualified custodian. I mean, we're basically d choice you know, based here in the US that hedge funds are going to want to work with. And so in Q four I mentioned this on our earnings call, actually that we saw an increase in the number of institutions onboarding to coin Base. Now a lot of them have haven't deployed substantial capital to crypto yet in this market environment,

they're kind of waiting and seeing. But it's great to see them onboarding, and that's kind of a coiled spring that I think could unleash a lot of potential in the next market change. Hedge funds still flocking too, crypto. Listen, we are resetting here just really quickly here with Brian Armstrong, the CEO of coin based for our Bloomberg television and radio listeners. Getting into the complicated regulatory environment now stable coins.

You were talking about how there are multiple regulators for the crypto industry. But who should be the primary regulator for stable coins and is there a case for them to be overseen more like money market funds. Well, I think Congress ultimately is the one that's going to create the laws in the United States, right, and so we could probably use new legislation, new laws around how stable coins should be regulated. I don't presume to tell them how to do that, but I think some of the

key things are uncontroversial. I mean, we need to have one to one backing of assets behind these stable coins. We need to have audited financial statements to make sure the firms issuing these are are doing a good job. So these are just kind of basic good practices, and I think a stable coin bill is one of the first things that could really help you get consensus and move things forward in DC to VISA. You still have concerns around the stable coin industry, what would they be?

I mean, as broadly as a concept, I don't have concerns about it. There may be individual stable coins which are better or worse. I mean, we actually recently delisted you know, busd as an example, and the reason we did that was, you know, Paxos had gotten who's the issue of of BUSD had been kind of ordered to stop minting it, so we were concerned about liquidity issues

for our customers. But you know, we're always evaluating through our internal processes different stable coins, different assets, and updating when we see new information that comes to light. I'm curious about your own way of using stable coins. Recently, in the fourth quarter, it's showed that in your filings, it's showed that USDC has doubled in your holdings prior

to the quarter before. Why is that the case? Well, okay, so usdc is is growing quite a lot, and I think actually USDC is it's the best answer to a stable coin in the United States right. Um, it's it's issued by Circle, which is a US based company. We're in partnership with them, and we want to see that grow. It's also been a really nice source of subscription and services revenue for US, which is, you know, in contrast

to trading fees, which are quite volatile. We've seen in our Q for earnings that our subscription and services revenue is now forty seven percent of coin is the revenue almost half, and so that's allowing us to build a more predictable business with a diversified set of revenue streams. So yeah, I'm quite bullish on USD coin, and I feel like that's a good solution for the US. Does

that look a lot more like traditional banking? Not necessarily no, I mean in traditional there's many differences, you know, in traditional banking, they you know, there's fractional reserve, they have banking licenses, there's capital requirements. Everything in USD coin is backed one percent. There's no fractional reserve. So I think of USD coin as a really important tool to help

payments be more efficient globally. It's helping provide you know, access to you know, something like a bank account, but it could be self custodial for many people around the world who don't have access to a stable currency. It can improve even you know, a lot of defy, which you mentioned at the beginning. The trading pairs are denominated in usdcoins. So these are all good things which are an important part of the ecosystem. So let's move to

the staking part of the business here. Because you have been concerned, you have voice concerns you and your colleagues about the SEC's definition of staking and how they've approached staking. Are you prepared to fight the SEC on any front if you need to when it comes to the staking world. Yeah, so, I mean we recently saw there was a settlement with Kraken. That's another exchange out there, and they have what they called a staking product. It was kind of more of

a yield product. But you know, in coin basis case, our staking product is not a security. There's many differences. I mean, we customers never turn over their assets to coin base, for instance. They're they're always in the customer's possession and we're really just providing a service that passes through those coins to help them, you know, participate in staking,

which is a decentralized protocol. So that's an important part of you know, the cryptoeconomy that we want to make sure that we ensure that that's out there, and you know, we're prepared to defend that in court if we need to, but you know, we never we're never looking for a fight. We want to work collaboratively with regulators all over the world. But you know, we have to follow a rule of law, and in this case, I think we're well within the law.

Given the stance the SEC has been taking regarding defining certain assets of securities. Is there anything that you think we'll need to get to that point? Well, you know, the SEC has expressed their view about what is a security, and they've taken kind of an expansive view of that.

Um I think, you know, coin Base, we've evaluated over a thousand different assets, and as I mentioned earlier, eight hundred of them we've rejected and we do think they have some properties of being a security, so we don't trade those today. Another two hundred or so of them we do trade today, and we feel that those are commodities. So you know, look, I think as a as a CEO, we want to basically just have a clear rule book, right and if a clear rules are published, we're happy

to follow it. And if and if those rules change, you know, we're happy to follow those. Um But I think you know, when we when we became a public company, we explained to the SEC and our S one filing and in dozens of meetings that we've had with the SEC, I think we worked pretty collaboratively with them. We've explained our business to them many times, including in our S one and you know, they approved us to become a

public company. So we'll continue working with regulators all over the world about where the boundaries are on what's a commodity, what's the security, or what is something else we're setting once more for our Bloomberg radio and television audiences. In conversation with coin base CEO Brian Armstrong, you know we're talking about the SEC and state regulators as well. You know, in regulatory filings, you've noticed that you've received investigative subpoennuts

from the SEC and state regulators. How and when do you get those resolved? Yeah, Well, subpoenas are really just requests for information, right, and so we're in dialogue with regulators not only here in the US at the state and federal level, but really around the world. I mean we're in Europe, European markets, and you know, in Singapore and Australia, et cetera, Canada, many different markets around the world. So I think subpoenas are an important part of the process.

That's them asking us a question and saying we'd like more information on this, and we're happy to do that. It sounds like it sounds like there was a tension between the SEC and the industry before. It sounds like some of those tensions have boiled up after aft TX. I'm wondering if you think that the conversations between coin base and the SEC in particular have gotten more or

less contentious over the years. I think we have a good relationship with the SEC commissioners and staff, and you know, I've met with the chair as well, and so we're going to continue to invest in those relationships. I would like us to find a way to bring crypto I think this is what they want to Our interests are aligned. We want to bring this industry within the regulatory perimeter so that we have good consumer protection, but we also

preserve the innovation potential of this. And as I said earlier, you know, eighty percent of Americans want the financial system to be updated, and this is the most important technology I'm aware of that can help do that. So you and your collegues have also voiced a lot of concerns today. You've voiced concerns about kind of more of the crypto industry moving off shore. Draw us a picture here of what happens in five, ten, twenty years if the digital

asset landscape exists mostly outside of the United States. Yeah, and exchanges that are not based here. Yeah, Well, I mean, look, I think that would be a terrible mistake for the United States. I mean, look at what's happening with AI, right, that's an important technology trend where it's becoming a matter of national security, right that some of these things are built in the US or we saw it in the

past with five G or with semiconductors. And so if we have this really powerful technology, cryptocurrency that has the potential to update the financial system and improve it in so many ways, how can we sit on the sidelines in America and say, oh, okay, well, we're gonna let you know, the EU pass comprehensive legislation and so it'll be built there, and we're gonna let the UAE and you know, London and Singapore and Hong Kong. I mean,

this is America. We need to be a technology hub, we need to be a financial hub, and the future of this industry needs to be built right here in America. I want to get to the bottom. It's I'm just reading the Bloomberg News reporting here and some Chinese economy shows strong recovery. Is COVID zero era ends? That's the headline. So when we talk China, we talk Leland Miller from the China Beije book Absolute expert Our go to source here.

So Leland we had some manufacturing Purchase Managing Managers index rose to fifty two point six last month, the highest reading since April of twenty twelve. They had some other good data out there. Are you buying it? Well, yeah, there the economy is recovering, but very important is understanding what your base of comparison is. You know, if you look at from year ago levels, everything is still down.

If you look at from the fourth quarter of twenty twenty two, everything is up from month on month January to February. Some things are up and some things are down. So it's telling a very confusing story right now. And that's even more convoluted because of course January February is difficult with lunar New Year, and people were down with COVID and so this has been a very difficult time to understand. But yes, you are seeing the beginnings of

a recovery right now. So it doesn't seem to be supporting all the commodities I was hoping to see jump, you know, when China reopens. I was like, okay, so one point four billion people are now going to go to the gas station. But we haven't seen a huge gain in oil. Why do you think that is? I think people are just trying to understand what this recovery is going to look like. Certainly in the second quarter,

you're going to see, you know, all systems go. You're going to see businesses start to reinvest and borrow and hire. You're going to see some measure of revenge consumer spending probably, and then you know, you also have funds and policy support flowing into property for the first time in a long while, so things will look better. But I think people aren't convinced that this is going to be a longer or sustainable recovery. They want to see what the

policy support looks like. When we look at our data, there is credit flowing into the property set of the first time in a while, where you know, we are seeing policy support to property in particular. So I think some of these things will jump in the coming weeks, but it's it's it's a story about twenty twenty three, and markets aren't convinced yet that that the government's going to be behind the economy. Hey, Leland, I don't know if you have any data on this, but I have

seen nothing really definitive about the reopening here. This seems to be the best, quickest, least painful reopening of all time. Do you have any sense of how bad it got in China, if at all as it relates to infections, deaths, that type of thing, because it seems to be like I think, there's nothing stuffed up hospitals and crematoriums that

I don't know that's right here. I don't know. Oh yeah, of course, I look if they completely glossed over all the difficulties from getting from November to hear you know that we don't know what the death counts are. Nobody knows except the Chinese government. But we do track, you know, the COVID COVID spread our and our corporate networks, and what we were picking up is a lot more reports of COVID spread in February than what the government was

was letting on. Everyone's obsessed with these subway indicators that they, you know, insist made. You know, they showed the economy, you know, recovering and peaking and getting back on step in January. We saw COVID flow through the economy in December. In January, still in February, and so, yes, the recovery is coming. Yes, you're already seeing improvement from from the end of last year, but the economy is not back up the story of the government about peaking last month.

That's just not what we're seeing. So you know, this is a much lower process and it's a lot uglier underneath the underneath the hood than they're admitting. But you know, it's it's hard to tell when when they're you know,

not admitting to anything behind the scenes. But I guess if I was an emerging market investor, if I was a China investor, no matter how it's getting done, don't I have to be bullish on China over the next sever you want to buy in before everyone else buy exactly, I think you need to be bullish on the next several months. I wouldn't be bullish on the next several years, because what you're seeing right now is a recovery that will happen in the second quarter. It could go from

two to four quarters. You can continue on, but then you know this is a cyclical bound spec and the cyclical bounce back takes place with the backdrop of a long term structural slowdown. None of these problems that we saw before are taken care of. None of them are being dealt with. You're just seeing a cyclical bounce back from a very bad COVID zero recession. So you're going to see better data for the most of twenty twenty three. But twenty twenty three is going to be a head

fake in terms of China's growth. We're not going back to the status quo anti things are slowing down going forward. We had a story yesterday that apple suppliers are moving out investing in Vietnam, looking at India. Is that going to be a big story across manufacturing for China from now forward. Yeah, it's a huge story. I mean, these are difficulties there, the supply chains. Some supply chains are

being pulled out of China. They you know, they have had extraordinary manufacturing export growth for years, mostly because of COVID, but also because you know, you know a lot of people were buying around the world. Now you've got more of a global economic recession potentially looming. You know, you've got difficulties with supply chains and being pulled out of China. So it's gonna be a lot harder sledding in. You know,

the manufacturing world. The hope from Beijing is that they have other sectors of the economy pick up, you know, pick up and drive growth. But it's very unclear how how domestic consumption is going to do that, because they're not doing anything to support domestic consumption being a long term structural driver of the economy. All right, Leland, great stuff.

Really appreciate getting a few minutes of your time. You are absolutely one of our go to people as it relates to China, both from a geopolitical perspective but also obviously from the economic perspective. China Beige Book International, Leland Miller, he's a CEO there and the China Base Book folks, they have real primary data that they get from their network of people on the ground. They don't rely on

government statistics. And so that's what I think really makes China Beage Book and Leland Miller really compelling to chat with. So Paul as an equities guy, right, an investment banker from the days of your thinks everyone else is a geek. Yeah, but he looks at fixed income. George Patterson, he's a CIO of PGIM Quantitative Solutions. George's kind of have to join us here in our Bloomberg Interactive Broker studio. George, just start us off and tell us how you guys

at PGIM Quantitative Solutions. How do you guys invest capital h So, thank you very much, great to be here. UM. Our view is always trying to understand what the client's needs are and and really for us, we always think longer term and we always think we always think fundamentals driven. So you know, what, what are the what are the factors, what are the trends that are going to be rewarded over the next full cycle, and you know, how are

we best position for that? UM and really for the clients that really you know, there's a lot of from our perspective, there's a lot of customization to really build a portfolio that meets a clients have a black box that spits out equities and fixed income options for you, Well, it's actually not a box. It's a triangle. Okay, it's a triangle, and it's not black, it's yellow. Okay no, So so you know, I'm very uh I love to

say that. You know, again, from a quantitative perspective, we do have a model that's expressed in mathematics, but it is. Our model is very fundamentally driven. So the types of factors that we look at are going to be very fundamentally based, things like earnings, you know, earnings to price, or earnings based metrics, ebidom metrics, cash flow, you know,

quality of the of a board. So we're really looking at things that fundamentals, fundamental investors look at, but we're doing it in a systematic way and that allows us to just be very disciplined. That it allows us to be disciplined, it also allows us to take the emotion out of the process. I want to get to what you're investing in, But before that, how did you get to this point in your career? I mean, you went to M I T. So I get the math part of it, but then you did a PhD in physics.

How do you get from there to Wall Street? Essentially? Yep. So it was it was the mid nineties, and when I was graduating from school, it was a it was a recession or we were emerging from a recession, and I had an opportunity lined up. So I actually, in addition to doing those things, I actually worked at the Jet Propulsion Laboratory in Pasadena, California, so I can say that I'm an honest to goodness rocket scientist. However, at the time, I did a lot of soul searching about where,

you know, what did I want to do? And I knew I was not going to do a traditional career, and I looked at a couple of different things. But I went to a presentation on quantitative investments and there was a fellow there who was presenting some of his research, and I kept pointing out errors in what he did, and we had a chat afterwards and he said, well, you know, we're hiring, but this is this is in San Francisco. I was in Los Angeles at the time, and next thing I know, I was working at bz W.

Barclay's Global Investors. That is awesome. So and from there too, chief investment officer at PGIM Quantitative Solutions. How would you differentiate quantitative investing from I think there must not be a short leap to AI, which is still popular to talk about right now. But you'd basically plug things into a model. I guess the model just doesn't learn by itself. So it really so the way I like to think

about it. So, if you think about the world of fixed income right, there's people have there's like this segmentation idea. There's people who focus on the long end of the curve. There's people who focus on the short end of the curve. There's people who focus in the middle. Quants are very much the same way. There are people who look at longer term trends, there's kind of mid horizon trends, and

then there's ultra high frequency things. So the challenge with AI is that you need data to train the models. And you know, the great thing about science in general is that if you have you can do an experiment, and if you don't have enough data, you just do the experiment again. Um, and you can generate lots of data to train a model. And you can do that for short horizon models. It's very hard to do it. We just don't have enough data to do it. For

long horizon models. There's some areas where it makes sense, but it really depends where where you're targeting within quant quant is kind of like saying, um, you know, you know, you know, my boyfriend plays sports, but I don't know what sport it is. There's a lot of difference between a hockey player and a soccer player and a football player. It's the same thing with quant There's a lot of different subspecialties within there. So where are you, where's your

model focused well? And what and what are you coming up with? Tell us about some of the ideas that you've generated. So so all of our ideas are really implemented by buying baskets of securities. We're not buying you know, we're not building a concentrated portfolio. We're building a diversified portfolio. And for us, everything has to have some sort of route in um economic you know, economic or behavioral fundamentals,

like we need to understand why something works. And the reason we do that, and we have a very high bar for putting things into our models is because we want to be We want to be able to be patient when the market is either going against us or in times of a crisis, because that's the one time you don't want to panic. So we spend a lot of time trying to understand why, why do the models we have work, what is behind them? And that allows

us to be patient. It means that you know, like we're we are you know, we do use valuation based metrics and you've probably heard there was there's a period of time that everyone was talking about is value dead? Is value dead? And then value comes back? I think this is the kind of thing. I can't tell you how many times in my career I've seen somebody put on a trade and it goes against them, and it goes against them, and it goes against them, they decide to take the trade off, and the next day it

starts working. So you have to be patient in this business. It is. It is one that test you on a daily basis. Are you buying equities here? Are they too rich? If you're buying equities, you're buying US equities, international equities, So from a multi asset allocation perspective, we're generally much more positive outside the US. The US has great fundamentals, as we all know, the economy is firing on all cylinders.

But US equities do look expensive on a number of different metrics, so we do tend to favor non US, whether it be EFA or EM. A lot of interesting opportunities out there In terms of the US. What do you see this market telling us about, you know, the economy, the possibility of becoming recession. You know, earnings seem to paint a far worse picture than the data that we're

getting from unemployment and prices paid impmiyes. Like everything looks so great, and then you look at earnings and they not only were disappointing, but expectations are for them to disappoint more throughout the year. Yeah, but look look where we've come. Look where we come from, right, you know, we came from COVID where like literally, you know, unemployment you know, was going through the roof. I mean the economy came to a stop. Right, Planes basically stopped flying,

Cruise ships like basically couldn't take paslengers on. So the economy literally came to a stop. And we you know, the economy was rescued with with stimulus and it it there was kind of a very strong rebound, particularly in certain sector of the economy, the stay at home, the technology stocks, and what you're seeing now is kind of like the this is I don't want to say it's the hangover, but you know, we're seeing a lot of repercussions.

You know, so like the US economy is actually very healthy, but like we're seeing a bit of a reversal in some of the corporate earnings. I don't think it's a surprise. I think this is all given. This is what I just mean. We're pricing uh eighteen times earnings is great. You know, that's not a hangover. This is if No, it's not love that kind of hangover. No. No, well it was even or during in twenty you know, after

post COVID, right, I mean when everything was up. I mean, just look at the total return of the market post COVID. It was phenomenal from the bottom to the top. Was like, it was an amazing It was an amazing thing. Now there are parts of the economy that move a little slower, like housing. Right. Like housing, we saw prices, you know, dramatically change over the course of over the course of COVID. That's going to take longer. Housing market just does not

adapt that quickly. But the US economy is very healthy. It's just that equities are expensive. I am a little concerned that the FED is going to have to continue raising rates. As I said, I'm a rocket scientist and not an economist by trees training. But every indication we've seen, apart from a handful of senior apart from a handful of large tech companies that have announced some layoffs, it's still hard to find good people. I think companies want

to hold on to their employees. All right, good stuff, George Patterson. We really appreciate getting your thoughts there. George Patterson. He's a chief investment officer for PJIM Quantitative Solutions. Joining us live here in our Bloomberg Interactive broker's studio. Church are based in Boston, Boston and Newark, New Jersey. Here we go, boom, all right, Boston, only the nicest, only the nicest towns on the East Coast exactly. I love Newark,

the Iron Bound, all that good stuff, great restaurants. George, thanks so much for joining CHERL. I want to get over to someone who knows what's going down in commodities and from a city that has been historically an amazing commodities hub. I'm Goola. Zeidler joins US vice president Investor Relations over at Arubis. They are the largest copper producer in Europe, the largest copper recycler worldwide, and they're based in Hamburg. I'mngola, thanks so much for joining us. First

of all, is your family historically from Hamburg? Because Seidler sounds to me like someone who makes things out of silk and I think of Hamburg as this commodities hub. So is this is this where it comes from? No? Actually not, I'm sorry for bath And actually it's the name of my husband, so I don't really know where it comes from. As you said, As you said, I'm located in Hamburg. It's almost evening here, so good morning to you. Ah, yes, yeah, you've you're later in the

day there. Um, let's talk about the commodities that that you move around, make and move around. I would have expected the China reopening, and Paul and I have been talking about this for months now since the COVID zero kind of pivot that they made. I would have expected that to drive up commodities prices across the board. What does doctor Copper look like right now? What does doctor

Copper telling us? Well, actually, I think we have to well, I first of all want to talk about a Europea view another that come to a Chinese view, because of course we're looking at the market globally. So the European demand for copper is very healthy. You know, we are one of the leading copper producers in Europe and globally. So here and driven by the energy green energy transition, the electronic vehicles and all of this, the copper is

really copper demand in Europe is really healthy. We see today that the copper price again goes went up over nine thousand US tolop ton, meaning that the mind supply of concentrate materials where we generate our copper from, is

in a good situation. And also the recycling markets here in Europe, where we of course are engaged also all right, So when you're when you're when you go to visit Oliver Bloomer and Wolfsburg, is he putting in orders for copper that he can now afford to pay for because he doesn't need to fork out so much cash for gas. I mean, there is an expectation that that would be a huge problem. Now it's not. And Folkswagen nimes to be the biggest maker of electric vehicles in the world.

I think that that is counting in for them as well. But from our point of view, we see that the construction industry is demand is increasing, and automotive from our today's perspective, is stable. But you are right, energy prices are coming down in Europe. We had a mild winter here for God's sake, so energy prices are going down and this of course will given tailwind to all the

let's say commodities consuming companies. But on the other hand side, if you look at it globally, and we've got a lot of customers which which have maybe facing supply chain disruptions. So currently we don't see it. But I'm we are happy here in our European market. Demand is still a stable and healthy For US, situation might be different than you mentioned that at the beginning. In China, we see, as you mentioned that the demand didn't pick up as

we earlier the year expected. That that might be because of we had a long Chinese New Year and after COVID the markets are slowly picking up, but not in that direction which we maybe earlier the year expected. I'm going to talk to us about the recycling business, the copper recycling marketplace, if you could just kind of lay out the primers, what that market looks like, kind of

in kind of how you see that developing. Actually, we last year and announced that we are doing a huge recycling investment for US and we huge recycling investment in the US and Augusta in Georgia. We will invest six hundred forty million euros in a big plant of recycling materials, and we are doing this not because of the lower

energy prices in the US. That's nice as well, but the market for recycling material is extremely growing in the United States and Arugus will be the first recycling company investing there and building the first recycling plant in the US. So big opportunity for us in a fast growing market. What kind of energy usage does it take to recycle

copper actually doesn't matter. Well, we have different energy. We have a gas, we have what everything you can imagine we do have and we were facing at the beginning of the year high energy increase, especially price increase, especially in Germany situation in other European countries where we produce

as well, we're different. But in the US, of course, this is much more competitive for us, the energy situation than we have it here because you are using nuclear power plants as well, and this is something which you know probably don't want to have here in Germany anymore. So I'm gona. I know your first quarter earnings profit fellos doing part too inflation and higher energy prices. Talk to us about the cost side of your business. What are the big costs and kind of what are the

trends there well. Costs, of course is personnel costs is the biggest factor here and as we are facing high inflation rate even in Germany they announced just that we are at eight point seven percent, so all over Europe this is something we have to face. But energy costs our highest factor. And if you look at last year, our fiscal year of September, the energy cost almost doubled. We see now that it is coming up and we

had in our forecast a little bit room here. So currently the situation is better and we are very well supplied with energy with long term contracts and it is not at that with position as we've seen it before. And I talked to a lot of investors last year about the situation of energy in Germany and I can say we are now much more relaxed on that side. In China, the reopening we were going to we put a pin in that. So let's go back. Is it expected to be drive demand in a big way? Actually,

I would say of course it will. Our Rubis is not engaged in any kind of direct business to China, but we are, of course depending because fifty percent of the global demand and copper is in China is coming from China. So the Chinese are of course driving the copper price, and we and the mining industry especially, we don't have any minds. It's if they earn good money by a high copper price, it is good for us. They create a lot of copper concentrate and this is

perfect for us on the other hand. Site so we are we are looking at China very closely, have good contact over there, but currently we see that the demand is still weak and the premium before we find copa allow. All right, I'm gla. Thank you so much for joining us. Really appreciate you taking the time. Angola Seidler, vice president of invest Relations for a Rubis. It is the largest copper producer in Europe and the largest copper recycler worldwide.

They're based in Hamburg, Germany, so excellent getting the European perspective on that commodities. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three. I'm fall Sweeney. I'm on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio