Why Online Education Should Come With An Online Price

columns Kathy O'Neil. She's some a mathematician and also a columnist for Bloomberg Opinion. I want to talk about higher education as uh the father of two college age students myself. Uh, Lisa, you know it's really an issue here. We're paying full tuition yet they're not getting the on campus classroom experience and kind of calling it the question the value proposition there. So, Kathy,

thanks so much for joining us here. What do you think is the future, at least in the near term, of some of these decisions parents and students and colleges need to make about pricing what is a much much different experience. Thanks for having me yeah. I mean, I'm looking right now at this Chronicle of Higher Education website that says that two thirds full two thirds of colleges are still claiming that they're going to have in person classes in the fall. I just don't think that's realistic.

I think the ones that have copped to remaining online for the fall, which is only at six percent right now, are being much more honest with their students and parents, And for for now, we're just playing a game of chicken. We have parents and students who are strapped for cash. We have colleges who desperately, desperately need the tuition money, and that first tuition payment, as I'm sure you know, is coming due in a month or two, and they're just not going to tell us. It feels like I

also have to college students at home. Um, they feel like they're just not going to tell us what the actual situation is until they get that tuition payment, which doesn't seem like a good deal for us. Well, and it seems like increasingly parents are wondering about the value proposition. And my kids are younger than college at age. But I'm a little bit nervous looking at how quickly the

inflation has occurred in college price tags. I'm wondering what the pandemic and the disruption to in class attendance might mean in terms of colleges going out of business if parents do decide not to pay the bills, or potentially a rejiggering of more kind of technical colleges versus uh

liberal arts educations. What do you think, well, exactly, And I think basically the value proposition has been for the last few dozen years that it's not just an education, it's a sort of certificate for the middle class or for certificate for a better than a middle class job,

depending on which college you go to. So so parents have been shelling out more and more and more and and have as have students, not simply for the education, but also for the experience, for the socializing, for the connections if you will to good jobs afterwards, and if it's online, you clearly don't have all of that, you

don't have the on campus experience, etcetera. And to be clear, colleges have been cashing in on this holistic approach to what they're offering just as much as parents have been

buying into it. So it's it's just simply not about education and I and I hesitate to say this because I have many, many friends who are professors who are working their tails off in order to deliver as good an education as they possibly can in the context of online And it's not not to say that they're not doing a really good job, but that's really not the only thing we're paying for when we pay for college.

And so the question is what will happen next. And I really do think if it becomes online, then people will say, wait, if it's just about education, I'm simply not willing to pay this. So, Kathy, I mean, it's interesting you mentioned tuition, how the colleges really need tuition, and I think that's so much about the really big universities, well known universities that have big endowments and that can

perhaps weather the storm a little bit. I'm thinking about that this may be the second and third tier colleges and universities that really don't have those endowments and therefore really rely on funding their operating budget with two ocian

What are those schools going to do? I think there's gonna be a lot of liberal arts schools, the ones that really like remate, like sort of rely heavily on this in local parentis concept um that we're going to be, you know, there for your kids, and it's going to be a full pledged liberal arts education. Those schools that rely that don't have a huge endowment are going to go out of business. I expect to see a whole a huge slew of colleges just closing shop in the

next couple of years because of this disruption. Kathy, have you heard any of Scott Galloway's comments, the n y U professor who's been going on the airwaves and saying that basically a lot of colleges should go out of business, that they're overpriced, and that finishing schools essentially are the IVY Leagues will continue because they are sort of artificially propping up their value. I mean, you basically was comparing

them to Gucci scarves. But I'm wondering, I mean, are you going to see this increasing bifurcation among the IVY League and everyone else as everyone else tries to justify the finishing school aspect of their business as sort of as you describe the holistic experience. Yeah, I mean I hope so. And and what what I really hope is that whatever we replace this with is less expensive, um and less like arduous for me and for their parents and I you know, like, look, there has to be

some way to decide what job who gets right. It's a sorting mechanism, but it's just an unbelievably expensive sorting mechanisms. So my hope would be that we really do figure out a way, um that that works. Um. You know, look at the German model with an enormous amount of apprenticeships for example, where there aren't that many uh, sort of university educated students um relative to the number of students that take sort of apprenticeships after call after high school.

There's nothing wrong with that model, except we don't do it whatsoever. Um. So if we could find a reasonable system that isn't nearly as expensive, that gets people um jobs sooner and less long term student debt, that would be fantastic. Kat the O'Neill, thank you so much, and uh from your lips to the higher education's ears ahead

of my children having to go to college. Cathy O'Neill, a Bloomberg opinion columnist, a mathematician who has been a professor as well as a hedge fund analysts and data scientists and author of Weapons of Math Destruction. Definitely something on the forefront of our minds the price of college education, which is absolutely skyrocketed in relation to everything else, raising a lot of questions, especially given the student debt load right now that we're seeing come into the focus. Paul, Yeah,

it's really interesting. And again, those fall semester payments are coming up, and I wonder if there's gonna be any pricing adjustment here for what is a very different product that we're getting now versus what we initially signed up for. Well, the up and down relationship between the US and China seems to be approaching another low, this time due to the new security laws that China has imposed on Hong Kong, and a response from the U s has not been positive,

to say the least. Michael Herson, practice head at China and at Northwest Asia for the Eurasia Group, joins us. Michael, thanks so much for your time here one of for our listeners, if you could just summarize what these new security laws are in Hong Kong and maybe why China is doing it now. Sure so, China announced on Friday that it's legislature the National People's Congress will implement this law rather than go through Hong Kong's own legislature. And

this has been a long, decades long sticking point. In fact, Hong Kong establishing a national security law and Beijing had left that to Hong Kong to take care of but basically ran out of patients. And there have been waves of protest over the last year and even earlier over Hong Kong um proposing this legislation on its own. So essentially Beijing said time is up. We're going to do this for you under its own interpretation of the law

that governs China's mainland China's relationship with Hong Kong. Now, what the law actually does is well, first off, I should say we won't know the details because the law has not been drafted yet, and that will likely be something that happens over the course of the summer. But essentially it gives likely some fairly broad powers for Beijing to extend its authority over Hong Kong in areas that

it regards as anti government uh and treasonous activity. A lot of people are saying that the US should and will step in. We've seen Congress come out and threatened to take action, including potentially provoking the special trading status that the US has with Hong Kong. What does China stand to lose if Hong Kong loses some of its

special status with respect to its reputation financially around the world. Well, I think for China, the economic importance of Hong Kong has diminished quite a bit relative to the size of China's economy, So I think the biggest threat for China at this point would be if these actions create fundamental financial instability in Hong Kong. That would be bad and could have ripple effects for China's economy and financial system.

But generally speaking, losing Hong Kong's vitality as a global business hub is not positive for China, but it doesn't represent any kind of systemic risk. I think it's fair to say that mainland China has has moved on beyond that. So Michael does realistically, does Hong Kong have any recourse here? Hong Kong, I think to be blunt, No, not really, And of course Hong Kong's government is at this point the the administration of Carrie Lamb is moving essentially in

lockstep with Beijing. So really the question mark at this point is not so much whether or not Hong Kong has recourse, but as you suggested, what the US responses. There's also a question about other power graphs that China is making right now. There was a one point for a trillion dollar investment program in its technological infrastructure that they announced. They've been trying to get a vaccine through faster than the United States. What's behind this at this

point and is China getting the upper hand? Well, I think there are some areas that you can call this a power graph, but there are other areas where China is just behaving opportunistically. The world is in crisis, China is more stable than a lot of other countries, and so it's it's looking to gain an edge, and I think that's the case with the stimulus program, in the investment and a lot of these strategically important sectors that you mentioned. UM. Generally speaking, China is trying to use

the crisis to expand its influence, uh. And it would do that through vaccine diplomacy, through the assistance that it's all already offered to countries um for medical supplies. And yes, I think it's fair to say that China see this as an opening, especially at the time when when China's economy is recovering earlier than most other large economies, to

really expand its influence. So I wonder if you can just give us a sense of the the health and the strength of the presidency of President g given the COVID christ pandemic, given the impact to the Chinese economy, given that some you know, international condemnation, perhaps China was somehow involved in the origination of this pandemic. What's the standing of the president right now? I think right now

his footing is quite secure. In fact, you can even make the case that for now she emerges stronger from this, and it's because of China's ability to contain the virus and to recast the narrative at home by showing that the party has been successful, his leadership has been successful, whereas the U. S and West has had a far more fumbling response to the pandemic. Now, I don't think that means he's out of the woods. Unemployment is rising in China. I think it's going to be a quite

gradual recovery. But what it means is that to strengthen himself, she will continue to ramp up patriotic sentiment at home and and portray China success whereas others have failed. And that is going to mean that these issues like Hong Kong, like disputes with the US over Taiwan, over the South China, see, all of these I think are going to stay at quite a high temperature, and it means real risks for the relationship now through the election. This is when I

don't really understand. It seems like mark markets are shrugging off the prospect of an escalating, escalating trade war or cold war between the US and China, and yet it seems like things are escalating. What's the tipping point at which it really will bleed over into the global economic recovery.

I think it's a very good point. I think markets tend to focus on the issue of tariffs because those are the most visible and easy to quantify in terms of tensions and argue at this point, and it's not a it's not a firm conviction, but we think that the Phase one deal will last through this year because neither side has the incentive to to re escalate on trade. We put that at about so I think the markets should be aware that there's a risk of breaking down.

But they also need to keep in mind that non tariff measures that are harder to price in are I think having a very significant impact. I mean things like US restrictions against Wally, new US restrictions against a further set of Chinese technology companies, the tensions that we're seeing in Hong Kong. These do have significant impacts on the global economy. They just harder to price in, and I think markets may be missing that. Michael Herson, thank you

so much for being with us. Michael Herson practice ahead of the China and Northeast Asian regions for eur Asia Group joining US based in New York. Definitely in the four front as these escalating tensions, yet markets just don't care. Paul, Now, the market, it disappears, as we've been discussing this morning, Lisa, really focusing on the pandemic. What stage are we in

the pandemic? And I think the markets obviously looking forward a little bit and seeing some gradual reopening around the globe, including here in the United States, and that's where the bed is. Yeah, people are hoping for a world that returns to something more normal than what we've all been experiencing.

One of the big stories over the past few months has been an unprecedented surge in borrowing, and that's from investment grade companies that have sold a record more than a trillion dollars of bonds so far year to date. This just raises all sorts of questions to me. Yes, their investment grade, but yes, they are adding leverage in a quest to just get as much cash onto their

belt to survive through this next period. Joining us now as someone who buys some of that debt, Josh Lomier, head of North American investment grade credited Viva Investors, which oversees four hundred and thirty eight billion dollars firm wide, enjoyces from Chicago. Josh, have you been out there seeing opportunities and some of this new issuance at a time of so much uncertainty? Yeah, we really have. I mean you mentioned that over a trillion dollars of new issuance

during a period of unprecedented volatility. There will always be opportunities to find value in that kind of environment. So Josh kind of give us a sense here, you know, given where we are in the credit in the economic cycle, are you concerned that risk assets have gotten a little bit ahead of themselves. I mean, it's sure to have

just more and more economic pain to come across the economy. Yeah, I think you're right, And I think you know, if if we just think briefly back to the last recession, the global financial crisis, you had the first iteration of you know, wobbling of volatility around Bear Bear Stearns in the first quarter of tow that O than eight, and then you know Lehman Brothers in the in the majority of the volatility we didn't feel till the fourth quarter

of two thous eight. And so I think any recession or recessionary environment is going to feel a lot more like a roller coaster. Maybe that first hills the biggest and the most scarier, perhaps, and then we we hit different peaks and valleys throughout. But I think I think we are at the early stages of this recession, and it's going to take some time to really figure out how deep the damage is done and how quickly we

can recover. Well, how worried are you about the fact that companies that are worried about their futures, worried about future revenues, have started odd leverage have started to reduce, uh, this sort of emphasis on deleveraging and shoring up their balance sheets. Right now, has that affected what you decide to buy? It really does. And if you think about it right now, and this is the whole market is

really just focused on ken things survive. A lot of this reaction function of just adding as much dead as they can to preserve liquidity is a is a survival technique and I just want to get through the next couple of quarters, and that's fine. But the reality is is when you do start to recover, when economies do start to open back up. Now, what we have, what we will have to worry about then is what are the second derivative impacts of all of this Because now,

best case scenario, we enter a shallow recession. And when you enter a shallow recession and companies are a half a turn one turn two turned higher leverage into that slower growth shallow recession, if you start to have to worry about their ability to earn their way out of that larger hole, if you will. So, what are you are you seeing in terms of credit quality across your portfolio?

We've seen a couple of bankruptcies just over the last several weeks gives a snapshot of kind of that where you think the credit quality is in the space you

look at. Yeah, so there's you know, there's gonna be a lot of fit stuations where you know, we all we all can see, you know, real estate, retail sectors are some of the biggest you know, on the very front lines of this, and other sectors like telecom and cable um and certain areas of healthcare and even packaged goods where you're not really as an impact because you're actually getting some tail winds from this environment. And so what we're really thinking through is who does have who

who is less impacted, who is the most impacted? And for the ones that are the most impacted, you know, you can start to steal how big of a drop in their ratings are they going to have as you start to project out significantly reduced earnings and revenues relative to these higher debt metrics. And that's kind of all the hard credit work that needs to go into making decisions in over the next two quarters. So let's talk about where you're seeing opportunities. What have you actually been

buying recently? You don't I know, you don't want to talk specific securities, but if you could talk sectors, types

of ratings, etcetera, that would be awesome. Yeah. I think one one important strategy we've deployed over the last couple of months is really to go down in quality into some of the sectors that we feel have been least impacted, and I mentioned some telecommon cable as as an area where that that can work, including some healthcare, and then going up in quality in some of the sectors that are most impacted, i e. In the energy space, focusing more on the high up and quality integrated companies or

the stronger midstream credits where you have much more forward looking or they have more levers they can pull to reduce leverage, as well as a bit clearer cash flow guidance in the current environment for commodity prices and so kind of barbelling your risk in that regard is a way to keep some beta in your portfolio while avoiding the lowest echelons of quality and some of the most impacted sectors. What kind of returns are you looking for

given the pretty significant returns that we've seen. It just gives people a perspective. So far in May investment grade bonds in the United States have returned to ten point eight percent. I mean, it's been a dramatic increase, and it's been both on the right side as well as on the credit spread size side. Is it basically a

coupon clipping exercise from here? I think so. I think we've you know, if you just looked at the credit spreads on the market as a whole, it's still wider than you know, um the types we've seen even year today, by a pretty meaningful amount. And so as the market recovers longer term, you can still see value in the

compression of spreads. I think rates have come down a ton, so you probably won't get as much of a kicker from a rally, and just broad interest rates and spreads are still wide, but I think spreads are more fairly and accurately reflecting the risks we still have in front of us, and so there's not going to be easy money left on the table, per se, from a spread

compression perspective or a yield drop perspective. And so now we're back in that period where things might be fair more fairly valued with lots of uncertainty, and the expectation is we're going to see some more volatility here over

the next coming quarters. So, Josh, I know, again you don't want to talk about individuals individual securities, but Macy's is just out with some news does they're gonna try to tap the markets for one point one billion dollars and they're going to use their real estate as collateral. What do you think of that structure? Is that is that something that's common for the retail space or is

this something unique reflecting very unique times. I think it's unique because it might not be that uncommon for high yield or leveraged credits, but for investment grade credits, it's

clearly a lot less common. And I think this is kind of back to that point we talked about earlier around companies in survival mode, and one of the biggest risks to unsecured deadholders, which are most of the investment grade bonds out there, are the ability of credits when they do see periods of stress to prime your debt, which what what that means is put secured debt in

front of your unsecured debt. And so what that means is if this, if this works, if this ends up working out for someone like Maze's, it gets them through this crisis so that they can grow at some point

in the future, then everybody's going to be okay. But if something doesn't happen with these types of credits in these situations, that that increases your tail risk and reduces your return on a a bankruptcy scenario or your recovery rate because you're now you now have another debt holder with security on their real estate ahead of you that wasn't there before. So it's not a good thing for the investment grade market, unless, of course that works out

in the end. Josh Lomar, thanks so much for joining us. Josh is head of North American investment grade credit at Aviva Investors, talking all things across the credit spectrum at least, so what's interesting talking about some of these lenders are saying come to the market like a Macy's, uh, you know, really trying to get creative and innovative to to really short up the balance sheets. But it is certainly a

risky time for credit investors. One of the most creative parts of the market has been the cruise liners, and some of them have put islands up for sale. I think Norwegian Cruise Lines put an island up not for sale for for collateral for some of their bond sales, and we've seen them put up cruise ships. And we've seen this, of course in the airline industry as well, with United not gain traction because people didn't necessarily want the aircraft they pledged as collateral. Uh, they thought that

those those airline aircrafts were not valuable enough. But it just highlights the desperation, right, how do you lure in new investors at a time when leverage is already high, at a time with such great economic uncertainty? Really question it is. And you know, since you see the price action today in the market, certainly gave risk on feel

to the market. And you know, it's just I think the president, you look across the Bloomberg termina looking at the news, a lot of it is just kind of positive expectations for a gradual reopening of the economy and and what that could mean for uh, you know, the economic statistics that have been so devastating for the markets over the last couple of months. As we've come to grips with the economic impact from the pandemic, a lot of people are wondering the Federal Reserve has done so much,

what more can they do? And people are definitely looking at yield core of control. The idea of managing yields at all different maturities of treasuries is the next likely step for the US Central Bank. Ira Jersey Bloomberg Bloomberg Intelligence chief interest rate strategist joining US now, Ira, I'd love to get your take on what this will mean for bond traders if the Federal Reserve actually does this. How many more longer maturity bonds does the Federal Reserve

have to buy? Well, they would have to buy a lot. I mean that the idea of yield curve control would be for the Federal Reserve basically to say we're going to set this rate um, you know, maybe it's thirty year yields at two percent, or maybe it's five year yields at one percent, I mean some number, and say we're going to buy as many bonds as we need

to in order to keep rates there um. I think initially the market would probably test the resolve of the Fed and say, well, let's see if you'll really do that.

So initially, I think the Fed would have to buy a lot of bonds, you know, a couple of hundred billion probably over a month or two, and then after that they probably won't have to buy as much, primarily because the market now would know that if we get there, we know that there's going to be an active buyer, so, um so we're not going to be you know, very short the markets. So I think it could be a

pretty efficient way for the FED to do that. Now, the political challenge there is is that, you know, does that mean that, um you know, is the Federal Reserve doing this because it wants to keep government borrowing clus low? So, you know, is the separation of the Federal Reserve and the federal government has blurred even further. And I think that that's a political challenge that that the FED ed will have to ultimately have to tell Congress, like, you know,

explain why they're doing this exactly. So I, um, I have not in my career seen this before. Um is this market manipulation to some degree? Have we seen this before? Well, it is market manipulation for sure, but so is regular quantitative easing that the FEDS done on and off for the left decade or so. Um so. So, Yeah, in the nineties and fifties, during World War Two, the Federal Reserve cap thirty year government bond yields at two and a half percent. So UM, so there's a not unprecedented

in the US. UM. In Japan they did the same type of yield curve control UM idea. Of course, their their interest rates were even much lower than ours are now, but the Japanese did it for the better part of three or four years. So UM. So it's it's it's

it's another tool in the toolbox. And basically the the important thing that I think something like yield curve control would say is, firstly, we don't want long term interest rates to go much higher because if they do, that could be detrimental to the economy because you have the rollover of corporate debt for example, or people getting mortgages. Um, we don't want those interest rates to go high because

that could have a detrimental effect on the economy. UM. But at the same time, UM, the it's in the Federal Reserve doesn't want to have to do some other draconian type of things like UH, cut the Fed funds rate into negative territory, which might which they might have to do if they don't do something like yield curve control or more massive quantitative easing like they did back

in March. If they do yield curve control, and considering the fact that they've purchased about se the maximum of what they can purchase of longer term bond issuances recently from the Treasury Department, how big do you think their balance she could get in the next year. Yeah, so so, I mean, we we've we've been forecasting that the FEDS balance sheet will get well over ten trillion dollars um.

Now part of that is also predicated was predicated on well over trillion dollars of some of these other facilities, and it seems like maybe those other facilities, like the credit facilities for example, won't get quite as large as

we initially thought. Um, primarily because of of what's happened in the markets and where credit spreads have gone over the past couple of months or the past couple of weeks, I should say, Um, the uh, the the Even though the Fed owns seventy of a lot of bonds, they still there's a lot of off the run securities that they don't own that many of yet, so they still have plenty of room to buy um, to buy a significant amount of maturities, and of course the FED, the

Treasury Department is also issuing a lot of new securities as well. So you know, they just issued a new twenty year. The FED doesn't own any of those. They they're going to issue a new Uh, they just issued a new thirty year. The FED also doesn't own any of those, although it will um over the next couple of weeks, so you have they still have a lot of ability to buy a significant amount of So I give us you mentioned that twenty year bond. Um, how

did that go? Because that's a new Security Act. So so it's the first time that that the Treasury Department issued a twenty year bond, a new twenty year since six and it went pretty well actually so um it came at at slightly higher yields than the market was expecting, but within a basis point, so I call that noise anything within a basis points basically noise and and and the bitter statistics went pretty well. So it had um, you know, good demand from end user investors where people

wanted to wanted to own the security. All right, thanks so much for it. Joining us as always, Ira Jersey Teeth us interest rate strategist for Bloomberg in talentence joining us on the phone. At least that's I think this is a new term for me, yield curve controls, and I I have to brush up on that a little bit more. But think its another tool. I guess Bank of Japan has been doing this for a long time, and it raises a question about frankly, quidity in the bond market.

When the Federal Reserve clamps down to such degree and sucks up such a significant portion of the outstanding debt, does this reduce liquidity in the existing bonds? What does this judist how to chist? What does it do the whole industry of of the bond market if it's completely controlled by the central bank. Yeah, it's it's really interesting,

and I'm not sure it's something you know. I'm sure a lot of market participants have different views about it, but certainly, you know, we've given the Fed credit since the beginning of this whole pandemic for taking decisive action, for taking early action. Uh, and this appears to be just another tool in the toolbox that they're prepared to use. This is Bloomberg. 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. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woids. I'm on Twitter at Lisa A. Bramwod's One before the podcast. You can always catch us worldwide on Bloomberg Radio