Bond Selloff Forces Funds to Reassess Strategy: FTN's Vogel

Jim Vogel, an interestrate strategist at FTN Financial based in Memphis, Tennessee. Jim, thank you so much for joining us. You've absolutely nailed this market again and again. So right now we are looking at ten year treasury yields that are two point eight five creeping up from the highs of last week. Um, how much more do we have to go? Here? We're looking at the highest ten year treasury yields since January

two tho. We've compressed about into three weeks what many people thought the market would do in terms of um increasing rates by say the third quarter. So where we continue to go, it's it's easy to see that the ten year could head towards to nine or so before it begins to even catch a breath. We see um really about the next two to three weeks people redoing their strategies and thinking through where do they want to be buying tens and thirties in particular, So, Jim, why

are people going to be reassessing their strategies strategies? Now? What changed? There's so many things changed about the yield curve. It had been flattening very hard. The thirty year was a star last year and you returned nine in a thirty year government. Now everything is turning in the opposite direction without any bond aim to come in at these new higher levels. Yet, So in that kind of perspective, you've got to sit back and look at your strategy

not only in treasuries but also in corporates. Well, Jim, what would just suggest given what you know about people's positioning, And I'm just curious if you can also add in the supply and demand of treasuries absolutely right now, in particular, what the seven year part of the curve has been hurt because they've just been trading almost one for one with tens, but nobody really trades the seven years a

hot item. It just follows so for in particular retail investors intermediate bond funds, if they want to take advantage of this move, that's a great place to try. In terms of supply and demand, we've got the next three months is going to see are going to see progressively hired treasury supply and then the treasury where we ass asked probably with at least one more um significant increase

when they announced the May refunding in three months. So, Jim, you said that people should reassess their strategies, not only for US government pown markets, but also for corporates. Uh, if you look at spreads, the extra yield that investors earn over the benchmark rate, you could see that it really has not increased for investment grade corporate bonds, but

it has increased for high yield bonds. Do you think that that actually makes sense and that you should expect the sell off to continue there with both the spreads rising in tandem with rising benchmark rates. So far, the sell off and high yield is taking back a lot of the profits that were generated just last month. So we won't know until we get a little bit higher. In terms of the high yield spreads before we know whether that's a trend or just a bounce. Sorry, beg

your pardon? Go ahead? No please, no, no, go ahead? Finished your thought? I've now lost the question. I beg go ahead, It's save me. Well, no, Jim, you know, I'm just thinking, what is sort of the threshold yield for ten year treasuries that you would recommend people start buying. There isn't one yet, and and that's exactly what we've

learned the last couple of weeks. Until you begin to see any sign that people are not have stopped moving and racing ahead in terms of their inflation expectations, there is no place to necessarily immediately stepping in by the tenure. Instead, we have it's much easier to see fair value relative to what the said might do and say the five year or the three year. So we've got to wait for We've got to wait a week two weeks just before people really can start doing that strategy on tens

and thirties. All right, So if people really can't do that strategy yet and they aren't necessarily going to come in and buy, what does that mean for equity markets? Because we've seen a whole host of analyzes them out over the weekend talking about just what the rise in treasury yields means for stock markets, right because a lot of people were talking about the FED model, A lot of people were talking about how, uh, the dividend yields were paying more at one point than you could get

on benchmark treasuries. So if that equation changes, are you really going to see selling continue in the U S stock indices despite the fact that earnings have actually come in pretty pretty good. It depends. If the equity market slows down in terms of volatility um you will not see people really you will not see the bond market

herd stocks. So as soon as we can pause in stocks and people can catch their breath there as well, Uh, the stock market remains largely unrelated to rates for the moment.

Think about last year, UM income grew four point one percent, spending grew four point seven That was cond evidence in all sorts of different things, including the stock market, that confidence is not going to leak out that quickly in terms of the drivers of the economy until stocks really begin to disappoint for perhaps several weeks in a row. Jim at the three percent level at least for the tenure.

We're now at two point eight five. At that point, aren't you going to see big demand from pension funds, life companies, other firms. I mean, because don't they have to immunize themselves against liabilities. Uh? They do, But I don't think there's necessarily one particular level where they will begin to come in with enough strength to overcome the

selling At some points. Last week, you know, particularly right after don farm payroll reports on Friday, the selling volume was two times the busiest that we've seen over the past couple of years when we had a surprising payroll number. So there's one group of people that are selling bonds extraordinarily fast. The buyers that will be coming in or want to pick up um bonds at a higher interest rate, they're going to move much more slowly. I want to

thank you very much for joining us. Jim Vogel is interest rate strategist of FT and Financial. They're based in Memphis. What if money fell from the heavens, what would be the effect on growth and inflation? Well, here to help us answer this question is Joel Stern. He is the chairman and the chief executive of Stern Value Management, and he joins us here in our eleven three oh studios, Joel Stern, thank you very much for being here. So, indeed, if money were to drop from the sky, what would

happen to growth and inflation? People would in the initial expectation strong profits, strong growth. It looks like paradise. But I have to admit to you, Pam. My teacher Milton Friedman asked us that question on the first day of class. He said, if money reigned down from the heavens, what

would happen? And of course he got the right answer, the rest of us did not, because he said companies would compete against each other with this additional moneys and they would lower prices to the consumer in order to try to gain market share. And I believe that's going to happen here too. Don't get me wrong. The size of it is so huge, there's enough to go around for everybody. Uh So my answer to you is that

I don't think we would have inflation from it. I think what we would do is we would have lower prices to the consumer. So can you connect this, Joel, to markets, to to to sort of how you invest. Because I was struck by a statistic that of S and P five hundred companies that have reported so far, eighty percent have beaten Wall Street expectations for revenues, which is the biggest beat going back in data to at least two thousand and eight. So is that already baked in?

For sure? The price today is the present value of tomorrow. What's actually happened. What's interesting about the the the economy right now is the economy is poised to grow at at least three. I believe it's going to be a lot higher than that. I think it will be close to four. And when people say, oh that we don't have enough people coming into the workforce, remember they talk about productivity and population growth. Do me a favor. Relax

would your place? You'll be really fine? What's what's the answer to this? So many people left the workforce during the last ten, twelve, fifteen years. Right now, the participation rate is only around six. Think about it. I believe it's going to move up over and that will be the equivalent of immigrants coming into the country and journing the workforce. So what I'm hearing from you is dampened

inflation expectations. Frankly, because even with all this money you're going to have more competition on both sides, both with employees coming into the workforce as well as companies that are competing with each other. This does not our scream of of runaway inflation out. It occurred to me that maybe when you said all of this, I should have said, very nice, Lisa, I think we should go on to the next topic. But we cannot do it. And what's

the reason. The reason is that the gold price is still sitting at thirty four dollars or thereabouts as interest rates rise. If the interest rates that are rising are because of higher real rates, not inflation, that's good for the economy because that's a signal to the rest of the world. Hey, come onto the United States. High rates of return are available here. That's what you would expect to have happened. But you see, what's happened is that with the rates rising, by this time, the gold price

should be down around twelve fifty. How do I know it happened before? When Trump won, interest rates rose dramatically, and I had the pleasure of talking to him, not to you, unfortunately at that time. But he asked me this question, and I said, I got news. Take a look at what's happening to the gold price? As the rates went up, the gold price went down. That meant

inflation was tame. We wouldn't have to worry. But if interest rates rise and the gold price does not fall, it must mean that there is some inflation in there that we're going to see at the end of this year. Can we just assume for a moment that there is going to be an acceleration and inflation just kind of to be the devil's advocation? But what is a good investment? Is it gold? Yes, it would be it would be

gold would be a good investment. But real estate is always a good investment unless it has already reflected all of this and so it's already in the price. But I believe that real estate it is just a fantastic investment if you think the inflation rate is coming back. I'm surprised to hear that, given the fact that Janet Yellen over the weekends pinpointed commercial real estate values in particular as being a particularly frogthy or hetty invaluation. It's

a good thing she's going back to academia. Huh, you can pontificate a little bit. She is a lovely, lovely human being. Her position, though, on how markets work, is not the same as my own. I am a true blue Chicago boy. I'm a I was bred by Milton Friedman and Merton Miller, and I believe that markets actually

do work. What we have to do is develop models that replicate what the markets are doing so we can see it clearly before it actually happens, instead of waiting for it to happen and then everybody else is telling the same story. Talk if you can about regulations and how regulations or the lack of regulations can spur economic growth. I spoke of people in the current administration before they were the current administration, way back two years ago, this

coming July. I was teaching in Brazil at that time, and I had questions coming in from people who now have very authoritative positions in the administration, and I said, you gotta do three things. Just three. Number one, slash the regulations. Why because regulations not only lower the rate of return on investment, they increase the risk of investment. Because today's regulation becomes tame compared to what they'll do

to us tomorrow. In other words, when when when Hillary Clinton was running, she said, you think the regulations under the Obama administrations. Only wait to like, get in there. I'm gonna really wet Okay, set number two, slash the marginal tax rate. Our trait twenty six major trading partners had an average tax rate of only two when hours was in the high thirties. If you include city and state, you can compete that way. By the way, I have three firms that I'm involved, okay, and one of our

firms is headquartered in Singapore. The tax right there is around what should I do bring the money back to the United States and get hit a second time? So real quick, I want to get your take on Wells Fargo, because we have this feeling that regulation is moving in the opposite direction. Then what the Fed seems to have done with Wells Fargo. Do you think that this is sort of the opening salvo or sort of the I

am so disgusted. I don't know what to say to you, Lisa. Look, when people do things that are what shall we call them fraudulent, they should be banished from the industry. Remember when Michael Milken was told his infraction was minor. These people created things that didn't exist, and they seem to have gotten away with it. I was. The thing that I was unhappy about with Janet Yellen is that she should have acted on this as soon as he found it out, as soon as they verified it, and using

my vocabulary, they should have been speked. All right, Jill Stern from your words, from your lips to perhaps the new fed chairs ears Joelster, chairman and chief executive officer of Stern Value Management. Always a pleasure speaking with you. Uh, this is Bloomberg market Time is money, especially if you

have airtime during the Super Bowl. And here to talk to us a little bit about the advertisements that you saw last night during the fifty second Super Bowl is John Swallen, chief Research officer of Cantor Media, which is based in New York. John, I want to start with the price tag for thirty seconds more than five million dollars? Was how much companies paid for that time? Is it

worth it for many companies? It is yes, UM companies are not just paying for the prety seconds of at time, They're actually rolled up in that in the value of that five million dollar investment. UM is are some other things that I think brands considering that helped justify UM for what I'm sorry, just give us some some figures if you can just in terms of the actual total

amount that's been spent. Sure, UM, So the total we asked me that the total amount of money spent on the game last night was approximately four fifteen million dollars for the commercials that aired between kickoff and the final whistle, which would make it the second highest Super Bowl of all time after two thousand and seventeen. Is that considered to be a win for NBC? UM, Yes, it is. UM. It's a win every year for whichever network gets to

carry the game. UM. And NBC also was able to use that as a platform to promote their upcoming Olympics telecasts, which will also be a financial windfall for them, So they had a nice synergistic effect there. John one thing that I noticed. I was looking over some of the notes that you put out just sort of some conclusions from the Super Bowl and the advertisements, and there was a pretty notable drop off in the number of companies

that were advertising during the Super Bowl for the first time. UH. The percent of first time parent companies dropped just eleven percent this year from last year. What happened why so many fewer entrants to this field? UM? I think parlates the price tag UM five million dollars for a thirty second spot, plus the additional costs for creating a commercial, promoting it on social media and so forth, is a big hit for many of the small companies that make

up those first time advertisers. UM. So I think this year there was perhaps a little bit more price sensitivity. UM that can you know that that can happen. It's a it's a big investment for small companies. Who do you think was the most successful at their advertising? UM?

I think everybody has a different metric. UM. If you take a look at the consumer popularity polls, I'm sure that the Amazon Alexa ad and the NFL AD with Eli Manny and O'Dell Beckham doing their version of dirty Dancing, I'm sure those will end up on the you know its probably the top two in terms of consumer popularity.

But in terms of long term payout UM and brand effectiveness. UM. I actually think that a brand like UM tied um had a very interesting media strategy running one commercial in each of the four quarters, and they weren't obvious commercials when they started out to heay this is a commercial for Tide, it wasn't until sort of the end of the commercial that it all came together and tied together. UM. I think that was a very effective strategy for PNG. John.

There was a lot of talk leading up to this Super Bowl about the politicization of football and how viewership had actually gone down as people view the sport is becoming increasingly political. Do we have any preliminary assessments of what viewership was like last night or whether some advertisers shied away from, uh, perhaps participating this time around because of all that drama. Um, the viewership figures won't be

enough until won't be out until later today. UM. So I can't tell you how many people watch the game. In terms of the advertisers and their approach. UM, there certainly was less advertising of a political or social issue

nature this year as compared to last year. UM. And I think that reflects the fact that in our increasingly polarized environment, UM, taking any kind of of a stand pro or con and any sort of an issue, UM, it's just a landline that marketers don't want to get involved with, particularly on a stage as public as the as the Super Bowl, and so the big corporate ads, the you know, the the as it weren't plugging brands per se um like the bud Wiser at promoting their

water relief efforts, were taking things of a more humanitarian approach, UM, kind of a safe issue that nobody can object to. UM. So I think that was the strategic to this year. John, I have to wonder whether you're seeing an increasing number of ads direct viewers to their websites to watch longer saga as I saw that. It was certainly a part of some of the strategies, but is that an increasing one. Um, It's not increasing only because it's been a very common

tactic for you know, for the last ten years or so. UM. You know, many companies are putting their commercials out online uh up to a week in advance of the Super Bowl, promoting them through YouTube, promoting them through social media, UM, and leaving them there after the game so people can go back and watch them the second time. UM. So the social media wrap around UM is very well integrated into brand strategy for Super Bowl advertising. Thank you very

much for joining us. John Swallen is the chief research officer for Kantar Media. He joins us from New York, giving us his perspective on Super Bowl Advertising. Well, a lot has changed in the retail world since nine and here to tell us more. As Lindsay Rupper, specialty retail reporter for Bloomberg News. Lindsay can be followed on Twitter at l c Rupp and you can listen to her podcast, Lindsay's Material World Podcast. It is at Bloomberg dot com

Slash podcast Material Slash rather Underscore World. All right, Lindsay, thanks for being being here. Um, I just want to start off with a little news about Bontage stores because I was looking today bankruptcy doesn't look like anyone's gonna come and really throw them a lifeline. And they if you go to their website up to seventy percent off, what happens when they get to a cent off? Does that mean they start to sell things? You know? I don't know what it's going to take for them to

sell things. The problem is for all these retailers, they're just too many stores, and people have more options than ever for places to shop. And so if it's not a great experience, or it's not on trend, or it's not the right product, you have other options. You're not loyal anymore. So, Lindsay, you wrote a piece, and I found it fascinating about how this sort of death of retail has been a long time coming. Can you explain, Yeah, absolutely, so.

Apparel retail specifically is plagued by a myriad of issues, and it's you know, it's really easy to say, oh, it's Amazon, Amazon's killing these apparel retailers and companies like Bontan, but it really is so much more than that. You know, it's, Uh, it's that these apparel retailers got really slow in terms of it takes a long time for them to get product to market, and then you've got H and M and Zara who can get on trend styles to you in weeks. Or uh, it's the fact that people have

more options of places to shop. Or it's the fact that prices have been driven down by discounters and by fast fashion companies, and so you don't want to pay full price for a white T shirt because you can get it almost anywhere for less. Um it's it's just so many different factors that are really hurting the apparel industry and they've been really slow to transform. And I think we're starting to see and will continue to see

the fallout from that. Well, Lindsay. You mentioned that there are a variety of things that are contributing to this. No one needs to buy a separate wardrobe for their workplace anymore. You also mentioned that things such as neckties seemed to be disappearing from at least the most heavily purchased of items, as well as the introduction of sort

of new trend setters who are not celebrities. They're all over social media, right, I mean, the societal and cultural shifts in the way that we think about fashion, uh, is a huge problem for the apparel industry. So it used to be that you'd spend money on your wardrobe because you know, the fashion industry was telling you these things are on trend, you need to have them. You know, you wanted to look yeah, exactly, you wanted to look good in your workplace, but then you had a different

look for the weekend. None of that's really true anymore. I mean, people really can kind of wear what they wear to work out. Casual Friday is not just Friday anymore, So you don't need to buy two different wardrobes, and you can look online to celebrities or people who you find interesting and see what they're wearing. You don't have to look to the magazine. So if you look at from a market's perspective, this has been going on for a while, and this has sort of been a slow

moving destructive train. How can retailers assess what a right sized retailer looks like now and when we've moved past the sort of carnage stage into one where you can rebuild for a modern era. I think that's the question everyone's trying to answer right now. And it's expensive to

close stores if you have a lot of stores. But you know, we've also seen these e commerce only retailers pop up and well, well to some extent, right, they reach a certain size and then they kind of stopped growing and so they need to get to that next level of growth and they open some stores. But you know, but Albost sold to Walmart for for less than the money they raised. Guess the the key question is what's

the model now? Who who's doing it right? Uh? You know a lot of people think that CSAR is doing it right. They're you know, owned by a Spanish company into texts, and they're expanding really quickly all over the world. They can get product to market really quickly, and it's on trend and it's uh really cheap frankly, um, and that seems to be working really well for them. But you know, H and M was of that same model. H and M just announced that it's going to have

the slowest store opening rate in two decades. Um. People really weren't thrilled to hear that, you know. They they're like, oh, the H and M model, it might be stumbling. So I don't think that there's anyone you can look to and say they're doing it right. I mean, there are a lot of people who are doing pieces of it right. There are a lot of niche brands who you know, own one piece of your wardrobe and they're doing that really well. But I think gone are the days of

the giant retail behemoths of the past. You know, I don't know that we're going to see another gap, another ubiquitous company that's going to clothe you from top to bottom anymore. Having said all this, and maybe you can just help me because of course here in the Northeast, who have been going through winter weather and no really across the country in some areas you have inclement weather.

All I see your Canada Goose down jackets and Montclair down jackets, And I think to myself, who needs to spend a thousand dollars on Parka right or five on a three year old outfit to stay warm? And yet you seem to see them everywhere? Is that just anecdotal? No?

I think that that's that's very true. And there are some trends that are that are definitely sticking out, so like people will spend up for that jacket with that brand name, or they'll buy the Lulu Lemon pants, but they're they're mixing those with lower end things, you know, so they're they're also going to t J max and and buying cheaper, you know, jeans or it's it's sort of like a high low you you decide where you

want to signal. Yeah, Lindsay Rob, thank you so much for joining us, because truly it was a fascinating story. I definitely recommend reading. And it's on Bloomberg dot com or on the Bloomberg Lindsay Rupp is a specialty retail reporter for Bloomberg News. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm

on Twitter at Lisa Abramo. It's One before the podcast. You can always catch us worldwide on Bloomberg Radio