Long Bond Positions Are Ripe For A Reversal: Authers (Podcast)

at Bloomberg dot com. This week really was driven by bonds, the yield curve, the gap between two year and ten year treasury yields inverting for the first time briefly of it UH since two thousand and seven, adding to this gloom and doom that was pervasive throughout all markets. But the question is where do we go from here? And our bonds really sending that barish of a signal. John Authors is joining us now senior editor for Bloomberg Markets,

fabulous columnist for Bloomberg Opinion. I recommend you read his work. It is tremendous. John, Thank you so much for being here. What's your take on the message being sent from bond markets this week? Well, the message is plainly negative, ridiculous to try to argue any way other than that. Less perhaps the inversion. We've been inverted on the three months ten years for quite a while anyway, and we were only inverted on the two years to tenure for a

matter of minutes. So that's actually, I think, less important than the show publicized minutes. Though. Yeah, well yes exactly. I I got to I gave an interview for I gave an interview for Bloomberg Radio in my pj's and the moment it happened, more or less, that's how we do it. Yes, so we we we we were there and we were not the only ones there on on

that story. But but what has been more important, plainly is the remarkable falling yields, the remarkable moved to buy bonds therefore, and that has not really been reversed in any meaningful way during the week. Plainly, that can only be negative. The interesting question and the reasonable question, is whether the bond market tends to be wrong less of the time than the stock market tends to be. But

it's not as though the bond market is infallible. The question is whether the bond market could be wrong about this, whether we've got into um the inverse and anti bubble where negativity takes over in the same way that optimism takes over in the top of a stock market. Yeah,

I mean, and I'd like to dig into that. But before we do that, I mean, I guess I hate to be the person to say this time is different, because I think that I'd rather shoot myself than than commit to that kind of statement and say that everybody else is wrong. But you know, people are talking about

the change in demographics. They're talking about the change in inflation regime, the fact that the population isn't growing as quickly in developed markets, the fact that you know, all of these types of factors leading to lower inflation, slower growth, and just lower natural yields, not to mention just the amount of dead outstanding. So you know, isn't that enough to send yields lower? Despite the fact that we may not be headed toward recession, right, all of those things

certainly help send the yields lower. I would I would add the sheer technical factor of liabilar team matching, which is much more of an issue than it was even ten or eleven years ago when we had twelve years ago now, when we had the last inversion that said that said, okay, from the war through to at least, the turn of the millennium was a historically great time

to be holding both stocks and bonds. And you could argue that that that we're now into a you know, argued into different period given the level of the demographics. It's only twelve months since all the logic, all the narrative, all the great bond gurus said that the direction for

bonds was naturally up. Um, that the secular ballmarketing bonds was over, that pension funds as as we saw the demographics shift to people actually retiring selling their bonds as part of the process of drawing their pensions and so on. That those demographic forces might tell you something about the economics, but in terms of the technically impact on the bond market,

they would still actually drive yields up. That argument is true as far as it goes, just as the one, just as the bullish argument for the bonds you just gave me is is true. Um, people seem to have put too much credence in one of them twelve months ago, and I suspect may still be putting too much greetenance to the other at the moment. So that's that's where I wanted ahead with it. So basically, are the positions Are the long bond positions crowded and overcrowded except for reversal? Yes?

I think so. I mean there was a I did a column earlier this week where you if you take a look at Kindleberger's famous definitions of the guy wote this wonderful Manias, Panics and crashes book on uh investment manias, mostly stock market manias because stocks are where things really go hey why most of the time. But it could apply to two bonds. What he was talking about there was his valuation obviously extreme, which is is there a narrative to back it that makes people think that it

will carry on like this, that they can justify it? Yes, there is? Is there cheap money available to fund it? Well? Duh? And perhaps the only questionable one is is investment in

this market being funded by leverage? Which arguably there's I'm not sure how much leveraged money is pouring into the bond market, um, but plainly there's a good argument that what we have here is a bubble like condition that people in many cases, really if you're buying a bond with a negative yield, presumably you're at least thinking in terms of sending it to somebody else for an even more negative yield rather than happily losing some capital by

holding it until maturity. That's again bubble behavior. So it does look to me as though the markets overcrowded. And similarly, if you take a look at the performance that you've also seen all the patterns that you see in the stock market kits that have been caused by people trying to deal with the bond market, you can see plenty

of signs of overcrowding there. That you're talking about the bond proxies, right, yes, to talk a little bit about what we're talking about, that's utilities and reads, real estate investment trusts, etcetera. Those are the most obvious bond proxies. Companies that are boring are unlikely to give you amazing capital growth, but will actually pay you quite a well supported, predictable yield in the case of utilities from regulated Harris and reads from the from the rental yield, but it

actually goes beyond there. Obviously, those companies have been doing well of late in the stock market. But I had a look at some research from sock Gen which was fascinating that they looked at this in a sector neutral fashion. So for each sector, even if it's biotech, which were the ones that were most correlated to bonds and which

were the ones least correlated to bonds? Over time, and in the last year or so, the last couple of years, even on a sector neutral basis, the bonds proxies have suddenly become vastly more overvalued just using p ratio standard valuation measures, while the ones that the least like bonds have become startling lee under valued. People are so if you're more like a bond, people will buy your stock more than your closest competitor. That really does reek of um.

Obviously we've people brainlessly blamed algois and so on, which can often be rather a tired way of doing these things. But plainly, lots of people are looking for yield, they're looking for bond substitutes. If they're in some kind of a market neutral strategy or whatever. That means they're buying the most bond like tech stock and shorten the least

bond like tech stock. And that means we've got some weirdly overcrowded positions that are only there in the stock market, that are only there because of the weird conditions in the bond market. John Authors, thank you so much for taking the time. I love speaking with you. It's great insight, and uh, it's sort of an interesting time to be

not necessarily bullish. But at the same time, it does seem like the bearishness is getting crowded, so uh, you know that's gonna be something that we're gonna be keeping an eye on. John Author's a senior editor for Bloomberg Markets and a Bloomberg Opinion columnist. You can read his columns O P. I N Go on the Bloomberg, Bloomberg dot com slash Opinion on the web. It is about ten thirty on Wall Street. That means it is time

to get some opinions from Bloomberg Opinion. We are so lucky to have Brook Sutherland here with us, a columnist for US covering the deals in industrial sectors. And Brooke, it really is about GE today. I know DearS in

the headlines and we're going to get there. But GE is really fascinating because yesterday it was accused of being a Zi scheme by someone who called out the burning made off Ponzi scheme, or he called it basically, someone said that the accounting issues there were were highly problematic. Today we're seeing a bit of a bounce back in the shares. Why. I think part of it is because Larry cold said yesterday that he bought two million worth

of shares UM. So that is a vote of confidence by the CEO, sort of putting your money where your your mouth is. UM. He is required by the proxy to own ten times this salary in stock over the course of five years, he's supposed to build that up. UM. So clearly he's trying to incentivize the CEO to do the right thing for shareholders. UM. But you know that you also had some analysts come out and say, you know, they're not all of the report necessarily makes sense to them,

and that it may be going over the top. But you also have city groups saying, you know, look, this builds on existing ongoing concerns. And that's sort of where I fall on the spectrum is, particularly with the insurance business, it is impossible to know how much money they're going to have to put into this. Give us a sense of what the report said, who did it, etcetera. Sure, So it was Harry Marcopolis, who is a whistleblower on Bernie made Off, was ignored by the SEC for years

and then ultimately proven correct in his analysis there. So we published this report on GE accusing them of sort of a couple of main things. So the biggest is that he thinks that they are significantly under reserved and their long term care insurance business. Now remember this is where they had to disclose of fifteen billion dollars shortfall

last year. He thinks that they ultimately need thirty eight billion dollars more there, and part of that is an eighteen point five billion immediate cash inflex and then a ten point five billion non cash gap charged in order to sort of respond to tougher accounting rules that are going to be coming out regulating this business. Um that is a very big number to put on it. And again it's this is such a black box of a

business and it's entirely dependent on assumption. So it matters what you think interest rates are going to do, what are healthcare costs going to do, how many people are going to get all timers, are they going to get healthy? When are they going to die? There's so many different variables here that you can make assumptions and come up with sort of whatever number that you want. But I do agree that g E is not being conservative enough

when it comes to the long term care insurance business. Um. You know, I wrote about this in February when they sort of laid out more details in their ten K of the various assumptions that they were making. And when you look at companies like Prudential, it does seem that g E is slightly on the more optimistic side. Um. So how much they're gonna have to put in there is still a question work. But this is certainly something

that investors have been watching and are aware of. All right, so we'll keep watching GE and I know you will as well. I do want to shift gears to dear. Do you reported earnings today and they're uh. They cut their full year forecast, which sounded bad, And when I came in, shares were down ahead of the open. Currently they're up three point six. What happened? I think it

might be an issue of expectations versus reality. I think expectations were very low for Deer, and you did have a Goldman report out this morning saying, you know, they were not that bad, particularly when you look at the profit margin ringing endorsement. I know, but I think but it is sort of you know, demonstrative of what investors are going to be focusing on for industrial companies over the coming years. Is as you know, we've now established

that we're in a slowdown. There's nothing that I'm seeing that's going to arrest this slowdown, particularly when you have the ongoing trade war uncertainty. So assuming this continues, where do you put your money? And so I think the focus is now on what companies can sustain their profit margins when their sales are falling um. And you have Deer also talking about changes to its cost structure, so clearly it's concerned about that is trying to protect its profitability.

But but this is, this is this is what was struck me this morning. When you start talking about cost cutting, which is essentially that cost cutting and raising prices for the customers that you do have. You can only do that so much, right, And I mean, does that sort of indicate is something bigger that is concerning to you? It does? I mean, I will say, so, You're You're absolutely right, there's only so much you can cut. But the idea is that these companies are becoming more efficient,

more productive. Now a big part of that is a lot more of their operations are automated, so they don't have as many people to pay in the first place. Um. So that's their argument is that you know, they're they're

sort of protected in that way. But yes, it does raise questions about longer term impact on demand and sort of supporting this cycle, because you can only do these things so long before then we do start to see this recession that you know is for the most part been sort of contained to manufacturing slip into the consumer. So with Deer, I know that in general Caterpillar is viewed more as a proxy on the economy than than

Deer is. But is there anything that we can read in uh two Deer's results to give us a broader sense of what's going on in the effects of corporate balance sheets? Yeah? Absolutely, I mean I think they're a great proxy for trade war pain because of course this

has really hit the agricultural sector, um. And so just looking at the general uncertainty that's pervading manufacturing, I think this is another example of that where people are just not willing to spin because they don't know what's going to happen, what's going to be out there. How do you justify spending thousands of dollars on a tractor? Yeah? Um, so right now we are talking about deer shares up at three point six percent. Next week, just real quick,

what industrial news are you looking for. I'm hoping it might be a little slow next week because it's it's the middle of August. We've sort of gotten through earnings. But I think, you know, with this Trump administration, nothing can ever be totally uneventful, and so I'm sure we'll get some trade headlines which will have an impact act

on on industrials. And of course we're going to keep watching g for more developments there and especially to see if they have a more robust defense point by point, because we haven't really seen that yet, And do you expect that. I think they would be wise to do that. I think they'd be smart to go in and get rid of all the earnings adjustments and their financial statements to you know, stop being quite so opaque with the

way that they present their numbers. Um. They've had some unfortunate errors just over the past couple of months where they've had to go back and correct what they said in presentations, correct marketing materials that you know, had made their business sound better than it really was, and so that is not a good look. And you know, I think they have a clear opportunity here to do more

to improve transparency and credibility. Brook Sutherland, thank you so much for being with as Brooks Sutherland of Bloomberg Opinion. You can read all of our columns O P I and go on the Bloomberg or Bloomberg dot com slash Opinion on the Internet. I do want to just mention that General Electrics, the biggest plunge in eleven years, came as of a bad time for a lot of hedge funds.

There's a really interesting story talking about how the likes of Rhissance Technologies, Citadelle Advisors, and a Dodgy Capital Management all piled into General Electric shares right before the shares completely fell out of bed. So not the best time. Biotech is risky China is risky. Biotech in China an opportunity. That is what our next guest says. Brad at long Car.

He is chief executive officer of Long Car Investments, normally in Lenox, Kansas, but joining us here in our Bloomberg Interactive Broker studios, Brad, So you invest You've been an investor in biotechnology shares for a long time, So just you give us a sense of why you were attracted to China in particular within this sector. Yeah, so thanks for having me. This does sound like something that's new,

because it is. China is having a biotech boom right now, and part of what's behind it is, you know, think of the trade war and all of the headlines that are going on. China wants to shift its economy from being a manufacturing base and traditional industries like that to innovative sectors like tech and clean tech, and biotech is one of those. So your listeners might be familiar with the term made in China. Five. China has singled out pharmaceuticals as an industry that it wants to be a

world leader in by that time. So the government is behind this. They've completely reformed their version of the f d A. It's called the National Medical Products Administration. The stock markets are actually allowing biotech companies to list for the first time, believe it or not before last year, like in Hong Kong. If you didn't have revenue, as most biotech companies don't, you couldn't even list on the stock exchange, and so all of these things are incubating

a biotech sector for the first time. How do you evaluate a company? First of all, how do you evalue a biotech company and is potential worth when a lot of them are binary? Right? I mean you can have a binary outcome either something gets passed by the FDA and adapt adopted by the mainstream medical world where it doesn't. But in China, I feel like the bar is even hired to understand what's going on with the company. I mean, is that a big problem for you just evaluating what

they actually do and how good their products actually are. Yeah, so it's a little different there and here. So here you really have to analyze the science and try to figure out what's going to work or what's not. The phase that China is in with biotech right now is a lot of the companies there are licensing drugs here. So these drugs that are innovative and being approved here for the first time, but are already proven, have already

succeeded in trials. They're licensing those drugs and then commercializing them there. So the stage that we're in right now is trying to determine the size of the market and the patient population for AREUS medicines there, and then to

use that to figure out the value of the companies. Now, Chinese companies are also doing what we call discovery work, and they will be inventing new medicines over the coming years, and so we're gonna have to shift our focus and focus on that scientific risk they're like we do in the US today. But that's kind of the next step. The first step is just getting innovative drugs into the country to begin with, and what are the economic ramifications

of that? And for that, there's it's wide open. They're transitioning from a generics based model to an innovative based model, and so there's gonna be lots of room for many companies to succeed. I'm listening to you talk about adapting or you know, bringing over some of the established medicines here. How does this fit into the trade war and the

whole intellectual theft in IP theft discussion. Yeah, well, the trade wars you classically think of it, There are no tariffs on medicines because if you think about it, that would raise drug prices and neither side wants that so this is one area that fundamentally is not affected by the trade war. Now in terms of IP theft, that's

part of the trade war negotiation. So a big class of drugs here what really created the biotech sector, what's called biologics and China in the US right now are negotiating how many years of exclusivity biologics will get in China. What are biologics? Just to give us a sense of what kinds of drugs were talking about. So like a traditional traditional medicine is made by chemicals, so like a pill, biologic is like hum era, you know, drugs that are made from living organisms. And so in the US we

have twelve years of protection from biologics right now. China would like to have nine years. But our industry views the negotiation as a hugely positive thing. That's that it's even taking place. So China understands that you can't have a biotech sector without IP protection, and they're starting to write that in more forcefully than they have in the past. And so I think the arrows are pointed in the

right direction as far as that goes. So, you know, moving aside from the science of it, and I understand sort of the technical backdrop, the fact that the biotech industry in China is gaining new steam because of the Maid Proclamation and also just because there is a shift to a more developed economy. How do you invest in Chinese stocks? Do you do it with U N do you do it with dollars? I mean, is that a big consideration for you? Yeah? Well, I'm an index creator.

I've created an index that tracks a basket of China biotech stocks, and most of them are listed in Hong Kong. Like the index that I've created, it's called the China Biopharma Index, tracks twenty nine companies and twenty three of those are listed in Hong Kong. But there's actually a handful of really good ones here listed on NASDAC. There's one called by Jane, one called zy Lab, and so they're listing in both places. And you know, I personally do a lot of on the groundwork. Over the last year,

I've traveled there six times. And in biotech that's really important. You have to meet management teams, you have to visit facilities and really see the science they're doing and their manufacturing facilities. You know, to make sure that you're investing in good companies and that takes a lot of legwork. What about in the US, do you think that the opportunity in biotech in the US has already basically played out at this point? Well, you know, the US has

been very rocky. The ib B, which is the biggest biotech ETF actually peaked in and a lot of people don't realize that. You know, we the stock market makes new highs every day, not over the last couple of weeks, but um, the biotech sector is one exception to that. So we peaked in ten And the reason for that is everything you see in the news about payers pushing back on drug pricing and all of this stuff, and

so it has impacted the industry's growth. And I would say biotech investors in general are really nervous about the next year because we've got the presidential election and you have all of these candidates, you know, saying terrible things, some frankly well deserved about our industry. And so we think biotech is going to be taking a lot of shots over the next year, which is actually one reason

why I'm so focused in China. You know, in the US, we're thinking of ways of how we won't spend money on drugs and China they're starting from the very beginning. Their biotech sector is just like ours in the eighties and nineties, meaning it's just getting started. And what I tell people is, there's an am gen there, there's a cell gene there, there's a genetech there, and they're just small companies that most people haven't heard of yet, but you will one day because it's gonna look just like

our biotech sector in the future. Thank you so much for being here. Brad Lankar, chief executive officer of ln CAR Investments, talking about China biotech and uh, it really interesting to see also the backdrop of this having to do with biotech in the US and some of the pressures that it will inevitably come under as election cycle heats up. We're already seeing a lot of rhetorics saying that frankly, we need to lower drug prices, and this

has been an ongoing discussion. We have had a tumultuous week here, Uh, markets getting whips ode by competing tweets and comments about the trade war. The U S and China do appear to be talking. The US made delay tariffs until December that it had originally planned to impose in September. The question is how much is this really soft and trade tensions, especially as China says that it plans to retaliate against the US if it does impose those extra tariffs. So how does an investor deal with US?

David Cat's joining US now, chief investment officer at Matrix Ascid Advisors. Uh, David, I'm just wondering after this week, is there anything that happen that makes you want to change how you allocate your money. Well, we think that the large sell off is actually created an opportunity. We are fearful of the trade war. Uh. It definitely is slowing the economy. If there isn't a daytonter cessation of hostilities, we think that it could cause the global economy to

slow down, possibly a recession, and the same with the US. However, if there is any sort of easing of the tensions, we think the economy is in good shape. And stocks which sold off probably about six from their highs in the last two to four weeks, are really a very good prices. So key to investor take a longer term time horizon, uh, and pick companies that you like. And

we definitely would be buying into this week. That's not on a day like today where the markets rallying, but on a day like Wednesday when it looks like the world's coming to an end. So where exactly do you see opportunities? Well, the group that's been hit the worst in the last week or two, who has been financials or one of the worst been financials, And we think that even though it's gonna be a little bit tougher to be as profitable in a lower interest rate environment,

they're still making a boatload of money. They're buying stock back. They're actually among the best yielding stocks in the market today. So you have a good two to three year time horizon or two to three year earnings growth window, and you're gettinghim a ten eleven times earnings paying a three and a half percent yield. So we would be pretty aggressively buying financials, whether it's a BBT or Wells Fargo with JP Morgan at b n C. We really like that group a lot. We like the um brokers like

a Goldman Sachs or Morgan Stanley. Again, we think that's a very good opportunity if you're willing to turn down the day to day noise. So David, I guess that then what would you say, how much is this predicated on the idea that the Federal Reserve is going to cut rates at least two more times this year. So the Fed's gonna cut rates for sure, whether it's it's one, two, or three times. We think that will help the financial markets and provide liquidity, but we don't think it really

will have that positive impact on the economy. We're speaking with hundreds of companies, and what all of the companies are saying, pretty much across the board is that their business is slowing because of China, because of trade tensions, and because of tariffs. Not one company that we're speaking to has said, hey, business is slow because we're worried about the credit markets, that we're not able to land,

our interest rates are too high. So the Fed lowering rates, we think is a foregone conclusion and will be a net positive. But the real key to the economy and then the real key to the stock market is do we get better progress on the trade And the reason that we're hopeful that we will is it's finally starting to set into everybody and ultimately to the President that

tariffs are bad. Trade war is bad. More and more strategists are talking about it, more and more newspapers are talking about it, and that's going to put pressure on the President and Theater Navarro to come up with the resolution rather than keep talking about tariffs being such a great thing. People are now losing real money. The economy is gonna slow and President Trump does not want to go into next year in a recession as he tries

to run for re election. David, let's say that there it becomes clear there's not going to be a trade deal between the US and China. Would you be forced to sell some of your stocks that you've been buying. Well, we wouldn't be forced to sell them, but it definitely would extend our time horizon. We think you're gonna have a pretty quick rebound if you get some sort of a deal, but if you don't, you're going to go

into a slowdown or a recession. But again, we think it's self correcting because the more the market goes down goes down, the more pressure there is on the United States and on Chid into settling something. So this isn't the type of problem that you had in two thousand, where you had huge excess inventories and spending in the internet bubble, or in two thousand and eight when you had a huge real estate bubble and banks have bad balance sheets. The overall economy is generally intact. You don't

have excess inventory. Consumer balance sheets are in great shape. Bank balance sheets are in great shape, so you have a lot of really good things out there. This is a self inflicted wound that can be corrected easily, So we think the longer it goes on, the great little likelihood it gets fixed, simply because you can't continue in the form that it is. David Cats, thank you so much for joining us today. David Cats, chief investment officer at Matrix Acid Advisers, joining us from New York on

the phone. 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 bram Woyds. I'm on Twitter at Lisa bramwo wits one before the podcast, you can always catch us worldwide on Bloomberg Radio.