P&L: How Blockchain Will Affect Market Structures

us from Boston. Christian, you recently wrote a paper UH with Joshua and Gance of the University of Toronto arguing that cryptocurrencies will affect key costs in the economy and namely the cost of verifying transactions, the cost of running a network platform or a marketplace. I just want to get your sense of where we are in the evolution away from paper money and towards cryptocurrencies. So thank you very much for having me here. UM. I think this

is an interesting time, UM are around this space. We we we just came back from I think the most ip phase around cryptocurrencies and blockchain and digital ledgers. UH twenty sixteen and fifteen have seen a lot of VC investment and attention in this space, and I think as people are starting to build solutions that actually deliver value UH to to customers to different industry verticals, we're coming closer to two applications. UH. Digital currency is clearly one.

A number of central banks are looking at this really closely because it has implications for how we think about monetary policy, taxation, UH, and a number of other dimensions. Of course, as many other systemic changes. UH. It's unlikely to happen overnight, and I think a lot of the IPE has inserved well this UH this ecosystem because the technology is complex and bringing it to market what will

take some time. Can you speak in detail about blockchain and its ability to create or to offer tamper proof trans action records. I mean that's part of the promise, absolutely, and in fact, so in our piece, what we're trying to focus on is really basic economic theory. So from from an economics perspective, we verify attributes of transactions all

the time. Anything you can think of in the economy is essentially a transaction, whether you're authenticate yourself, you buy goods yourself goods, you're trading UM, and those attributes matter a lot because often, you know, as long as things go well, we we don't worry and and the transaction

goes smoothly. But when there's an exception, we often need to go back and verify credentials of individuals involved, attributes of the goods, think about the provenance, how they've been manipulated across the supply chain, and that's usually very costly. We usually perform an audit when we need to verify attributes. Um I think the promise of blocation is really lowering the cost of that process, that process of verifying attributes to almost to zero, and that's quite fascinating, you know,

to to markets. Well, Christian, I want to look at bitcoin, which is probably the most close watched virtual currency out there. Yesterday, there was a story in the Wall Street Journal that Circle Internet Financial, which is one of the most heavily funded digital currency startups, will no longer offer customers the ability to buy and sell bitcoins based on the setbacks that we have seen with bitcoin gaining cloud as a currency, and you know, the failure for block chain to really

take off at the big banks. What's your optimism that we will transfer the financial system towards something that is more in line with a cryptocurrency model. Absolutely, so I think those are all very valid points and and those are kind of the main challenges of a technology that is evolving into compliance. Right. So Bitcoin was designed, let's remember that to be totally decentralized, censorship proof and distribute it. Right. So it was in in total antithesis to the regular

financial system. Uh, therefore it made some choices in terms of, you know, the privacy of the transactions, who can vet transactions that were very deu syncratic to Bitcoin at the same time, and we need to not forget that the major breakthrough in cryptography behind blockchain is much more general and in fact, what you're seeing now is you know, banks, financial institutions, accounting firms rethinking this technology from the ground

up and repurposing it for different markets. In different settings. You will need different types of cryptocurrencies with different properties, with different you know, compliance levels. Bitcoin, I think it's scaling quite successfully on a global scale, but not necessarily you know, in the way that it's the most compatible

to current financial systems. Um the movie that you you mentioned by Circle is one where the company is seeing itself more and more as you know, a global payment app where people can easily transfer money across the globe. It doesn't really matter what cryptocurrency they use. It could be bitcoin, it could be something else. Uh, the technology is still kind of working in the background, but the

consumer doesn't really need to see it. Is This competition include companies such as Venmo and then maybe bringing our three, which is that consortium back by financial firms right JP, Morgan Chase, Bank of America and Barclay's absolutely and in fact, I think you're seeing a lot of experimentations from startups that maybe want to tie themselves to to bitcoin or

etherium or other cryptocurrencies to consertions of banks. Are three recently released Korda's fascinating to see how even within that consortium, some players have decided to just tell people what courtA is briefly because that's an interesting collaboration result. Yea. So essentially that's a number of banks that have decided to design their own protocol to streamline transactions because I think there's a huge opportunity here in improving our settlement and

reconciliation of books. Happens on a global scale. Um, but even within KORDA I think you're starting to see that, you know, uh, Goldman, Sacks and others are deciding to go alone because maybe they want a slightly different implementation of the same technology. So real quick, what's the one thing that you're looking for, the one development that will push the evolution of cryptocurrency into the mainstream and make

it the base of the financial system. I think it will take time, but I think what we may see is maybe an economy, a government or um. You know, it could be even like a private player within an ecosystem with the supply chain doing a major adoption effort. Um. I think that would take some time, but as you as you know, like recent events like the India demonetization of the thousand and five hundred Europe's can provide the

fuel for for further adoption in this market. And I wouldn't be surprised if, you know, given the current microeconomic turmoil, maybe a central bank we considered this as an opportunity to reform taxes and how they do many of their services to citizens. Christian Catalini, thank you very much, Professor of Entrepreneurship at the m I. T. Sloan School of Management. If you want some immediate thoughts from our next guest, John Stults was is Oppenheimer's chief investment strategist. He knows

everything about global markets. John, it's always a pleasure. Thanks for being here with us. Let's start off with the Mario Draga European Central Bank, and then I want to get your thoughts on emerging markets. But won't you start there and tell us what that all means for investors. Well, we've been big fans of Mario dragging for a long time with think his his process of doing whatever it takes has has helped Europe. It's a very complex situation.

But when you consider it that it's they're coming up on their second anniversary of KWI and already they're talking tapering much of that not officially talking, but I was just auty. We learned today at sixty right, sixty billion, but for a longer period of time until December. It reminds me of Shakespeare Arose by any other name, you know, it's I mean, honestly, everyone today is debating the meaning

of taper. Basically, they said that they're going to lower the pace of purchases next year of the longer term bonds that they're buying, but they haven't discussed tapering. So then you had all of these journalists asking Mario Traggy, wait, but how does that work? You're you're you're slowing the purchases. I actually looked up tapering in the dictionary this morning.

I'm like, that's the definition of it. That's the thing, you know, The process is always one of a lot of dialogue, questions of semantics, always wide for interpretation, and that that probably offers the day to day drama for the markets, which I think we saw on the currency with the Europe first was stronger than it moved lower

uh ash as the announcement came out today. But I think the good news is just the thought that they're thinking of going to that UH sixty UH number on a monthly basis versus eighties shows it yet very much on parallel to Bernanky in in May of twenty uh when when Bernanky intimated that the Fed was beginning to think about the possibility of tapering, and uh when the market took that the market actually had a tantrum. Then it doesn't look like we're getting that today, And I

wanted to ask you about that. That to me is meaningful that We're not seeing a tantment markets. Yes, you are seeing some price wings, but these are pretty minor moves in the scheme of things. This is not another taper tantrum all over again. Does this mean to you that central bankers have really lost their clout, that people are not looking to them as much anymore. I really

don't think that that that's the the issue. I think it's more that I think there's a recognition that the central bankers have become remarkably experienced since two thousand and eight dealing with a significant crisis situation, coming out of it and managing a recovery process, both sometimes on a concerted effort and sometimes really on a parallel effort. It just just depends what they appear to have learned from one another. And of course the next chapter is as

government start fiscal spend. We think the infrastructure story here from state side, which would have happened I there with Hillary Clinton and now will happen probably a greater extent with Donald Trump, will spread around the world, and it's something that's needed both by developed nations as well as emerging nations. So and it will relieve, it will take the onus away from the central banks we think of having to carry these economies, aren't we. You mentioned emerging nations.

I'd like you to get a little specific and tell us which ones do you think will benefit the most from the fiscal stimulus that you're describing may appear in the United States. Well, I would have to think that on a regional basis, Uh, we would probably there's risks, of course, because of the president elect Candida with Mario. In fact, Mario said spec he said, quote political uncertainty is dominant, and he cited Brexit and the election of

Donald Trump. Yeah, without a doubt that there are all kinds of questions is to to what's going to come. But I think that in terms of signals that are coming out of fifty six Street and Fifth Avenue, we would have to think that what we're looking at is uh, certainly it's somewhat of a melioration from where the very

sharp rhetoric during the campaign being rounded out here. We'd have to think in terms of emerging markets, we think Asia looks like it's it's plenty happy about what's going on, compared to what many would have thought initially, Uh, not necessarily on China, but on the region, so their trading partners of what we do like about China. Of course, as we saw an uptick in imports and in exports, UH,

that's a good sign. And we can't help but think that, Yeah, Donald Trump is a globalist, even though he is, he is looking to uh perhaps take back some of the economic edge we gave away years ago in trade agreements. Now on a world where the competitive landscape has been vastly reduced or leveled by globalization as well as by technology, where emerging markets are so which countries okay? In terms in terms of countries, I'd have to think, Uh, Korea, Taiwan.

I would have to think, are you naming countries that have turmoil related to the political issues or opportunities both well? I would say here opportunities from the extent that of multinational uh trade positions that will likely not be as affected as negatively as might be thought. And we'd have to think China will come will benefit from this as well. We we've just been usually we like to benefit from

the region more than direct in China. What about back here in the U s UM, I've heard some calls for decline and the SMP UH. Some people are saying maybe just a ten percent. What's your thought? What what in terms of you know, and we'd have to get some kind of a bolt from the blue to see some kind of a decline. Do you think that the SMP is going to keep going up? I think that the S and P will likely level out. We're hoping it will go through our twenty target, which we put

in last December twenty two. We're about two and a half percent away from that right now. But we've seen real good performance, much better performance out of mids and smalls, and we were market capagnostic also, so we're optimistic. We think the the but the the level of and and momentum that we're seeing now we think will carry through the end of the year. But the first quarter may have a traditional New Year's revisiting and consideration, but we're

not looking for a significant drop. Just real quick, What about highyeld bonds related to high yield? You know, the thing about high yield is if, if if anything, it tends to be an area that we're sentiment swings very sharply either one side of the boat or the other. Right now, the fact that you're dealing with a scenario that appears to be a continuation of increasing growth. State side moving forward should be good for high yield bonds, which are proxies for the equity market within the bond

space forward. You sound pretty bullish. Yeah, I still am bullish, and I have been bullish actually since January of two thousand and nine when we were looking forward. Fortunately we were quoted by by a newspaper out in Des Moines at that time, Otherwise we would have forgotten when we turned bullish. John stultis Oppenheimer's chief investment strategist. Thank you

so much. I want to learn more about moonshot ideas, to sort of out there crazy ideas that may one day make another billion dollars with us, to tell us all about those ambitions, ambitions and how they may be getting ratcheted back at Google. Is Max Chafkin, Bloomberg tech reporter who's here in Bloomberg eleven three Oh's studio. Max, you wrote this fascinating story about how Google makes so much money. Me that never had to worry about financial

discipline until now set the scene for us. Right. So, uh, basically you think of Google, and you think of um search obviously, but you also think of a very successful email program. Maybe YouTube, Um, maybe you start thinking about these these further off ideas, the self driving car, they make internet balloons. Uh, they have venture capital arms, they have all these different divisions trying to find a cure

for death trying. Yeah, there's a company called Calico trying to find a cure for death, run by Art Levinson, um and and and the weird kind of reality of this is that there's really only one piece of the business that makes a lot of money, which is their advertising part, primarily search ads, the little ads that show up when you search and you know, and that and that's created kind of like one of the weirdest companies I think in like the history of capitalism, where you

have this amazingly successful business and then all these other businesses that are outside of that and um. For years, uh, Larry Page ands are gay Brand basically allowed these other businesses, which are kind of these little fife tums to just do whatever they want. And now Google, which is now called Alphabet, is trying to kind of rain that in but also ran it in a way that doesn't totally

squash innovation. You know. One of the illustrations for this story is an energy generating kite, and I confessed that it immediately brought to mind images of Howard Hughes and the spruce goose, the mega plane that flew just once. Can you tell us about Astro Teller, the people that you met while you made this story come to life? Right? So, so my co writer and I Mark Bergen went inside of X, which is used to be called Google X. It is the crazy research lab that's responsible for for

Google's moonshots. They call themselves the Moonshot Factory. They all have these crazy titles. Astro I think is now called CEO, but for a long time he was keptain of moonshots um and and so you have and so anyway, it's it's it's this crazy research lab they have. They have the driver car, they have the energy generating kites, they have these Internet balloons, and they have drone delivery and

you know, all of these things. You know, they could be huge businesses, but they're all still sort of a ways off. I'd say the car, the driverless car, is the thing that's closest to becoming you know, a revenue generating uh business. They're they're supposedly they're going to spin it off next year, although we don't know for sure. I love this quote from the Owner's manual for Google shareholders, do not be surprised if we place smaller bets in

areas that seem very speculative or even strange. Uh. You know, you were talking Max about how Google is unlike any other company possibly in history, because they get most of their revenue from one area and then invest in all these other areas. One possible agent for change has been Ruth Poorat, who came to the company last year as chief financial officer from Morgan Stanley. Uh. And she's developed

sort of an unflattering reputation among these sort of Moonshot magicians. Correct. Right, Well, so it's probably important to point out that on Wall Street people love this. They love they They're very happy that Google is trying to be a little bit smarter

about how it spends its money. However, in the Moonshot Factory and in some of these other divisions, uh, this is look really looked at as like bringing in this kind of New York Wall Street type to kind of, you know, make a bunch of decisions where you know what I mean, where where. From their perspective, she doesn't know anything about Yeah, it's some one person called called

her referred to as a hatchet man. Um. Now, I think what Google would say, and what what what people inside of these bets as they're called say, is that you know, from you know, constraints, you can still have innovation. That sometimes it's important actually to say like you can only spend this much money, because that forces people to be a little bit more creative. I actually think there's

something to that. And I think one of the things, especially when you look at, say the driverless car, I think it's possible that the driverless car suffered a little

bit from basically an almost unlimited budget. Um. You know, Google is technologically ahead of just just about everybody else, but commercially they are actually kind of behind a bunch of companies there, behind Tesla, they're behind Uber and you wonder if maybe if they had had placed some more constraints on the business, they would have been forced to take a product to market sooner. On the other hand, their safety reasons and and you know, it's a long game.

So we'll see. How was the food. The food at Google and Alphabet is excellent, as you might imagine. Um, And and one of the one of the most surreal experiences, Uh, Mark, my co writer and I had during the during our visit to X was you know, sitting there and there's this picnic area where people are picking at you know,

seared tofu it's probably locally sourced or something. And you know, just a few feet away from this picnic area, there's a drone going up and down and up and down, and everybody's just you know, basically ignoring it, like you know, like it's nothing, and you just realize, like, man, this is a this is an interesting place. Is a place that's that's doing things that nobody else is doing, and it's kind of doing it on a scale that nobody else is doing it at while you're doing it on

a great scale. By sharing this information in this story with us Max Chafkin, also with Mark Bergen, co authors of this great story, you've got to read about Google making so much money that it doesn't necessarily have to worry about discipline. I want to take a look at bonds. I want to look at particular European bonds which have been out responding to today's ECB announcement that they will slower the amount of bonds that they will purchase each

month starting in April next year. But they also had some other messages that might be a little bit more uh, sort of dovish. Frankly, I want to bring in for more insight, uh, Max seems abay, Euro Area economist for Bloomberg Intelligence. Uh, to give us a better sense of what's going on here. So Maxie, what's your big takeaway

from the CBS announcement today? Yes, Settle from London. Well, the the announcement of d c B was quite a surprise actually because right, yeah, because they went for for actually it went for longer than what I expected, but at a bit at a smaller pace. So now they're gonna buy sixty billion months starting in April until December two thousand seventeen. So that means they're going to go for one more year of que market expectations, well for something a bit a bit shorter at the same current

eighty billion pace. So they're going smaller but for longer. Wait, hold on, I just I want to raise one important point. They also lowered the yields, or they allowed the ECB to buy bonds with yields that are lower than the deposit rate. In other words, Uh, this is saying, Okay, you want to go buy those two year German yields, German bonds that have yields that are too low under the current provisions, go ahead, We're going to allow that.

And what you're seeing is a steepening in the yield curve. In fact, the German yield curve steepened to the widest of the year and uh and and the most in in many years. So I'm looking at this and wondering, is this a similar move to the Bank of Japan. Is this basically the e c B saying we're gonna peg short term rates and we're gonna allow longer term rates to sort of creep upward. Well that's not what

they said explicitly, but maybe they're going to that. The deposit rule well actually something they put in place from the start to avoid making losses on on these purchases. And basically now they can buy anything below the deposit which is set a minus your point four percent. And also another cuy parameters that changed today is the fact that they can buy anything now until one year maturity. Before that it was from two years and thirty years,

and now it's also one year to thirty years. So there's there's a double effect here, obviously weighing on the on the short end of the curveous, Can I just ask you to comment on whether these projections into two thousand nineteen really make any sense? I mean, I know they have to answer the question and they have to check the box. But you know, even if we just look back to two thousand fifteen, originally the European Central Bank estimated that they would have maybe a trillion euros

on their balance sheet. Today they have more than two and a quarter trillion on target. This is a changing situation. So why did these projections out to two thousand nineteen and and beyond, Why does that really matter? Well, Um, as an economist, it's always difficult to to to talk about projection in the next three years. Obviously, it's already difficult to do it for the next year, the next

two years, so three years obviously it's a bit stretched. Um. The thing is they have to publish this because it's also an eddication of how they assess um their own homework, how they are reaching the target. And this thing to to to be careful with these projection is that they what they did today the announcement and all the decisions are not penciled in these projections because they were made

before that. So it's important to keep that in mind. Um. Obviously, Drag, you acknowledge during the press conference, just it just explained, and so what does that mean? What should we what

should we take away from that? Well, let's takeaway is that you acknowledge during the press conference that one point seven percent in two thousand nineteen, which is the projection they have now for inflation, is you acknowledge it is not close to the target to the mandate and that means the it's a very dovish message actually that they could actually go for even longer than the seven two seventeen uh. And yeah, again that's the dovish message from

drug Is saying we're not done here. It could be much longer than than what we have today. Maxim, what insight did you glean on what the latest ECB announcements mean for the peripheral nations, namely Italy which has struggled, uh, certainly after the no referendum vote, but also because of the banking system there. Well, we know that the career program is helping the periphery more than the core. If even if they buy more at the core then at

the periphery because of the capital keys. But the message sent from the EC year is that we're gonna be here for longer. Mario Dreggie said that. He said, there's no tampering. We're gonna stay in the market. We're gonna continue exert pressure on prices. It was very clear about this. The message is your boring costs are gonna say, uh, for longer, I'm gonna stay very low, and that we're here to help you, not just the periphery but the

Eurozone as a whole. Speak if you can about the implications for currencies, because the tenure US Treasury at right now two point three nine percent, a sell off of sixteen thirty seconds. The thirty year stands at three point oh eight percent. It is off one and six thirty seconds. Implications for the euro and the dollar well, Obviously the e c b S is probably expecting, it's probably hoping for this to have an effects effect. Obviously with the

fom C next week, this would also be a factor. Uh, it's not a policy target, as they say, but it's surely something they're watching today. Thanks for listening to the Bloomberg pien L Podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio