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The US House is passing the bill that would force TikTok sale or face a band. We want to get a little bit more on this with Daniel Flatley, Bloomberg national security reporter, joining us on this. Daniel, what happens now and kind of what is the victory here on a national security level?
Yeah, I mean it's a it's a great question. So, like you said, the House just voted a pretty big vote in terms of support for the sale or band of TikTok. That was a vote of three fifty two in favor of sixty five against. So that gives it some momentum heading into what might be a much murkier
pass forward in the Senate. You know, we've talked to senators over the last couple of days and basically they have some concerns as senators are wont to do about the speed with which this has passed The House and or moved through the House. And also is this the right approach? Do we want to you know, target a specific company. So we don't know yet. In the Senate's out today inconveniently, so we don't know exactly what the
path forward will be in that chamber. But Biden has said that he would sign this if it passes Congress. So I think they're moving very quickly at the moment.
Can you you know, you made this interesting point that the future of this looks a little bit murky, But can you just remind us what's the national security risk that we're facing, you know, such that we need to have this bill in order for it to be solved.
Yeah, no, it's a great question. So critics of TikTok, you know, national security officials, including most prominently probably the FBI director Christopher Ray, have long sort of warned about two primary vectors, if you will, of national security threats that could come from TikTok. One is data. So you know, the government of China several years ago now passed a law that says any company that was within the Chinese territory could be compelled to give data over to the
Chinese government. You know, if they ask for it. So that's one big problem. And then the other big problem is sort of could TikTok be used in an influence campaign, could have used to spread propaganda, you know, all sorts of things like that, could have been married potentially some of the data that's collected through TikTok with some other data that the Chinese government has gotten through hacks or other sort of cyber security actions and used to blackmail
or bribe people. So that's all of that.
Yeah, that's the one that really makes me nervous. Ll right, Daniel Thoughtley, We appreciate it when you're quite busy. A Bloomberg National security reporter joining us. So the broader question then is if TikTok is banned here in the US, what do you do with your ad dollars? Like, where do they wind up going? One person to go to on this Siemashaw, vice president of Research and Insights at Censor Tower. She joins us now to discuss Sema also used to work here, and she's really fabulous. You So
we have I'm an advertiser. What do I do? Do I just go pile all that money into Instagram? Well?
Okay, first, so the best way that we can go about thinking about this is thinking about what happened in India and June of twenty twenty when India band TikTok. So essentially what we saw was huge gains for both for Instagram in particular in terms of active users, but also on an absolute basis for YouTube. And to step up one step back, the reason is we've seen a
huge growth in the popularity of short form video. Based on our data, users spend about three hundred and fifty million hours per day on short form video versus one hundred and fifty million for social media and less than fifteen million for streaming. So it's the popularity of this short form video and that's why you saw in Instagram roll out reels right. So now about forty over forty percent of peopil's time on Instagram is spent on the
reels portion. So when you're an advertiser, not only do you want to be on the app where people have the most engagement, but you also want to be on the right place on the app. So in Instagram's case, it would be in reels. And so to think about so that's how much time people spend on short from video for TikTok in particular, globally, people spend seventy eight minutes per day on it compared to forty eight for Instagram, and I think it's like twenty three sub thirty for Snapchat.
So Instagram has a highly engaged audience. It's become increasingly popular with advertisers because it has a younger audience. Right, So you see, we've seen ad dollars shift within the United States to TikTok, but Instagram remains popular. So I think that the short answer is you'll see gains in share for Instagram in terms of ad dollars, and probably YouTube, maybe less so Facebook because Instagram still has a younger audience than Facebook. But I think that is the biggest repercussion.
But for TikTok itself, the US is ten percent of their active users, twenty percent of their in app revenue, and they've been growing their advertising business in the US and probably globally, so on an absolute basis, this would be a blow to them and symbolic because it's if it happened in the US, it could be copied in Western Europe as well.
I had absolutely no idea that the proportion of people watching short form video versus social media was so skewed that way. But let me ask you a question from the point of view of an advertiser. So this is all about, well, where advertisers is going to put their money. But can you take a step back for me and give me a picture of where how popular is social media short form video spending versus other types of spending, billboards, whatever, magazine ads.
So our data focuses on digital advertise.
Digital.
Digital is growing because that's where a greater portion of people's attention is, and particularly within apps, right because time on apps and you're kind of trapped you're looking at the ad, right, so if they place it on your feed or in your reels, you don't really have a choice but to see it. And because apps like Instagram and TikTok knows so much about the user, they can target their ads, right, so they can tell their advertisers, look, our audience is this, We're going to show your ad
here where these people will see it. So I don't have the breakdown of digital versus traditional, but certainly digital is growing at a much much faster rate, and particularly in the mobile space.
I mean, this is a very appealing business model. With a lot of growth, So yes, would it be easy for another company to buy TikTok. Then, based on all these users, all this AD revenue and the growing.
Platform, assuming they could just buy TikTok as is without any other changes, it would be a huge gain for somebody who's trying to grow in this space, right, because it's really hard now to grow users. Instagram as growing users, TikTok has seen a deceleration in the growth rate, it's still positive. And then apps like Snapchat are seeing growth internationally,
but that's because they haven't been there before. But for the most part, similar to streaming, it's the apps are very saturated right in terms of downloads, so you have to think of what can you do to drive that engagement, right and so reels and then obviously TikTok have been able to get that attention and drive that engagement. So if you're somebody who wants to be in this space and you're not owned by a Chinese company, this would be a great opportunity for you.
So get into this real quick.
This is the trick question or the billion dollar question. Now, who would be a potential buyer? Do you have any thoughts on that?
I've heard news of a lot of different companies buying it. I mean, I think you would depend also on a regulation. I mean, clearly one of the existing social media platforms may want to buy them. I don't think meta platforms
would be allowed to do so. But then you have someone like a Snap or even smaller ones like Pinterest, if they were able to finance such a purchase, that would certainly push them way up in terms of active users, engagement, and understanding the audience even better because they'd have that many more users to analyze.
Semen, it's so great to see you, amazing analysis and stat Semasheaw, vice president of Research Insights over at Sensor Tower, giving us the lay of the land on what's up next for TikTok. As the House does pass the bill to either banon or spin an off, does it go to the Senate? Is really now the question?
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The other breaking news we had in the last half hour is a jug dug in Georgia has dismissed some of the counts against former President Trump. Trying to understand what that means, particularly how that sets him up going forward. Wendy Benjaminson is Washington Senior editor, and she joins us, Now, Wendy, what does this mean.
Well, it is certainly good news for Donald Trump, and I'm sure he will he will crow about it and offer it up as proof that these are political persecutions. However, it leaves some of the more serious charges in place. The charges that were dismissed were the charges involving that quote unquote perfect many one of his many perfect phone calls, so quote unquote to the Secretary of State of Georgia, the administer of the elections who you know who heard Trump say to him, I just need you to find
me eleven thousand votes. So that the charge was interfering with acted official or solicitation of you know, bad acts. So those charges were dismissed. However, there are still these rico charges. Those are the racketeering and influence corrupt organization charges that prosecutor Fannie Willis has charged Trump with and those charges remain, so he is still in jeopardy of
a felony conviction in the state of Georgia. However, this is the same judge who is deciding whether Fannie Willis can remain as the prosecutor who you know, over these allegations of favoring a certain prosecutor that she was dating the man whom she made special prosecutor, so that's still hanging over her head. The other reason this may not be as great news for Trump as he will undoubtedly post or talk about later today is that the judge said that Fannie Willis was free to refile charges in
a different way. So clearly there was some technicality we don't know about that led him to dismiss the charges. I'm sure we'll know more later.
Can you give us some sense of the timeline for all of these charges in court cases getting resolved, not just in Georgia but elsewhere well.
The hope of some, particularly Democrats, that this would be resolved before the election are dimming now there is supposed to be jury's election later this month. In the New York case over his hush money payments to the porn star of Stormy Daniels, whom we allegedly had an affair with that's supposed to start later this month. Trump is trying to delay it by arguing that they need to wait till the Supreme Court rules on immunity. That may
not be till June. So, like I said, the chances of these trials all coming to fruition before the election are are slim, but they may be in progress on election day, which would be just another unprecedented moment in this crazy election.
Here talk about unprecedented. It is now official. The US House passes the bill that would force TikTok sale or potentially face a ban. We will talk about that in just a moment, sort of what advertisers do in that kind of situation. Again, the US passes bill that would force TikTok sale or face a ban, as one hundred and seventy million people cry, particularly teenagers, cry with pain. I do want to get your understanding, Wendy, that what is now the smoking gun case that President Trump is
up against? Right like in all the polling, there is always that one thing. If he's convicted on that, I won't vote for him. Is there a that still?
No? Actually, there isn't our Bloomberg News Morning Console poll shows that the country the least swing staved voters, who are the crucial voters were waiting for are evenly split on whether they would still vote for Trump if he were convicted on any of these charges.
There.
If you just asked the question, would you vote for him if he were convicted felon, fifty three percent said they would not. But when you divide the cases up up into the hush money payments for a point star or overthrowing the government, they feel the same way. They they're not seeing these cases as one more important than the other.
All right, Wendy, we appreciate it. Thank you very much for jumping on with us, Wendy. Benjaminson is Washington Senior editor.
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Let's get Ben Emmons take here, you senior portfolio manager, head of fixed income at you as well. He's standing by here. So and also if you were in the market, you read his notes. They are so great, they are so sweeping. They come at least two to three times a day. It's one of my go to things to read. Ben. So I do want to say thank you for those notes. Do you have a Tesla, Juba tesla or an EV?
I don't, Alix, by the way, fantastic to be with you on the show. I think the last time you and I spoke was more than five years ago, actually were Yeah, it's true. It was right before the pandemic. It was in it was in the studio of New York with you. So great. Great to be back with you. Yeah, so thank you by the way for the shadow on the notes. I I don't have a Tesla. In fact, I have a Volvo. That's uh, you know that's kind
of my favorite from my wife. Yeah, that's like European thing, right, It's like, you know, it was stuck with that, yeah, you know, but a normal gas car. But you know to the EV discussion, you know I wrote about us not that long ago, but these EV terrors right as in, there's going to be I think part of that trade war story coming back that the flood of evs from
out of China is so significant. I was just reading the B y D Company, Right, they're putting out a new car for twelve thousand dollars that you can buy. And this is why these evs are flooding our markets. And I think you're going to get a lot of pushback from from from the US and Europe and trying to you know, curb those those those cars coming into countries because it's a major price competition to the likes of Tesla and others.
Well, can you talk a little bit more about that, because we've got all the major automakers got their have their own EV plays and then we've seen some some of them pulling back, and so where is this all going to settle?
Yeah, I think it's going to settle at lower prices. I'm afraid. Right, this is real price competition. And you know, I think part of the reason why why Tesla is losing its Magnificent seven status it was it had a very smart tactic I think about a year two years ago, lowering prices and thereforejuiceing the sales. And now you're seeing the opposite sign of it, at least for now, right there may have to cut more in prices to get higher sales, right, So it's the competition aspect microeconomics as
you will. But I think this is what what what the EV market is ultimately about, is going to be even lower prices. And for China that doesn't matter, right, They like to continue to produce at even lower prices, So I expect more competition.
So, Ben, let's broad out for a second, because we've been talking about how the NASDAC is selling off. I've used that relative term, and you still have small caps holding up. Is this a rotation that we think putting yesterday aside, this rotation from tech to small caps has legs.
I think it does have sum legs alex because it makes sense that if you have a specific group semiconductors in this case in the video, maybe the star of it, but there's other related ones if you think of Broadcom, of IBM or any of those companies, that it expands
itself out to other sectors. Now, I thought what was really interesting was the earnings from Navidia highlighting that their technology is now being used in healthcare and financial services, in automotive and I thought that was like, Okay, this is actually along Gens's view about these AI agents, right, they're spreading across the industries, and I think this is
part of that moddening aspect of the market. Like if that's true the investment that the administration making in the semis in the economy, plus in the VIA being such a powerful force on the economy in itself by spreading all this technology, then the other sectors are going to lift up too. At least the market will try to price it. You know what it means for the economy
for out companies. Of course, in the end of the day, we do have to see AI truly pay off with sales, meaning you use AI and it can actually generate more sales, and say in healthcare of financial financial sector, say right, we haven't seen that yet, But I think the market wants to broaden out to discount that these sales will increase over time as AI is more widely adopted.
I wonder if we could shift here just a little bit and think about the yesterday's CPI print, because we've got this broadening out in the equity market, but there's also an enthusiasm there for the Fed to continue with its easing message, and so I wondered if you thought the CPI number yesterday should you know, give anyone some confidence that there's still cuts coming, or are you more of a mind that, hang on a minute, we might see fewer cuts and people are expecting.
Yeah, I'm more on that on that camp fewer cuts, because I think what this CPI data showed was that one the disinflation is stalling out. That's clearly now happening. Two we're certainly not going to go back to where we came from pre pandemic. There's too much pricing pressure building in the economy. Still, We're certainly not that the disinflation is going to flip over into deflation, even though
I would know that. Bloomer Intelligence are a very nice graph out on how the number of categories with prices below zero has definitely increased. But if you look at the percentage was about thirty five percent of CPI index. That's not too significantly different from a few years ago, but it has somewhat increased. I guess again, price competition
probably in the economy. So I think the feeds at that moment to say this CPI data there underscores that the economy stays above trend and until the economy truly moves back to trend right, just to trend, you cannot actually cut rates. I think that that is I think the big challenge for the fat here why they probably stay on hold for a little while.
Right, And first of all, if you shot ut Bloomberg intelligence like you're coming back all the time, like that's a definite plus one for ben Emmons. But if that's the case, and I mentioned earlier that Jeffrey is starting to talk about that also sort of following Torsten slockover at Apollo, why buy small caps?
Yeah, I think you need to trade that differently. Ale said, you know, people, if you traded too simplistically, like cut rates and then buy small caps. There's a lot in between there, right, you know one the small cup index. You know a lot of people look at that like, Okay, there's about I guess forty percent or so that our companies are highly indebted, non profitable companies. I guess they benefit from lower rates. But it's also just I think
it was of the economy in itself. I think small caps, I think of small business, I think of you know, what's all happening on the ground. So was I think notable is what Bostic said that they went out and did a survey among businesses, and as businesses said like, well, we think that if you cut rates the economy is only going to get stronger. We're actually waiting for you to do that and then we'll re see even more activity.
So it is partly true that I think cutting rates will benefit small caps, but there's also some micro aspects to it, so I won't be all in our view by the way the new edge is said, as Cameron probably talked to you about it, is that we're taking very selective approach to small caps because as you can tell when we haven't set a new record higher small caps really because they are downs about radcots. On the
other end, it's also about specific companies there. So it's a bit of a mixed back I think, and it probably will stay that way until we get a little bit more clarity on if the economy is going to keep tracking on the way we are doing right now.
What do you think is the biggest risk there for the economy to keep tracking the way that we're going now?
Wow, One, it's that we are going to see a change in fiscal spending. If that actually happens as in more cuts, right then I think the economy could slow, but this is clearing out of the story for this year. As you can tell. You know, we'll keep rolling the the shutdowns like rolling Black House. But it doesn't matter for the market because they know, like nobody's gonna put any type of significant cut into spending until there's a
new president in the White House. And and that's the big big I'd saying uncertainty from here, you know, whomever gets in there. My view on this is is not political. Was more about you know, how much you're gonna cut really right and still try to keep the economy on track right and.
And also feels like fiscal is gonna come either way. Ben Emmons joins US senior portfolio manager, head of fixed Income a new Edge. Well, you will definitely becoming gret back. It was really great to see your.
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This is going to be a segment that is near and dear to gen Ryan's hard because you are looking to buy at home right now.
I am, and it is very, very painful, and I'm going to share that pain with you over the course of the rest of the week.
Yes, I love housing pain. I mean not for you. I hate that for you, but I love it as a story.
Yeah, and it is just absolutely shocking. We're first time buyers and we are amazed at how disorganized and opaque this market is interesting.
Is it the price? Is it the mortgage? Is it the supply? What was the hardest part?
It's all so hard. It's just hard to pick a favorite child here.
Oh wow, Okay, well this leads us perfectly into our next segment. So Lenar is reporting today after the closing bell. You're looking at just an earnings estimate of about two dollars and twenty one cents for the first quarter. You're looking at revenue estimates about seven point four to two billion dollars. So nobody else better to talk to than Drew reading Bloomberg Intelligence at US home building analyst. Hey, Drew,
is Jen going to feel better after Lenar reports? I mean, I appreciate that she's looking in queens, but still.
Well, if she's looking for a new home, she'll probably fare a little bit better than something in the resale market. And it goes back to some of those things we've discussed in the past. There's not a whole lot of inventory in the resale market, and at the same time, builders have been able to buy down mortgage rates, so they're making the financing calls a lot more attractive for homeshoppers, which is just not able to get in the resale market.
Yeah, I mean talking about getting into the market, what's the incentive for me at this point? Because I feel like I'm sitting there. Rates are still pretty high, there's not a lot of supplies shuffling around, like where's my inn.
Yeah, it's it's tough and as I mentioned, in the resale market, things are particularly challenging. And we've been describing housing, you know, for the better part of a year and
a half as a tail of two market. So you've got the resale market where costs are higher, inventory is lower, and you've got the new home market where builders have been able to expand their community counts, they're purchasing land, they're growing their inventory bases, and at the same time they're making the finance and costs a lot more attractive. So the competitive dynamics have favored the builders for the last year and a half, and we think that continues through twenty twenty four.
Has len our stock already run up enough that anything is sort of like the law of good numbers, Like, no way the stock is going to rally after earnings.
Yeah, good question. I mean, since since the beginning of November, the builder stocks have been on a tear, you know, along with much of the market, and I think it speaks to that competitive dynamic that have favored the builders. Intuitively, when mortgage rates arising, interest rates are higher, that's not typically when you think about investing in the home builders. But I think that the dynamics have changed so much for them that there's been a lot more interest in
the group now. You know, if you look at where they're trading relative to book values over the last couple of month months, they've certainly come back more in line with what you'd expect based on future returns on equity.
It's interesting, though, if you look at some of the smaller and MidCap builders, there's still a little bit of a disconnect between you know, expected earnings and what they're currently trading at One of the things that I think is really interesting within the group is kind of, you know, the the drum beat has started to get a little bit louder, and we've heard some CEOs come out and speak in favor of this, as you would expect that builders have made a case that their stocks should be
created higher and there, yeah, I mean there has there has been a precedent for this in the past, in the case of MVR, and the argument is that the business models have changed so much. One, you know, you've got businesses which are shifting to more asset lights, so they're not holding as much land on their balance sheets, they're operating with historically low leverage, and they're becoming more systematic in their repurchase of shares because they're generating so
much cash. So it does bear watching, you know, as we get through this year and in the next. If investors are willing to underwrite these changes in the business model is kind of a longer term thing.
Can you talk a little bit about how that willingness is going to intersect with changes in what the ALOK is for FED policy, because after yesterday's CPI print, we're sort of wondering how many rate cuts we're going to get this year.
Yeah, it's a good question, and you know, a lot of the builder stock performance, and you look back to late October early November has been predicated upon what's happening with the FED. You know, when there's a lot of enthusiasm that the FED was going to start cutting maybe in one queue and there's going to be several cuts throughout the year. I think that's when you saw the
stocks really start to take off. And I think what you need to see now from the builders in terms of terms of an investment, is are lower rates going to actually show tangible benefits to the fundamental So one of the things that we're looking at specifically is gross margins. As we discussed, builders have been offering financing incentives and
obviously comes out of their profitability. But I think, you know, a lot of the enthusiasm stems from the fact that with lower rates, builders don't have to be as aggressive in all for and incentive. So I think there's there's a thought out there that margins should rise throughout the year. So that's what we're going to be looking at, is has this modest pullback in rates from eight to somewhere around seven right now enabled them to kind of dial back a little bit.
I mean, I gotta say this is totally anecdotal. Bit like I am addicted to Zillow and I'm addicted to Street Easy. I love it for fun. I'm not looking to move, But I gotta say I'm noticing things getting like snapped up in like thirty two days, thirty six days, despite the fact that the thirty year is still pretty sticky. I'm like, those are existing homes.
It's like, is there enough available land for the builders out there?
Well, I mean they're building up a ton in downtown Brooklyn. I mean, again purely anecdotal and just talking about well like buying up housing and tearing it down and putting up. Yeah, there's so many new complexes that are coming up. It's insane. And things are going I mean it feels I actually really wonder if that eight percent, seven percent, six percent hurdle is as much of a hurdle as we thought. Drew.
Yeah, that's a great point, and I think so we've been we've been dealing with mortgage rates that are above six percent for more than a year and a half now, So I think as we start to get through this year. I think you have buyers coming into the market who are coming in with a better understanding of what their costs are.
Going to be.
You know, maybe they have to make an adjustment on the particular house or buying, maybe they're making a concession on the square footage of the home, but I think they have a better understanding of what their costs are going to be. And you have to remember, even though home sales are down significantly from you know, twenty twenty one, we're still selling about four million single family existing homes
on an annualized basis, so there are still transactions. And as that continues, it starts to loosen up that mortgage rate lock and effect because you've had people who are buying at six seven eight percent rates who aren't going to be impacted by that in the next couple of years. You know.
Going back to the search for among homeworlder's for margins to us, can you talk a little bit about what their cost pressures are like, because what I really want to know is ultimately, how is this feeding into the inflation picture?
Yeah? So, and speaking to Lenar specifically, they mentioned during their last quarter that their construction costs were down double digits from the prior year, so there has been a little bit of relief on the construction costs side. The expectation is that things will stabilize as we get through the remainder of the year. I think the one particular challenge for the builders that you know has become more
of a concern is the cost of land. You know, builders bought up bought up a lot of land during the pandemic. A lot of it was lower priced, and as we're doing higher volumes in the industry, builders are starting to cycle through that lower cost land and now the stuff that they're delivering now and you know through twenty twenty four and into next year, is going to carry a higher cost land based so there's going to kind of be a give and take between higher cost
land and what they're able to do. From a pricing perspective, what we've seen now, interestingly, is that builders have seen a little bit of pricing power on alke for like basis, so you will see average selling prices for many builders
in the group start to come down. A lot of that has to do with where they're building or the type of product they're building, So there's been a shift to smaller square footage houses, but for that same square footage house builders have been able to raise prices in many of their communities.
So okay, so just to recap, we're watching concessions, we're watching house prices, right, input costs and anything they say about higher cost land am i ams summon you up? Right?
Yeah? The other thing specifically for Lenard's, they're going to be the first builder to report with that the month of February when we did see rates move up from you know this called it six and a half percent to seven percent range. So we wouldn't do want to see kind of the cadence of orders throughout the quarter and if that increase in rate did have an impact.
Real quickly, just about wrapping up here thirty seconds. Do you see any election year issues that we should know about for the home builders?
Well, you did have which was interesting during the State of the Union. The administration came out and the kind of emphasized housing as a key concern and something that they wanted to focus on. I think I think you'll you'll continue to see that kind of dialogue happening. But I think you know, what they've discussed is kind of throwing money at it from the demand side, which we think,
you know, ultimately ends up being inflationary. We think in order from a policy perspective, you need to find a way to address housing from the supply side.
One hundred percent. That makes such good sense. More supply prices come down and end a story rather than make it easier to buy. In essence, Hey Gray stuff really appreciate Drew. Thank you think thank you. You're reading Bloomberg Intelligence US home building analysts.
You're listening to the Bloomberg Intelligence podcast. Catch us live week days at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station just say Alexa playing Bloomberg eleven thirty.
Here's an amazing Big Take story that we wanted to talk about. The title is how a physics whiz made a fortune betting on Nature's catastrophes. And you can access this story on the terminal on Bloomberg and also Bloomberg dot com. Slash Big Take we do one every day, and it's a chance to go deep into the headlines. Here some of the underlying trends within the market. So let's go to the author, now, Gautam Nick Bloomberg, Senior Editor ESG Investing, joins us. Now, Gatum walk us through
what this article is. It basically feels like making money off of disasters.
Well, yes, on the face of it, that's say, that's probably what it is. But it's a bit more laid than that. So it has to do with insurance. So traditional insurance and reinsurance, you know, do a fairly good job of covering modest and medium sized catastrophes, you know, storms and hurricanes and earthquakes. But every thirty fifty one hundred years you get a Hurricane Katrina like event which
is completely devastating in its scope. And that's a kind of event that traditional traditional insurance company can't really handle. So they've turned to a new type of asset class. Well it's not new, it's been around for twenty five years, but it's really coming into its own more and more now, and it's called catastrophe bonds. And the way it works is that instead of the insurance company taking the risk should disaster happen, that risk has passed on to Wall
Street investors. So if the disaster does happen, the Wall Street investors can lose some or all of their money, so it's a pretty risky move. But if it doesn't happen, and these bonds are only they run for only three to five years, not for much longer. If the disaster doesn't occur, then the investor gets to keep its original capital plus gets a hefty return on top of that for taking better risk.
So your story, it's fascinating and there's subage today to dig into there. But you start off taking a look at for Matt Capital Management, and this is the owner
of the world's biggest collection of astrophe bonds. Can you talk a little bit about their strategy and in particular, you know, I just want to circle back to a comment that you may just now that in this current environment these this market is very very interesting, and I wonder if you could talk about about how a warming planet is figuring into for Meat's strategy.
Sure, so you know there are always hurricanes and earthquakes, but the problem is that more and more people are moving to Florida and California and other parts of coastal regions in the world where you know, they want to have a nice view and a nice seaside experience. But those expensive homes are building, when they get hit by a storm, they you know, tend to lose a lot
of money. So that is the real problem. It's that human beings are moving to these risky areas, and the insurance industries either in some places like California and Florida walking away from it. They're not going to ensure people the risks are too high, or they're turning to kind of instruments like a catastrophe bond to do so. So firmat Capital is the world's biggest cat bond investor. Their assets are about ten billion dollars and they have a
very interesting strategy. So like other cat bond investors, they do buy these risk models which help you to predict the likelihood of a hurricane occurring in a particular year or over two three years. But what they do is they add a magic source. Because the co founder of this firm, John so has, you know, a physics background, has a biophysics degree from Harvard. He's been able to layer an extra in a sophistication in trying to predict the likelihood of risk and return for each of these
potential catastrophes. So his buying approach is quite clever and sophisticated, and he hopes to get an edge from that. So that's where Fermat has really you know, they've been involved in this market almost inception, and they use this extra edge to try and beat the market and other catbord investors.
And has it worked. What are their returns like?
Yeah, so their returns last year, which is a very good year for all investors, about twenty percent, and I think a lot of other investors also came in at that level. I should say that. The interesting thing about cat bonds it's a really good diversifier. So you know, unlike your regular you know, stocks of bonds that fluctuate with market movements or the Federal Reserve decisions, a catastrophe bonds outcome is down to mother nature. Either she's kind
or she's unkind. And if you diversify a portfolio with cat bonds and you know, you get the benefits of that, it's a really good, you know, diversifier that has no correlation with the rest of the financial markets.
Can you talk a little bit about how the current environment in the insurance market is affecting for Met's returns, because you know, you make the point in the story that a lot of insurers are charging more to protect customers from devastating weather.
Well, you know, last year was a record year for the issue of catastrophe bonds, and this year is looking likely it's going to be again a pretty solid year, and that reflects the insurance industry's desperate need to pass on some of this risk beyond the traditional reinsurance industry. To Wall Street, Wall Street is a huge, you know, deep pocket with lots of trillions of dollars at its disposal, a lot of you know, risk taking investors, unlike traditional insurance,
which is a lot more conservative. So as you can see from just the number of new issuances that are lined up for twenty twenty four that insurers are increasingly
turning to this market. So one of the issues a problem is that secondary perils, as the industry likes to call it, so floods, wildfires, and thunderstorms are causing more and more insurance damage as opposed to you know, Hurricane Ian a Hurricane Katrina like event, and insurers are trying to figure out how can they protect their own portfolios, their own balance sheets, but also provide insurance to people When you have more of these type of events occurring,
this sort of medium size five ten billion dollar disasters versus you know, the once sort a thirty year event, and at the same time try to make sure that you know their balance sheet is protected. That's not so easy to do because we don't have much data on these kind of secondary perils. And also the models that are used that give an investor some certainty that okay, they don't stand to lose. You know, typically rare hurricane, the loss estimate is somewhere in the region of two percent.
It's fairly low. The return you can get is something like eight nine percent. So as long as that clarity isn't there for these tornadoes, thunderstorms, ice storms that you see in Texas, as long as that's happening, the insurance industry is going to find it difficult to access the camp bond market to cover those kind of perils which are becoming more common.
Gotam, what are the main risk events that now a CEO is modeling that may or may not happen like because he basically has a model what he thinks will happen, and then either take a little bit more risk but for more reward, or avoid that altogether. But what are the things that he's seeing right now.
Well, you know, they own something like two hundred and fifty or two hundred and eighty individual catastrophe bonds, and the whole market maybe has three hundred and twenty or so. These are rough figures, so they are very dominant. They own a vast swath of this whole market. You know, that could include a tsunami campbond for Japan, or typhoon camp bond for the Philippines, a hurricane cat bond for Mexico,
all kinds of different events. So I think their modeling is primarily focused still on the big potential disasters such as hurricanes or an earthquake in California or wildfires in California, unless so on things like thunderstorms, because again they don't really have the data or the sophisticated models yet, but they're building up that because that's where the catastrophe bond
market is going to grow. It's going to move away from the kind of you know, Hurricane Katrina like events, the rare of big, big disaster events, and more to you know, Hurricane Sandy like event, which you know there is a catbond for you know, the New York Subway system has acquired one hundred million catborn I think they've renewed perhaps the third time now to protect the subways from going underwater should a hurricane Sandy like event hit the city head on.
We have all very little time left, just in thirty seconds. Can you tell us what's the next big move in catastrophe bounds.
Well, I think it's just going to grow. There's a lot more catastrophes are going to be covered. I think some of the secondary perils like flood and wildfires in particular. There's more sophisticated modeling available from certain modeling companies. Also, there's more data, and so I think that's where the cap bond market is going to grow, not to its a huge rare disasters, but more of the commoner, medium size disasters.
All right, Gautam, thanks a lot, Thank you so much. Gautam. Nike joins Us Bloomberg, senior editor at ESG Investing again a great big take, and you can check that on the terminal or at Bloomberg dot com slash Big Take.
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