Stimulus Priced In, Says Mahajan

substantial negative real yield. Let's continue the conversation with Mona John Alliance Global Investors US investment strategist. She joins us. Now, Monor, if you disappeared from the market for the last ten years and heard us talk about a breakout in tray sury yields of eighty basis points, I think you'd wonder what planet you've just landed on? Minority basis poicte. When can we get a real move on? You know, interestingly, from a percentage perspective, this was a pretty real move.

You know, we're now off the lows of forty six basis points from this crisis back up to eighty. What we're seeing the markets is pretty consistent here we talked about weaker dollar, higher treasury yields, higher gold crisis. This is a market that's thinking at some point stimulus is going to happen, and also perhaps starting to price in over the last few weeks this democratic sweep idea, where where in that scenario you do also get more stimulus

but also more spending. So it does feel like we're on a trajectory. To Lisa's point earlier, how high can it go? We may not get much more movement from these levels until we see actual As Efen says, eyes of inflation MONA. Part of this is the glide path involved with your computer science background. It's real simple. At some point there's a kink, at some point, there's a jump condition. Where is that on a ten year yield?

Is it near year or is it surprisingly much higher? Yeah, you know, we think over time, if if inflation is in the one and a half to two percent range, uh, real GDP growth in the US also probably at some point one and a half two percent, as the actual GDP growth yields should also at some point be in that one and a half to two percent range. Now, of course, we're now emerging from a very deep crisis. Uh, we don't think that type of level happens in the

next twelve months or so. But recording the ingredients together certainly for an inflationary environment, or at least for pick up in inflation expectations. We're keeping rates low, We're adding Huey to the system. Growth may be accelerating next year, especially if we get those vaccines, especially if we continue to get stimulus and investment into the economy, and so we are certainly setting up for that pick up in inflation, which would lead to a pickup in those yields back

to more normal levels. Okay, so pick up in those yields. In the meantime, there are a lot of people saying the reason why yields are rising is because of supply, because of the stimulus, because the US will have to sell trillions and trillions of additional treasuries. Is that the real story here? I'm looking at the total value of negative yielding debt globally. It is close to the all time high of seventeen trillion dollars. Where else are investors

going to go for yield other than the United States? Yeah, I mean absolutely that that's part of the story. As well. And you know, keep in mind, our yield even here at eight basis points compared to Europe, Japan, across the globe, still relatively fairly attractive. And of course this year in particular, treasury bonds have been one of the best performing asset classes, not only within fixed income but really across the board,

especially since that March twenty three low. So clearly there is this light to safety, but also this hunt for income. But to your other, you know, other point of your question, where do people go, Well, they're also looking beyond the fixed income market. Clearly there there's been this push for

investors to to go out the risk spectrum. We're seeing that clearly in the US equity markets now more a little bit global em but also in parts of higher higher risk fixed income as well credit markets UH in high yield as well as parts of investment grade. This is a familiar conversation for money. The reflation story that you described just moments ago, folt that into the equity market, and the much talked about rotation that has really alluded us over the last couple of months. Yeah, you know,

that's really the key question here. Will we get over the next twelve month period. This much anticipated and much alluded over the last ten years rotation into this value cyclical trade. Um clearly, and when we looked historically over the last ten years, there have been approximately four instances where value cyclicals have led in a more sustained way, and in that time period usually they're leading for six

to twelve month period. Over that those four instances, UM, we think we could be set up over the next twelve month period for another leadership in value cyclicals. And of course, um that would be in the scenario where we get the vaccines in the latter half of this year. Of course, it takes some time to manufacture and distribute,

but markets will start pricing that in sooner. Of course, we'll get that re acceleration hopefully in growth not only in the US but globally, and so in that backdrop, combined with ongoing low rates and ongoing stimulus, we do see a potential for that value cyclogal trade to re emerge, and so we think investors should layer that in over the next you know, when they get the opportunity over the next few weeks. There all these t las out here.

There was Proctor and Gamble the other day and right now there's Nestle coming out and once again organic revenue growth. You know, it's not a big deal, but it's just simply better than the gloom that's out there. Is that the major call for the next two or three years that were you know, with the shock of the pandemic and the agony of the pandemic. Manchester shutdown is just one example. Are we completely misjudging the ability of these

companies to adjust and to adapt. Yeah, you know, it's interesting. I think, uh, last quarter, our second quarter, we certainly got a lot of that as well. You know, the expectation was, you know, something for a negative decline and we came out you know, negative or so, so there was a huge lowering of the bar in terms of expectations,

and there was a nice beat. You know, historically companies aren't known to do that keep the bar low, but that the percentage of beat was much more substantial than we've seen in the past. That could be the trend over the next couple of quarters, although we will say, you know, over time that probably goes back to more historic averages where it's a three to five percent beat on average. But to your point, I do think that

that in many cases. You know, companies have performed much better in this crisis than we've seen in the past, and partly that's because we've become a more digital, more online economy. You know, this acceleration to a more stay at home world has really benefited certain companies and really has helped a lot of companies across the board. And so I do think, uh, the ability for consumers to buy online and to to show demand in that way

has helped. And so we do think this quarter will certainly see a nice feed as well, and over time it will be more normalized, but we see the ability for companies to rebound nicely over the next twelve months. Mana, thank you. Always great to catch you up. Thank you very much, thank you. This is the interview of the day. Unfixed Income. Kevin get Us is with Raymond James and

critically important. He comes off a trading platform where he understands suddenly the bid slips away in fixed income, Kevin get Us is the bids slipping away on price in full faith and credit. Well, you know, Tom, we're finally

starting to see this. I you know, a week ago I would have said probably not, but we are starting to see this period, uh, closer and closer to the election, especially if we get this blue way where I talked about, because you know, I have these kind of nightmarish feelings of two thousands team after the elections. If you're a bond guy, you did not expect the outcome and you

did not expect the price action after the election. So I think the bond market and the treasury market in particular is underestimating the fact that if you got this blue wave or a complete suite, what might occur after that and why interest rates are are likely to go higher not lower should that occur. So you know, higher spending, more taxes, um, increased growth, and growth tends to have

a friend. Uh it's called inflation. And if all of those hit the mark, then yes, rate moves would be fairly significant, especially in the ten year and thirty year out for the balance of the year. So at one pm today, Tom Keene is going to be closely watching the twenty year auction of treasuries. I know he watches every auction very carefully. Is this a supplies story in terms of higher yields going forward or is it, as

you said, a growth and inflation story. Well, I think from a rate movie would be a growth and inflation story. We really have a had a problem selling our debt, and you guys have mentioned it earlier in the show about negative yields in particular, and you look across the globe, where are the opportunities. There still is a great opportunity and treasuries, especially in the long end of the market,

but that the door is starting to close. And the only way it does close is if we get a blue wave, if we get whatever they call it blue tied or whatever you want to call where you still Republicans control the Senate, and even if you got a Democrat or a Republican in the White House, the rates aren't going to move that much. I think we're gonna be you know, we know what red luck looks like. But if you get a kind of a clean suite um, I think the treasury market would have to catch up fast,

which was you know, higher rates across the board. But I don't think it hurts financing right now, Kevin, you mentioned and it wasn't just the political event that was unexpected for money. It was the outcome of that political event. The people missed what the red wave would mean for markets, what do you think people are missing right now? Kevin be specific. We know the consensus people think of blue wave. Increasingly, the probability is lifted over the last couple of months.

What is the I think people are missing about what that means. Yeah, the part that they're missing is the inflation part of the occurrence um two thousand and sixteen. If you remember, we went from a one eight ten year the day before the election to it almost a two fifty by the end of the year on the expectation of deregulation and tax cuts and growth, and that what was anticipated was that inflation component that really never came.

We did see it when the when the GDP peaked in the first quarter of two thousand and eighteen, and then inflation reach its highest point in May of two thousand and eighteen. The point of this is now is they're not thinking about it in the ways that you would normally think about it. Is that growth will bring that inflation at some point in time. It may not be in the next few months, but the bond market tends to try to get out in front of any uncertainty,

and I think we're starting to see that now. I think we'll see it for the next few months through the election. So, Kevin, how would you push this view? Three fixed income? Right now? What's the miss price? Do you want to take advantage of it? You know, Johnathon, it's really still hard to find. But one of the things that are really good in either way this goes the at tax free mini market is likely going to gain if if the prospect of higher taxes is going

to support that market. Uh an uncertain or continued environment is probably gonna support that market. We're still at a hundred uh a tax free yields to the ten year versus where we were at seventy in the pre crisis period. So I still think um that even though a lot of state county Missibal credits are coming to market now, there is value in the mini market now, no matter who takes the White House and who actually owns the Congress. Kevin, long agoing far away, we had a Monroe trader where

we could enjoy price declines. You and I have hallways of people that say the bond market never has a bear market. Can you model out a bear market to come price down and yield up off of my Monroe trader calculations? I always said that when my Monroe trader stopped working. It was the end of my career, so I still have a couple of around Kevin, that's when you bought a Bloomberg Thank you and Mike, thank you. This morning. Are we uping for a bear market in bonds?

So we have a potential for it, tom But really the only way we're going to see a bear market in bonds is if we see this big blue wave occur at election time. In my opinion, and the rest of it looks like um, we will get increased stimulus at some point in time. We we think that maybe inflationary somewhere down the road. We're still making up a lot of ground from what's happened during the pandemic, and

we still have the pandemic to deal with. So I don't think it's extremely bearish unless we get this scenario play out in a blue wave after the election. So the reflation trade that you're talking about, this idea of higher growth has lit a lot of people to feel safe or safer going into the riskiest bonds. And this morning I was looking at the spreads, the extra yields that investors demand to own the riskiest junk bonds over benchmark rates. It is contracted back to February levels. We

are treating about the average of last year. It is as if the pandemic did not happen. Is this market right that we are not going to necessarily get an escalating default cycle? Is that what this market is saying or is it saying something else? Well, at least it's saying that, but I'm not sure it fully realizes that

that may not occur. So I think, as you point out, I mean, we are almost to the to the pre crisis spread levels, and certainly high grade in I G corporate debt, and almost there again on high yield in particular, and that's a sector I would be very very careful with right now, because you know, to over the tens for high yield is not enough of a cushion for

me based on where I think we're headed. So I think, even even so, let's say nothing happens or nothing changes, you know, less than three hundred for high yield is expensive purchase for a portfolio. From me, I still would favor uh I G debt, but realize you're gonna get it at less than a hundred basis points. You have to be happy with that. So even if we get higher yields, spreads would tend to contract even further, but you would get paid to high yield versus uh where

the treasury is now. So I just think that that it's an expensive opportunity to take on that additional risk and fixed income. Kevin, you live and break this world. I just wanted from the conversations you've been having over the last few months, the senses a little bit too much confidence in credit because of the fedback stop. Yeah, there it really is. John. I think that there's a point here where, um, we're gonna see a lot more bankruptcies because they just have to occur. If especially if

you don't get stimulus within this calendar year. Uh, that is going to have an effect on credits themselves. But the offsetting opportunity, and you're seeing this a lot, even high yield companies, even the state of Illinois are coming in and refinancing. They're debt at much lower yields, building cash positions, and they may you this, uh, they may be able to ride the storm out without seeing as

many bankruptcy somewhere expecting. On Bloomberg Radio, on Bloomberg Television, Kevin get us with us, and for those of you on radio, one of the cool things that Kevin get us is the Cincinnati Reds memorabilia behind him, its shape get us, Kevin get us. We just lost Joe Morgan. Bill James says Joe Morrigan was better than the giant

Rogers hornsby what did Joe Morrigan mean to your Cincinnati Reds? Well, if you remember, and it goes way back, we got him, got him from the Houston Astros at that time, and it really filled the void, especially hit on second base um for the Reds and the big Red machinet at that time. So the impact that Joe Morgan had on both the organization and afterwards was long lasting. And we we were fortunate that he associates to himself or he

did associate himself with the Reds versus the Astros. Kevin, just the final question from me, just to end on a more positive note, can you give us a review of what you would think of apply like Mookie Batts and why a team like the Red Sox would would let him go. He's killing me, Kevin Well, I would become by default a bigger Dodgers fan that I would admit. And I'm just happy that they have Mooky Betts, like cut this guy back before the Reds won a title

in ninety. The Dodgers haven't won one since eight, so they've actually been suffering along with us, even though so you're telling me, Mookie Bets, is that Joe Morgan of the Dodgers. That's what you're saying. Kevin, well for a very short period of time. It will let that play out over a number of years. Oh, we will thank you, Kevin. Get us the Ryman Jacks. Beautiful. This is a joy, particularly thirteen days out in the middle of this historic election.

Wendy Schiller is at Brown University, and it's too modest to mention that she is part of the new fifth edition of the Great Definitive of Gateways to Democracy. It is without question the one volume seven under page thrown at the kids and say shut up and read a textbook on this American politics. And we're thrilled she could join us today from Brown in the fifth edition, Wendy, or maybe in the sixth edition to come. You have

to write about mail in voting. What will you say? Well, the world changed for American elections, right, we have close to eighty three million people have asked for mail in ballots. It's about, you know, at least one third more than in previous elections. And they're returning them. And guess what they're getting to the boards of elections. They're getting registered, they're getting verified, and they're getting counted. So the big crisis of that has not yet emerged in what we're seeing.

And at least thirty seven million of those votes have already been cast at both in person and by mail. This changes everything about how we vote. It will probably lead to a higher vote turnout this year and in subsequent years, and it makes for a more engaged public. From a business educational political standpoint, you want people to be engaged. If you don't want your tax dollars wasted. You want people to be engaged. If they can vote

more easily, they'll be more engaged. So I think this is a big factor coming out of One of the problems is you had a Brown PhD student a couple of years ago who wrote four hundred pages on Mayor Daily JFK stealing the election. How do we get away from that thinking? Well, I mean the thinking that people will steal it. I think that's a hard thing, right, That's been ingrained, as you well know, because you know

your history. Ever since we basically started with these sort of protected elections called the Australian ballot in about the eighteen eighties, everybody's been worried about that. But so far you have a lot of county boards, both Republican Democrat areas of the country that aren't counting votes and aren't losing them yet. So we have to go through that now.

Whether you reject about because the signature isn't right or something's wrong with it, that's really locally controlled and that will be the point of contention if this turns out to be a close race, Wendy, given the success of mail in ballots, is there any talk about shifting to I don't know, an electronic method of voting. Considering that we are in and the world is digital, we said,

that's a great question. But I think there's still some big distrust about hacking, particularly since that's made a big focal point in terms of the Russian hacking, the Chinese hacking, American hacking. You know, thinking about hacking and machines, people are still worried about that. I don't know if American voters are are interested in trusting that to the point of giving up this sort of ritual of filling out a ballot and and handing in and signing it and

showing identification. I'm not sure anyone's willing to move there, you know, in the next decade. But I think that just the fact that we we get more engaged, just the fact that we realize it should be easy to vote, that's a huge difference. And I think that comes out of a lot of discontent with the system on all

sides of the political spectrum. You just want to run through these headlines coming from White House Chief of Staff moth Met, speaking of Fox News in the last couple of minutes, plans to talk to the Senate Republicans and Pelosi staff members on relief talk. Still a number of issues to work on, and the main issue, the biggest issue remains still state, local and government aid and Tom that has paen the issue. Yeah, that's your I think the last three hunts totally agree on John. I think

Mr meadows Is is dead on Wendy Schiller. There it is, but it's just not Democrats, cities and government is a president of others paying it. Isn't it true that there are so called Republicans states and cities and towns that will be effective if they don't act. Of course, places like Ohio, Michigan, Pennsylvania, North Carolina, everybody's experienced in search. Everybody's had to spend a lot more money. Even educational systems have spend more money to reconfigure their classrooms. There's

a tremendous amount of need across the country. But the cynical view in me says that McConnell's looking at he's looking at his people, has got a good year look at two for the Republicans. If they lose the Senate this year barely, they'll get it back, or they'll try to in two. If you add two more trillion dollars to the deficit, then you've got Republicans running on a four trillion dollar deficit, which isn't a good look for them.

So I suspect he feels like he can forego this and start looking at two pretty much the day after election day. And that's to me why he's holding out. It's not just that he can't get the votes. I think he could. I think they think this is something they don't want to have to defend going into another election cycle where they could do well in Wendy. If they were to pass a fiscal support bill ahead of

the election, would that make President Trump look good? Of course, the only president look goodly, So that's a really good point. It also makes us Pelosi look good and make Man you can look good, and McConnell if he if he relents, looks good. But to me, the checks don't go out with Trump's name on it, quote unquote a lot of its direct deposit. But that's a metaphor so getting credit

for it. When now, by the end of the weekend, fifty to sixty million votes have already been cast, the marginal utility of this bill to Trump shrinks every that they wait, which is why Pelosi kind of fanaggled and sat on it installed knowing that so many votes will already been cast. I think she realizes he may get a bomb, but it's not gonna be as big as they got this bill done a month ago, when he just quickly and finally on the Senate. You said everybody

would look good. Are there any candidates in the Senate that are worried about passing this bill because being a fiscal hawk is still attractive to a certain part of this electorate. Yeah, I think the bulk of the Republican goop Senate caucus, all of them, they don't want to get primary. They're always worried about primary. Even if the Trump factor goes away, if he loses, there's still going to be a primary because people realize you can upbend

incumbents and primaries. We've been seeing that for about four to six years now in an active way. They're worried about getting primary on deficit spending. And so if McConnell's looking ahead, this is what he's most concerned about. This is why he's taking the gamble that it won't pay off for them. Now. The ones that are gonna lose are already gonna lose. Let's look forward too, when Sheila, thank you. Brown University Chair of Political Science, John McKay

is just understood. Yes, Soul Wholefoods to Mr Bezos for more than a jillion dollars. But what he really did was completely invent a culture from safer way a zillion years ago, literally a vegan co op and I believe it was Austin off of ut He built it into a juggernaut that changed everything in food in America, David Rubinstein Peer to Peer Conversations Fourth Carlisle Group had the privilege of talking to this truly original executive. David, What

did you learn original from John McKay. Well, he's a very contented person. Um, he is not as wealthy as somebody might think he would be from having started this incredible company. But he's wealthy by any normal human standards. But he doesn't care about money. Pretty really, Uh, this is his life. He he he doesn't He's married, but no children, and this company is a child And he likes to say he sewed off his daughter to the wealthiest man in the world. Well, he sold him off to Amazon.

And you know, we all see the changes those of us that darkened uh doors of whole paycheck. But David, what is so important here are the processes he put in place around a core strategic belief. How did he do that? Well, he's a person who really believed in the value of organic and healthy foods, and so it was easy for him to promote that because he really truly believed it, and ultimately it turned out a lot

of other Americans did as well. What he's done with Amazon, though, is Amazon has improved the technology dramatically that he would admit. And also during the COVID period, online sales have been much higher than they would have otherwise been. Um. He has said he's going to do this for a couple more years, but he doesn't know how much longer. He's a content person. Uh, you know, sometimes you get CEOs and founders are still not happy with their life and

so forth. He's a very happy person. I think he spoke for all of us though, and he said that is the weirdest year of my life. Why did he say that, Well, because he's had to retool the entire company. It used to be that people came in for the shopping experience and walked in the aisles, and now they have to focus more on getting people to have pick up there because people don't want to walk in the aisle so much because of COVID. So he had to

reinvent a bit the business. But still and he has more competition he used to have when he had virtually no competition. He said for the first twenty five years. He's been the CEO for forty two years, and for twenty five of those there wasn't that much competition. Now the major supermarkets are all having whole food kind of aisles and other kinds of organic food displays, and he

has more competition than he ever had. There's a question about his contentedness with the sale to Amazon, especially in light of the increasing scrutiny around big tech and monopolies consolidation. Did he give an alternate view that was believable to you of the possible benefits to consolidation at a time when people are to pomoneing the concentration of wealth and market share among the biggest companies in America. Look, when you marry off, your daughter always saying is this person

going to be good enough for your daughter? And so he's always saying, well, did I make the right decision? But in the end, I think he's content with it because Amazon has helped him in many ways. On the other hand, they've imposed some constraints that he might not be completely happy with. He would say he's ninety eight percent happy, David. David, It's widely understood that the panels you and I have done in Davos, you've always wanted a mute button to shut me up. We're gonna have

a debate tomorrow night with some mute buttons. What is your prescription for your candidate, Vice President Biden to survive Thursday to get to the election. I don't have a candidate. I'm an independent, and I don't give money to either candidate, just to be clear. But on the other hand, I would say, um, I don't think the debate can change that many votes at this point. I'd be very surprised.

I've been involved in debates over the years and they have marginal impact act and so unless somebody does something outrageous, I don't think it will have a big impact. So the main thing I think Biden has to do is just not make a mistake. And the thing that Trump has to do is not do the kind of things he did before. Whether you can do that or not, I don't know. The mute button will have some impact. But you know, you can talk over a mute button too,

Go ahead, that's news to you. You can talk over the mutant button. That will be helpful. Go on. You know. I look, David, at this moment that we're in in a country moving forward, and part of it for so many people is the inefficiencies or harm of capitalism. Defend the system. Well, capitalism is the as Churchill would have said, in effect, the worst system of all except for all the others. So capitalism has a lot of income inequality that's built into it because the people the bottom don't

do as well. On the other hand, it's created more wealth for more people around the world than any other economic system, so very few people are rushing to leave capitalist systems to go to communist systems social systems. The immigration in the United States is pretty heavy, the immigration is very modest. How the outcome of this election affect your investments, if at all we make a long term investment,

So it's hard to say. In the end, I suspect that the economy will probably have some uh slow down period of time in the next year or two. It it's probably due for that. In the end, I don't think the tax policies are going to change all that much no matter who's president, because Congress is probably not going to move dramatically on things. I do think the most important factor right now over the next six months is having an economic stimulus package. Because it's clear that

the last stimulus package is wearing off. We don't have a stimulus package the next couple of months. I think you'll see much higher unemployment rates and much lower growth rates. David Reubintson, thank you so much. Greatly appreciated an interview with John Mackie, the founder inventor of what we call whole housing in the organic as well. Thanks for listening

to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, Soundclouds, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio