Flattened Yield Curve Signals a Fed Policy Error, Jersey Says

interest rate strategist for Bloomberg Intelligence, and he joins us. Now. Ira, in one of the most recent pieces I have read that there's a variety of different type their variety of flattening types when it comes to the yield curve, and I'm wondering, what's that there. I thought, you know, I

thought flat is flat, but apparently not. Yeah. So, so there's basically two ways that the curve can can change, and one way is during market selloffs, and the other way is during market rallies and um and and what what what? When you look at the history of interest rates and what the curves none versus the economy, what you find is that it's really when you get bare flattening, and that's the type of flattening that we've had now

that's preceded economic slowdowns. But when you get UM, when you get both flattening, so flattening for example, like we had inn when the Fed was buying long end bonds and you wound up getting a very flat yield curve as well, that tended that type of flattening actually tends to be good for the economy. So it's basically that you have low interest rates, people are um. People are trying to stimulate the economy by um by taking advantage

of those low interest rates. But when the curve flattens while the front end is selling off, it's it's not so good. So you know, there is a reason for kind of a little bit of concern with the the yield curve being as flat as it is. And quite frankly, just from a technical perspective, we're sitting right on top of a very important technical level four UM for the

two year versus ten year treasury curve. Okay, So in other words, for all of the enthusiasm we hear about stocks, all the optimism, the yield curve to you is sending an ominous message that traders need to pay attention to. That is saying that the U. S economy is slowing down and is heading towards some kind of downturn. Well, so it takes a long there's long leads here. So when the yield curve gets to zero gets to flat, what you've experienced over the last forty years or so

was sometime within the next two to four years. So again long long leg there. Within two to four years, you tend to get an economic slowdown. But you know, it's not the curve itself that's causing that. It's you know, the reason why we get this bare flattening is because front and interest rates are being increased by the Federal Reserve. So um, so it's really the policy error. So it's really the actions of the central bank that is causing the curve to flatten, and that's where, um you wind

up getting the slow down in the economy. Get you know, one of the impacts and effects of that, and kind of the canary in the coal mine might be the flattening curve. But it's um But like I mentioned, the curb being flat in and of itself isn't necessarily bad.

It's the way that it flattens and why, and that's that's the policy are part of this, all right, so policy error from the Fed, of course, UH, FED Chair jin Yellen is going to step down as soon as the appointed next FED Chair, Jerome Powell, is confirmed and sworn in early next year. I'm wondering, given the fact that Chair Yellen is going to be departing, and given the vacancies already a mug among the FED governors, can we really even have visibility into the path of the

Fed's rate hikes next year? I mean, presumably that the sort of policy error here is that they're hiking too fast. Yeah, that that's exactly right. And I know that the market thinks that they're hiking too fast or that they'll hike too much, one or the other. But either way it would be that would be a policy error, and it you know, it's hard to judge what the future Fed's going to be. We're going to get a whole lot

of new governors. We already have a number of new members of the f O m C in in the form of of several presidents who have been appointed recently. UM, and you're gonna get a new a new vice chair of the Federal Open Market Committee when UM, when new York Fed President Dudley retires at the end of next year resigns um sometime next year, so so we really

don't know exactly what future monetary policy will bring. So that's one reason why listening to the confirmation hearings of Jerome Powell and uh you know who the who the President picks as the next vice chair, those two seats in particular will probably be very important for um for

what the future monetary policy is. What will they be more dubbish, will they be more hawkers, or will they stay the course like it's you know, we can all make speculations, but in reality, I don't think anyone quite knows at this point. I just want to go back to something you talked about having to do with this flattening of the yield curve and your analysis at last time that this offered itself. We saw a lot of bond buying by the Federal Reserve, by the Central Bank,

and that's not taking place now. Now, that's right, And in fact, you know, the Federal Reserve is um already starting to allow its portfolio to run off, and starting in price February or March next year, the Treasury Department is going to have to start issuing more bonds, partially due to um to this extra supply that the Fed's not going to be buying every every month when they have maturities, but also because there's going to be higher

deficits starting next year, um just because Medicare and sort of security payments are going to go up, and and the potential for additional deficits based on on the budget that Congress passed recently, which could add another hundred and fifty billion dollars of potential supply into the market. So so there is going to be this, uh, this supply.

I don't want to call it fear, but there is going to be certainly a supply push which is going to have to be absorbed, and that could certainly affect prices, and where and how it affects those prices will be determined by what bonds the Treasury Department decides the issue. So will this be a good empirical test that if stock prices continue to move higher or are higher. Let's say in that the argument that stock prices moved because of this extra liquidity from central banks, that theory would

be tossed out the window if we saw prices accelerate. Well, I think you know, liquidity is is a strange is a strange thing. I think one of the things is that you've you've seen now more recently, the fact that you don't need all the liquidity from the FED reserve for the economy to run. I mean, basically, what the Fed did when they did all the bond buying, did all the quantitative easing, was to try and jump start

the economy. It was kind of like you know, putting a doctor putting on the the you know, the A D and and trying to you know, kick start your heart. That's basically what queue is. But now you know, the economy is pumping on its own and it doesn't necessarily need all the accommodation that it's had. Now. The problem is is that if you pull that accommodation out too quickly, you have a detrimental effect. And that's I think the worry, and that's that's that's really going to be Powell's um.

The challenge for the power Powell set is not removing accommodation too fast that you really stifled the economy and you wind up hurting things like corporate profits and the like were real quick, which yield curve Do you look at so so you know the one that has the best um, the best correlation to the economy is the two year versus tenure treasury yield curve. UM. No, that that's the main one. All right, Ira, Jersie, thank you

so much for joining us. As always, well, the U S is suing to stop a T and T S takeover of time Warner. There are all sorts of suspicions and rumors that the Department of Justice is doing this, uh due to CNN and President Trump's contentious relationship with that. These have not been proven, and in fact, some are saying that this lawsuit by the d o J resembles classic antitrust cases that are pretty much routine. Here to talk about it and put it into perspective is Jennifer Ree,

senior litigation analyst for Bloomberg Intelligence. She joins us in our eleven three oh studios. Jennifer, is this a routine antitrust case? You know? No, I would not call it a routine antitrust case. I would call it a routine theory of harm. And I think the big difference there is that theories of harm from a vertical deal are talked about in discussed. Um. Sometimes they come up and

they get resolved in mergers with behavioral remedies. But the reason I say it's not necessarily a routine case is because we haven't seen actual litigation to try to block this kind of deal in a very very long time time. And it's really kind of a departure from you know, D O J precedent in history, and so it is. It is surprising, and I think that's why these political ideas are kind of haunting this. Okay, so the political

ideas are haunting this, uh potential combination. I have to assume that somebody in the Council's office at a T and T sat down with Mr Stevenson, the CEO, even before they decided to make this attempt public, to go over some of these issues. Do you think that this was something that was discussed and then said, oh no, we'll get over it or what do you how does how does that work? And you're talking about in advising the companies as whether they face risk, you know, I mean,

that's what's really tough here. My guess is that the outside lawyers said, look, there there always can be some harms that come from vertical deals. But look for fifty years, they've been treated in one way. So you will likely be able to close this deal, but you'll likely have to agree to a consent order, a settlement where you moderate your conduct, where you agree that after you emerged you will behave in a certain way. You're probably going to have to make those agreements. But with that, we

think you'll be able to close. That's likely the legal opinion that they got. Yeah, so then they went with that and the Department of Justice kind of turned things on their head. I want to talk about the precedent this sets. You know, if this is a departure from the norm, what does this mean about a deal, uh, say, like the Tribune at Sinclair Broadcasting merger. I mean that combination would give the company access to seventy two percent

of the American television audience. Are you expecting this deal to get the same kind of scrutiny from the Department of Justice? You know, I think that's a great question because it will be so interesting to see how that's treated. It gives some clue as to whether politics have weighed in on the A T and T Time Warner deal because Sinclair theoretically we we assume as a friend to

this administration or the administrations of friend to Sinclair. And if you look at the way past similar deals have been treated, I would expect that they'd have to divest sell off at least ten stations, ten stations in ten different markets, but possibly even a few more, but at least divest in ten markets. If we this would follow the precedent that's been set in similar deals to the Sinclair Tribune deal. If we don't see that, then it

makes this all look more political. I'm struggling here also, because typically Republican administrations have been more allowing of big deals. That's sort of the assumption that mergers have an easier time getting through under Republican administrations. Is that an inaccurate impression? And if it's not, how does this square with that?

You know, that's a very accurate impression. And I think there are a lot out there that had that impression, because if you remember, just about a month ago or so, Senator Elizabeth Warren was asking for this new head of antitrust at the d o J to recuse himself from this deal, and she is against this deal. She has, you know, vocalized her her opinion about it, So obviously what she was thinking is that he would also just sign on the dotted line to get let this go

forward as well. I think most of the antitrust community is very surprised by this for that reason, and and and that is why you hear people talking about politics and politics weighing in, because this just seems so out of the ordinary, well out of the ordinary or not. CNN and Time Warner, they are all content providers, right, they don't actually own any of the distribution assets. That is where a T and T comes in. That's right.

So what is the anti true? What is the argument, if you can make it, what's the antitrust argument that says, no, you're a distribution company, We don't want you owning the content that would then be distributed on your pathways as

well as those of your competitors. The argument that's been made here is an economic argument, and it is that by they get added leverage by owning the content, it will give them the freedom to raise the price survival distributors because either they make more money by raising the price, or if these distributors refuse to pay that and they have a blackout of their of their television stations. Then some of those subscribers will be lost to that distributor and we'll come over to a T and T. So

in the long run they'll benefit from it. Does that mean that the next step would be to go after a company like Comcast to divest the or split the content producing division from the distribution division. Now, I don't think that that that the anti drest agencies would do that at this point unless there is some evidence or some reason that they want to investigate the company for potential anti competitive conduct at this point. All right, thanks

very much for being with us sharing the updates. This is a story that's going to keep on giving. Indeed, thank you very much. Jennifer resurstigation analyst for Bloomberg Intelligence, speaking about a T and T S attempt to acquire Time Warner and push back from the US Justice Department. Uh Denver is going to get a hyperloop or rather hyperloop inspired system, and the person who is going to

build it is Brogan. Ben Brogan, founder and chief executive officer of Rivo based in Los Angeles, California, and he joins US now. Brogan is an early Space X engineer and is working on making it quicker for people to get from one major hub to another. Brogan, thank you so much for joining us. Can you give us a sense of what exactly it is that you are working on in Denver? Absolutely? Thank you in the good morning. Um, yeah, so it is century. So I figured let's get some

more century technology into transportation. So what we're designing is an integrated vehicle system that works in enclosed environment. Um. So it is kind of like a hyper loop, and that we have a dedicated roadway or guideway that we move our vehicles, but we do not operate in a vacuum. And we're focused more on kind of regional and super regional travel of kind of unlocking traffic and cities. Is

what we want to do with this new technology. Can you give us some idea of the cost of this new technology, because there's been some estimates that well, I know, for example, Elon Musk when he first put forth the hyper loop concept that was back in I think the cost was estimated at around eleven and a half million dollars per mile of hyper loop. How have you costed this out? Uh, well, we think we're gonna be far

cheaper than than other forms of the hyper loop. You know, one of the things by eliminating the vacuum, of course, it eliminates the the operating cost, eliminates some of the capital costs. It doesn't eliminate the and cost. It brings them down. It brings down the capital costs and of course makes it much more safer. So we have a partner in Denver. Region four seventy is a toll road that moves a lot of people around the region. Already. With our system, we can move more people on a

given lane of road. Uh, and I'll talk a little bit about more about that in a second, but uh, we're gonna be operating our system at the same cost or lower as the current toll road, so it should be very very low cost and everyone will be able to use it. Can you help me picture in my head what this looks like. So it's an enclosed space and you go in your own car, or you go in a car that is sort of resting on some kind of magnetic track, and it goes to a certain

place and goes two hundred miles per hour? Am I butchering? This is that? Basically? No, it's it's also so okay, if you've seen um, maybe some of the images of classic hyper LUPSI above grade or in tunnels. We can do both of those. But a EVA was also designed to work on an existing lane of freeway. So what we can do is we can put our own technology right down on the roadway. We do put an encapsulation over it so it keeps the weather off, it keeps

tree branches, soda bottles. Basically allows us to short circuit ourselves to level five autonomy. So inside the system, uh, you can drive your own vehicle onto a sleigh. That way, you can take your own stuff on the bother of a fourteen month old so I can assure you we have a lot of stuff in our car. I don't always want to take a lift, so you can do that.

You can put your surfboard or your skis in it um and you can zip you know, in our infrastructure and then drive your own car in the last mile. There's we have multiple products. We also have what we call super Metro, sort of like a metro style product that carries groups of people that can have beyond bicycles

or pedestrians. We also have a palette zipper UM and so wherever we have our infrastructure, there's gonna be some dedicated places where you you load and get on it and then yeah, you you end up moving fully autonomously and two winter miles an hour. Um, you know to the portals closest to your final destination. Is it? Is it magnetic? Is it is it wind? Are you just being sucked as quickly as possible to the other side? I mean, what what is this? No? No, no, there's uh,

there's no giant sucking sound. Um, it is magnetic levitation and propulsion. So linear electric motors are used in roller coasters today they're using aircraft launch systems. So we're just optimizing it for our application on the roadway. UM, we do levitated high speeds that both enables the high speed itself. What also means it's a super smooth ride because we can actively control that, so it would literally be as

smooth as sitting in the chair. Um. So you know, we're just taking some of these twenty century technologies and really focusing. You know, as populations urbanized, more people are moving to cities. Traffic is a major problem. So what we want to do is do more with less. So our focus is on getting more vehicles on a given lane of infrastructure. That's the key. Just to put a quick number to that, given freeway, depending on which standard you use, can move about two thousand to thirty hundred

vehicles per lane per hour. The Rebo system to move twenty thousand vehicles per lane per hours. This idea that you can enable regional mobility with less infrastructure. I hate to keep harping on the on the money, but I'm but I'm wondering how much money have you have you raised so far to do this or how much money has the Colorado Department of Transportation put into this partnership. So yeah, So the the study that we've announced, we

formed a public private partnership. Uh see dot put in about Colorade Department Transportation put in about two hundred thousand dollars for the first phase of this study. Uh And and if we're successful, then then we like to to to go a little further with that. M Our Companies privately funded. We're gonna be dealing our series A uh coming up, and I'd be happy to come back on

the show and announce that. But we do have a team of of over forty people, mostly engineers, really world class talent from from all the most you know, technically impressive companies and universities around the world. Amazing team. Where is this being tested? Is there a place where someone could go and actually see something that was built? Because I know that the hyper loop that Elon Musk has put together, I believe that there's a test center in Nevada.

What you want to built a test hyper loop in Hawthorne, California, and there's a private company that built a test system in Nevada. We are going to be doing that, so you know in Los Angeles where our engineering headquarters is, we're doing competent level work. Mind you were only you know, nine months old as a company, and we did announced also a test site in Denver, So we will be doing system level testing and we're gonna have shovels in the ground for our own test site in Q one

of next year. You have been you're only around for nine months and you've got a fourteen month old. You must have had a crazy year. It's crazy good but yes, crazy um real quick? In your company? Are the actual builders part of the company or are you going to contract out that work? And is there enough uh, those types of workers to actually construct something like this? Oh? Um? So you know our company is really a technology company.

As we move into projects, we're all about the partner ecosystem. We've partnered with a Coom, the world's number one design construction firm, on this never project. We have other partners in different places around the world. Um, so we'll be building out a workforce in Denver that's going to be a Revo employees, but it will also be a workforce in Denver that will be supporting the project. So the

project will be separate from our balance sheet. All right, Well, we look forward to learning more about it and perhaps even getting a ride on it when it is built. Thank you very much for being with us. A. Brogan Van Brogan is the founder and the chief executive of

the Los Angeles based a Revo hyper Loops. How about that when we talked about Uber Technologies agree meant to buy twenty four thousand Volvo cars, including some that are autonomous, The focus was on the fact that drivers are becoming obsolete. But Sherry O. Day, who is a Bloomberg Gadfly columnist here covering tech, points out another very important aspect of this deal, which is Uber is going to own cars

and this is a change for them Shara joins us. Now, Shia, can you just talk a little bit about what your biggest takeaway was from this announcement. Yeah, I was actually very surprised with the Uber Volvo announcement yesterday for the reason you said right that this is a company. Part of the beauty of the business model at Uber is it doesn't own anything. It doesn't employ people, or doesn't

employ drivers. At least, the beauty of the business model was it connected people who wanted rides with drivers who are willing to take them places, and it took a cut of the fairs, and it didn't have to deal with owning cars or other messy and expensive assets. But as you said, Uber is now saying it's going to buy cars from Volvo and retrofit them to so they're driverless, and in doing so, it is owning assets for the first time, expensive depreciating assets, and I wonder what that

does to its business model. Does it also mean that Uber is going to have to learn how to service the vehicles. Well, they weren't very specific about the servicing aspect of it, but you're right, no matter whether cars have drivers or not, they still need to be serviced and maintained like any car, you need to change the oil, you need to recharge it with electricity. With all this autonomous driving that is being touted, how is it going to be fueled? Uh? Nobody has really addressed publicly all

of these questions about driverless cars. We have seen companies including Lift and and Waymo, which is the driverless car business within Google's parent company. Those companies have adopted a different model that they don't seem to be willing necessarily to own cars, but are rather contracting with fleet ownership companies including the car rental companies were familiar with to kind of own and service cars in a future driverless

car world. And Uber is obviously taking a different approach, although it's still early, and I suspect they're going to do a mix of owning cars and kind of um leaning on service company to own and service cars, you know,

talking about Lift in Waibo. I mean another way that you can look at this is that this change in Uber's business model is brilliant because now a they're especially given the sort of controversy over Uber in Europe, now they're actually going to be a buyer of European goods, right, So that gives them more political cloud. But then also it distinguishes them from way more or lift and all of a sudden they actually do have assets which could

be considered, you know, potentially a benefit. Now, I mean, I think you're right on both points that um Uber basically said yesterday that they want to have a little bit more control over their future, over this kind of driverless car future, and they believe that actually owning physical the physical cars themselves gives them that control. So that

will be an interesting thing to see. The other point about you know, the business model changes is yeah, yeah, it could be that um in the future Uber's business model looks you know, perky and bright when you kind of take the drivers out of the equation, which is one of obviously the biggest costs and complications and Uber's business. But I think the key to meet for me is that we don't really know what a future Uber is

going to look like. If we assume the driverless cars are going to be ubiquitous, how is the company going to make money? What do these sort of financial dynamics look like? And is valued at something like seventy billion dollars and you know that assumes that the company has a lot of its kind of business model questions figured out, and part of my point is it doesn't have those

questions figured out. Sure, in all of your conversations with experts in the technology world, is there anybody that points to Uber as being the potential straw that breaks the markets back that if something were to happen with this valuation, or there were to be some question about its ongoing viability, would that cause a route in technology? It's an interesting question.

I don't know that I've heard anybody. I mean, certainly there are questions about what Uber is really worth um right now, especially because you know, soft Bank, the Japanese conglomerate, is negotiating to buy stock from Uber shareholders at a

significant discount to where the company is currently valued on paper. UM. But I don't know that there would be kind of contagion effect if Uber's valuation were to create if the company had significant business problems um and certainly not in public markets, I would think, although it might have a cast of Paul on other private tech companies. Well done. All right, Well we're gonna leave it there, thank you very much. Shira Oviday are technology columnist and Bloomberg gadfly

when it comes to all things technological. And you can follow Shira on Twitter at Shira ov Day And of course we look forward to more of your reports on Blouberg. 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