Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day, we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Ridge Borky covers all the steel in speculating a little bit here. You were just speculating, you know, just spitballing here. Boy, I never thought we'd see a deal in there. I just I guess I wasn't expecting the deal in the steel industry. I don't know why, but it was an interesting transaction. What is Cleveland Cliffs really looking to do here?
Why are they doing this steal? Why would they like to do this deal?
I think they'd like to do this deal again. Like you touched on, it's back to nineteen twenties. Steel is cool again, right, let's make steel cool. Fortunately, Cleveland Cliffs most of their plants are from the nineteen twenties.
Okay, so what.
They're looking for is, obviously they're looking to get exposure Big River Steel, which is the EAF to US Steel.
Is building what's what's e AF. EAF is electric arc furnace, electric arc furnace.
Rather than the blast ferns.
So this is newer technology to make steel.
Newer technology, more flexible technology usually also non union technology, non union run. So if you look at kind of the math they're paying, they offer thirty five dollars this year, half cash, half stock. The cash portion comes to a little under four billion dollars. US Steel has three point one billion dollars of cash on the balance sheet in order to finish big River steel they bought. They bought Bigger River Steel when it was half built three lower
three million tons of year. They're expanding to another three million tons of year to bought. To get three million tons a year of EAF capacity is around three to four billion dollars. So if you look at this way, we just offer stock and four billion dollars of cash to get six over six million tons of y capacity. That probably cost US seventy eight billion to go bill.
And that's basically what they're what they're bidding, right.
That's basically what they're bidding.
Right on the EQUI.
But US Steel apparently thinks they're worth more than that, although they were trading for twenty two dollars a share on Friday. Why do they Why do they fight this? It's a it's a decent premium. Can they get more elsewhere?
I think you take the deal. You have forty three percent premium today you have out They US Steel House outlining is what they call their best for all plant. So part of it one one part of it is finished billion out Big Steel. Other parts are to upgrade our finishing capabilities. The other part is they're looking to expand in elect sure because electrical steals which flowing to evs,
which you're gentlemen, we're talking a little about prior. So they've outlined this plan, but it's a multi year capital spend program and we don't see the success. You know, whether it would be successful doesn't play out for a few years now.
Paul, we've been, uh, you know, we've been invited out to see Big River. I'd love to go see because David Stickler came in here. He sat right in that chair where you're sitting, and he said, you guys should come out and check out our new plant.
So I guess the issue is, I mean, I'm looking at the capex I mean, for you a steal. They spend you know, a couple of billion dollars a year, two and a half billion dollars a year in capex.
Is that money going just for the.
New technology or are they still putting money into somebody's plants in Pittsburgh and Garyan Dan and Allentown, Allentown.
Right, it's about two thirds one thirds, two thirds for the new technology, one third for old technology.
And the old technology used to kind of keep it running.
Try and keep it running.
Wow.
Correct, So the the thing here is you you have this plan to you know, both US Steel and Cliffs have been shining down, rationalizing capacity, you know, closing the old blastwarenesses and things like that.
That's why environmental purposes are just because it costs too much to run.
They're not getting enough.
A product out of it really costs too much to run, right, and the technology in order to reinvest in the technology is just too expensive.
Well, well, this is what Cleveland Cliffs is looking to do essentially, right, this is what US deal is doing at Big River, and Cleveland Cliffs wants to buy that from them.
Right, if you look at this will take the pro former company clean cliffs probably is ninety three percent blast furnesses today seven percent eafs. The new technology this would take them to eighty twenty beyond that. You say, well, gee, that seems not that big of a deal, But it gives them a lot of flexibility because one of the other things about eafs is you can shut them off, turn them up, and turn them down a lot easier than you can't wait blastphemers.
By the way, who who are there competitors? Who else in this market could make a bid?
If you know US steel could be worth more.
Well, you would have Newcorn Steel Dynamics, which are two other big players in the US. They're one hundred percent technology there, so they probably don't care for the blast furnace route.
Right.
You know you mentioned that David Stickler built inviting you guys out to see bigger or steel. He built bigger steel. Now he's moved on to another project, high Bar, which a rebar plant. But David Steckler also built some steel dynamics first plant or was it part of a group that built the first eas for steel dynamics.
So are new steel mills in the United States being built today?
Well, what's happened is Section two thirty two has really helped these guys.
If you look at the US steel what a second two.
Section two thirty two was the the Trump laws to prevent imports, putting a twenty five percent tariff.
On steel import to the US.
If you look at the US steel industry, US steel industry historically is about one hundred million tons of steel a year. Eighty percent is produced in the US, twenty percent is historically imported. With these tariffs, that's made the imports a little less competitive. What's happened is we've seen over the last few years capacity being added in the US to displace the tariffs once they finally to displace the import steel once the tariffs finally go away.
So that so the enshoing is actually happening in the steel business.
Okay, great, So.
Are you put these If you were to put these two companies together, Cleveland Cliffs in the US steal, how big would they be kind of relative to the world order of steel makers.
It wouldn't make it would make them a top ten in the world. Okay, I don't think scale helps you at all, But.
That's why I thought manufacturing scale helps. I learned that I know you went to shout to go business school. You guys are good with the numbers, but.
It's just the industry that's you know historic. You know, it costs a lot of ship So why would you why would it be cheaper to build a ton steal in the US put a boat to somewhere else?
All Right?
So what what's what's this steel call?
Today?
You talk to institutional investors in the the three guys in Pittsburgh that still invest in this stuff. What's the call here? Do I do I buy a new Core? Do I buy a US steal? What's what's the investment call for this group?
I mean if you kind of look at New Core, Newcore and Steel Dynamics, that I'll perform these these two guys by wide margin.
And that's the function of the technology.
That I think one function of technology. And two you've also New Core and Steel Dynamics have over the last few years been more aggressive in moving further downstream.
Part of this deal.
And I could go to Jenrey because she's the expert in anti trust. What is generally telling you about any tit trust here?
There's going to be I think there's gonna be an anti trust review here talking with Jen too. She was also so that's another element of YO, another reason whether the deal goes up.
Yeah, I mean I look at the five year performance of as we mentioned earlier. You know, US steel has returned nothing negative one percent, but new core is has tripled over the last five years, and and Steel Dynamics is almost there. I mean they're up one hundred and seventy percent.
Money and steel companies.
Yeah, what are the contracts that you look at for the underlying and get ten seconds?
What are the what are the steel contracts that.
You look at for the price, the price if you look at S T A, N H HC.
All right, all right, we'll get into the steel business.
That's w is this hot rold steel? I got rolled steel steel?
All right?
Rich Richard Borg, thanks so much for joining us.
Rich Board covers all the steel companies and all that good stuff for Bloomberg Intelligence.
You're listening to the team Ken's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
Matt, we like talking to Dan Ees equity als what Bush Security is.
Pretty smart guy.
We usually learn a thing or two when we talk to him, but I don't feel the need to interrupt his vacation, particularly when his vacation is increte.
He's not down at the Jersey Shore.
He's in crete, and we get a video zoom thing going of him right here. Because Bloomberg Markets is simulcast on YouTube, you can go to YouTube and search Bloomberg Global News. Dan, I hope you're having a great time and create it looks beautiful behind you. Give us a good sense of what you've kind of just observed just in your time over there.
Yeah.
No, it's great to be great to be with you, Matt.
I am look, I mean to me, it's it's it's it's always great food, great music. You see some you know some obviously some maybe electric vehicles here and there, but it's it's been a great it's been great and uh, you know, I think it's just a good uh.
Sort of rest going into what's gonna be an exciting fall.
All right, Dan, So I'm just looking at the bring you back into reality here, the NASTAQ one hundred stock index Real Tech heavy here up thirty eight percent year to date. Put that stock price performance in context of what we've seen from these tech companies for the first you know, we just got through their second quarter earnings and kind of the outlook for the remainder of the year.
Put that into into context.
For US, I Mett, I view this as just a little sell off, a pause to what's going to be a rally second half of the year for tech. I think if you look at numbers overall, from cloud to digital media to what we're seeing across enterprise, I.
Think we're actually it's stronger than expected.
Now, granted the stocks have run significant, you've seen sell offs posed to Apple, Microsoft, Tessa.
I think it's short lived because I think.
Second half numbers were conservative and we're seeing upticks across the board.
That's sort of our view going into the year end.
Dan, where do you think they look most conservative? When you when you were going over these earnings reports before you jumped on the private jet decrete, where did you where did you think, Ah, this is these guys are sandbagging US.
I think Microsoft is extremely conservative.
I think that's probably the one that sticks out the most relative to what we've seen post quarters, especially what we see from a from a channel perspective, I think cloud actually see an acceleration.
We saw that with AWS, we see I think as with Google as well.
I think overall cybersecurity, that's probably the sub sector that I think sandbag i'll call it the most relative to estimates, you know, and that's one where we actually see strength going the second half of the year. And I look at Apple, I think that's one where everything we see from a supply chain perspective is going to be strength from this iPhone fifteen, not just into September, but in the year end. So that's where I really am looking.
And I continue to think AI, and we're seeing that the mind isetion is gonna be a lot sooner than expected.
All Right, That's kind of where I wanted to go dan AI, because that's been one of the if not the driving force behind some of the performers we've seen out of these the NASDAQ one hundred and big tech names. When you talk to the institutional investor clients, what's kind of the key question regarding AI that you get from them.
I think the big question is within Nvidia's guidance heard around the world last quarter, the four billion dollaries. Okay, well we're not going to We're not seeing that ramp as quick across software. That's maybe the knee jerk disappointment from Microsoft to maybe some of the chip names.
I think that's that's misplaced.
I think this is really just the start of what I've used sort of fourth Industrial Revolution, almost AI goal rush, playing out a trillion dollars of incremental spend.
And I just hit back of clients.
You know, from everything we see next year it's eight to ten percent of budgets in terms of AI versus less than one percent today. That iView is really going to be the catalyst for this tech. What I view is really the new tech bull market that's already begun to continue well into twenty twenty four.
We're where have markets or what have markets missed? Because in video we have all seen and everyone's impressed, and I think everyone even Paul has bought some.
What what have we overlooked?
Well?
I think I think what's markets maybe missing the near term is just what a catalyst this is going to be for software.
I think really it's the software when I look at.
Names like Salesforce, Mango, dB, you look at AI names like Pou and Teer. I think it's the second, third, fourth derivatives that maybe market's missing out here and just maybe underestimating it because I believe this is a nineteen ninety five moment Star of the Internet nine nineteen ninety nine, two thousand moment. I think that dynamic is why we see tech stocks of fifteen percent second half of the year.
Dan, you mentioned Palenteer, and I know you recently initiated coverage there. Not a lot of people know what Palenteer is. Give us just a quick description what Palenteer is, uh, and why you like this name?
Yeah, and that's one you know, car create Palenteer really coming out of the government.
You know, if you look at where their success has been.
Really machine learning is who's who they are, and now it's happening from a use case perspective, they probably have the most robust pure play AI platform and use cases out there, so you're seeing across enterprise, across government. I look at it as a pure PLAYAI play of course in Nvidia, Microsoft, Google, Mango dB among others, but this is really front and center.
I think it's a it's an.
Undiscovered gem in my opinion relative to the broader.
AI try.
Let's get to Tesla.
I want to ask you about the price cuts in China. Paul brought this up already. Weren't they supposed to stop doing that?
Yeah, look we've said that here and there you could see some price cuts, but this only impacts what fifteen percent of when you look at model wise impacted, it's really around the edges. I mean mostly you're really not seeing price cuts across in China.
Now.
Of course, headline it's gonna look negative, but if I look from a demand perspective, China continues to be strong. I think on track from one point e potentially higher in terms of million units for the year. And right now they are just I view, this is almost halftime of the super Bowl. But does this they're just gearing up.
But does this kick off? Does this kick off another price war Dan in China?
I don't think so, because Matt we've talked to, I mean, all the work that we've done the last two three weeks, we think ninety five percent of the price cuts are basically done in China. In terms of that price I don't see this igniting the next stage to the price war, which is why we're buyers here on weakness. I think this is Barkwurson bite.
Hey, danis just looking at the PGeo function on the Bloomberg terminal, which gives you a breakdown of the company's businesses by measured by geography, by segment. And I'm looking at the bi geography and China is now up to you more than twenty percent of revenue for Tesla. How does Elon musk How does Tesla manage its relationship with such an important market like China?
How do they manage it?
I mean they take a page out of the playbook from Cook and Apple because it's ten percent political ninety percent business. But ultimately, I mean if you look at you President g and in China, they look at having Tesla in terms of Giga Shanghai potentially second.
Factory as well.
That's a that's a trophy case in terms of having Tesla as well as Apple there. It's a major part of production, a major part of the mand It's the hearts and lungs of the story.
And that's been that tight groupe, that balancing act.
It's been one of the key successes that has been able to navigate despite many worrying about the geopolitical and I think they continue to gain and share there along with Apple, and I think that's a story that's going to continue to play out.
But to what.
Extent do investors or do you view their exposure to China as a meaningful risk.
I view it as a background noise, headline risk.
I think they've been able to navigate that well.
I think maybe some of the risks, the most of that was probably in the rear view mirror. It's still gonna you know, for here and there, just given the geopolitical but you know, we view a more as an opportunity than a risk for the likes of test on an Apple, and that that continues to be our view of China in terms of those stories.
I just want to ask about the competition you see from GM and Ford. I was over looking at Cadillacs new Escalade IQ, which is awesome but expensive, so it's not going to compete really with anything Tesla makes other than I guess the X.
I don't think that would be a fair fight.
But are they gonna are the are the incumbent automakers going to really bring it Tesla in terms of affordable electric vehicles?
Well, that's the key.
I mean, if you what's come out of three win three area code more affordable evs.
I think what Farley's doing to Ford or Mary's doing it, you know GM. I think it's the right strategy, and it's not a zero some game.
I think they are going to really transform those companies in terms of four and GM, but Tesla in terms of electric vehicles, it's still Tesla's world. Everyone else is paying rent. And I think this is just start of this green tidle wave five trillion dour green tyway that's really going to transform autos across the board, from Tesla.
To three win three area code Europe and of course China.
Hey Dan, thanks so much for joining us. Well appreciate you taking a few minutes out of your holiday. Dan ives from Crete. He's a managing director senior equity analyst at web Busch Securities. I don't know that water behind is at the gen C or the Mediterranean.
I mean there's both of there.
I mean, what's what, I guess that's the med Yeah, both of them are. It's a completely random gas and I have no way.
I'm looking at my Google maps here. It could be either. I don't know where one starts the other one begins. Don't see at the tree right off, right off?
I guess the southern coast there of Greece, part of Greece's largest island and vacation spot in Greece.
How about that? So Dan I was over there getting a little R and R. Good for him.
You're listening to the tape catch are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
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Lots going on today, Matt in kind of just geopolitics around the world. Argentina, they had a primary vote. I guess a populist leaning person, not just any populous. He looks like a cross between Elvis Presley and Johnny Cash. Nice.
Maybe throw a little James Spader in there. U.
He has I think five.
Or six giant dogs, each one named after a different Austrian economist or I mean like liberal free market economists. One of them is called Milton Friedman. I know from the Bloomberg story, and I mean there's such a great story on the terminal that if you haven't read it, I highly recommend going to uh Bloomberg dot com on the on the computer or on your or on your terminal checking it out because it's really good.
And we've got big moves in the currencies and the bonds and the treasure treasure of the government bonds there in Argentina as well. So let's get the latest reporting there. Manuela Tobias she joined us. She's the economy and government reporter for Bloomberg News. Menuel it's just let's just start off by just reframing what happened in this primary and and what has been the reaction in Argentina.
Menuela is in Buenos As today.
Hey, yeah, so yesterday it was just a complete upset. The economists you guys have been talking about. Outsider presidential bid was not expected to get more than twenty percent
in this three way race. There was the incumbent, the main opposition block that everyone saw as winning, and the question mark was around you know what kind of margin they would be the incumbent buy and then Relay just completely surprised everyone and got thirty percent of the vote, becoming the most voted candidates as well as the most voted block, and that just sent everyone into panic mode. No one was expecting this on the political side, and
much less on the market side. This was the least likely scenario and definitely the one that was going to see the most panic, and that's exactly what we're seeing today. The central Bank just raised its key rate from the already very high ninety seven percent to one hundred and eighteen, and he valued the bissal, which was treating to it's it's an officially set rate, from eighty seven to three point fifty today.
I love the quote from your story, Manuela.
He says, remember, a different Argentina is impossible with the same people as always, with the same people that have always failed. Uh, you got to get rid of all that old blood, right, I mean, does he really want to throw out everybody who's been there?
Well?
Does he really want to start a revolution here?
That is that's his proposal, and that's exactly why people support him, you know, talking to his voters, this was, you know, very much a question mark collection. No one knew what was coming, and all the Post has described it as one with high levels of apathy among voters. I mean, you know, we have inflation running at one hundred and sixteen percent, nearly forty percent of the population
is below the poverty line. Things are pretty desperate here, and you know you need the thinking among his voters, which you know who turned out and droves, is you need someone just as crazy as a situation that that we're experiencing to get us out of this mess. And you know that was his campaign message. He said, I'm gonna blow it all up. In fact, during his the campaign closing event to get you know, his his fans
riled up. Before coming on stage, he had a of videos of buildings blowing up h literally and people you know, going crazy in the crowd, you know, before he came on and just started singing his theme song and you know his his his big bontra is you know uh uh.
So yeah, wait, what what is that? What's the translation of that?
It basically means, uh sorry, I'm trying to translate in my head now we have it at the on the lead of the story. It's well, let's go liberty.
Dam I see long lived freedom damn it exactly the translation.
All right, So Menmuel, what's the next steps out here in Argentina on this political process?
Uh?
So, okay, So this was a primary election, very different from from the primaries you guys are probably used to, where you know, there's different different parties have their own votes. This is kind of like a general because everyone, all the candidates are on the ballot and so and polls, as we just went over, are completely unreliable, and so this was kind of a thermometer of what's to come in the general. This knocked out one of the two
candidates in the pro market business coalition. Uh, and you know, left the incumbent party pretty knocked down. It's a historically poor election for the parentist left wing party. So what this means is we have an October election coming up that's a general. In order to win that election, the winning candidate needs to get forty five percent of the vote or forty percent with a ten percentage point ten ten points above you know, the runner up. If we
don't get to that, which is looking increasingly likely. With you know this this free literally divided in three, we could go to a runoff, which would come in November. So uncertainty is is certainly the.
So just just to circle back to Javier Malai here he I mean, in the story we say that he's kind of radical with some far out ideas, and I think the term crazy was was thrown in there.
But his dog's name Milton Friedman.
So for those of us in this country, Manuela Milton Friedman is a pretty sound thinking free market capitalist economists, Like, uh, what's the crazy part of Milly's propositions here, because it seems like I don't see anything that that far out there for us.
Yeah, of course, okay, So that you know, I think that's part of the nuance here is that his his reforms, you know, the policy ideas that he has, which is, you know, cutting public spending. In fact, he says, you know, bringing a chain saw to public spending. These are you know, the kind of ideas that that could support that the Pro Business Coalition is proposing. But he has a certain in you know, eccentricity to him. We're talking about his dog. This uh, this dog, he refers to him as his son.
And then the four the four kids that this dog had are his grandkids. That that that oldest dog died and he actually had it cloned. He had another another dog and was you know, talking about him again.
I'm again, I'm totally understanding all of this.
All right, Matt Manuel. You've got a lot going on down there. We're gonna look forward to some more reporting down there, but a big, big surprise in the primary election down there, which is royling the financial markets down in Argentina.
You're listening to the team Ken's our live program, Bloomberg Markets weekdays at ten am eastering on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
A hotspot to another, that being China.
We got a lot of economic data coming out of China which was we're not economic but more just some financial data going on about the economy and some of the businesses there. Tom Orlock joins his chief economists and chief ASA economists for Bloomberg Economics. Tom, you lived and worked in Beijing four years. You know what's going on there. You know, I think twenty twenty three people went into saying this is gonna be a good year for China.
The economy's reopening, We're gonna be a good year for China.
It's not turning out to be that way.
What are some of the key headwinds that we've been reading in the last couple of days.
So the really big challenge for China's economy this year, Paul, is what's happening in real estate. Real estate is a critically important driver of China's economic growth. It's also where households have most of their wealth. Chinese households, they haven't got a lot in stocks, they haven't got a lot
in bonds. It's all in their houses. And what's happening right now is there's just been massive overbuilding in the real estate sector, and there as a consequence of that, we're now seeing property sales falling, property investment falling, and property prices, especially in some smaller cities falling. Now, that was already part of the narrative in twenty twenty two,
what's happening in twenty twenty three is getting worse. We've now got news that Country Garden, one of China's biggest property developers, is struggling to repair its debt, and we've got some alarming signs that this is now tipping over into the financial sector. One of China's biggest trust companies struggling to make its investors whole.
So what happens here, I mean, if one of their biggest trust companies starts defaulting on payments, doesn't the government just come in take it over and make those payments in lieu of the failed company.
So the strength that China still has is that the savings rate within China is really high. It's hard to take money out of the country. And if you look at not the shadow banking system, not the shadow banks like the trusts, but the banking system proper, it's all owned by the government. And what that means is that China's government has a lot of tools they can use to prevent real estate stress, even extreme real estate stress,
tipping over into a financial crisis. The question is where do they draw the light right, A trust company, even a really big trust company, is not what you would consider a core part of China's financial system. If a trust company goes down, some rich investors are going to lose some money. It's going to be a bit painful for a sort of that group, but it's not going to be a trigger for a systemic crisis. The question for Beijing in the days and weeks ahead is are
they okay with big trust companies going down. If big trust companies go down, are they okay with small banks going down? If small banks go down? Are they okay with city banks going down? Where do they draw the line? My instinct is the trusts, the shadow banks, they might have to get through this on their own. When we start to see problems trickling into the banking system, even the smaller city level banks, that's where Beijing steps in.
So Tom, how much of a political headwind is this for President Xi, who just recently secured another I don't think it's five year term, if not more of an issues is for him politically.
So China does not have elections, but China does have politics. And if you're in charge of an economy with a youth unemployment rate of twenty percent and with prices for housing, which is where most Chinese people have stored their wealth either flat or falling, then you've got a political problem. How does that play out in a single party state. Well, the first thing to say is it plays out behind the scenes.
Right.
If She's hand is weakened, that's going to be something which is evident to people in the backroom deals in Beijing. It's not going to be so evident to us here in the United States. Still, that additional political stress is an additional constraint on policy makers room for maneuver.
Thomas Sir, I know there's not an easy fix here, But is there is there a solution that a lot of economists like yourself see there is, or is this just something that the Chinese ecindress can have to deal with for a long time let a play out.
So there's a big structural problem here right. China has massively overbuilt its real estate sector, and that means there isn't an easy fix. There just has to be a period where real estate construction, real estate prices come down in order to realign supply and demand. There's no getting away from that. Now, what does a kind of a big fix, a kind of grand solution look like. Well, firstly,
it's a grand solution which doesn't make things better. It's a grand solution which stops things tipping over into catastrophe. What are the moving parts of it? Well, I think it has to combine an element of reform, an element of increased transparency, an element of increased market control. So investors think that the underlying problems here aren't going to repeat and an l of stimulus, more significant stimulus than the government has so far been willing to put on the table.
And that's we still expect that base case that China's going to stimulate the economy, so they're.
Drip feeding the stimulus.
Right.
We've had a mini rate cut by the PBAC. We've had the PBAC guiding banks to move mortgage rates lower. We've had Lee Chang the premiere saying to China cities, Okay, we want you to reignite the property sector. We want you to stoke the healthy development of the property sector. They need to do more.
All right, Tom, thank you very much for taking a few minutes. Tom Orlick. He's a chief economist for Bloomberg Economics. He's also author of the book Understanding China's Economic Indicators and China The Bubble That Never Pops.
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Matt much to bring on a next quest and hopefully we'll get the sunit back on that track.
All right.
So my old producer, Matt Siegel is here. For a few ill fated years.
He worked at Bloomberg, but then he moved.
On and is now covering crypto, running crypto coverage for Van Eck. And we're glad to have him here in the studio to talk about all things bitcoin ETF. Really, because on Friday, the twenty one shares and arc ETF proposal was punted by the SEC. They were due to decide I think by today was the deadline, and they pushed that off. Now they've got even more bitcoin proposals
to decide on. One of them is black Rock. So everybody is paying attention on the street, and Matt Siegel is the man to ask what's going on at the SEC.
What's going on is there's it seems to be a political objection to a bitcoin ETF, which is coming from the very top. President Biden, if you recall January twenty twenty two, put out an executive order instructing all agencies to use kind of maximum levels of enforcement to bring this market to heal, and the arguments against a bitcoin ETF have become increasingly haphazard and incoherent, and now there
are there's a gray scale lawsuit against the SEC. We're expecting a decision any day on that which could kind of reveal the illogical the illogical nature of the SEC's objections. So now it's a delay. No bitcoin ETF for now.
So what you know.
Proponents of the SEC will say the concerns are around fraud and manipulation, and certainly there's no shortage of that in the crypto world, not that there's any shortage of that in the plain vanilla Wall Street world, but you've seen some firms make moves to try and alleviate those concerns, right, including with surveillance sharing agreements.
Is that not far enough?
Has it?
Not?
One far?
Let's start with the original objection, as you note, fraud and manipulation and the underlying market. Well, there are plenty of commodities like gold and silver and oil where the underlying commodity trading is not regulated. But once you wrap that commodity in a vehicle like an ETF, then that vehicle needs to trade on a regulated exchange. So we don't think SEC's being consistent in how they're applying that logic.
Why what's the basis from your understanding of this decision coming now from the top from President Biden about crypto? What's the what is their size's fundamental issue?
I think it's an issue of control right now, which is playing out across the political spectrum on a range of issues, not just crypto. But it plays into the
potential threat against the dollar as a reserve currency. You know, the IMF had a blog just last month they say that the way to protect against the substitution of sovereign currencies is by having legitimate institutions, and frankly, there's just an increasing number of people around the world who are doubting the legitimacy of those institutions.
If Blackrock comes and says they want an ETF, aren't they going to get an ETF it's Blackrock?
Well maybe eventually, but the final decision on the Blackrock
ETF isn't DOE until next March. And before then, there's a lot of phone calls that are going around which are not being done in a transparent manner, And you have all these ETF issuers like Vanak and I think we have some authority to speak on this matter because we were the first TRADFY managers to first file for a physically backed ETF in twenty seventeen, and we spent the last six years trying to figure out what exactly are the conditions that the regulator is looking for that
will allow for the approval of such a product. Those conditions have not been laid out in any systematic way, and we're going to see the result of this lawsuit Gray Scale versus the SEC, which we think will reveal that the SEC has been acting in an arbitrary and capricious manner in denying Whether or not that leads to an immediate approval, we'll have to see. But we have until next March to get the answer to your question.
All right, So, I guess.
You're putting this at President Biden's on President Biden's desk, But if we take it a level lower, right, Gary Gensler seems to be the one that's holding things back, at least from our perspective.
Is that wrong?
No, at the SEC because he has recently or the SEC has recently I'm going to say, lost a case in the Ripple trial. Although I think they might claim that they partially won right because the judge declared Ripple to be a security when it was marketed to a bunch of institutions, but not a security when it was sold to I guess retail investors on an exchange. Is that maybe the first crack in the SEC's you know, wall against crypto.
I think it very well could be. And there have been multiple examples in the last two decades of SEC chairs who have had to step down after an embarrassing loss, like you know, Bloomberg's former board member Arthur Levitt comes to mind. So there's also a great history of a change in leadership at these agencies ahead of an election, which we have next year as well. So my personal call is that Gensler will be gone before the next election and that will facilitate a change in policy here.
But there's a lot of steps between here and there.
Is there a physically traded ETF bitcoin ETF in Canada.
Yes, Canada, Europe, multiple jurisdictions on Canada.
What have we learned, what have we observed about the pros and cons of that that maybe the SEC could learn from.
Maybe there have been no comms because ETFs are a time tested, well regulated, liquid and cost effective.
Whether they treated US whole security in Canada? Yes, okay? And here the.
ETF is not the bitcoin underlying.
Okay, Right, So the ETF is not the bitcoin can that structure and that's the structure that the SEC is not comfortable with here?
Correct? They object to the well, they have a number of objections and as I said, each one of them has kind of been proven to be logically incoherent. But we're stuck in this mandate, whether it's coming from the President, whether it's coming from Genzler.
All right, So what does this all mean for innovation in crypto in the US. My concern, if if I were in senior political levels, it would be I want to make sure that whatever this crypto thing evolves into, I want the.
US to be a leader.
And now I feel like, just knowing what I know, that perhaps we're not going to take a leadership position because we don't have a well defined regulatory framework. Whether you like it or not, it doesn't seem like we have a one. Is there a risk that the US maybe is not a leader in this business?
That's definitely the path of direction. So we can track the number of developers who are working on these open source blockchains, and we can track them by country, and what we can see is that the US is losing market share of crypto developers, so the innovators are looking to work elsewhere. The other thing that we can see is that stable coins like USDC, which is the coinbas Circle JV, are losing market share to Tether, which is an offshore, less regulated model on the same on the same Now.
I feel like asking a political question, should Americans care?
And if so, why Americans should care? Because every currency has there's been no currency that has been the global store of value for multiple centuries, and at some point the world is looking for an alternative. And here you have a decentralized money where the creation schedule is transparent, and that's very different from what's happening with the Federal Reserve. So what's going on in our concern?
I don't want a dollar to be at risk if I'm President Biden or anything.
I think what Matt's saying is that the dollars at risk. So even though you don't like it, we need to prepare for the reality that that turns around. We're still a long way off from that, right I want to wanted to ask you about other tokens because other than Bitcoin, you know, people may know Ether, but beyond that they don't really I mean dogecoin, right, what else is serious? And you think really important in crypto that we should be paying attention to.
Yeah, So, there are a number of smart contract protocols. These are blockchain software that enable more complex transactions than Bitcoin can enable. So with Bitcoin, it's just very difficult to program in a bunch of if then conditions and make your bitcoin move around programmatically. With ethereum, because of the architecture of the blockchain, that is possible. And there are you know, a handful of similar layer one smart contract platforms to Ethereum. We're thinking of like a Solana,
which make different trade offs on decentralization and speed. The history of these digital platforms is that they tend to be winner take all businesses. We're seeing that in Web two, Amazon, Google, et cetera. So one of the big challenges for digital investors right now is balancing those winner take all characteristics of these digital platforms with the extreme price disparity year to date, because year to date Bitcoin and Ether are outperforming.
Part of the reason why they're out performing because the regulator is coming down on all these other innovative platforms. The more that the regulator cracks down, the greater these winner.
Take all characteristics will be, the faster they will be.
In a way, it's government picking winners. We don't want that. We want innovation to win out.
Sounds reasonable to me. Matt Siegel, thanks so much for joining us here. A Matt Siegel, He's head of digital asset research for at van Neck. He's joins us live here in a Bloomberg Interactor broker's studio. Just looking at bitcoin because it's on my monitor for whatever reason. It's up six tens of one percent here twenty ninth, thousand and five eighty one for bitcoin.
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Joining us here in our Bloomberg Interactive workers studio. Matthew Palosola. He's a senior insurance analyst with Bloomberg Intelligence.
But whenever I see this guy, I know that a disaster has happened.
Is exactly ifa things have happened. So we call on Matthew Palazola. So, Matthew, we seen the destruction in Bermuda, the loss of life. It's just horrific as some of the images that we saw. From the insurance perspective, What are you hearing from the companies as to perhaps exposure and all that type of thing.
Right, So, nothing from the company specifically. We're looking at industry data data from the ground. In these cases, you'll hear about economic losses first, So we're hearing numbers like five six it can I just saw one for eight billion dollars economic damages?
What's that actually?
So that could be.
Lost wages that it encompasses insured values, but insured values would be much less, so they could be even half of that. So the work that I'm doing now is kind of coming around low single digit billions for the insurance companies, which is a pretty manageable.
Number, right.
So but the thing is, these payouts are probably going to get bigger and bigger every year, right, not just what's happening in Hawaii. Not just you know what the Anino's brought, but every year did natural disaster payouts climb higher and higher.
That has been happening, right.
So it was thought of years ago that one hundred billion dollars and insured losses was something we'd never see, and now we've seen it for several years. So this this year so far is running above average catastrophe losses. It's climate change is kind of the big boogeyman in the whole thing. No one's saying it's not happening, but the insurance companies will tell you that a lot of this is driven by density of population building in catastrophe
prone areas. It's kind of moral hazard where we keep building, we keep rebuilding, and you know it did. The cycle goes on and on. So it's not all climate change. I wrote down the stat I did want to tell you though. This is according to a catastree modeling company. They said, over the past century Hawaii, the average burning there has increased four hundred percent due to man made factors. So obviously something's happening there's I also thought this was interesting.
There's a non native grass species that was introduced to Hawaii, which actually is feeding a lot of this because it's fire prone.
Right, So, I mean there's all kinds of drivers here go into that issue of the kind of the moral hazard. I mean, a hurricane comes along, hits take your place, Florida, North Carolina said, you know where reverer it hits wipes.
Out a part of the coast, The insurance guys pay up and people build houses right back there.
Again, I forget about that. I'll take that to my Jersey Shore super sore Sandy. You get down a man looking which have some of the nicest homes on a Jersey Shore, they have rebuilt monster homes. And then the next lot, for whatever reason, completely blank, nothing's been rebuilt. So I don't know if there's a money's held up with the.
Family or whatever. But is that person who rebuilt the monster house again, is he or she getting insured?
Look, depending on the monstrosity of the house, may you might not be insured.
And yeah, my experience with Chubb is after you take a big hit, they don't come back.
Yeah.
So I mean, if you have enough money where you built that house on your own, you don't have a mortgage, you don't have anything. I guess theoretically you could not have insurance. What's happening though in these states is a lot of it's falling on the state. So when you can't get insurance in Florida, in California, there's a state fund that you get insurance from. So ultimately it comes back to the taxpayer. So it's not the insurance companies have wised up.
They don't just keep paying out.
They will step back and drop these people. But what happens is or charge higher rates. They'll definitely charge higher rates, so they'll they'll charge you such a high rate that you'll go to the state fund.
Does the state fund lose money?
Hand over fists?
I see?
And funds that we do you okay, okay, yeah, you gut did. And but that's again at some point. Again, my good friends at the Jersey Shore, I'm just picking on them because that that that's where I crip these days.
I mean, I don't feel like they should be insured.
I mean, if it's given what's happened, But I guess it's up to the companies and if maybe they can decline to have insurance.
Right And this question may be beyond the scope of Matthew Powis no, no.
No, I don't know if we can get the situation in here from Jersey. But no, I mean, like I said, you if you have a mortgage on your property, you need you have to have insurance.
Yes, and that's it right.
The state is not going to let people be completely unhappy and not have insurance and it'd be too expensive. So that's where this kind of comes in, and people don't realize that the taxpayers are ending up funding that.
It's also it's not the Jersey shore that takes the big losses, right, it's Florida's Florida.
Yeah, it's Florida, and it's California. It's Texas to some degree. I mean, we had Sandy that was kind of an odd off event, but I mean we also had last was I don't remember if it was last year where we had these significant rain events repeatedly and it was the most rain ever. And then the next week it was the most rain ever again in you know, the tri state area.
So it is happening, all right.
So we're August fourteenth here, what's the hurricane call this year? I mean, so far, I don't recall nothing big as hit here has it?
So it hasn't been.
It started off quick and hot, right, and I was pretty worried that it was going to be above average season. So you've got to countervailing forces. You've got the Onino effect which you brought up before, that actually suppresses hurricane activity in the Atlantic.
That just and it's blowing somewhere.
It's a hot current, right.
Essentially, I'm just an amateur meteor I'll just so you know, I'll have to take a step back and say, yes, it's basically just winds moving right that usually suppresses hurricane activity here. But then you have these record sea surface temperatures which feed hurricane activity. So this has netted itself out to be from the forecasts. Forecast is to be in above average season, but we haven't seen that much yet. The peak is about mid September.
By the way, hell Nino is it is a warm current of water, ocean water that develops in the central and east central Equatorial Pacific.
And do you know the opposite La Nina.
La Nina, the girl sorr Helinos, the boys.
We've been in La Nina for a while, which is actually fed hurricane activity.
All right.
The S and P five hundred property and casually insurance sub index down five percent this year.
Yes, so insurance is gonna be suffered from. I think that the risk on environment in the beginning of the year, the defensive stocks they can sell off with that rotation. I think unfairly they suffered with the bank turmoil, they weren't really exposed. Another concern is commercial real.
Li I mean, the concern there is that they hold a lot of long term for example, treasuries, you know, and maybe they haven't marked to market either.
So they did that last year. That was a big impact, so they still do. It's it's kind of reversing this year. They have They hold a lot of commercial real estate, more specifically maybe the life insurance companies.
We did analysis on that.
It seemed to be very magicable exposure for them in a bad case. It hasn't really reared its head, but I think those things were dragging them down.
And otherwise, how are they doing making returns because that's the idea, right we all put in our premiums and then they take that money and they go invest it and hopefully they make more than they lose on these natural disasters exactly.
So fundamentals are good.
They've been you know, earning that we're at it could be peak roes for this pricing cycle, could be this year or next year. Typically valuations peak before the rois, So if it's this year, then maybe they peaked already, but it could be next year.
Are there any hot you know?
We're the best managed insurance companies that you cover.
I love Chubb, right, It's it's the biggest and it's still growing a lot. Evan Greenberg's CEO, I mean, of this giant company, and he kind of knows all the ins and out details.
You know. They they have the best.
Commercial underwriting of their peer group and they're the biggest ones. So I mean, I love Chubb's management and strategy.
It will take me. It will take me as a client.
They wouldn't take you, of course they did once.
But I guess too many losses, too many claims.
You have like motorcycle, there's no way may have been a part of that.
Do you have your Picasso in the basement when flood.
No, I didn't have any really big problems, just I think there was a small issue with a Portia nine to eleven and and the motorcycle accsent.
Motorcycle acts and in the jump out of planes and all that kind of stuff. What's the area of insurance that you just are staying away from it right right now in your.
Space, staying away from so you know what's interesting. Cyber insurance, right Cyber insurance is a big growing line of business. A lot of companies are getting into it. They've been very cautious on it. But you don't know what you're underwriting. And I think the world is not getting anymore any It's not gonna getting less risky, right, and it's getting more risky.
And these are things that companies don't know about.
So be a little wary of someone who's talking about growing a lot in cyber insurance right now, all.
Right, Matt, good to have you in our Bloomberg Interactive Broker studio. Matthew Palosola. He's a senior al is covering all the property and casualty insurance for Bloomberg Intelligence.
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Javia Giant.
He is the founder and CEO of Techian and he was the former chief information officer at Tesla. So let's talk a little bit what's happening in the EV space. Jay, Thanks so much for joining us here. First, let's just start off real quick. Tell us what you guys are doing at Techian.
Hi, Paul, Thanks thanks for having me here. You're looking forward to to our conversation. Yeah, at Techian, as you know, the automotive industry is going through some major fans everything from EV to autonomous vehicles, from selling models.
Tekan is right in the center.
So we've created a platform to bring together the major stakeholders in one seamless and technology platform. Manufacturers, the retailers, the ecosystem players being soft where are be functional industry players like insurance providers, lenders and others.
And then of course the beneficiary is the consumer.
So the end of the day, the consumer really needs to get what they're looking for in terms of their automotive buying experience. We are delivering that through the technology as an operating platform for retailers, manufacturers, and then the participants are the industry software ecosystem players.
So it gives a sense Jay, I mean if I'm a I mean, Tesla has obviously a different distribution model, does not rely on dealerships, kind of goes direct to consumer.
How do you think.
The the original OEMs, the Fords, the Gms of the world, the Volkswagens of the world, how do you think or how do you think they should make this evolution to selling these electric vehicles?
Great question, you know it's a I don't know if I should say it's a trillion dollar question, right. So the way we see it, we are deep into the industry. Techon works with you know, many of the retailers. In fact, the world's largest automountive retailer runs on Techion, and we work with multiple manufacturers as well. So the bottom line is, as you know, trends go through different phases, and they go through a big hype face where everything is like, oh,
for example, I can give you a simple example. Before COVID, everyone said the car ownership is going away, and after COVID we all realize it hasn't gone away.
People are still buying cars now.
The other trend is people are thinking about everything will go online, people will buy cars online. I don't ever see that happening for the same reason why you know Tesla is still opening retail stores. Apple is still opening retail stores. What consumers are looking for again, putting myself in consumer shoes, the way I shop versus the way my twenty year old daughter shops for cars versus my
wife shops for cars would be different. What consumers are looking for is give me the choice, give me the experience. Seamless experience doesn't matter how I choose to shop. If I want to do an online, majority of the tasks which I don't like, which is signing documents or negotiating price. But there are specific tasks I want to do it in, like experiencing the product itself, test driving, Like I walk into an Apple store and touch and feel my iPhone or a Mac.
I think that is the fundamental.
So what I see the industry evolving as the retail model not going away, but the business will evolve to provide the seamless experience for consumers, be if they start at a manufacturer website or they start shopping at a retailer website.
Today, the experience is disconnected.
That's exactly what we are solving from Technion perspective. Why not use that as an advantage because consumers need to go into a retail location to shop.
Or whatever.
Yeah, what are you finding from some of these existing OEMs? Do they have that mindset to be flexible about using technology? Maybe in ways they haven't done it before. Number one, Are they flexible?
Number two? Are they willing to make whatever investment is required?
Yeah, you see a full spectrum.
Some of them are quite flexible, want to do it, and they didn't have a very clear path to do it. And I think fortunately, I think Techion is helping because as you know, we are a new generation company started in twenty sixteen, so most modern tech platform from a cloud native versus also using machine learning and AI inherently part of the platform. So it was not an afterthought where we went ahead and built something like that.
So now we are helping that.
And you see there are another spectrum where not a lot of flexibility is there. There's willingness from the you know, senior management at the working level, there is not enough incentive.
Or push to go change.
So we see a full spectrum of automotive manufacturers willing to change again. We all know the answer is anyone who's truly changing will continue to be in the middle or be in the front in some cases, and anyone who's not changing will be left behind over a.
Period of time.
So Jay, just give us a sense of what product or what service that you guys are tech on provide, say a dealer or the OEM dealer relationship that's proving I guess the most popular at the moment.
Absolutely there are you know two, so three we have a three offerings. Retail cloud all interconnected. Retail cloud is for retailers. Runs the entire retail operations of retailer everything you know if you look at from selling cars online, shopping experience, selling cars online, customer engagement, selling cars in store, and the complete back office if you would call it as a ERP like General Ledger ap AR running their entire business and payments because it needs to come together
to give the best experience. So that's automotive retail cloud seamlessly connected to the manufacturer's back end system so to track vehicle inventory, to order parts and receive it seamlessly, have with civility. And then we have enterprise cloud, which is focused as an e commerce engine for manufacturers but
having a seamless connection to its dealers. So we have some of the largest manufacturers in the world using Techion, like for example, General Motors is our customer, so we have a white liveled platform for them to sell their evs, but seamlessly really connecting to their dealers as well.
So that's retail cloud.
The last one is we need to bring the ecosystem together partner cloud where we have technology APIs and you have like insurance providers lenders. So if you sell a car, you need to sell an insurance So how do you make that process simple and easy? See how do you bring the providers through technology seamlessly exchanging data and securely?
All right, fascinating stuff.
I mean, it's an industry that is evolving with the times and with the technology, and you kind of think about the whole stack there. Jay Vagian is the founder and CEO of tech Young, joining us here to talk to us about evs and how you kind of bring it all together from the OEM manufacturer right down through the dealer and to the consumer.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
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