The 'Liquification' of Private Markets Is Underway

with it to get returns? What kind of returns are you expecting? Joining us now, Christopher Wolf, chief investment officer at First Republic Private Wealth Management, which overseas about a hundred and forty billion dollars in assets under administration, joining

us here in our Bloomberg Interactive Broker Studios. So, Christopher, I want to start with when you have your wealth management, when you have your clients wealthy individuals, they have money, where do you start in terms of the returns that they should shoot for, in terms of their expectations. So

that's a great question. I think expectation management often becomes the heart of the initial discussion that you have with the client um and where we start with them isn't all about the numbers, because you often get on the lges You're only gonna get two percent in bonds or maybe six percent in stocks, and that sounds kind of scary for a couple of reasons, which I'll get into, But it actually starts with the goals. What's important to

you and how do you want to get there? And uh, that's a different conversation than what can I get for a return? Because the second question I just raised, which a client when they ask it often means they start to chase things. I want to get that return and that becomes more important, and well, what's the purpose of your money? So I'm gonna leave the purpose out because

that's individualized for everybody. It then becomes a job of a wealth manager or someone else in a professional in the business to think about how am I going to manage the risks to get from A to B. So if A is I have let's say two million dollars and I need to have three million and you know, seven years to make my goal whatever it is, how am I going to get there with the least amount

of risk possible? Now, the big judgment is what's the return number, And kind of simply put our views that returns are going to be a lot lower than they have been in the past. Past numbers I think is everyone knows from famous studies like if It's in and the like, or equities are more north of nine, ten eleven, depending on what time period you pick. We think it's closer to six um. And that's important because two big

things have changed in our view. One is population growth has actually come down quite a bit and is set to decline as unless immigration changes a lot in the United States. And two is productivity growth looks like it's stagnant a bit, so kind of the drivers of economic growth over a long period look like they're a lot lower number one. Number two is we're maxed out in

some ways in our view around the margin story. So if you're thinking about the premium you get from equities, it's still good relative to bonds in a low inflation world. But wow, it's not a high nominal number like nine, so it's more like six. But here's the good news. If inflation is like two, six is still better than two. Right, So if if the expectation is coming down for say stocks, and bonds. Are you finding that your clients are more willing to go out on the risk profile, whether it's

alternative investments or emerging markets. Are they willing to take on more risk that maybe try to chase that return. Yeah, we have a slightly different view around that. I think a legacy of a lot of the thinking around where demographics as destiny and I have to invest where populations are growing. Lad most people to just run right into emerging markets and I need an allocation or some other kind of Patinko machine fill it out, you know approach.

Our view is that there are some structural changes going on in markets that represent meaningful opportunities for clients. Here's two big ones, and then it leads to an answer to your question. The first is there's a lot less public stocks these days. There's about three thousand you can really invest in, and maybe two or three hundred that

clients really recognize. A lot of M and A and other things have really brought down the number of opportunities in the U S. It's actually gone up outside the US. But the second big thing that's changed is you've seen, with the cost of money being so low, a collapse

are really emerging evaluations between public and private markets. So if you're public companies dominated by machine trading, a lot of private companies well funded now means that those valuation multiples are likely to stay close together and until the meaning a private company might trade it a similar valuation multiple pe or enterprise value to EBA dah. And we see that, and a lot of private folks are saying, well,

this is just super expensive, and we get it. Private companies are now more highly rated than they have been in the past. But that makes sense. The cost of money, the cost of financing these companies is now so low, and if there are a fewer public market opportunities, then it looks to us like the private set is actually kind of very interesting. Here's the big trade. I think over the next couple of years there's north of eight trillion in our view of refinancings and the credit market

that's likely to happen. And you can't capture that just by buying long fixed income as an example. You've got to do something different. You have to be thinking about long or short or distress debt or some kind of restructuring approach in our view to capture some of those refinancings and restructutions that we think are coming. So that's a private answer. That's where we go. I guess when

when we look at the risk part of the pendulum. Though, in response to what you're saying about private markets, a lot of investors are saying this. In fact, you're seeing record amounts of money going into private markets debt and equity, and I'm wondering, at what point, uh, this is all chasing a return earn and ends up having a sad ending in terms of these companies having unsustainable businesses that are being kept afloat by a rush of cash seeking

the promise of higher yields. Uh, and somewhere just to sit totally agree that what happens when the cost of money is zero is you're gonna have fund things that should have never been funded in the first and first place, or even yeah, you're gonna keep funding things that should stop being funded. Would be kind of one way to think about it. I guess our perspective is that, you know, the big driver here is interest rates. The cost of money is zero, cost of capitals close to zero. It's

very low space. And if you don't have a lot of public market opportunities. The liquefication of the private markets as well underway in the United States. It's going to be very hard to reverse that our judgment, you're I'm sorry, we need like a little ding ding ding. The liquefication of private markets. I love it, go on, carry on, So I like it. I like that. This is great. The rally here is two big things are happening in private markets, and our view one is the growth in

things like secondaries. So secondaries are when a firm comes in and buys a limited partnership interest from you. So when you buy a private investment, you're often if you're qualified and meet all the regulations, you have to buy a limited partnership or a limited liability company. You can't really trade it. But trading systems are now being built up as a lot of firms are looking to do with all their extra capital, well maybe I can buy

an interest from somebody. You can now get a little bit more liquidity and private markets than you've had in the past. You still pay a price for it, but fifteen years ago was almost zero. Now post two thousand and eight, there's a lot of excess money looking to buy some of these interesting things. I think the second big thing that's happened is that we started to see a greater concentration of private capital in some of the bigger hands. It's much harder, I think for some of

the smaller shops to to start up. So bigger pools a capital often means a lot of liquidity goes with that. So our view is that this trend is going to continue for a while. And the real barometer here is just simple interest rates staying low. On the floor of Chairman, Powell said, that's likely to be the case. This trend continues for as long as rates stay very low, the cost of capital stays very low. In our view, as long as the real cost of capital is close to zero,

it's going to keep funding these private markets. So Chris, just about twenty seconds, real quick. You every recession in your outlook, we do. We think it's uh, you know, decent probability next year, um, but it's not fifty. It's not overwhelming. So we're in a place where we think the low and slow story is still the central one. Just gonna feel really bumpy. It might feel like a recession in certain parts of the stock market, for example, but bond markets a little over reaction. They're kind of

telling you the story that it's really slowing down. At this point, things like optimism are a little bit lagging indicators. Bottom line is we think you can still position well for a low and slow environment, low and slow environment. Chris Wolf, thanks so much for joining us. Chris as a chief investment officer for First Republic Private Wealth Management, joining us here in our Bloomberg Interactive Broker studio. So that's the liquefication of private markets, that's all I can think.

It's just great. But honestly, this it's It's true. There is an you know, flood of cash it's gone into private markets, and people are trying to create more of a public overlay for these markets to allow people to get in and out with a similar sort of liquidity as public markets offer. So at what point what's the difference between public and private? I don't know. And we will take a look at reworks and take a look at we Works. Maybe maybe there is a golf there.

T MT Tech, Media, telecom. There is a lot going on in the TMT space every day, which is why we're happy to have John Butler here. John covers telecommunication services and equipment for Bloomberg Intelligency joins us here in our Bloomberg Interactive Broker studio and John a lot of stuff going on in your world. Let's start with a T and T. Boy, they have an activist investor in their Elliott Management, pushing for change. What is Elliott Management

really looking for? I think in a word, they're looking for divestitures. They're looking for a T and T two get more focused. And if you read their letter, they talk a lot about how A T and T has since they first announced the acquisition, a Time Warner has changed strategy multiple times as the market itself has changed. In fairness to a T and T. But I think Elliott's point is they don't really have a handle on

what the strategy is with Time Warner yet. And you know, and again I'll defend A T and T on this one, the linear media market is changing rapidly, and so it's hard for them to really skate to where the puck is going to be, so to speak, if they don't know where it is now. Okay, but even aside from A T and T and Time Warner and whether that tie up was a good idea or how exactly they're controlling that. They're these other businesses to like a home

security business, which who knew. Then there's direct TV of course, the Mexican in wireless operation who knew? Uh? And part of its wire line footprints. So basically focus really is the issue here, right that Ellie is trying to bring here. How do they how are they going to identify which assets? So, just to answer your question, A T and T has sort of taken a conglomerate approach to the answer of what do you do as wireless slows and it has been slowing, it's going to continue to slow. It's a

commodity market. Do you do what Verizon has done, which is you lay your bets on the next generation of wireless and do that better and try and get some profit out of that. Or do you tap an jacent market or markets for growth, which is what A T and T has chosen to do. Elliott is arguing there's some stuff that A T. T has purchased over the years that should go like the satellite business, direct TV and as you meant in the Mexican wireless operations, which

frankly I agree with. I never quite understood what the rational was there. Other than two create a cross border network with an adjacent country. But frankly, I'm not again sure if they know what they're doing in Mexico. It's a very tough market, and that is a commodity market

dominated by the low end prepaid business. So I think Elliott is looking at it saying, you know, let's think about lopping that off and lopping off the satellite business in order to become more focused and therefore more profitable. So when you look at the media business, they've spent over a hundred billion dollars buying a direct TV now buying Time Warner. One of the concerns I would have if I were a shareholder is, boy, that's really a

people intensive business. I need some creative people and they're really driving the business forward. And what we've observed is a defection of a lot of the senior people from Turner, from HBO, from the studio. How concerning is that to shareholders that you know, really need the content people to

drive the business. That is a big concern. And um, you know, I've watched that defection process you were talking about, you know, one after another, um leaving Warner, And so the question becomes can telecom people competently run a media business. You know, you and I were talking before the segment about how different those cultures are. I worked at HBO, and I've I've really seen the difference in cultures between companies. You know, Telecoms are very utility like it's a high

fixed cost business. Uh, it's much easier to budget, I think, and media is high variable. The microphone goes on and he just tones it down completely. We were talking about hanging from hanging from the chandeliers at h are a kin drop in the cubicles at A T and T. But it is interesting right now A T and T shares up two point three percent, So clearly there are plenty of people who agree with Elliott's sort of push

here now on one thing before we move on. In fairness to A T and T. They have not had a lot of time owning time Warner to make changes, and there always are management affections in the wake of acquisitions, So I think things will settle out from here a bit. All right, Well, we now get to Apple releasing phones, and we have a minute left, so we're gonna give it its due. Should we really care about the new launch of the latest edition of the iPhone in this

manufactured holiday that Apple is so good at. Well, we should care in the sense that we're going to get a big camera up upgrade, and smartphones really are now digital cameras with voice capability. In many ways, everything that people are doing on smartphones is video oriented or picture oriented's app Chat, Instagram, FaceTime, etcetera. And so I think a camera upgrade is important, but it's not a big year in terms of a wholesale change in the look and feel of the iPhone like we saw with the

iPhone Tan or the iPhone Sex. Sorry, I was just taking a selfie. John Butler, thank you so much for being with us. John Butler, senior Telecom Services and Equipment analyst, joining us here in our bloombergerta active broker studios. He hails from Bloomberg Intelligence. Of course, uh, doing wonderful work there.

I love that we left a minute talk about the new iPhone, which basically you should have because honestly, it is really ultimately a camera and cameras are incredibly important, but it's not a huge ce change in the way that we experience the iPhone. Gold is really hot these days, even though I sort of come off. It's high as

that we saw in the past few weeks. We have City Group out today saying that they expect the price of one ounce of gold to go to two thousand dollars, a record high, up from a little bit more than four dollars. Currently joining us now not to talk about the price, but to talk about the process of trading gold. I'm so clear pleased to say, is Sequila Mears. She's senior director of the London Bullion Market Association. She's joining

us here in our Bloombergada Active Broker Studios. Sequila, let's just start with the trading of gold and precious metals. How do most investors trade these days? I mean, how much are people still trading the physical commodity versus some other sort of derivative. Well, thank you for this opportunity

to talk about the pressures metals market. And actually it's quite a time any question, because since November two thou the LBMA has been on a journey whereby we've been collecting data on a voluntary basis from the banks and I actually can tell you the London market currently is trading fifteen billion US dollars worth of gold um, which just gives you an idea in terms of liquidity and how popular this asset class really is. Are you talking about that I have a chunk of gold and I

give it to you and we've traded. Are you talking about derivatives or you know, futures contracts? So it's spot, it's options, it's uh, And obviously in terms of the exchange traded party side, it's it's a variety of products making up the gold trading number. Okay, my knowledge of gold and trading is limited, but I do know some a term called the gold fix, the pricing fix, that it's done daily. That's about the extent of it. End. But I read here that it's the anniversary of the

price fixing. So a couple of things. One, congratulations, Uh, explain how gold is actually priced, because I don't understand is that priced daily by you guys? Are by banks or by How's that work? Sure? If I may just for to firstly correct the term price fix, it's no longer the price fix, while historically that's exactly what it was referred to. Since two thousand and fourteen we now

refer to as a price auction. So it's an auction platform and Basically what's changed over the years is enhanced transparency, independent governance, and actually giving you an electronic platform to allow banks to trade and put in real, live trades. So it is an auction process. What you have are the bias on one side, sellers on the other side, and the intention is for there to be an equilibrium.

So you try a price every round, and we're at to specific a point an equilibrium has been reached between the buy side and the cell side, that is the

price for that day. So as we talk about the incredible volume of trading in precious metals right now that you've been tracking collecting from banks, there is a question of how much money banks have to hold when they do trade gold, for example, and right now the standard is for them to hold I believe, I believe of the capital required to match the total value of the

amount being executed. Is that correct, That's but it's still a very high number because one of the main things that the l b m A has been lobbying against that it's the wrong number for gold. Gold is a liquid asset, as we've just shown and demonstrated through the voluntary trade reporting regime, fifteen billion U s dollars is a lot, So it is a liquid asset. And because it's a liquid asset, there is no need to be

holding that much capital to back your balance sheet. Well, how does that compare in terms of the amount of capital the banks are being required to hold for gold versus say, instruments that are recognized as being more liquid. So, I mean gold has been grouped with commodities generally. So what we're trying to explain that gold is, well, it's yes, it behaves like a commodity given that there's a real

tangible but it also behaves like a currency. So actually, and we all agree and we all know and understand that currency is a liquid asset class. So what we're trying to explain to the authorities is gold is a unique asset class, specifically because it is a safe haven when there is a crisis, when there is issues in the terms of the currency prices, gold tends to do well, as we are seeing in the recent times. So because

of that, we believe that is the wrong number. It should be zero percent um And actually, if the rules go ahead, it could impact that trading and it could impact the banks being in the market within the gold space. So secular just in thirty seconds. What's the counter argument to that? Why are why is the number eight? Well, I mean we're still trying to understand that. Um as far as we're concerned, what we understand is that the authorities saw gold as a commodity put it with the

comodities because has been allocated. When we try and understand and ask the rationale behind, we haven't quite been given a clear answer. Is it my guess, is it just something around liquidity? Anythink? No, it's it's it's the idea that there have traditionally been some serious losses incurred on commodity trading desks from time to time, and they're trying to make sure that that it doesn't happen, right, I mean,

that's sort of the idea exactly. And I think from our perspective is again to explain that gold isn't just your typical commodity, it's a it's a hybrid between a commodity and for example, the FX markets Secular MERSA thank you so much for joining us. Sequila is executive Board Director in General Council for the London Bullion Market Association. Well billionaires such as Jeff Bezos, Bill Gates and Warren Buffett could have collectively lost hundreds of billions of dollars

in net worth over decades. Presidential candidate Elizabeth Warren's wealth tax had been in effect. To get some of the details behind us, we welcome Rich Miller Riches, an economics reporter for Bloomberg News. He's down in Bloomberg studio in Washington, d C. So Rich, thanks for joining us. What's behind

the math here? Well, behind the math is is they take a look at what seemingly on its face is a small tax proposed by a senator war and you know, two percent on wealth over fifty million dollars and three percent on wealth over a billion dollars. But thanks to the cumulative you know, the the the impact of compounding, uh, that amounts to a huge amount of money over time. So the top fifteen richest Americans have wealth, according to

Forbes magazine in two thousand eighteen, approaching a trillion dollars. Now, if this tax had been in effect since nine two, when Forbes started started UH listing the rich richest Americans, that that wealth would have been reduced to like more than half to two billions. Still a nice piece of change. But it shows you how how big an impact this tax potentially could have. So which angle to this study?

Have the angle of look what this could have done decimate the wealth of these individuals who are entrepreneurs in our nation, or is it look at how much money it could have redistributed and sort of evened out the gap between the wealthy and the and the lower the lower income very much the latter. I mean these two economists, Manuel Says and Gabriel Zuckman, they're both at both French economists, but they're both now at the University California at Berkeley.

Helped Senator Warren put together her plan, and there the argument is very much why we need this sort of tax, this huge disparity and wealth, and and how we can make it work. So they're trying to make it. I'm I don't want to say that they're trying to make it a bigger number, but there is sort of you know, a gold sort of have this headline number of that

that's that sort of hits you over the head. I'm saying this only because I was reading through and struck by the idea that the assumption is that these individuals would take no action to reduce those tax bills. And we know that everyone gets an accountant who has a certain income over a certain point, and they find every loophole and then some well these guys with these guys would probably have ten, ten or twenty accountants, right, the

entire accounting firm, right exactly. Now, I agree, it's it's it's it's it's, it's it's they make some assumptions, and but I think, I mean, the point is that this is a debate that the Democrats are having and probably the country is having. You know, what do we do about this huge disparity? Uh? You know, here we have top fifteen people and the country have close to a trillion dollars worth of assets, and we have the top

zero point one richest have like twelve trillion dollars. You know what, what if anything, should we do about that? So this, I mean this, this underscores what, you know, how you could try to do something about it, and what impact it would have on on potentially on individuals. And I agree with you that you know, obviously these guys would take all sorts of legal actions to you know, and including like you know, increasing consumption, you buy more votes,

right exactly, So Rich. How much support, you know, bipartisan support is there in d C for these types of plans, you know, that really are intended to kind of redistribute wealth across the US. I think well, on the Democratic side, I think you can see you know, from uh, both Bernie Sanders and Elizabeth Warren, you know, two of the top three vote getters according to the polls in among

the presidential contending field. You know, they both very much zeroed in on wealth and income inequality and what you know their respective administrations would do if they can't got the presidency to to address it. So at least on the Democratic side, it's it's a it's a it's a it's a pretty big issue. You know, whether it would be addressed through maybe changes in the capital gains tax would be another way you could try to get at that, or you know, changes in the progressivity of the income

tax or this wealth tax. You know, I don't think there's any sort of agreement on that, but I think there's at least among the progressives on the Democratic side, where obviously there's a lot of energy um in the primaries pre primaries, you know, there is a lot of focus on this kind of issue. Rich Miller, thank you

so much for being with us. Rich Miller is an economics reporter for Bloomberg News, joining us from our night now in studio in Washington, d C. It's a really interesting issue and one that I'm sure we'll be hearing a lot more about as we head into the elections. Thanks for listening to the Bloomberg pen L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on

Twitter at pt Sweeney. I'm Lisa Abramloyits. I'm on Twitter at Lisa Abramloits. One before the podcast, you can always catch us worldwide. I'm Bloomberg Radio