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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 actually think it's a huge black eye for Silicon Valley. That's just my East Coast bias problem. Let's check in with Dan Ives.
He's a senior equity analyst a web Bush Securities. Dan you follow Microsoft closer, you follow the tech space as closely as anyone else at here. We've had a few days here to kind of digest what is a very fluid situation still to this minute.
What are some of your takeaways here?
I mean, if you have a clown show that runs the board, this is what happens. And essentially this is four individuals that took down a ninety billion dollar company. And I think when what happened over the weekend, they were essentially seven year olds playing checkers at the kids table, and then the Della, the grandmaster chess wizard basically was three steps ahead took Alman. Now essentially this is a shell company where all the assets essentially moved to Microsoft.
And is it all a surprise that all been so quickly? It seems to me it makes sense. But it seems that like very swift move for Microsoft to swoop in and snag Altman that quickly.
Almost the golden child of AI, I mean, no different than Zuckerberg to social media, must to electric vehicles. He was the asset, you know him, Brockman and some of the top leaders. The last thing that could have happened, the worst case would have been them going to an Amazon of Google and Apple because there's just massive, massive demand for these assets in terms of not just them, but the seven hundred open Aim boys. Look, this is
a board. I mean they're gonna be dealing with legal issues for probably you know, the next decade because of this. But the reality is they took down a ninety billion dollar company by themselves.
You know, with a little bit of hindsight, Dan, do we know why they did what they did? What was the core issue here for the actions on Friday?
I think Paul, you hit on it. It's typical four to oh eight Valley, you know, where they you know, whether it was egos, political and not communication. I mean, all men became the face AI. It's a board that probably felt slighted, you know, obviously went back and forth, and then I do think they underestimate the ramifications. I mean, when you look at you chief scientist, co founder, one of the four vooted, was key in getting them fired.
Then all of a sudden yesterday morning says, oh, he actually regrets it.
Paul.
That's like that's literally like burning someone's house down and then the next day coming with a Hallmark card and a he's a chocolate, saying I'm sorry, all right.
So one of my issues or one of my questions, I guess Dan, is I mean the sam Altman and others are obviously key to this whole AI technology. But doesn't the intellectual property reside at open ai. Doesn't the entity control it and have most of the value as opposed to what's behind or what's between sam Altman's.
Ears before Microsoft? Yes, after No, I mean now essential that technology is baked into Microsoft's ecosystem, and that was part of the deal. You know, in my even though it's forty nine percent, if you look how Microsoft actually structured the deal, I mean open AI. That technology is
essentially embedded in Microsoft. That's why they recognize that the value of open ai is basically goes up and down the elevators if they come to Microsoft that open ai essentially is a board with a third rate ce interim CEO former Twitch And that's it. And now they'll just be spending all their time with lawyers.
And Dan, what happens next and how do you incorporate sam Altman into your? Valuation of Microsoft stock was up two percent yesterday, but is not really continuing to add to those games.
When we went to bed midnight Sunday. I mean Microsoft could have been down eight ten percent if Nidela didn't swoop in, because that was the fear. Now it's essentially I'd say Microsoft's in a stronger position today. You show the reaction yesterday then it was on Friday. It's a win win because either way, the legal, the global pressures, the board, they're lawyers, they're gonna resign. Then it's actually a better situation than was before Friday because you don't
have a GV circus show board. They're blocking things and then if they just sit there, then they'll all just go to Microsoft and it's essentially a shell company. But it goes back to they were playing checkers, I eight year olds, Nadell was playing chess.
So do you think Sam Alman? I mean, I don't know. I haven't even seen an interviewed. There's a guy, I mean, for us who aren't tech folks really under the radar? Can he work and can these people work in a big corporate organization like Microsoft? Can he report to somebody, some other executive, whether it's Nadella or someone else.
Oh, it's a great question. And in Microsoft, I mean they're very well versed in doing this in terms of almost an entrepreneur atmosphere in that Redman headquarters on campus. Just leave them alone do what they do. I mean, it's similar to the success they've had with LinkedIn and other assets that's part of that DNA and Microsoft, which speaks to why all men Brockman signed up so quickly. And now either way it's a win win for Microsoft.
They are positioned for a Nadella just a phenomenal PR show yesterday, because that's just putting more and more pressure on the board because either whichever which way it happens, it's a win for Microsoft.
So, Dan, from your perspective, what do you think is a better structure for this AI investment and technology to continue to flourish. Is it for Sam to go back and his team to go back to OPENII with a revamped board. Would that be better than sitting within the halls of Microsoft. How do you think that should play out?
You get rid of the four circus show board members and you put in Brett Tayler, Marissa Meyer, you have someone from Microsoft, a legit board governance is there? I think that would also give comfort to the Beltway. You're just given how important this technology is, and then they go back it's actually buried than before. That's the ideal situation.
That's what everyone thought was going to happen Sunday, and they're just turned into what's going to be an infamous probably a Netflix documentary at one point in terms of what happened here, and.
You mentioned Alman could have gone to Amazon, Google, Alphabet and others. How does this move impact those companies and their ambitions within AI?
Yes, basically offering to match any offer out there for AI engineers. I mean there's massive, massive demand, call it fifty x for everyone. Employee, Google, Amazon, They're going to be aggressive trying to get assets because of this air pocket. Look, it definitely gives them a window that they could gain some share, get some engineers, get some helpers. Then maybe they could have gone before with significant pay packages. This
is going to be you know, a friends. You look right now, if you're an AI developer, engineer in the valley, I mean you probably drinking of mimosas in the morning.
So Dan, I mean, just again, I'm an old school East Coast Wall Street guy.
It's almost embarrassing for Silicon Valley.
I mean I would almost be like, God, this past four or five days makes us look like a bunch of kids here.
What are you hearing out there.
For the weekend? I mean from people you know very close to the situation. It's an embarrassment. It's a historical embarrassment, and it just shows what happens when you don't have adults in the room and some of these political sort of back and forth. This is what happened. But that's also why you need the Nedallas and Microsofts to basically swoop in and make sure that this goes no further.
And that's why right now the board backs against the Well, they're probably on their phone with lawyers the whole day exactly.
All right, Dan, thanks so much for joining us. Really appreciate it.
Just been an extraordinary story there, Dan Ives, Managing director, Senior Ecoity analyst at Wedbush Securities, kind of giving us some of the latest.
Here. 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.
All right, we're streaming live here at YouTube as well, so check us out there, So Bailey, it's a time of year where strategists and people in the money management business start thinking about next year, you know, and a lot of folks even think of being farther out over the next three, five, ten years.
One of those is Shanad Colton Grant.
She is a global head of investor solutions at a little financial institution known by the name of b NY Mellon and she joins us here. Shanate, thanks so much for joining us here. I know, you guys you've got a what you guys call all capital markets assumptions kind of You guys look out across asset classes for a long period of time. What are you guys thinking about
as you look out going forward? Because it's been a you know, it's been twenty twenty two, it's a tough year, and twenty twenty three has been a little bit better.
But as you guys think ahead, what are some of your key themes?
Well delighted to be here and yes, so we have just published our twenty twenty four capital Market assumptions and these are really the risk and return assumptions that are intended to guide investors in how they develop long term strategic acid allocations. So this is very different than something like a twenty twenty four outlook. This is much more long term in nature. Now your reference to twenty twenty three, or rather the poor market returns in twenty twenty two.
So last year when we published these expectations, our expected returns for several asset classes had moved considerably higher following those poor returns for particularly equities and bonds in twenty twenty two. Our outlook for twenty twenty four, of rather our expectations over ten years continue that theme, albeit at a slightly slower pace. And so a couple of themes that I wanted to really highlight. First of all, slowing inflation.
Central bank tightening around the globe has really had the desired impact of obtaining inflation from the high single digits we were seeing too low to mid single digits in
most developed market economies. But the last mile in getting inflation down to central bank targets is probably going to be the most difficult, and so built into these forecasts we expect that central banks will begin to loosen policy soon, but we still expect that over the next ten years interest rates will settle at higher levels than we've seen in the last decade or so since the financial crisis, and those higher rates are one of the factors that
driver moderately higher return and volatility forecasts in twenty twenty four.
And how did those high how do those higher rates impact the investment in terms of different asset classes in the interest in where people should be putting money.
To work and great point, so I would say when we look across the asset classes, first of all US equities, our expected return for US equities really stand out among equity markets as being revised higher. And that's across capitalizations. It's largely driven by our expectations that the US economy will continue to outperform the rest of the developed world, the focus on innovation in the US as a particular tailwind, specifically when we think about productivity games related to AI.
And of course higher rates means higher yield in bonds, and we think bonds will benefit not only because of higher current yields, but they're also going to benefit as the economy slows, which is what we expect, a slowing not an outright recession in the near term.
Schneid in twenty twenty two. In particular that sixty to forty portfolio really took a beating. There's this nowhere to hide here. How do you guys think about ALLOCA here? I mean, presumably you know, alternative assets is also someplace you might consider. How do you think about all alternatives as part of a portfolio?
Well, it's a great question, and two points here. One, we all think about sixty forty, but the sixty forty twenty years ago was actually quite different and is quite different than what a straightforward public market exposure to sixty forty is today. And so that means that private markets become a much more important part of your portfolio, and
also alternatives to really help with diversification. The thing that we often don't talk about when we use the shorthand of sixty forty is, you know, even look at the number of public companies in the US. At the end of the nineties, it was close to eight thousand. Today it's less than four thousand. So companies are staying private for longer, and it means that if you don't have that private market exposure, you are losing out on the
ultra high growth phase where companies are going public. A lot of the high the household names that we would think about in recent years it went public, they were already large cap stocks by the the time they came to the market. So if you don't have that private market exposure in your portfolio, you miss out on that completely. So I think that that's point number one in relation
to sixty forty. You need to think broader, probably somewhere in the region of a twenty to twenty five percent allocation to private markets and alternatives, depending on your your risk tolerance. But the second point is that actually over the next ten years, purely from an index only perspective, we expect a six point four percent expected return over the next decade or so for that public market only
sixty forty portfolio. That's because we see a moderately higher return in a number of equity markets and also those higher fixed income expected returns given the starting point of yields and.
Looking at AI obviously being the theme of the year, does AI have to work to drive markets hire especially equity markets when you're looking at what we've seen from the likes of Nvidia and Microsoft in terms of sheer market cap being added this year.
Well, look, clearly it is not the only driver, but there's been a huge amount of excitement about the technology this year. What we think is really interesting when we look ahead, and similar to if we think about the advent of the Internet and we go back and think about dot com. Look, there's a lot we don't know about exactly how this will evolve, but what we can say is that AI has the potential to significantly impact
global GDP and global inflation over the next decade. What we're looking at near term is an early promise to automate some tasks, but really the full extent of its impact on productivity, global growth, disinflation. We haven't seen it yet, but our sense is that over the next ten years we're going to see astounding progress. We'll see a lot of new jobs created, new products and services that I
really haven't been invented yet. And in the context of a broadly declining population in an economy, increased productivity is critical to support ongoing economic growth.
Shanate, thank you so much for joining us. Really appreciate getting your insights here. Shand Colton Grant. She's a global head of Investor Solutions at bny Mellon.
You're listening to the tape Ketsur 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.
Let's talk bonds. Let's talk risk at Harrison Joints. And he's a senior editor at Bloomberg News and author of Everything Risk, a column to check that out. And Lis McCormick, chief correspondent of Macromarkets at Bloomberg News. Both of those folks join us. Ed hears in studio, Liz is joining us via zoom and I want to start with you because I got a problem, my friend. You got your latest note out. Your another's opinion piece evokes nineteen ninety nine.
I was there, dude, and two thousand was there. It's just not good, that whole burst thing of the bubble. Although I did top tick the market, signed my contract with Credit Swiss First Boston, February of two thousand, oh boom, top ticked it. Three weeks later the world came to an end. I didn't care, so Ed you talk about markets and bubbles bursting. How do you kind of feel like we are right now as we head into twenty twenty four.
Yeah, I think that we're u It's a good quick question because I think we're at a point where if things get a little more exciting, they could be too exciting.
Okay.
I think it's interesting that we're talking about this on the day that in Video is right awarding, because I mean, is that not the company that sort of tells you whether or not it's going to be exciting or not. Because if Nvidia is able to continue to outperform and therefore the stock goes higher, that tells you what the sentiment is.
Yep.
Well, with that in mind, I guess are you in the camp of this is a market driven by seven plus three stocks? And how does that impact kind of your view of risk? More broadly speaking, given every time I pull up a GP on the S and P or Nasdaq one hundred, it seems everything's rosy, but not so much under the surface.
Yeah, Well, you know, the interesting bit is how the rustle two thousand actually responded recently as we've gone up. I mean, all of this was driven by rates from where I can sit, and that says that, you know, rates went down, everything went up because of the potential for a soft lane. And it's interesting when you say seven plus three, you know, I'm thinking about the Magnificent seven. It used to have Netflix in there. Do you remember, like a two years ago, Netflix was ejected and yet
they continue to go higher. So what it tells you is is that as long as the economy holds and these companies can keep their margins going, we still have the potential for the reality to continue higher. The hope, however, is that it doesn't go into two thousand mode, you know, so that so that we don't get that sort of negative reaction on the backside of that.
All right, Liz, you're coming to us from what I call the yellow room, so great paint drop there. What's the bond market telling us here about where we are kind of in the cycle. It seems like we've seen maybe peak rates. What are you seeing in the bond market?
Yeah, so I'm going to get to that, just kind of getting my head around. Just meant and could marry the one of the McCormick things. But yeah, the bond market, so it seems like, you know, I hate to go with consensus, because you know, we know what happened with the consensus going into this year, but definitely most of Wall Street things, and I don't think that's a bad call that you know, we've seen the peak and rates, like someone was saying, getting the ten year note, or
remember we had almost five's all across the curve. That happening again is a very high bar a right, because most likely the Fed is done. But I think the bond market is saying the worst is over. How fast rates go down is an open question, right, There's a lot of uncertainty I think into next year. Even people
saying the Fed's gonna cut. You know, Rich Miller in Washington was saying some smart stuff earlier to me and some others that you know, the question is if the Fed starts cutting, why, you know, are they cutting for these kind of call it technical just to so rates don't get too restrictive if inflation goes down or if the economy is doing very poorly and they have to cut quickly then and a lot that that's the bigger
juice for the bond market. So I think just how far yields can go the shape of the yield curve most people see steepening. You know that's going to be yet to be seen because you know this, you know, recession we everyone thought was coming this year didn't pan out. So we'll see what happens next year.
I you know, Liz, I try to avoid, you know, these Treasury auctions because there are a lot of smart people like you and Ira Jersey that do focus on them. But what what have you learned from some of the recent auctions out there? Is are Treasury refunding working.
Well?
Yeah?
I mean so the twenty year, which, to be honest is all has always been like the lame duck here or the problem child that is for Treasury. That didn't go so bad yesterday, and people were worried about that. We didn't have a thirty year recently after the refunding even though they cut you know, they didn't increase it as much, so the size wasn't as big. Didn't go well. But somebody was saying, and I think they're right, Like,
you know, we've seen so much volatility and rates. To see a poor auction, you know, it was not surprising. I mean it was terrible. He had a huge tale, But I think you know, you know, Treasury is getting their paper done. You know, we'll see we've gotten through the new issues of the refunding stuff, so you know, now it's going to be just the kind of regular monthly and then the reopening.
So I don't know.
I think if volatility can calm down, then in general the auctions can go a little better.
And is the market right now built on those FED cuts actually playing out? Because I remember six months ago we were talking about cuts in twenty three and now we're lining up cuts starting in the second half.
You know, it's hard to say what's going on, to be honest, because you know, people talk about paying more for longer maturity bonds, you know, term premium not in there. We have one hundred basis points of differential between the front of the curve and the ten year, you know, fifty between the two year and the ten year, and so you know, the market isn't telling a very consistent story because I think Liz, what she was pointing out is is there are two ways to look at it.
One is that inflation comes down and the FED says, okay, really yields are high. Therefore we have room to bring it down or we fall into a recession and we get those cuts. I think, you know, some people are saying basically the cuts that are priced in are sort of a mix between those two scenarios. Scenario one might give you a cut or two at the end of the year. The other scenario could give you six seven cuts.
You know, that's the sort of like the two thousand episode that we're talking about, where the FED just has to go to town and cut more. And so we're sort of somewhere in the middle, and it's hard to say what the market is exactly telling us.
And do you think the FED risk kind of you know, going too far, staying high too longer, and pushing this economy to your recession. What are you hearing out there?
Well, I think that a softish landing is not terrible from everything that I've heard that Jerome Powace said. And you know, if you think about the numbers that they've been putting out for the last six months, I think it's you know, the summary of economic projections in September
and then in June. Basically the numbers that they put out, if you back out where we are in the unemployment rate, it suggests a mild recession, even though of course he says, and the FED economists say they don't expect the recession. But if you had a mild recession, I think that no one would be they'd be nonplussed. I mean, because that takes the risk off the table of you know, just hyper extending a into a bubble and then crashing down.
Liz, looking at that MC minutes later today, somewhat dated at this point, just based on more recent data. What do you have your eye on from these minutes and what could be driving the market in the days and weeks a cup.
Yeah, so it's definitely data, especially as long rates, which you know, were one of the reasons why financial conditions had tightened, have come down a lot.
So they have these but.
I'd like to see in the minutes, like how confident policy makers were that, you know, or not that policy was sufficiently restrictive right, which Pale had said in the pressure he thought we were. But you know, that might kind of give an inkling of you know, if that was kind of just a squishy consensus or not. Again,
the bar seems high for them to hike again. But given the the backdrop of easing financial conditions since the meeting happened, I'm just really looking to see how much they thought conditions were tightened, and was it all about long rates because a lot of that is reversed, and what that might mean for the future policy.
Ed you've got your everything risk column out there, what's your biggest risk that you think the market needs to really be cognizant of going forward.
I think the risk is the risk of credit adding to some downside risk in twenty twenty four, because we've done a really good job in twenty twenty three of keeping those credit spreads tight. But you know, we have all the commercial property we've got, you know, some bankruptcies bubbling up, and we have a decent number of bonds
coming to market for refinancing in twenty twenty four. That sets up the potential that you know, credit is is front and center in twenty twenty four in a way that it hasn't been in this entire cycle.
Right because we really haven't seen I mean, I guess it's from all that stimulus money we had at the beginning of the pandemic.
But that's a good play out.
If you think about the pandemic. Was there any credit stress? Yeah, except for March twenty twenty. I mean we really haven't seen it. We saw it with Shale oil in twenty fifteen sixteen, but really we've not had a bout of credits dress in a very long time.
Good stuff, all right, Thanks so much for joining us. Ed Harrison, Senior editor at Bloomberg News and author of the Everything Risk column, Joining us live here in our Bloomberg Interactive Broker studio. Joining us VI assume Lis McCormick, Chief correspondent of Macroadvisors at Bloomberg News. Little roundtable of what's out there in terms of risk out there in those markets.
You're listening to the tape Cansur Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in alf 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 playing Bloomberg eleven.
Man.
What a story here.
Finance founder Chang Peng Jao agrees to step down, plead guilty.
That's according to the.
Wall Street Journal, just another crypto exchange after FTX going down and just extraordinary. Let's break it down a little bit with somebody who's really into this business. Matt Siegel, he's over at van Ck and we talked about a lot about crypto. Mattan I know they're investigating Finance and mister Jao for a while, but I mean.
This is a leading exchange here. What do you make of this?
Thanks for having me. Yeah, it is a big deal. Finances, you know, the largest spot crypto exchange by some size. But we've been seeing all year that Finance has been losing share as investors have been anticipating some type of enforcement actions. We see this every site called. Old main characters in crypto retire or get arrested, new main characters emerge. You know, you can see Coinbase kind of acting while on this news, probably bullish for coin.
Yeah, I was gonna ask, so who are the winners? As you mentioned Coinbase right now little changed on the day. Bitcoin actually briefly turned positive, Like what is the read across two other tokens to other exchanges on this news.
I think it's a continuation of the trend we've seen this year, which is coinbase picking up market share because they are the closest thing to a regulated entity inside the US given their custody solution and that's despite the fact that you know, the SEC has has sued coinbase
as well for selling on registered securities. But I think the most important thing here is that, according to the news reports, at least finance will continue to be able to operate, So this should not have any dramatic impact on the market on anyone's coin holdings. It'll probably be a gradual market share loss as the story plays out.
Hey, Matt, as someone here, I'm just speaking to myself. You know, I don't have a lot of experience in the crypto space, but when I see leading exchanges run into these legal problems and the executive run into these legal problems, I'm just like, this is the wild West?
Why would I even pay attention to this?
Can you give us a sense of how much of a concern that is for people in the crypto space?
That, man, this looks bad.
The main use case, or one of the main use cases of digital assets is the ability to custody them yourself in cold storage. When you hand over your keys to an exchange and leave your keys on an exchange, by definition, they are going to hold your coins, settle the trade, clear the trade. The whole stack is condensed into one, you know, that can be a very efficient way of doing business. It just doesn't have a ton
of regulatory clarity here in the US. But when your bank is failing over a weekend, you're pretty happy to be able to move your dollar stable coins onto an exchange and monetize them, which you can't do during a bank run. So there's some inherent advantages to this tech as well, though you note.
The risks, Matt. Four point three billion dollars is according to the Journal, what they will be paying, and CZ will retain his majority ownership in Finance. Either of those that number in that update surprising at all.
It's a large number, But the SEC claimed in the crack and lawsuit yesterday that Krack had made forty three billion dollars twenty twenty and twenty twenty one, So presumably CZ has negotiated this settlement and can't afford it. Finance will continue to operate.
Wow.
Just an amazing story, amazing development in the world of crypto, So stay on top of that again, Matt Siegel, thank you so much for joinings. Appreciate getting and you hop on this and give us your thoughts here again. Finance founder Changpeng Zhao agrees to step down and plead guilty.
That's according to the Wall Street Journal.
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.
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