Latest / Bloomberg Intelligence / Higher U.S. Yields Are Shifting The Risk-Reward in EM: Sassower

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Higher U.S. Yields Are Shifting The Risk-Reward in EM: Sassower · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
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• 0:32
  Speaker 1: Today we hit a threshold that has gotten a lot
• 0:35
  Speaker 1: of people excited. Tenure treasury yields touched kissed that three
• 0:39
  Speaker 1: percent mark. There were bells ringing across Wall Street, and
• 0:42
  Speaker 1: then it dipped right back down. Joining us now for
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  Speaker 1: some of the implications on a broad level of what
• 0:48
  Speaker 1: higher treasury yields UH could mean. As Damien Sassaur, fixed
• 0:52
  Speaker 1: income strategist at Bloomberg Intelligence, he joins us here in
• 0:55
  Speaker 1: our eleven three oh studios. Damon, I want to look
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  Speaker 1: at this from the emerging markets point of view, because
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  Speaker 1: there has been so much money that has flow flooded
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  Speaker 1: into developing nations. So now that we're seeing higher yields
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  Speaker 1: in the US, what's the implication. Well, I'll tell you
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  Speaker 1: what's gone on here. We've seen emerging market US dollar
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  Speaker 1: debt come off returns of decline quite considerably year today.
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  Speaker 1: I think they're off of you know, two point or something,
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  Speaker 1: but yields have risen sharply, um. And so what that's
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  Speaker 1: done is it's created a bit of an anomaly. So
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  Speaker 1: you have em dollar debt issued by you know, all
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  Speaker 1: these you know, emerging market nations like Turkey, Argenta and
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  Speaker 1: Brazili you name it, looking rather attractive relative to their
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  Speaker 1: local government debt, which is denominated in local currency. I mean, basically,
• 1:38
  Speaker 1: back up, this is important, Okay. So basically people went
• 1:41
  Speaker 1: into emerging markets debt in local currencies betting that the
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  Speaker 1: dollar would continue to weaken. As US yields continue to rise,
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  Speaker 1: you are starting to get a bid on the dollar.
• 1:53
  Speaker 1: And this leads to your issue, right, I mean, I
• 1:56
  Speaker 1: mean we We've long been an advocate that investors are
• 2:00
  Speaker 1: um perhaps you know, getting ahead of themselves in sacrificing
• 2:03
  Speaker 1: spread risk for foreign exchange risk. And when they do that,
• 2:06
  Speaker 1: they probably don't realize that that's inherently more risky. Is
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  Speaker 1: local currencies have historically exhibited much greater volatility than spreads. Right,
• 2:13
  Speaker 1: So what you're seeing is a lot of anomalies. You're
• 2:16
  Speaker 1: basically seeing e M dollar debt now the yields looking
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  Speaker 1: relatively attractive to EM locally yields probably at the you know,
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  Speaker 1: the gap between the two is at the tightest level
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  Speaker 1: since March of two thousand nine, right after the global Finalial,
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  Speaker 1: right at the height of the global financial crisis. And
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  Speaker 1: then if you look at EM dollar debt relative to
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  Speaker 1: US high yield, which is actually up on the year,
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  Speaker 1: And if you recall, you know, we have talked about
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  Speaker 1: this previously, the yields are now at the widest levels
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  Speaker 1: I've seen since TwixT so on a relative basis to
• 2:44
  Speaker 1: US credit, it's actually looking rather attractive as well, Damien,
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  Speaker 1: How big is this market so EM dollar debt, sovereign
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  Speaker 1: quasi in corporate, I mean three to four trillion today?
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  Speaker 1: A lot of investments are done through exchange traded funds,
• 3:00
  Speaker 1: or they've done to actually buying the debt. A lot
• 3:02
  Speaker 1: is done through a TS that's exactly right, alright. So
• 3:04
  Speaker 1: if you're buying it through an e t F or
• 3:06
  Speaker 1: an exchange traded note or some other kind of derivative product,
• 3:09
  Speaker 1: are you the insurance company, the pension fund, or you
• 3:13
  Speaker 1: the trader? So if I mean if you're a e
• 3:17
  Speaker 1: t F investor. Historically, we've been led to believe that
• 3:19
  Speaker 1: there's a retail investors mom and pops. But increasingly, what
• 3:22
  Speaker 1: we're realizing that a lot of institutions, a lot of
• 3:24
  Speaker 1: fund managers use those instruments as a way of off
• 3:26
  Speaker 1: setting risk in other areas, or perhaps you know, quickly
• 3:29
  Speaker 1: adding to risk in certain areas and dialing it in. Okay.
• 3:32
  Speaker 1: And they're doing this because what they want to hold
• 3:34
  Speaker 1: the debt long term, They want to take the coupon
• 3:36
  Speaker 1: and take the principal payment. Absolutely not, absolutely not. They're
• 3:40
  Speaker 1: trying to get exposure to an asset class that may
• 3:42
  Speaker 1: have a higher yield or a higher beta than another one. Okay,
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  Speaker 1: Just last point. The amount of money that is going
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  Speaker 1: into exchange traded funds that are backed by emerging market
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  Speaker 1: debt far out ways the actual amount of emerging market
• 4:00
  Speaker 1: debt that's being issued. That's not true. Now Here. Now
• 4:04
  Speaker 1: here's the interesting thing, because I see where you're headed there,
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  Speaker 1: and and it's something we've also talked about before, which
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  Speaker 1: is the liability mismatch between the underlying bonds and these
• 4:13
  Speaker 1: et f s, which may not be as liquid as
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  Speaker 1: the daily liquidity you're being provided by the e t
• 4:18
  Speaker 1: s themselves, right, especially PIM in local currency debt. Right,
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  Speaker 1: So you know the real risk here is that you know,
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  Speaker 1: you've got local government debt. That is, you know, investors
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  Speaker 1: can go move in and out of intro day, yet
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  Speaker 1: the underlying bonds don't trade that liquid and so you know, yes,
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  Speaker 1: if yields continue to go up in the US leads
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  Speaker 1: to your point, you know, we may see, uh, we
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  Speaker 1: may see a little pushing pull there, and we may
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  Speaker 1: see us reach a point where, um, you know, investors,
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  Speaker 1: I don't want to say they can't get their money
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  Speaker 1: back from an e t F. Far be from me
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  Speaker 1: to even you know, conceive of that. But yeah, those
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  Speaker 1: are those are stress signals. Those are blacks want events
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  Speaker 1: that we look for and that we're looking at. Yeah,
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  Speaker 1: I want to build on what PIM was talking about
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  Speaker 1: e t f s being used for quick bets on
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  Speaker 1: emerging markets. Is there a threshold at which, you know,
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  Speaker 1: US yields cross a certain point and people just yank
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  Speaker 1: their money out of developing markets and go back to
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  Speaker 1: the US. You know, to make a call on a
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  Speaker 1: particularly yield threshold that's going to drive investors away from.
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  Speaker 1: It is kind of difficult to say, you know, I
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  Speaker 1: don't think we've we have seen you know, fits of
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  Speaker 1: it for sure, and in certain environments absolutely. I think
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  Speaker 1: the one area right now and that's the one, you know,
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  Speaker 1: the one thing that you know a lot of people
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  Speaker 1: have kind of it's killed people in the M as
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  Speaker 1: the US dollar, right, the US dollar has come off
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  Speaker 1: you know, quite considerably in the last year, mostly because
• 5:37
  Speaker 1: of the wand right the China remnimbi has just been
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  Speaker 1: on a straight shot higher. And if you saw overnight
• 5:43
  Speaker 1: there's been talk that they may start easing rates in China,
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  Speaker 1: which you know is kind of taking people by surprise
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  Speaker 1: here today in the market because what would that mean.
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  Speaker 1: That might mean that growth is slowing in China, and
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  Speaker 1: what would that mean for all of the largest constituents
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  Speaker 1: et s in these industries. If if growth starts to
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  Speaker 1: slow in Southeast Asia and it filters into Latin America
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  Speaker 1: and in the Emia region because of China being the
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  Speaker 1: largest trading partner of emerging market, that could be a
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  Speaker 1: real risk and that can drive investors into the dollar,
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  Speaker 1: into the And when the dollar starts to rise, i
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  Speaker 1: M currency's tend to fall and local debt tends to
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  Speaker 1: get hit pretty hard, and we've seen that happen quite
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  Speaker 1: often in UH in recent memories. So yeah, thanks for
• 6:19
  Speaker 1: being with us. Always a pleasure, always learned something. Damien
• 6:22
  Speaker 1: Sassaur is fixed income strategist for Bloomberg Intelligence. Giving us
• 6:27
  Speaker 1: the wherewithal when it comes to emerging market that always
• 6:30
  Speaker 1: always a pleasure. A lot of people are going to
• 6:45
  Speaker 1: dissect the key moment when you as ten year treasury
• 6:50
  Speaker 1: yields hit that three percent mark, only to come back
• 6:54
  Speaker 1: down here to talk about how much he cares about
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  Speaker 1: this sort of thresholds, this magical numbers. Ason trent Ert,
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  Speaker 1: Managing partner, chairman and chief executive officer of Strategious Research
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  Speaker 1: Partners in New York. Chason, thank you so much for
• 7:07
  Speaker 1: being with us. How much do you care that tenure
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  Speaker 1: treasury yield hit three I, frankly, I only care to
• 7:14
  Speaker 1: the extent to which I think it's a sign of
• 7:17
  Speaker 1: a strengthening economy. I don't do you think it's that?
• 7:21
  Speaker 1: I do? I do? I think that Listen, nominal GDP
• 7:27
  Speaker 1: growth this year should be somewhere, in our opinion, between
• 7:30
  Speaker 1: five and six percent, and um generally speaking, in the
• 7:34
  Speaker 1: past tenor treasury yields are roughly a word UH nominal
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  Speaker 1: GDP growth is so in my opinion, we've been much
• 7:41
  Speaker 1: lower than that for variety of reasons. A lot of
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  Speaker 1: it has to do with financial oppression in the propensity
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  Speaker 1: and the other times of banks propensity to buy treasuries.
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  Speaker 1: But I think to the extent to which we're normalizing
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  Speaker 1: interest rates, it would be natural for interest rates to
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  Speaker 1: move higher. Jason, I want to push back a little bit.
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  Speaker 1: Some people are arguing that the reason why US treasure
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  Speaker 1: yields are rising so rapidly on the longer end right
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  Speaker 1: now has to do with oil oil prices at their
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  Speaker 1: highest since two thousand four, and arguably that could crimp
• 8:12
  Speaker 1: growth in the US. No, it could, um, it could,
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  Speaker 1: But you also I think, UM, there's also the physical stimulus, which,
• 8:21
  Speaker 1: in my opinion, for whatever reason, I'm not quite sure
• 8:23
  Speaker 1: why people have UM stop talking about it but or
• 8:29
  Speaker 1: um or have written it off. But in my opinion,
• 8:31
  Speaker 1: the fiscal stimulus that's likely to hit the economy this
• 8:34
  Speaker 1: year UH is very large and should increase real GDP
• 8:40
  Speaker 1: growth by fifty to seventy five basis points, so you'd
• 8:43
  Speaker 1: have something well over well over three reel this year,
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  Speaker 1: plus you have somewhat stronger wages um because there was
• 8:51
  Speaker 1: someone stronger wage growth as well, So energy would be
• 8:55
  Speaker 1: an offset. That's shoot, your trade might be a little
• 8:57
  Speaker 1: bit of an offset. But I think if you a
• 9:01
  Speaker 1: counterbalance of that would be the enormous fiscal stimulus that's
• 9:04
  Speaker 1: that's coming down the pike. So good for stock prices, Jason,
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  Speaker 1: I think so, I know. I certainly don't think it's
• 9:11
  Speaker 1: inconsistent with with with stronger stock prices and maybe someone
• 9:16
  Speaker 1: inconsistent with an expansion of earnings multiples. I think that
• 9:20
  Speaker 1: you know that is a distinction, in my opinion. Over
• 9:23
  Speaker 1: since the financial crisis, you've had a situation where financial
• 9:27
  Speaker 1: assets greatly outperformed the real economy, and in my opinion,
• 9:31
  Speaker 1: we're going back to a period now where the real
• 9:34
  Speaker 1: economy is likely to outperform the financial assets of financial markets.
• 9:38
  Speaker 1: There's another way of saying, you're not gonna get big
• 9:40
  Speaker 1: multiple expansion. Earnings will grow but um, but the market
• 9:44
  Speaker 1: will probably grow more in line with what earnings grows.
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  Speaker 1: Is as opposed to two thousand, fourteen, fifteen and sixteen
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  Speaker 1: earnings were flat on a nominal basis at around a
• 9:55
  Speaker 1: hundred and eighteen dollars and um, and yet the market
• 9:59
  Speaker 1: continue need to rise. And I think here you're going
• 10:02
  Speaker 1: to different, You're going to a little bit of a
• 10:04
  Speaker 1: different paradigm. So don't be don't be surprised if you
• 10:08
  Speaker 1: see a flat stock market but good economic reports from
• 10:12
  Speaker 1: the United States. Yeah, I mean, I think my own
• 10:15
  Speaker 1: opinion is that the market will probably be up somewhere
• 10:17
  Speaker 1: in the order of seven to eight percent this year
• 10:21
  Speaker 1: in terms of price return, maybe another two percent for
• 10:24
  Speaker 1: for dividends, so you might get something close to double digits,
• 10:27
  Speaker 1: but earnings will be up much more meaningfully than that.
• 10:30
  Speaker 1: Earnings could be up. Earnings the first quarter will be
• 10:32
  Speaker 1: up probably somewhere around and so UM. So the idea
• 10:38
  Speaker 1: is that earnings growth the market will be up probably
• 10:40
  Speaker 1: around in line, if not a little bit less than
• 10:42
  Speaker 1: what earnings growth is probably for the foreseeable future, as
• 10:46
  Speaker 1: long as interest rates are rising. What metric are you
• 10:49
  Speaker 1: looking at to uh to see if you're right with
• 10:51
  Speaker 1: this thesis, Well, I think earnings are one of the
• 10:56
  Speaker 1: earnings are probably one of the better better things to
• 11:00
  Speaker 1: looked at, and just the performance um of the market.
• 11:04
  Speaker 1: I think those would be the primary primary things to
• 11:07
  Speaker 1: look at. I find there's a lot of skepticism about UM,
• 11:12
  Speaker 1: about the potential for the economy to do better. I'm
• 11:15
  Speaker 1: not quite sure why earnings recessions are twice as likely
• 11:20
  Speaker 1: as as economic recessions. And while there have been earnings
• 11:24
  Speaker 1: recessions that we're not accompanied by an economic recession, you've
• 11:28
  Speaker 1: never had an economic recession that was accompanied by stronger
• 11:32
  Speaker 1: earnings and so uh. In my opinion, the most meaningful
• 11:37
  Speaker 1: thing to look at with regard to the efficacy of
• 11:41
  Speaker 1: the fiscal stimulus that was passed would really be capital spending.
• 11:44
  Speaker 1: And I think capital spending is just the policy legs
• 11:47
  Speaker 1: are long and variable, and it takes a while, and
• 11:50
  Speaker 1: I think in the immediacy of our environment, we we
• 11:54
  Speaker 1: tend to expect things to happen all at once. And
• 11:58
  Speaker 1: and again, the tax pack was was only past three
• 12:01
  Speaker 1: and a half months ago, so I think it's gonna
• 12:03
  Speaker 1: take a little time for capital spending to show up UM,
• 12:06
  Speaker 1: and I think now you probably should so arche to
• 12:09
  Speaker 1: see consumer spending pick up as well. Jason, you've written
• 12:12
  Speaker 1: in the past that Donald Trump is under owned. What
• 12:15
  Speaker 1: do you mean by that and does that still true? Well, yeah,
• 12:18
  Speaker 1: we had written, you know, uh back to two thousand.
• 12:21
  Speaker 1: In two thousand and eleven, we actually wrote a piece
• 12:25
  Speaker 1: about the potential appeal of Donald Trump as a political
• 12:29
  Speaker 1: candidate when he flirted with running, and then in two
• 12:31
  Speaker 1: thousand and fifteen when he announced for president, we we
• 12:35
  Speaker 1: uh suggested that he had a shot of winning, and
• 12:38
  Speaker 1: then after he one, we suggested it would be good
• 12:41
  Speaker 1: for the markets, and so um, you know, became less
• 12:46
  Speaker 1: and less crazy as time went on. It's it's still
• 12:49
  Speaker 1: you know, it seems kind of crazy. But the idea
• 12:51
  Speaker 1: of Donald Trump being under own really we wrote that
• 12:53
  Speaker 1: last last summer, and it had to do with the
• 12:56
  Speaker 1: fiscal stimulus. Uh. You know, we had found that certainly
• 12:59
  Speaker 1: the administration had a rough spot at the beginning, or
• 13:01
  Speaker 1: continues to have some rough spots, clearly, but with regard
• 13:04
  Speaker 1: to its legislative agenda and particularly healthcare, and I think
• 13:08
  Speaker 1: as a result, people were quite skeptical that anything could
• 13:11
  Speaker 1: get done as far as tax reform was concerned, and
• 13:15
  Speaker 1: we were we were of the view that that idea
• 13:17
  Speaker 1: was very much under owned, that there there was a
• 13:19
  Speaker 1: very good chance of tax reform getting getting through and
• 13:23
  Speaker 1: it and it did, and of course you also have
• 13:25
  Speaker 1: regulatory reform, regulatory easing, particularly as it relates to the
• 13:29
  Speaker 1: financial sector, which again in our opinion, is probably being
• 13:34
  Speaker 1: underestimated in terms of its potential impact on the velocity
• 13:38
  Speaker 1: of money. Uh, there's there are a lot of reserves
• 13:40
  Speaker 1: in the system, but the velocity of money has been
• 13:42
  Speaker 1: weak really since the financial crisis. I gotta leave it there,
• 13:46
  Speaker 1: but thanks very much for being with As Jason Trenter
• 13:48
  Speaker 1: is managing partner, chairman and chief executive of Strategous Research Partners.
• 14:07
  Speaker 1: We have been talking about what a big rash of
• 14:09
  Speaker 1: earnings we are getting this week. The biotechnology as area
• 14:14
  Speaker 1: is similarly seeing some pretty big earnings here with us
• 14:18
  Speaker 1: to walk us through them. As Max Nissan, biotech, pharma
• 14:20
  Speaker 1: and healthcare columnist for Bloomberg gad Fly, So, I want
• 14:23
  Speaker 1: to start with the earnings. We got results already from Eli,
• 14:26
  Speaker 1: Lily UH, and Biogen so far today they were kind
• 14:29
  Speaker 1: of mixed. Both companies are seeing their shares down. We're
• 14:32
  Speaker 1: expecting Amgen earnings after the bell. What stands out to
• 14:35
  Speaker 1: you so far? Yeah? Absolutely, um So. The thing about
• 14:38
  Speaker 1: Biogen that I think kind of sparked the negative reaction
• 14:42
  Speaker 1: is that sales disappointed for spin Raza, which is a
• 14:46
  Speaker 1: drug it kind of got recently approved for a rare
• 14:49
  Speaker 1: uh a rare new neurodegenerative condition. It's been launching extraordinarily well,
• 14:54
  Speaker 1: but in this quarter I grew sales by only a
• 14:57
  Speaker 1: million sequentially. It's because of of a strange dynamic with
• 15:01
  Speaker 1: that particular drug where patients start on the drug, they
• 15:04
  Speaker 1: take a lot of it, and they graduate to a
• 15:07
  Speaker 1: more kind of gradual intermittent dosage. This is something that
• 15:11
  Speaker 1: was known, but to kind of just see it was
• 15:13
  Speaker 1: a bit of a shock and in the broader context
• 15:16
  Speaker 1: of the company where they have a declining older set
• 15:19
  Speaker 1: of multiple scrossest drugs, it's just sort of scary to
• 15:22
  Speaker 1: see and and puts pressure on them to maybe do
• 15:24
  Speaker 1: a deal or find some more in the pipeline. Didn't
• 15:27
  Speaker 1: they have a deal though, I believe with I Honest Pharmaceuticals. Yeah,
• 15:30
  Speaker 1: so that was actually the original developer of spin Raza,
• 15:34
  Speaker 1: and um, you know, it's a decent sized deal. It
• 15:36
  Speaker 1: it gives them more access to that company's pipeline of medicines.
• 15:40
  Speaker 1: But they're sort of hoping for for lightning to strike twice,
• 15:43
  Speaker 1: you know, before spin Raza, I unders had a pretty
• 15:46
  Speaker 1: long history of drug development failures, and um, you know,
• 15:49
  Speaker 1: they might get another spin Raza, but that's kind of
• 15:52
  Speaker 1: the extreme optimists case there are. The more likely is
• 15:55
  Speaker 1: that that they'll either get nothing or or something of
• 15:58
  Speaker 1: a little bit less value. You So, I want to
• 16:01
  Speaker 1: talk about Eli Lily as well, because they boosted their
• 16:03
  Speaker 1: full year revenue forecast and it was two above estimates,
• 16:07
  Speaker 1: and yet the shares are down. I don't get it why. Um,
• 16:11
  Speaker 1: you know, I think it might be to some extent
• 16:13
  Speaker 1: because that beat came in large part from the company's
• 16:17
  Speaker 1: diabetes franchise, and that's just sort of a scary thing
• 16:21
  Speaker 1: to rely on given the amount of price pressure and
• 16:24
  Speaker 1: competitiveness in that particular sector of the market. Also, the
• 16:29
  Speaker 1: companies is pretty heavily our investors, at least are heavily
• 16:33
  Speaker 1: watching an upcoming trial of one of its diabetes medicines,
• 16:36
  Speaker 1: which is going head to head with really good data
• 16:38
  Speaker 1: from the arrival Novo Nordis treatment. If it doesn't measure up,
• 16:42
  Speaker 1: things will go from you know, kind of nerve wracking.
• 16:46
  Speaker 1: It's it's truly scary for what's the company's most important franchise,
• 16:50
  Speaker 1: UM does to Kada need the deal we're shifting to
• 16:54
  Speaker 1: Shire and yeah, six right, I mean, why do they
• 17:00
  Speaker 1: need to do this. I think that the CEO, Christopher Webber,
• 17:05
  Speaker 1: is probably feeling some degree of pressure in that shares
• 17:09
  Speaker 1: of the company are kind of flat um during his tenure,
• 17:13
  Speaker 1: and the company lacks really any easily identifiable catalysts or
• 17:19
  Speaker 1: drugs in the pipeline that might give it some upside.
• 17:22
  Speaker 1: So this is kind of the biggest and boldest of
• 17:25
  Speaker 1: of possible ways that they might go about this. Whether
• 17:28
  Speaker 1: this is the right way to go about it is
• 17:30
  Speaker 1: is another question, um, you know, because they're they're likely
• 17:33
  Speaker 1: going to have to deliver an improved price even on
• 17:36
  Speaker 1: what we've seen so far, which means an incredible amount
• 17:38
  Speaker 1: of debt and a highly dilutive deal for for shareholders.
• 17:43
  Speaker 1: There's a lot of risk and and it's for Shire,
• 17:46
  Speaker 1: which you know, even though the company is at a
• 17:48
  Speaker 1: discount to what it might have fetched in the past,
• 17:51
  Speaker 1: there are reasons for that. There are risks to as
• 17:53
  Speaker 1: team Ophilia franchise and to its pipeline as well. You know,
• 17:56
  Speaker 1: it would have to really really outperform on the pipeline.
• 18:00
  Speaker 1: I'd uh to justify this price. So so it's big risk,
• 18:03
  Speaker 1: even if it is theoretically at least worth it to
• 18:06
  Speaker 1: for Takeda to make a spplash. So the latest on
• 18:09
  Speaker 1: this is that Shire is studying a new takeover bid
• 18:12
  Speaker 1: from Takeda that already have been four snubs and another
• 18:16
  Speaker 1: suitor that has come in uh to possibly do something
• 18:19
  Speaker 1: here and then quickly backed up Takeda shares down, Shire
• 18:23
  Speaker 1: shares up. I thought it was interesting Max just quickly
• 18:26
  Speaker 1: that some of the rating agencies are looking at possibly
• 18:29
  Speaker 1: downgrading Takeda if they did go through with this deal. Yeah,
• 18:33
  Speaker 1: and that's not a surprise. I mean Takeda is about
• 18:37
  Speaker 1: the same size as or a little smaller than Shire.
• 18:40
  Speaker 1: And then in addition to the death that it would
• 18:41
  Speaker 1: be taking on in this transaction, which could be up
• 18:45
  Speaker 1: to even from from levels that we thought previously, if
• 18:47
  Speaker 1: they're raising the the price, they're also taking out a
• 18:50
  Speaker 1: substantial deadload from from Shire, which spent big on back
• 18:54
  Speaker 1: Salta a couple of years back. So, um, it's definitely
• 18:58
  Speaker 1: comes with some financial RISKSK And um, you know, they
• 19:02
  Speaker 1: they may raise the price. I know, if they'll have
• 19:04
  Speaker 1: to raise it that much to get this deal done. Um,
• 19:07
  Speaker 1: you know at the end of the day. Shire was
• 19:09
  Speaker 1: trading around thirty pounds just a few weeks or months ago,
• 19:13
  Speaker 1: and this has at a substantial premium to that. So
• 19:15
  Speaker 1: even if it's more of a stock component that they
• 19:17
  Speaker 1: might like and becomes tricky because some people don't want
• 19:21
  Speaker 1: to own Japanese shares, it's still a pretty good option
• 19:24
  Speaker 1: for for Shire at least, and they can still kind
• 19:27
  Speaker 1: of hold out hope that someone will scoop in with
• 19:29
  Speaker 1: a better, more cash ret option and then have this
• 19:32
  Speaker 1: kind of sitting on the back burner, which is not
• 19:33
  Speaker 1: the worst outcome. Thanks very much. Max Neeson, Bloomberg gad Fly,
• 19:37
  Speaker 1: commist all Things Healthcare much appreciated the shares of Alphabet,
• 19:54
  Speaker 1: the parent company of Google. They are lower by about
• 19:56
  Speaker 1: four and a half percent after the company reports results
• 19:59
  Speaker 1: that exceed need analysts estimates yesterday after the market close.
• 20:03
  Speaker 1: But seven point three billion dollars that may be giving
• 20:08
  Speaker 1: some investors pause. That's how much the company is spending
• 20:11
  Speaker 1: on a variety of ventures. And here to tell us
• 20:13
  Speaker 1: more about the company is Alex were Bloomberg Gadfly calumnists
• 20:16
  Speaker 1: covering technology. Alex thanks very much for being with us.
• 20:20
  Speaker 1: Give us your reaction and your analysis of the report
• 20:23
  Speaker 1: from Alphabet, it seems to be a sort of task
• 20:26
  Speaker 1: admission that they recognize that there's the potential for headwinds
• 20:30
  Speaker 1: coming up. They clearly see regulatory pressure being exerted on Facebook.
• 20:34
  Speaker 1: They have a very similar model to Facebook. They can
• 20:37
  Speaker 1: target adds that people based on the data they have
• 20:40
  Speaker 1: on those people and so ensuring that they are owning
• 20:44
  Speaker 1: the interaction with the customer through that their own made,
• 20:47
  Speaker 1: self made mobile phones and some in the form of
• 20:50
  Speaker 1: the pixel is one thing. And investing in the real
• 20:53
  Speaker 1: infrastructure of the web, cloud computing network, cabling those sort
• 20:57
  Speaker 1: of ideas they that helps build a backbone of data
• 21:01
  Speaker 1: which can help support their business. Alex, can you help
• 21:04
  Speaker 1: me understand something I can do my best? Please do?
• 21:07
  Speaker 1: Alphabet posted the strongest sales growth in almost four years yesterday.
• 21:13
  Speaker 1: The initial response was positive, The initial response in pre
• 21:16
  Speaker 1: trading this morning was positive, and then close to around
• 21:21
  Speaker 1: eight a m. The shares tanked. Why suddenly do the
• 21:24
  Speaker 1: investors start to get nervous about alphabets spending? Because yes,
• 21:29
  Speaker 1: they are going to be spending a substantial amount more
• 21:32
  Speaker 1: and tripled their capital expenditure for the quarter to seven
• 21:35
  Speaker 1: point seven billion. Why was this suddenly such a concern?
• 21:38
  Speaker 1: I mean, this sounds like such a cop out as
• 21:40
  Speaker 1: an answer, but I wouldn't put it. I mean, i'd
• 21:43
  Speaker 1: wager that it's just profit taking. You know, you quite
• 21:45
  Speaker 1: often see this with the big text docs when they
• 21:47
  Speaker 1: have a really good quarter. UM people sense that as
• 21:50
  Speaker 1: a good opportunity to get out, particularly they've been on
• 21:52
  Speaker 1: a tear of late, and and you know that there's
• 21:55
  Speaker 1: a very good chance that's what's happened with Google. I
• 21:57
  Speaker 1: haven't seen the volumes, which probably would be more indicative
• 21:59
  Speaker 1: of that, but I wouldn't be surprised if that is
• 22:02
  Speaker 1: the reason. Equally, as I said, you know, Google is
• 22:04
  Speaker 1: recognizing that down the line they do have challenges coming up,
• 22:07
  Speaker 1: and so if I were to give the non cop
• 22:08
  Speaker 1: out answer, it might be on that basis, but I
• 22:10
  Speaker 1: think that's less likely. But if that's the case, isn't
• 22:12
  Speaker 1: it a positive that they're actually spending on diversifying their business.
• 22:17
  Speaker 1: Wouldn't that be uh something that shareholders should cheer. Yeah? Absolutely.
• 22:23
  Speaker 1: But there were some some analyst notes this morning saying
• 22:26
  Speaker 1: that UM they expect some volatility in the margins going forward.
• 22:30
  Speaker 1: The margin dropped the operating margin dropped from them, which is,
• 22:35
  Speaker 1: you know, that's clearly a big drop off. And if
• 22:38
  Speaker 1: they're anticipating that sort of um lack of consistency was
• 22:42
  Speaker 1: going to become a trend, that perhaps means that people
• 22:45
  Speaker 1: expecting you know, stability in the stock um are therefore
• 22:48
  Speaker 1: prime to get out of it. Is it worth noting
• 22:51
  Speaker 1: that a lot of the expense two point four billion
• 22:54
  Speaker 1: of it? I believe it's the purchase the Chelsea Market
• 22:57
  Speaker 1: Building headquarters in New York City for a goop for
• 23:00
  Speaker 1: it is worth noting that. But equally, even without that,
• 23:03
  Speaker 1: they're spending doubles, you know, so it's still it's still
• 23:08
  Speaker 1: a substantial increase. Uh, I mean, frankly something like that.
• 23:11
  Speaker 1: It seems like a not want to predict the housing
• 23:15
  Speaker 1: market or the property market in New York, but that's
• 23:17
  Speaker 1: always going to be a prime property and seems you know,
• 23:20
  Speaker 1: pretty sound investment, particularly if they intend to keep attracting
• 23:23
  Speaker 1: top talent which likes to live in a big metropolis.
• 23:25
  Speaker 1: Another area that investors are showing increasing queaziness about is
• 23:30
  Speaker 1: with Apple and increasing predictions that the supercycle of cell
• 23:35
  Speaker 1: phones and smartphones is dead. Why is this now a
• 23:40
  Speaker 1: theme since we've known this for years now. Well, it's
• 23:45
  Speaker 1: more the fact that last year, heading into the iPhone
• 23:48
  Speaker 1: ten cycle, there was some hope, or at least expectation,
• 23:51
  Speaker 1: or at least hope, I should say, that this would
• 23:53
  Speaker 1: be another supercycle. The iPhone six is with the last
• 23:56
  Speaker 1: supercycle that was a generation of phones which spurred you know,
• 24:00
  Speaker 1: really stratospheric growth numbers and uh and it carried on
• 24:04
  Speaker 1: for two or three years. There was a hope that
• 24:06
  Speaker 1: this would be kicked off again with the iPhone turn.
• 24:08
  Speaker 1: So far that absolutely has not materialized. And the Christmas numbers,
• 24:13
  Speaker 1: the moments in the Christmas quarter were okay, the sales
• 24:16
  Speaker 1: numbers were The actual unit sales numbers weren't great, but
• 24:19
  Speaker 1: Apple was able to squeeze more dollars out of every phone,
• 24:22
  Speaker 1: and so the the revenue number continued to grow. The
• 24:26
  Speaker 1: big question mark was going to be over this March quarter.
• 24:28
  Speaker 1: To what extent does appetite for the iPhone turn hold up.
• 24:31
  Speaker 1: That clearly hasn't proven to be the case, it seems,
• 24:34
  Speaker 1: judging by how what the suppliers are saying today. It
• 24:37
  Speaker 1: was a MS, an Austrian company which makes a lot
• 24:41
  Speaker 1: of the components going into the three D censors, and um,
• 24:45
  Speaker 1: they have said that they've got capacity which is being
• 24:48
  Speaker 1: unused in Singapore right now, or an asiable baldy right now.
• 24:52
  Speaker 1: And each chance that the new screen technology is going
• 24:54
  Speaker 1: to revive people's interest in getting a new phone. I mean,
• 24:58
  Speaker 1: my take is no, the new screen technology. Was Mark
• 25:02
  Speaker 1: German I think, referring to his scoop a few weeks ago,
• 25:04
  Speaker 1: that Apple is developing, Well, you know who is the
• 25:06
  Speaker 1: leader in screen technology right now, it's Samsung. Apple buys
• 25:09
  Speaker 1: most of this stuff from Samsung. So it's the extent
• 25:11
  Speaker 1: to which Apple is able to introduce new stuff. By
• 25:13
  Speaker 1: the time it comes to market, the odds are it
• 25:15
  Speaker 1: is going to be catching up with what Samsung has already,
• 25:18
  Speaker 1: So they seem to be behind the curve on this front. Um,
• 25:23
  Speaker 1: I don't know if you know anyone who said that
• 25:24
  Speaker 1: they bought the iPhone ten because it had an old screen.
• 25:28
  Speaker 1: You if you, I think if you've got to those
• 25:30
  Speaker 1: people on the street and you asked what a od
• 25:31
  Speaker 1: led screen is, they would have not the foggiest idea. Um,
• 25:34
  Speaker 1: it's something that the fan boys really like, but those
• 25:36
  Speaker 1: guys are going to buy a phone anyway, so it
• 25:38
  Speaker 1: doesn't seem to be a massive differentiated to me. Alex Web,
• 25:41
  Speaker 1: thank you so much for being with us. Alex Web,
• 25:44
  Speaker 1: European technology columnist for Bloomberg gad Fly. Thanks for listening
• 25:51
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 25:54
  Speaker 1: and listen to interviews at Apple Podcast, SoundCloud, or whatever
• 25:58
  Speaker 1: podcast platform you prefer. I'm pim Fox. I'm on Twitter
• 26:02
  Speaker 1: at pim Fox. I'm on Twitter at Lisa abramoits one
• 26:06
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• 26:08
  Speaker 1: Bloomberg Radio