Garlic Cartel: Markets, Credit, Code

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Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

What are we talking about today, Katie?

We're going to talk about farmers markets.

We're going to talk about private credit.

And then we're going to talk about stealing some trade secrets and moving to China.

Sounds good.

I printed out the pricing charts for like beef.

So.

We have a meaty section.

I was at one of the farmers markets near me.

I go to two farmers markets per weekend now.

Oh, God.

I was recognized by a person working at one of the stands

who

works in financial media and also works at a farmer's market to get her mind off things.

And she's apparently a fan of mine and offered me free garlic.

Did you take it?

No comment.

So you took the free garlic and then you undercut some farm stand, some farmer who like put in the labor and you knew what to charge because this is before I knew anything about farmer's market pricing.

I was a babe in the woods in terms of oh, I thought this was like last weekend.

No, it was like three weekends ago.

Okay.

If only you had known.

I do not honestly pay that much attention to pricing at the farmer's markets, but I am aware of the disparity in garlic pricing at the different stands.

There is a stand where I have seen, but not purchased, garlic for $3 a head, which seems really high for garlic.

But also, the farmer's market garlic is so good.

Like, I know only at farmer's market garlic and probably pay 5x what I'd pay at a grocery store.

Me,

me trying to think of something relatable to say reminds me of the arrested development scene where Lucille's like, it's a banana, Michael.

How much could it cost?

Or something like that.

Yeah, I feel like if you're at a farmer's market, you're kind of a price-insensitive buyer of produce.

I'm pretty close to the ideal price-insensitive buyer of produce, but even I was like, $3 garlic, hold on.

Whoa, it's too rich for my blood.

Well, what a timely conversation that we're organically having about pricing at farmers markets.

It's all I think about.

Yeah.

Sorry, I just said it's not anything I think about at all, and I'm totally price insensitive, which is closer to the truth.

But now I'm thinking about pricing at farmers' markets.

Yeah, so is Cornell University, question mark?

Great transition.

Yeah.

Why don't you tell me about what they're doing?

They're aggregating prices for farmers.

They have like a website that publishes free information on prices of various agricultural goods for farmers at farmers markets to basically help them set their prices.

Because basically, if you're a farmer at a farmer's market, you

are in the business of working the land, growing the produce, and you're maybe not a savvy pricer of produce at farmers' markets.

And the buyers at farmers' markets are not necessarily savvy pricers of produce either.

So you could probably charge them a lot more than you do.

And Cornell is helping you charge them more than you do by telling you what the actual price of garlic is.

Seems like a real antitrust concern, potentially.

You

you know, I sort of half-jokingly suggested that.

People got kind of mad at me, like from two perspectives.

One is like, no, it's not anticipating.

Like the farmers got mad?

No, no, no, no, like just my regular readers.

Some of it is like, no, it's not an antitrust concern, which it is not really an antitrust concern.

But the other thing is like, I made that suggestion because the Justice Department a couple of months ago sued RealPage, which is like,

I'm going to exaggerate and say, this, but for landlords, right?

It's like a software product that tells landlords how much other landlords are charging for rent so they know how to set the rent on their apartments and the justice department said that real page is fostering collusion among landlords and reducing competition in the rental space and raising prices for tenants and i sort of tongue-in-cheek compared this farmer's market stuff to RealPage and people got mad because they're like but the real page case is real like there's there's more stuff there right like the real page case the farmer's market stuff they're essentially using fairly straightforward technology to aggregate prices at a bunch of farmers markets and also supermarkets.

Real Page is getting private information from landlords, right?

So it's like they get more information than just like what's available to the public.

And they're also using it to suggest to landlords, or this is what the Justice Department alleges, they're using it to suggest that landlords raise their prices.

And like they've explicitly said things like a rising tide lifts all boats.

It's like they're like, you know, in the business of trying to make landlords charge higher rents.

This one is, you know, based on publicly available prices.

It's harder to get mad at it.

It seems to me that there is a real continuum and that it just used to be the case that it was hard to be sophisticated about knowing your competitors' prices in like all sorts of areas because, yeah, your competitors' prices weren't like easily available on the internet.

And now it is so much easier to like aggregate public data about prices.

And so now you can, anyone can be more sensitive to like what their competitors are charging.

And the Justice Department gets nervous about that.

Not the farmers, but in general.

The goal here for the farmers is explicitly to raise prices.

Yeah, that's true.

Like there's a quote from someone involved.

In other words, to give them a better day at the farmer's market because they're going to be there for eight or six hours, whether they make $400 or $800.

So we're looking for how we can help them earn more in those hours.

So that's the goal.

That is the goal.

They want the farmers to charge more.

We should say this is from a marketplace article.

It was a really fun read.

It was fun.

I realized, so I was reading your RealPage column, and it occurred to me that perhaps I'm being naive.

I just don't see any situation where there wouldn't be a race to the bottom.

What do you mean a race to the bottom?

Like in terms of like, okay, we're all only going to charge $3,000 per month, guys.

That's the bottom.

I feel like...

Why wouldn't you just undercut that?

Right.

I mean, these cases are weird, right?

This notion of like tacit collusion or algorithmic collusion is different from a classic cartel where you get together in a room and you're like none of us are going to charge less than three thousand dollars and if you do we'll break your legs right there's no suggestion of breaking your legs here right this is just well not written down no

i don't think at all maybe joking they're not going to break your legs matt

uh we'll get to a story about that but um there's no like explicit cartel right it's just like like everyone wants to charge as much as they can and like they're limited by competitive pressures where they have to charge less And there is this suggestion that if you know your competitors' prices, it is easier to not undercut them or to like undercut them less, right?

Like if you don't, like if you don't know what everyone else is charging, you might be like, I want to be the low-cost provider, and so I'll charge $2,700.

But if you know what everyone else is charging, you can be like, I'll charge $2,999, right?

Like you can, it's a little bit easier to coordinate on the same price if you have complete information.

This is a theory.

It's not necessarily true.

And the Justice Department has been interested in the idea of like price sharing.

Because there's this theory that if competitors in an industry are getting together and sharing prices with each other, it's because it's anti-competitive, right?

You don't have to know exactly what they're doing at the price.

You have to be like, well, if they're sharing prices with each other, that's probably not good for consumers.

They're probably doing it for a reason that involves maximizing their profits.

And the Justice Department has long been interested in that.

And they had guidelines that were like, certain kinds of price sharing are okay, including like if it's aggregated and not like broken down by a competitor.

Because by the way, if you know what each of your competitors charges, then like you can break the legs of the one who charges it the least, right?

Whereas if it's just aggregated, it's like a little bit more just informational.

But, you know, they said like aggregated data is okay and data published by a third party.

So like a trade magazine publishing prices rather than the competitors getting together and sharing prices.

They said that stuff was okay.

And recently there's been a change in their guidance where they're like, we're going to actually look at that stuff more closely.

And I think the impression is that they are worried that machine learning algorithms are going to make companies better at using this data to price at the maximum level to extract profits.

And like the sharing of data is going to make industries less competitive.

So there's also this interesting paper from a couple of months ago by Jun Young Jiang of University of North Carolina called Salaries on Display, Unintended Consequences of Wage Disclosure.

There was a paper about, you know, like there's a lot of states have wage transparency laws where like when you advertise a position, you have have to say New York does now.

Yeah, exactly.

And Zhang finds that those seem to lead to lower wages

because if you don't have information, like the market is going to have disparities, right?

And like some people are going to pay more than others because they're ignorant, right?

Whereas if you know what everyone else is paying, you're not going to pay any more.

You'll pay like a dollar more.

Or you'll be a little competitive, but there will be no outliers.

And so I think that's the same intuition with pricing stuff, where if everyone is sharing information, you won't have any outlier cheap providers because everyone knows like, you know, the market price is this.

I guess I shouldn't charge less.

Hmm.

That's interesting.

The thing that I think the wage disclosure laws lead to is just super wide salary ranges that make no sense, but that's interesting.

I agree with that.

Like they don't seem to tell you that much.

Yeah.

Do you want to talk about some meat prices?

Sure.

I actually looked at the

website from Cornell.

This is monthly data, so I don't think it's the like weekly data.

I think it's going to be a long podcast where you read out the price.

Well, I think it's interesting.

So at the farmer's market in September, we're looking at price summary statistics across multiple meat products collected from 10 farms selling in 21 different farmers markets in New York State.

For Chuck Roast in September, your weighted average price per pound was $9.60.

Can you guess what it was from the grocery store?

$7.20.

$8.25.

I don't know if I was close.

I think you were doing it, but that's the average price per pound versus the weighted average price.

So farmer's market's barely charging more than the grocery store.

Well, and like the experience can't be beat.

Hold your horses there, my friends.

I'm a big farmer's market proponent.

Non-organic bacon from the farmer's market in September, according to this data, $17.21 per pound.

What do you think it was from the grocery store?

$7 per pound.

So close.

$7.98 per pound.

I almost said eight.

So quite a markup on your bacon.

Like, that farmer's market bacon is going to be delicious.

Is it?

I don't know.

I'm not a bacon person.

I'm a big farmer's market guy.

Hello.

Great experience.

Great food.

Yeah.

Garlic cannot be beat.

The ginger I got at my local farmer's market, astonishingly expensive.

So good.

We were driving back from Albany this past weekend, and we went to a rest stop, and there was a farmer's market outside, like on the highway.

I'm sure that was great.

I got some dried beet chips, and I got these.

I know that stand, but okay.

Yeah, it was on the cusp of New Jersey.

No, I just mean like

there's like stands that you see a lot of people.

Were you also at the rest stop on the highway?

Yeah, but I don't think I'm a farmer's market person.

I don't think I have the patience.

Anyway, that was a robust discussion.

I want to add one more thing, which I did write about, but I love it so much.

Yeah.

I got an email from a reader about the Ottawa farmer's market where this reader sold strawberries for a while.

Yeah.

And like Ottawa's farmer's market had explicit price fixing where like the rules of the farmer's market said you couldn't undercut the prices prices that they were that were agreed on and he didn't say that legs were broken but like a little bit implied um

he he found a loophole where he was like you know a four liter container of strawberries had to cost this much and he realized that if he sold the two and a half liter container non-standard size container he could undercut because there was no rule about selling that size container wow so he would sell two and a half liters for less for half the price of four liters and get more business the kicker to the story is that he's he's now a data scientist at a tech firm because because i assume that like a tech firm recruiter it's like walking through the market and be like this guy yeah knows how to price at auctions i wouldn't have guessed that the pipeline worked in that direction but that's pretty cool you're right it would it normally goes and like i don't know if he was a data scientist taking a break by selling strawberries but maybe he was on gardening leave

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so private credit in the sober world of private credit

there's a lot going on is there or are there just a lot of headlines I don't know there was a really interesting financial times story the title of something like State Street is shopping for a private credit manager that's exactly what it is Photographic memory amazing

the thing that I thought was interesting is that the CEO of State Street was like yes we're desperate for a private credit manager Do you know any?

I need to buy one right away.

It's just like the intensity of the search for every big asset manager really wants to buy a private credit manager, which is just like

a great position to be in.

A few years ago, launched your private credit firm.

People are like, oh, that's weird.

What does that do?

There was like a little bit of time where private credit was like, you know, like a little bit in the wilderness, like a little bit of a niche strategy.

And now it's like, all these managers are like, State Street is kicking down their door.

Yeah, I wish that that's how I had spent my pandemic, but here I am recording this podcast.

I kind of like the honesty and the aggression.

So this is the CEO of State Street Global Advisors.

It's their asset management arm.

She said, this area is so well established, and given the size of our clients and their need to build and invest in a meaningful size, I think it just makes more sense for us to either partner or take a stake in a much more established firm where it's one plus one equals three.

That's interesting.

Rather than trying to do it organically, they're like, we're behind already.

Let's go.

By the way, do it organically isn't even a thing because do it organically means like pay huge guarantees to the people you hire, right?

There's no like the market for people in private credit is just really pricey, whether you're hiring them or buying their firms.

Yeah.

I started thinking about Apollo because she also said we're shopping for either a full acquisition or a minority stay combined with product partnerships.

And they have a planned product partnership with Apollo, that ETF filing heard around the world between Apollo and State Street for a private credit ETF, which I don't know if that one is going to launch.

There's a lot of skepticism over that, but that's interesting.

Oh, sure.

But like they want a private credit offering for their institutional clients, right?

Like they want to be able to chuck billions of dollars of institutional money into a private credit offering.

And everyone wants that.

Yeah.

You know, if you are running a private credit firm, you're raising funds and like you're...

getting all these offers from all these traditional firms.

Yeah.

You know, there's another article in the Wall Street Journal about BlackRock looking for alts managers, like private credit or other like alternatives.

And the reason for it is so clear.

Like you can charge like roughly one order of magnitude more in fees for running alternatives than for running traditional long-only money.

Well, to the point that State Street be shopping, BlackRock has been shopping in a big way.

I mean, they bought Prequin, for example.

That was, you know, for data.

Global Infrastructure Partners, that finally closed.

By the way, I think, I forget if it was the State Street or something else, but one of the articles was like, they're shopping for a private credit or infrastructure.

It's like, yeah, anything and alts.

Yeah, let's do it.

Yeah.

As long as it's alts.

And also, maybe BlackRock is going to buy HPS.

I don't know.

There's a fascinating story about HPS a while back.

HPS is like nominally preparing an IPO, but like also shopping themselves hard to

probably BlackRock, but also like there's

talk of like JP Morgan is like maybe the, you know, like Jamie Dimon, like, I think was asked about buying a private credit firm and he's like, No, we would never do that, and then like came back later and was like, My team tells me we might.

Yeah, my team, I've been informed, yeah, yeah, yeah, like they're like, They like pulled him back, but a lot of ways that HPS could go, but one of those ways is selling themselves to BlackRock for an enormous premium.

This strategy has worked out for BlackRock, they have like $450 billion in alts, at least $116 billion

is coming from GIP, for example.

So, it's a really easy way to just scale up.

Yeah, I mean, like, scale up, like, you know, is like what, like 4% of BlackRock's assets, right?

But it's like the very juicy 4%, right?

It's like the

4% that makes a lot of money.

Yeah, you charge, it makes a lot of the money and it gets a higher multiple, and it's like, yeah, it's just like really attractive.

And like, you know, saying we're a giant index fund provider is just less appealing to investors now than saying we're a giant alts provider.

I have some numbers.

In your column, you referenced this Wall Street Journal article that pointed out that BlackRock's market cap is similar to those of Blackstone, Apollo, KKR, et cetera, even though BlackRock manages like 11.5 trillion and they manage a fraction of that.

I wrote about this in mid-October following BlackRock's earnings, just about how much money they make per dollar of AUM.

And for BlackRock, it's like, according to Bloomberg Intelligence, they

have an annualized fee rate of 14.6 basis points.

You compare that to Apollo, and it's something like 52 basis points.

So I would have guessed a higher number.

For Apollo?

Well, apparently for Blackstone and KKR and Aries, that figure ranges from 50 basis points to like 100 basis points.

Right.

So, you know, classically two and 20, right?

Yeah.

But like, it's a much, much, much richer

fee product.

And like a lot of the stories about private credit are like, wow, there's so much more money in this.

Oh, my gosh.

This is a Bloomberg article from September.

Bonus-starved bankers are jumping ship for private credit riches.

Yeah, why wouldn't you do that?

That makes sense.

You know, all of these private credit funds are started by people who were like, you know, Lev Finn bankers at Goldman and went to start their own funds when that was a somewhat contrarian move.

And now they can sell their firms for billions of dollars to BlackRock.

If I could do it, I would.

It's just like, you know, one thing I wrote about this is like, it seems hard to run a private credit fund now from the perspective of like being an investor.

Josh Harris said to David Rubinstein the other day that like a lot of these alts funds are like the beta of alts, right?

Private credit, like at its core is like direct lending to leverage buyouts.

And so you are in a business of like being friends with 20 private equity sponsors.

And when they do a buyout, they call you and they say, would you like to lend us the money?

And you say yes, because you say no, then they stop calling you.

And then you don't have the paper to feed your hungry investors.

And so there's this sense in private credit that, like, it is hard to be a disciplined investor.

It is hard to look for value and make do really careful credit work because you're essentially in the business of saying yes to every buyout that gets offered to you because you just have to do deals.

But it's a great time to be selling your private credit firm, right?

Like, you know, it's this huge boom that like any huge boom makes it hard to be like a careful investor because like you have to deploy a lot of money, but like it's a great time to be a seller.

Yeah.

I was actually just having this conversation with a private private credit person, and this person was talking about how there's private credit beta right now.

And you have to get more esoteric to find the alpha, et cetera.

Because you don't have to find the alpha.

You can charge 2% and

you can charge 50 basis points and you can sell it.

At least this person would like to.

That's why I'm saying it's hard because everyone is constitutionally wants to be doing good deals and not doing bad deals.

But there's a lot of money in doing like private credit beta.

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Let's talk about some trade secrets.

So there's a Bloomberg story about Xiao Zhang, who's the founder of Pinestone, which is this big and very successful quant fund in China.

He was charged criminally in Boston, federal court in Boston, for allegedly he had a former job at an American asset manager and he like allegedly like downloaded all the models and like left for China.

Actually, he left for China and then downloaded all the models.

He was out of the country first.

Out of the country first, which is smart.

There was another story a while back about a guy who did the reverse.

Like he downloaded the models and then he like left the country like that night.

And like by the time he landed, they had them detained and like it was it didn't work out for him.

But this guy left the country first.

Wasn't supposed to be able to get into his corporate hard drive, but

used the VPN to somehow log into work from China, which I think is probably not technically feasible anymore at most quant firms, but he allegedly did it, and he allegedly downloaded all the models.

And it's an indictment.

It's not full of detail.

There's a suggestion that he used these models to set up his now very successful Chinese quant fund.

I don't know if that's even what they're charging, but there's a hint that these things are useful in his subsequent career.

Well, I would like to know his returns.

No, they're great.

Well, you point out in your column that the U.S.

market is different than the Chinese market.

It's very different.

You know, there have been a lot of stories about Chinese quant funds getting wrecked in regime changes, where

the Chinese government is like, oh, you can't bet against stocks or whatever.

And your long short fund just

explodes because you can't be short anymore.

You think of a quant fund stereotypically

being trained on some relatively recent history and being bad at adapting to sharp changes and like how the world works.

Yeah.

That's like probably an overly simplified stereotype and like some quant algorithms are really good at adjusting to new information.

But like, you know, that's the stereotype.

And like it does seem hard to run a quant fund that is like, these are the returns of going long this basket of stocks and going short that basket of stocks.

And then like you update it for you can't short stocks anymore.

Like it just seems hard.

Yeah.

Or the government comes in with like a ton of stimulus and just completely changes the narrative

to development which we saw a couple of weeks ago right it's not it's not necessarily regulatory that's right like the the economic environment can change rapidly and it does seem very hard to deal with that and like there were a lot of quant funds that blew up and as a sort of like amateur tourist reading those stories i'm like

The lessons of like the sort of classical development of like quant investing in the U.S.

might not apply perfectly to China, but presumably people know that, right?

It's like, well, they stole the code.

But like, by the way, his firm is doing great.

If he just stole the code and like plugged in like U.S.

trading to Chinese markets, like either that worked really well or like there's something we're missing there.

Perhaps he tweaked it a little bit.

You could draw parallels to another case we've talked about.

That was Jane Street and Millennium's trade secrets.

Tell us about the nuances here.

Well, I mean, one thing is like, there's actually a lot of these cases where the person gets charged criminally.

I was going to say arrested, but this guy's not been arrested because he was out of the country.

But

a number of them get arrested.

The one that is famous is Sergei Ilanikov, who allegedly stole code from Goldman Sachs and got arrested and spent quite a long time in jail before his, like, I think his convictions were ultimately overturned.

And he was like, he had kind of a rough go of it.

He was arrested roughly the time that I left Goldman.

And although I did not steal any code, I like.

Do you want to say that again?

I did not steal any code.

I could, to be clear.

But I was worried because I was going into media and I was like, what if they get mad at me and say that I stole code?

It was a real like time of like

looked like Goldman could have you put in prison if they didn't like you.

Or it looked to me like that because I was paranoid.

Anyway, they put him in prison.

But like, you know, the Jane Street stuff, no one's going to get put in prison for a variety of reasons.

But a big one is like, there's no allegation of code stealing, right?

There's a difference between stealing ideas, which is like a really fuzzy area, right?

Like Jane Street is like convinced that these traders stole a proprietary, complicated trading strategy that was developed with like much work and investment at Jane Street and belongs to Jane Street.

And like Millennium is like, no, these guys, like, you know, they learned how to trade options and now they're trading options for us.

There's nothing proprietary about that.

And I think probably the truth is somewhere in between.

But even if Jane Street is right, that kind of like know-how, you can get mad.

You can get sued.

You can be like stopped from working at the new firm.

You can have to pay them back.

But you're not going to go to jail for that.

Probably.

Not legal advice.

Whereas if you download code from a VPN, like, yeah, you can go to to jail.

Yeah.

If you're caught.

Well,

this guy, what's going to happen to him?

Because he is in China.

Nothing.

This is interesting.

So you can't go back to the US.

It's like a real consequence.

Yeah, that is a consequence.

Does his firm get to keep doing great and using these models?

I think there's a widespread assumption that

this stuff decays.

Yeah.

Like maybe he downloaded the whole framework for how to build a quantitative trading firm, but that stuff is kind of public domain, you know?

To the extent he downloaded signals, those decay.

Like no one, no one thinks that like three years after you've stolen stuff from your firm, it's still, I mean, maybe if it was Renaissance, but like, yeah, for the most part, like this stuff decays.

And so there's like, there's this notion that like you have to be stopped from using it for some period of time.

But then after that, it's probably not worth worrying about.

Yeah.

Like you see that in the Jane Street case where it's like.

Whatever secret trade they're doing,

options in India.

But options in India doesn't tell you very much about the trade.

Like Jane Street will say it's like some very complicated, you know, clever implementation.

But

no one thinks that's going to make $100 million a year forever.

You know, like it's like Jane Street had some window

in which to do that trade.

And then like Millennium butted in and now they, you know, have to split the profits or the profits go away.

Probably that's what's happening here.

But also this guy can't be like shooting the lights out trading quantum China solely with stolen models.

He's only 33.

Yeah.

Yeah.

And he stole these secrets allegedly in 2021.

That's the other cool thing is like the indictment says that he was an associate and was not responsible for these models.

Like often

you have some dispute about like whether the person was like

downloading their own work.

Yeah.

But like here, the implication is kind of like he like showed up as an associate, did the training, and then like downloaded all the models and left.

There's like an implication that

he was just taking other people's work.

This did prompt a response from your readers, as I understand it.

Oh, yeah.

So I wrote about like the high-level problems with doing this, right?

Like, if you just download code and then go start your own firm, like the big problem is that you get arrested.

Yeah.

So I was like, you know, moving to China solves that problem.

But then a secondary problem is like you're crowding a trade that is, there's not that much profit in it necessarily.

So like if you and your old firm are both doing it, like you both make less money.

One reader pointed out that actually the biggest problem with this, besides getting arrested, is raising money for clients.

Yeah.

Because if you work at a hedge fund and you download their code, then like, how do you raise money?

You're like, I stole code from my old hedge fund.

Like no one's going to invest with you or that.

Or you can be like, I'm just really smart.

I have some great ideas, but it's like, or you can be like,

I'm going to undercut that hedge fund and I'm going to give it to you at a cheaper price, which gets us neatly back to farmers markets.

It does, but I do think that that pitch,

while it might work for garlic, is very bad for a hedge fund client.

Yeah.

Because you're just like, you're taking on a lot of like operational and regulatory and reputational risk for like saving some money.

Because like, you know, like this hedge fund strategy fell off the back of a truck and I'll give it to you for cheap.

Like that's not, that's not a good like long-term strategy for like an endowment.

But moving to China and saying, hey, we've developed our skills at like a leading U.S.

institution and now we can apply them to this somewhat like less fully efficient market,

that's a good pitch.

And if you're like, nudge, nudge, wink, wink, also we stole the models, like maybe that's a fine pitch too.

I don't know.

Yeah.

And that was the Money Stuff Podcast.

I'm Matt Levine.

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