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Why Online Education Should Come With An Online Price · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul swing you,
• 0:05
  Speaker 1: along with my co host Lisa Brahma wits. Each day
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  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
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  Speaker 1: podcast or wherever you listen to podcasts, as well as
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  Speaker 1: at Bloomberg dot com. There's time for us to check
• 0:21
  Speaker 1: in with Bloomberg Opinion. Today we're joined by Bloomberg Opinion
• 0:24
  Speaker 1: columns Kathy O'Neil. She's some a mathematician and also a
• 0:27
  Speaker 1: columnist for Bloomberg Opinion. I want to talk about higher
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  Speaker 1: education as uh the father of two college age students myself. Uh, Lisa,
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  Speaker 1: you know it's really an issue here. We're paying full
• 0:38
  Speaker 1: tuition yet they're not getting the on campus classroom experience
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  Speaker 1: and kind of calling it the question the value proposition there. So, Kathy,
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  Speaker 1: thanks so much for joining us here. What do you
• 0:49
  Speaker 1: think is the future, at least in the near term,
• 0:52
  Speaker 1: of some of these decisions parents and students and colleges
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  Speaker 1: need to make about pricing what is a much much
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  Speaker 1: different experience. Thanks for having me yeah. I mean, I'm
• 1:01
  Speaker 1: looking right now at this Chronicle of Higher Education website
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  Speaker 1: that says that two thirds full two thirds of colleges
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  Speaker 1: are still claiming that they're going to have in person
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  Speaker 1: classes in the fall. I just don't think that's realistic.
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  Speaker 1: I think the ones that have copped to remaining online
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  Speaker 1: for the fall, which is only at six percent right now,
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  Speaker 1: are being much more honest with their students and parents,
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  Speaker 1: And for for now, we're just playing a game of chicken.
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  Speaker 1: We have parents and students who are strapped for cash.
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  Speaker 1: We have colleges who desperately, desperately need the tuition money,
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  Speaker 1: and that first tuition payment, as I'm sure you know,
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  Speaker 1: is coming due in a month or two, and they're
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  Speaker 1: just not going to tell us. It feels like I
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  Speaker 1: also have to college students at home. Um, they feel
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  Speaker 1: like they're just not going to tell us what the
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  Speaker 1: actual situation is until they get that tuition payment, which
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  Speaker 1: doesn't seem like a good deal for us. Well, and
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  Speaker 1: it seems like increasingly parents are wondering about the value proposition.
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  Speaker 1: And my kids are younger than college at age. But
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  Speaker 1: I'm a little bit nervous looking at how quickly the
• 1:58
  Speaker 1: inflation has occurred in college price tags. I'm wondering what
• 2:04
  Speaker 1: the pandemic and the disruption to in class attendance might
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  Speaker 1: mean in terms of colleges going out of business if
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  Speaker 1: parents do decide not to pay the bills, or potentially
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  Speaker 1: a rejiggering of more kind of technical colleges versus uh
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  Speaker 1: liberal arts educations. What do you think, well, exactly, And
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  Speaker 1: I think basically the value proposition has been for the
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  Speaker 1: last few dozen years that it's not just an education,
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  Speaker 1: it's a sort of certificate for the middle class or
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  Speaker 1: for certificate for a better than a middle class job,
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  Speaker 1: depending on which college you go to. So so parents
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  Speaker 1: have been shelling out more and more and more and
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  Speaker 1: and have as have students, not simply for the education,
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  Speaker 1: but also for the experience, for the socializing, for the
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  Speaker 1: connections if you will to good jobs afterwards, and if
• 2:55
  Speaker 1: it's online, you clearly don't have all of that, you
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  Speaker 1: don't have the on campus experience, etcetera. And to be clear,
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  Speaker 1: colleges have been cashing in on this holistic approach to
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  Speaker 1: what they're offering just as much as parents have been
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  Speaker 1: buying into it. So it's it's just simply not about
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  Speaker 1: education and I and I hesitate to say this because
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  Speaker 1: I have many, many friends who are professors who are
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  Speaker 1: working their tails off in order to deliver as good
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  Speaker 1: an education as they possibly can in the context of
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  Speaker 1: online And it's not not to say that they're not
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  Speaker 1: doing a really good job, but that's really not the
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  Speaker 1: only thing we're paying for when we pay for college.
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  Speaker 1: And so the question is what will happen next. And
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  Speaker 1: I really do think if it becomes online, then people
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  Speaker 1: will say, wait, if it's just about education, I'm simply
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  Speaker 1: not willing to pay this. So, Kathy, I mean, it's
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  Speaker 1: interesting you mentioned tuition, how the colleges really need tuition,
• 3:43
  Speaker 1: and I think that's so much about the really big universities,
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  Speaker 1: well known universities that have big endowments and that can
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  Speaker 1: perhaps weather the storm a little bit. I'm thinking about
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  Speaker 1: that this may be the second and third tier colleges
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  Speaker 1: and universities that really don't have those endowments and therefore
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  Speaker 1: really rely on funding their operating budget with two ocian
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  Speaker 1: What are those schools going to do? I think there's
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  Speaker 1: gonna be a lot of liberal arts schools, the ones
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  Speaker 1: that really like remate, like sort of rely heavily on
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  Speaker 1: this in local parentis concept um that we're going to be,
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  Speaker 1: you know, there for your kids, and it's going to
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  Speaker 1: be a full pledged liberal arts education. Those schools that
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  Speaker 1: rely that don't have a huge endowment are going to
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  Speaker 1: go out of business. I expect to see a whole
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  Speaker 1: a huge slew of colleges just closing shop in the
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  Speaker 1: next couple of years because of this disruption. Kathy, have
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  Speaker 1: you heard any of Scott Galloway's comments, the n y
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  Speaker 1: U professor who's been going on the airwaves and saying
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  Speaker 1: that basically a lot of colleges should go out of business,
• 4:39
  Speaker 1: that they're overpriced, and that finishing schools essentially are the
• 4:42
  Speaker 1: IVY Leagues will continue because they are sort of artificially
• 4:45
  Speaker 1: propping up their value. I mean, you basically was comparing
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  Speaker 1: them to Gucci scarves. But I'm wondering, I mean, are
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  Speaker 1: you going to see this increasing bifurcation among the IVY
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  Speaker 1: League and everyone else as everyone else tries to justify
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  Speaker 1: the finishing school aspect of their business as sort of
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  Speaker 1: as you describe the holistic experience. Yeah, I mean I
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  Speaker 1: hope so. And and what what I really hope is
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  Speaker 1: that whatever we replace this with is less expensive, um
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  Speaker 1: and less like arduous for me and for their parents
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  Speaker 1: and I you know, like, look, there has to be
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  Speaker 1: some way to decide what job who gets right. It's
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  Speaker 1: a sorting mechanism, but it's just an unbelievably expensive sorting mechanisms.
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  Speaker 1: So my hope would be that we really do figure
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  Speaker 1: out a way, um that that works. Um. You know,
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  Speaker 1: look at the German model with an enormous amount of
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  Speaker 1: apprenticeships for example, where there aren't that many uh, sort
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  Speaker 1: of university educated students um relative to the number of
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  Speaker 1: students that take sort of apprenticeships after call after high school.
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  Speaker 1: There's nothing wrong with that model, except we don't do
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  Speaker 1: it whatsoever. Um. So if we could find a reasonable
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  Speaker 1: system that isn't nearly as expensive, that gets people um
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  Speaker 1: jobs sooner and less long term student debt, that would
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  Speaker 1: be fantastic. Kat the O'Neill, thank you so much, and
• 6:01
  Speaker 1: uh from your lips to the higher education's ears ahead
• 6:04
  Speaker 1: of my children having to go to college. Cathy O'Neill,
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  Speaker 1: a Bloomberg opinion columnist, a mathematician who has been a
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  Speaker 1: professor as well as a hedge fund analysts and data
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  Speaker 1: scientists and author of Weapons of Math Destruction. Definitely something
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  Speaker 1: on the forefront of our minds the price of college education,
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  Speaker 1: which is absolutely skyrocketed in relation to everything else, raising
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  Speaker 1: a lot of questions, especially given the student debt load
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  Speaker 1: right now that we're seeing come into the focus. Paul, Yeah,
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  Speaker 1: it's really interesting. And again, those fall semester payments are
• 6:34
  Speaker 1: coming up, and I wonder if there's gonna be any
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  Speaker 1: pricing adjustment here for what is a very different product
• 6:38
  Speaker 1: that we're getting now versus what we initially signed up for. Well,
• 6:44
  Speaker 1: the up and down relationship between the US and China
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  Speaker 1: seems to be approaching another low, this time due to
• 6:51
  Speaker 1: the new security laws that China has imposed on Hong Kong,
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  Speaker 1: and a response from the U s has not been positive,
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  Speaker 1: to say the least. Michael Herson, practice head at China
• 7:01
  Speaker 1: and at Northwest Asia for the Eurasia Group, joins us. Michael,
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  Speaker 1: thanks so much for your time here one of for
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  Speaker 1: our listeners, if you could just summarize what these new
• 7:09
  Speaker 1: security laws are in Hong Kong and maybe why China
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  Speaker 1: is doing it now. Sure so, China announced on Friday
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  Speaker 1: that it's legislature the National People's Congress will implement this
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  Speaker 1: law rather than go through Hong Kong's own legislature. And
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  Speaker 1: this has been a long, decades long sticking point. In fact,
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  Speaker 1: Hong Kong establishing a national security law and Beijing had
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  Speaker 1: left that to Hong Kong to take care of but
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  Speaker 1: basically ran out of patients. And there have been waves
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  Speaker 1: of protest over the last year and even earlier over
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  Speaker 1: Hong Kong um proposing this legislation on its own. So
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  Speaker 1: essentially Beijing said time is up. We're going to do
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  Speaker 1: this for you under its own interpretation of the law
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  Speaker 1: that governs China's mainland China's relationship with Hong Kong. Now,
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  Speaker 1: what the law actually does is well, first off, I
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  Speaker 1: should say we won't know the details because the law
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  Speaker 1: has not been drafted yet, and that will likely be
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  Speaker 1: something that happens over the course of the summer. But
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  Speaker 1: essentially it gives likely some fairly broad powers for Beijing
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  Speaker 1: to extend its authority over Hong Kong in areas that
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  Speaker 1: it regards as anti government uh and treasonous activity. A
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  Speaker 1: lot of people are saying that the US should and
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  Speaker 1: will step in. We've seen Congress come out and threatened
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  Speaker 1: to take action, including potentially provoking the special trading status
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  Speaker 1: that the US has with Hong Kong. What does China
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  Speaker 1: stand to lose if Hong Kong loses some of its
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  Speaker 1: special status with respect to its reputation financially around the world. Well,
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  Speaker 1: I think for China, the economic importance of Hong Kong
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  Speaker 1: has diminished quite a bit relative to the size of
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  Speaker 1: China's economy, So I think the biggest threat for China
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  Speaker 1: at this point would be if these actions create fundamental
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  Speaker 1: financial instability in Hong Kong. That would be bad and
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  Speaker 1: could have ripple effects for China's economy and financial system.
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  Speaker 1: But generally speaking, losing Hong Kong's vitality as a global
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  Speaker 1: business hub is not positive for China, but it doesn't
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  Speaker 1: represent any kind of systemic risk. I think it's fair
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  Speaker 1: to say that mainland China has has moved on beyond that.
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  Speaker 1: So Michael does realistically, does Hong Kong have any recourse here?
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  Speaker 1: Hong Kong, I think to be blunt, No, not really,
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  Speaker 1: And of course Hong Kong's government is at this point
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  Speaker 1: the the administration of Carrie Lamb is moving essentially in
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  Speaker 1: lockstep with Beijing. So really the question mark at this
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  Speaker 1: point is not so much whether or not Hong Kong
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  Speaker 1: has recourse, but as you suggested, what the US responses.
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  Speaker 1: There's also a question about other power graphs that China
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  Speaker 1: is making right now. There was a one point for
• 10:11
  Speaker 1: a trillion dollar investment program in its technological infrastructure that
• 10:16
  Speaker 1: they announced. They've been trying to get a vaccine through
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  Speaker 1: faster than the United States. What's behind this at this
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  Speaker 1: point and is China getting the upper hand? Well, I
• 10:29
  Speaker 1: think there are some areas that you can call this
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  Speaker 1: a power graph, but there are other areas where China
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  Speaker 1: is just behaving opportunistically. The world is in crisis, China
• 10:37
  Speaker 1: is more stable than a lot of other countries, and
• 10:40
  Speaker 1: so it's it's looking to gain an edge, and I
• 10:42
  Speaker 1: think that's the case with the stimulus program, in the
• 10:45
  Speaker 1: investment and a lot of these strategically important sectors that
• 10:48
  Speaker 1: you mentioned. UM. Generally speaking, China is trying to use
• 10:52
  Speaker 1: the crisis to expand its influence, uh. And it would
• 10:56
  Speaker 1: do that through vaccine diplomacy, through the assistance that it's
• 10:59
  Speaker 1: all already offered to countries um for medical supplies. And yes,
• 11:05
  Speaker 1: I think it's fair to say that China see this
• 11:07
  Speaker 1: as an opening, especially at the time when when China's
• 11:10
  Speaker 1: economy is recovering earlier than most other large economies, to
• 11:13
  Speaker 1: really expand its influence. So I wonder if you can
• 11:17
  Speaker 1: just give us a sense of the the health and
• 11:20
  Speaker 1: the strength of the presidency of President g given the
• 11:24
  Speaker 1: COVID christ pandemic, given the impact to the Chinese economy,
• 11:28
  Speaker 1: given that some you know, international condemnation, perhaps China was
• 11:33
  Speaker 1: somehow involved in the origination of this pandemic. What's the
• 11:37
  Speaker 1: standing of the president right now? I think right now
• 11:41
  Speaker 1: his footing is quite secure. In fact, you can even
• 11:44
  Speaker 1: make the case that for now she emerges stronger from this,
• 11:47
  Speaker 1: and it's because of China's ability to contain the virus
• 11:52
  Speaker 1: and to recast the narrative at home by showing that
• 11:55
  Speaker 1: the party has been successful, his leadership has been successful,
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  Speaker 1: whereas the U. S and West has had a far
• 12:01
  Speaker 1: more fumbling response to the pandemic. Now, I don't think
• 12:04
  Speaker 1: that means he's out of the woods. Unemployment is rising
• 12:06
  Speaker 1: in China. I think it's going to be a quite
• 12:08
  Speaker 1: gradual recovery. But what it means is that to strengthen himself,
• 12:12
  Speaker 1: she will continue to ramp up patriotic sentiment at home
• 12:17
  Speaker 1: and and portray China success whereas others have failed. And
• 12:20
  Speaker 1: that is going to mean that these issues like Hong Kong,
• 12:23
  Speaker 1: like disputes with the US over Taiwan, over the South China, see,
• 12:27
  Speaker 1: all of these I think are going to stay at
• 12:29
  Speaker 1: quite a high temperature, and it means real risks for
• 12:32
  Speaker 1: the relationship now through the election. This is when I
• 12:35
  Speaker 1: don't really understand. It seems like mark markets are shrugging
• 12:38
  Speaker 1: off the prospect of an escalating, escalating trade war or
• 12:42
  Speaker 1: cold war between the US and China, and yet it
• 12:45
  Speaker 1: seems like things are escalating. What's the tipping point at
• 12:50
  Speaker 1: which it really will bleed over into the global economic recovery.
• 12:55
  Speaker 1: I think it's a very good point. I think markets
• 12:57
  Speaker 1: tend to focus on the issue of tariffs because those
• 13:01
  Speaker 1: are the most visible and easy to quantify in terms
• 13:04
  Speaker 1: of tensions and argue at this point, and it's not
• 13:07
  Speaker 1: a it's not a firm conviction, but we think that
• 13:10
  Speaker 1: the Phase one deal will last through this year because
• 13:13
  Speaker 1: neither side has the incentive to to re escalate on trade.
• 13:17
  Speaker 1: We put that at about so I think the markets
• 13:20
  Speaker 1: should be aware that there's a risk of breaking down.
• 13:23
  Speaker 1: But they also need to keep in mind that non
• 13:25
  Speaker 1: tariff measures that are harder to price in are I
• 13:29
  Speaker 1: think having a very significant impact. I mean things like
• 13:32
  Speaker 1: US restrictions against Wally, new US restrictions against a further
• 13:36
  Speaker 1: set of Chinese technology companies, the tensions that we're seeing
• 13:40
  Speaker 1: in Hong Kong. These do have significant impacts on the
• 13:44
  Speaker 1: global economy. They just harder to price in, and I
• 13:47
  Speaker 1: think markets may be missing that. Michael Herson, thank you
• 13:50
  Speaker 1: so much for being with us. Michael Herson practice ahead
• 13:53
  Speaker 1: of the China and Northeast Asian regions for eur Asia
• 13:56
  Speaker 1: Group joining US based in New York. Definitely in the
• 13:59
  Speaker 1: four front as these escalating tensions, yet markets just don't care. Paul, Now,
• 14:04
  Speaker 1: the market, it disappears, as we've been discussing this morning, Lisa,
• 14:08
  Speaker 1: really focusing on the pandemic. What stage are we in
• 14:10
  Speaker 1: the pandemic? And I think the markets obviously looking forward
• 14:13
  Speaker 1: a little bit and seeing some gradual reopening around the globe,
• 14:16
  Speaker 1: including here in the United States, and that's where the
• 14:18
  Speaker 1: bed is. Yeah, people are hoping for a world that
• 14:21
  Speaker 1: returns to something more normal than what we've all been experiencing.
• 14:30
  Speaker 1: One of the big stories over the past few months
• 14:32
  Speaker 1: has been an unprecedented surge in borrowing, and that's from
• 14:35
  Speaker 1: investment grade companies that have sold a record more than
• 14:40
  Speaker 1: a trillion dollars of bonds so far year to date.
• 14:43
  Speaker 1: This just raises all sorts of questions to me. Yes,
• 14:46
  Speaker 1: their investment grade, but yes, they are adding leverage in
• 14:49
  Speaker 1: a quest to just get as much cash onto their
• 14:52
  Speaker 1: belt to survive through this next period. Joining us now
• 14:55
  Speaker 1: as someone who buys some of that debt, Josh Lomier,
• 14:57
  Speaker 1: head of North American investment grade credited Viva Investors, which
• 15:01
  Speaker 1: oversees four hundred and thirty eight billion dollars firm wide,
• 15:04
  Speaker 1: enjoyces from Chicago. Josh, have you been out there seeing
• 15:08
  Speaker 1: opportunities and some of this new issuance at a time
• 15:11
  Speaker 1: of so much uncertainty? Yeah, we really have. I mean
• 15:16
  Speaker 1: you mentioned that over a trillion dollars of new issuance
• 15:21
  Speaker 1: during a period of unprecedented volatility. There will always be
• 15:25
  Speaker 1: opportunities to find value in that kind of environment. So
• 15:29
  Speaker 1: Josh kind of give us a sense here, you know,
• 15:32
  Speaker 1: given where we are in the credit in the economic cycle,
• 15:35
  Speaker 1: are you concerned that risk assets have gotten a little
• 15:37
  Speaker 1: bit ahead of themselves. I mean, it's sure to have
• 15:40
  Speaker 1: just more and more economic pain to come across the economy. Yeah,
• 15:45
  Speaker 1: I think you're right, And I think you know, if
• 15:47
  Speaker 1: if we just think briefly back to the last recession,
• 15:51
  Speaker 1: the global financial crisis, you had the first iteration of
• 15:55
  Speaker 1: you know, wobbling of volatility around Bear Bear Stearns in
• 15:58
  Speaker 1: the first quarter of tow that O than eight, and
• 16:00
  Speaker 1: then you know Lehman Brothers in the in the majority
• 16:03
  Speaker 1: of the volatility we didn't feel till the fourth quarter
• 16:05
  Speaker 1: of two thous eight. And so I think any recession
• 16:08
  Speaker 1: or recessionary environment is going to feel a lot more
• 16:11
  Speaker 1: like a roller coaster. Maybe that first hills the biggest
• 16:15
  Speaker 1: and the most scarier, perhaps, and then we we hit
• 16:18
  Speaker 1: different peaks and valleys throughout. But I think I think
• 16:20
  Speaker 1: we are at the early stages of this recession, and
• 16:23
  Speaker 1: it's going to take some time to really figure out
• 16:25
  Speaker 1: how deep the damage is done and how quickly we
• 16:28
  Speaker 1: can recover. Well, how worried are you about the fact
• 16:31
  Speaker 1: that companies that are worried about their futures, worried about
• 16:35
  Speaker 1: future revenues, have started odd leverage have started to reduce, uh,
• 16:40
  Speaker 1: this sort of emphasis on deleveraging and shoring up their
• 16:43
  Speaker 1: balance sheets. Right now, has that affected what you decide
• 16:47
  Speaker 1: to buy? It really does. And if you think about
• 16:52
  Speaker 1: it right now, and this is the whole market is
• 16:54
  Speaker 1: really just focused on ken things survive. A lot of
• 16:59
  Speaker 1: this reaction function of just adding as much dead as
• 17:03
  Speaker 1: they can to preserve liquidity is a is a survival
• 17:05
  Speaker 1: technique and I just want to get through the next
• 17:08
  Speaker 1: couple of quarters, and that's fine. But the reality is
• 17:12
  Speaker 1: is when you do start to recover, when economies do
• 17:14
  Speaker 1: start to open back up. Now, what we have, what
• 17:16
  Speaker 1: we will have to worry about then is what are
• 17:19
  Speaker 1: the second derivative impacts of all of this Because now,
• 17:22
  Speaker 1: best case scenario, we enter a shallow recession. And when
• 17:26
  Speaker 1: you enter a shallow recession and companies are a half
• 17:29
  Speaker 1: a turn one turn two turned higher leverage into that
• 17:33
  Speaker 1: slower growth shallow recession, if you start to have to
• 17:36
  Speaker 1: worry about their ability to earn their way out of
• 17:39
  Speaker 1: that larger hole, if you will. So, what are you
• 17:43
  Speaker 1: are you seeing in terms of credit quality across your portfolio?
• 17:46
  Speaker 1: We've seen a couple of bankruptcies just over the last
• 17:49
  Speaker 1: several weeks gives a snapshot of kind of that where
• 17:51
  Speaker 1: you think the credit quality is in the space you
• 17:55
  Speaker 1: look at. Yeah, so there's you know, there's gonna be
• 17:59
  Speaker 1: a lot of fit stuations where you know, we all
• 18:01
  Speaker 1: we all can see, you know, real estate, retail sectors
• 18:05
  Speaker 1: are some of the biggest you know, on the very
• 18:07
  Speaker 1: front lines of this, and other sectors like telecom and
• 18:11
  Speaker 1: cable um and certain areas of healthcare and even packaged
• 18:15
  Speaker 1: goods where you're not really as an impact because you're
• 18:17
  Speaker 1: actually getting some tail winds from this environment. And so
• 18:20
  Speaker 1: what we're really thinking through is who does have who
• 18:24
  Speaker 1: who is less impacted, who is the most impacted? And
• 18:28
  Speaker 1: for the ones that are the most impacted, you know,
• 18:31
  Speaker 1: you can start to steal how big of a drop
• 18:34
  Speaker 1: in their ratings are they going to have as you
• 18:35
  Speaker 1: start to project out significantly reduced earnings and revenues relative
• 18:40
  Speaker 1: to these higher debt metrics. And that's kind of all
• 18:43
  Speaker 1: the hard credit work that needs to go into making
• 18:45
  Speaker 1: decisions in over the next two quarters. So let's talk
• 18:49
  Speaker 1: about where you're seeing opportunities. What have you actually been
• 18:52
  Speaker 1: buying recently? You don't I know, you don't want to
• 18:54
  Speaker 1: talk specific securities, but if you could talk sectors, types
• 18:57
  Speaker 1: of ratings, etcetera, that would be awesome. Yeah. I think
• 19:00
  Speaker 1: one one important strategy we've deployed over the last couple
• 19:03
  Speaker 1: of months is really to go down in quality into
• 19:07
  Speaker 1: some of the sectors that we feel have been least impacted,
• 19:10
  Speaker 1: and I mentioned some telecommon cable as as an area
• 19:14
  Speaker 1: where that that can work, including some healthcare, and then
• 19:18
  Speaker 1: going up in quality in some of the sectors that
• 19:20
  Speaker 1: are most impacted, i e. In the energy space, focusing
• 19:23
  Speaker 1: more on the high up and quality integrated companies or
• 19:27
  Speaker 1: the stronger midstream credits where you have much more forward
• 19:31
  Speaker 1: looking or they have more levers they can pull to
• 19:33
  Speaker 1: reduce leverage, as well as a bit clearer cash flow
• 19:36
  Speaker 1: guidance in the current environment for commodity prices and so
• 19:40
  Speaker 1: kind of barbelling your risk in that regard is a
• 19:42
  Speaker 1: way to keep some beta in your portfolio while avoiding
• 19:47
  Speaker 1: the lowest echelons of quality and some of the most
• 19:50
  Speaker 1: impacted sectors. What kind of returns are you looking for
• 19:55
  Speaker 1: given the pretty significant returns that we've seen. It just
• 19:58
  Speaker 1: gives people a perspective. So far in May investment grade
• 20:03
  Speaker 1: bonds in the United States have returned to ten point
• 20:06
  Speaker 1: eight percent. I mean, it's been a dramatic increase, and
• 20:10
  Speaker 1: it's been both on the right side as well as
• 20:11
  Speaker 1: on the credit spread size side. Is it basically a
• 20:15
  Speaker 1: coupon clipping exercise from here? I think so. I think
• 20:20
  Speaker 1: we've you know, if you just looked at the credit
• 20:22
  Speaker 1: spreads on the market as a whole, it's still wider
• 20:25
  Speaker 1: than you know, um the types we've seen even year today,
• 20:29
  Speaker 1: by a pretty meaningful amount. And so as the market
• 20:32
  Speaker 1: recovers longer term, you can still see value in the
• 20:37
  Speaker 1: compression of spreads. I think rates have come down a ton,
• 20:40
  Speaker 1: so you probably won't get as much of a kicker
• 20:42
  Speaker 1: from a rally, and just broad interest rates and spreads
• 20:45
  Speaker 1: are still wide, but I think spreads are more fairly
• 20:48
  Speaker 1: and accurately reflecting the risks we still have in front
• 20:51
  Speaker 1: of us, and so there's not going to be easy
• 20:54
  Speaker 1: money left on the table, per se, from a spread
• 20:56
  Speaker 1: compression perspective or a yield drop perspective. And so now
• 21:00
  Speaker 1: we're back in that period where things might be fair
• 21:02
  Speaker 1: more fairly valued with lots of uncertainty, and the expectation
• 21:07
  Speaker 1: is we're going to see some more volatility here over
• 21:09
  Speaker 1: the next coming quarters. So, Josh, I know, again you
• 21:12
  Speaker 1: don't want to talk about individuals individual securities, but Macy's
• 21:15
  Speaker 1: is just out with some news does they're gonna try
• 21:17
  Speaker 1: to tap the markets for one point one billion dollars
• 21:20
  Speaker 1: and they're going to use their real estate as collateral.
• 21:23
  Speaker 1: What do you think of that structure? Is that is
• 21:25
  Speaker 1: that something that's common for the retail space or is
• 21:28
  Speaker 1: this something unique reflecting very unique times. I think it's
• 21:33
  Speaker 1: unique because it might not be that uncommon for high
• 21:37
  Speaker 1: yield or leveraged credits, but for investment grade credits, it's
• 21:40
  Speaker 1: clearly a lot less common. And I think this is
• 21:43
  Speaker 1: kind of back to that point we talked about earlier
• 21:46
  Speaker 1: around companies in survival mode, and one of the biggest
• 21:49
  Speaker 1: risks to unsecured deadholders, which are most of the investment
• 21:53
  Speaker 1: grade bonds out there, are the ability of credits when
• 21:56
  Speaker 1: they do see periods of stress to prime your debt,
• 22:00
  Speaker 1: which what what that means is put secured debt in
• 22:02
  Speaker 1: front of your unsecured debt. And so what that means
• 22:06
  Speaker 1: is if this, if this works, if this ends up
• 22:08
  Speaker 1: working out for someone like Maze's, it gets them through
• 22:10
  Speaker 1: this crisis so that they can grow at some point
• 22:14
  Speaker 1: in the future, then everybody's going to be okay. But
• 22:16
  Speaker 1: if something doesn't happen with these types of credits in
• 22:19
  Speaker 1: these situations, that that increases your tail risk and reduces
• 22:24
  Speaker 1: your return on a a bankruptcy scenario or your recovery
• 22:28
  Speaker 1: rate because you're now you now have another debt holder
• 22:32
  Speaker 1: with security on their real estate ahead of you that
• 22:34
  Speaker 1: wasn't there before. So it's not a good thing for
• 22:36
  Speaker 1: the investment grade market, unless, of course that works out
• 22:40
  Speaker 1: in the end. Josh Lomar, thanks so much for joining us.
• 22:44
  Speaker 1: Josh is head of North American investment grade credit at
• 22:47
  Speaker 1: Aviva Investors, talking all things across the credit spectrum at least,
• 22:51
  Speaker 1: so what's interesting talking about some of these lenders are
• 22:53
  Speaker 1: saying come to the market like a Macy's, uh, you know,
• 22:55
  Speaker 1: really trying to get creative and innovative to to really
• 22:58
  Speaker 1: short up the balance sheets. But it is certainly a
• 23:01
  Speaker 1: risky time for credit investors. One of the most creative
• 23:04
  Speaker 1: parts of the market has been the cruise liners, and
• 23:07
  Speaker 1: some of them have put islands up for sale. I
• 23:09
  Speaker 1: think Norwegian Cruise Lines put an island up not for
• 23:12
  Speaker 1: sale for for collateral for some of their bond sales,
• 23:16
  Speaker 1: and we've seen them put up cruise ships. And we've
• 23:18
  Speaker 1: seen this, of course in the airline industry as well,
• 23:21
  Speaker 1: with United not gain traction because people didn't necessarily want
• 23:24
  Speaker 1: the aircraft they pledged as collateral. Uh, they thought that
• 23:28
  Speaker 1: those those airline aircrafts were not valuable enough. But it
• 23:32
  Speaker 1: just highlights the desperation, right, how do you lure in
• 23:35
  Speaker 1: new investors at a time when leverage is already high,
• 23:40
  Speaker 1: at a time with such great economic uncertainty? Really question
• 23:44
  Speaker 1: it is. And you know, since you see the price
• 23:47
  Speaker 1: action today in the market, certainly gave risk on feel
• 23:49
  Speaker 1: to the market. And you know, it's just I think
• 23:51
  Speaker 1: the president, you look across the Bloomberg termina looking at
• 23:54
  Speaker 1: the news, a lot of it is just kind of
• 23:56
  Speaker 1: positive expectations for a gradual reopening of the economy and
• 23:59
  Speaker 1: and what that could mean for uh, you know, the
• 24:03
  Speaker 1: economic statistics that have been so devastating for the markets
• 24:07
  Speaker 1: over the last couple of months. As we've come to
• 24:09
  Speaker 1: grips with the economic impact from the pandemic, a lot
• 24:15
  Speaker 1: of people are wondering the Federal Reserve has done so much,
• 24:18
  Speaker 1: what more can they do? And people are definitely looking
• 24:21
  Speaker 1: at yield core of control. The idea of managing yields
• 24:25
  Speaker 1: at all different maturities of treasuries is the next likely
• 24:29
  Speaker 1: step for the US Central Bank. Ira Jersey Bloomberg Bloomberg
• 24:34
  Speaker 1: Intelligence chief interest rate strategist joining US now, Ira, I'd
• 24:38
  Speaker 1: love to get your take on what this will mean
• 24:40
  Speaker 1: for bond traders if the Federal Reserve actually does this.
• 24:44
  Speaker 1: How many more longer maturity bonds does the Federal Reserve
• 24:47
  Speaker 1: have to buy? Well, they would have to buy a lot.
• 24:50
  Speaker 1: I mean that the idea of yield curve control would
• 24:53
  Speaker 1: be for the Federal Reserve basically to say we're going
• 24:55
  Speaker 1: to set this rate um, you know, maybe it's thirty
• 24:58
  Speaker 1: year yields at two percent, or maybe it's five year
• 25:01
  Speaker 1: yields at one percent, I mean some number, and say
• 25:04
  Speaker 1: we're going to buy as many bonds as we need
• 25:06
  Speaker 1: to in order to keep rates there um. I think
• 25:09
  Speaker 1: initially the market would probably test the resolve of the
• 25:13
  Speaker 1: Fed and say, well, let's see if you'll really do that.
• 25:16
  Speaker 1: So initially, I think the Fed would have to buy
• 25:18
  Speaker 1: a lot of bonds, you know, a couple of hundred
• 25:20
  Speaker 1: billion probably over a month or two, and then after
• 25:24
  Speaker 1: that they probably won't have to buy as much, primarily
• 25:27
  Speaker 1: because the market now would know that if we get there,
• 25:30
  Speaker 1: we know that there's going to be an active buyer, so,
• 25:33
  Speaker 1: um so we're not going to be you know, very
• 25:35
  Speaker 1: short the markets. So I think it could be a
• 25:37
  Speaker 1: pretty efficient way for the FED to do that. Now,
• 25:40
  Speaker 1: the political challenge there is is that, you know, does
• 25:43
  Speaker 1: that mean that, um you know, is the Federal Reserve
• 25:47
  Speaker 1: doing this because it wants to keep government borrowing clus low? So,
• 25:50
  Speaker 1: you know, is the separation of the Federal Reserve and
• 25:54
  Speaker 1: the federal government has blurred even further. And I think
• 25:57
  Speaker 1: that that's a political challenge that that the FED ed
• 26:00
  Speaker 1: will have to ultimately have to tell Congress, like, you know,
• 26:05
  Speaker 1: explain why they're doing this exactly. So I, um, I
• 26:09
  Speaker 1: have not in my career seen this before. Um is
• 26:14
  Speaker 1: this market manipulation to some degree? Have we seen this before? Well,
• 26:18
  Speaker 1: it is market manipulation for sure, but so is regular
• 26:21
  Speaker 1: quantitative easing that the FEDS done on and off for
• 26:23
  Speaker 1: the left decade or so. Um so. So, Yeah, in
• 26:27
  Speaker 1: the nineties and fifties, during World War Two, the Federal
• 26:30
  Speaker 1: Reserve cap thirty year government bond yields at two and
• 26:34
  Speaker 1: a half percent. So UM, so there's a not unprecedented
• 26:37
  Speaker 1: in the US. UM. In Japan they did the same
• 26:40
  Speaker 1: type of yield curve control UM idea. Of course, their
• 26:44
  Speaker 1: their interest rates were even much lower than ours are now,
• 26:46
  Speaker 1: but the Japanese did it for the better part of
• 26:49
  Speaker 1: three or four years. So UM. So it's it's it's
• 26:53
  Speaker 1: it's another tool in the toolbox. And basically the the
• 26:56
  Speaker 1: important thing that I think something like yield curve control
• 26:59
  Speaker 1: would say is, firstly, we don't want long term interest
• 27:02
  Speaker 1: rates to go much higher because if they do, that
• 27:05
  Speaker 1: could be detrimental to the economy because you have the
• 27:08
  Speaker 1: rollover of corporate debt for example, or people getting mortgages. Um,
• 27:12
  Speaker 1: we don't want those interest rates to go high because
• 27:14
  Speaker 1: that could have a detrimental effect on the economy. UM.
• 27:17
  Speaker 1: But at the same time, UM, the it's in the
• 27:21
  Speaker 1: Federal Reserve doesn't want to have to do some other
• 27:23
  Speaker 1: draconian type of things like UH, cut the Fed funds
• 27:27
  Speaker 1: rate into negative territory, which might which they might have
• 27:30
  Speaker 1: to do if they don't do something like yield curve
• 27:33
  Speaker 1: control or more massive quantitative easing like they did back
• 27:36
  Speaker 1: in March. If they do yield curve control, and considering
• 27:40
  Speaker 1: the fact that they've purchased about se the maximum of
• 27:43
  Speaker 1: what they can purchase of longer term bond issuances recently
• 27:47
  Speaker 1: from the Treasury Department, how big do you think their
• 27:50
  Speaker 1: balance she could get in the next year. Yeah, so so,
• 27:54
  Speaker 1: I mean, we we've we've been forecasting that the FEDS
• 27:57
  Speaker 1: balance sheet will get well over ten trillion dollars um.
• 28:00
  Speaker 1: Now part of that is also predicated was predicated on
• 28:05
  Speaker 1: well over trillion dollars of some of these other facilities,
• 28:08
  Speaker 1: and it seems like maybe those other facilities, like the
• 28:10
  Speaker 1: credit facilities for example, won't get quite as large as
• 28:12
  Speaker 1: we initially thought. Um, primarily because of of what's happened
• 28:16
  Speaker 1: in the markets and where credit spreads have gone over
• 28:19
  Speaker 1: the past couple of months or the past couple of weeks,
• 28:21
  Speaker 1: I should say, Um, the uh, the the Even though
• 28:26
  Speaker 1: the Fed owns seventy of a lot of bonds, they
• 28:28
  Speaker 1: still there's a lot of off the run securities that
• 28:30
  Speaker 1: they don't own that many of yet, so they still
• 28:34
  Speaker 1: have plenty of room to buy um, to buy a
• 28:36
  Speaker 1: significant amount of maturities, and of course the FED, the
• 28:40
  Speaker 1: Treasury Department is also issuing a lot of new securities
• 28:43
  Speaker 1: as well. So you know, they just issued a new
• 28:44
  Speaker 1: twenty year. The FED doesn't own any of those. They
• 28:47
  Speaker 1: they're going to issue a new Uh, they just issued
• 28:49
  Speaker 1: a new thirty year. The FED also doesn't own any
• 28:51
  Speaker 1: of those, although it will um over the next couple
• 28:54
  Speaker 1: of weeks, so you have they still have a lot
• 28:57
  Speaker 1: of ability to buy a significant amount of So I
• 29:02
  Speaker 1: give us you mentioned that twenty year bond. Um, how
• 29:06
  Speaker 1: did that go? Because that's a new Security Act. So
• 29:09
  Speaker 1: so it's the first time that that the Treasury Department
• 29:12
  Speaker 1: issued a twenty year bond, a new twenty year since
• 29:17
  Speaker 1: six and it went pretty well actually so um it
• 29:20
  Speaker 1: came at at slightly higher yields than the market was expecting,
• 29:24
  Speaker 1: but within a basis point, so I call that noise
• 29:26
  Speaker 1: anything within a basis points basically noise and and and
• 29:30
  Speaker 1: the bitter statistics went pretty well. So it had um,
• 29:33
  Speaker 1: you know, good demand from end user investors where people
• 29:36
  Speaker 1: wanted to wanted to own the security. All right, thanks
• 29:39
  Speaker 1: so much for it. Joining us as always, Ira Jersey
• 29:42
  Speaker 1: Teeth us interest rate strategist for Bloomberg in talentence joining
• 29:45
  Speaker 1: us on the phone. At least that's I think this
• 29:47
  Speaker 1: is a new term for me, yield curve controls, and I
• 29:50
  Speaker 1: I have to brush up on that a little bit more.
• 29:52
  Speaker 1: But think its another tool. I guess Bank of Japan
• 29:55
  Speaker 1: has been doing this for a long time, and it
• 29:57
  Speaker 1: raises a question about frankly, quidity in the bond market.
• 30:01
  Speaker 1: When the Federal Reserve clamps down to such degree and
• 30:05
  Speaker 1: sucks up such a significant portion of the outstanding debt,
• 30:09
  Speaker 1: does this reduce liquidity in the existing bonds? What does
• 30:13
  Speaker 1: this judist how to chist? What does it do the
• 30:15
  Speaker 1: whole industry of of the bond market if it's completely
• 30:18
  Speaker 1: controlled by the central bank. Yeah, it's it's really interesting,
• 30:21
  Speaker 1: and I'm not sure it's something you know. I'm sure
• 30:23
  Speaker 1: a lot of market participants have different views about it,
• 30:26
  Speaker 1: but certainly, you know, we've given the Fed credit since
• 30:29
  Speaker 1: the beginning of this whole pandemic for taking decisive action,
• 30:31
  Speaker 1: for taking early action. Uh, and this appears to be
• 30:34
  Speaker 1: just another tool in the toolbox that they're prepared to use.
• 30:37
  Speaker 1: This is Bloomberg. Thanks for listening to the Bloomberg P
• 30:42
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 30:44
  Speaker 1: at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney,
• 30:48
  Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa abram Woids.
• 30:51
  Speaker 1: I'm on Twitter at Lisa A. Bramwod's One before the podcast.
• 30:54
  Speaker 1: You can always catch us worldwide on Bloomberg Radio