Latest / Bloomberg Intelligence / Long Bond Positions Are Ripe For A Reversal: Authers (Podcast)

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Long Bond Positions Are Ripe For A Reversal: Authers (Podcast) · 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 Waits. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. This week really was driven by bonds,
• 0:23
  Speaker 1: the yield curve, the gap between two year and ten
• 0:26
  Speaker 1: year treasury yields inverting for the first time briefly of
• 0:29
  Speaker 1: it UH since two thousand and seven, adding to this
• 0:33
  Speaker 1: gloom and doom that was pervasive throughout all markets. But
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  Speaker 1: the question is where do we go from here? And
• 0:39
  Speaker 1: our bonds really sending that barish of a signal. John
• 0:42
  Speaker 1: Authors is joining us now senior editor for Bloomberg Markets,
• 0:45
  Speaker 1: fabulous columnist for Bloomberg Opinion. I recommend you read his work.
• 0:50
  Speaker 1: It is tremendous. John, Thank you so much for being here.
• 0:53
  Speaker 1: What's your take on the message being sent from bond
• 0:56
  Speaker 1: markets this week? Well, the message is plainly negative, ridiculous
• 1:00
  Speaker 1: to try to argue any way other than that. Less
• 1:04
  Speaker 1: perhaps the inversion. We've been inverted on the three months
• 1:07
  Speaker 1: ten years for quite a while anyway, and we were
• 1:10
  Speaker 1: only inverted on the two years to tenure for a
• 1:12
  Speaker 1: matter of minutes. So that's actually, I think, less important
• 1:15
  Speaker 1: than the show publicized minutes. Though. Yeah, well yes exactly.
• 1:18
  Speaker 1: I I got to I gave an interview for I
• 1:21
  Speaker 1: gave an interview for Bloomberg Radio in my pj's and
• 1:24
  Speaker 1: the moment it happened, more or less, that's how we
• 1:26
  Speaker 1: do it. Yes, so we we we we were there
• 1:30
  Speaker 1: and we were not the only ones there on on
• 1:31
  Speaker 1: that story. But but what has been more important, plainly
• 1:36
  Speaker 1: is the remarkable falling yields, the remarkable moved to buy
• 1:40
  Speaker 1: bonds therefore, and that has not really been reversed in
• 1:44
  Speaker 1: any meaningful way during the week. Plainly, that can only
• 1:50
  Speaker 1: be negative. The interesting question and the reasonable question, is
• 1:54
  Speaker 1: whether the bond market tends to be wrong less of
• 1:57
  Speaker 1: the time than the stock market tends to be. But
• 1:59
  Speaker 1: it's not as though the bond market is infallible. The
• 2:02
  Speaker 1: question is whether the bond market could be wrong about this,
• 2:05
  Speaker 1: whether we've got into um the inverse and anti bubble
• 2:10
  Speaker 1: where negativity takes over in the same way that optimism
• 2:14
  Speaker 1: takes over in the top of a stock market. Yeah,
• 2:16
  Speaker 1: I mean, and I'd like to dig into that. But
• 2:19
  Speaker 1: before we do that, I mean, I guess I hate
• 2:21
  Speaker 1: to be the person to say this time is different,
• 2:23
  Speaker 1: because I think that I'd rather shoot myself than than
• 2:26
  Speaker 1: commit to that kind of statement and say that everybody
• 2:29
  Speaker 1: else is wrong. But you know, people are talking about
• 2:31
  Speaker 1: the change in demographics. They're talking about the change in
• 2:35
  Speaker 1: inflation regime, the fact that the population isn't growing as
• 2:38
  Speaker 1: quickly in developed markets, the fact that you know, all
• 2:40
  Speaker 1: of these types of factors leading to lower inflation, slower growth,
• 2:44
  Speaker 1: and just lower natural yields, not to mention just the
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  Speaker 1: amount of dead outstanding. So you know, isn't that enough
• 2:49
  Speaker 1: to send yields lower? Despite the fact that we may
• 2:52
  Speaker 1: not be headed toward recession, right, all of those things
• 2:54
  Speaker 1: certainly help send the yields lower. I would I would
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  Speaker 1: add the sheer technical factor of liabilar team matching, which
• 3:00
  Speaker 1: is much more of an issue than it was even
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  Speaker 1: ten or eleven years ago when we had twelve years
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  Speaker 1: ago now, when we had the last inversion that said
• 3:10
  Speaker 1: that said, okay, from the war through to at least,
• 3:16
  Speaker 1: the turn of the millennium was a historically great time
• 3:19
  Speaker 1: to be holding both stocks and bonds. And you could
• 3:22
  Speaker 1: argue that that that we're now into a you know,
• 3:24
  Speaker 1: argued into different period given the level of the demographics.
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  Speaker 1: It's only twelve months since all the logic, all the narrative,
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  Speaker 1: all the great bond gurus said that the direction for
• 3:38
  Speaker 1: bonds was naturally up. Um, that the secular ballmarketing bonds
• 3:45
  Speaker 1: was over, that pension funds as as we saw the
• 3:50
  Speaker 1: demographics shift to people actually retiring selling their bonds as
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  Speaker 1: part of the process of drawing their pensions and so on.
• 3:57
  Speaker 1: That those demographic forces might tell you something about the economics,
• 4:02
  Speaker 1: but in terms of the technically impact on the bond market,
• 4:06
  Speaker 1: they would still actually drive yields up. That argument is
• 4:11
  Speaker 1: true as far as it goes, just as the one,
• 4:13
  Speaker 1: just as the bullish argument for the bonds you just
• 4:14
  Speaker 1: gave me is is true. Um, people seem to have
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  Speaker 1: put too much credence in one of them twelve months ago,
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  Speaker 1: and I suspect may still be putting too much greetenance
• 4:22
  Speaker 1: to the other at the moment. So that's that's where
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  Speaker 1: I wanted ahead with it. So basically, are the positions
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  Speaker 1: Are the long bond positions crowded and overcrowded except for reversal? Yes?
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  Speaker 1: I think so. I mean there was a I did
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  Speaker 1: a column earlier this week where you if you take
• 4:37
  Speaker 1: a look at Kindleberger's famous definitions of the guy wote
• 4:40
  Speaker 1: this wonderful Manias, Panics and crashes book on uh investment manias,
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  Speaker 1: mostly stock market manias because stocks are where things really
• 4:49
  Speaker 1: go hey why most of the time. But it could
• 4:51
  Speaker 1: apply to two bonds. What he was talking about there
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  Speaker 1: was his valuation obviously extreme, which is is there a
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  Speaker 1: narrative to back it that makes people think that it
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  Speaker 1: will carry on like this, that they can justify it? Yes,
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  Speaker 1: there is? Is there cheap money available to fund it? Well? Duh?
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  Speaker 1: And perhaps the only questionable one is is investment in
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  Speaker 1: this market being funded by leverage? Which arguably there's I'm
• 5:20
  Speaker 1: not sure how much leveraged money is pouring into the
• 5:23
  Speaker 1: bond market, um, but plainly there's a good argument that
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  Speaker 1: what we have here is a bubble like condition that
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  Speaker 1: people in many cases, really if you're buying a bond
• 5:34
  Speaker 1: with a negative yield, presumably you're at least thinking in
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  Speaker 1: terms of sending it to somebody else for an even
• 5:40
  Speaker 1: more negative yield rather than happily losing some capital by
• 5:46
  Speaker 1: holding it until maturity. That's again bubble behavior. So it
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  Speaker 1: does look to me as though the markets overcrowded. And similarly,
• 5:54
  Speaker 1: if you take a look at the performance that you've
• 5:57
  Speaker 1: also seen all the patterns that you see in the
• 5:59
  Speaker 1: stock market kits that have been caused by people trying
• 6:01
  Speaker 1: to deal with the bond market, you can see plenty
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  Speaker 1: of signs of overcrowding there. That you're talking about the
• 6:07
  Speaker 1: bond proxies, right, yes, to talk a little bit about
• 6:09
  Speaker 1: what we're talking about, that's utilities and reads, real estate
• 6:12
  Speaker 1: investment trusts, etcetera. Those are the most obvious bond proxies.
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  Speaker 1: Companies that are boring are unlikely to give you amazing
• 6:19
  Speaker 1: capital growth, but will actually pay you quite a well supported,
• 6:23
  Speaker 1: predictable yield in the case of utilities from regulated Harris
• 6:28
  Speaker 1: and reads from the from the rental yield, but it
• 6:34
  Speaker 1: actually goes beyond there. Obviously, those companies have been doing
• 6:38
  Speaker 1: well of late in the stock market. But I had
• 6:42
  Speaker 1: a look at some research from sock Gen which was
• 6:43
  Speaker 1: fascinating that they looked at this in a sector neutral fashion.
• 6:47
  Speaker 1: So for each sector, even if it's biotech, which were
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  Speaker 1: the ones that were most correlated to bonds and which
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  Speaker 1: were the ones least correlated to bonds? Over time, and
• 6:59
  Speaker 1: in the last year or so, the last couple of years,
• 7:02
  Speaker 1: even on a sector neutral basis, the bonds proxies have
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  Speaker 1: suddenly become vastly more overvalued just using p ratio standard
• 7:13
  Speaker 1: valuation measures, while the ones that the least like bonds
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  Speaker 1: have become startling lee under valued. People are so if
• 7:21
  Speaker 1: you're more like a bond, people will buy your stock
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  Speaker 1: more than your closest competitor. That really does reek of um.
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  Speaker 1: Obviously we've people brainlessly blamed algois and so on, which
• 7:35
  Speaker 1: can often be rather a tired way of doing these things.
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  Speaker 1: But plainly, lots of people are looking for yield, they're
• 7:40
  Speaker 1: looking for bond substitutes. If they're in some kind of
• 7:42
  Speaker 1: a market neutral strategy or whatever. That means they're buying
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  Speaker 1: the most bond like tech stock and shorten the least
• 7:50
  Speaker 1: bond like tech stock. And that means we've got some
• 7:53
  Speaker 1: weirdly overcrowded positions that are only there in the stock market,
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  Speaker 1: that are only there because of the weird conditions in
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  Speaker 1: the bond market. John Authors, thank you so much for
• 8:01
  Speaker 1: taking the time. I love speaking with you. It's great insight,
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  Speaker 1: and uh, it's sort of an interesting time to be
• 8:07
  Speaker 1: not necessarily bullish. But at the same time, it does
• 8:11
  Speaker 1: seem like the bearishness is getting crowded, so uh, you
• 8:15
  Speaker 1: know that's gonna be something that we're gonna be keeping
• 8:18
  Speaker 1: an eye on. John Author's a senior editor for Bloomberg
• 8:20
  Speaker 1: Markets and a Bloomberg Opinion columnist. You can read his
• 8:22
  Speaker 1: columns O P. I N Go on the Bloomberg, Bloomberg
• 8:26
  Speaker 1: dot com slash Opinion on the web. It is about
• 8:40
  Speaker 1: ten thirty on Wall Street. That means it is time
• 8:43
  Speaker 1: to get some opinions from Bloomberg Opinion. We are so
• 8:45
  Speaker 1: lucky to have Brook Sutherland here with us, a columnist
• 8:48
  Speaker 1: for US covering the deals in industrial sectors. And Brooke,
• 8:52
  Speaker 1: it really is about GE today. I know DearS in
• 8:55
  Speaker 1: the headlines and we're going to get there. But GE
• 8:57
  Speaker 1: is really fascinating because yesterday it was accused of being
• 8:59
  Speaker 1: a Zi scheme by someone who called out the burning
• 9:02
  Speaker 1: made off Ponzi scheme, or he called it basically, someone
• 9:06
  Speaker 1: said that the accounting issues there were were highly problematic.
• 9:11
  Speaker 1: Today we're seeing a bit of a bounce back in
• 9:13
  Speaker 1: the shares. Why. I think part of it is because
• 9:18
  Speaker 1: Larry cold said yesterday that he bought two million worth
• 9:21
  Speaker 1: of shares UM. So that is a vote of confidence
• 9:24
  Speaker 1: by the CEO, sort of putting your money where your
• 9:26
  Speaker 1: your mouth is. UM. He is required by the proxy
• 9:30
  Speaker 1: to own ten times this salary in stock over the
• 9:33
  Speaker 1: course of five years, he's supposed to build that up. UM.
• 9:36
  Speaker 1: So clearly he's trying to incentivize the CEO to do
• 9:40
  Speaker 1: the right thing for shareholders. UM. But you know that
• 9:44
  Speaker 1: you also had some analysts come out and say, you know,
• 9:47
  Speaker 1: they're not all of the report necessarily makes sense to them,
• 9:51
  Speaker 1: and that it may be going over the top. But
• 9:54
  Speaker 1: you also have city groups saying, you know, look, this
• 9:56
  Speaker 1: builds on existing ongoing concerns. And that's sort of where
• 10:00
  Speaker 1: I fall on the spectrum is, particularly with the insurance business,
• 10:04
  Speaker 1: it is impossible to know how much money they're going
• 10:07
  Speaker 1: to have to put into this. Give us a sense
• 10:09
  Speaker 1: of what the report said, who did it, etcetera. Sure,
• 10:12
  Speaker 1: So it was Harry Marcopolis, who is a whistleblower on
• 10:16
  Speaker 1: Bernie made Off, was ignored by the SEC for years
• 10:19
  Speaker 1: and then ultimately proven correct in his analysis there. So
• 10:23
  Speaker 1: we published this report on GE accusing them of sort
• 10:26
  Speaker 1: of a couple of main things. So the biggest is
• 10:28
  Speaker 1: that he thinks that they are significantly under reserved and
• 10:32
  Speaker 1: their long term care insurance business. Now remember this is
• 10:34
  Speaker 1: where they had to disclose of fifteen billion dollars shortfall
• 10:38
  Speaker 1: last year. He thinks that they ultimately need thirty eight
• 10:41
  Speaker 1: billion dollars more there, and part of that is an
• 10:44
  Speaker 1: eighteen point five billion immediate cash inflex and then a
• 10:47
  Speaker 1: ten point five billion non cash gap charged in order
• 10:52
  Speaker 1: to sort of respond to tougher accounting rules that are
• 10:54
  Speaker 1: going to be coming out regulating this business. Um that
• 10:58
  Speaker 1: is a very big number to put on it. And
• 11:01
  Speaker 1: again it's this is such a black box of a
• 11:05
  Speaker 1: business and it's entirely dependent on assumption. So it matters
• 11:08
  Speaker 1: what you think interest rates are going to do, what
• 11:10
  Speaker 1: are healthcare costs going to do, how many people are
• 11:13
  Speaker 1: going to get all timers, are they going to get healthy?
• 11:15
  Speaker 1: When are they going to die? There's so many different
• 11:18
  Speaker 1: variables here that you can make assumptions and come up
• 11:22
  Speaker 1: with sort of whatever number that you want. But I
• 11:25
  Speaker 1: do agree that g E is not being conservative enough
• 11:29
  Speaker 1: when it comes to the long term care insurance business. Um.
• 11:32
  Speaker 1: You know, I wrote about this in February when they
• 11:34
  Speaker 1: sort of laid out more details in their ten K
• 11:37
  Speaker 1: of the various assumptions that they were making. And when
• 11:39
  Speaker 1: you look at companies like Prudential, it does seem that
• 11:42
  Speaker 1: g E is slightly on the more optimistic side. Um.
• 11:46
  Speaker 1: So how much they're gonna have to put in there
• 11:48
  Speaker 1: is still a question work. But this is certainly something
• 11:51
  Speaker 1: that investors have been watching and are aware of. All right,
• 11:54
  Speaker 1: so we'll keep watching GE and I know you will
• 11:56
  Speaker 1: as well. I do want to shift gears to dear.
• 11:58
  Speaker 1: Do you reported earnings today and they're uh. They cut
• 12:02
  Speaker 1: their full year forecast, which sounded bad, And when I
• 12:05
  Speaker 1: came in, shares were down ahead of the open. Currently
• 12:09
  Speaker 1: they're up three point six. What happened? I think it
• 12:14
  Speaker 1: might be an issue of expectations versus reality. I think
• 12:19
  Speaker 1: expectations were very low for Deer, and you did have
• 12:22
  Speaker 1: a Goldman report out this morning saying, you know, they
• 12:24
  Speaker 1: were not that bad, particularly when you look at the
• 12:27
  Speaker 1: profit margin ringing endorsement. I know, but I think but
• 12:31
  Speaker 1: it is sort of you know, demonstrative of what investors
• 12:34
  Speaker 1: are going to be focusing on for industrial companies over
• 12:36
  Speaker 1: the coming years. Is as you know, we've now established
• 12:39
  Speaker 1: that we're in a slowdown. There's nothing that I'm seeing
• 12:42
  Speaker 1: that's going to arrest this slowdown, particularly when you have
• 12:45
  Speaker 1: the ongoing trade war uncertainty. So assuming this continues, where
• 12:49
  Speaker 1: do you put your money? And so I think the
• 12:50
  Speaker 1: focus is now on what companies can sustain their profit
• 12:54
  Speaker 1: margins when their sales are falling um. And you have
• 12:58
  Speaker 1: Deer also talking about changes to its cost structure, so
• 13:01
  Speaker 1: clearly it's concerned about that is trying to protect its profitability.
• 13:04
  Speaker 1: But but this is, this is this is what was
• 13:06
  Speaker 1: struck me this morning. When you start talking about cost cutting,
• 13:09
  Speaker 1: which is essentially that cost cutting and raising prices for
• 13:12
  Speaker 1: the customers that you do have. You can only do
• 13:14
  Speaker 1: that so much, right, And I mean, does that sort
• 13:16
  Speaker 1: of indicate is something bigger that is concerning to you?
• 13:21
  Speaker 1: It does? I mean, I will say, so, You're You're
• 13:24
  Speaker 1: absolutely right, there's only so much you can cut. But
• 13:26
  Speaker 1: the idea is that these companies are becoming more efficient,
• 13:29
  Speaker 1: more productive. Now a big part of that is a
• 13:31
  Speaker 1: lot more of their operations are automated, so they don't
• 13:34
  Speaker 1: have as many people to pay in the first place. Um.
• 13:37
  Speaker 1: So that's their argument is that you know, they're they're
• 13:39
  Speaker 1: sort of protected in that way. But yes, it does
• 13:42
  Speaker 1: raise questions about longer term impact on demand and sort
• 13:46
  Speaker 1: of supporting this cycle, because you can only do these
• 13:49
  Speaker 1: things so long before then we do start to see
• 13:51
  Speaker 1: this recession that you know is for the most part
• 13:54
  Speaker 1: been sort of contained to manufacturing slip into the consumer.
• 13:58
  Speaker 1: So with Deer, I know that in general Caterpillar is
• 14:01
  Speaker 1: viewed more as a proxy on the economy than than
• 14:04
  Speaker 1: Deer is. But is there anything that we can read
• 14:06
  Speaker 1: in uh two Deer's results to give us a broader
• 14:10
  Speaker 1: sense of what's going on in the effects of corporate
• 14:12
  Speaker 1: balance sheets? Yeah? Absolutely, I mean I think they're a
• 14:15
  Speaker 1: great proxy for trade war pain because of course this
• 14:18
  Speaker 1: has really hit the agricultural sector, um. And so just
• 14:22
  Speaker 1: looking at the general uncertainty that's pervading manufacturing, I think
• 14:27
  Speaker 1: this is another example of that where people are just
• 14:29
  Speaker 1: not willing to spin because they don't know what's going
• 14:32
  Speaker 1: to happen, what's going to be out there. How do
• 14:34
  Speaker 1: you justify spending thousands of dollars on a tractor? Yeah? Um,
• 14:38
  Speaker 1: so right now we are talking about deer shares up
• 14:41
  Speaker 1: at three point six percent. Next week, just real quick,
• 14:44
  Speaker 1: what industrial news are you looking for. I'm hoping it
• 14:47
  Speaker 1: might be a little slow next week because it's it's
• 14:50
  Speaker 1: the middle of August. We've sort of gotten through earnings.
• 14:52
  Speaker 1: But I think, you know, with this Trump administration, nothing
• 14:54
  Speaker 1: can ever be totally uneventful, and so I'm sure we'll
• 14:58
  Speaker 1: get some trade headlines which will have an impact act
• 15:00
  Speaker 1: on on industrials. And of course we're going to keep
• 15:02
  Speaker 1: watching g for more developments there and especially to see
• 15:05
  Speaker 1: if they have a more robust defense point by point,
• 15:08
  Speaker 1: because we haven't really seen that yet, And do you
• 15:09
  Speaker 1: expect that. I think they would be wise to do that.
• 15:12
  Speaker 1: I think they'd be smart to go in and get
• 15:14
  Speaker 1: rid of all the earnings adjustments and their financial statements
• 15:17
  Speaker 1: to you know, stop being quite so opaque with the
• 15:19
  Speaker 1: way that they present their numbers. Um. They've had some
• 15:22
  Speaker 1: unfortunate errors just over the past couple of months where
• 15:25
  Speaker 1: they've had to go back and correct what they said
• 15:28
  Speaker 1: in presentations, correct marketing materials that you know, had made
• 15:32
  Speaker 1: their business sound better than it really was, and so
• 15:35
  Speaker 1: that is not a good look. And you know, I
• 15:37
  Speaker 1: think they have a clear opportunity here to do more
• 15:41
  Speaker 1: to improve transparency and credibility. Brook Sutherland, thank you so
• 15:44
  Speaker 1: much for being with as Brooks Sutherland of Bloomberg Opinion.
• 15:47
  Speaker 1: You can read all of our columns O P I
• 15:49
  Speaker 1: and go on the Bloomberg or Bloomberg dot com slash
• 15:52
  Speaker 1: Opinion on the Internet. I do want to just mention
• 15:56
  Speaker 1: that General Electrics, the biggest plunge in eleven years, came
• 15:59
  Speaker 1: as of a bad time for a lot of hedge funds.
• 16:01
  Speaker 1: There's a really interesting story talking about how the likes
• 16:05
  Speaker 1: of Rhissance Technologies, Citadelle Advisors, and a Dodgy Capital Management
• 16:09
  Speaker 1: all piled into General Electric shares right before the shares
• 16:13
  Speaker 1: completely fell out of bed. So not the best time.
• 16:29
  Speaker 1: Biotech is risky China is risky. Biotech in China an opportunity.
• 16:35
  Speaker 1: That is what our next guest says. Brad at long Car.
• 16:38
  Speaker 1: He is chief executive officer of Long Car Investments, normally
• 16:41
  Speaker 1: in Lenox, Kansas, but joining us here in our Bloomberg
• 16:44
  Speaker 1: Interactive Broker studios, Brad, So you invest You've been an
• 16:48
  Speaker 1: investor in biotechnology shares for a long time, So just
• 16:52
  Speaker 1: you give us a sense of why you were attracted
• 16:55
  Speaker 1: to China in particular within this sector. Yeah, so thanks
• 16:59
  Speaker 1: for having me. This does sound like something that's new,
• 17:02
  Speaker 1: because it is. China is having a biotech boom right now,
• 17:06
  Speaker 1: and part of what's behind it is, you know, think
• 17:08
  Speaker 1: of the trade war and all of the headlines that
• 17:10
  Speaker 1: are going on. China wants to shift its economy from
• 17:13
  Speaker 1: being a manufacturing base and traditional industries like that to
• 17:17
  Speaker 1: innovative sectors like tech and clean tech, and biotech is
• 17:22
  Speaker 1: one of those. So your listeners might be familiar with
• 17:25
  Speaker 1: the term made in China. Five. China has singled out
• 17:28
  Speaker 1: pharmaceuticals as an industry that it wants to be a
• 17:31
  Speaker 1: world leader in by that time. So the government is
• 17:35
  Speaker 1: behind this. They've completely reformed their version of the f
• 17:38
  Speaker 1: d A. It's called the National Medical Products Administration. The
• 17:42
  Speaker 1: stock markets are actually allowing biotech companies to list for
• 17:45
  Speaker 1: the first time, believe it or not before last year,
• 17:49
  Speaker 1: like in Hong Kong. If you didn't have revenue, as
• 17:51
  Speaker 1: most biotech companies don't, you couldn't even list on the
• 17:55
  Speaker 1: stock exchange, and so all of these things are incubating
• 17:58
  Speaker 1: a biotech sector for the first time. How do you
• 18:01
  Speaker 1: evaluate a company? First of all, how do you evalue
• 18:05
  Speaker 1: a biotech company and is potential worth when a lot
• 18:07
  Speaker 1: of them are binary? Right? I mean you can have
• 18:09
  Speaker 1: a binary outcome either something gets passed by the FDA
• 18:12
  Speaker 1: and adapt adopted by the mainstream medical world where it doesn't.
• 18:17
  Speaker 1: But in China, I feel like the bar is even
• 18:19
  Speaker 1: hired to understand what's going on with the company. I mean,
• 18:22
  Speaker 1: is that a big problem for you just evaluating what
• 18:24
  Speaker 1: they actually do and how good their products actually are. Yeah,
• 18:27
  Speaker 1: so it's a little different there and here. So here
• 18:29
  Speaker 1: you really have to analyze the science and try to
• 18:32
  Speaker 1: figure out what's going to work or what's not. The
• 18:35
  Speaker 1: phase that China is in with biotech right now is
• 18:38
  Speaker 1: a lot of the companies there are licensing drugs here.
• 18:41
  Speaker 1: So these drugs that are innovative and being approved here
• 18:44
  Speaker 1: for the first time, but are already proven, have already
• 18:47
  Speaker 1: succeeded in trials. They're licensing those drugs and then commercializing
• 18:52
  Speaker 1: them there. So the stage that we're in right now
• 18:55
  Speaker 1: is trying to determine the size of the market and
• 18:58
  Speaker 1: the patient population for AREUS medicines there, and then to
• 19:02
  Speaker 1: use that to figure out the value of the companies. Now,
• 19:05
  Speaker 1: Chinese companies are also doing what we call discovery work,
• 19:09
  Speaker 1: and they will be inventing new medicines over the coming years,
• 19:12
  Speaker 1: and so we're gonna have to shift our focus and
• 19:15
  Speaker 1: focus on that scientific risk they're like we do in
• 19:19
  Speaker 1: the US today. But that's kind of the next step.
• 19:21
  Speaker 1: The first step is just getting innovative drugs into the
• 19:25
  Speaker 1: country to begin with, and what are the economic ramifications
• 19:28
  Speaker 1: of that? And for that, there's it's wide open. They're
• 19:32
  Speaker 1: transitioning from a generics based model to an innovative based model,
• 19:36
  Speaker 1: and so there's gonna be lots of room for many
• 19:38
  Speaker 1: companies to succeed. I'm listening to you talk about adapting
• 19:43
  Speaker 1: or you know, bringing over some of the established medicines here.
• 19:48
  Speaker 1: How does this fit into the trade war and the
• 19:50
  Speaker 1: whole intellectual theft in IP theft discussion. Yeah, well, the
• 19:55
  Speaker 1: trade wars you classically think of it, There are no
• 19:57
  Speaker 1: tariffs on medicines because if you think about it, that
• 20:00
  Speaker 1: would raise drug prices and neither side wants that so
• 20:04
  Speaker 1: this is one area that fundamentally is not affected by
• 20:08
  Speaker 1: the trade war. Now in terms of IP theft, that's
• 20:11
  Speaker 1: part of the trade war negotiation. So a big class
• 20:14
  Speaker 1: of drugs here what really created the biotech sector, what's
• 20:18
  Speaker 1: called biologics and China in the US right now are
• 20:22
  Speaker 1: negotiating how many years of exclusivity biologics will get in China.
• 20:26
  Speaker 1: What are biologics? Just to give us a sense of
• 20:28
  Speaker 1: what kinds of drugs were talking about. So like a
• 20:30
  Speaker 1: traditional traditional medicine is made by chemicals, so like a pill,
• 20:34
  Speaker 1: biologic is like hum era, you know, drugs that are
• 20:38
  Speaker 1: made from living organisms. And so in the US we
• 20:43
  Speaker 1: have twelve years of protection from biologics right now. China
• 20:46
  Speaker 1: would like to have nine years. But our industry views
• 20:49
  Speaker 1: the negotiation as a hugely positive thing. That's that it's
• 20:53
  Speaker 1: even taking place. So China understands that you can't have
• 20:56
  Speaker 1: a biotech sector without IP protection, and they're starting to
• 21:00
  Speaker 1: write that in more forcefully than they have in the past.
• 21:03
  Speaker 1: And so I think the arrows are pointed in the
• 21:05
  Speaker 1: right direction as far as that goes. So, you know,
• 21:09
  Speaker 1: moving aside from the science of it, and I understand
• 21:12
  Speaker 1: sort of the technical backdrop, the fact that the biotech
• 21:15
  Speaker 1: industry in China is gaining new steam because of the
• 21:17
  Speaker 1: Maid Proclamation and also just because there is a shift
• 21:25
  Speaker 1: to a more developed economy. How do you invest in
• 21:29
  Speaker 1: Chinese stocks? Do you do it with U N do
• 21:31
  Speaker 1: you do it with dollars? I mean, is that a
• 21:32
  Speaker 1: big consideration for you? Yeah? Well, I'm an index creator.
• 21:36
  Speaker 1: I've created an index that tracks a basket of China
• 21:39
  Speaker 1: biotech stocks, and most of them are listed in Hong Kong.
• 21:43
  Speaker 1: Like the index that I've created, it's called the China
• 21:45
  Speaker 1: Biopharma Index, tracks twenty nine companies and twenty three of
• 21:49
  Speaker 1: those are listed in Hong Kong. But there's actually a
• 21:52
  Speaker 1: handful of really good ones here listed on NASDAC. There's
• 21:55
  Speaker 1: one called by Jane, one called zy Lab, and so
• 21:59
  Speaker 1: they're listing in both places. And you know, I personally
• 22:03
  Speaker 1: do a lot of on the groundwork. Over the last year,
• 22:05
  Speaker 1: I've traveled there six times. And in biotech that's really important.
• 22:08
  Speaker 1: You have to meet management teams, you have to visit
• 22:11
  Speaker 1: facilities and really see the science they're doing and their
• 22:14
  Speaker 1: manufacturing facilities. You know, to make sure that you're investing
• 22:17
  Speaker 1: in good companies and that takes a lot of legwork.
• 22:20
  Speaker 1: What about in the US, do you think that the
• 22:22
  Speaker 1: opportunity in biotech in the US has already basically played
• 22:25
  Speaker 1: out at this point? Well, you know, the US has
• 22:27
  Speaker 1: been very rocky. The ib B, which is the biggest
• 22:30
  Speaker 1: biotech ETF actually peaked in and a lot of people
• 22:35
  Speaker 1: don't realize that. You know, we the stock market makes
• 22:37
  Speaker 1: new highs every day, not over the last couple of weeks,
• 22:41
  Speaker 1: but um, the biotech sector is one exception to that.
• 22:45
  Speaker 1: So we peaked in ten And the reason for that
• 22:47
  Speaker 1: is everything you see in the news about payers pushing
• 22:50
  Speaker 1: back on drug pricing and all of this stuff, and
• 22:53
  Speaker 1: so it has impacted the industry's growth. And I would
• 22:56
  Speaker 1: say biotech investors in general are really nervous about the
• 23:00
  Speaker 1: next year because we've got the presidential election and you
• 23:03
  Speaker 1: have all of these candidates, you know, saying terrible things,
• 23:06
  Speaker 1: some frankly well deserved about our industry. And so we
• 23:10
  Speaker 1: think biotech is going to be taking a lot of
• 23:12
  Speaker 1: shots over the next year, which is actually one reason
• 23:15
  Speaker 1: why I'm so focused in China. You know, in the US,
• 23:18
  Speaker 1: we're thinking of ways of how we won't spend money
• 23:22
  Speaker 1: on drugs and China they're starting from the very beginning.
• 23:24
  Speaker 1: Their biotech sector is just like ours in the eighties
• 23:27
  Speaker 1: and nineties, meaning it's just getting started. And what I
• 23:30
  Speaker 1: tell people is, there's an am gen there, there's a
• 23:33
  Speaker 1: cell gene there, there's a genetech there, and they're just
• 23:35
  Speaker 1: small companies that most people haven't heard of yet, but
• 23:38
  Speaker 1: you will one day because it's gonna look just like
• 23:41
  Speaker 1: our biotech sector in the future. Thank you so much
• 23:45
  Speaker 1: for being here. Brad Lankar, chief executive officer of ln
• 23:48
  Speaker 1: CAR Investments, talking about China biotech and uh, it really
• 23:52
  Speaker 1: interesting to see also the backdrop of this having to
• 23:54
  Speaker 1: do with biotech in the US and some of the
• 23:56
  Speaker 1: pressures that it will inevitably come under as election cycle
• 24:01
  Speaker 1: heats up. We're already seeing a lot of rhetorics saying
• 24:04
  Speaker 1: that frankly, we need to lower drug prices, and this
• 24:07
  Speaker 1: has been an ongoing discussion. We have had a tumultuous
• 24:25
  Speaker 1: week here, Uh, markets getting whips ode by competing tweets
• 24:30
  Speaker 1: and comments about the trade war. The U S and
• 24:32
  Speaker 1: China do appear to be talking. The US made delay
• 24:35
  Speaker 1: tariffs until December that it had originally planned to impose
• 24:39
  Speaker 1: in September. The question is how much is this really
• 24:42
  Speaker 1: soft and trade tensions, especially as China says that it
• 24:45
  Speaker 1: plans to retaliate against the US if it does impose
• 24:49
  Speaker 1: those extra tariffs. So how does an investor deal with US?
• 24:51
  Speaker 1: David Cat's joining US now, chief investment officer at Matrix
• 24:54
  Speaker 1: Ascid Advisors. Uh, David, I'm just wondering after this week,
• 24:59
  Speaker 1: is there anything that happen that makes you want to
• 25:01
  Speaker 1: change how you allocate your money. Well, we think that
• 25:06
  Speaker 1: the large sell off is actually created an opportunity. We
• 25:09
  Speaker 1: are fearful of the trade war. Uh. It definitely is
• 25:13
  Speaker 1: slowing the economy. If there isn't a daytonter cessation of hostilities,
• 25:19
  Speaker 1: we think that it could cause the global economy to
• 25:21
  Speaker 1: slow down, possibly a recession, and the same with the US. However,
• 25:26
  Speaker 1: if there is any sort of easing of the tensions,
• 25:29
  Speaker 1: we think the economy is in good shape. And stocks
• 25:32
  Speaker 1: which sold off probably about six from their highs in
• 25:36
  Speaker 1: the last two to four weeks, are really a very
• 25:38
  Speaker 1: good prices. So key to investor take a longer term
• 25:41
  Speaker 1: time horizon, uh, and pick companies that you like. And
• 25:45
  Speaker 1: we definitely would be buying into this week. That's not
• 25:47
  Speaker 1: on a day like today where the markets rallying, but
• 25:50
  Speaker 1: on a day like Wednesday when it looks like the
• 25:51
  Speaker 1: world's coming to an end. So where exactly do you
• 25:54
  Speaker 1: see opportunities? Well, the group that's been hit the worst
• 25:58
  Speaker 1: in the last week or two, who has been financials
• 26:01
  Speaker 1: or one of the worst been financials, And we think
• 26:03
  Speaker 1: that even though it's gonna be a little bit tougher
• 26:05
  Speaker 1: to be as profitable in a lower interest rate environment,
• 26:08
  Speaker 1: they're still making a boatload of money. They're buying stock back.
• 26:11
  Speaker 1: They're actually among the best yielding stocks in the market today.
• 26:15
  Speaker 1: So you have a good two to three year time
• 26:17
  Speaker 1: horizon or two to three year earnings growth window, and
• 26:21
  Speaker 1: you're gettinghim a ten eleven times earnings paying a three
• 26:23
  Speaker 1: and a half percent yield. So we would be pretty
• 26:26
  Speaker 1: aggressively buying financials, whether it's a BBT or Wells Fargo
• 26:30
  Speaker 1: with JP Morgan at b n C. We really like
• 26:32
  Speaker 1: that group a lot. We like the um brokers like
• 26:36
  Speaker 1: a Goldman Sachs or Morgan Stanley. Again, we think that's
• 26:39
  Speaker 1: a very good opportunity if you're willing to turn down
• 26:41
  Speaker 1: the day to day noise. So David, I guess that
• 26:45
  Speaker 1: then what would you say, how much is this predicated
• 26:48
  Speaker 1: on the idea that the Federal Reserve is going to
• 26:49
  Speaker 1: cut rates at least two more times this year. So
• 26:53
  Speaker 1: the Fed's gonna cut rates for sure, whether it's it's one, two,
• 26:56
  Speaker 1: or three times. We think that will help the financial
• 27:00
  Speaker 1: markets and provide liquidity, but we don't think it really
• 27:02
  Speaker 1: will have that positive impact on the economy. We're speaking
• 27:07
  Speaker 1: with hundreds of companies, and what all of the companies
• 27:09
  Speaker 1: are saying, pretty much across the board is that their
• 27:11
  Speaker 1: business is slowing because of China, because of trade tensions,
• 27:15
  Speaker 1: and because of tariffs. Not one company that we're speaking
• 27:18
  Speaker 1: to has said, hey, business is slow because we're worried
• 27:21
  Speaker 1: about the credit markets, that we're not able to land,
• 27:23
  Speaker 1: our interest rates are too high. So the Fed lowering rates,
• 27:27
  Speaker 1: we think is a foregone conclusion and will be a
• 27:29
  Speaker 1: net positive. But the real key to the economy and
• 27:32
  Speaker 1: then the real key to the stock market is do
• 27:34
  Speaker 1: we get better progress on the trade And the reason
• 27:38
  Speaker 1: that we're hopeful that we will is it's finally starting
• 27:41
  Speaker 1: to set into everybody and ultimately to the President that
• 27:44
  Speaker 1: tariffs are bad. Trade war is bad. More and more
• 27:47
  Speaker 1: strategists are talking about it, more and more newspapers are
• 27:50
  Speaker 1: talking about it, and that's going to put pressure on
• 27:53
  Speaker 1: the President and Theater Navarro to come up with the
• 27:56
  Speaker 1: resolution rather than keep talking about tariffs being such a
• 27:59
  Speaker 1: great thing. People are now losing real money. The economy
• 28:02
  Speaker 1: is gonna slow and President Trump does not want to
• 28:05
  Speaker 1: go into next year in a recession as he tries
• 28:07
  Speaker 1: to run for re election. David, let's say that there
• 28:10
  Speaker 1: it becomes clear there's not going to be a trade
• 28:12
  Speaker 1: deal between the US and China. Would you be forced
• 28:15
  Speaker 1: to sell some of your stocks that you've been buying. Well,
• 28:18
  Speaker 1: we wouldn't be forced to sell them, but it definitely
• 28:21
  Speaker 1: would extend our time horizon. We think you're gonna have
• 28:23
  Speaker 1: a pretty quick rebound if you get some sort of
• 28:26
  Speaker 1: a deal, but if you don't, you're going to go
• 28:28
  Speaker 1: into a slowdown or a recession. But again, we think
• 28:32
  Speaker 1: it's self correcting because the more the market goes down
• 28:34
  Speaker 1: goes down, the more pressure there is on the United
• 28:37
  Speaker 1: States and on Chid into settling something. So this isn't
• 28:41
  Speaker 1: the type of problem that you had in two thousand,
• 28:44
  Speaker 1: where you had huge excess inventories and spending in the
• 28:46
  Speaker 1: internet bubble, or in two thousand and eight when you
• 28:50
  Speaker 1: had a huge real estate bubble and banks have bad
• 28:52
  Speaker 1: balance sheets. The overall economy is generally intact. You don't
• 28:56
  Speaker 1: have excess inventory. Consumer balance sheets are in great shape.
• 29:00
  Speaker 1: Bank balance sheets are in great shape, so you have
• 29:02
  Speaker 1: a lot of really good things out there. This is
• 29:04
  Speaker 1: a self inflicted wound that can be corrected easily, So
• 29:07
  Speaker 1: we think the longer it goes on, the great little
• 29:10
  Speaker 1: likelihood it gets fixed, simply because you can't continue in
• 29:14
  Speaker 1: the form that it is. David Cats, thank you so
• 29:16
  Speaker 1: much for joining us today. David Cats, chief investment officer
• 29:19
  Speaker 1: at Matrix Acid Advisers, joining us from New York on
• 29:23
  Speaker 1: the phone. Thanks for listening to the Bloomberg P and
• 29:28
  Speaker 1: L podcast. You can subscribe and listen to interviews at
• 29:30
  Speaker 1: Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney,
• 29:34
  Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa bram Woyds.
• 29:37
  Speaker 1: I'm on Twitter at Lisa bramwo wits one before the podcast,
• 29:40
  Speaker 1: you can always catch us worldwide on Bloomberg Radio.