Minsky Moment Is Real Possibility: Economist Bob Barbera

is particularly relevant for our next guest. Uh our guests, I should say plural who have been sort of honing in on this concept of a Minsky moment, and I'm really glad to say we have John Authors with a senior editor from Bloomberg Markets, as well as a special guest, Bob Barbara, who wrote a book on the Minsky moment that a lot of people talk about and are waiting for.

It is also a professor at John Hopkins. So I'm wondering, John, just can you give us a sense of why you wanted to take a closer look at the concept of a Minsky moment right now. Well, I did decide this before somebody in a control of a very large amount of money declared that the boom bust cycle was over, which would appear to be one of the classic moments

that Minsky would worry about. But even a month or so ago, when we started on the Boom bog book club saying read Minsky and read Bob's book on Minsky, there was obvious concern that the key notion of Hyman Minsky that we were trying to get at is that stability breeds instability, that when people are calm and relaxed and confident, they will inevitably take things too far, and that will lead to over expansion of credit, a Ponzi cycle.

And then the Minsky moment is when the coyote looks down to mix my metaphors and realize that there is that there is nothing to support that debt. Dr Barbera, do you believe we are at a Minsky moment currently? Well, I like to say that the difference between me and Ray Dalio is that he had the timing precisely right,

and therefore he has fifty billion and I don't. So I can't tell you I know we're at a Minsky moment right now, but I can tell you that we we have the preconditions falling into place, and and certainly on the death side. I mean, just think about the fact that junk bonds yielded sixteen percent in two thousand nine. In other words, no one was willing to to lend to a risky company, and now you're seeing them at less than five percent. So there's no margin for error

there now. If a company is offered an extraorin and extremely easy credit term, they're going to borrow more. And that's what we're seeing right now. Well, although you could argue people have been trying to make this bet for a long time since the crisis. Everyone's been worried that we're sewing the seeds for the next crisis. But there's the Federal Reserve, in the ECB and the b o

J sticking their thumb on the scales. Here to Bob Prince's point, you know, a lot of people are saying he's crazy, this sort of heralds the next Minsky moment. Other people saying he's right. The idea that the central banks are coming in and suppressing volatility, suppressing yields changes the equations fundamentally. Okay, So um, I think that if you, if you, if you were to watch what the Fed is doing. Let's pick one central bank, the one we

watch most of the time. What they're saying is the inflation backdrop is quiescent, and as a consequence, they'd have to see a meaningful change in inflation before they would begin to tighten credit. A right, that's been the movie. The movie has been you watch the wrong arena. So you're watching a side show the price of corn and what you a w wages are doing, and you're ignoring the main event, which is what's going on in asset markets.

So you're staring staring at the price of corn the asset markets because you've said, I'm not going to do anything, get progressively risk here. At some point you get a modest, unimportant rise for inflation, but you dutifully respond to it, and you let everybody know. It's a small inflation, it'll be easy to take care of. But what happens You bust the bubble, and then you discover that the cost of that modest tightening is much larger than you anticipated.

So Greenspan talks about secular head wings in two thousand. Bernankei says, we need helicopter money, and you're watching the wrong movie. And it's not that that they have ended the cycle, it's that they're not looking at what matters. Hey, John tell us about the upcoming book club live chest So this is a part of our ongoing book club with the screamingly clever clever name of Author's Notes, Authors with an E get it? Yeah good, And we'll be

live blogging on the terminal. So anybody on the who has access to a terminal who wants to multimedia Bloomberg experience this morning can keep listening to radio while following our live blog on T live t l i V go on the terminal starting at eleven carry on till twelve thirty. If you have any questions for me or particularly Bob Barbara emailed them to Author's Notes Authors with any Notes Bloomberg dot nets. John Author's thanks so much

for joining us, really appreciated. John Author's senior editor Bloomberg Markets, and Dr Barbara from JOHNS. Hopkins, who is the author of the Cost of Capitalism, Understanding Market Mayhem, and Stabilizing our Economic Future. Have we had estabilization or we face

right exactly. One of the top stories that it really caught my attention was the FTC, the Federal Trade Commission antitrust officials are looking into the top index fund providers that have seen incredible inflows and surge to to sort of record power and scope Black Rock, Vanguarden, State Street

in particular. And one kind of statistic that caught my eye here is that the Big Three, which is what they're called, collectively owned about two of the typical SMP five hundred company, which could potentially give them significant influence over major decisions like mergers. That is the theory and chopping at the bit to weigh. And here is Barry rid Holes. I have to even introduce you. Yeah, come on, Barry rid Holts whose founder of Ridholes Wealth Management and

a Bloomberg opinion columnist who has opinions. Yeah, he's got he's got some strong opinions. Let's hear it. I'm confused. You have to break it down. So what you you understand how passive indexes work? Right? A third party index provider like let's say the SMP creates this index and you passively own it. Well, no, but hold on a second. The theory here is a black Rock, particularly black Rock where you had Larry Fink come out and say, we are such a huge owner of stocks, we are going

to have a more activist approach in our shareholder. Okay, he's he's making hand motions that I wish we could. He could write whatever he wants letters and he could send those letters out to whoever he wants, and he could go on TV and he could talk about it. But at the end of the day, Larry Rock, that's

what the president calls him. No, Larry black Rock, like Tim Apple, Uh, Larry Fink of black Rock is going to own funds that own indexes, and if he doesn't like the companies that are in those indexes, well it's too bad. That's how he got to be a seven trillion dollar company. He is not going to advise companies about their mergers and acquisitions. He's not going to advise

them about their strategy. He could write a very lovely annual letter saying, hey, we should all be green and we should be concerned about the future, bah blah blah, and then he's going to go back to his office and he's going to count the seven trillion dollars in passive indexes he has and do nothing else. And we could see this in how these companies vote their proxies in what they actually do. All three of these companies

are on average of um U S companies. That means seventy of those holdings are other owners who actually vote their proxies, who elect the board of directors of these companies, and they don't really care what Larry think thinks about the companies in their indexes. So if I'm company A thinking about buying company B, and company B is has a terrible E s G score and is a polluter or whatever, and I know Larry finks index Blackrock owns. You know X percent of this company is the biggest

sharehold of this company, I don't care. Well, actually, Mary, thing you almost out there. It's not Larry think. What we know about E s G indexes is on average they've been out performing the broader indexes. And we also know that E s G as a screen is a fantastic risk management tool. When it turns out that you have a diverse board of directors and you have fairly gender parity and pay, you're much less likely to get hit with the sort of compliance problems. And we meet

two problems that have afflicted other companies. But let's get back to the real core of this issue here, which is what kinds of power do the big index providers have with the companies that they own shares and given the fact that they are owned in passive companies in passive indexes, and they really are not able to sell the shares if they want to protest that is the powers to sell. Active managers have the power because they say, you know what, I've had it with you, Jack Dorsey,

You're not running Twitter. But look at professor Scott Galloway owns ten million shares of Twitter and said, the guys a part time CEO, he's also CEO Square is going to Africa for three months. I'm gonna I'm gonna sell my show. But then there's a question sort of embedded in this is the only check and balance that a shareholder has, this sell option? Where are there other options? You can vote? And black Rock has a lot of votes. Yeah, but they don't really use them. But they could Why

what What's What's what's keeping them from using them? Because they operate on behalf of their clients, the investors, and if they want to diverge their activity and their belief system from the trust that investors have put with with them. So hypothetically, there are three companies. Let's say one of these companies decides to become much more activist as a

passive investor. I know that it's a little bit of a contradiction in terms the other two companies are gonna then start advertising, Hey, listen, we're here to invest your money. We're not trying to change the world. We're not trying to run a political campaign. Trust to us to manage your money appropriately. Who wants to take that risk with six or seven trillion dollars in client assets? So the the whole argument. Let's let's step back and look at

where this argument came from. So as passive has written from a relatively insignificant part of mutual funds and e t f s to now over half. Now, admittedly mutual funds is still a small part of the total world of investing, but fifty of that call it of the world is passive. As that's taken place, as that's risen, the active world has responded aggressively. We saw research papers that said it's it's Marxist, it's an American it's gonna

crash the market. It's going to destroy the economy. Every hair brained our argument against passive investing, very efficient, very low cost, very unemotional, has been mustered. This, Oh my goodness, the big index ers are now you know they're gonna they might theoretically, in some alternative universe, collaborate to stop um stop competition is the latest stupid to roll out.

And by the way, the underlying academic research is based on looking at airline stocks and banking stocks, two areas that have been wildly aberrational compared to the rest of the market. Yes, of course we've we've seen total deregulation in the airline industry. Of course that looks different than the rest of the world. And banks, in case you haven't noticed, received a giant bail out over a decade ago. So when we look at these things, those are not

the right sectors. If there's really coordination amongst the big companies, show me how that's impacting competition. In the tech space, where there are a lot of monopolies, it turns out it's not happening. Barry ri Hilts, thank you so much, Barry Hults. Guess what people he is a Bloomberg opinion I wonder what his opinion was on this issue. It really seemed a little bit opaque to make exactly a

host of Masters and business on Bloomberg Radio. Great podcast, also founder chairman, chief investment officer Vert Holds Wealth Management. We love having Barry here talking about the all things financial markets. Our next guest really has a unique view on the market. Michael Son and Felt, chairman and founder of Tiger twenty one. Tiger twenty one is a peer membership organization for high net worth investors. Tiger twenty one has seven seventy members with more than seventy seven billion

dollars in assets, so really a unique view on the market. Michael, thanks so what for joining us here in our Bloomberg eleven three oh studios right now? After the move we had in the market in what are you are members saying about the market? Are they running out on that risk curve? Are they saying, gee, maybe I'm going to pull it in a little bit? So, uh, I think sentiment to shifting. People who weren't concerned a year ago or a little more concerned today. People who were concerned

are even more so. But our members are looking for an all weather portfolio, and the way they do that is sort of barbell. They have risk assets in public, private equity, and real estate, and then they have large reserves of cash at about twelve percent, so they're not forced to liquidate if there's a market downturn. The very best assets they want to hold onto. Rad Dalio said, cash is trash, what's the argument for holding it? So the argument for holding it is, if you're an entrepreneur.

ARE members have built great businesses and they've done it sort of step by step by rolling up their shirt sleeves, you want to have count cash to pounce on an opportunity. If you're a pure investor like Ray, he has different ways of looking at a fully invested portfolio. But for our members who are individual they want to make sure that if there's a tremendous downturn, they can live through it. So they have twelve percent in cash, which is about

six years living expenses by historic standards. ARE members live on about two percent of their assets. And more importantly, they don't want to be forced to liquidate assets at just the wrong time at low prices. They want to be able to weather through any potential storm. Michael, I know many of your members and you as well, have a background in real estate. How are they looking at real estate right now? Sure? So real estate is king.

It's the number one asset within our members portfolio about I think they look at it as the great anchor. It's the income producing, the reoccurring UH income that comes from real estate that a lot of our members count on. UH. They've taken some trips off the table a year or two ago, it was in the mid thirties, so they've taken low hanging fruit. And you have such transformation in

real estate, particularly in the United States. You have the Gateway twenty force evan cities which are very strong, but even there's some weakness there in the upper end here in New York. And then you get out of those gateway cities where technology companies are thriving and there's growth, and you have a heap of heartache out there. So it's not just the one size fits all. But that's where our members expertise is and that's why they want

to continue investing. When we talk about private equity, so that that was one area that they have been increasing allocations too. There's been record amounts of money raised record amounts of dry powder to put to work. Valuations near or at record highs. How concerned are the members that they're perhaps getting in at the top, even though this has been an asset class that has been delivering outside returns.

So our members are entrepreneurs who have built businesses from scratch, and so they tend to want to look at private equity as a direct shareholder in a small company that's growing. They understand that there's lots of cash, but they're playing into that trend by growing very small businesses into large They're not putting huge amounts of money in the big mega funds. They've had their day. Our members are helping to create the businesses that are going to take advantage

of that cash that you're talking about. So in order to be a seller into a seller's market, you have to create companies that are the stuff of legends. And that's why at the other end of the spectrum, they're staying away from the I p o s. Those were over priced. Last year, whether people got greedy or whatever it was, most of the I p o s traded down. So our members have shifted from looking at I p

O opportunities to venture capital and private equity opportunities. How concerned are your members about, you know, some of that geopolitical risk, whether it's impeachment or whether it's trade issues. And they try to take a longer term view and not let that noise get in away. So um, for

the long term, our members are risk on. They have seventy plus percent in public equity, private equity, and real estate, so they have a long term bet on the economy that is almost doesn't look at the short term, if you will. But because they know that unexpected things are what trash markets, You're gonna come in one day in the market's going to be dramatically down. That's why they're carrying large amounts of cash. They want to have that balance.

When you sell a business, you have to come together with a strategy, and when you meet every month with people who have been doing this, in particular, people who lived through the two thousand and eight crisis and said what worked. When you can learn from your peers in a confidential setting, you can get an edge and figure out where your place is in that In that egosistem just real quick here, I'm wondering whether you have a sense of the appropriate returns to expect in an all

weather portfolio through the cycle. So last year, I'd say most of our members were in the high single digits and low double digits, and many of them watch the markets up twenty eight or but they had much higher return than the market over their career. Last year was an anomaly. So we'd like to be long term greedy, not short term greedy. We'd like to be able to weather through the storms. I think if you could get on a passive portfolio anything in the high single digits

over the long term, that would be pretty great. Michael sonon Felt, thank you so much for being with us. Michael sonnon Felt, chairman and founder of Tiger One. With members who have the dollars really really interesting to hear how they're thinking what it means to be cautious right now and the bright teck Away living on two percent of their assets twelve percent being in cash, so much

for cash as trash. California's the biggest utility is finally working through or getting closer to working through UH some of its liabilities after wildfires put it on the for billions of dollars, throwing it into bankruptcy from having been an investment grade rated company. Joining us now is Phil Brandall, senior credit analyst from Bloomberg Intelligence joining us from Skullman,

New Jersey. And I'm wondering where we are if you could just bring us up to speed in the whole court process and uh this sort of resurrection of p G and E to a solvent company utility one more time, Hi, Lisa,

thanks a lot. Yeah, and no, So, Pacific s and Electric announced through an a K that they've reached a deal with note holders and that's about twenty two billion dollars of notes and what they're going to get back is some some bonds will be reinstated, some will get a mix of longer dated notes and shorter dated notes. But the bottom line is is this is a tremendously successful,

uh you know, progress for the company. Uh you know, first they kind of deal with the torque claimants, the insurers, uh, the shareholders are getting some in here. So uh, you know, we're seeing all the pieces come together for a deal. So Phil, we understand, however, that Governor Gavin Newsom of California is not supportive of the deal. What's the status

of that and what needs to happen? Right? So for a while there it was the company and the UH and the shareholders on one side, you had the governor on another side, and then you had a three way standoff with the note holders. Uh. And you know, one of our thesis was that if two of those parties get together, the other the thirds in trouble. And and I think that's what we're seeing now by and large, the governor's moment to impact the plan in bankruptcy court

has passed. They arguably could have been more forceful when the tour climates and subrogation claimants that they had a restructuring support agreement that was up for court approval, but they chose to be fairly silent. So, Uh, it might be a little bit late in the game to impact things in the bankruptcy court. But uh, there is the

there there. The trump card that they hold is, uh, the CPUC needs to approve this plan and so they'll have an impact there obviously that the Public Utility Commission. Can we just take a step back for a second. I remember when the wildfires first were in the news and when pc n G ended up filing for bankruptcy in short order because of these liabilities. There was a larger discussion about what California should do with its utilities.

Who should be on the hook for this, you know, whether or not this was mismanagement or just an increasing issue that was going to occur. And I'm wondering has there been any broader conversation on that front. Right So, and it's all about who made money here, who lost money? And I think the winners and losers. I think the shareholders obviously were big losers. But at the end of the day, they're probably going to walk away with twenty thirty five percent of the reorganized company on behalf of

their old stock. They are also going to be on the hook to put in twelve billion dollars more here, So they there definitely has been you know that I think most of their pain was taken up front. Uh and and and that twelve billion dollar equity investment. So there's they really uh you know, I think that's where the bulk of the losses were suffered. Um. As far as the bond holders, the bond holders are coming away

pretty nicely here. They're getting a full recovery, and on top of that, the terms of that debt look to be pretty attractive given where the market is right now. So I to some extent, the helpful credit markets right now are providing UH is providing value to some of the stakeholders here that otherwise wouldn't be there in a in a different market. So at this point now with the with the holders signing up and saying yeah, we'll

take these notes back at four nine for thirty years. Uh, they're effectively taking the market risk from this point forward. And so you know, if the markets did go against them, Uh, this state and the state and t g N have that deal already. Yeah, nailed down, Phil Brenda, thank you so much for being with us. Phil Brendel, senior credit analyst with Bloomberg Intelligence, ruining us from Skillman, New Jersey. You know, bigger issue, especially for people like yourself with

homes in California. Uh, you really waiting to figure out what the longer term ramification because I mean, these fires aren't going away. So it's how do you, year after year, season after season deal with it. Thanks for listening to the Bloomberg Penl podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney and Lisa bram Woyds. I'm on Twitter at Lisa bramwo wits one

before the podcast. You can always catch us worldwide on Bloomberg Radio