100-Year Bonds Could Alter How Rate Risk Is Traded

at Bloomberg dot com. Every six months or so, the debate about whether the U s should sell fifty two a hundred year bonds emerges, and once again we have that battle raging, Treasury Secretary Steve Manuchin weighing in and saying that it seemed really like a logical thing to do for the US to sell ultralong dated bonds in the face of just how low interest rates have gone, and his advisers are looking into it and are expected

to recommend against it. But Paul, it really raises this question, you know, again and again, what is the hold up? If the borrowing costs are so low, and if the hold up is that compelling, why do we have this debate every six months? Joining us at a discussed Marcus Ashworth columnists covering European markets, as well as bond markets

globally for Bloomberg opinion joining us from London. So Marcus, let's just start with why did Treasury Secretary Stephen mcnuchin revive this debate that seems to sort of bubble up every six months or so because he was told to

behind you, behind you, behind the curtain. Who knows? Um. The great thing is is that the Treasury Borrowing Advisory Committee the key word they're being advisory m keeps on trying to push this back because look, and I've been a years Treasury pod dealer, and it's difficult enough trying to trade thirty years. Can you imagine trying to trade

hundred years or even stripped hundred years. All of a sudden someone comes along lets you out of five hundred million, you have no hope of getting them back, and cleep paying five points higher. It's a disaster to try and manage this type of risk from a dealer market maker put point of view. They know also that of a client buys this stuff, they're gonna look it away not come back for what hundred years, So you know it kills liquidity, it kills their sense of controlling risk. It can,

of course created a whole bunch of other stuff. I mean, look, to make this sort of sector work, you'd have to have hundred your futures, uh and options and all after other stuff. It could be great, It could really stretch the way that the people trade risk and trade duration convexity, and it could do all sorts of things. But the U. S. Treasury has to be committed to it for a longer term clear plan. This trouble is that Trump could be out of office in little every years time and then

new treasure secretary could do the opposite. So that's what scares people, because you know, once you go down this route, you've got to stay committed to it and there has to be a rational reason for it. Now they can be wrong. Yield are incredibly low. It makes sense for as far as the government's concerned. But you have to

have your client base and pensions funds with you. And though they may be in Europe and sent in the UK because of actual eril and different reasons, there's less demand and requirement in the US because you already have strip thirty years, which give you a duration of final exactly thirty years. Its coomed to a fifty year regular bond, so there's less real need for it. But still this

is a government intent on doing different things. So Marcus, are there other developed markets that have longer dated bonds years and can we take anything away from those? Sure? Okay, Look so in Europe, Germany doesn't go over thirty years. Um, we were starting to see other countries around it go there. So we know austri has done a one hundred year bond, uh, Italy has done a fifty year bond, tapped it again, um,

France has done fifty years. UK goes out as far as as fifty years, Sweden's about to look at possibly doing a hundred years, Ireland in Belgium just a private places the last couple of years in one hundred years. But they're so like one offs, so they really and you can look at maybe Italy toward certain degree, UK definitely and possibly France of having any form of liquidity

further out. But it's becoming more and more popular because there is a huge, huge hunt for yield in your much more extreme than you see in your in the US.

And then you're on it's definitely there. But but Marcus, I mean, how much is the obstacle for the US, the fact that US rates are such an important benchmark, and that you know, a shift in the whole curve creates a much more challenging situation than say in some of these nations in Europe that where there's more of a composite type rate that is sort of the benchmark

for a lot of other debt. In other words, it won't matter as much to the whole structure of of a huge debt market if they issue longer dated debt as it would in the US. Lisa, you've clearly been doing bonds and fixes quite a while. Spots on exactly right, and that is that is the number of the argument. I couldn't put it better. You know, look it does he cares if Ireland does it all think good for them Austria. Likewise, that the reason why Germany hasn't done it.

Perhaps in Europe they don't really need the money and that all and not have the potential sort of liquidity out there. And this is that this is exactly the point. If you go out to a hundred years, you've got to be convinced it's it's it's a worthwhile thing. There is huge demand for it, and it's gonna be sudden, it's hangs around, and you're gonna be able to issue them courtly, you know, for decent amounts of money, and you're gonna be able to create a features market and

blah blah blah. You are the world's interest rate benstion mark. Do you mess with that? At your peril? You have a fantastic thirty liquid um bond which has strips off it, which has tips off it, It's everything works perfectly. Why mess for something which is perfection in liquidity terms? And and you know for what benefit? Yeah? Okay, I get the point that it's looking at very low rates for a long, very long while. But you know, thirty years

not enough here, alright. So my my, my takeaway, Lisa's Marcus is not a big fan of Nike, unlikely want to trade it. I will never want to be you know. Please make me make me a market a hundred million Marcus Ashur, thank you so much for joining us. Marcus is the Calamus covering European markets for Bloomberg Opinion from London. You can read more on this and other stories from Bloomberg Opinion at Bloomberg dot com, slash Opinion and on

the terminotorl by typing O P I n go. Well, as investors come back next week from the long holiday weekend, they're gonna take a look at their portfolios and they're gonna say, hey, we're ten plus years into this economic cycle. Trade uncertainty is out there weighing on my portfolio. But I've got a dubbish fed What should I do? Uh?

Maybe to get some answers, we welcome our next guest, Deepak Puri, chief investment Officer for the Americas for Deutsche Bank Wealth Management, joins us here in O Bloomberg Interacted Broker Studio. Deepak, thanks so much for joining us. So again, we kind of look at the SMP and it's kind of flat over the last twelve months. We've had a great rally this year, but again if you look at

it over the trailing twelve months, kind of flat. What are you telling the Deutsche Bank Wealth investors how should be position a portfolio right now? Great? Thank you, Paul. I think a couple of things. A what we have seen over the last one year, especially year to date is primarily driven by what we would call a PE expansion. You know, it's not really driven by corporate earnings going up, so keep that in mind as you've positioned yourself for

the next few quarters. Um. Having said that, I think there's certain things for the next couple of months that makes us take a little bit of a cautious stance. You know, you look at the trade war that's going on. Even though there was an olive branch yesterday from the Chinese, we feel this is a you know, protracted sort of give and take one step forward, two steps back kind of situation, and we really don't expect a comprehensive trade

deal anytime soon. On top of that, the next couple of quarters, the third quarter is going to be by far the worst quarter for this calendar year, for the earning season, and then the fourth quarter could be the low watermark for the g d P. So the next couple of course, are definitely something to keep an eye on. Having said that, I think a longer term, uh, you know, things look much better for equities, especially we haven't seen

a top. You know, when you look at how the equity markets end, they usually end up with the bank. You know, last twelve months, as you just pointed out, has been relatively flattished. So this is not really a very top heavy kind of an equity market. We still see legs in this markets are twelve month forecast remains around three thousand, but that is primarily drivened by a little bit better earnings than a pe expansion that we

have seen them more recently. One counterpoint is that a lot of the bearishness that you talk about has been baked into valuations currently, and we've seen a sell off that really has stemmed from the recognition of some of those pesstomistic kind of developments that you were talking about. Bank of America came out this morning and recommends buying stocks right now because they say that the bearishness has gotten so extreme that it makes sense. What do you

day to that. I wouldn't say that the bearishness is to an extreme. I think there's you know, and you have to take into account what the other asset classes are telling your signaling. So I think the bearishness is really at an extreme. When you look at the fixed income markets, you know, they are really highlighting a really pessimistic scenario for the for inflation, for growth, and so forth.

On the equity market side, you know, currently you're trading at seventeen eighteen times multiple, which is to my mind, is pretty much where it should be. Um. You know, when you look at how to assign a PE multiple on markets, you have to look at both what I would call structural forces at play and then the technical trend. The cyclical trend is what we call earning s curve.

You know, there's a lot of talk about yield curves and yield curve inversion, but I see a lot less focus on earning s curve, which is simply put next twelve month earning, subtracting the trailing twelve months earning, and what's the trajectory for that earning scurve? And that still is positive. So that's a I think to extent a positive take on the PE. On the other side, when you look at the more structural forces at work, that

could be a little bit of a downside. UM. So that is, you know, you're looking at inflation, prognosis and so forth. So overall, that seventeen and a half multiple seems reasonably fair to us, and that's what we're saying that for the next round months it stays where it's at. UM. I would be recommending a little bit of an underweight position to your neutral at this stage, given the next couple of quarters could be a little bit shaky, as

I said earlier. So you know, if you have a fifty percent neutral allocation to equity, maybe this is the time you take some profits of the table markets are up fifteen sixt and reallocate or keep some extra money in cash. So in your scenario, in your outlook for the markets, how aggressive do you think the Fed is going to be and how aggressive do you think they

need to be to kind of support your outlook. So I think there is a little bit of a disconnect in terms of what the FED futures market is saying and what the reality is. You know, you look at the numbers, especially from the consumers coming in yesterday today. You know, yesterday's the revision on the GDP side. You know, you see the consumer spending number at four point seven multi year high. This morning we saw the core pc

E number, you know, inching a little bit upwards. I think the FED has has to act given the Jackson Old speech and also the preemptive insurance rate cut that they started the July meeting with UM so they probably go for a cut here in September meeting. But after that, I think the incoming data dictates and um, you know, our viewers to rate cuts for the next twelve months, which is a little bit uh, you know, not as

aggressive at what the STEAD is expecting. And primarily our take is dependent on the fact that we see consuming a much better health than what the FED is looking at. I think the FED is very myopically looking at and it's maybe not asthmiopic, but they're really concerned about the overseas market. You know, what's the other central banks doing the manufacturing slump in the global economy, and that's creating

some level of anxiety. On top of that the trade war that has the potential of really you know, having a second, a third derivative effect that no one really has the policy measures to counteract. So I think that's really where the FED comes into play. But we still think of this as a sort of an insurance policy cut phase. So two to three rate cuts or all similar to and not really start off an easing cycle, which would be two thousand, two thousand two or two

thousand eight. Deepa poor thank you so much for being with us. Debak Pouri is chief investment officer for the America's at Deutsche Bank Wealth Management joining us here in our Bloomberg Inactive broker studios, talking about a bit of cautiousness heading into the next few months. Right now, we're seeing a bit of cautiousness clawing back some of the earlier games that we saw in the US equities nazdac up now just four basis points, so almost flat on

the day after starting solidly in the green. We are seeing bond yields coming off their earlier highs as well. It seems like people are getting a little more skeptical ahead of trade talks this weekend. Art investing should it be a part of your portfolio? Our next guest thinks maybe it should be. Dr Carvey Manus. He is an art collector, board member of the namesake and the namesake of the Manace Art and Education Center at the Nassau County Museum of Art. Dr Manis, thanks so much for

joining us here in a Bloomberg Interactive broker studio. So again, we've heard about it from time, like when I think about investing in art, I think about these big hedge fund managers going out and spending you know, gazillions of dollars on art. Do you think it should be part of maybe the average investors portfolio. Well, thank you for inviting me, and uh, I think it's a good a

good investment. As a matter of fact, that the Wall Street Journal came out a couple of months ago stating that art was the best investment for two thousand eighteen. Art work was up uh ten point six percent while the SMP was down five And through the years, art has been quite a good investment. I've been collecting for over forty years and I've I've purchased pieces that were let's say one thousand, five thousand, ten thousand, and they've

increased twenty and thirtyfold. And during uh good times, people have money and they can they can buy art. And and if you look at the graph of prices of art, it continues to rise. Very rarely does it go down. All right, let's let's start with how you got into this in the first place. You're an orthopedic surgeon by day, investor by night, and then perhaps if you have a few then your back at your carpentry roots. So how did you get into this sort of art in casting world? Well,

I always love art. As a as a child, I would my father would take me to the Brooklyn Museum. And uh, I I lived in a kind of a rough area, a rough neighborhood. It was Crown Heights, and uh, and my friends were not interested in museums. Nobody around they was interested in museums except when my father would take me. I loved looking around at the old Masters and the Impressionists and and and the different paintings. I

just loved art. And when I went to college, I was a pre med major, but I actually majored in art history. So I took a lot of art history classes. Uh. Then when I finished medical school and I was able to save a few shekels, I started buying art. So how would you suggest that someone gets started in the art business and the kind of art investing in art? Okay, that's a very good question. There are many anyways to buy art. You can buy art at the auctions, you

can buy at galleries art fairs, you can buy online. Now, buying online is is a very good venue. Uh. And you don't have to spend a lot of money. Of course, you can spend hundreds of millions like some of the Matisse and Picassos. And actually, couldn't excuse me that you who bought that the Da Vinci looked like that person a little bit back at my records. Anyway, carryout, so

you can buy a lithograph. A lithograph, let's say, from Chicalo, Picasso, famous artists that I just happened to mention, could be between one thousand and a hundred thousand. So if you have a you know, just a few thousand dollars to invest, buy a litho from one of the famous artists. Now, Uh, there are certain parts of an areas of art that go up faster than other areas. So we have the old masters that increase in value maybe four or five

percent a year. We have the modern artists like Picasso and Uh and Jay and Dolly that increase in value I don't know, six seven, eight percent per year. And then you have the contemporary. The contemporary market is hot, as am I llowed to say hell and say that is really hot. And we have artists like Damien Hurst and Jeff Coon's and especially well Walhole Lichtenstein. The pop artists are still very hot, but the graffiti artists are

doing amazingly well. Artists like Basku, Yacht, Keith, Harry, Kenny Scharff, Uh, and now fellow called cause k A W S they are so hot. Uh. You buy a piece now and within a year or two it they will definitely increase in value. So if you if it, let's say it's not one of the top names. How do you determine whether something's good? Also a good question. First of all, you're gonna this is a collection, and you have to really like what you buy. You just can't buy because

you think it's an investment. You're gonna have to hold onto these pieces for a while. It's not a flip type of thing. Let's say like real estate or or stocks. You have to hold onto it so you're gonna live with it. So you have to find a piece that you really like, uh, the color of the design, whatever, a piece that you like. Then and then as far as I'm sorry, what what I but how did you know? I was thinking? I'm just thinking about you know, if you ask, you asked the dealer, you you asked the

auction house, You get prices, you do due diligence. You do your due diligence. Go online, put the artist name in. Let's say the artist is John Smith. Put it online and you'll see the prices uh if he's sold in galleries and auctions. But if you if you're talking about an up and coming artist that has not had any UH sales at auctions or or major galleries, then it's difficult. Then it's a crapshoot. But I try to buy like stocks.

I try to buy blue chip artists and UH and and and occasionally I'll buy like an overd uh what did they call us? The pink sheets? Occasionally I'll buy an artist like on a pink sheet. But that's then you're taking a risk. So all right, how about for someone like me with little too absolutely no experience, how do I spot fakes? Or is that a risk that I have to really deal with something that's just you know,

it's it's not it's a fake, it's not authentic. Well, Thomas Hoving, the director of the Modern Art Museum UH, said that of the art and museums are fake. So it's very hard to really stay away from fakes. But what you need is provenance. You buy a piece, and you need the papers from the gallery, from the auction, provenance that this is an authentic piece. Where is the

bid coming from? That keeps prices continually marching higher. Is there sort of the Chinese buyer that's been coming in or the European buyer, or is it you know, everywhere, And just the more that it becomes sort of you know, pop pularised online, etcetera, the more everything is worth well, you you have people who buy art who are very wealthy and it's kind of a prestige type of thing. Uh So that that pushes the prices up as well.

But there are more museums opening up every year, more people are educated, more people are going to museums every year, and people want to you know, have art in their in their life. It's beautiful to be surrounded by, you know, wonderful pieces of art. Besides the fact that it's a very good investment. So if I go to an auction, just real quickly, what do I need to know? Do I just wave my little paddle when I like something? Well, yeah, I guess no. You that's a big paddle, okay, but

uh you are that you look before you bid? You have to you look up the artists and the auction catalog will have a low estimate and a high estimate, so they they do a lot of the due diligence for you. Uh. Let's say a piece is estimated between ten and twenty thousand, so you know, you you look it up and and and online and see if this is, uh, you know, within your price range. And if you see

if it's you think it's fair. And you could call the auction or the gallery and ask for previous prices and asked them how they came up with this particular estimate. Dr Harvey Mannus, thank you so much for spending time with us. My book collected. We're going to get there. Don't worry. Dr Harvey man This is an art collector of board member and the namesake of the Mannis Art and Educations that are at the Nassau County Museum of Art.

And he has a book collecting Art for Pleasure and a profit that he is holding up and you can find it on Amazon and others. Hurricane Dorian continues to bear down on the state of Florida, expected to make landfall perhaps Monday of next week. The question really is

where will it make landfall. To help us get the latest, we welcome Matthew Polozola, Senior annalys covering Property and Casualty insurance for Bloomberg Intelligency joints us here in our Bloomberg Interactive Broker studio and Brian Sullen, Energy and Commodities reporter for Bloomberg News and our Bloomberg one oh six one studio in Boston. Brian, let's start with you. Can you just give us the latest on what we know about

the storm. So, the storm is um on the verge of becoming a Category three, which will make it a major hurricane, and it is potentially going to be a category four when it finally gets to the Florida coast um late Monday early Tuesday. Right now, the current thinking is that it will be somewhere between Fort Lauderdale and

Port Lucy in Florida's um southeast coast. So, Matthew, given the fact that you focus on insurance companies and that they're expected to have potentially billions of dollars of losses with this hurricane, I'm wondering, where do you see which companies are going to be most affected? Which what are

you watching? Sure? So, the market share of homeowners insurance in Florida is mostly dominated by smaller regional companies, large mutual non public insurance companies, and the state run insurance company so the large national companies like A I G. Chub Um, All State Progressive, they will have exposure, but they're kind of in the bottom half of the top ten of market share. Not only that, but they're pretty

significantly protected by reinsurance. So in the event of a really, really large storm, it's probably the smaller regional companies who are most in jeopardy. So, Brian, I guess the question is if comes across as it makes landfall as a category for obviously major, major storm. I know one of the things I've been reading about and hearing about this storm is kind of the the speed at which the storm is moving, i e. It's not going very fast.

So that suggest said there could be some significant damage. Well what are you hearing? Um, Yeah, So there's two things that are gonna happen. One is it's going to come ashore and you're gonna have that that initial burst of really intense winds in a small area plus the storm surge, and that's gonna cause you most of your damage right along the coast. But as you point out, then it's gonna stall out and it's gonna sit over

Florida for maybe a couple of days. And this is a situation similar but not exactly the same as what happened in Texas with Harvey, where it just came out and it just wrung itself out. So, um, I've been watching the rainfall totals just keep going up, and right

now we're in the six to fifteen inch range. This is really interesting to me from an insurance point of view, Matt, because the more rain there is, the more relief there Probably isn't some of these insurance companies right because it isn't flood insurance covered by the government and not necessarily their per view. Isn't that correct? That is true? So the federal government basically backstops most of the private flood insurance.

There is commercial flood insurance, so you could see private companies should UH see some of those losses, but for the most part, a lot of flood uh doesn't impact these companies. But one thing that I find really interesting, so there were some estimates of fifty three billion dollars for the potential losses for this storm. Is that correct? That that's insured values of where it was aiming towards well?

But so so, what I'm struggling to understand is just in a larger context, these slow moving storms seem to be increasingly common. So how do insurance companies change their calculus as this increasingly happens? I mean, basically, are our insurance premiums going up dramatically as each storm happens? I probably say not not as each storm happens, but certainly over time. Insurers are definitely reacting to higher catastrophe prone

areas like California and wildfire and Florida with hurricanes. So not only are they pulling back capacity, but they're buying more protection for these areas as well. So Brian, Yeah, I know you cover commodities for Bloomberg News. What's been the projected impact on some of the citrus and other you know kind of produce and so on for the state of Florida. Um, it could it could get very bad um in that situation, especially if um the storm

kind of drags its way northward up the peninsula. UM. You know, the area where it's going to come in and make landfall is not necessarily a heavy um citrus producer, But uh, that's further north up the peninsula, and as as the storm goes up there and you get these flooding rains, that that is. UM, it's going to add up, Brian, since you cover the weather so well, and I love reading your stories because I've always interested in what's going

to be happening. How much more frequently are we seeing these big, slow moving storms that just sort of dump a lot of rain and create a whole host of problems. Yeah, there's been a lot of discussion back and forth about that with UM. People who have study climate change, for instance, are saying that these things are becoming more common because

the jet stream itself is getting stuck. And in Dorian's situation, what we're gonna have here is two very large high pressure systems, one over the western Atlantic in one over the Great Planes in the United States. And because hurricanes don't move under their own power, these two two monsters basically are gonna pin Dorian down and that's what's going

to create it and make it such a slow mover. UM. And like I said, some people point to climate change is saying that, you know, these big high pressure systems are getting stuck more often because of UM the problems related with that. So, Matthew, you mentioned earlier reinsurance. That's one of the many areas of insurance I don't understand, um explain to us kind of how the reinsurance market works and kind of how that might how they might be affected here in Florida. Sure, So it's insurance for

insurance companies. So like let's say you're all state and you write a lot of homeowners insurance in this in Florida, you might say you go to a re insurance company, say, if we have losses over one billion dollars, you take a certain percentage of that reinsurance company. So it's increasing looking like this storm is probably gonna be worse than last year's Hurricane Michael in terms of insured losses, maybe

closer to IRMA in two thousand seventeen. So when you start to get into those like dollar storm losses, uh, it starts to go through the reinsurance coverage of companies. So, Brian, how would you rank this season that we have coming up in terms of how active the hurricanes are going to be? How are people sort of talking about it

versus previous years. So we're right now we're entering the most active period of the hurricane season, and that typically happens around this time of year, like say from August twenty October one, so we're just getting going. Um, there's two more potential storms out in the Atlantic following this one, and they may take a similar track. So you know, we could be back here in a week or two weeks talking again about Florida taking a hit. I wouldn't

be surprised if that was the case. Um, the early part of the season was kind of slow, but you can't really judge the rest of the season by what happens in the early part of the season, so we could be in for a very active period here well. And we wish the best to everybody who is in the regions that are squarely in the target of Hurricane Dorian. Uh, Matt, Paul Zilla, thank you so much for being with us.

Brian Sullivan, thank you as well, both of them for Bloomberg covering from the insurance side as well as the weather and commodity side. What we can be expecting definitely, Uh.

The human aspect is important, honestly, Paul, though, I'm actually expecting the debate to emerge once again about the US government's program to ensure against flood damage, because it's not they don't have enough money to make it sustainable given the payouts that we've seen in recent years, and so there's going to be a big question of what you do with this program. And it always sort of strikes me, as you know, the bulk of the of the damage gets caused by flooding, and so then it ends up

squarely in the government's hands. Very interesting. Well, I'm sure I'll be talking more about that. Thanks for listening to the Bloomberg Piano All podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa abram woits one. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio.