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 moven news.
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I would love to be a fly on the wall through your weekend because it's no secret that private equity interest has been in and around the regional banks. Were you interested at all in buying First Republic assets?
So assets? Yet?
We're always interested in buying assets, but not in the banking business. We like others. We're not banks, we don't intend to be banks. We don't buy banks. But if we can be supportive of restructuring of the banking system through the purchase of assets, absolutely.
Now I want you to look beyond even just today because we have the First Republic sale to JP Morgan. But you have Jamie Dimond saying that the banking crisis is almost over. Do you see a whole second wave of this crisis coming?
I think part one of the banking crisis is over and I would never disagree with Jamie because this is his job and he lives it. But if my observation is what's happened so far totally predictable, marked to market losses and treasury security is well known to everyone, structure of deposits above minimum guarantees well known to everyone. Are we surprised we shouldn't be. Everyone knew what was happening here.
Rising rates created the stress. The interesting thing to me is not whether these street banks failed, it's what's the business of regional banking going forward?
Think about it.
Forty two billion left SVB in four hours without a line.
So you're now the CEO of a big regional bank.
Your cost of funds is up, your regulatory costs are up.
Can you lend money?
Or is your business model going to need to change, going to need to evolve. I think that's what's interesting. And I think we have a second wave in commercial real estate.
The second wave in commercial real estate. Do you think that that wave pertains to the banking system at large or a broader set of investors?
I think it is.
Look, there are lots of people own real estate across the world, across the economy. Investors who own real estate, suffer losses. Investors suffer losses all the time growth stocks go down, investor suffer losses. That to me is not systemic in any way. A banking system which has government guarantees where people put their money in a trust relationship, if they suffer significant losses, that's what causes concern, and that's what we have here. It won't be systemic in
my view, but it'll be concentrated. Regional banks once again are the primary lenders to many of our regional real estate issues.
Now, we just saw this morning the big get bigger, JP Morgan buying a massive regional bank. But what happens to the banking system moving forward? You mentioned there will be changes. What does the new banking system look like coming out of these troubles.
I think it's already changed. We have yet to adjust to the changes of two thousand and eight. So if you think about two thousand and eight and Dodd Frank, ostensibly the legislation was to restrict the exposure of the US economy to large, systemically important banks. By the way it worked, banks are less than twenty percent of all lending in the US. The new banks, by the way, are investors. Everyone who's at this conference today, in some
way or another participates in the banking system. But if you ask about banking proper, I do think in the short term we're going to see the big get bigger. People fly to safety when you have any.
Sort of crisis.
JP Morgan is positioned to step into fixed safe first Republic should not be surprised. But regional banks are a very attractive political entity.
Everyone has a regional bank.
It'll be interesting to see how the system deals with the fundamental issues facing regional banking.
Yeah, well, you mentioned banking system has already been our only twenty percent of the country's lending here, So what does that mean for who will and will not be able to have access to credit in the future.
Look, we are I'll say it at a country level, we are fifty percent of the world's capital. We are Our businesses benefit, our government benefit, our consumers benefit. We already have unrestricted assets to credit. Sometimes it's more expensive, sometimes it's less expensive. Go anywhere else in the world. We are the envy of the world. No one has what we have, So I don't know that it gets
to who has access to credit. The democratization of credit through the investor investment marketplace has already created unparalleled access.
Now, if you think about the commercial real estate issues that we've been talking about, I'm really wondering. I know, over at Apollo, you guys look at things security by security, sometimes building by building. What are the office vacancies telling you about the state of the commercial real estate market.
It's a bad day to be an office owner in San Francisco and Chicago.
I mean, we could get more.
Granular than that, but I step back and again try to put it in big picture. Every piece of real estate everywhere in the world that was purchased pre the run up in interest rates as a result of the change in interest rates is now worthless.
We've had such a move in.
Interest rates and real estate is an interest rate sensitive activity, that everything is worthless. It does not mean it won't come back, It does not mean it won't ultimately be a good investment. But in the short term we have significant dislocation. But we also have this change in how people use real estate. Office being the most visible, we are going to see losses.
Now I'm sitting here in conversation with Mark Rowan, the CEO of Apollop Global Management, now, Mark, you mentioned this kind of pain that the office system is still yet to see the office buildings and the commercial real estate. Now what does that mean not just for investors in commercial real estate, but also investors in the regional banks as a derivative effect. Do you think the market is still under counting how bad things can get?
I think the market has yet to ask the long term question. Right now, the question being asked is is the bank safe? Will there be a run on a bank? Will it survive?
Safety?
I believe has been our primary focus. But we've already seen and the government can make this safe with the stroke of a pen. I believe the banking system to be safe. That is different than what is the business of a regional bank going forward? If you don't know how sticky your deposits are, if your cost of funds is high, your cost of operations is high, what is.
Your business model going forward?
Like every other industry that has had to adjust to technology, regional banking is going to have to adjust to technology. I'll be shocked if five years from now the business model of a regional bank looks like what they do today.
Now, let's take a big step back for a second. Because there's this big understanding in the industry that you're in that you can't unwind twelve years of easy money so easily. And you saw a lot of hiccups already, the LDI crisis in the UK now, the regional banking crisis, the crypto crash. What else is still yet to break.
It's hard to be a predictor of what else is to break. But I look at places in the world where we have mismatches between liquid asset liquid liabilities, like a bank borrow short and len long. We have other places in the world where that same build up has taken place ten years twelve years of easy money forced people to do unnatural things to look for yield and to look for rate of return. LDI was the first
time systemically the question was called. LDI was nothing more than a misplaced expectation in the part of UK institutions that public securities were liquid. They found out they're only liquid on the way up, they're not liquid on the way down. We have that same in certain open end of mutual funds. We've seen it in ETFs in point of stress. We've seen it even in some private vehicles in point of stress. So this is not a public
or private issue. This is a mismatch between the underlying liquidity of assets and the structure of liabilities.
Well, speaking of the public markets, there's some question about how well the public markets have actually held up in the base of some of this. You know, how safe can you feel in the fact that you have liquidity.
Look, I stepped and I think about what's happened in the world and the difference between public and private. We used to think public was safe and private was risky. We now know public can be risky as well. We now have found out that private can be both safe and risky. What we're talking about is differing degrees of liquidity. What we have elected to do in our industry and certainly for.
Apollo, is we focus on private.
And the reason we focus on private is we don't believe there is sustainable alpha excess return in publicly traded markets, particularly in publicly traded debt markets. Therefore, if investors come to us for excess return, we need to step away from daily liquid markets. Fortunately, there's plenty.
For us to do now.
Just this morning there was news about arrival of Yours. Blackstone facing another wave of redemptions when it comes to its semi liquid vehicle. When it comes to the real estate market, you know, a lot of big private credit funds, big private equity funds are trying to court retail investors.
When you look at some of the hiccups that some of the current funds are facing in the market, here some of the challenges when it comes to the investors ask for their money back with the for long dated investments. You're on the other side. What does this tell you about the direction of travel? Is investor confidence in retail semi liquid funds becoming dented in disenvironment?
I don't know about dented. First, I think Blackstone is doing exactly the right thing. I think the industry owes them a debt of gratitude because they are teaching investors that alternatives are not an ATM. Now they're in an asset class that is under stressed because people are concerned about real estate valuations, and they are redeeming because they think valuations are headed down. Blackstone is behaving responsibly and doing exactly what they are supposed to do and what
these vehicles are designed to do. But I look forward and I think about the structure of our business. I think retail investors high net worth are going to be fifty percent allocated to alternatives in the next five years. No, fifty, but not alternatives private equity and hedge funds. Alternatives are just alternatives to publicly traded.
Stocks and bonds. They go from double A to equity.
What do you say to people who criticize the private markets the credit markets in particular, is masking some of the risks that would be in public credit markets.
I think the easiest thing to value as a bond bonds are cash flows, intrat rate and duration, and bonds adjusts quickly. The fact is, better risk reward has been available in private markets than in public markets for much of the last ten to twelve years. Everyone in our industry has picked a different segment. The segment we've picked is private investment grade. Private investment grade is something people haven't even contemplated. Think about what banks used to do,
what ge capital used to do. That's the business we've built, and at four hundred billion of private credit, mostly investment grade, unfortunately, we're not relevant. It sounds like a lot four hundred billion, but we're talking about a forty trillion dollar market.
We have a long way to go.
Hundred billion, but getting bigger as well. There's a lot of discussion in Washington, for example, about regulating non banks. Do you think that you will face tighter regulation as things to procure?
I think we all face tighter regulation. That is clearly the direction of travel. Ultimately people look for, is the information available? Yes, the information is already public. Are we mismatched in terms of borrowing short and lending long? No, We're actually countercyclical, and the vast majority of institutions countercyclical as well.
Are we levered No? Are we concentrated?
No?
Are we a diversifier for the economy? Yes.
At the end of the day, the US financial system is the envy of the world.
We are fifty percent of all the action everywhere in the world, and it's a result of.
Decisions made along the way to allow investors to be suppliers of credit.
Well, I think that's the other part of the argument here.
If not you, then who that's the choice?
The US economy, the world economy will need a certain amount of credit, and the choices are you will allow it to be supplied exclusively by the banking system, backed by government guarantees, as we have in many foreign countries, or do we allow investors broadly defined retail investors, high net worth investors, pension investors, institutions to participate and get diversification and socialization of risk. Investors for the most part, are prepared for things that go up and down, things.
That go up and down. You had mentioned kind of the benefits of the private markets in terms of return opportunities here in the credit markets. I'm curious about what you think about the current state of investment grade when you look at the public markets. There has been a lot of discussion about how eerily calm that spreads have been behaving in the face of what many feel is a pending recession. Do you think that there's more risks under the surface when you look at public credit.
I don't think there's more risks under the surface. I think that you have a confused market. You have lots of talk about recession, and you have a yield curve the shape of which is.
Up and then down.
So it does not surprise me that investors who are being offered yields today of a certain magnitude are active in locking them in, especially after a decade of very low rates.
Well, you've mentioned also I've heard you say a few times that kind of the era equity is eroding here. Does that make a bigger kind of secular push to credit in general?
I think it does.
I think this is an amazing entry point for credit, not just because we're in it, but because of what's transpired. Equity we printed eight trillion dollars from two thousand and eight until twenty twenty two. Exactly what was supposed to happen happened. Now that we've started withdrawing it. Entry point for credit is fabulous. Has adjusted very quickly. Liquidity has eroded, banking crisis has further roded it. We have a unique entry point for credit. It will not always be this good.
Equity has adjusted somewhat, but not nearly as much as credit now.
Also, I mean we've seen from the banking system that what was safe yesterday can be rated as junk tomorrow. Do not believe that we would be facing the greater wave of downgrades.
I think all pricement, there's no doubt.
But if you are concerned about the direction of travel, if there's uncertainty, I would almost always rather be top of the capital structure, senior secured.
You tend to get paid back.
So for our shop, the bet we've made has been on private investment grade.
I like our hand.
I would rather play our hand than anyone else's hand in our industry.
Now, I'm kind of curious about Apollo's plans throughout the rest of this year. You're looking across Wall Street, You're seeing a lot of people either slimming back on hiring or flat out letting go of thousands of staff. What opportunity do you see there? Given Apollo has already tremendously added to have headgn in the.
Last we will continue to grow.
We've already said our business will be up in the asset management side. We've told the street better than twenty five percent this year, on the retirement services side, better than twenty percent this year. And that's with an overlay to our strategy of what we call no new toys. And the reason no new toys is not to add new things. The upside from simply executing the business plan that's in front of us is so high that the
price of distraction is just very hard to contemplate. So I think twenty three for us, we will grow, we will add team, but we will do it in the context of the envelope of our business that exists and no new toys.
Are you finding it very easy these days to hire from the banks or even the technology companies that are slums back.
It's never easy to hire. This is always about culture. But we have.
Grown the team tremendously and in fact is the limitter of our growth. At the end of the day, we provide our client's judgment, and that judgment comes from people being at Apollo for a long time and integrating into our culture. We can only grow as fast as we can culturally absorb people.
There's a natural hedge.
If you will, or a natural limitter to our growth, and we watch that balance very very carefully.
Before I let you go, before Wednesday's big FED day, what do you expect in terms of the direction of travel when you look at the interest rate trajectory for the rest of this year and what it means for the state of markets.
Look, I think there's a there's a push pull. I think the direction of travel Wednesday is going to be up.
It'll all depends about the.
Language that surrounds it and the activities that take place following it. If we have a second leg of this banking crisis that I obviously augurs for slower. If we don't and we continue to see the wage pressures that we just saw, it'll be tougher.
You're listening to the team. Hen'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.
Let's bring in Herman Chance, speaking of Bloomberg Intelligence. He covers the regional banks here. So Herman, I guess it's done. JP Morgan, First Republic. You know, we kind of went into Friday thinking something's going to happen. JP Morgan was certainly on the list. We kind of wake up Monday morning.
Here way up there at the time, top of the list. Boom, they got it. What a shocker? What did how did why did they?
What did J?
I guess?
How did jpmore win?
What did they do to put them over the top to beat out Bank of America and.
P and C and some others? Yeah?
Sure, so what Bank of.
America declined to even participate in the addiction? Okay, so did US Bank? And we know that PNC and citizens were invited.
But I'm assuming they probably made a bid, but really assumption what really put JP Morgan over the top is that they are acquiring all of the assets that are underwater, both on the loans and security side, Whereas any potential regional bank that would have made a bid probably would have just cherry picked the best and most attractive assets
and left these underwater securities and loans with the FDIC. So, in effect, the FDIC made the best choice in limiting the losses to the Deposit Insurance Fund by doing the deal with JP.
We don't know, this probably isn't in your remit. But the flip side to that is that now we kind of set a precedent for a JP Morgan or I don't know, somebody else that's of that ILK, that they're really, you know, the lender of last resort, that they're really the backstop. It may not be the regulators.
Yeah, we just wrote about a little bit about this with respect to PNC, that was in our mind the most likely acquire of the First Republic assets and deposits.
And if the regulators are going to let these systemically important banks acquire these failed banks, then it makes the region is less likely to be able to absorb these these types of deals because the FDIC would most likely prefer to deal with the largest banks because they can acquire the entirety of these troubled assets onto their own balance.
Shot, let's parse this out because there's also a lot of spin here. There's a lot of politics. The FDIC doesn't want to be blamed for bailing out there rich, which they did, and they didn't want to take the bank into receiver ship, so went to JP Morgan. But
they had to first take the bank into receivership. Right, how much is the FDIC going to have to pay initially and how much are they going to have to guarantee in terms of insurance to convince Jamie Diamond, who remember, wouldn't even take a call for SBB because his board wouldn't let him. Now his board's got lenient in just six weeks time. How much does the FDIC really have to shell out in this big bail out of the rich.
The FDIC estimated in the press release it's going to be a thirteen billion dollar hit to the Deposit Insurance Fund, which, in the grand scheme of things, is better versus the twenty billion dollar hit they're taking with the SVB failure, So dealing with JP Morgan is more is more advantageous for the regulators, and the FDFC is offering a lost your agreement on the loans for First Republic and their offering so financing.
Lost share agreement. So they had to pay thirteen billion upfront and they're going to have to pay the other at least nine billion down the line because JP Morgan and their slides estimated that the loans they bought are worth twenty two billion dollars less than par.
Right, so they're taking a thirteen percent haircut on the loans, which is much larger than what we've seen out the others. For example, the other failed bank deal that we found from a New York community and signature, they were only taking a five percent haircut. So it just reflects the underwater nature of the loan book that First Republic had.
All right, Herman, thank you once again for coming to our rescue, bringing it making it all clear here what's happening on the regional bank front. Herman Chann from Bloomberg Intelligence.
You're listening to the tape cats are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
A little preview, what maybe the markets are thinking about when we get to that FED day. Let's bring in one of our all time faves, and whenever we see her running around the Bloomberg HQ, we grab bring her down here to the studio. Liz McCormick, Chief correspondent of Global macro Markets with Bloomberg News List, Thanks so much for joining us here. What are you going to be looking for this week? I mean, we've got the Fed on Wednesday, We've got economic data. Every time we turn around,
there's something being released throughout this week. What are you looking at? What do you think the markets are looking at?
Well, yeah, it's like a blockbuster week. We have the Fed and also on Wednesday, for the bond walks, there's a Treasury refunding, you know, so the Treasury Department weighs in on their thoughts about borrowing, and then payrolls on Friday.
And wait, what is the Treasury refunding, they weigh in, they just give commentary.
No no, no, So they say, hey, this is our borrowing plan for the quarter. So you know, dealers are always looking are they going to increase auction sizes more notes and bonds this time? Given the constraints of the debt limit, their kind of hands are tied. They think they're going to keep notes in bonds stable, but they're looking for insight.
You know, does every sentence have an asterisk at this time or do they say, like, actually, as of now, we don't have enough money to borrow at anything at all. I mean, well, that's exactly right.
If you look at Luke crandall from rights and he was writing that some of these they give some financing estimates today and then the refunding is Wednesday, but that Treasury has been assuming each time they do these numbers that there is a resolution of the debt ceiling, which
of course hasn't happened. So it's a lot of asterisks and if and only so that's why they're going to try to like do nothing with the big kahunas the notes and bonds and just give some more guidance because there's a lot of people saying, you know, there's going to be a wave of new treasury bills after we get through the debt limit because they've been kind of cutting them back dealing with the extraordinary measures and to stay under the debt limit.
So there's the short end.
Folks have a lot on their mind. You know, bills as you talk about, a lot affect the curve. There's pricing of the you know, risk of the debt ceiling. Let's not buy the bills in certain areas, so for the bond folks, and there's other things that they'll kind of communicate about their plans. So but on the FOMC, I was listening to you guys chatting with Jess and
I think she kind of really nailed it. That people are saying, well, stocks and things are holding it okay because the market is priced for like hike, a pause, a pivot, and a cut. That's like Tom s e
of A seven's report always says that. But if the Fed doesn't signal that, or if they you know, hike one more time and make it sound like wow, there's a chance we have to do more or just really try to push back on this surety for cuts, then they're talk but yes, yes, might take a hit, you know, So that's what people are looking for.
What does he have to say, Well, that's what they I mean. So if that's what they have been saying consistently the Federal Reserve, So if they don't say it as consistently this time, that in and of itself is news, right right.
In fact, Anna Wong at Bloomberg Economics is calling for a hawkish hike, right, you know, But I said, the problem is the market doesn't seem to take it that way.
So I don't know what all has to say.
You and some other folks, Garfield Reynolds and Red Pickered are out with something a note today or I guess call it a piece of journalism. I don't know what you call it. In research we called research note. Anyway, it's good reporting. I think I know stagflation when I see it. It's a slowing economy and high inflation. That's stagflation. That sounds bad, is it?
Well, it depends on what you're in, right, You try to and I keep saying to people, this is maybe not your mother's stagflation. It's like, you know, people are calling it stagflation light, so maybe zero to one percent growth, inflation staying above the Fed's target, so not the horrific horrible seventies, but not great, So you got to kind of pick your spot.
So real stagflation is inflation with contraction.
Exact.
Mean, it's pretty basic. And I know everyone's tried to make up new definitions over the past couple of years. But if you have inflation and if you have a contraction, that's stagflation. That's not in the Miller household.
Yes, that's that's a Midwestern and we have no debt ceiling.
Yeah, there's just so many things on the radar here, you know. And I was joking with a colleague, you know, inflation, even though you hear, oh, certain things are getting better, I don't know.
When I go shopping, I'm like, wow, that.
Those berries are expensive.
I think I can live on bananas, you know, whatever's cheaper.
Everything I do is more expense. I had I broke my iPhone. I had to buy a new one. I don't even want to tell you how much it costs. Well, I went to the movies on Saturday. Very expensive. I want shopping.
This week, I went to a factory outlet store for the first time in my.
Life, the first time you've ever been to a factory outlet store? Yes, which one? Did you go to? Nike?
So just just you didn't go to one of the factory Alan malls. It was the factory out of malls, the Shore Factory out let.
Mall in fall Es.
Actually it's got had everything every brand. I didn't know that this whole world existed. I saw a movie about Nike this weekend.
I want to see that. I want to air the Air Jordan movie. My wife loved it and I thought it was pretty good. And Liz ask him how he got there. He drove in a Sure, we drove there in a white Rolls Royce ghost with red bright red leather interior.
What do you not notice us and see in his town that didn't even stand out? It's just like, oh yeah, that's just the Miller's all right. Liz McCormick, thanks so much for joining us. Lots of echo data, lots of fun stuff we'll keep an eye on all week.
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.
I want to talk ETFs. Ye, right now. I love talking about ETFs. You have a show TV show by ETF. Yes, and it's a you know, it's a more than ten trillion dollar industry globally. Forecasts are for the ETF industry to double within the next I think five years, so right now seven trillion in the US.
And that's why the young guys are going to the ETF business.
Yes, but there's some old people in ETFs as well.
Okay, were you with Northern Trust before I was with the Trust. I haven't even brought him in, But here's the story. Our next guest was with Northern Trust in Chicago. The crustiest money you could ever imagine that all the money in the Midwest, Northern Trust manages. You go into their offices in Chicago, it's like the nineteen thirties, which is awesome, which was.
When Chicago was at its peak.
Right, And so this young buck a Northern Trust gets trained up in the crusty world of pensions and all that kind of stuff and he goes to the et business.
Well, that actuallyins it. I think it's a pretty convincing product. He also worked at Invesco, one of the biggest ETF issuers in the business. Tim Urbanowitz is in the studio. Thank you, Tim for coming to New York and joining us here in the in the studio. It's always great to have guests live. You are the head of research at Innovator ETFs. Now after the experience, we've talked about your CV already, and you went to Wheaton College as well,
so you're all in when it comes to Chicago. Tell us first of all about Innovator ETFs and what drew you to that firm.
Yeah, So Innovator ETFs it was actually founded by the same two partners that founded the Power Shares ETF franchise back in the early two thousands, Bruce Bond, John Southern. That business was then sold to Investco, fourth largest ETF business in the world. Now, so I had the opportunity to work at power Shares for a while, really cut my teeth in the ETF business. Learn a little bit about it. You saw power Shares grow to the monster
that it is now and then Innovator. You know, Bruce and John founded Innovator back in twenty and seventeen, and the idea was really you know, the first time, it was how do we take the ETF rapper put a more intelligent strategy underneath the hood, and that was how smart beta was born. This time around with Innovator, it was how do we take some of the interesting payoffs that we're seeing in the structured noteworld and make those
more efficient. How do we use the ETF wrapper to provide the tax efficiency, the liquidity, get rid of the lock up period, surrender charges, all that stuff that you see in the structured noteworld and just make that experience much more efficient for investors. And that's really how Innovator was birth.
And this is I mean, the ets we're going to talk about now are part of a whole new class. You had your playing vanilla atfs. Of course, I think now thirty years ago was when they first put out the spies, and then you had smart beta ETFs. You know, different weighting on stocks and the index for example, is one way that people do that. Then you had thematic ETFs, which were all the rage last year. And now buffers
have become Buffers is like a keyword now. But you say a barrier APRJ for example, is your innovative innovator premium income, thirty percent barrier ETF. What exactly does this product do?
Yeah, so, I mean you look at the category of we call it defined outcome investing, and really this is when we talk to advisors more than anything else. What their clients want to do is to remove as many of the unknowns out there as possible, and really a buffer and even a barrier. They do that by providing a defined or known outcome, so we really remove the
guesswork altogether. So with a barrier, what we're striving to do is provide a defined level of high income with built in risk management, so a known barrier against losses over the outcome period. So APRJ you have a thirty percent barrier against losses over the next twelve months.
With meaning you can lose up to thirty percent but no more.
Meaning that if the market were to go down on a price return basis anywhere from zero to thirty percent from a April to April, you would be fully protected from those losses.
Oh sorry, okay, you can. You can avoid losses down to thirty percent, but when it's if it loses more than thirty percent, which God forbid, right, then you've got to start taking a hit exactly.
So that's when you would see if you break that thirty percent barrier, that's when you're down one for one with the market the whole way. The difference here is that you're always going to get that income, so that distribution rate is known and that continues to be paid out regardless of if we break the barrier or not. So at APRJ, that thirty percent barrier level, just given a client's view of the market right now, that is one of the most popular strategies that we've seen since
launching one of the biggest asset gatherers. Just you know, if you don't think the market's going to go down more than thirty percent, to be able to say, hey, I can get you that seven percent rate with no guesswork, it's a very powerful conversation for the advisor to hit and have with their clients.
Paul, a thirty percent drop on the S and P five hunder it would take us to twenty nine nineteen.
Oh that's not good, so it's pretty far down. So what's in there for you guys? I'm get seven percent, I got downside protection. You're not doing this for free.
So we charge a management fee. Seventy nine basis point expense ratio. That's all we get other than that. We're setting the options package on day one of the strategy, and we set that package. That's how we're able to deliver that defined outcome. So there's nothing else other than that expense ratio.
You have another one, PAPR. That's the innovator. You asked equity fifteen percent power buffer ETF. I guess this is similar, right, what's the difference between the buffer and a barrier.
It's similar, but there's also a big difference. So similar in the sense that you have a defined outcome, so we know whatever the market does, we're going to have that fifteen percent downside buffer in place. So with a buffer, no matter where the market goes, So let's say the market goes down fifty percent, you're always going to have that fifteen percent downside protection in place. So in that scenario the market goes down fifty percent, you would be
down thirty five percent. On the flip side of that, Unlike the barrier, you have upside potential with the buffer ETF, So PAPR you're capturing the first fifteen give or take fifteen percent of the upside of the sens P five hundred ETF's price return with that fifteen percent built in buffer against losses.
So right now, so instead of the seven percent guaranteed return, you're allowed to take part in the upside up to about fifteen percent exactly.
You get that upside appreciation. And I think part of it is, you know, why you're seeing this defined outcome in buffer category one of the fastest growing categories of ETFs again this year, is because a lot of clients look at the market they say, Okay, is it really going to go up more than fifteen percent? All the headwinds that we have, restrictive monetary policy, all the impacts of the past hikes that we've seen, the chances of
that A lot of advisors think that's very low. So they view this as a very good trade off to be able to help hedge some of that recession risk.
But Paul apr Jam, I mean, you're talking all the time about putting money in the two year YEP for four point one percent right now, which makes sense. But if you don't think the market's going to fall more than thirty percent, which is serious crater edge YEP, then you're going to get seven percent with apr.
J, I tell you, these guys selling me right here, here's I stand. So who's actually just consistens of that flows in into these funds? Yep, So inception the barrier.
ETFs launched at the beginning of April, and we've already seen over sixty million dollars of inflows in just the first few weeks, which, if you know about getting ETFs off the ground, that's that's there's been a lot of demand. I think a lot of that demand has really come from a lot of advisors that have seen the benefits that come with the defined outcome wrapper and they're just translating them over. So they had this on their you know,
the equity side for the price return. Now they're transferringing that over to the income sleeve with their portfolio. So how do I replace things like high yield bonds with a thirty barrier or you know, even investment grade bond? How can we put those in that sleeve?
How many ETFs are there out there? It seems like you guys are coming through the door every week with new things that every time I'm like, boy, that's cool, that's interesting. How many ETFs are out there? And how do you differentiate yourself.
So we have I don't know what the industry right now, it's hard to keep track of.
I feel like it's growing quickly close.
Yeah, it is. We have about ninety in our lineup, and really, you know, we don't just launch anything, but our goal is to really take ideas that clients want exposure to. We look at what's going on in the structured note world, what are sales like there, what are clients gravitating towards, and again taking those payoff profiles that have been very successful, whether it be a buffer all.
The time, Matt, that's kind of what my guys pitch me all the time.
Yeah, and we're taking that. We're doing it for cheaper without the bank credit risk, which is obviously becoming more and more important, without the lock ups, the surrenders. You know, the ETF rapper is just so advantageous and so beneficial in so many ways. We're really just taking at and gravitating toward ideas that we know advisors already need in their portfolio.
What's the best place to live around Chicago, what's the what's the uh Wheaton looks great, right, Lake Forest. I've heard a lot about up there.
What's the Uh, Well, I'm a big fan of Wheaton, Illinois. We're calling it basically outside of New York ETF capital of the World too.
Lot of it really is the ETF capital of the world. I mean, Eric Beltunas was this just there and did like six meetings in that little suburb.
He was in our office walking just point to point. So it's a great, little, great little town.
Go figure.
Somebody's got to do it right, all right, Wheaton, Illinois. Timber Bannitt's Bandwitz, I'm sorry. Timber Bannowitz, head of research at Innovator ETFs. Joinings here in our Bloomberg Interactive Brookers studio.
You're listening to the tape cans are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven.
Matt, did you know that AI stands for Artificial intelligence?
I had heard had heard about that. I think that's becoming a thing.
I think it's something that we need to pay attention to I'm not gonna I don't know anything about this thing, but our next guest does and that's why.
We got him in our Bloomberg Interactive Broker studio.
Krishna Gupta, chairman of Presto Automation, Christian, thanks so much for joining us here. Can you tell us what you guys do at Presto Automation, which, by the way, publicly traded company pr ST is a simpler to put into Bloomberg terminal.
Yeah, so thanks for having me and really excited to talk about AI and Presto here. So Presto is quite simply an enterprise AI business for the restaurant industry. Restaurants, okay, and very simply. What we're looking to do is automate every drive through in the country, so using voice AI instead of having a human. I mean, I'll just ask a simple question. Do you think in three years time there's going to be a human taking your order in the drive through?
I guess it depends where we go, right because.
No, now that you mention it, no, I'll go with you on this one. So tell us how it works, how you think it's going to evolve? Yeah, well, it works very simply can I actually drive up and say number two with a coke? Well, when you drive up, someone says, hi, what would you like to have?
Right?
Right, So that's what our AI will do.
Hi.
You know, it's like they ask you what would it like to have? Then you might well that we're gonna get to that. It's very interesting. So he's gonna say number two, or he's gonna say I want whatever, and then they'll say, okay, great, would you like fries with that? Would you like a drink with that? It's hot outside? Would you like an ice drink with that? So you know, let's sort of split up what the value proposition is for the restaurant. The obvious one is there's some labor
labor cost savings. And there's a reason why this is relevant today. We're a really specific and interesting moment in time where labor costs are rising, and so in the past, you know, restaurants hadn't adopted much AI or technology because labor costs were low. And then the other thing is the AI technology has developed. We couldn't do this eighteen twenty four months ago, and so the fact that those things have converged, so there's clearly a labor automation play.
But then the other part is, you know, to what Matt was talking about is the upsell, and the upsell is something I obsess over because the human being, the minimum wage employee is not up selling. They're forgetting to upsell. They get tired top sell. They are very far from an optimal up cell. And we look at our team incentive,
right and they have no incentive. They have no incentive, and so so whereas for us, the AI never gets tired, it never forgets, and we are increasingly making it more optimal. You know, right now we can we can personalize it to some extent by time of day, weather or maybe what you ordered. Over time, I'll be able to reach your license plate, I'll be able to sink into the loyalty system and say, okay, Krishna driving through. You know, clearly he's ordered a vegan burger. He probably wants a
vegan brownie because it's a chocolate addict. And so that level, like the perfect upsell, does three things. It makes people, you know, move through the sort of drive through is still in a very fast way while increasing the check size by a few percent. And the other thing it does it leads the customers happier, you know, like customers walk away feeling like they got something that they didn't
necessarily know they wanted. So yeah, that's it's it's very simple to understand, and that's what we do.
So what I mean, you founded this business in twenty seventeen, but you say you didn't have the technology to do what you're doing eighteen twenty four months ago. What changed? I mean, what motivated you to found it before you had the technology and what changed since you started the company.
So we actually started the company more than a decade ago out of MIT, and the the sort of impetus was always engineering school.
Yeah, I've heard of it. I've heard of it. They're pretty good at here.
Yeah, we're okay, you know. And so so you know, we started it initially to do the same thing, which is drive labor automation and increased revenue. But initially the use case was at the table. So we have tablets at the table where you can order, you can play, you can pay, and that's that's a business that's out there.
It's several large chains using that technology. Three four years ago, we realized that the same kind of labor automation play, especially as we headed into COVID, we realized could be applied to the drive through and that's where we started. COVID is what forced us to start thinking about it. So I would say our current business is a direct output of COVID.
So talk to us about some of the conversations you're having.
I don't know who you.
Can discuss disclose with whom, But where are you in terms of the discussions here and rolling out the technology and how's it going?
Is it better for bigger chains? For example? I can see how this would work really well with a McDonald's. Everybody knows that order the menu is pretty simple, and it would be more difficult I guess a more customizable, smaller fast food restaurant.
Yeah, so it works for everyone, right, It really does. I'm not gonna comment on a specific name, and what we have out there publicly is we work with checkers in Del Taco. At the end of the day, it works for everyone because everyone has the same challenges right now in the industry, whether you're a large chain or mull chain. Labor is hard to find, it's expensive, and then you know you have a menu that's constantly changing.
You need to figure out a way so there's complexity in the technology, and so when we think about how we roll it out, we are thinking very actively about what the corporate cares about and what the franchisees care about. And this is one of the technologies, not every technology and hospitality actually it's a few of them are with a franchise ease really wanted because they see the value proposition. These see the ROI, and then they're going to corporate
and saying can we have this? And then corporate is sort of doing their evaluation and doing what the corporate does. But it's been really energizing for us to hear from franchisees directly and understand their need. And so when we roll out where we sell to corporate, we are actively thinking about the franchise e population first and form.
Is there a legacy problem because the systems, the automated voice systems that we already deal with. I was on the phone at the horizon for two hours yesterday. They suck. They're really bad.
You know.
The worst thing that can happen is if I call a service department and I get a computer and I immediately start saying agent, agent, agent, give me a human. Now I can imagine a better use case at a drive through, But do you have a difficulty selling it because the automated systems the computer voices were used to have been so useless.
It's a great question. And and you know, I would say we talk a lot about AI, I mean talk a lot about generative AI these days, but you know, the drive through actually ends up being one of the most immediately actionable and scalable like applications of generative AI in the enterprise. The other one would be customer service to some extent, but customer service is actually much harder because you have to deal with you know, you're on the phone with Verizon, and I know that business very well.
I'm a large share holder of another company that works with companies like Verizon, so you know that business. You're dealing with an angry customer that can go in all kinds of different directions. And you know the baseball game this that in the through, you have a relatively confined situation where you have only so many different ways it can go. Now it can go in different ways, so it's not so trivial. You know, you might think, you know, hey, I want a chocolate shit. Oh no, actually I want
a strawberry shake. Oh what about your special? Can I get fries with that? Honey? What do you want?
You know?
So there is sort of complexity in terms of what the voice has to pick up on.
What's the original frosty they're offering me now, Vanilla or chocolate? It's one of frosty. When I was a kid, there was only one choice there, you go.
Well, so now there's gonna be a lot more choices.
You know.
I'm very upset still that Starbucks killed the pistachio latte from three months ago, but apparently no one else seems to like it, so so, you know, I think there
is there's a real opportunity to the voice qualities. When I said this couldn't be done eighteen twenty four months ago, it's partially because the quality of the voices and the humanness of the voices has improved dramatically too, so it is increasingly sounding more conversational, and at the end of the day, our goal is just to make it as much like a human frankly better than a human, right, so that you're getting in and out of their as fast as you can and getting what you want.
All right, interesting stuff, interesting, practical application of artificial intelligence in the hospitality business. Christiana Gupta, chairman of Presto Automation Trades PRST is the ticker. It went public via a spack as a lot of companies will want to do back in the day, so I want to keep an eye on this one.
You're listening to the tape Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty Man.
To be perfectly honest with you, I know absolutely nothing about insurance, ignorant to the nth degree, and I've tried to educate myself, but it just doesn't help. Fortunately, I've got some good people.
Helping me out.
I think, or maybe they're fleecing me, but I think I'm in good shape. But I know I like the business and I like talking to Pat Gallagher. He's the CEO of Gallagher Insurance and the stock simles a JG. You put that in there and then you hit GP for to get the graph. The stock is hitting an all time high today two d and ten dollars. Not too shabby. It's up twelve percent year to date, up twenty seven percent over at trailing twelve months. Pat, congratulations on the stock price.
Good for you.
Why is your stock hitting an all time high?
Well, thank you guys for having me on. Look. I think a couple of things are happening that make a lot of sense to me. Number One, we're finding that our middle market clients, that Corporate America and the tech companies are not necessarily indicative of what's happening in our client base. Our clients are healthy, their businesses are growing.
We are seeing infrastructure spending in construction accounts, et cetera, et cetera, and so the recession that has been touted in the press for the last twelve months has not yet at least hit our major base of where our
clients are, and they continue to be healthy. Secondly, rates in the insurance industry continue to rise, and that's because loss costs are up in large part due to inflation and nuclear settlements, judgments by juries, which is forcing lost costs on insurance companies to rise, and they're covering those by raising premiums. And lastly, we have inflation. And when you look around the world and try to find an industry that does well with inflation, they're few and far behind.
And the insurance brokerage space does well. When your property values rise, your premiums rise, our commissions rise, makes it more difficult for us to do the placement for you if you're a large portfolio. But nonetheless we get paid for it, and I think that's what's happening. We fall on a lot of screens. We look very good, we're very healthy, and the company's done extremely well over the last number of years. So also we're not extraordinarily priced
at a high multiple. We're at a multiple that fits the SMP makes sense in a business that makes sense, that is a business that everybody needs, that's growing organically and by acquisition everyday, single quarter.
So first I want to touch on one thing that has well. I guess it has a lot to do with the business, but not day to day operations. You were voted among the world's most ethical companies. I thought of that when Paul said he's trusts the guys he has advising him, or maybe he's getting fleeced. I'm taking it from this award that you don't fleece people.
Well, you know what, I really appreciate you bringing that up because we're extremely proud of that. So thirteenth year we've been recognized by the Ethisphere Institute, whose role is to promote ethical behavior in the business community on a global basis. The only award this to about one hundred
and thirty five companies. The process by which we go to apply for this award is incredibly onerous, and it's very important to our culture to continue to emphasize from the day that my grandfather started this business in nineteen twenty seven, ethical behavior is critical to our success. Never ever forget it, and we take that right to the mail room, and we're proud of this award recognizes that I take it.
Your grandfather with Arthur J. Gallagher and and how cool would it be to have your initials as the ticker? Yeah, for the company, AJG is the ticker. And every time I point this stock out to somebody, I have been pointing it out a lot since we last spoke to you, Pat. They're always blown away by the size and the value of the company. How do you deal with getting that big? Is it hard, you know, because I imagine at this size you have to always be hiring more employees.
With the kind of.
Regulation that we deal with, you have to have a huge compliance department. I mean, the operation must be so large that your grandfather might not even recognize it today.
Well I'm sure you wouldn't recognize it at all, but thank you for bringing that up. I mean, first of all, I think we've built just an outstanding team, and it's a team that over the years, have to each other. Look, we've got to build a chassis that can put a twenty billion dollar company on top of it.
Now.
The other thing, too, is when you talk about all the things you just mentioned, people look at us to go, oh, Gallagher's on its way to ten billion. But remember, we count the revenue that we get as commissioned So if we're a manufacturer, in essence, our revenues would be ten times because they're counting their gross revenues, we're counting net. So it makes the company even bigger. But we've got a chassis that deals with that. Our professional back room
is outstanding. You're correct. We have a significant compliance component and we're proud of that. Our people get it and I'll tell you what I'm most proud of of anything we've accomplished, including our stock price, which is really just beginning its run, is that this culture has hung together. I started with this company in nineteen seventy two is an intern We didn't have one hundred and twenty people, and today the culture feels the same as it did
forty six thousand employees later. And that is the answer to our success.
That is an impressive We have a listener writing in pat His name is Matthew Pallazola. He's kind of a plant because he's the insurance CENTERLS for Bloomberg Intelligence. He asked that your company's been going into the non admitted market, so he's suggesting maybe you describe what that market is and kind of why you're in the market, what trends are you seeing there.
So not admitted is referred to in the industry as excess and surplus and what not admitted does not mean that they can't trade. It means that they're not regulated by the state to form and rate in the state that they're applying their insurance. And you have to tell the client that you have to say, look, I am not XYZ insurance company who file files their rates and has governmental oversight. I can basically sell you the coverage
I want at the price I want. That's excess and surplus, and that market is growing exponentially because of the fact that the regulated carriers are having a very hard time getting the rates they need, and every one of them are putting rates up and having to go to regulators to get those approved. And insurance is something that's absolutely necessary. So those that trade around those rules appropriately, by the way, I don't want to make it sound like they're doing
anything wrong. Access in surplus is a very very important part of the market, especially when you look at things like California fire, earthquake, Florida wind, that type of thing, And that market has always existed, but now it's growing at a much faster pace than normal because losses have been so great.
Well, that kind of goes to my next question.
Pat.
It seems like almost every week every month, we see some devastation going through the state of Florida, whether it's hurricanes or floods or tornadoes. Talk to us about insurance in Florida. Can can anybody ensure that area down there?
Well, there's another factor in Florida that is really difficult, and I think the governor's rightfully trying to address it. The state has passed and needs to make sure it holds to it to tort reform, because Florida has a very, very litigious nature. So here it is the darling of the business community. You know, what a great place to trade, and it is and we low taxes, et cetera, et cetera, and a great economy and people are moving down there
left and right. But there's the tort situation there is really really difficult for insurance companies. So add that to the fact that you've got floods and surge and wind, and you hit right on the reason access and surplus is growing so quickly because it is a very difficult place to insure. And I'll tell you my friends all over the state have called me, can you help me on my homeowners? Can you do something about my insurance? And I'll say to them one thing, do you have a quote?
Yeah?
Yeah, yeah, but it's expensive by it yep, So it is. You raise a very good point. It's a difficult state for insurers to make money in, and the state and the governor are trying to address that. And I think appropriately.
So, Pat, let me just ask you how you've dealt with the rate risk that has taken out now four banks in six weeks. You know it's easy to fault those managers in hindsight, but at the time, you know, treasuries seem like a safe bet, mortgages a super rich people seem like a safe bet. How have you dealt with that risk without having the same problems as these others.
Well, remember, we're brokers and we're not frankly risk takers. So when you look at an insurance company, we're the ones who packish your risk. So we're the ones that would when we started the conversation, you know you're getting advice. We would typically be the ones giving advice and making sure that your placement was with a licensed carrier. Then when the loss happens in your house burns down, we don't pay it. So similarly to the banking industry, we
aren't the major buyer of those bonds, et cetera. We take a dollar, we keep a dime, We send ninety cents to an insurance company. So I really don't have any commentary about the banking industry because I'm not expert in that.
At all, well, that sounds like a good business you're in.
Yeah know what I mean.
That's like an asset asset you know, kind of liability light business. And Pat's the only guy that can make insurance interesting to me. I don't know how he does it. Pat Gallagher, thanks so much for joining us. As always, Pack Gallagher the CEO of Gallagher Insurance, formerly known as Arthur Gallagher and Company Arthur J. Gallagher, which gives you
the symbol a J G on your terminy. You punch that into your Bloomberg terminal, you'll see a forty five billion dollar market at company that's hitting all time highs. That's not too shabby.
Thanks for listening to the Bloomberg Markets podcasts. 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. And I'm fall Sweeney.
I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio