Epic S&P Rally Is Powered By Assets You Can't See or Touch

He used to distinguish between the modern economy and the older economy by talking about things that you can pull out of the ground in terms of what companies are doing well. Sarah Ponzac, who joins me in studio now, has a version of that idea in a fantastic story today where she talks about the epic SMP five Raleigh being powered by assets you can't see or touch. Sarah, give us a little rundown of what goes on there. Well,

thank you very much, Bonnie. The idea behind this is really that all year long, we constantly hear about tech outperforming tech out performance. The reality is that COVID nineteen sure, it has sped this up, but this has been a trend for a very long time, and in speaking with professors, researchers, economists, one thing that you can really trace this back to

is the difference between intangible assets and tangible assets. So intangible assets being those things that you cannot see, you cannot touch, think of them as a brand name like the iPhone, for example, or data collected on people, algorithms, software, even you can think about it in the sense of a vaccine being created. All the R and D that does go into that, it's all considered intangible and it's not recorded on a company's balance sheet. So a on

impotent On institute. They put out a report back in ten. It was recently cited by Bank of America by Carlyle. This has really become a topic of conversation and what they found. The way that they did this was they took total SMP five market cap and they subtracted out what's called tangible book value. Then they said every thing else, well, that's due to intangible assets, which represented eighty four percent

of the SMP five dred. Now there are some discrepancies here about how you can actually go about calculating this, and it's really difficult because so touchy feely and accounting measures really aren't that great surrounding this. But yes, you have to take into account that what we see in the length of market cap and that gap is also

due to projected earnings from both tangible intangible assets. But the reality is that growth in intangible assets has just been astronomical over the past two decades, over the past decade in particular, and now sped up by COVID nineteen. And that has extreme implications for the economy and the labor market too. And of course how you value these

assets is what's important, or how investors value them. I should say, some of these are just runs, some of them, as you say, or you know, intellectual property and so on. Some of them produced revenue, others absolutely don't. Right, There are many implications of this. Often spoken about is what this means for value investing. There is large question about if this is the reason why value seems to be quote unquote dead, why value hasn't been able to outperform.

Is it the reality that value investors are missing this key input of intangible assets. Bank of America, for example, how a recent report on this and they created their value Intangibles basket where they incorporated intangibles into value investing and they got much better returns. There's also a value et F, for example, that holds Amazon, and the reason that it holds Amazon is because they do take into

account intangible value. But when you think about the macro economic effects of this and the macro economic implications when you think about a company with a lot of intangible assets, for example, a software company, there's a lot of R

and D research and development that goes into this. But once the software is created, or once a vaccine is created, for example, they have immense scale and you don't need too many people working to keep that scale growing, to keep software being issued too many different people to many different companies for example. Same with a vaccine having it

administered around the world. So what people wonder and what the proof has shown is that aside from the growth of intangible assets alongside it, I should say we've also seen slower labor market recoveries because if you think in the olden days, if you think with oil wells and factories, you needed a lot of people to really power these tangible assets. Well, with intangible assets, the idea is that you don't need that much growth and employment, you don't

need that many people. So people are starting to think about and really wonder about what this means for the

future of the economy. One interesting area is brand names, as you said, And yesterday I was speaking with somebody who owns many Reads or who's the CEO of a red company, and he talked about how they've undone some deals they had with Marriott or I h S for example, and you have to wonder, you know, he talked about a hundred fifty hotel brands that they used to work with and now they're really consolidating that and going with

their own hotel brands like Sanesta. You have to wonder, will some of these brands just go away or decrease significant dy and value. Well, you have to wonder that. And when you think about a brand, you have to think about the emotions that comes with it, also just how recognizable it is to a majority of people. When I was working on this story, one example that came up,

for example, was the likes of band aid. For example, band aid is a brand, but when we talk about using band aids, I mean, I'll go ahead and say the name you talk about using band aids, so that is such value that is added to the company that creates band aid. For example, you think about the likes of Apple and It's iPhone. When people talk about phones, a lot of people will just off handly use iPhone because such a large proportion of the population uses it.

So when you think about the value of a company, brand names are so important and the ideas the emotion that comes with it. Another one that comes to mind is Disney. Disney has such a great brand value that comes with it. Even though it's a company that does have a high amount of tangible assets, you also have to think about the brand. To Sarah, there's so much more we can talk about in this story, but we do have to leave it there for now. Sarah Ponzac

is our Cross Asset reporter here at Bloomberg. Again, if you have a chance to have a read through this story, it really is just a fun story, but also extraordinary, lust lustrative, and also educational epic SMB five values powered by assets you can't see or touch. That Sarah Ponzac, time for a conversation now about monopoly, and I'm not talking the board game. I'm talking Google which our next guest says should learn from Microsoft's a tough lesson. Jon

Oh Sarah joins us now Bloomberg opinion columnist. What was the tough lesson that Microsoft learned, Joe that Google is about to learn? According to you, you fight the federal government at your peril. Uh, let's let's start there. Um. You know the the when you look at the complaint that the Dust's Department filed against Google, it is uncannily similar to the complaint the Justice Department file twenty two

years ago against Microsoft. Microsoft was accused of using it, you know, operating system monopoly to squash um a competitor, Netscape that had a browser that was competing with with the Microsoft browser Internet Explorer. Um Uh. Google is being accused of basically, um uh, going to going to Apple and other companies and basically saying, we want to be the pre we want to be the defalse search engine.

We'll pay you to put our search engine you know, embedded in your in your devices and keep everybody else out. It's very very similar, and you know, Microsoft lost that case, and even though antitrust is um gotten a little more las fair since then. I think Google's in a heap of trouble. Well, there have been twenty two years in the meantime. Is there anything in case slow or anything in precedent that Google might be able to learn from

and use to its advantage. Well, the main thing that they will argue about is how to define the market. So if the if the market is defined purely as the search engine market, then I think Google's going to have real problems defending its position. But if they can persuade the judge to make the market um, you know, Internet platforms or something that's broader and wider than simply search, then I think they've got a pretty good shot. I

think a lot. So it's a it's as technical term, but it's super important in the antitrust is how do you define the market? Uh? And if you define it one way, it can you know, then you're a monopolist. If you define it another way, then maybe you're not. They will have teams and teams of lawyers, Joe, I mean how will this play out? I mean will it be a public spectacle? Will we be able to see

a lot of drama, a lot of theater? Um? Well, in the past, Google has uh wound up usually settling Uh with gup various governments or in Europe paid to paid large fines. So the real question is will it get to the trial stage. If it does get to the trial stage, I think it's quite likely that it will be, um, you know, one of those uh high profile rock and roll you know trials with lots of fireworks and you know, inflammatory emails and you know, so

on and so forth. Um. I'm sure one thing that they learned from the trial is uh, not to act the way Bill Gates acted during his deposition, which was devastating for Microsoft. As you were called, he was his his answers were he he barely seemed to know you know, what the words meant, and when that was played in the courthouse, that did not help Microsoft at all. Joe, you know, Google is going to face this first, but it's clear that some of the other major tech companies

are going to face this as well. Is there anything to suggest that one company might prevail over some of the others, or that that companies will take a different tech when dealing with us, Well, each company is going to have a different issue, you know, and that's what makes this so hard. So, you know, Facebook, you know, is the is the eight hundred pound gorilla UH in

social media. UM, and if the government went after them, they would probably try to break them up and and and you know, UH separate them from Instagram and What's App, which which they both own. Amazon is the platform company that is being accused of using data from UH it's its own customers, companies that sell on Amazon to make their own products to compete with these other companies. And UH so that's what they'll be suit over UM an Apple.

If the government goes after them, it'll be because of the way they enforce the rules and and handle their own UM the app store, the propriety of the app store. So each case is going to be different. They're all antitrust cases, but but the the emphasis in each case is going to be quite different. And it's really hard to know at this point which of the cases are the stronger for the Justice Department and which are ones

are the weaker. I think the other thing that's gonna happen though, don't forget, there's also Congress, and so if the Democrats take the Senate and UM the White House, you're almost surely going to see laws being written and passed that UM that outlaws some of the practices these tech companies have been doing. UH, so that there's no there's no ambiguity about about whether they violate the law or not. They're just gonna say this is against the law.

You cannot do this Amazon, or you cannot do this Facebook. It's so fascinating. I'm also curious as to whether a change in administration should we get one, and that's absolutely not not determined yet. But if we get one, doesn't make a difference in this what's going to be a year's one case. I don't think it does. UM. This this case was clearly put together by the UM career

professionals at the Justice Department. They're not going to go anywhere. UM. The Democrats, as I wrote in another column recently, are really UM geared up to go after these big tech companies on antitrust grounds. And UM the idea that Biden administration would back away from this lawsuit is almost inconceivable. If anything, they will add additional charges that are not currently contained in in the in the in the in the complaint right now. Yeah, I mean, it's really interesting.

There's also the question of how the do o J is going to be staffed up and so on, Joe. But you think these things just carry on sort of seamlessly transition or no, well, seamlessly it is probably overstatement. I mean, don't forget don't forget a T and T T and T deal with time. Warner was just about locked up when making del Rayhan became the antitrust chief of the Juice Department under under under President Trump, and he immediately reversed course on it with much of the

dismay of the career professionals. But in this particular case, I think the career professionals and whoever hit their superiors turn out to be are going to be going to be aligned on this case. Joe. It's always so fascinating to speak to you just on a stufford note, before we let you can ask you what you think it's going to happen tomorrow night, debate night. You can ask me. But I don't know that's a fair enough answer. It's uh, it's not fair to put an opinion columnist on the

spot like that, Joe. Thank you. Jonah Sarah is a Boombrig opinion columnists covering business. We should say, and of course I do check out if you haven't heard it. His project the Bloomberg Wandere Project, the Shrink next Door for all sorts of prizes, and really just a fascinating liston as well. So Joe, thanks for joining today's column. Is that Google should learn from Microsoft's tough lesson and well worth a read for anybody out there. Let's get

back to the markets now. A very interesting conversation coming up with Anderson Capital Management. Peter Anderson, who is located in Boston and manage is something called the weather marka fun It's a credit driven, concentrated, low turnover stock portfolio that apparently incorporates a truly different esoteric stock selection process. So Peter, welcome and give us just a little hint of what this esoteric stock selection process might be. Well,

good morning, Bonnie. Yes, so I come from a fixed income background and inequity background, and not many people have that combination. Usually you stay in one swim lane for your profession. But I switched over to equities and I found it very convenient and helpful, frankly, to borrow from the fixed income marketplace the different tools they use and

apply that to equity analysis. So what I have is a current portfolio or fifteen stocks, but they are derived mainly by looking at dislocations between how the bond market might have an opinion on a company versus how an equity market would have an opinion on the same company. So what does it led you to put into your portfolio in the last six months? And have you changed much? Uh? You know, my turnover is very low relatively speaking. You know,

there are a lot of competitors out there. Mutual funds would have over ad percent turnover, but mine is only about twenty five. So that's an indirect way of saying that my turn my new stock selection is pretty slow. At most. Ill pick maybe one or two stocks a year, and uh, I hoping that's a sign of my conviction on the holdings that I currently have, of uh in terms of my outlook for their market appreciation. Okay, how specific can you get when you talk to us about

what's actually in your portfolio? Because last year, for example, return on an eighteen stock portfolio. Yes, yes, and I've delighted to talk to you about that, and I wanted to also tie that in to you know, what my current assessment is of where we are. I think it's extremely difficult right now. You know, COVID has just kind of dropped a bomb on all the standard metrics that either economists use or equity analysts used. I think they're having a very very hard time formulating, oh, what is

going to happen, say with the next three months. So I don't take an approach like that. This approach takes a longer view, and I tried to simplify UH supply demand and try to get a clearer sense of what stocks out there will endure and indeed appreciate regardless of what happens in the White House, how long the virus lasts, or whether an we have our hopes for the vaccine or dash. So with that in mind, some enduring themes

are believe it or not, pet care. That's the most recent editions I've had in the portfolio, and I have a theme of pet care sub theme if you will have three stocks in there, and I can explicitly tell you what they are, the Trupanion Fresh pet in Zoetics. Each one has a very specific place in the pet

care of this nation. At least we own over a hundred million cats and dogs out there, and I've write reason to that no matter what happens, we treat our pets equal to and to a family members in a family. So Trupanion is the only publicly traded stock that provides healthcare insurance for pets, and their market penetrations is only one percent of the entire hundred million animals out there.

So just think of that. If it doubles its market share, it's only up two percent in market share, but it certainly double its revenues in fresh pet is gourmet food for pets and zoetts. Provides the medication, the prescription medication that once you bring your pet to UH doctor veterinarian, you will usually get UH prescription for medication and most likely the way if this is a manufacturer of that. So this is a long term perspective. Uh, from now

through the end of the year. I think that there will be incredible volatility, but who can predict who's going to win, when the virus will end, when the vaccines will come out. But I think these socks have an enduring quality. Are any of your holdings at all dependent on more stimulus coming? You know, I try to stay away from me because when you think about it, pets

are definitely, you know, something that costs some money. You know, you just said it yourself, right, So you're essentially trying to gather the extra pennies that people have, and in this case it's through their pets. But a lot of people who have pets that you know, don't get extra stimulus, will not be able to get their pet that extra

operation or that medicine. Yes, that's a possibility, but I would also say that if that's the case, it's almost like saying you wouldn't be able to provide for your own family member. So I think there is a strong commitments and I would say almost an inelastic demand for pet care in this country, at least the way um the demographics read and all the latest polling of pet um owners say that this is top on their list next to a family member to spend. So I think

you'd really have to erode. There's a lot of inelastic demand elements out there that I try to avoid, uh. And I do think that these stocks, for instance, will be unaffected by a stimulus as some other sectors, such as data security and data storage. Those are other to two other themes that I play in the portfolio, but I think also have enduring qualities. Interesting. Alright, Peter's thank

you some wonderful things to think about. Their Peter Anderson, as founder of Anderson and Capital Management, talking to us there about some pet care stocks and then also data storage, and of course we know storage of all kinds has been pretty popular in this pandemic, a lot of people transferring. There's the literal physical buildings into physical storage in inner cities as well. So that's another theme that we can

look at another day. Let's get now to our next guest who keeps an eye on emerging markets, but also so much more than that. Damian Sasaur is just an absolute genius when it comes to watching the markets. He's chief Emerging markets credit strategist for Bloomberg Intelligence. But I know that in his spare time he does a lot

more than that, such as looking at frontier markets. And Damian, if you don't mind me jumping you with the question, we haven't really spent any time on Nigeria or on any of the problems that have been having that we've been seeing on the periphery. Have you looked at any of the frontier markets that are that are suffering right now and where is experiencing the most trouble. So it's interesting actually that you bring that up, Bonnie. And by

the way, I'm blushing, thank you for the introduction. So you know, the reality is in Nigeria. You know, you've had some protests. Nigeria is kind of a closed market. There's a big dislocation between the niro, which is its local currency, and and the black market rates. So you know, I mean, you know, it's not really an investors market from a US dollar investor perspective, but you can get some really high carrying a lot of frontier markets for

for example, Egypt and Uruguay and Ghana. You know, you've got double digit yields and all of those economies, um, and you know, you know you can get that, albeit with increased currency risk. So I think that's the real risk here. But my goodness, the moving the dollar is definitely catching people's attentions. And you know, I can see a lot of people putting more money to work in the front along the frontier and emerging markets. Right, So net net is it better for these markets when that

happens or is it is it a disaster? Do they need to run to the I M F and runder any program that that will host them. Well, it certainly depends, right I mean, certainly the I m F is there for you know, real troubled economies. I mean, we saw what they're doing with with in places like Argentina, Ukraine,

you know, even Ecuador. But you know, when you're looking at the front here, you know, and and some of the markets I just mentioned, I wouldn't say stable is the right word to to characterize them, but certainly more stable than than than the former. So you know, Egypt is one place where you can carry really really well in the short end. You can get double digit yields there.

But again, you know, those economies are subject to real volatile moves in their local currencies relative to the dollars. So you know, for example, if we see you know, a Trump victory and the dollar rallies off the back of that, all bets are off, right, So you know, you have to be very selective, and most people use that exposure as sort of a satellite within their core emerging market portfolio. So it's really more of a terro risk kedge or like what I like to call a

free call option. We like to call that a free call option as well. Of course, Damian talks us about the some of the things that did get resolved this week in terms of some of this Latin American countries. In the South American countries, we saw Argentina, for example, take a big step. Bolivia too. Yeah, no, absolutely, So

you know Bolivia is obviously pivoted more towards the socialist bent. Um. You know, look, what's interesting is, you know, if you just want to just kind of think about Latin America, Latin America is really underperformed. Um. I'm talking local Latin America effects relative to the broader emerging market universe. And you know, if we do see you know, the US

E pretty market reopening. You know, if we do see a steeper U S treasury yield curve, if we see the election risk subside, and you know vaccine sentiments improved, Latin America for FFX is gonna is gonna rally off the back of US. I mean, so you know, for me, I'm actually looking at a basket of Latin American currencies

for example, Brazil, Mexico, Chile, Colombia. You know, that's sort of a way of playing for you know, um, you know, good news after the election, right and so um, So that's one thing that you know, we think a lot of investors should take a long, hard, good, a long look at here in the current environment, Well what evaluations like, I mean, what's priced in our people already sort of getting involved? Is it already of date? Now? Latin America

is one that's really lagged the broader complex. So it's

one that we like, I mean, like Brazil. Like Brazil has itsissues, but in my opinion, it's going to receive some tactical re leafs, primarily because short positioning remains elevated, the macro risks are abating, and quite frankly, the budget discussions are going to be pushed out, so left it in November municipal elections, so you could have a two to three month window here where the RAYL really regains a lot of the lost ground in the rails off of the dollar year today it's Banni, So you know

that would be one. Mexico's another. You know, Mexico is now testing that twenty one level, that key twenty one level in the currency, and you know, if it breaks below that, you know we could easily see it go down to levels we saw a pre pandemic, and so you know, again these are currencies are ways to kind of more liquid, cheaper ways to play for a US equity market reopening or sort of a recovery basket, so to speak, because as we know, a lot of value

stocks in the US are still quite crazy, right And of course it all depends on you know, whether we get back to trade discussions on how that works as well, and immigration policy and so on. So really, you know, the change that might occur with this election could have a big influence on valuations. Now, well, it already is. I mean, just look at the China you on, I mean, and we're at the strongest level. I think we're six sixty four dollar you on now, I mean, that's the

strongest level we've seen since July eighteen. And look, you know, I've long been an advocate of receiving in China. UM the People's Bank of China wants a stable affirm currency

to attract for an influence, it's maintaining domestic confidence. And look, it's the only central bank in Asia to embark on effects intervention where they're actually selling dollars in the last year through August, So you know, that's you know, it's it's actually coming out of the pandemics much stronger than its peers, and it's one area that we like to look at. But you know, there is beneath the surface

some fiscal vulnerability. I mean, we put out of debt just this morning, Vonnie talking about e mxternal debt ratios which are rising across the whole of emerging markets. I mean full year hard currency debt issue and from emerging markets is on track to eclipse seven hundred and fifty billion dollars this year. The former high was in only four hundred and seventy one billions, So they are levering

up and that is certainly a risk going forward. Yeah, for sure, Damian, you mentioned, you know, six sixty four on the off shore, you on, this has been creeping lower. I mean it was around six seventy for a long time, and then there was a big range between the off shore and the on shore that's now narrowed. What's going on with the Chinese currency, Well, I think the reason we saw that that the entrere off shore basis, you know, widen out, had more to do with the fact that

you know, China was on vacation for eight days. But you know, now that's kind of it's kind of subsided, you know, for me, the best way to express a China view if your bullish on China is through the short end of the curve, right, I mean, like everyone's talking about receiving in the belly and China government bonds

at three and five year tenners. But you know, for me, I mean you can get you know, one to two hundred basis points above treasuries just by carrying on a one year or less basis right, So using efforts forwards to not only take advantage of a strengthening currency relative to the US dollar and also very large pickup over treasuries. It's a really nice it's a really nice way to play this market into your end in my opinion, Damien,

really fascinating speaking with you. Always are you coming? You see, you know a matrix when you look at markets, and it's just really it's really great. And of course you have all of the um history as well, so it rings bells. I'm sure for you to other ears and eras and other years. Damien Sasaur joining us there. He is chief Emerging Markets credit strategist for Bloomberg Intelligence. Thanks

for listening to Bloomberg Markets Podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Bonnie Quinn. I'm on Twitter at Bonnie Quinn. And Paul Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio