2008 Crisis Lesson: Be Greedy When Others Are Fearful

five hundred touch six hundred and sixties six. Since then, the market is up over three So to give us a sense of kind of what has been driving the market and what to look forward to going forward, we welcome to Charlie bobrinsko A. Charlie's a vice chairman ahead of of the investment group at Ariel Investments with over close to fourteen billion dollars under management uh arials based in Chicago, but Charlie joins us here in our Bloomberg

Interactive Broker's studio. Charlie, welcome to our studios. What looking back, what were some all the lessons that you guys at Ariel, you folks at Ariel, take from the financial crisis and then what's happened since over the last ten years. Yeah, some of its relearning old lessons. The biggest one is that you have to be greedy when others are fearful. And people were very fearful in two thousand and nine, and it was the best time to be a buyer,

but boy didn't feel like it at the time. People felt great about stocks in two thousand and one, and it was a terrible time to invest in stocks. So by when others are selling, sell when others are buying, be greedy when those are fearful. Those are the lessons we relearned so and right now unfortunately possibly for investors, investors, for for those who are seeking those values, retail investors

don't seem either particularly greedy or particularly fearful. They just kind of are following what's going on, and they're being almost dare I say it, prudent. I'm just wondering, from your perspective, is there alpha left? Is there a place for an active manager to really generate significant returns? So when we make presentations to investment committees at institutional investors, they're still pretty nervous. They keep asking questions about when

is this going to end? Hasn't this rally going on too long? We're gonna have a recession here any day. There's been a shift to UM fixed income ld I investing at pension plans. We think the institutional investor is still pretty nervous. A lot of questions we get about our earnings recession coming the first two quarters, we don't see it. So I'm gonna just say that the market in general is still pretty nervous. So, Charlie, it's interesting

because the markets up. The SMP is up over eleven percent this year, and one of the stats that that really caught my eye is just that this this round trip we've had since early December, that thirty seven percent move up roughly in SMP from the So when you think about that, one could argue that, gee, maybe today's now and now's the time to sell that kind of made eleven percent. Isn't that good enough? And what's your

view for the remainder of this year? For example? Yeah, so are the flagship fund of arial is the aerial fund, which is actually up eighteen percent when the SMP was up eleven on Tuesday, and um, you know, I will say it was dirt cheap after the drop last quarter. At the beginning of the year we were at thirteen times forward earnings. We're not at dirt cheap anymore. We're probably close to fair value, but there are still pockets

of cheapness and there's pockets of overvalued. We think there's still a safety bid of stable stocks are considered stable stocks, Utilities, high paying UM consumers, staples are still overpriced. What's not expensive are anything that's considered cyclical. You still have a lot of people thinking and recessions coming that global growth

is going to close, is going to slow down. So we love the alternative asset managers KKR and Blackstone, which are considered high beta and cyclical, and they're very cheap right now, as are a lot of industrials. So I'm looking right now at SP five hundred, that's up more than eleven year to date including reinvested dividends. How much further does it have to go? What's gonna be the full year return? So we think neither we nor anybody

else can have a good prediction on that. UM. We can at any given time give you a view on relati of value. But we don't think anybody's any good at at predicting the short term. We think of frankly, the secret to investing is focusing on the long term and not spending too much time worrying about the short term. However, at certain times, however, here is an exact number for the but it is actually true that that market multiples

are a pretty good predictor of returns. And so when you had at the beginning of the year um our value stocks at around thirteen times, that was cheap and low p s do tend to produce high returns even in the short term. There's a great statistic that when the pe ratio drops by in the market, it's often a very good period of time to invest for even the next twelve months. Does Aerial invest all on I P O S uh Not usually UM, And the reason is because we want to UM investing companies that have

a proven sustainable competitive advantage. UH. We're value investors, so we look at earnings. A lot of the companies are gonna becoming public this year have no earnings. People are talking about multiples of sales, So we would be very cautious on some of the valuations that we're seeing for companies that are coming. Charlie, why do you feel about concentration, because I've been hearing about more funds that are going in to say fifteen names, and that's it. Yeah, we're

very concentrated. We believe in focus. Uh. We have in the Aerial Fund of forty stocks. Buffett talks about why it's so much better to invest in your top twenty ideas rather than putting money into your thirties best idea. We think it's if you're really diversified with a hundred stocks, very hard to beat the indexes after fees. So we believe in focus, you can know those names better. Uh. Frankly, there's stocks like KKR that are very cheap, and we'll put a lot of money into KR five percent of

a position. When did you start that bet? In two thousand and thirteen when the US government downgraded Uh? Uh. When S ANDP downgraded the U S government from triple A, everybody thought the high yield market was going to close and kick Hare's stock went from eighteen to twelve, and it became a wonderful opportunity because of the two and twenty didn't go away. Um, but the stock got reduced in price by it's gone now from twelve to UH three.

And then one of the reasons was it was a partnership that index funds can't buy and kk are converted into a sea corps and now everybody can buy them. Vanguard just bought eight percent of the company in the last quarter. Yeah, and I'm looking at the shares right now.

KKR shares have risen more than sixty since March. Charlie Bobrinskoy, thank you so much for being with us a vice chair and head of the investment group and portfolio manager at Aerial Investments, which is in New York City, to celebrate the ten year anniversary of the financial crisis and rather celebrate what's after the financial crisis and the crisis itself. It wasn't so long ago that things were starting to

look up a little bit for General Electric. There was a sense that there was going to be a restructuring, a path forward. What happened ge the shares having it's their biggest two day decline right now since November, in the red by more than four percent today. Karen you Blhart of Bloomberg Intelligence joining us here in our Interactive Broker Studios Karen covers industrials here. What's going on now? Uh, well, you know, we've had a lack of disclosure on so

it has been anybody's guests. We've had no guidance for over nine months and we are a long awaiting the fourteenth where they would give us twenty nineteen. And yesterday Cult gave a little preview of what they're going to announce next week and said that negative, that cash flow, which was four point eight billion positive this year, was going to be in the negative column next year. And it was a total surprise. So what's driving this negative?

Surprising casual? Which of the remaining businesses? I know, I know they've sold off a lot of businesses. They've really focused what's causing the problems now, good old power. But in addition to that, and this is one of the problems with the last year, they apparently got a billion plus in pre payments from their little renewable business, okay, which they didn't mention when cash flow was better than expected. Right,

this year they have to start delivering that stuff. That business, that little tiny business is going to shift from a billion positive to probably you know, I don't know up to a billion negatives, So that's two billion of the shortfall. Why didn't they tell us there was a one time

last year? But this, but this raises another question. Right, one sort of hallmark of general Electrics problems has been I don't know if accounting issues is sort of a strong way of putting it, but the inaccurate accounting statements or statements that have not fully disclosed the depth of the problems at the organization for a variety of reasons. Does this just sort of confirmed that nothing on that front has dramatically changed and that these surprises will keep coming. Well,

that that is part of it. People are hanging their hat on you know, this is a this is a you know, an honest guy, a really good operator. He's gonna he's gonna, you know, give us, you know, the details, and uh, this was like dropping a bomb. And and but the second one is power. Power. You know it's gonna it's taking him longer to get his arms around it. I don't have any doubt that he will. But Power is going to be worse this year. And again some

of that could have been disclosed. These are very long term contracts. They did very bad contracts over the last two years just to get orders on the books, and guess what now they've got to ship them and they're shipping very probably some some deals at losses and that's going to be a multi year workout, you know, kind of like an engineering construction company that gets a bad

contract and takes years to work through the backlog. Right. Um, but then also, um, you know, the cost structure is not anywhere near in line with where revenues are today, and that's ongoing. He laid they laid off twenty four thousand people in that division a loan last year. They've cut a number of plants. It's not enough. So that's what he's telling us. They have to do more. Okay, so let's now they've they've done a lot in terms of the the M and A, the restructuring in the company.

Do you think that they are done with that in terms of selling what I guess people would call non core assets. Are the assets that g has today is that it now they still have about fourteen billion in stock ownership of Baker Hughes that that business is already offline, it's it's being run independently, but they have a fourteen billion dollar ownership there. They have about another four billion that they can get out of the web tech business that they sold um, and then it's going to be

smaller units I think from here. But even in the power division there's two pieces now that the non gas piece. There's stuff in there that they can sell um. But I think the big stuff is probably behind us. So alright, So of course, I'm sorry. I am very focused on the debt side of this, just because that is the nature of my d n A. That is I'm sorry, it is who I am. I'm looking right now. General Electric perpetual bonds UH five debt is the biggest loser

among the investment grading universe today. Another decline in price that means higher implied borrowing call. How crucial is it the General Electric gets its act together and is able to give better disclosure and frankly, a better view into just how much more can sell in the valuations that will be able to achieve in order to avoid paying criminally high interest rates are prohibitively high interest rates and

a potential downgrade. Well, I think they bought some time with that twenty billion dollar assets sale that they announced last week that will significantly help the debt burden. They're not going to get the money until the fourth quarter of next year. But uh, you know, there's a good shot that the credit agency agencies will say, look, we gotta get a lot of cash coming. And um, it's

the deal with Danaher uh. And I think that really brought them time the sales at selling something for three billion or five billion or four billion, there was still a lot of worry. Um, and now this they got a chunk of change coming, which will I think alleviate some of that those fairs. The one risk is what if some of these these unknown liabilities are much bigger

than we think. Right. There's a lot of lawsuits out there. Um, you know, there's a number, there's a long term healthcare insurance thing that do they really have their arms around that? So I think they're okay with this big asset sail if nothing big hits them, you know, unexpectedly. But there's room for that. There's room for the unexpected here. All right. Let's lastly, let's talk about the dividend. I'm looking on the Bloomberg terminal. Now there's a forty two um ascent

dividend yielding about three point eight percent. Is that safe? No, they cut the dividend um to a penny because so so it's um they had and they're saving four billion dollars by doing that. Well, actually it's an eight billion annual cost that's now uh not like millions. So this this is not the GE we grew up with, building, growing, buying dividends for widows and orphans. That's that those days are gone, right. You know, he's said down the road he wants to be two and a half times leverage

and and and a competitive dividend. But that's really quite a bit down the road. Count double hard. Thank you so much, uh, Karen Uberhart, senior industrial analysts been covering GE forever, not the age you She's our our best in Bloomberg Intelligence, so thanks so much. As usual, there is a lot of news in the healthcare space. First, we have the announcement that the FDA has approved Johnson and Johnson nasal spray that works to I guess alleviate

symptoms of depression. We also have news that of the sudden resignation of the Food and Drug Administration's Commissioner, Scott gott Leaps. Help us break down all that's going on in healthcare, We bringing our friend, Max Nis and Max's biotech, pharma and healthcare columnist for Bloomberg Opinion. He joins us here in our Bloomberg eleven three year studios. Max, welcome once again. Uh this Johnson and Johnson News. The story seems like a big deal, is it? It definitely is.

So it's the first kind of real novel depression medicine in more than a decade, and it's the first one, you know, in an even longer time that has kind of a genuinely different way of working on the brain. And then kind of the third differentiation factors that it's it's fast acting. What we have generally takes you know, weeks to kick in. You have to build kind of

a concentration up over time. So this has the potential be used in a lot of interesting different ways for people that are kind of in you know, an acute moment of crisis or who just don't respond to existing therapies. And that that is a pretty big population. So you know what else is fast acting cocaine ventanyl? I mean is is this is ketamine? Is this potentially the next opioid crisis? So you know, it's it's a it's a

relative of ketamine and a close one. And I think the potential for abuse is something that the FDA definitely considered as opposed to you know, whether it's the equivalent of just giving someone a party drug that they did run kind of you know, randomized you know, late stage trials, in control trials in really sick patients and it did

have an impact. Well flipping on its head, right, have there been studies done of people who let's say, uh, it took katamine or took other party drugs, took ecstasy, and that that actually helped with depression? You know that there have been a lot of attempts to to study this, but not in kind of the scale and riggor of

of this trial. And you know, beyond the fact that it, you know, has this kind of psychoactive effect that that people have chased, uh, there does seem to be some kind of you know, scientific evidence that there is an effect on the brain that you know, there's there's like a medical thesis that they're chasing here for why it might help people with depression. It's not let's give people a happy drug and let's see if they get happy. Known some mats, I know, the antidepressant market in general

is a monster market. Is there a sense of how big this sub part of it is, so that that's the big question. You know, treatment resistant population is potentially millions of people. The question is how many of them are are going to end up getting getting Johnson and Johnson drugs. And that's that's a trickier question. This isn't you know, you just get a pack of pills and take them. You have to go to a licensed office, take it, and then sit there for two hours while

you're monitors for symptoms of association and sedition. Then you're not supposed to operate heavy machinery for the rest of it. It's gotta find someone to give you a ride, so that that's a really hard thing for for people that are working to do. And then you know, this isn't something that your average psychiatrists is equipped to handle, so that that is likely to kind of keep it from reaching its full addressable market at least anytime soon. And

I just want to be very clear. I mean, I've sort of been talking about this with a light tone, but it's really not frankly underscores how much the epidemic of suicides in this country has absolutely been exploding, especially among the younger populations. I do want to shift gears a little bit to the Food and Drug Administration UH or just basically the chief of the US Food and

Drug Administration, UH, Scott Gottlieb resigned suddenly. It seems like there was nothing on toward it and why he resigned. There was no kind of push, It was a personal issue. How big of a loss is this and how much does it affect the industries? Yeah, I think it's pretty significant. Um,

everyone likes Scott. He he you know that there's even you, even even me, Um, you know, obviously there's some such people that really like, you know, selling tobacco and vape pens less fans because he took kind of an aggressive regulatory stance on them. But he was seen as someone that that understood the industry, worked really hard and pushed on a lot of significant public health issues in a

way that you hadn't really seen from previous commissioners. It can be a quiet job, and you know, it's a technical administrative post, but he turned into something that was a lot more communicative and and active on the policy front. So I think he he will bend, and not just by by drug makers who saw him as someone that was really pushing to modernize the agency and and make it easier for innovative therapies to make it to market,

but but for further country as a whole. You know, Uh, it's really the exception when you have kind of a relatively drama free and competent um leader of an agency in this day and age of relative to the past. So is there any sense of who's going to replace Gottlieb? And and and just in general, the big farm and all their lobbyists, did they have an influence on who

gets selected? Um? You know, I imagine we're we're not going to get someone that they really hate, just because that is a big lobby and and it's one that has a lot of influence in Congress. But but there is a chance that we could get a left field candidate. And I'm just thinking of you know, the people that

were rumored to be considered alongside Scott Gotlieb. One of them was kind of a Peter theel affiliated investor who um has some some pretty um out of the mainstream I'll save views on on regulation of medicines, which is to say that they shouldn't be regulated very much. Uh that that's um a position that you might think that drug makers are in favor of, but actually would potentially

be pretty chaotic, so that that's a potential negative. But we could just get you know, a pretty mainstream bureaucrat as well. It won't be as exciting as Gottlie, but probably won't cause any harm, So we'll see. You know, you started off talking about this with respect that tobacco companies and invaping companies were not that excited about him being there and are more excited about him leaving. We did see a pop in their shares. Do you expect that to last or do you think that any successor

would would adopt the same kinds of policies. Uh, you know, I I wouldn't be too surprised if they at least continue got Leave's efforts. Maybe they won't be as kind of publicly energetic about them. Um, but you know, I don't think there's much of a push that these these companies can make to to kind of combat the general rise of of kind of further regulations industries. On the

public health impact is is pretty obvious. You don't want people getting addicted to tobacco or or Nicktine products, one wear another and uh, it's the role of the FDA and one wear another to to take a role in that. So how is the FDA today? Is it generally perceived as a good bipartisan view or is it really And then then in the lap of big pharma or on consumers, where is you have to kind of proceed right now? Uh?

You know, I think the god Leave FDA at least was was kind of respected to a certain extent by by people on both sides of the aisle, which is an achievement in itself. I think you'll find people that that do feel that it tends to lean too much

in the way of of pharma. And and that was a criticism of god lea who who had some industry experience, But at the same time he did things that were kind of to the detriment of the industry, calling people out for kind of abuses of the generic approval system UM, for pricing things like that and UM. But on the other hand, you have people that want to push for the FT two more of an active role. Sulie Max, he said, thank you so much for being with us.

Max Neson Biotech Fireman, healthcare columnist with Bloomberg Opinion. We always value your perspective. Good morning. Well it, as Lisa said earlier, the market seems to be discounting that the Fed is done raising rates, at least for the New York term. But there is an interesting column out this morning by former New York Fed President Bill Dudley that said, don't assume that there may be room for the Fed to perhaps even raise rates at some point later this year.

Help us dig into this issue and outlooks for rates. We bring in Carl Ricka Donna. Carl's the chief US economist for Bloomberg Economics. He joins us live barely in the Bloomberg leven three studios here in New York. You're gonna take that sitting down very much alive. Just he's one floor way and he made it with the second of spirit. Thanks Carl. So what do you make, Carl of Bill Dudley's column about rates and the outlook for nineteen I agree with what the former New York Fed

president is saying, and we've maintained that view as well. Uh, this is a pause, not a peak for interest rates. We can look at the you know, the the grand scope of history and the economy has never rolled over with interest rates as accommodative as they are at the moment. And so we look at real GDP growth relative to real interest rates, and real interest rates are essentially at zero. They have to rise significantly higher, maybe two hundred basis

points higher, to actually be depressing economic growth. Alright, so let's take a little bit more into exactly what Bill Dudley said. He said that probably the economy would underperform for the first half of this year. He thinks that patients indicates the Fed won't be raising rates in the first half of ten. However, he expects the economy to re accelerate in the second half off and basically prompt the Fed to rethink its patience. Do you agree with that?

I agree with that. And here's the story. So the economy grew about break it down. The economy grew about three percent last year. That's well above trend growth. And when you grow above trend, two things happen. One, the unemployment rate moves lower, and two you generate inflation pressure, so you get an acceleration and inflation. We saw both

of those things last year. Uh, the economy is moderating this year, so we're going from two point nine or three percent growth down to my team is expecting something close to two point four percent, still above trend. So you get exactly what you got last You're just in a slightly smaller dose, and so that the expectation is right.

The earning season is not looking that great. If you talk to our chief equity strategist, Gina Martin Adams, she'll say that that we may even be potentially contending with an earnings recession, not an economic recession, but an earnings recession, or at the very least a soft patch in the first part of this year. And so we have this, you know, equity market correction in Q four, a soft patch for corporate earnings, residual seasonality issues with the GDP numbers,

where we get a soft print in Q one. Once we get to mid year and central bankers sit back and assess what's happening in the economy, they're going to see that we still have growth that is above trend, we have an unemployment rate heading into mid three, territory pressures running. It's the hottest of the cycles, and they'll say, in that environment, we're not done. We have to keep hiking. How surprised will markets be if when the Fed? If the Fed hikes again this year, well, the Fed doesn't

want them to be surprised. So while the Fed kind of led the market to this point in terms of the rate increases we've seen, the Fed got burned in Q four. Uh. This means now the Fed is going to follow, not lead the market to interest rate. So the Fed is gonna let the market beg for it, uh and then be happy to oblige them. And by letting the market beg for it, it means that we'll see a steepening of the yield curve. The Fed lets

the market price in more inflation expectations. You see a bare steepening of the yield curve, and then the Fed steps in and says, we'll help you address the inflation problem and layer some rate hikes in. Give us a sense of timing here, is this a third quarter type environment? Because I think if you look at them, I think the market's discounting really nothing for twenty nights, right. The market is saying nothing. Economists are saying they're still hikes coming.

I like the market better than economists, but go ahead, that's that's you. But they're gonna beg for it. That's what they're going to go on. So the way the timing of this works out right, we have to wait until we have a sense that we're in the clear from this earnings recession, which means probably by the time we get the Q two GDP numbers, which would be

the end of July. Uh, that would be the time where you'll start to see both market participants and FED policymakers say, Okay, the economy is still running a little hot, a little bit of additional accommodation is warranted, and so I think we see two hikes in the back half of the year, probably at the September meeting, in the December meeting. The December is a bolder call, and so you know, the risk is not symmetric around that. The risk is we would only get one hike this year.

But we do have the view that you know, we're going to be contending with a still robust economic environment and the Fed's going to have to do more. They'll just speak really fast the meeting to indicate that they're not patient any longer. I just have to ask you, I just have to ask you, really, in thirty seconds, how much of the slowdown that we're saying in the first half is due to this trade skirmish that's been

going on. That's an interesting question. I think second element to that, I think it's just a confluence of factors. I think we're we're blaming trade too much. Uh, and we'll realize that domestic economic fundamentals are still very strong. And I keep going back to that unemployment rate generating wage pressures that is a backstop to consumer spending, and the domestic economic outlook is still very robust. Cacadonna telling it like it is here in the Bluebergetter Active Broker Studios.

Cara Kadona, chief you as economist for Bloomberg Economics, talking about that Bill Dudley column really interesting to me. Uh, the idea that the market right now has completely written off rate hikes and yet we have former Fed officials coming out and saying, you guys are being a little premature. Thanks for listening to the Bloomberg P and L 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 Woyd's I'm on Twitter at Lisa Abram woits one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio