Money Stuff: The PodcastMatt and Katie answer reader questions about the quality of cocoa beans, who picks the loans in private credit ETFs, whether everything is stupid now, how to work quant hedge fund money laundering into your novel and how to save on financial advisor fees.
Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to The Money Stuff Podcast. You're a weekly podcast. Are you talking about stuff related to money? I'm Matt Levine and I write The Money Stuff com Bloomberg Opinion, and.
I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television. And today it's a nail back. Dear listeners just keep on sending in questions, and it feels like it's about time. It also helps that I'm on vacation right now. We're recording this in the future. In the past, I don't know.
I'm the Sloops.
Yeah, definitely, I am actively skiing right now. Remember we did an episode about cocoa futures.
How could I forget?
I forgot a little bit, but I was so tickled by this question. Yeah, we did. We talked about Hersheyr.
Can I forget? Coming back to me, Matt.
We have a question from Patrick, who says, thanks to your podcast, I'm now obsessed with chocolate futures contracts. I have a question about these chocolate warehouses that I just can't understand. Maybe you can help me if they exist to facilitate futures contracts. Why is the quality of the chocolate often bad? I thought futures contracts specified the quality of the chocolate in advance, in terms of origin and grade. Is it not a flaw in the system that worst chocolate is being put in these warehouses? Thanks? I love that questions, good question. I did some Reportingeah, I I went to Bloomberg Intelligence. When I have like a niche question about a topic I know very little about. I'm going to read this out loud. Sure, I got this email and I read it really quickly, so I haven't thought deeply about this. So hello, You're completely right. Contracts would specify the quality and origin of cocoa beans, and this is the reason why cocoa really doesn't have one single price, but several that reflect these differences. So to illustrate this from a higher level perspective, at the end of last year, the ic COO published a report noting that the price difference between London futures and NY was due to London having more beans from Cameroon, which are perceived to be of lower quality. Now, because cocoa is a soft maybe there is some scope for exchanges to hold lower quality or just mismanaged inventories. Don't really know to what extent this is happening. Now, I'll leave a quote quite popular among cocoa market participants. Quote when there is a lot of cocoa, all cocoa is crap. When there is no cocoa, all crap is cocoa. Oh dear, I hadn't read that first. That's really funny. It's all crap is coco. That is so interesting. I guess I haven't really thought about it before that. When you take a look at commodities such as this and you think about the different prices on the different exchanges, I have never thought that maybe the quality in this case of cocoa explains the difference. Yeah, because with oil, I mean, I don't really think about the quality of oil, but it makes sense that there's I don't because I don't think about that, but it makes sense. Yes, true, Yeah, I mean I.
Read about this a lot. Like if you're a chocolate maker, you want cocoa to put into chocolate, and like if your a chocolate bars tastes bad, that's bad for you. If you're a commodity's futures warehouse, you need cocoa to like be the underlying deliverable for the commodity future since you put that in the warehouse, but you don't expect that most people trading the futures will take delivery of the cocoa, and so there's like a little bit more of a disconnect, like you have to use pct vigrate and everything, but like it's a little bit less important that the cocoa taste good if it's mostly being used as a substrate for commodities futures contracts, then if you're actually just putting it directly into chocolate bars. And so there are a couple of like examples of this from the not chocolate market, which my very favorite is that in the nickel market, Yes there's a warehouse, put nickel in it. You trade futures on the nickel. Nickel is kind of non perishable and so like you never really have to say the nickel out of the warehouse, and so it just sits in the warehouse for years. And at some point someone discovered that some nickel that JP Morgan owned not because it was like JP Morgan nickel, because like they you know, happen to take the liver around the futures contract. The nickel in this warehouse that JP Morgan owned was actually a bag of rocks, and like it was fine, Like who cares. They never took it out, They never like made anything with it. Was just a bag of rocks and the thing. But like, once you discover it's a bag of rocks, you can no longer use it to trade nickel futures. But until then it doesn't matter. You're not like building anything. The other great example is coffee futures. Yeah, in the coffee market, coffee is like cocoa, perishable, and so there are rules about like quality of the coffee that goes into the coffee warehouses. One of the rules like you can't leave it there forever, right because it's perishable, and so there's an age penalty where like you get paid less if you deliver old coffee. But it used to be that you could take your older beans off the exchange and then resubmit them for a new round of certification and get rid of the age penalty. So the beans are so like abstracted that like taking them out and putting them back in makes them fresh new beans again, which is not how like actual coffee brewing works. But for commodities futures. It's fine, it's good enough, and they change that rule, so like now you have to the fresher coffee.
That would be a disgusting cup of coffee.
I mean yes, like I think coffee. Probably you could go, I.
Don't know, pretty high standards.
Yeah, okay, fun you would not drink no commodities futures exchange coffee. I probably would just for rust.
I mean, if I was dying, that would be kind of fun.
I think you should do it. So different commodities have different rules, but like in general, like the need to have like the freshest possible commodity, Like you want that for your industrial uses, not for your putting in an a warehouse.
Yeah, great question, Patrick, that was That was a lot of fun. Mail bag, mail bag. This question comes from justin straight after my own heart. With the advent of a private credit ETF is an adverse selection and inherent issue. What is to protect the retail investor and prevent the ETF manager from stuffing the fun with the loans it expects to underperform with respect to similar loans from a particular vintage. That is, like the most pessimistic fear here a very reasonable fear, I know, but you would hope that Apollo isn't trying to like use retail as exit liquidity or whatever.
I mean, you would hope you hope that all the loans are good. Yeah, And like as an asset manager, you have fiducial idities to all of your clients and you try to make only the best loans. It is weird, you know, Like, you know, you look at Apollo, like much of their capital is their balance sheet, right, I mean they run a big retirement services company, right, so yeah, a lot of it is their balance sheet. A lot of it is client money that pays stereotypically two and twenty, right, It's probably not really two and twenty, but like you know, people who pay kind of like alternative manager fees, and some of it is like ETF money who pay let our fees. So where do you put the best loans? Your insurance company, your balance sheet? Very smart people run that, your limited partners and your institutional prior credit funds, smart repeat player allocators, your retail ETF clients. Who knows? Well?
I actually did reporting for this question as well. I sat down with Annopoglia from State Street Global Advisors on March thirteenth on Bloomberg Television and I asked her this question, does State Street have the in house expertise to sort of evaluate what Apollo is putting in the ETF? And this was her answer.
She said, we do have the expertise in house, but we also made the new hire set to make sure that we had the right in seed SSGA is the advisor by design. We wanted us to be in a position to make selections and have investment discretion on what task sets to take or not to take from Apollo.
That's the sounds a blance right, is like, yeah, the ETF manager has a fiducial abbligation to the ETF clients and they have their own independent ability to make sure they're not getting stuffed with like Apollo's worse loans. But it's like Apollo, it's like not in the business of like trying to make the worst loans, right, so like they're trying to also make good loans. If you think about like a bond ETF, like you have the same risk there. And the reason people don't think about it very much like they do a little bit right because like there are sometimes like worries about chart picking But the reason people don't think about it that much is because, like you know, a bond fund has like a track record. There's an incentive for like PIMCO to not do a bad job managing its public bond funds because then people won't put money into them. Yeah, the prior CREDITTF stuff is new, and so there's no like through the cycle performance data where you can tell whether a fund is good or not right, and so you have to worry about this stuff. In the long run, you sort of assume that, like people will try to manage funds well because that's how they raise money.
Yeah, it doesn't have a track re heard, And I think that's an important point because there are a lot of very pessimistic concerns about the CTF. But it just hasn't been alive for very long.
Right, Like you could like sort of tell a story of like private credit has had this like massive boom and the market might be turning a little bit and that was the perfect time to stuff retail with it. But yeah, that's like.
A kind of a I mean, we're recording this in the future, so who knows what it looks like. Yeah, maybe things will be totally better by the time this episode comes out. But great question, mail bag, mail Bag, we have another question. I don't have a name to attach to this one, but the question is fun. As we accelerate slash descend into the scenario where Elon Musk is God King and the answer to every question is because that's what Elon wants. What's the point of digging into anything, Matt, take us into this existential spiral, right.
I used to think of my job as like trying to understand and explain complex structural financial topics, and then like memestocks hit and I found myself writing a lot of very dumb stuff and like coining the Elon market hypothesis, which is, yeah, financial assets are valuable not because of their cash flows, but because of their proximity to Elon Musk. Because like there was a time and it's kind of continuing where like Elon would like tweet about a thing and like the thing would go up, and it's like doage cooin, or like there's a story about Signal where he tweeted Signal and like an unrelated company with Signal his name went up. Like just anything like he turned his attention to would go up. And if you sort of like looked at that and thought, well, the present value of the expected future cashlows of this company has gone up because Elon tweeted about it, Then you would be missing the point. And like what was actually happening was just like yeah, people like Elan Musk and the stock goes up right, And then like Memestock's kind of crystallized that, like a lot of mental energy went into like understanding the technicalities of a game stop where it's like, oh, you know, like you could have a thesis about the company's turnound, or you can be like, oh, like there's a gamma squeeze and a short squeeze. There's all this like technical stuff that you can understand. But like mostly it was like people online liked it and this so they bought it and went up. Right, everything got kind of dumber, and our current political environment has expanded that dramatically. You know, I wrote, let's say last week now about the US Consumer Financial Protection BEEAU. The CFPP right like, has written some rules about how financial companies are supposed to interact with consumer customers, and those rules have been sort of suspended by everyone of the FB being told to go home. But like they're still there. Yeah, and so there's only like stuff you can look at and me like, oh, like the rules say this or like this is like how you're supposed to do stuff, but like it's not clear that how you're supposed to do stuff matters anymore, that the rules are enforceable, And so we're in this sort of weird gray area where like if you try too hard to understand what is allowed or how things work, you will be making mistakes because like things don't work the way they're supposed to work, and the rules don't necessarily apply anymore. And that's a frustrating position to be in if you're in the business of trying to understand things.
How does it make you feel as a person who writes a newsletter though, because it seems like you had fun with the GameStop era.
I define fund with the GameStop era, but it ate at me because I was like, I wish I had insight to off or have elite jokes.
Well, when all else fails, at least we can laugh. Yeah, we still have our.
Loster sort of like yeah, I don't know. I mean, like, as a person who has a newsletter, like there are always events, but they are not interesting events.
Yeah, I mean there's a parallel to be drawn with my life on TV. News is always happening. I anchor from nine to eleven, and there's just so many tape bombs coming across all the time. But you know you have to wonder at the end of the day, like did I add value?
I wonder every day.
I cannot. I can't answer this question on this podcast. Cool great question, mail Bag, mail Bag. I like this one. This question comes from Bruce. It's a little bit of a long one, so tuck in. Bruce says, I'm intrigued by your recent coverage, so stick with us, all right, Bruce. Bruce says, I'm intrigued by your recent coverage of super performing private investment funds sefed heavily with techies. For my spy novel, I invented a tech heavy hedge fund whose principles are former CIA contractors who go from stealing Oligarch secrets to stealing Oligarch cash, which they then launder through a private fund whose operations are a black box to the outside world. My villains reverse engineer capital market data to fake trade reports for their tame auditor that explained the funds quote unquote returns. I'm not accusing the funds you wrote about of anything nefarious. I'm just struck by how much they resemble the fictional high tech high return mcguffin in my book. Is that crazy?
Is there?
For a recent A real world operator with bad intentions couldn't take say, the cash from his cocaine business and report it as fictional market returns from a proprietary model investment fund, pay some tax, and then have untraceable money to spend. Just asking the question, and not for legal advice, Bruce, don't give away this gold material. As someone who's also working on a kooky novel, you know, you can't say too much.
Have you not described your entire navel on this podcast?
Off Mike? For sure.
It's a little bit like Bernie made Off right, Like, yeah, it's a little different. But like Bernie Madoff pretended to have investing returns and in fact had you know, Ponzi returns, and people who are knowledgeable noticed that and said he can't really have these investment returns. Someone is just like he like, was doing more pretend volume than there was volume in the stocks he was pretending to trade, right, And so you have a little of that here. If you were in the business of like selling drugs, yeah, and then taking the money and pretending the money was returns from your hedge fund, you would be reporting to a regulator something about your trades, and the regular would be like, but you don't have a custodian, you don't have audited financial and like maybe like you grab your auditor and maybe like the SEC is fooled, as they kind of were with Bernie made Off. But it seems like a lot of effort to go through in a lot of like surface area for regulatory exposure. Yeah, and you'd probably rather run like a coin opp laundromat or something, right, Yeah, There's a lot of ways to launder money that don't involve like entering a regulated industry.
So, Bruce, I do want you to keep in touch though you know where this, Yes, did you get further along with the novel? Love to know the title?
He's not like the only person who's ever thought this. A while back, there is like a kerfuffle when uh oh, when someone speculated that Bridgewater might be a Ponzi scheme because they like were trading with like someone who they expected them to be trading with the people had this tether too, where they're like, who trades with tether? Whoere do they get all their stuff from? But those things seem to be wrong.
Yeah, I don't think Bridgewater is a Ponzi scheme.
No, I don't either. Okay, there was a minute where people were like, oh, that's interesting.
I feel like some of those tether questions are still out there. Yeah, great question, Bruce, Good luck with the novel. Maybe people have had this thought before, but turns out it's really hard to actually write a novel. So I respect very hard.
That's making money and contrary.
Mail bag mail Bag one more from Andy, Let's bring it home, Andy says. Matt's newsletter today mentioned how financial advice was traditionally bundled, where the overpriced stock picking paid for the useful advice. This reminded me of a dumb question I've had for years. Why doesn't anyone offer unbundled financial advice on a fee for service basis? I want to pay someone a fixed fee to chat with me once per quarter about my goals, asset allocation, tax considerations, when I can retire, et cetera. But as far as I can tell and I've looked. No one offers these services without bundling them with money management services where the fee structure is a percent of AUM, and then they charge like one percent of AUM, which feels like a lot. It sounds like Vanguard is offering a cheaper version of this for like twenty basis points of AUM in improvement. But if I have like five million dollars to invest, that works out to two thy five hundred per quarterly zoom call or whatever. Seems like a bit expensive. Anyway, Does unbundled financial advice exist?
I feel like it must a little bit, but like, right, there's not a lot. And you see why. It's like the opposite of his problem, right, Like, if you're offering zoom calls to people to talk about their hopes and dreams and portfolio allocations, yeah, and you do you four zoom calls a year with that person. You have to like market yourself. You have to find hundreds of clients and you have to amortize the cost of that over the zoom calls. You do have to charge them hundreds or thousands of dollars for the zoom call because that's just your time on the zoom call. It's your time like marketing and like, you know, building the business, and then like who wants to pit dollars for a zoom call when you put it like that, right, if you put it as like, I'll provide you holistic services in exchange for a small percentage of your assets, then people like, yeah, sure, And if the small percentage one percently works out to thousands of dollars, but I don't know, like you don't get into the financial services industry to like build a captive out for your hours, like you want the ability to scale. And it's also it's like a natural form of price discrimination, where like if you get a small client, you can charge them a small amount of money because you're charging them a fixed percentage of assets under management, And if they then grow into a large client, you charge them a large amount of money and they don't notice because it's the same percentage of assets under management. And it's just like a better business model for someone who is, like you know, kind of largely in the business of marketing and funding clients. That just seems like the answer, right, Like, it seems like a bad business model for someone to be in to be like I'll give you some financial advice for an hour for one hundred bucks, Like, I just don't think you can make a living doing that. I will say that Andy found a solution, so he continues, I think I found a workaround. I signed up for a wirehouse financial advisor. He charges like one percent of AUM, but I only pay him for the accounts I keep with him, which I keep around the minimum he'll tolerate. And he's not the only person who has done this. Like, you know, you find a financial advisor, You're like, how much do I need to put with you? He tells you five hundred thousand dollars. You put five hundred thousand dollars with him for the rest of the money and index funds, you know, and like your self directed Vanguard account, and then you call your financial advisor. I record it for advice. Right, you get like a lot of the tax advice and whatever that you get from the bundled fee, But you're not paying him one percent of all of your ass as. You're paying one percent of the minimum amount of assets to get him on the phone.
Does that feel a little mean to the financial advisors? Like, Hey, I have this sum with you, but I have like two million dollars in my Vanguard account, give me advice based on my holistic.
I don't think the financial advisor would like give you advice basically. I don't think the sial adviser would be like, oh, here's what you should do with your Vanguard account, right, Yeah, Well, what you're looking for from the financial advisor is not only like what should my asset allocation be? Yeah, you'd rather he'll give you that. I hate to like undermine financial advisor. Will they give you a thing being like this is how much you have in stocks or bonds? Right, and you can believe that or not right, because like the financial advisor knows that and you don't, right, But like whatever, they're.
Probably buying a model portfolio from Black Rocks, so.
Sure they've got some professional deciding how much you should have in stocks and bonds or whatever, and like they'll tell you that, and they'll do that with the portfolio they manage, and then you're gonna mirror that with your Vanguard account, right, you know, kind of more or less.
I just feel though.
The rude to mirror it exactly. It's rude.
But also I feel like maybe you'd invest differently if you have more money rather than less, If that makes sense. Maybe I think that the only way to really know is, you know, if Andy would let us listen to one of these phone calls that he has with his financial advisor.
The other thing is they say is like, you're not mainly looking for advice about how to invest. Yeah, you're looking for advice about tax harvesting. You're looking for advice about like what the gift tex limits are on putting money into a five twenty nine. You're looking for advice about like how much money you need to say for a time, Like you've all this like stuff that a financial advisor does. Yeah, that is useful for you. That is not like here's how much you should have in stocked.
I know, but I'm saying it's.
The least useful part. Yeah, like no one knows.
But like retirement planning, for example, Like it would probably be useful if the financial advisor had a holistic view at all of your portfolios. That's right, Yeah, that's right.
And some financial advisors will consider all of your money and providing you that advice, even though not all of it is with them, because like you know, there's like and he's not the only person who like has money elsewhere? Right, and the financial advisor like tries to give you a host of picture and like they'll be mad if like most of your money has elsewhere and they're you're calling them every day, but like it's not like all or nothing true. So I don't know that's the way to do it.
Good question, Andy, Good good question.
And good answer. Yeah, all the conundrum right now, Like I mean, like there's some minimum that the financial advisor charges, and if you have that minimum with them, you're paying a certain number of thousands of dollars a year for your quarterly zoom call with them. And that's the going rate for financial advice. And if you have one hundred times the minimum with them, then you're paying more. And you could put ninety nine percent of that money into a Vanguard self tractored account and pay less, but like you don't want that, and you're paying for service.
Yeah, all right, all right, Well that was our meal pad episode, and what a good reminder it is to always send us questions. We love questions.
We send us questions. And that was the Money Stuff podcast.
I'm Matt Levian and I'm Katie Greifeld.
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