Facebook Unit Works With Nearly Anyone Seeking Power: Silver

Podcast on Apple Podcasts, SoundCloud and Bloomberg dot com. What does what does India's Prime Minister Narendra Modi have in common with the President of the Philippines, Rodrigo du Terte, as well as the Scottish National Party, an alternative for Germany another party that is based in Germany. Well, here to tell us is Vernon Silver Projects, an investigations reporter for Bloomberg. He joins us from Rome, Vernon, I'm gonna let you tell people what do what do all four

of these different political connections have in common? They've all gotten advice in elections from Facebook, from a special unit within the company that focuses on politics and governments and has apparently increasingly participated in helping in electioneering. This is

an amazing story. I highly recommend everyone read it. This Facebook team helps regimes that reach out and cracked down um, Vernon, do we have a sense of the financials here of how much Facebook earns from helping these campaigns to disseminate their message as widely as possible on social media. What's what's interesting about this is how small the direct numbers are. You know, in some of these campaigns. Uh, they were only spending hundreds of thousands of dollars on these campaigns.

But as Facebook has learned through the last few election cycles, UM, these are big events. Elections are big events that rank alongside the Super Bowl in the Olympics in terms of drawing black block blockbuster ad dollars from elsewhere, you know, stuff that other participants are bringing into the conversation and more importantly, boost engagement, which is sort of the key metric at Facebook. That includes you know, how many people are clicking how many times and sharing how many times?

And so if you get a party in Germany or the Philippines that's spending hundreds of thousands, um, you might end up seeing a multiplier effect, and that's what they've really tuned into. So Vernon, can you give us some details about what encouraging engagement means, What does it mean to help these campaigns, what did this unit actually do well?

It started out, this unit started in Europe servicing the Middle East after the Arab Spring, talking to new leaders transitional governments, trying to let them know what this new tool was Facebook. I mean, this is just a few years ago. Facebook did not have the two billion users that it had. And then a few years ago they started staffing up in Washington, and they did so with

people who came from political campaign backgrounds. And what they started doing was taking the traditional pitch, like you know, hey, campaign X and Y, because they were helping everybody in every race that they went to deal with UM in addition to verifying you as an authentic Facebook user, helping you figure out how to use the basic tools and

leaving you the campaign to do it. They started getting more engaged to the point where in the last election in the US there were Facebook employees embedded with the Trump campaign and you know, even in local elections, we saw that some in the US were being offered collaboration on testing different video formats with Facebook. So the collaborative nature grew. And that's what the issue is that some

of the critics are having. Can you explain or maybe just give a little uh sort of story about Katie Harbath and Elizabeth Linder who are these two individuals. There's interesting Elizabeth Linder Um started the unit. She was based

in London for Facebook. She was very early Facebook employee and she started sort of as an ambassadorial figure making the rounds in Europe and the Middle East and Africa, helping introduce people to the tools, and she would just sort of leave them there with them and she would make a presentation to the candidates on the right and the candidates on the left, and that was it. But then a few years in UM Katie Harbath is hired and she's a former Republican strategist who worked at Rudy

Giuliani's two thousand and eight presidential campaign. And things started changing. Among other things, that Katie became the the global leader of this politics and government unit within Facebook, which is a small unit at most, you know, maybe a hundred or something people during a pea collection time. And according to what Elizabeth Linder, who is no longer with Facebook, she left because of a different opinion about the direction

they were going. UM they started tailoring the advice that they had to each of the parties that were involved in getting more and more involved. So it went from sort of a think tanking NGO vibe to one where like, we will bring in democrats to work with the democratic side and Republican support with the work with the other side, and you know, we're going to help you use as many of the Facebook tools as possible to know, in the end boosting engagement and controversy also is really great

for for boosting engagement during election time. And you know, in all these countries, whether it's Poland or Germany or the Philippines, are India, which is essentially, in a lot of measures, the biggest market for the company right vernon, A lot of people will read this story and think, wow, how can Facebook allow this? It basically is helping fuel the rise of some misinformation or certainly higherly or more

highly politicized types of rhetoric. At the same time, Facebook isn't doing anything wrong, is it, I mean, is it disseminating bad information on purpose? Or you know, some people could say, well, it's just doing its job. It's helping clients use the platform as well as they possibly can. Yeah, I mean, that's a really interesting question because what you have is and let's say, a face like a place like the Philippines where they came in and they offered

their services to all the candidates. UM. But there was one candidate who really embraced the technology and once he was in power, um, Facebook again helped, you know, sort of writing the cotails into the presidential palace, so to speak. UM. And they started broadcasting through Facebook channels official events and in a lot of countries. And we see this in India also. The campaign work then becomes this door into

being part of the power structure in the country. And what this is really a contrast to what Mark Zuckerberg has said in saying that the company is agnostic politically. Yeah, we we're gonna have to leave it. They're fascinating a story. Thank you so much for joining us. Vernon Silver Projects and Investigations reporter for Bloomberg News. Facebook team helps regimes that reach out in cracktown. This is Bluemberg. Will Big Tech keep on rallying to the degree that they did

this year? That is the question and the answer, according to John Patritis, is no. He is managing director and portfolio manager for Point View Wealth Management in Summit, New Jersey, and he joins US now. John, thanks so much for being with us. So what's going on here? Why do you think that the fang stacks, the Facebook, Amazon, Netflix, and Google shares are not going to have such a great year next year? Well, thanks for having me on. I think that investors love to rally around us store

worry stock. You know, in the late sixties, early seventies, it was the fifty fifty, and the eighties it was the Go Go Stox, and then nineties it was dot com. Uh. In the early part of the turn of the century, it was the brick stocks, you know, the International StockX and now you know fangs all our age. I mean, is there anything else we've spoken about more this year

outside of bitcoin than the fang Stox. So I think investors have piled into these, uh, these companies, and I think valuations are starting to get stretched, and I don't think the downside risks are priced into the stocks at all. Well, John, I'm looking at you know, their sales annual sales for Facebook thirty six and a half billion, and they got net income of fifteen billion. You know any other company

that does that kind of business? Right? Maybe Amazon? How about still look at some of the other fangs dots. How about Amazon does so the uh no, no, no, no no, but Amazon doesn't. I mean you're talking a company does thirty six and a half billion in sales and puts fifteen of it in their pocket. Said and done, right, So let me clarify all five of the FANG stocks and if you want to add Microsoft into that as well, they don't fit nice into the acronym. But Microsoft has

boosted the tech sector as well. Are fantastic companies. What I'm saying is I think the market is pricing these companies that they could do no wrong. And that's where investors have to be careful of because every great investment is always a function of the price you pay for it. So I think Facebook and Google can be under significant regulatory pressure in two thousand eighteen. I think the whole

Russian interference with Facebook is a big red flag. And I don't think any political risk or regulatory risk or price into those stocks at all. So the companies are fantastic, but I think you could see discounts priced into the stocks because of regulatory issues. You know, everyone is excited about Apple because of the new iPhone, but Apple is now a hundred, eight hundred and fifty billion dollar company.

You know, if you want a dent return on Apple from here, you're gonna have a one point six trillion dollar company. They have to sell a lot of iPhones to do that, right, So you're getting up, but you're pushing up against law of large numbers. Some people do think that it will be a trillion dollar country company. Actually almost said country pretty soon. But but John, you know, I want to talk specifically about the regulatory issues you

pinpointed Amazon and Google in particular. Uh, can you just play out what some of those regulatory pressures would look like that would cause a stock swoon because we hear a lot about it, but I don't hear of any regulatory efforts that are currently being discussed in concrete terms on the hill, And I'm not sure what would do it to these two. So yeah, I think so the regular issues I think you for Facebook and Google specifically because of the massive amount of data that they have

on all of their users. And I think the fact that it was disposed that Russia was buying uh ads on Facebook and using that uh along with it too many pilate to a degree the uh the election results I think is um uh you know, could within the argument can we make within Congress to that as a national security issue? So I think that if that's the case, what that does is it forces Google and Facebook to go back to the drawing board and tighten up UH their own practices, which will add to their own to

their expenses and their costs. So my point behind all that is, I don't think that Google and Facebook go out of business. All I'm saying is that I think their stocks are overvalued at current levels and they're not pricing in any potential downside risk, And I think investors fall in love with stocks like that. Who's chart what's fantastic? If you're looking backward, UH could become a risky place in two thousand eighteen, all right, So where is their

value to be had? So I still like the financials despite the fact, again looking backward over the last eighteen months, the banks have done a fantastic job from a performance standpoint. You nowhere near valuation stamp valuation levels of where we were in two thousand five, six seven during the apex of the dot com bubble, and the fundamentals of the financials are fantastic. Right. Interest rates continue to creep higher. You're in a government to a regulatory situation where there's

deregulation going on. The bank's balance sheets are as healthy as they've been so um since World War Two. So you know, I still still think there's room to run on the financial sector. I also think, you know, the selloff and healthcare that we saw in October and September and even a little bit in November provides an opportunity healthcare insurers, how medical devices, pharmacy. I like big farmer

um particularly. Uh So if you look at where you know, globally again thinking long term, where investors not traders, so we're not thinking about next quarter. You know, as the global population grows and ages, the utilization of the healthcare system was only going to increase. So big farmer companies are sitting with a ton of cash um. They have the ability to reinvest in their pipeline and or do

acquisitions to bolster their own pipeline. They usually pay at a big dividend and they buyback spots do so I think it's a long term story out there that is being overly discounted by investors because this fear of regulation or drug prices. We're gonna have to leave it there but thanks very much for enlightening us. John Patries is Managing director portfolio manager for point View Wealth Management. They are based in some New Jersey, and he was making

the bear case for those fang stocks. He watches all of the information, whether it's the average private work week, whether it's wage growth or even the conference board leading indicators which we receive today, but he also follows Christmas trees. Phil Orlando is the chief equity market strategist and head of client portfolio Management at Federated. He thought you were joking when you said we were going to talk about Christmas trees. I'm not gonna choking. It's a big business.

It is a big business. And and thank you for having me back on again. Merry Christmas, Happy Honkkah, and and let's talk Christmas trees. Then that's my point. I wanted to ask you about Christmas trees because I know I heard about the shortage, because this has to do with the economy in two thousand seven and eight. But

you've done some work, so let me So. I've got to give props to my buddies at ever Core I s I. Oscar slaughter Back is the guy that runs this regular survey for them for the last fifteen years. And the issue. The problem here is that it takes about eight to ten years for a seedling to sort of grow into a mature tree. But think about ten years ago, we were starting, we were growing into the

Great Recession. So a lot of these smaller independent tree farms around the country Canada whatever, they said, we don't have the money were we were, we cut back our planning, we went out of business. And so now ten years later, we've got a shortage of trees. So uh, when I s I put out the you know, they do this survey over the four weeks of Christmas, the numbers, frankly on a year of year basis, didn't look particularly good.

Yet we've got a very bullish forecast for Christmas. So in my mind, I'm trying to say, okay, wait a second, one of the key things we look at not working

yet I think Christmas is gonna be really good. And then I sort of stumbled upon this, this this Great Recession thing that I think that the shortage of trees and the fact that prices have gone up, I think people are either doing without or they're they're shifting over artificial Now I s I survey doesn't capture artificial sales, so we don't know how much of that mix shift occurred. So I'm still sticking in my forecast that we're gonna

have a great Christmas. You know, based upon some of the indicators we're looking at, this could be the best Christmas since eleven when year of your Christmas sales were up like six percent. So we're we're you know, we're gonna have I think a pretty good year. Three hundred and fifty million real Christmas trees currently growing on Christmas tree farms in the US alone, so this isn't a

tiny business. This is. But again, because it takes about ten years that million, you're going to chop down maybe thirty million of them in a given year, al right, So as people chop down their trees and get ready for for the holidays, I'm just wondering. You know, we talked to a lot of people. There seems to be some consensus forming, not as much as going into going into this year, but the consensus seems to be growth

is pretty good. We're going to get a modest boost from the tax plan, not anything to write home about. The dollar will remain range bound, possibly go down. Uh, Stocks in the US will continue to do well, maybe not as well as this year, but we'll continue to do well, and bonds might sell off, but it won't be a disorderedly unwind. What's wrong about those consensus ideas.

There's nothing wrong with them. I mean, basically your point painting by and large, a goldilocks kind of an environment where we think treasure yields will sort of grind up to three percent over the next year year and a half, stocks will grind up to three thousand over the course of the next year or so. Uh GDP growth is you know, we've been at a three percent run right the last couple of quarters. We've got a three point two percent estimate for the fourth quarter, We've got a

three percent estimate for next year. We're sort of back to trendline. It's all good as far as we can tell. Okay, So given that backdrop, what do you tell your clients with respect to active management, Because this goldilocks scenario is great for indexing well, not necessarily, because there are aspects of this market that active management will be able to do a better job. For example, UM, I'm going to disagree with one of the elements of your analysis, which

was the dollar. If the economy, which was growing at one and a half percent last year and is now sort of at a three percent run right now, continues at that pace, and that's our call, uh, and the transition from from yelling at Powell is successful, and and the Fed continues to gradually remove accommodation. UH. That combination of better economic growth, better corporate earnings growth, UH, tighter monetary policy out of the Fed should result in a

stronger dollar over time. So we went from dollar euro I think we were one oh three or so at the beginning of the year, topped down at about one two. We started to strengthen down about one s eighteen. We seem to be temporarily going back the other way. I think we're gonna we're gonna catch a bid here, uh, and we're gonna get the dollar euro back into that you know, one one fifteen neighborhood over the course of

the next year. In that scenario, small cap stocks UM, stronger economic growth, UH, the tax cuts, Remember small cap companies pay very high taxes. UH, stronger dollar, So that benefits UH more of the domestic oriented smaller cap companies as opposed to the international companies. Small cap stocks ought to do well in that environment. That's an environment that active management really has an advantage in the indexers not

so much. Also, growth stocks, Remember large cap growth did much better than large cap value and the first part of the year we've rotated right around Labor Day to a value trade. So we think the financials, the energies, the industrials, et cetera. Those companies ought to catch a bid relative to some of the growth stocks that did really well of the first seven or eight months of

the year. So there are parts of the market that that ought to do well here given the environment we've laid out that that in our view, should benefit active management rather than passive management. Phil, I would imagine you've racked up a number of miles this year, traveling all over the country talking to various investor groups. Has the investor changed in the last decade we've talked about Christmas Trees. Has investors mature to the point where they better understand

the investing environment that you're in today. I thought you were going to say that they're gonna be chopped out. I don't think so. I travel You're right, I travel around the country talking to client groups all over the place, and people are still scared to death because they they uh, they're they're they're furious with the nonsense that's going on

in Washington, the stupidity in Washington. I think the single biggest mistake a lot of investors have made over the last year is allowing their political biases to influence their investment judgment. I mean, that's a huge deal. And then you know, you flip on the TV and and you've got any number of of theoretically credible people saying Trump's an idiot, This tax plans a disaster, it's not gonna work. Uh, the stock markets are overvalued. You know, we're going to

hell in a handbasket. The average person doesn't know that that's bad information and and that that we're in pretty good shape right now. Is Lisa just articulated a moment ago beautifully and that we're grinding up towards the three thousand SMP over the next year or so, so we think you gotta stick with it. That's a tough message to get across, phil Or And oh, thank you so much for being with us, and good luck with your Christmas.

Tree Business Analytics and Merry Christmas too, Merry Christmas. Tick to Fill Orlando, chief equity markets strategist and head of client portfolio management for Federated Investors. We always love having him and UH, you know, I never realized that it was that big of a business, to be honest, the whole Christmas Tree business. UH. Here to help us understand a little bit about the risks that perhaps are in the financial world is Mike Bodson. He is the chief

executive of the Depository Trust and Clearing Corporation. Mike, thank you very much for being with us. Tell people what does the d t c C do and then explain what is your systemic risk barometer? Thank you, good morning. UH. Dt c C is basically the central counterparty for the US cash securities market, and we're also the central securities the depository for cast security markets. So in a nutshell, we process every cast trade done in the United States,

every bond, stock, treasury security, mortgage backed security. So we do about a hundred million transactions to day. We do about one point five quadrillion dollars a year flows through us. So we're basically the uh, the processors of all transactions in the US markets as well as some other ancillary businesses.

Our Systemic Risk Barometer is just something we started a few years ago where we go out and survey our membership primarily US but internationally as well, UH to get a gauge of where people are focused on from a systemic risk basis, where the leading issues, and from there we build the thought leadership pieces. We've done thought leaderships on fintech, on cloud, on interconnectedness, risk, and things along

that deadline. I found it interesting that an emerging worry among the people who you spoke with and with respect to financial stability with fintech financial technology in particular, it's lack of regulation with this idea that advancements have outpaced governance. Please explain, Yeah, I think, um, you know, obviously, fintech is something that's gotten a lot of focus on in the last few years as a disruptive technology and competitive

force to financial market participants. But as the competitive threat and competitive risk has been better understood, I think people now are focused on, well, what does it mean to the system itself and what type of risk doesn't introduce and that will vary from fragmentation and changing the basic economic model to things like cyber security, having you know, small fintech companies who may not have the rigor UH in terms of cyber over their product that you know,

the more established players may have that could bring obviously a major risk if they're connected to the ecosystem. So I think, you know, there's a variety of different ways to look at it. But I think people have gotten comfortable with the thought of fintech can be a real positive force and don't want to stop innovation, but they don't want to open up the system too unknown or anticipated risk that could bring down the entirety of the

the financial markets. Mike, I'd be remiss if I didn't use the word blockchain and just about every conversation, but you are using the blockchain system for derivatives processing. Explain this. Sure, we have a prototype being built. We hope to go live with it UH next year where we're working with IBM x only and R three UH to re platform a product onto a distributed ledger to TO TO platform or

something called the trade Information warehouse. It is a central repository of information primarily about credit to false swaps UH. It's used by regulators to monitor the market. It's used by market participants for payments and reconciliation purposes. But it's built on mainframe technology. Uh. Give in the nature of distributed ledger blockchain uh and its ability to have one version of the truth that shared amongst all participants, that

seem to be a natural uh usage for blockchain. So we started this project this year and as I said, we hope to roll it out sometime next year. It's very exciting to see an actual application on a wide scale basis. Uh. We you know, it'll be pretty much the first one in the US securities market. Mike, how concerned are you about the blockchain or just in general about increases in financial technology and frankly a potential issuance of digital currency undermining the dt c c S business

model as a processor. Yeah. You know. Look, and when the blockchain first became widely under steward or widely discussed, we read a lot about how, you know, all of a sudden, we would go to a blockchain based settlement system and uh, there will be no need for clearing

and settlement. Then the biggest clear and settler in the world is dtc C and we would disappear, And you know, we kind of said, look, our business model will always evolve and even using blockchain, there still is a role to be played by somebody who's gonna be the central authority. They're not gonna be open systems, they'll be closed systems. Uh. You still have governance needs and processing needs over things like smart contracts and nodes. How do you change uh,

the programs, etcetera. So you know, we're not immune to competition, we're not immune to the world moving on. But rather than you know, being scared of it, we've embraced it and become where we believe our thought leaders in the space. And you know, it'll take a while for blockchain to be able to handle the volume as we do. Um. You know, one of the things that we manage, as I said, we do a hundred million transactions a day

come in from the stock exchanges, for instance. We net that down to three million net movements of securities in cash, which is highly efficient and saves a lot of money and operational risk. Alston, if you went back to a process where a hundred million cash movements would happen to every day, that would not be anywhere near as efficient and be a lot risk here. So I think as the hype has the simmered down and people understand the

benefits of blockchain, but also the costs. You know, you're having much more rational discussions as to you know, how does it, how is it going to roll out, how is it going to impact the market, and what benefits will to bring Mike, we also have heard a lot about the cleared derivatives and how essentially cleared derivatives have eliminated a lot of the risk to the financial system. Did your survey touch on that at all? And have

risks migrated to the central clearing houses themselves? The survey didn't touch on that per se. I mean, I think we we looked at things like interconnectedness risk UH and failure market participant um. I mean, and the risk hasn't disappeared. I mean what happens with a CCP as you're concentrating the risk and managing it at a central point. So

it's not like the risk of disappeared. But it went from a very bilateral basis I firm may exposed the firm b uh and in some ways very opaid because there was not transparency over those positions before two now through both the cleared o tcs as well as the business we do in terms of a trade repository which

gathers all the information about these transactions. You know, the transparencies increase the concentration, and therefore the central management of the risk has increased, and you know, it's made the system that much stronger. Mike Bodson, thank you so much for joining us a truly fascinating discussion. Mike Bodson, Chief Executive Officer of the Depository Trust and Clearing Corp DTCC. 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.