Digital Currencies Are Entering A Third Phase: CoinShares Chair

a huge step into the world of cryptocurrency. It announced the launch of a separate company called Fidelity Digital Assets Services. It is designed to handle cryptocurrency custody and trade execution for institutional investors. And I think there's probably no one better to comment on this than Danny Masters. Danny Masters is, of course the chairman of coin Shares. He is previously the head of JP Morgan's New York energy trading business before he set up his own commodity funds. He joins

us here in our Bloomberg Interact or Broker Studios. Danny, thank you very much for coming in. What was your reaction when you heard that Fidelity was offering these kinds of services? About time? Abby Cohen's been at the forefront

of distributed ledger technology. For some time, we've interacted with Fidelity across multiple vectors, Um Johnson, Abbie Johnson's face parton Johnson, You're right and she Um, I think what you know in concert with her founding grandfather's view about the finances, Um, you know, they think big and they think forward, and she sees this as being a new industry in a new way to form capital and distribute capital. Um. And I think they're going to do very well with that.

Do you still think, given all the volatility that we've seen in cryptocurrencies this year, that this asset class is sort of a new commodity of sorts in a new store of wealth. I think the narrative change is very rapidly in crypto. It is an evolutionary process, for sure, maybe a revolutionary process. Uh. And the way I'm currently thinking is really in that what is happening now and the timely entry of Fidelity and others is really the what I call the third wave of the crypto movement.

First wave Bitcoin arrives, it disrupts golden money. The second wave we see ethereum a new blockchain that has the ability to form capital. That happens very rapidly in in a in a very large way. The SEC don't like that. We're talking initial coin offering, initial coin offerings. The SEC don't like that for obvious reasons, and that comes to essentially a screeching halt. Third wave, in my opinion, will

be this so called security token. So you cannot do an initial coin offering with ease anymore, but you can do a security token. What does that mean? That will be in the first instance, one of the exemptions from the Securities Act, either a reg A and a plus reg D reg S, whereby a token will will represent equity in a private company and it will exist in this space between what has traditionally been private companies and public companies, and it will be a hybrid which is

transparent and liquid and transferable. Why do we need this Well, I think you for the average investor um to buy into a fully publicly listed company, you know the S and P multiple will be around right now. If you buy into a private company, you might get the five to ten P So there is potentially a tremendous value to be a accrued to a smaller investor coming in at the lower end of that of that P spread because those assets are typically not available to the average person.

I want to ask you about something having to do with access, because if and I know from your website, if you have a broker that already does business on the NASDAK in Sweden, you already have pretty much access to a variety of trackers for cryptocurrencies. There's the Bitcoin Tracker one, there's one in Euros. There's also the Ether tracker one and one in Euros. What have you learned from that experience? It's been a expt provider, has been

a wonderful journey for us. You know, we we we started very small and we got I think we peeked around one point seven billion, and the prices were high last year and obviously receded with the price drop. Um it's been an interesting episode and journey with NASDAC themselves because it's a controversial asset class. It has characteristics like security of the assets themselves which don't exist in other

asset classes. I think you've seen NASDAC themselves now starting to talk about security token exchanges as well going forward. So you know, it was an embry on, it an early adoption and it got a lot of traction and I think it's going to be the first of not only trackers in other markets and other jurisdictions on bitcoin and other cryptos, but I think it will be that it will prove to be the precursor to the larger exchanges.

Actually looking at security token markets themselves, So how does blockchain fit into these sort of securities token markets because it just listening to it, it sounds like it's a way to create a token that is outside of the public equity regulatory structure. But how does blockchain fit into It's not actually outside of the regulatary structure, it's outside

of the piping and infrastructure of the conventional marketplace. So, um, when you look at how the Chicago merk or the New York Stock Exchange work, there is a bunch of electronic piping that goes around making the transfer and the trading of these shares happen. Um, and that is a con cerebral infrastructure. And there has been talk about deploying distributed ledger technologies to these exchanges in order to get the advantages of distributed ledger technology. What are the advantages?

They are real time settlement, low latency, transferability, portability, ext central crisis for b andy melon right exactly. So, so those are the advantages. But rather than re engineer the CME so that they rip out all their old systems and put in distributed ledger databases and so on, what you do is you turn securities into cryptos, and you turn them you trade them on crypto exchanges. So we're

seeing this with a bunch of companies out there. They're taking as a certain an example before the regg D environment, creating a security in a token. We will have an ice in, but it will trade in a some sort of walled garden that will look like a crypto exchange. You've seen coin based do this um. The structure that they're putting together is a register broker dealer, a registered investment advisor in all fifty states, and an automated and

alternative trading system. Once you put those three things together, plus the twelve and a half million customers, they have their own stock market, and once they issue tokens on it. This is a competitor's nicely and that step just quickly. Should you mine or should you buy? If you're an individual to learn about this marketplace, buy, okay, don't go into the mining business. I think for coin Shares at least. You know, we we we occupy multiple verticals in this

digital esset space. The one thing we don't do directly is mining. It's a very complex calculation in order to figure out the economics of mining. It is also something of an arms race when it comes to the chips and the technology that go with it, and we don't really want to play in that space. Danny Masters a pleasure. Thank you so much for coming in. We really appreciate it.

My pleasure, thank you, Thank you guys. Danny Masters is a share a bit of coin Shares Group, which oversees about a billion dollars or more than a billion dollars of crypto. So it's from London, although he joins us here in our eleven three oh studios, and of course he is a former global head of Energy and Trading at the predecessor of JP Morgan and then the JP Morgan Unich him. Yesterday, news came out that Uber Technologies is increasing the size of its debut bond offering since

there just is so much demand. They're going from one and a half billion to two billion dollars of bonds. Joining us now, Kathleen Gaffney co director of Diversified Fixed Income and EAT Advance UH and GURU and all things fixed income and credit. Kathleen, are you out there buying these super bonds? We are not UH as as tantalizing as eight percent is. Eight percent comes with a whole lot of risk about the future. I tend to be

very cynical about new issue in general. The bankers have a good sense of timing, which is not in the favor of investors. Good sense of timing means knows when they can get the perfect pricing for the issue you're but probably the worst pricing for the investor. But what does this tell you that there is so much demand for this bond offering from a company that is burning cash and UH and has a lot of sort of hair around it. It's tough because there aren't a lot

of options. There isn't a lot of supply, and so if you have to be invested in high yield and those are the buyers high yield funds in general, you've got to buy what's coming to market, and you can make the case that it's good relative value. You're getting paid quite a bit. But eight percent may not cover the risks that we see down the road. If Uber isn't able to execute perfectly, I don't know how many new young companies have been able to pull off executing

things perfectly. Even at my old age, I'm not executing things per I stop. I want to put a larger question to you, which is that the total US debt to GDP ratio is currently around three, and if you include state local debt contingent liabilities, this goes above five. Oh. Yes, adding global debt to GDP has surged. It's over seventy trillion dollars was added to global debt total since two thousand eight. Why would people be buying an asset that

has just swamped the market with supply. It isn't rational in the long run, but in the short term, And if you're only short term oriented, you can make that case. That's the trouble that investors are going to get into that if you only think about the short term, your eight percent is going to be a lot lower in terms of your real return down the road. Pay attention to where rates are headed long term. It's eight percent, you believe Do you believe that institution well could have

divided institutional investors? Do you believe they recognize the risks or do they see that they can get out. I think they think they can get out um. But I also think they operate in a short term environment where their incentives are to make it through this year. They're not thinking about what do I ultimately want to be able to deliver. We have come so far away from what our jobs ultimately are to do uh that we

work in very narrow uh spaces. Well, but hold on a second, because a lot of people have been sort of for telling gloom and doom since given how low rates were going and short term turned out to be five years at least six years, so you know what is short term, especially if people don't foresee a downturn. That That is a very good point, and I think it's part of what keeps people anchored um in the old ways and not thinking about how differently the market

could be. The biggest signal has been the correlation between stocks and bonds of late. We saw it in February stock sold off, bonds were essentially flat when they should have rallied. It happened again in the last few weeks when we saw the equity vall pick up significantly, but treasury vall and and in fact credit fall picked up very little. So it's not the income. The carry isn't serving the role that it did, and that anchor to windward, that flight to quality is not working the way that

it did. So what's your best bet right now, given the changing environment, It is to look to look abroad, to look away from the US, to look at where there's real growth and positive fundamentals and positive economic policy. So emerging markets. I continue to harp on that, but I think that's where you're seeing inflation coming down, reforms

being put in place. It's not widespread. There are still countries that are struggling to become more mainstream, but there are areas of the world, particularly Latin America, that look attractive.

And I think Asia down the road because of the um differences, the long term tension that is increasing between the US and China, that is going to have some significant implications for countries in Asia that aren't China that will benefit from our need to keep our tech capabilities close to home and China racing for made so lots of long term implications that favor emerging markets. We've got to leave it there, but we'd love to have you back and spend more time. Thank you very much for

being here. Thanks Pam Kathen Gaffney, co director of Diversified Fixed Income at Eaton Vance on the world's fixed income markets. Well, Canada is the second country in the world to legalize

recreational marijuana and just after Uruguay. And here to tell us about perhaps some of the beneficiaries is on AA Grana, our senior software and I T Services analyst for Bloomberg Intelligence on a rag the company Shopify connect Shopify with the legalization of recreational pot Hi, Pim, isn't it interesting that IBM st and we're talking cannabis. But you know, you look at um Shopify, which provides software and an e commerce platform for companies to sell whatever they want

to sell. UM it's a Canadian domicile the company, so it was very natural for I believe the Canadian government to go out and you know, use them as one

of the vendors. And given that their software is cloud based, and some of the requirements are that you have to make sure that you know, you track the entire supply chain of cannabis from you know, the seed to supply and also you want to know to make sure that you have you know, enough data encryption and privacy regulations in place so that you know that the customer data is not leaked. So because of those two reasons, I think,

you know, Shopify was the natural choice. All right, let's if Tom Keene were speaking, let's rub up the script, because you say that IBM you point out that it's having its biggest one day to clients, and this comes of course off their disappointing earnings a sort of point to some issues with their cloud computing and artificial intelligence units. Is this a huge deal or is this an overreaction

by markets? Oh well, we wrote about this even before learnings that, you know, the last push that they got from some kind of you know, you would say glimmers of hope was through their systems division, which is a mainframe refresh they get about two to three years. But if you peel that off, you know they're they're petting the entire company on Watson, an artificial intelligence and a large portion of those products are in a division called

Cognitive Solutions. And I mean that you know, there was down five in constant currency. That's a that's a massive drop in our you and I think that's what striving this particular UM, you know, sell off and we need to understand whether they can recover from this or not. So do you think that they can. It's going to be tough, especially given that you know the market is getting very competitive and there are enough you know, cloud

based software companies out there. Amazon selling it's artificial intelligence tools, enterprise art visual intelligence tools, Microsoft is selling it, Google is selling it UM. I mean theeed IBM people have to do something drastic and something you know completely, I would say, um urgently. Otherwise, you know, people not gonna like sales, you know, being negative let's say in the next couple of years. That's not going to go well with them on the rug. How did IBM miss this?

It's tough him as I've said it for the last several years. I mean, this is a company which has a fair amount of legacy I T services business and UM. Sooner or later, a large portion of data centers are being closed down, People are moving workloads to the cloud. People are actually sometimes renting somebody else's data. No, I know all this, but how did IBM miss this trend? Oh? You mean to say from a large I would have to go back to Mr Sam Paulisono and ask him

this thing. This goes way beyond you know, even earlier than gineer Maries days, because um, this this move, it has been going on for over ten years, and IBM, I think, you know, was was a lagged at that point. So I'm just looking right now. So IBM is considered one of the big giants, the stalwarts of the Czech universe. In the United States, hasn't a rating, has a whole

bunch of debt. Do you see this sort of miss and they're missing of the trend to be a permanent blemish that going forward they cannot recover from, will end up degrading their credit rating and create a downward spiral for them. So I'm not sure about the credit rating part of it, because at the end of the day, you know, one division was down five the other one

was too. You know, if you're going to be looking at zero two percent growth, you mean you're gonna probably make the same amount of money next year to the year after. But if you're a tech company, you know mrs want to see growth at least equity investors do. So from that point of view, I think the biggest question is can they show positive growth over the next couple of years, and yesterday's results puts a big question mark to it because you know, as I said, one

of the most promising divisions, that's the one where the photos. Yeah, Annora Grana, thank you so much for being with us. Annora Grana, Senior analyst of Software and I T Services at Bloomberg Intelligence. And IBM does have more than forty one billion dollars of debt um, which you know isn't massive compared to their cap market cap compared to say, I don't know a Netflix out there or one of the others, but definitely interesting and shares are plunging today

after their disappointing earnings last night. Our guest is Ben Emmons. He is the chief economist and head of Credit Portfolio Management and Intellectist Partners. He is also a contributor to Bloomberg Opinion. He's based in Los Angeles. Ben, thank you very much for being with us. Talk if you can about the independence of the Federal Reserve and how many interest rate increases you see in twenty nineteen after the mid term elections. Good morning, Bim, and thanks very much

for having me. Um. Well, the defend independence is very much. Dare I think that that the v in comments by bus Stage or even Kaplan have indicated clearly that you know, we're staying the course here. Paul will not come out himselves maybe saying this, but clearly they're going to stay

the course. Um. And that's really cement about his labor market strength, like for example, Jolt State yesterday shows that that you know, they can keep that gradual rate hike patients intact, which I think we will see another three rate hikes into the middle of twenty nineteen, which will bring us closer to that three number on the fat fronds rate, which is sort of the long term neutral rate. I think that's where they're heading. It does seem like

that's what is being priced into the market. But I'd love to get your opinion. Just on something that happened yesterday to not a lot of fanfare. There was the first time ever that the Treasury Department sold eight week treasury bills two month treasury bills. And I don't know if this is wrong to say, but it was not a good auction and I've seen sort of some distortions in the front end of the treasury market. In a response with three month treasury yield climbing at a disproportionate rate.

Do you think this was a mistake at the Treasury Department's part. So it's an interesting dynamic that as you're highlighting, Lisa, because you know, this is like a really short term gap measure if you think about it, right, you financed the deficit really short term, and not all of it of course, but like it's one of those measures and two months, right, which binks is you know, basically at

the end of the year. So you know, I think what the market is trying to indicate it is like all this sort of supply that then needs to be rolled over again. It is what I think causes some

of that distortion. The other part I think is happening is that we're going again towards this year and effect on bank balance sheets, right, that that tends to be the case when they withdraw some of the balance sheet to fund other people's balunce sheets, And therefore I think you get some distortion and money market rates to which includes treasury bills. Why maybe some of his bidding wasn't

that strong in the in the treasury bill market. That being said, though, if you think about treasury bills is and safe assets. It's still very much in demand, right, So I don't think that the distortionself isn't signal that the demand for safe as is a necessarily change. But let's go overseas if we can for just a moment. I want to get your thoughts on what is happening

in Italy and the European Union and the Italian government's budget. Yeah, so you know, the headlinesing and today are just very European bim if you think about that, you have the European Commission that wants Italy to stick with the rules, and of course Italy proposes a budget that's you know, not sticking with the rules. And you see Salvini just

out now saying let us just do the work. And then you have the entaser, you know, chairman coming out like, wow, we don't know, we're going to support and the idea of rules and we're gonna stick with that. So you have this noise, right, and what it does is in particularly European bomb markets, gives this perception that there will be a standoff idea that just like Shablow with treesa trip us in the past and Greece, that that creates and widening of spreads, just uncertainty gets priced in there.

Ultimately Italy will likely go its way and does this budget of two point four percent, and then there's a question about how they're going to moderate it over the over the time that comes after that in terms of controlling the deficit, because clearly Italian rates have risen much higher with this view that that death load is becoming more problematic. From here, how much further do you expect the Italian yields to rise though? I mean, are we just sort of at the beginning or middle end of

the widening. So if you think about what happened in the in the death crisis a number of years ago, when we were at seven percent in the Italian yields, that was really pricing Italy essentially being out of the Eurozone, out of the monetary Union. And so I don't think

we'll go to death directions as yet. This three and a half percent seems to me more like what markets are indicating that in order to run the deficits like like two point four percent and the debt GDP rates you're well over hunters in order to stabilize the death GDP ratio, that needs to be higher risk beaming right

in order to to compensate for that. I think this is why three and a half percent the ten years sort of reflecting, and we could go up a little bit more from here, because if this uncertainty remains about, you know, approving this budget, markets will price and uncertainty into the higher yields. So, since we're in Europe and we're overseas, I want to get your thoughts on Turkey, which has been dealing with a currency crisis and then decides,

well it's ebbed a little bit. We've released that pastor uh, we're gonna now sell dollar bonds two billion dollars of them. Would you be a buyer of Turkish dollar bonds right now? So? I think that that greatly depends upon the stability of

the Turkish layer itself. That the central bank has responded, and there's been some you know, if you think about the debate about central bank independence, which clearly was at stake it in Turkey, given the relationship with Oregon and the central bank, I would be very cautious about dollar bonds as yet for Turkey because I'm not so sure if the central bank will follow on with more rate high measures to control the inflation, which is really spiring

right now, and so the Turkish layer has been temporarily I think stabilized that stage very weak right. It hasn't really rallied any further from here, So I would not be necessarily and investor in dollar bones in Turkey at there's a moment. Ben Emmon's, thank you so much for being with us. Van Emmon's is chief economist and head of a credit portfolio management and Intellectus Partners LLC in Los Angeles. He's also a contributor to Bloomberg Opinion. Thanks

for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.