Quant Fund Just Went to 100% Cash: Cumberland's Kotok

Cumberland Advisors. H really interesting right now to see bonds continuing to rally even as we get better than expected data out of China, and there seems to be a growing amount of optimism that perhaps Europe is bottoming. And I have to wander has the rally gone too far too fast? Where are you on that? I think the treasury rally in the United States that has flattened the yield curve, inverted it. Some people would say you just had a previous segment and talking about that, I think

it's gone too far too fast. And this whole notion, now that we have futures pricing of rate cuts, how recently did we have futures pricing rate hikes? What makes futures pricings gospel? I don't see it, So I think we're in our shop. You know, what do you think is one thing? What do you do in a portfolio? Was another. We are shortening duration, we are favoring the front end. We've expanded the shorter maturity side of the barbell. We're taking profits in bonds because they've galloped by so

many points, and we're shifting a portfolio to defense. So in the high old market, that's also how to rally? Do you see any value there? In which market is in high I'm worried about credit. When you spend ten years at zero interest rates, you buffer sensitivity, you you eliminate this notion that there's credit risk. So you see this spreading out a credit risk in spreads and then it tightens right back up and people chase yield. And chasing yield in the long run is a bad thing

to do. So in our shop, we're favoring higher grade, not how you here's the problem, and this is something that I think a lot of people are struggling with. There are a lot of signs that were in late cycle on every level, whether it's equities, whether it's risk assets and credit. And the problem is is that that can continue for a long time, right, and this would actually be one of the best parts of the whole rally, especially if there is no sort of disruptive factor. So, uh,

your your you look you have consternation. No, I don't. I agree with you. A late cycle sweet spot two growth, no excesses. It appears low inflation, low interest rates. Uh. The markets ignore the geopolitical risk, it's there. They ignore the narrative and volatility of politics, it's there. They ignore Brexit in the charade we call the UK trying to do something. I mean, markets are ignoring us. Well, why there's a salve. The salve is constant monetary policy with

excess liquidity. And now in the United States that's normalizing. In Europe they're gonna try in a change of regime after drugging, to try to normalize interest rates up to zero.

So here's the question. Do you have a permanent free lunch of infinite liquidity and therefore everything is wonderful all the time, or is there some transfer that's taking place between those who are borrowing long term at low interest rates with some plan or no plan to ever pay it back, and those who are trapped in a paradigm. An institution, for example, that is forced to buy a German government bond with part of its capital by law. Is there a trade off and when it happens, we

don't know. Does it get ugly when it does? Maybe? So when you get a massive rally like this, you put some of it in the bank. You earn your two percent on your cash in America, and you say, you know what risk is rising, and I don't know when it's gonna bite. So how much cash are you have? You increased the allocation too well. In the bond side,

we're moving to the short duration. In the stock side, we run four different types of stock portfolios and they are in various positions in cash between fift and the high turnover technical quantitative strategy went to a percent cash last night last night. Please please elaborate how much was it in cash before you sold out of everything. It's a binary strategy, so it's either fully invested or it's in cash, and it had it's got phasing, its intricate

math and the final trunch went to cash yesterday. David Kotok cash and one of his funds that last night. How often does it happen? Well, this strategy can sit in cash for months till it has the right kind of entry. It's it's quantitative driven. It doesn't have human beings making decisions using their emotions. So no matter what I think, it's the math that will was the last time that it was in all cash um last time

it was in all cash was last um fall. Sometime we had an entry after the summer sell off and we went into the v drop in ash. So we had a Swan song down and back. Interesting. So so it's clear you think the FED has gone too far. Well, I think I think the FED was remarkable. The FED says we're data driven. The FED says we'll look at data and if it changes, will change. And the FED has said, okay, we're gonna pause for a while. That's what the dots are all about. David Kotak, thank you

so much. I think we heard this was really interesting, so interesting. We've you just never hear that going to catch And it's a it's a binary strategy, to be clear, which is what David Kodak was saying. But the idea that right now things look a little bit overdone, even when it comes to someone who doesn't have emotions exactly. David Kotok, thank you so much. Thank it's a chairman of Chief Investment officer of Complerent Advisors. Always a welcome

guest here in a Bloomberg Interactive Broker studio. Well, financial technology or fintech is one of the hottest areas, not only in technology but in financial services, and it is impacting companies large and small across the spectrum. To help us kind of dig into this issue, this issue, we welcome Karen Mills. Karen is a senior Fellow at Harvard Business School and she's a former Small Business Administration Administrator for President Obama. Uh, Karen, thank you, and welcome to Bloomberg.

I really want to get a sense of is in your book. In the book is entitled Fintech Small Business in the American Dream. Is that your contention that financial technology is a net positive or net negative for small businesses. It's a huge positive for small business. In fact, I think we're at a huge inflection point. You know, we all talk about AI and fintech um and I think one of the places that we're going to see huge change is not in driverless cars, but it is in

small business lending. We're going to see the ability of small businesses to have credit at the push of a button. And the players in this are not going to be just your old community bank. It's going to be Apple and Amazon and Square and new fin techs and then traditional places like JP Morgan are investing, you know, billions of dollars literally in providing new services. So this could be the game changer that small businesses need to get

the products and services that meet their needs. So here's my question. We've had peer to peer lending that has been going strong and then not so much over the number of past number of years, we've had an increase in online marketplaces for loans to those small businesses crop up. Why have we not yet seen, uh, this sort of crossing of the tipping point with respect to how much this can help small businesses? And the book I talked about the fintech innovation curve and you just described like

the first phase. In the initial part, we called it the wild West. You know, we thought everything was going to take off, and then take off was aborted because the peer to peer lenders it turned out they weren't actually solving that bigger problem. They were making a better customer experience, but they were giving people the same product, maybe at a higher price. So enter big tech and then you've got Amazon and PayPal and Square starting to lend,

and then people rethought the whole experience. What happened is that data technology changed so that you could suck up big pools of data through a p I S and now the process is going to be radically different. If you want to understand what's inside a small business, it's very opaque. You know, how do you know this business is really making money? How do you figure it out?

You have some poor banker who spends three months sort of figure ing it out and then they say, uh no. So what if all of this went into an algorithm and the lender could say right away yes or no, and the small business could also at the same time know what's going on in their business. So I think take off. We're just at this inflection point and you're

going to see that takeoff you were looking for. Well, how about if I think about this, the small community banks have been to the backbone of lending too small businesses across America. Are you getting a sense that some of these smaller regional banks have the wherewithal to make the investment, to get up the technology, to curve to compete against what will be really tech driven lending to small businesses. I'm a big fan of small banks and community banks, and from my time at s b A

I saw how important they were to the economy. I would not count them out. What I think is going to happen, and one of my predictions is that if we get the regulation right, data will be open. So if you give yourself permission, your permissions, then anybody can

suck up that data. So the winners will be people who can create these platforms, and banks large and small they can acquire or use those platforms, and you can use your banker for more real advice and counsel rather than that sort of grinded out process of the loan. So I think you should not count out the community banks. They should stick around and wait for the fin techs to give them the products they need and just partner

partner with them in the meantime. Though you did mention the behemoths the Amazons of the world, it's really just Amazon and Apple, I guess, I guess Google, but I haven't really heard them getting in on this, but Amazon really stands out to me, especially because so many of these small businesses may use the platform to actually sell

their goods. And I'm just wondering, when you talk about sharing this data and allowing uh, you know, potential lenders to see into the inner workings of these small business is to give more confidence to giving them loans. I assume that's what you're talking about with the data. Um, Amazon has a tremendous leg up because they can see the flows themselves as they lend to their businesses. I mean,

they could really consolidate this business. No. If Amazon wanted to play like in many businesses, they could make a huge mark. And they're already doing three billion or so. And one of the interesting things with Amazon is are they going to make the choice to use their balance sheet to really enter this market? So far they haven't. And Apple when they came in the market, they partner with Goldman Sachs. So I think that data is key

to the decision making. But if we get more open access to data, if you could own the stream of information in your bank account and your Amazon flow, and you could make it funnel up into a fintech. Then that takes away some of their monopoly power. Why haven't they used their balance sheet? You know, maybe they have too many opportunities. They've got so many things that they're doing.

I actually they have asked them this question, and I know that they are thinking about it, they're working on it. But one reason is that small business never seems to be the priority. First of all, people look at the consumer market, and then small business is like the poor

cousin that gets the dribs and drabs. One of the things I think will happen is that somebody will figure out how to make a small business focus bank that has different products, different services, and just maybe even a vertical bank just for restaurants or just for dry cleaners, and that way they have the expertise and I think they will clean up. I think that's a way to win and invest as more technology comes into banking. Is the regulatory framework that we have in this country right

now set up to really regulate it properly in your opinion? Well, the short answer to that is no, and this longer answer is absolutely no. The regulatory system in this country is what I call spaghetti soup. There are seven regulators who oversee small business lending, and in the midst of that there's overlapping, there's confusion. A lot of people say, well, let's just get rid of all that regulation and then everything will flow in community banks will come back. But

that's actually not the answer. It's not less regulation. It's of course smart regulation. That means that the new regulations need to think about what's in the black box. Who owns the data? What if a small business gets a rejection, can they see what went into the algorithm? How are you going to figure out if there's a discrimination and disparate impact. So I think the regulatory questions get thornier. Karen Mills, We love having you on. Thank you for

being with us. Delighted to be here. Karen Karen Mills a Senior Fellow at the Harvard Business School, former small Business administrator for President Obama from two thousand nine through two, and author, most importantly of a new book, Fintech, Small Business and the American Dream dig into some of these questions. Well. The news this morning is that black Rock is launching a massive overhaul of its leadership to help navigate mounting

challenges across the asset management industry. From global expansion to pressure on fees. To help us dig deeper into this story, we welcome Annie Massa and he's a Bloomberg Finance reporter. She joins us in our Bloomberg Interactive Brooker studio. Any thanks so much for joining us. Why do you think black Rock is doing this now? What is really changing their business? I think that one of the key themes that they're trying to address with this leadership change is

the desire to grow globally. So they're the world's largest asset manager already, but a lot of their revenue is focused in the America's region, and Larry think Um black Ocksy has made a big point of how he wants to keep branching out the business and expand, especially in regions like China and um In this UH News this morning,

Latin America is a big focus as well. So the question that I have is how much is this a leadership issue with or issue but a bit of positive sign that black Rock is being proactive and trying to keep its position as the world's biggest asset management and how much is this a response and a reflection of the challenges in the broader asset management industry. With shrinking fees across the board, with the shift to passive and just the increased competition. Yeah, asset managers are under a

lot of pressure. As you mentioned, fee pressure is one of the biggest challenges I think, and especially the large asset managers have just been locked in this UM grinding competition over fees. But I mean one solution to that is to develop client relationships in new places and and

try to take on more clients UM globally. So I think that that's part of why they're why they're doing this now UM as a way to address UM that so is the expectation Annie that as they tried to develop new businesses maybe diversified geographically, that we may see black Rock, they're already the largest globally, may even get try to get bigger via M and A. Definitely UM. They've been pursuing UM some deal making globally to to

try and advance those goals. And one other thing I'll add on on the fee side is they're trying to grow their alternatives business as well. And so while you see this expansion globally, you're also seeing an expansion in terms of the types of offerings that they have for clients, and the alternatives has has been a big focus for them. Let's dig into what alternatives is. Are you talking about private equity and distressed dead hedge funds and things like that.

That's exactly right. So one example that we just reported on this week is black Rock has this long term private capital vehicle. It's kind of like a private equity type vehicle that they announced last year. So they've secured their first round of funding for this UM. They didn't reach their goals yet. They want to raise as much as ten to twelve billion UM for this vehicle. They've got about UM two point seven five billion already. What does it say that that it's taking longer than they

had expected to raise the money for this. It's a challenging environment and it's not exactly the type of arena that you can arrive in and um, you know, just take over completely. It won't happen in the blink of an eye. UM. So it's taking a bit longer than expected. But it shows, I mean, especially with the reorgan today, it shows that they've got a lot of focus on this and and they're trying to like meaningfully grow UM

in outside of their gigantic index business. So any does is also this management overhaul Today's is also addressed maybe succession issue for Larry Fink. Are we kind of setting up a two horse race here for to succeed Larry. It's it's more than two horses. It's actually a whole stable. UM. But today today, specifically, we've got UM a couple a couple of the people that have been widely seen as in the running. We're in play here, so especially Mark McComb UM. They've created a new role for UM of

Chief Client Officer UM. But there are several people in the running. And Larry think has actually said that he likes to UM look at management this way instead of just having one air apparent, have a whole bunch of people in UM, these higher up roles, shuffle them around and UM, you know, leadership is kind of about the dynamics UM interpersonally that happened there. Does this reorganization include further layoffs in addition to the five hundred announced cuts

that they've already made this year? The cuts that were announced earlier this year, UM are all that we know of right now. UM, But yeah, it is important to note that with the expansion and the reshuffling. Um there there were all there were also those massive headcount cuts that came early in January. So anyways, this overall black Rock, are they how profitable are they right now? I'm trying to get a sense of whether this is you know, coming from a position of strength or they're just like,

oh boy, our business is really in trouble. Well, I mean they are the world's artist asset manager. They have the biggest ETF business in the world. So I wouldn't say it would be I think a stretch to say that they're um under tons of pressure there, but I

mean asset management changes all the time. This is a business that for thirty years has been you know, growing through acquisition and now I think, um, you know, the global focus is really important to them, um as they try to kind of chart the next um, you know, expansion. Annie Massa, thank you so much for joining us. Annie Massa covers black Rock and asset management for us here

at Bloomberg joining us and our Bloomberg Interactive Brokers Studios. Paul, we talk a lot about five G and how it can transform the entire communications and frankly uh technological landscape. Four nations. Certainly the U, S and China have been sort of facing off in this battle for five G supremacy. Joining US now is Meredith Meredith at Well Baker c t I, a president and CEO former Commissioner of the

f CC. She was appointed by President Barack Obama in two thousand nine, serving on the f c C until two thousand and eleven. Meredith, thank you so much for being with us. So you're saying that you think the US has actually started to take the lead with the race for five G technology, please explain well, first of all, Lisa and Paul, thanks so much for having me. I'm pleased to be with you. Guys, Um and um, what

are our stages is? We're just releasing a paper today from Analysis Recun that says that, you know, a year ago, China and South Korea led the five G race, but the US was close behind, and really because of the quick actions of our administration and the FCC and Congress were tied in we're tied with China. Overall. US is first in private investment, and we're first and high and

low band availability, but overall we're tied with China. So again, what are really the metrics that you define to say who's winning or losing, because it's my understanding that not only were we be behind China, but we were well behind China. Well, the US leads commercial deployments, and we'll have twice the number of other nations by the end of twenty and remember that China won't have a single deployment by the end of the year. We're looking at

having over ninety deployments. All right. So the reason why one reason why we're raising that is because we spoke with a couple of weeks ago, we spoke with Susan Crawford, who's a Harvard law professor and a former special assistant

during the Obama invest administration as well. Uh, and she just wrote a book saying the coming Tech Revolution and why America might miss it, about how the US is profoundly behind in five G I'm just wondering, you know, how, how could you give us some confidence as you know that that that what you're saying is is more accurate. Um, well, I mean the metrics of the paper, certainly the investment of our companies is um you know, uh, three hundred it's gonna add you know, the jobs and the numbers

that it is going to add to the economy. It's three billion dollars. You talked about the the UM what is going to bring to you know, all all of the United States and our numbers or three and a hundred one point eight million new jobs. UM. We look at what the companies are investing. And if you look at A T and T and Verizon the top investing companies in the country, UM, and so what they are

willing to invest, what they have invested. After the administration had tax reform, and after the FCC lowered the barriers for entry for citing these new small cells, companies are quadrupling the number of small cells that they're installing. So I think not only are we looking at as a global race, we have a race going on here in the United States as to which company is going to be first for five G deployments. And um, they're they're

engaged in a battle. I guess that there's a question can the US gained supremacy with five G without the government actually financing some of this? Does it have to

be all driven by corporate spending? Well, the free market is policies of what have made the disference in our winning four G and I but from every indication that we see it's going to make the UM difference in five G. So UM, we don't we feel like five G. We are on a great path for five G right now and we don't need anything except for some more midband spectrum, which is the last ask key to the

piece of the five G puzzle for the carriers. Speaking with Meredith at well Baker c t I, a president and CEO on five gene and deployment of five G in the US. So Meredith, maybe just you know, really a basic point here maybe for our listeners is just explain why five G is important. Yeah, I think that's that's great. To take it up a step. UM, five

G is the next generation of wireless services. It's going to be a hundred times faster, it's going to support a hundred times more devices, and it's importantly gonna unlock real time applications, meaning that there's no lag time. So when we talk about you know, uh, telemedicine, when we

talk about autonomous cars, this is really what can transform that. UM. It's gonna really every industry is going to be transformed, from healthcare to education UM, and and really it's going to foster new industries of the future, from augmented reality to artificial intelligence. When we rolled out the four G technology, we didn't know what we were rolling out. We didn't know that we were going to create a sharing economy

and companies like Uber. So while we can see and we're starting to see the real time case scenarios um in certain certain um inventions that we're seeing different entrepreneurs in the five G world, we still don't exactly know what what it will spark and what it will mean

to the entire economy. But we do know. We do know it's the platform for tomorrow's economy, and that's that's why every nation wants to lead in five G. One question is, you know, if it is setting out the platform for the new economy, why shouldn't there be sort of some sort of oversight, like the utility kind of structure for this, given that it is something that will be and is already so uh fundamental. Well, that's a good question, and from a farmer regulator's point of view,

is certainly something that I have have looked at. But it is the free market policies and it is the innovation of this economy me that moves so quickly that it's very hard for some of oversight like utilities. Um. You know, we people get new phones every two years, the network changes every three months. Um so I think. Um, we in the United States have come to a regulatory perspective that when something goes wrong, we will fix it, but we don't build a house of regulation around something

just in case it happens. Understood, Meredith at well Baker, Thank you so much. Meredith as a c t I A president and CEO, a former commissioner at the FCC, I think with some interesting data coming out of the c t I A suggesting that the US is deployment of five g H is not behind those of some of the Asian countries like China and create but in fact maybe closer to you, maybe more on part Thanks

for listening to the Bloomberg P and L 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. Lisa bram Woyds I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radiom