Transcripts For BLOOMBERG Market Makers 20141208

I will start you off with a bulletin mark for oil,s the price of brent crude fell to a five year low in the United States also dropped and hedge funds and other Money Managers i have that too much on rising prices. Merck is taking aim at superbugs per the drugmaker has of debt has agreed to buy cubist pharmaceuticals. Developing products to fight drugresistant bacteria. Has increased the target price of its ipo. The Company Plans to offer per ofto 14 these. In india whereer they had been banned and accused in uber driver of rape. The company will do everything to support the woman. Today withbama meets the duke of cambridge, Prince William who is taking a break from a visit to new york to visit the white house. He and his wife arrived yesterday and they will have a reception with Hillary Clinton and an nba game featuring the brooklyn nets. Its a, 14 years but citigroup the longer holds the record for the most valuable bank of america. That distinction now belongs to wells fargo was closed friday with a market cap of 285 billion. With me is the responsible for the remarkable ascent, the wells fargo ceo, good morning. Nice to be here. Else but the economy . You like to say that wells fargo is all in on the u. S. Economy and you have 97 of your assets here. If you look at the jobs number we saw on friday, 321,000 plus revisions to the previous two months, what do you see . Not all that is surprising. Since we are so involved in the real economy, we actually have been hearing from our customers about more hiring. Our Small Business survey shows more optimism now by them than any time since 2008. While we do not expect next year to be a breakout year, we are probably on the upper end of the consensus of economist for next year. Where his demand strongest in the economy . Automobiles obviously. Commercial real estate come as you travel around the country, look at the number of trains. Cranes. Lots of stuff is going on in energy, some manufacturing, technology so this is a very diverse economy in the United States. We are happy to be all in with it. What about the Housing Market and housing prices . Why took a look this morning, it sawkind of random because i a fiveyear chart of wells fargo stock price against the s p 500 caseshiller and they almost match perfectly. I know you Pay Attention to housing prices because you are the nations largest home lender. Perhaps prices matter. They do matter and in this from housing has led to behind in this economy were normally it leads in front. Student debt is a part of it and availability of housing. On the coast, some housing is not available and not enough loans available. There has been some credit overlays by the originators. All of those things individually are not that big but in aggregate it makes a difference. The originators includes wells fargo. These are supplementary standards to what fannie mae and freddie mac require . Will not lend, we to everybody they will lend to because of the putback risk. What that means in laymans terms as if we made a loan 10 has been paying for 10 years and all of a sudden, it goes bad, the guarantor, fannie mae or freddie mac will put it back to us for a reason perhaps unrelated to the mortgage debt itself. Today we are working closely with them and making progress on clarifying some of that so we know where the risk transfers. I think that will help open the credit box. People think we will go back to the old days but, no. They are fully underwritten and documented but it helps provide clarity when risk does transfer to the agency that guarantees it. Fhfa would like more Mortgage Loans to be available and you are doing your part by the sound of a to increase mortgage lending. Are the other big originators being too conservative question mark i dont know what they are doing. They still maintain the overlay and you dont. In some cases they do. This will be good for borrowers. Im not saying it will change the whole mortgage business. Purchasedy much in a money business but its important for certain customers. Lets see how this goes in is more clarity comes, i expect you will see more Companies Responding to that providing credit where its needed. When you say housing is leading from behind and set out front, does that suggest that housing prices have a good way to go yet before increases run out of room . I would say this Housing Affordability is still very attractive for most customers. Back at the prices in many cases where we were. It is more regional but its still a good time to buy a home. What about oil . Crude oil can close to a severe drop. What does it means for the economy oil stays this low . United states is still a net importer of oil. Is net good for the economy. Secondly, think of all of the things that we use energy for. Agriculture, manufacturing, think of the extra money in the pockets of consumers who can now spend on other things so thats a good thing. What will it do to production in the United States . Even at these prices, you will still see a very high level of production area i think we are on our way to being the Largest Oil Producer in the world the next couple of years. A lot of the financing for drilling in shale was done in the junk bond market but banks remain a large lender to oil and gas. We are a very large provider of financing to this industry. Loans are in our the production side for the rest is in the midstream and other parts of it. For the most part, lenders in our industry, its almost an assetbased loan where you have a price less than what the going prices for the borrowing events. I dont see a lot of disruption from a lending or credit perspective at least in our book. At what price does that become an issue . It depends on the bank or the lender and the kind of company were dealing with. If you as the ceo of wells fargo feel ok about your energy loan book at 65, that says something. We are obviously conservative and we are obviously conservative and were looking at our portfolio all the time. , its notr customers only the asset we are lending against. We are looking at the history of the company, their capacity and ,he character of the borrowing not just the assetbased side. What about Credit Conditions generally . There is credit available and it is competitive in certain markets. Commercial loans are very competitive. Responsively competitive . I think for the most part. You always hear stories about i cannot believe this lender did this. For the most part, i think there is responsible lending going on. On the margins, you can always have examples, i know there is some concern by regulators on leverage lending. There is also a lot of other players in the industry these days. Funds,e nonbanks, hedge different crowdfunding so there is other places that credit is available. Is the fed scrutiny having any ability in in financing deals . We dont know all the final rules. Are you being more conservative in anticipation . No, we think we do the right thing for our customers. Our lending is how we have always done it. We have a conservative bias. Wells fargo has always been that way and i think thats one of our strengths. Sure, but the Banking Industry is the weakest link that breaks the chain. Maylls fargo does not not upend the Banking Industry, its what the most irresponsible lender does. What happens to the irresponsible loans on the credit cycle turns . First, but yout are right, the weakest link of the problem but not everybody always follows the weakest link. Mid2000 two timeframe, we were the largest mortgage originator. Another lender went out and said we want to do more and we thought it was crazy. We walked away. Thats part of our history. How about the Mortgage Market . We talked about housing prices rising and you are working to make more loans available to more people. About the reform of fannie mae and freddie mac . They are essentially the market. 40 of the market with private capital. I think thats an important question. There is lots of people who think now that maybe fannie mae and freddie mac incrementally modernizes and changes and a couple of years down the road, way, blesses the changes taking place. You think they reform themselves . It could happen. Is that happening . We are starting to see some reforms like rich just risk chance for a. Just risk transfer. Imagine anything like fannie mae and freddie mac question mark have people on extremes of the two parties saying that government should be the total market. Others say government should be totally out of the market. Even others say they sure there should be some blend. If youre going to have private capital, we have to get paid for that. Today, credit is pretty attractive in the pricing. To make a 30 year fixedrate mortgage around 4 , that is a bargain. That is a bargain . I think so. My first loan in 1975 was a. 5 . For the borrower. Right, for the borrower. If its good for the borrower, what business does private capital being in that market . If you put private capital income it could increase prices. Is lots of puts and takes here. Private capital meets its return. Whether its in mortgages or leveraged loans, both are subject to a lot of regulation. How would you describe the state of regulation we now have . There may be another one coming from the fed any day now. What happenedl, after the downturn should not be unexpected. You look back to 1929 and the great depression, there was a body of legislation and regulation that came as part of that. With this downturn, we had all of that. Its a question of balance. No question. Are we in a state now six years after the financial crisis where you would say the pendulum is still swinging too far in one direction . I would say its probably permanently stuck too far in one direction. Some of that has come back. Oni look at the initial read remittance business activity, that was too restrictive and that came back. On the mortgage site, we are starting to see moderation. It is hard to connect capital to real customers. Some of those cases, the pendulum is swinging back. To wheret will swing the pendulum is. We will return momentarily with the ceo of wells fargo, john stumpf and talk about what wells fargo is not your typical bank. You are watching market and we have the ceo and chairman of wells fargo, john stumpf. I want to ask you a question about culture. Bill dudley, the president of the new york fed was speaking and spent time talking about bank culture. Here is a direct quotation do you take him at his word that he and other regulators, if they believe that banks do not reforms are culture to make the banks more simple, they will go ahead and break them up . I cannot speak for bill but i do agree that you have to worry about it. I worry about culture. I think it is probably our singular most important asset. I think my primary job is to is the keeper of the culture. The culture and wells fargo is an and by things likeus you said earlierd we about 265 employees, we would not use that word. They are team members. Their assets we invest in, not expenses being managed. Intend to play a team role. We have customers, not counterparties. Personal responsibility and these are things that are important to culture. Go back to Something Else which is a bit about the weak link breaking the chain. If yours is among the stronger links in the Banking Industry, what about the weaker links . If other banking cultures are not strong enough, do they still to fail risk in the Financial System . I do want to call out anybody else and i dont know their cultures well. You see how they operate as a competitor. Yes, but i dont know whats happening inside the house. I respect bill and if he has concerns, that should be listened to. I know the culture matters. Our investors, when i talk with them, they uniquely know our culture and have been with us a long time and culture comes up a lot. One way to preserve and perpetuate culture is to hire the right way. How much of a challenge is hiring people today question mark its always been a challenge. We like to so we dont care much you know until we know how much you care. That is how important caring is to our culture. We can teach the technical parts. We cannot teach caring. How do you persuade a highquality graduate to come and work for wells fargo as opposed to taking his remote bridges in Silicon Valley or chasing riches in Silicon Valley . Do they like working together . Would they put team goals ahead of personal goals . Nothing wrong with me. Never at the expense of the us, we and ours. If they want to Work Together on a team, adding value, longterm relationships if that fits into the lexicon, they will have a wonderful career at wells fargo. Its all about me, they should probably go summer else to begin with. What about technology . I see it as disrupting the payments business like apple pay. Icy technology disrupting the lending business Like Lending Club about to go business. Companies are trying to intermediate the bank. How does wells fargo fight back and use technology as a weapon . We participate with many of an investories as in lending club or in other cases, we are the machinery or engine behind what other companies are doing. We look at a lot of other companies. People ask me who we are most impressed with in the industry. I say apple and google and amazon. They estimate about banks. To the extent they are teaching customers have to think and behave differently, they have a huge influence. We have 24 million online customers. 14 million of them are mobile. We did not have that five years ago. We have an Incubation Center now and we are using things to help our customers like click to service or make an appointment or we are using a new technology with begin to understand where our customers are and we can treat them individually. There are lots of things going on there but i like our chances. Its great to have you here, thank you very much. John stumpf is the ceo and chairman of wells fargo. They are the most invaluable bank by market cap in the world. When we come back, index investing with a twist and we will talk with a billionaire behind the index fund. Up, are americans ready for their golden years . We will hear from someone who manages billions in retirement savings. The last few days has been aboutart in miami. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and stephanie ruhle. You are watching Market Makers. Stephanie ruhle is on assignment. For ate has ranged raged for decades. Here is an answer. Our next guest helped lead the index fund revolution. 380 booth is the ceo of billion. You might recognize his name as the booth behind the university of Chicago Booth School of business. I think you need to grab that. It appears as though we have a small technical problem. We will sort that out for you. Some active manager is probably discouraged. The reason you are a big fan of indexes is you are among those who subscribe closely to the market theory. Argument about the efficient market theory, now that we are in the sixth year of a bull market, what can we say about the theory . Connect thed downturn with the efficient market theory. It says that markets go up and down and its difficult to forecast changes. In the financial downturn but the active managers that werent able to protect their clients very well. They are not doing well on the rebound either. Financial Services Industry did change slowly. Withked in the first index wells fargo in 1971. Years and its40 worked better than people thought it would. Are they universally good things . Anytime you have a category, there are opportunities to do things poorly. I think they are terrific. Thats why i asked the question. Example, one could use his investing internationally. Its difficult to invest sometimes internationally. Make it easyetfs for Foreign Investors to invest. Etfs are becoming more popular with institutional investors. They have been the equity markets and follow the index strategy very well. They have done very well. We are getting there. Over time, things are going to have to moderate. Expect equity returns at 12 year in and year out. What is that going to mean for the Retirement Assets out there . Whether it is done by a pension plan or individually, it is still fixed income. You have low returns on fixed income. We talk about the risk of equity. That is the problem. What people need are good, stable retirement incomes. The benefit plan is what you needed. People could not afford it. 7. 5 am thinking about the anticipated return rate in many of these Pension Funds. Either pull out of thin air or target because seven point 5 is the way its always been. 7. 5 is the way its always been. What is a more reasonable number . Rate is similar to the risk of your liability growth. The growth and liabilities of these Pension Funds is reasonably predictable just like you can predict High School Seniors from the can garden class. Its an actuarial. Are growing. The growth in liability grows, but the discount rate is a very high when. Sense,. 5 doesnt make knowing what you know about the patterns of returns over time, we live in a zero Interest Rate , what is a more sensible number . Take Something Like the 30 year bond rate and add basis points. 4 would be a sensible rate. Every Single Pension Fund would be underfunded at that rate. I dont think i am the first person to think of that. The answer that matters is what we do about that . We have got to be honest with people. That is a good place to start. We need to be more transparent. Planslly few of these have to be at risk. Is in liquidess markets, mostly equities. What about ill liquid investments . Index, would you expand it to illiquid investments westmark . Its a good idea if you can afford it. I would not use the same logic. Requires liquidity and volume. You can accept prices being fairly set. I dont think you can assume that markets are efficient. There has been a lot of talk from people like larry fink of others that we are going to be living in a world of greater volatility. That what we saw transpire in the middle of october is going to be commonplace or more frequent. Is that something you anticipate as well . No. I wouldnt dispute what he said. If you look at the ins and outs of 12 and change, we are going to be in the low volatility involvement for the future. I will rely on the market forecast. The argument that is made is theres not enough liquidity in the market, particularly in the bond market. People have made the same response. It has been going down and down. Do you buy into that argument . Consequences and costs as a result . If anything, there has been more liquidity. Reticular for the average investor. When i started in the visit business, there were fixed rates. Those were challenging times to get a fair deal on a trade. Andthe follies of so large the costs of trading have gone down so much. Volumes are so large and the cost of trading have gone down so much. We dont do highfrequency trading. If they have no more information than anyone else has. Sometimes the highfrequency trading has been associate with front running. That i dont think is fair. Other than that, i think it serves a purpose. If we take the pieces of the puzzle, more moderate equity returns, zero percent Interest Rates, what is the right approach for retirees today . A 6040ink Something Like balanced portfolio. Most people couldnt tell the 60 40. Nce between a there can be quite a difference in outcomes over the long haul. What i think is important for individual investor is that they develop a philosophy that they can stick with through thick and thin. Downturnems with the or the people who panic at the bottom and got out. They lost 50 of the value of their equity. The people who stayed in from today, itn 2007 until , but given great that there was a market crash in between, there returns a been remarkably good. You need an investment philosophy that you can stick with. You need to have the discipline to stick with it. David, great to see you. Thank you very much. Rangen we come back, the rover of outerwear. Season where retailers go to war with price cuts and doorbusters and cyber sales. Canada goose, the maker of , is taking it in another direction. Park is pushing those deeper in the United States and japan. We sat down with dani reese. You might appreciate this. The company is using its made in canada motto to establish itself as a lowball highend brand. Global highend brand. Sales are slowing to 3. 5 next year. They are going to grow 30 . They might be able to do that. They have doubled Production Capacity with a new warehouse in toronto. They have opened offices in london and new york last week. Pushed deeper into asian countries, even though they dont get very cold. I talked to the ceo about that. Cold is relative. It is not that cold of a place in tokyo. It rarely goes below zero. When it goes, they feel very cold. I tell people that we are the land rover of clothing. People are not ever going to go to the arctic. Because they want to know that i have that protection if they need it. A want the best. That is why we can do a market like japan or tokyo or soul in korea. Swisslikened them to watches. They come from region of his mastered the craft of that product. Mastered the craft of the goose down jacket. It doesnt have to be that close cold for people to wear a canada goose jacket. They are everywhere, included in my house. Heres a question, who do they see as their competitors . Montclair. You have to assume that that is a competitor. In luxury apparel, its expected to slide. Anybody that sells luxury clothing could be a competitor. The United States is the biggest target. When you look at japan, as the itcy has weakened makes it more expensive for them. You are seeing tourism skyrocket. There are tourists. To chinese are flocking japan to buy cheaper luxury products. Canadabrands, not just goose, they are all rates in their forecasts for japan against people are going there to buy products. They are not selling to the japanese. They are selling to people traveling there. They are buying them in yen. At a thousand dollars. We would love to see a cheaper coat. He has never seen a discount. He wants to be a burberry or a chanel, a brand that never discounts. They are always in high demand. And optimistic story for canada goose. When we come back, jim chanos shows stephanie around art shows in miami. The art world brought some heat to miami. It was the largest contemporary art fair. 3 billion worth of art drew a crowd of 70,000, including some of the wealthiest collectors. Our partner stephanie took her eye for talent to south beach. She spent some time with jim chanos. He is a collector in his own right. On the floor, take me inside. But me know what its all about. Lets go. That warhol is one of the signature pieces of the show. I love this piece. Eh. Where is the art there . I dont know. I would be looking at his financials. This is a garbage can with lights in it. There are some shots qs inside. This is a blank gallery space. Artistssents a lot of wellknown and upandcoming. I do business with white cube. What kind of influence do they have . I believe that one of the reasons that the auction houses are under pressure is because of the growth of profitability of this firm, the rise of the super dealer i call it. Day, itnd of the depends on this market. A bull market is like anything. This place is booming. You can find buyers at a price. If the art market is down, there are no buyers. Its time for you to take me on a trip. Things that i like and you did not seem to like anything that i liked. We are in your home filled with incredible pieces. I want you to show me your favorite. Watch out for the bear trap. This is a bear trap . Bears are a danger enough in the marketplace. Why would this resonate with you . We talk all day about arden youve got to live the things that are part of your life and decorate your world and entertain your friends. If you cant do that, why bother . Trap. Favorite is the bear for a guy like jim chanos, keep it where people can see it. There approaching 56 past hour. Flocks are fluctuating between gains and losses. The s p and dow are near record highs. By half of one point. The nasdaq is in the green up by one quarter of a percent. Rally. S a major though shares are up 35 right now. Merck is going to buy them. U. S. Equity markets are holding after seven straight weeks of gains for the s p 500. Thisroducer is sad that does not look its going to 18,000 today. Lets show you whats happening overseas. This is the euro dollar exchange. The dollar is trading at a twomonth high. It is trading at a five year high against the broader currencies. This is because of some data we had coming out overnight from china showing that chinese imports fell more than economists had expected. I should say unexpectedly fell. Lets show you what is happening to the shanghai composite. There has been a runup in chinese equities. It is up 24 in that month. It is truly incredible. Now it has topped 3000 for the First Time Since 2011. This is the first time in three years. This was a big move over there in europe. We will get to russia. Lets show you what is happening there right now. The ruble is a little bit stronger today. Inre is a lot of speculation the market that the Russian Central Bank this week is going 2. 5 percent. Tes by this is because of the selloff that we have seen in the ruble. This has been part of the selloff that we have been seen in oil. West texas is down again today by 2. 5 . I believe you with some fast food stories. Donalds shares are following. They are down 3. 5 . The Worlds Largest restaurant chain posted its worst sales decline in more than a decade. They warned that a health scare in china will continue to reduce profits. Thebiggest soft spot was u. S. , down by 4 . The core business is bond and big mac. They are really struggling. We will be back in a couple of moments. Of 2015 might be a rerun 2014. We will speak with one of the pension plans. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and stephanie ruhle. Race relations in america, a poll says they have gotten worse. Investors arest the same. We will show you how they are different. Betting big another big year, what 2015 looks like to one of the biggest pension plans. Makers onrket bloomberg television. Stephanie ruhle is on assignment this week. We will start with the bulletin. These of the top stories at this hour. Mcdonalds just seem to get back on track. Chain posted its worth worst sales in a decade. They fell 5 last month. The company says it will reorganize operations. Shares were down by 3 . Nintendo will have something to celebrate this christmas. A year after losing 200 million, they are on a comeback. Sales are soaring and the Company Projects it will sell 3. 6 million consoles this year. In hack attack on sony began a hotel in bangkok. Hackers working through this highspeed network at the Saint Regis Hotel began leaking confidential data to the internet. Eight Hacking Group linked to north korea is suspected. Denied beingas involved. Attack is clearly the righteous act of our separate and supporters who came forward following our field. Ae experience can be seen as just punishment for its unjustified actions. Is that north korea is exacting revenge for the new comedy the interview. It is about the attempt on the life of kim jongun. Is new hunger games movie tops at the box office for three weeks. Inhas grossed 258 million the United States. More blockbusters will be opening. It will be facing more competition. This is the 100 million cat. Grumpy cap has earned almost that much money for its owner, a former waitress. Rand ofced coffee iced coffee, next will be a worstcalled grumpy cats, christmas ever. With stephanie out on assignment, i needed some reinforcements. Ive got a cohost sitting beside me. His name is chris aleman. Advisor for the pension. A teachers resembles to of a matt miller than stephanie. I want to talk about the outlook for 2015. You have cryptically said that it could be a rerun of 2014. What do you mean by that . I want to be clear and not cryptic. I think we are if you looked at last year, if i came here a year ago and we looked out into the year and thought yields are at an alltime low, the market had done 20 and we did not take it could repeat and it has. When you look at the long bond, it is at a 25 total return fiscal year to date. You cant expect rates to drop again. We think the market is going to be healthy. It might not be a 20 year like this year, it is going to move up a little bit. This togot to expect rise at some point. I have been wrong on that for three years. I admit that. Blackrock is going to unveil its outlook for 2015. I sat down with larry fink. It wont surprise you, i asked him some of the same questions that we will be adding around. What are the chances that come this Time Next Year we are going to be looking at equity returns of 10 again and a rerun of 2014 again . D yields at 2. 5 this is an excerpt of what he had to say. Equities are going to start moderating. They are not going to go up 10 year. They will continue to be suppressed. To be returns are going somewhat muted. You are not going to have a disparity of 2. 5 bond returns. You will see that compression. I think there is a 20 risk that the economy does better and tenure rates could touch 3 in that range. Than 50 says no better probability that we get eight to 10 . A better chance that those returns are going to be 6 to 8 . Thee is a 20 chance that economy outperforms and we see yields tick higher. Im not going to disagree with larry. Hes the man. I am going to follow what he says. We are very similar. I would change the odds a little bit. There is a chance of the market is going to be around a six to eight. Stay invested in equities. Ou are going to watch europe i am more optimistic about japan. It is still in experiment. The United States the place to be. I think yields are going to rise a little bit, but not dramatically. The story of 2015 is going to be when is the fed going to tighten . Maybe june . Expect double digits out of a fixed income. Growth like webs did friday, how does that change the outlook . That makes it more comfortable. I think they are worried about disinflation and in for an on the other side. They dont have a lot of tools to stimulate. They stop the taper. Now they want to reload. I would like to see them start to tighten. The market is going to react super negatively when it happens. A halfu go from zero to on shortterm rates, what does that mean longterm . Talk to the ceo of wells fargo, it would help the banks out a little bit. Im optimistic, not wildly so. You are not going to get doubledigit returns. You have had five years of a bull market. We are back to neutral. That is a great set up in the next year. There are longterm problems. We know about them every day in the news. You can get a dump of snow out here. You are going to get a noreaster here shortly. I am going to get out of here before that happens. There are problems brewing in this country. It wont be a smooth year. I would agree with larry. You talk about the kinds of things that are entirely should do, somebody looking at a 401 k . The portfolio, how are you changing your allocations for 2015 . I want to be clear. I am talking about all of us who have a future retirement account. I am a longterm investor. To separate the investors from the day traders, those people i dont care about. They are going to be volatile. Our Asset Allocation will be at market rate for u. S. Equities. We will be at market weight. We are trying to decide on the international markets, when its time to go back into europe and when its time to go into japan. We think thats an interesting opportunity. The emerging markets, youve got to be contrarian. You cant just play what looks like the easy play. What is cheap right now in the world . Has made people a lot of money in the last five years. That is a great place to be an i think the u. S. Will be the bomb in place of the world for returns. If you look at the international of the bests is one places over the last two years and the dollar will be strong again next year. It will be a tough year to make returns. If you feel similarly to the way that larry fink feels, bond yields are likely to move higher over the next one or two years, why would you want to put more money to work now in fixed income knowing that money over the short run is going to generate a negative return at least on face value and bonds will get cheaper two years from now. Focus for us on our Asset Allocation, we have 60 of the portfolio in equities and 20 in private equity. We are exposed to gdp. Long bonds are a nice hedge to that portfolio. Youre not going to have negative 20 returns. Youre going to have flat to low returns. Half of yourhave portfolio invested in Global Equity . That is not liquid money. That should be fine. Why not match more . This is a question i have always tried to answer talking to people like you who do ron longterm money . Why not lock it up longer . You dont need liquidity. If you look at our portfolio, a third is not liquid. I consider real estate fairly on liquid. We are growing infrastructure. We hope the United States opens up the infrastructure area to create investment. Greatnk the u. S. Has possibilities if that market can open up. You had a great point. How muslim quiddity do we need . How much liquidity do we need . Not as much as we had. We are 22 billion in private equity. There are only one or two plans bigger than us. When you start lowing out your sub allocation, you dont want to be overloaded. That is what happens when you get really big. You just own the megabuyouts. That does not generate as much return. Those some interesting places. You can run into the same problem. You want growth, we have to earn 7. 5 . We are going to be in global stocks. Were going to take a quick commercial break. He is my special guest host for the hour. We will talk about activism. This is a different take on activists. They are not all the same. A little later, Hillary Clinton versus the republicans, how does she do when voters are asked about leadership positions . Activism is hot. Not all activists are the same. Who are the good guys . Them whiten calls hats versus black cats. Also here with us is a former Hedge Fund Investor and now a professor at columbia business school. What is the difference between a white hat and a black cap question mark . It sounds like the hacking world. It comes down to people who are activists that are loud and vocal and in the press. Its good for you guys because it drives news. We like engagement where its more direct and with the board. We want to invest with people that want to change the governance and not the structure of a company. Too often, the word activist is become a negative because of certain people being so loud and vocal and Holding Conference calls trying to explain why they shorten the stock. Im not sure that were looking at two fundamentally different things. I think this phase of the activist cycle has been about changing who holds the cash. The companies a been very cashrich. We get on the board or we have a special dividend. What we have not seen as the ugly phase of the cycle where the noisier people do come to the four. The ugly phase is after you have gotten companies to pay the cash, you close the plants and do the unpleasant things. The challenge for a public plan when its not just pay us out a dividend, which is what happens when carl icahns sitting down with apple. When you partner to break up of stresst was a lot in ohio. Shut down the steel plants and take them to china, that gets ugly. Theres no question about that. That was about my limit. There was a lengthy article and a lot of comments. It affects towns and peoples lives. We think that in total, the company will be better by being into halves. That, where a ceo sits on a company for a long time. They are not looking out for shareholder value. We are not looking for share shortterm profits. At the end of the day, shouldnt the one thing that matters be returns . Returns andgreat you have a bullhorn, who cares . Disagree. From an investor standpoint, it is long term shareholder return, we are not interested in shortterm off its or dividends from one quarter. We are to hold a stock for 30 years on average. We told Michael Eisner that we are going to hold disney before you came and after you are gone. When the company splits, we own the two halves. We will continue. We are longterm shareholders and we want value over the long term. We want to hold management accountable and get some fire under their feet. I dont mind them sitting on cash. Worriedk if they are about the environment. I want them making good Capital Allocation decisions. They are getting money in from operations. How do they spend that money . Often we see lousy investments. On erics point about the split between good and bad, a bunch of research has been done on this. At Columbia University to the study on these things. How the eventsr occurred. Activists added six points. The notion that it shortterm, the only way that you can do a shortterm pop as an activist is to do something that the investors havent priced in and cant price in. Its hard to do that shenanigan now. Main, when the activist came aboard, there was an improvement in price. Actually, black cap or white hat, getting somebody in there who is more motivated works. This blissfully side. Well on the publicity side. Its not wrong. Its not palatable. Look at star board. At the end of the day, they took the darden board and installed 12 of their own directors. Had they not been so public about it, they had a philosophy and they see value to get to where they want to go. It makes sense if you hear jeff smith talk about it. If you werent public about would they have been able to sweep the board clean . Maybe its better in the long run that they do sweep the board clean. That has to be a tool when n activist in the ester. When they sold off red they took the thing on their own and ran away with it. When you have that much disrespect to shareholders, you have to wipe out that board. There is a role for activism. I think its how vocal and when. We have some cases where its not been effective. If you talk to analysts up and down wall street where the company is sleepy and boring, i want to see who belongs in the white hat or black cat cap. ,worth, jeff smith it is clear. Ackman, theyd bill unload. They tend to do it more public. Where it gets complicated for me is its a webpage where they said these guys are wrong. The usual defense and they issued some press releases and caved. They split the company into wood and steel. That was the limit. What you going to do in a manager goes beyond that limit . You withdraw . How much control can you have on a manager if he goes ugly . To take a quick commercial break. It was great seeing you as always. Will be back in two minutes. Coming up, better or worse question mark a bloomberg poll in Race Relations are not especially encouraging. Live from bloomberg headquarters, this is Market Makers. I am Erik Schatzker. We have the chief Investment Officer of the california state chers retirement officer fund. Race relations may be the most talked about issue in america, here in new york city and missouri after grand jurys declined to indict Police Killed unarmed black man and a new poll shows the majority of americans believe Race Relations are worse since president obama became the first black president. We will look at those results with now and much more mark halperin. On one level, its not that surprising. Look at thef you state of racial issues in america, you could argue the president just by being elected improve things but overall, there are parts of the country still grappling with this even with an africanamerican president. I am so disappointed that the polls got worse. I had optimism that things would improve. These are part of the simmering problems that are out there in our country that slow the economy down. It is a risk to investors. No question. Would you say that by becoming the first black president , that says a lot about the state of Race Relations in this country . With this poll have yielded the same answers had we conducted a two years ago . Its hard to know. Aeriod we are in is a symptome this of what people are looking at around the country. If you go to Staten Island or st. Louis, you dont have to be on the ground for more than half a day to get a sense that the systole country that is grappling with race. Driving around new york city this weekend, paddy wagons were lined up. There was not much of a discrepancy between act africanamericans and white voters as of the same thing. The vast majority said things are about the same or things have gotten worse. President is a huge change but its not going to change everything down the system. Apparently, the white house changes the pictures all the time and im told theres one picture that stays there of a young boy from an africanamerican boy, who met the president and one question he asked him was can i touch your hair . He said sure and the young boy said you really are like me. Thats got to be a powerful impact to the future but it will not change everything right now. In the 70s and 80s, we had highprofile racial incidences that fueled the impression not just the last couple of weeks like the Trayvon Martin case also fuels the perception there is a division. It is still there and while the president has become more outspoken about it in his second term, in his first term, somewhat for political and technical reasons, he has not tried to be a leader in trying to change things. The poll is not just about the state of Race Relations in america, it also looked at Hillary Clinton and her chances for election in 2016. What did you find question mark we are interested to drill down on the question of how people look at her as compared to some of the other republicans. Andle across the board large majority look at her experience as secretary of state as someone who is been in washington as an advantage. Is above 50 including her ties to wall street. Is that an advantage . Wall street is seen as such a villainous place but people see that of having some value. They would like to see washington work better with wall street. We looked at her on a range of things on like if this person cares about you. Across the board, Hillary Clinton showed strength. She is better known but the fact that people see her as a stronger leader then Chris Christie or jeb bush coupled with the thing president obama has always excelled in is the question of does he or she care about people like you. Does hillary win . She is ahead in the polls. The person who does the best against her head to head is mitt romney still. I still think if jeb bush does not run, mitt romney may decide that he is the best republican to win and he will run again. What does it feel like in california . It is a closed case for hillary. But thats california. Its one in every seven americans. That matters. I would challenge that if hillary gets elected we would have our first woman president , two years after shes in charge, would we expect to see the quality between womens pay and mens pay and the answer is no. Maybe 20 changes and years later, we will say that is a huge difference but out of the gate, it will not be. Wall street will focus on the election and it will be a matter of if republicans put someone effective up in that looks pretty thin. I think californians would like to see republican in the race that cares about them. Who is that . I am an independent. Look at our state. It is predominantly democratic and has gone democratic. I set our state is not a red or blue state, its a green state predictors about the environment and longerterm issues like education. Somebody that resonates with that somebody who can do better with hispanic voters on immigration and the economy and even if they are not prochoice, can talk about abortion the way that does not make it divisive. I dont know who that is. There are many republicans thinking of running who could not compete in california. I think the republicans cannot win in california no matter who but they nominate. But they want someone who can go , all across state the state and compete and talk to californians. And that would be . I think jeb bush can do it and Chris Christie and rand paul. Stephen colbert has an interview with president obama today. Im jealous. Me too. To spend timee with stephen colbert. Thats brutal. What is on the presence mind as he heads into that interview . To try to be the straight man and then killed her in the 20 . How does he kill . How does the president kill it in an interview . Stephen colbert is a straight man in these interviews. He plays the bill oreilly characters and you can get your comedy in. Its hard to fit comedy in these days. Now, he agreed to do the interview. Its around the holidays. He is going to have to recognize tonally that they are different. He has done an interview with bet talking about the race issues. Something, he is showing leadership and trying to get out to the audience and talk to them about these issues which are difficult, longterm issues. Thank you very much. Watch Mark Halperins show at 5 00 p. M. Coming up, do doing well and doing good you will hear about the idea of responsible investing, can it be done . Cocois is Market Makers most investors concerned themselves with one and only one thing we talked about it earlier returns. Where does sustainability and responsibility belong . We have the head of north america of pr. What kind of response are you getting from Asset Managers like chris to this proposal, this idea that investing is about more than just returns . We have seen tremendous growth since we launched in 2006. We have grown from having signatories of 4 trillion in assets of 45 trillion dollars in assets. We currently have 1300 signatories and represent an Investor Network and guide how they look at environmental and social issues. What are they signing up for . They are committing to six principles inclusive but and they help investors understand how environmental, social, and government factors can impact performance over the longterm and how looking at them can help either mitigate risk or increase performance of their longterm investments. Longterm is the key. Return system number one. It will be about getting return first. Then the fact that we are longterm investors, getting a sixmonth or oneyear return does not help me. I need a return for 30 years. I will do that by taking these type of things into consideration or longerterm things. This gets pushed back in the u. S. Andybody is out for thebuck of cutting corners gets returned, they will do it and you cannot cut corners and repeat your return over the longterm. You have to do it the hard way. How do you know its going to work . This is not been a dominant feature of the investing landscape historically. There is not too much of a longterm track record. Studies will be coming out on the academic side. Oxford university came out showing investment at managers looking at these issues have better performance overall. Youre right, there is not a long track record but we are able to start seeing the evidence now. We are seeing growing awareness in the u. S. That looking at these issues can help performance. Unpri and i am on the board. They need to have factual results of where this makes a difference and shows up for return and then wall street will wake up and get it. I have ap or that one set when i mentioned esg, they said in our language thats a way to lose money. That is the key argument how these factors enter into adding value, not decreasing returns. Explain for those of my not know better what callisters has done as a result . The thing we have done is we have expanded the risks we look at in all of our asset classes. Instead of just private equity with some of the risks, we have 21 risk factors. And itly by a company pollutes a river and it makes money, that is great for a year or two years. If we are going to own that company longterm, that is a disaster. The cleanup will will be much more expensive than the cost of buying it. That one is obvious, what about coal . Is a companymple that takes advantage of its employees. You have highlighted a few that have less than stellar employee track records and end up with employee lawsuits. They make money in the shortterm but over the longterm long term, thats not a feasible way to make money. Great coal is a great discussion point we break it into thermal coal which is used for heating and we think that will be discouraged as a negative. Its likely not to be a great industry. They have expanded the risk factors were looking at. This is really about looking at the Data Available on all the issues that can impact a companys performance and longterm. Where do you run into the most resistance . The misconception that you have to sacrifice performance and returns to do this. Investmente . Managers, its the issue of whether this fits within their belief and how they design it. It is the middle of the country. And canadasts get it gets it and they are warming up more and more but if you look at the usa, the west coast of california and oregon and even washington are waking up to it and the east coast absolutely gets it. Its the middle of the country where they drink fracking water every day. They could care less. Oregon just added esg language to their investment policy. Thank you very much. Its the principles for responsible investment, part of the u. N. We will be back in a couple of minutes. Weve got a couple of minutes with my guest host for the hour. I wanted to ask you about a long running debate around the country whether one person same timee at the serve as the chairman and chief executive officer. Whichcalsterson has been vocal recently. Why does it matter . My answer was going to be absolutely not, they should be divided. You need some separation and more tension in the boardroom. We have taken on some very popular ceos who are media stars and you get lambasted for doing that. When they retire, we think the company should devide the positions. What about bank of america . We have seen that so often even at disney. Companies are doing the right moves and split it and then they feel weve got to do something extra. To make the ceo happy so emerge the role. I would love to be my own boss, wouldnt you . That would make life easier. We want that separation. The ceo need someone who is really a boss and the boards are not being their boston they are not tough enough. Outside of citigroup, every other bank on wall street has a combined chairman and ceo. The only bank who outperformed bank of america is wells fargo. I dont want to just keep them happy, i want to make shareholders happy for the longterm. Separating those two rules is Good Governance . Exactly. Thanks for being here. Chris aleman was my guest house, we will be back. That will do it for Market Makers today. Tomorrow, risk and reward, the outlook for next year from the Worlds Largest money manager, blackrock. You will hear from larry fink, the ceo and others. Its 56 and is past the hour which means we are taking on the markets. Heres julie hyman. Weve got stocks hovering around record highs although they are coming off a second consecutive week of gains with a little bit of indecision today. The s p 500 is now all deaf rebounded 11 from its low in october. The vix is recording is largest again since november 22. Always good to see you. Given todays lackluster activity, it is curious we would see any kind of sizable pickup in the vix. Just a frame the lackluster activity, if you look at 20 date realized volatility in the s p 500, a couple of weeks ago, it was over 4 which is the lowest reading since the 1960s. Volatility event in october, we are back in two a period of quiet with the holidays. Realized volatility is very low in that makes the move up invix a little surprising. It would seem to me and i totally that december should feel like a low volatility month even though it tends to be positive for stocks. Is that usually what we see . At seasonality from a volatility perspective, it tends to be in a lowell until the middle of the month and then the latter part of the month can deviate from that. For a santalooking claus rally which is the last week or two and then the beginning of january. It does not quite line up that way from volatility. One stock in particular is moving more today which is mcdonalds. The shares are down the most in a single day than more than two years after sales came in way below estimates particularly in the u. S. Where we saw the worst decline in a decade. Options on mcdonalds . Are they looking for sunshine on the horizon . Its a mixed picture. If you go back to beginning of the year, open interest has increased about 300,000. Its much more active on the options side. This suggests bullishness. One of the largest trades today looks to be an opening crawl seller call spread seller. 92. 5 with aling and 95 call spread. If correct, that would represent the view they think there is a lid on the stock even after the sharp decline today. One of the other big stock markets we are watching his china. Lastly week, the shanghai composite saw its biggest jump in almost six years. Trade china how you on options, how does that work . You do it through etfs. Traded chinesely etf is fxi and people look at that saying its up 13 since june whereas the ashares is up almost 50 . There is a huge spread here. There is an index that looks at the premium spread between the ashares in shanghai and the shares that trade in hong kong that are accessible to international investors. Shares herthat the a at about an 18 premium towards the upper end of the range that we have seen of the last several years. What you have is animal spirits in china, maybe related to the rate cut at the end of november or alibaba who knows . Historically fxi will follow along. We want to belong fxi. We looked at to february and dollar call by spreads. You make about 3. 80 on that 120, you are paying for the call spread. Thank you so much. We will be on the markets again in 30 minutes. Money clips is next. Money clips. I am olivia sterns. Exclusive we speak with john stumpf the ceo of wells fargo now the countrys most valuable bank ever by market cap and his thoughts on the u. S. Economy in the recent plunge in the present oil. And companies, we catch up with the ceo of starbucks in the city where it began. In politics, we may have the first black president of the u. S. History but most americans a Race Relations of gotten worse under barack obama. And luxury