Stability Risks Have Moved From Banks to Asset Managers: Algebris' Gallo

a healthcare and hospice and various medical service provider. Here to explain more and better than I could is Max Neeson, who covers the biotech, farma and healthcare industries for us here at Bloomberg gad Fly and always has fantastic insights into these worlds. So give us your take on this transaction. Sure, So it's some kind of pretty interesting and complex transaction. They're gonna take this business, which is, you know, the combination of those home care and hospice assets and then

specialty hospitals and kind of splitting them in half. So those those private equity companies will run a new special specialty hospital company, and human Uh is gonna enter into

joint venture with them on the home care stuff. And the reason that Human had got involved is, um, they're really big into Medicare, Medicare advantage, and um, you know they want these kind of home care assets in order to basically care for more people at home, prevent them from getting to the hospital, and generally find ways to to bring costs down because once you get into the hospital, as anyone who's ever made it their nos, it gets

really really expensive. Quickly, can you comment on this idea that Medicare which obviously available to people over the age of sixty and in some cases younger than sixty, But if Medicare is going to cover certain kinds of hospitalization but not certain types of home care, is that going to have to change in order to make this merger make any sense? This combination. Yeah, so so reimbursement with with Medicare is always pretty tricky, but I imagined Human

had that in mind. You know, certain things that at the end of the day, even if they have to cover more of the costs themselves, the cost of paying for some of the home care relative to being built at the hospital is probably so vast that they'll they'll take that any day, I want to ask you about this concept that Humanna as an insurance provider, is getting

into the healthcare business directly. I mean, we kind of saw that, um with the CVS merger, but this is a whole new ball game, right, I mean, what's the what's the logic here? Um, So this is the logic that that particularly United Health has been following for a long time. Basically, when you have kind of this integrat aided model where you're both to insure and the provider, UM, you can direct people to to your kind of in house providers, which you know, it's it's a lower cost option.

They're not taking, you know, an extra bit of profit. It's all the same company, and UM, they're gonna basically do the the procedures that you want in the order you want them, for the people you want. I also provide you a lot of data about your enrollees and um, you know, the marketplace in general, so you can provide care at a lower cost and price your insurance products better. Are there any big insurance companies that haven't made a move like this that you expect to at some point

in the near future. I mean, I I've been expecting that this from human or from another company for for some time, basically because you just look at how successful United Health has been. UM. I think I have a chart in my latest column. Their optim unit alone books more revenue than UM or just about as much as one bit more than most of the other large insurance companies in the United States. And also they've written the kind of cost savings and analytic benefits of that to

becoming the largest health insurer in the United States. It's worked incredibly well for them. I'm a little surprised to taken other insurers so long to emulate them, and now you finally have you know, the big and a CVS deal, which which is an interesting step, and and then HUMANO were just taking kind of a narrower targeted approach aimed at a particular market medicare in this case. Is this

good or bad for hospitals? Uh, this is bad for hospitals. UM. You know they're not going to say, I need to think this is terrific for them. So you know, any time when insure, you know, has UM more leverage, is doing more of the hospital's job themselves, that that's not good. I mean, part of the reason that you had such aggressive hospital consolidation. You know two reasons. One to kind of fight back about against insures that are ever larger and more powerful and have you know, can push back

on reimbursement. And also to kind of prevent patient leakage, so patients from leaving your health her system to go somewhere else. Um. You know, if if you own everything in area, they can't go anywhere else. That's why you have this consultation. But now if ensures own you know, their own providers and are actively pushing people there that that's pretty bad for prospitals. And just quickly, what about for people that are not necessarily in these insurance plans? Um,

you know, that gets a little trickier for them. You you don't get the same kind of discount or or synergy when you're when you're trying to, you know, use a human owned product and you're on another company's insurance, probably gonna be a little more expensive. All right, Thanks very much. Max Neeson are Bloomberg gadfly when it comes to all things related to healthcare. I encourage you to read his columns on Bloomberg dot com. Max Neison, thanks

very much for being here. It's really fascinating combination, and Humana is known as the number two seller of private health coverage plans for the elder lace. This is a Medicare advantage program, so it sort of explains their focus here him, I have been struck by the degree of consensus when it comes to US stocks next year and frankly stocks globally in eighteen. Everyone seems to think it will be a great year, another banner year for equities.

Here to tell us what he thinks is Alberto Gallo, portfolio manager and head of macro strategies at Algebra Algebra Investments, and he joins us now. Alberto, thank you so much for being with us. Good morning. So are you as bullish as everybody else in the world is. I think there is a lot of consensus both for equities to go higher in the US and also non US equities, as well as for interest rates to gradually move up in an orderly path. There's a lot of things that

can go wrong. We are coming from nine years of QUEI with central banks holding the hands of markets, and I'm not sure the transition to a world with less QUEI is going to be so orderly. So we could have basically we have three risks. One is a sharper return of inflation rock in the market. A second one is central bankers are getting a bit more hawkish and

worried about financial stability across the world. And then the third one is geopolitics with North Korea, with Iran and Saudi Arabia and a lot of other hotspots in the world. And we feel the market is underprising all the risks and still living in a goldilocks world. And that's a little bit. It's a red it's a red flag for us. One of the title of one of your most recent reports, The Silver Bullet, is irrational complacency. Then how do you

invest for irrational complacency? It is It is a conundrum for a portfolio manager to construct a portfolio in an environment where there is a lot of assets which are overvalued. You have to try to distinguish assets that are overvalued versus bubbles. And I think the behavior of investors is very important. Where you see assets where you have flipping, where you have financial engineering, where you have investors have never invested in their lives going in, then you're looking

at the bubble. Other assets are simply a little bit overvalued, but may have more room to run. So we are UM. We don't know when the crisis, when the next correction will will strike, but we're trying to construct our portfolios with less exposure to UM downside and buying upside exposure through options by limiting potential downside by investing a limited premium in UH upside optionality, but having a limited loss if things go south. Because we have we've come from

an environment of very, very low volatility. Let's let's remember q not only moved us the prices higher, but also pushed investors to sell volatility. Alberto, you said that you are concerned about financial stability and at the risk of some kind of threat to it next year could be more significant than the markets are currently pricing in. What asset class is particularly vulnerable in some sort of disruption

to financial stability right now? I would say there is a pyramid of asset classes that have been distorted by QUEI. At the bottom you have rates markets bonds, so you've got eleven trillion of bonds globally that have negative interest rates as central bankers normalized interest rates. These are are vulnerable. Then there is a middle section of the pyramid, which is the assets that people bought because they couldn't find yield in government bonds. So these are high yield bonds

or investment greate debt. There's eight trillion of them, and they are not a negative interest rates, but they are very very low credit spreads. Then the tip of the pyramid is strategies that are designed to sell volatility. Basically, they bet that tomorrow the market that will be as quiet as good as today, and this is something that

we estimate to be around two point one trillion dollars. Now, to put this into context, subprime was two point four trillion dollars when the credit crisis struck in two dozen and eight. So two point one trillion dollars in short volatility strategies is a substantial amount um and it could

cause a risk to financial stability. So if investors tomorrow um realized that the future is not going to be as calm as it has been for the last nine years, then these strategies may be unwound more quickly than the market is expecting today. So we are we are worried about this, this pyramid of trades, at the bottom of which there is kewy. Okay, So this these two point one trillion dollars of short volatility funds? Are these hedge funds,

are these mutual funds? What are the forms that you see them in and who are the biggest asset managers involved? But there's a variety of strategies. Some directly sell volatility, so shorting futures, and we are talking about a small amount in the range of a billion. But there's also strategies that are more institutional and larger and UM routinely sell volatility for yield or strategies that reliab alatility to

stay low UH to perform. So there's a variety of UM of strategies we we we UH don't have an exact estimate, but it is an amount large enough to create a problem for financial stability. Generally, I wouldn't go into specifics on on the asset managers, but I would say that regulators in two thousands and eight and following the crisis have been focusing on banks, have been regulating banks,

increasing capital requirements. But in the meantime, asset managers have been taken more and more risk to justify their fees as yields have gone lower. And we think that today the asset management industry has and also, both passive and active has more risks than UM UH than the banks. Bank risks have moved from banks to to UH, to

the by side, to the asset management industry. And another phenomenon that comes with this is there's been a an increase in passive investing and hurting, so everyone going for the same trade. Alberto, I'm gonna put you on the spot here because in November I read an article in the Financial Times about your boss, Davide Sarah, the head of Algebras, and he's quoted as saying, I have an Italian heart but a British brain. What what does that mean,

at least to you? Well, I think the team. I think what we try to do is to have a very organized UM risk management UH culture here. While you know, investing in very risky sectors UM are DNA comes from investing in risky bonds, like how your debt, you have to have very strong I think the Italian UM part comes in having strong views on the market, but you have to also combine them with UH, you know, with numbers and risk management. And it's a bit of a stereotype,

but that's what we're trying to do here. We're going in a very sky market, we have to have strong views to outperform on Um countries and names that have done well. We've you know, we've done very well this year, like Greece or Portugal, or Ecuador or Argentina. But going into next year, we have to couple that with some risk management. Thanks very much for being with us. Alberto Gallo is portfolio manager ahead of macro Strategies at Algebra's Investments.

Joining us from London, I am so excited for this next segment. Joining us as Ethereum co founder Joseph Lubin. He is uh one of the founders of the Global Blockchain of Ethereum, but also he is a founder of global blockchain Specialist Consensus, and he joins us here in our eleven three studios. Joseph, thank you so much for

being here. Thanks for having me. I want to start with energy consumption because there have been a number of articles talking about how bitcoin consumes so much energy that it's equal to the entire output of Denmark currently and that it will just surge continually. I know Ethereum consumes less energy, but what do you say to people who say bitcoin is killing our earth? So I'm not sure that statistic is true. UM. There are lots of people

who who are a little hyperbolic about that issue. UM, but U Bitcoin and our network ethereum do indeed burn a lot of electricity. They do that in order to establish trust in these infrastructures. UM. The traditional financial industry also burns a lot of electricity and occupies a lot of real estate. And uh um it uh I would argue as many orders of magnitude less efficient than UM these systems. The theorem itself is actually aware of this issue,

has been aware right from the start. We intended to move from the inefficient proof of work system, which burns a lot of electricity. Hold on, let's back up proof of work. You mean basically this idea that any change in the blockchain is uploaded at the same time to every system, uh, every network that is kind of in the in the sphere. So trust is achieved by having massive redundancy among a lot of nodes on this peer to peer network UM. In order to keep them in sync,

you need some sort of consensus formation mechanism. And in these consensus mechanisms, you have to elect a leader, and you have to have people follow on behind the leader. So a proof of work system which burns a lot of electricity is what enables the election of that leader

or the the winning of the leading position. That's true in bitcoin, that's true and Ethereum currently the theorem is moving away from expensive hardware, burning of electricity, a lot of wasteful computation to a system called proof of steak which replaces all of that waste with a system that is facilitated by an economic bond basically money that you place in a smart contract on the blockchain in order to enable um YouTube probabilistically be selected to be a

leader for a next round. Joseph Luban, I'm gonna just sort of take a off ramp for just a second because I need and just to mention as the founder of consensus, Uh, you're working in a variety of different kind of areas of related to block chain. What how would you describe or is there a good analogy that you can offer so we can understand what is a distributed application platform and why is that relevant to understanding all of this conversation about bitcoin or blockchain technology. So

Ethereum is a platform that enables decentralized applications. UM we like to think of it as one element of becoming decentralized Worldwide Web or the Web three point oh. It will be the infrastructure for trusted transactions, for automated agreements. There are other elements of decentralizing technology like decentralized storage,

decentralized bandwidth, decentralized high throughput compute, UM and UH. These sort of elements will enable us to move away from a business versus consumer kind of infrastructure for delivering services to infrastructures on protocol driven open platforms that have lots of different actors in different roles in insided markets and basically emerging ecosystems that offer sets of services to consumers. So none of those will there be um an actor

that's overly controlling or overly monetizing. So, for example, let's say you wanted to make a purchase of a product overseas.

The bank or banking institutions, whether they be with the buyer and the seller, they currently are in between the two intermediaries to intermediaries, right, So you what you're saying is that this new platform is a step in the direction of getting rid of those banks in between, so that now you can in a trusted way transact business financial business directly between the buyer and seller with knowing to me absolutely. So we've stood up a bunch of

different platforms. They're in different states of maturities. Some of them are launched on the Ethereum blockchain already. Um they enable certain intermediaries to be squeezed out of the situation, or certain amounts of value that intermediaries pull from the infrastructure to be right sized because there's less friction less, less rent seeking possible. So we built platforms for prediction markets or wisdom markets. We built an adjacent music industry platform.

We've built a supply chain platform. We've built a fixed income reference data platform. So we're kind of all over the map. We've got about twenty five different projects along those lines. You're gonna have to spend more time with us, because I'm just slightly beginning to understand and that's dangerous, as I'm sure you know. Thank you very much for being here. Joseph Luban is the founder of a Consensus and he can be followed on Twitter at Ethereum Joseph,

or at Ethereum project or at Consensus. Thank you welcome a burger that doesn't have any meat in it that doesn't require killing an animal that tastes as good as one that does. Impossible or perhaps the impossible Burger? Would you would you think of that him? He's really his eyes. No, I'm smiling. I like the Impossible Food enjoining us to talk about the impossible foods. The Impossible Burger is David Lee, chief operating officer and chief financial officer of Impossible Food. So, David,

what is the impossible Burger? Well, the impossible Burger is the only plant based burger that half the time hardcore meat eaters prefer blind versus a burger from a cow. It's it's this miracle burger that uses less land and only a quarter of the water and releases a fraction of the greenhouse gases. What's it made out of? So

this burger is entirely made out of plants. And what's interesting about it is it's four major ingredients are designed to be affordable and accessible at scale, and they're natural. So there's nothing synthetic or strange about this burger. It's it just makes for a craveable burger for a meat eater entirely made out of plants. Okay, let's let's just talk a little bit about the science if we can. Uh. This was founded in by Patrick Brown right at the

Stanford Okay. And what is the process by which you create the impossible uh burger? I want to get to this idea of using hem as a term. And it is an iron compound and iron based compound that hemoglobin is the way I understand right. So so Pat Brown to your point. Six years ago, working very hard over a period of four years, with a number of great scientists, discovered, among other things, what makes me taste and feel and

smell like meat. And it turns out this magic molecule hem h E m E is the only thing that can make eat seem meaty to a meat eater. Um. And then not only did he discover this, he discovered that, you know, he is a building block of life. It's in my globe, boom and animals, it's in hem global in us, but it's also in plants. Um. Lastly, he figured out a way, using a great industrial process, fermentation, to make this magic molecule originally found in a plant,

scalable and affordable and at high quality. And that's how that's how this burger is delicious for meat eaters. So Impossible Foods is still currently just selling it's uh me to put in quotes h two restaurants, Is that correct, It's not sort of in the grocery storage. Yeah. For now we are serving that half of the US ground beef market, which is sold through food service and restaurants. So I just want to talk about the vision here because I know that Bill Gates is an investor in

the company. Of course, Bill Gates known from founding Microsoft. Um, what's the sort of ambition, what's the sort of longer term plan here for hospital fits? Well, our investors are aligned to the very large ambition we have. We want our impact to be seen from outer space. We want every meat eater on the planet to happily choose an

impossible version of meat made entirely out of plants. Because if we can do that, then we can use a fraction of the world's resources while providing that delicious, cravable taste that we all know meat eaters are not going to forego. That's the ambition of the company, and I would imagine the ambition is also to make some money, because you've raised more than a quarter billions so far

in venture capital. I believe, like two hundred and fifty seven millions that well, our investor base goes beyond venture capital. It certainly does include great vcs like CoA, STLA, but it now includes sovereign wealth funds Singapore. Right, that's right, and on our investor base to your point, they're terribly interested in the size of business we're building, and we believe this financial engine that we're creating, to your point, is what's required to fund the mission. So absolutely we're

interested in business in return. What's the cost of impossible meat in quotes relative to uh similar grade of beef. So we like to point out that since our burger uses you know, less land and only a quarter of the water, that small amount of resources translates into a

burger that can be extremely cost competitive. Um. So, while we aren't releasing actual figures, the reality is we wouldn't be successful as a business or for our mission if we can't serve the globe extremely cost efficiently as or below the cost of commodity ground beef at scale. David, you're you've got a production facility that's being constructed, I believe in Oakland right now. It's actually for the last two months pump and running. Okay, if we went there,

what would we see? What would we smell? First, you are welcome to come. Here's what you wouldn't see or smell. You wouldn't see a slaughterhouse. You wouldn't see the expense associated with shipping animals. What you would see is an extremely clean, of efficient, simple finished goods manufacturing facility. One by the way, that reused in existing bakery of all things. Because our mission is to make sure that we do things as sustainably and cost efficiently as possible. Right, But

what what would we see? I mean? What is it a production line? Is it a huge extruding machines? What kind of it's nearly seventy square feet it you'll see produced off the line up to one point four million pounds a month when we're at capacity today, you know we're ramping up. It's only been open for two months, but you would see real product being shipped off the

line to two more and more customers. So is the idea or is the possibility here simply ground beef or could there be some kind of replica of different cuts and sort of The more intact slices of beef are are you know, our mission and ambition goes way beyond impossible burger. You know, we have the technology to do plant based chicken, plant based fish, pork, even a dairy platform. Um. I've seen prototypes of whole cuts of steak, of prototypes

of eggs um. We've already seen the products served quite well in Asia in the form of dumplings or abow um. This is a technology that spans multiple geographies and products. What's the biggest headwind for you right now? You know, I like to say that technology has now been eliminated as a headwind, and it's all about good old fashioned execution.

You know, with the amount of growth and the amount of demand that's ahead of us, we have to continuously grow at high quality, and that's what we're focused on. What has been the reaction by the Food and Drug Administration, because I understand that you want them to confirm that it's safe to eat, but they've expressed concerns mainly because this stuff has not really been consumed by human beings in any quantity and might even be an allergy or

an allergen for some people. Well, actually, we've been generally recognized as safe since and we have been working with the FDA for the last several years and and really a gold standard of safety that very very few food companies seek. Um in what's breaking news in in the

last couple of weeks, it's actually public. We believe in radical transparency, so any consumer it can go read the over thousand page filing we recently provided the FDA, having complied with every possible test we could think of to convince the world just how safe this product is. I like to think this product maybe the most well tested food product you'll ever come across. Soy leg hemoglobin that's

technical term, that's right. I mean what it really means is heam the same heame that you see in a burger from a cow, but sourced from a leg, you a plant. Well, we look forward to giving it a try. Thanks very much. David Lee is the chief operating officer and the chief financial officer of Impossible Foods, all about their plant based burgers. Thanks for listening to the Bloomberg

P and L podcast. You can subscribe and listen interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo wits one before the podcast. You can always catch us worldwide on Bloomberg Radio