Surveillance: Fixed Income With Holland

put it up every year. Holland is not in London with Pharaoh. He's stuck here in the United States. Michael Holland, how to corporations adapt to the reality of no travel, no globalization and the constraints of this pandemic UH travel. It's very well, is is the quick answer to the question UM. Throughout throughout the myriad of ZOOM meetings I've attended and others have attended over the past nine ten months, the words seamless has come up with with boring frequency.

UH companies are adapting extremely well. And if you look at look at UH the the C suite, I think there are a lot of quiet smiles there with respect to that. The answer to that question, well, forgive me for cherry picking the data point, but there was a huge smile and scratch into the head and confusion over adored ash and airp and be in the last couple of days, Michael, you've seen it all. You'll take place on the I P I S this week. Human nature

repeats itself, Jonathan. Uh, century after century, we've had these uh what you can broadly called blind pools, uh, the spects. So we've now got eighty billion dollars way huge record in spects, which are which are little slips of paper coming out. People get to do all kinds of promote in the front end, as they've done for centuries, make tons of money, uh, dribble it out to the public,

and screw the public. Michael Hall and I frame this earlier in the week and as actually a Michael Holland question, which is sp X up double digit this year, now, sp X up over the decade, double digit sp X back to the early nineteen fifties when you were an intern, double digit. Why don't we keep talking about single digit stock returns? Because institutional uh mindsets have a way of trying to protect their jobs, not looking silly saying things

that scare their bosses. Uh, there's no there's no way to uh look at the craziness of the capital markets today where we have of the of the European market owned bond market owned by the central banks. So your risk free rates of return by which you you judge value is thrown out the window. You you guys were

talking earlier about throwing away the textbooks. Uh, you simply have to say, here's what we're dealt in terms of cards today, and there's nothing other than equities that one can look at if you have if you're a serious investor, meaning your own four one K I mean, Michael, H and John. This is so so important about the idea of talking your book and recalibrating. Michael, we have to recalibrate to a measured ownership of Tesla. Everybody's under owned

on Apple, etcetera, etcetera. What is the institutional adjustment a

year end that you would expect to see? Oh, I think that that a lot of people who are heads of investment committees and institutional investment programs are are going to look to to try to protect their hights because the majority will have underperformed yet once again continuing triumph of hope over experience, as they say, and when you and you have so, you do a little bit more on the edges, which means that you probably get a little bit more buying in terms of allocation, because bonds

make no sense in this Lewis Carroll Alice in Wonderland world. When you're talking about the craziness of the the negative rates abroad and where where we may be going here with maybe going in the other direction and inflation, how how can you how can you justify buying a great deal of fixed income? You can't. Well, let's talk about it a little bit more. I think this is so important, Michael. You mentioned something about valuations. Valuations are unning important to

analyze if you benchmark them to something in isolation. What does it mean going back to the late nineties early two thousands. Let's look at the US two year the two year yield and early two thousand was almost seven percent. Michael. Now many people are looking at the price action of the last couple of days, the I p o s and benchmarking it back to the crazy times of the late nineties and the early two thousands. Let's talk about where fixed income is right now compared then, Michael, this

is another world, isn't it. It is truly and well described. Jonathan, It's it's another world. And Lewis Carroll and Alice in Wonderland keep keep popping through through uh my mind when I'm thinking about these kinds of crazy upside down numbers. Uh, you simply have if if we are going to get as I've heard on Bloomberg over the last few days from some people, two percent inflation is going to be

in the rear view mirror. Maybe it's three percent. And then and then you have, uh, the thirty thirty year treasury at under two percent, you have a chance to lose an incredible amount of money in fixed income when the duration spicy go against you. It's it's really quite incredible. Michael Holland, we lost a great one. Robert Stovol tell Us about Bob Stovoll Uh. He had this stentorian voice, wonderful voice. His son Sam had Lucia on your show periodically had as some of it. But he was one

of the kind. He was one of the great technical. If I had at Great Wall Street lore, he would be laughing at as I do at the the lack of guidance from the markets as to how you're supposed to comport yourself in terms of saving people from losing money in the markets. And today I think, uh, I think we we don't have enough of those kinds of people have some some kind of uh detachment from the craziness around us. I mean, Michael Holland you look at Martin's wage and what he did and telling us to

follow the fed to me. Bob stove All literally taught us how to speak about the markets with that voice on the floor of the exchange. And you know there were times on Wall Street Week where you guys just lit it up over the courage to be in the market. How do you stay in the market right now? Well, because there there's uh a serious business which is everyone's own personal accounts and and how people or its foundations or charities who rely on. So you you first do

no harm. And when first you know harm means you you avoid things like we were talking about, for uh, door Dash and and Tesla and and Airbnb, and the craziness of the markets, the SPACs. You identify those for people and then you say, go to real businesses, their businesses that actually are going to pay dividends as a dividends. Can you imagine that JP Morgan yielding nearly three when when the ten year treasury is yielding two thirds of

that or less. And I think that you simply have to use common sense and and and stepped in and say we're not going to participate in this this craziness. And when Johnathan was asking earlier about people at the end of the year, what what what do they do? I think that avoiding the craziness so you don't lose people with a ton of money in the coming couple of years, which which you may well do if you

step in the wrong direction. We'll try. And Michael, you'll want to the kind And it's great to catch out Visa. And it's great to hear your sounding so well. Michael Holland of hollyandand Company. Thank you. We need to get back to first principles and there's no one better on that. And Francis Donald and Dangerous Excel spreadsheets at Manual Life, their global chief economists and a head of keeping up

with data strategy. Francis give us the update on the American economy this Q four Q one and into the fourth of July next year. It's not great. We are heading into a very soft patch, something that looks like a double dip on the services component of the economy. I agree with Bloomberg Economics. There is a better than like the chance that we see negative print on the December payroll. And what we're trying to figure out here is how do markets trade that It's very possible the

equity market looks right through. Maybe they have a little bit of a step back here as they focus on the longer term. But this is not a rates market that I think is going to shrug off a lot of the challenges that we see. And most importantly, this is not a federal reserve or any global central bank that is going to shrug off the damage that's going to be created in the economy in the next two to three months. This is not a period to look through.

This is a period that carries higher potential for credit events, for long term scarring, for fuller drops in the labor force participation rate. Forget about Fabosi and all the fancy mathematics you know so well. Francis Donald, talk about the emotion in the behavior. If we get yields to break down, if the tenure yield actually comes in back again to new low yields, maybe even talk of a negative tenure yield. Who knows. I know where HSBC is on this. What's

the societal impact of ever lower in new yields. I'm more concerned about the societal impact if we were to see a breakaway higher. This is everything I hear every day. Oh, rates are moving higher. There's too much inflation in the system. We should be more afraid of stagflation and painful inflation coming through and the FED losing control of this field curve than we should about low rates, which are necessary and more linked to fundamentals right now than a break

right in the tenure. And John, this is so important is Francis always lays out so well, how wildly asymmetric the behavior is right now, John Farrell, everybody's in a panic about higher yield and yet we observe on the Bloomberg new tests of lower rates, which makes the question, Francis weather expectation for higher inflation actually comes from giving your analysis of the economy and how it's going to

materialize in the next twolf to white seen months. Well, in some ways higher inflation is justified and certainly heading into April one, this is so important. We are going to hit inflation that perhaps comes as close as three with upside. A lot of that is app and base effects. It's the disruption in the goods based economy. It's at week usc but that is not permanently higher inflation. And

this is what we're missing right now. If inflation is not permanently three percent, that bond market is not going to price in three percent inflation. We then come back to a period after that where inflation probably is around that boring old two percent. But most importantly, we are going to have areas of the economy that are experiencing painful high inflation good sector, and we're going to have other areas that are in painful deflation. This is not

your father's inflation. This is huge asymmetry within price action, and we have to be really mindful of that. This is not boring two percent everything a two percent. This is huge, huge dichotomies, and what's happening in the price space. Well, this clearly isn't your grandfather's bond market either. So Francis, let's talk about that. Given everything you've just said, do we just need to recognize now. The position that central banks in are in right now will be the position

central banks will be in for the foreseeable future. And I'm not just talking about the twenty two the Christine the god UCP president is talking about yesterday. I'm thinking five six seven absolutely. I mean, my my call is at interstrates have to stay extraordinarily low. And even if we do see a type of normalization, we're talking about fifty basis points, maybe a hundred basis points, we are not going back to even pre COVID levels of interest rates,

even as inflation moves higher. Because even though I spend the bulk of my time looking at the feds primary mandate inflation and employment, listen to what the FED is talking about on the sidelines all global central banks, housing affordability. From the New Zealand Central Bank, we're talking about things like climate change. At the Bank of Canada, we're talking about Powell talking more and more, as he should, about

racial and income in equalities. These are central banks that are shifting their perspective to a broader mandate than just inflation two percent, and they're going to be very happy to allow short term overshoots and keep this uppontly running hot. So Francis, let's go over to Secretary of Yellow and in the future of our stimulus in America, take all that you said and frame it into the amount of stimulus through this pandemic. Are you looking at it is

five billion? Eight billion? Is okay? Are you looking at there will be tranches of trillion dollars of stimulus or like liberal economies, are you suggesting four or five or six trillion dollars of stimulus will be required. I am expecting persistent, continuous stimulus that does not have an end date or an end number. We are seeing a shift

towards demanding a larger size of government. We're demanding that our government take over the reins of central banking to address very large inequalities, to address the need to ship towards a greener economy. We are moving towards a government that will become a larger segment of the economy. And for the market, it's incredibly important because you have monetary policy that says I will I will on that front end for a long time, and government policy that is

probably primed for massive issuance. We're looking at a pretty sizable steepener here. And we look for post COVID, and that shift from monetary policy is the main tinker of our economy to government is the really biggest, largest implication of what COVID did. Then bring it over to the chapter I don't know, chapter twenty three of your entry textbook, Francis Donald, years ago in economics. I believe it was

on the equity markets. Fold again. What you said over now, how corporations will adapt to this into the ultimate word, the profitability of our business environment. Well, I suspect we're gonna be rewriting a lot of those textbooks. But let me let me put it from you. From the investment side of the picture. You have extraordinarily low rates for a very long time, very cheap money. You're going to see larger and larger allocations towards equities. That doesn't mean

it's a straight line higher right now. For example, sentiment extremely extended, pre totally prime. For a bit of a pullback, that's gonna happen. But more and more money into that equity market is what I suspect over that five year. That's why even though I sound like that i'm barrish, I sound like I'm concerned. It's really hard not to have a bias towards risk assets over that five to

ten horizon. There's just really no other choice. Well, that's why it's been torture on the psychological front for an investor, Francis, and we've repeatedly said this on this program. Your feelings about the world, about the world around you in the here and now, you have to park them and put them to one side. And I think Francis still people find that really, really difficult. They're looking at their moral compass and they seem to think that markets should align

with it. And Francis, I think still now, even after the lesson the conditioning we've had through, I think it's still difficult for many people. Can you walk me through the conversations you have with clients around those issues, Francis and the lessons of twenty into twenty one and beyond. Well, John, I actually have two titles. I'm a chief economist and I'm head of Strategy. And in the past that was

the same job. If you thought inflation was going higher, you thought rates were going higher, if you were bullish on the economy, we were bullish on equities. What's been so challenging for people who have rules like mine. The past year is that we haven't just had to set aside our moral compass, where our heart is watching lines to food banks that go around the block three times

and say that's not the trade. We've also had to set aside fundamentals and our economics analysis when we say things like a negative print on December non farm pay rolls that should be so bearished, and yet we have to think, you know what that means, means lower interest rates and large asset managers, pension funds have to shift more into equities. Those are the connections that we're coming to. So this is no longer a situation where fundamentals are

the primary driver. Does that come back, maybe, but we really have to break out those correlations between a lot of the economic factors and the market. That's very uncomfortable, and like I said, we're gonna probably have to rewrite some at least chapters in those textbooks. I think we've gotta get rid of the Francis Grant to catch up. As always, we appreciate your time, Francis Donald of Mony

Life Investment Management. One of the things that John Farren and I agreed on long Agoing Far Away think March was who would speak to experts That includes Sam Facility of Bloomberg Intelligence expert on pharmacology, the good work of Imperial College, Washington State, what University of Washington I should say in their microbiology. And then there's the math of it all. And right now the math really really matters. She's out of the acclaimed Kansas math program and biostatistics

at Michigan. Leslie McClure joins us now from Drexel, truly expert on the mathliness of all of us. Over the weekend, you're gonna get nailed, Dr McClure on this. What's the key mathematics of the vaccine that our audience needs to know? Oh that's a great question. So mathematically, what's important about the vaccine right now is the number of people and the number of doses of the vaccine. Okay, that's the size of the vaccine, and we're going to impute it

onto society. What is the effect of what it seems to be maybe a statistically large body that says I'm not going to take the vaccine? What is there impact? And those brave enough like Pharaoh to get in line, Well, I'll tell you I'm in line. I'm and I'm putting my parents in line before me. I think it's really

important we all get in line. I think that as a public health professional, it's it's contingent on us to get the messaging out to tell people how important it is, and and to really educate the public about the vaccine and the benefits of it it's and how we harvest those benefits going forward. The question that we've asked so many times now is what size, what number of people, what percentage to the population do we need to reach

before we can scale that restrictions. I've asked this question to pay it to me and I get different answers, And I wonder what yours would be, Professor. Do we need to just vaccinate the most at risk in society before we remove all of the restrictions around social distancing, et cetera. Or do you need to achieve herd immunity to go forth and do that. That's a really difficult question because the assumptions you make to answer that differ

depending on the day of the week. So, but my my sort of stock answer is we can't remove those restrictions and we have to continue to be cautious even after we vaccinate a large proportion of the population as we learn more and more about the long term safety and efficacy of the vaccine. Just in terms of who needs to be vaccinated, we know the most at risk in society. Are we aware of the people who have already had COVID nineteen whether they need to be vaccinated.

So my understanding is that the the the advice about that is mixed. That there's some saying that that that those who have already had COVID nineteen perhaps don't need to be vaccinated. But the recommendations I believe are that they should be vaccinated and that it will it will infer additional protection on them. Right, Leslie. Where we want to get here, and you know this cold coming out of Michigan's prestigious program is where Thomas Francis was in

nineteen fifty five. He's the guy that stood up and said polio will work. Take the vaccine. Where we got on the polio vaccination program. How long is it going to get us to take to get to April of nineteen fifty Well, we need to build a time machine, right and be able to go back in time to a time when people trusted science more, and my hope is that we can get there. I don't know how long it will take. I frankly, I don't know how long it will be until we have the capacity to

vaccinate that larger proportion of the population. So, again, going back to the numbers game, we need to know, we need more information about the timeline for wide distribution of the vaccine. My hope is that by the time we are in wide distribution, that the public will be more trusting and that more people will be willing to take the vaccine. Because You're right, we do need to get back there. I mean, we've got to get back to

But when are we comfortable again? Just in your head, and I'm asking this as a complete amateur, When does Dr McClure think we will be comfortable again in society at the end of this pandemic, when the Kansas City chiefs can go out on the field comfortable that nobody's going to get the virus? When is it? So? My personal opinion is that it will be at least another year before I feel that comfort. I hope I'm wrong. I hope I'm wrong. I hope that the Super Bowl

in February with no issues at all. But I don't think we're so lucky to catch up with you today. Please come back. Even if that wasn't depressed again to this conversation, Professor Leslie mclaud that after actual university John there is s to thirteen that is a fancy room at the Capitol. It's a reception room, big and fancy

things happened there. Edward Mills has spent a lot of time and s to thirteen with Raymond James in a wonderful Washington policy analyst with true experience on the white marble of Capitol Hills at Mills, what's going on right now in s to thirteen and in those hallways around it? Forget about the media bladder. What's the back story of negotiations on Capitol Hill? Well, I think politics continue to get in the way tom of what we saw before

the election. I think, um, everyone that I talked to was saying that they were not sure if Nancy Pelosi wanted to get a deal. UH certainly did not want to give President Trump a victory before the election. Now that the election um is behind us, Um, we still have two races in Georgia and most of the conversations I have is that Mitch McConnell now is the person who does not want to get a deal. And so we have a bipartisan group of senators trying to advance

a nine hundred billion dollar package. We have a government funding deadline tonight, and we have an annual defense bill that's been passed every year since World War Two that needs to get done before we can. You can line up all the sentate majority leaders, Republican and Democrat have past and the fact that we need to pay for the Pentagon, we need to get a defense bill done, and on and on and on. What's original about Mitch McConnell speak to Republicans, speak to Democrats? How and why

is this guy different? Well, I mean to his core UM people look at miss McConnell and say, his motivation is his desire to win above all else UM, and he certainly UM wants to make sure that he wins these two races in Georgia to maintain his majority UM and is looking to see if he can set up a situation where a no deal on fiscal stimulus is blamed on Democrats. UM. He is currently pushing hardest for liability releases UM. A cynic would say that he is

uh doing the bidding of his donors. UM. But I think it is more about seeing a line in UM Georgia that if there is no bill, UM, that that would be more negative to Democrats who now will control the presidency. And we're kind of the focus of negotiations on fiscal release. He has not been very involved in a lot of these fiscal relief negotiations. UM. That has

been what has been surprising to folks. He needs to be much more involved in these conversations before we can truly be optimistic about the prospect of getting the next round of fiscal support for the autonomy. So at your base case right now, given everything you've just said, no deal until after January five, UM. You know, my my base cas is UH. You know that it's not a question of if. It's still a question of win and

how much UM. And I get a sense that UM Congress does not want to adjourn UH this year until something happens. But you know, it's it's hard to see how something kind of immediately comes together. Unless people start taking hostage of the defense bill, of the government funding bill, we could have a brief government shutdown. Come midnight tonight because we just don't have agreement there will. You know, there wasn't a sense that anyone wanted to hold hostage

any of these must pass bills before the election. Now that we're passed, everything is on the table. And is there a sense of embarrassment the prospect of the government shutting down tonight? Is there a sense of embarrassment of the fact that they just can't get anything done? Do you feel that you sense that? And they say at the moment, I don't think there is embarrassment. I think that there is UM an acknowledgement that there are some really high stakes negotiations going on in each side is

looking to find some leverage UM. And you know, DC usually only responds when there is a crisis, when there is a deadline. All of these fiscal relief packages have moved through other deadlines, have moved through other crises without getting done UM. And there is finally the sense that, UM, something has to happen, and people are ramping up and it's more of a political street fight than embarrassment at this point. Who applies pressure then on the senator from Kentucky?

What power party moves Mr McConnell to do with so many Americans desire. I think it's a combination of UM kind of political shame coming from UM, any kind of media coverage, or getting pushed by his individual members. Having

the bipartisan group is putting more pressure on him. Last night, you was an interesting situation where you have Bernie Sanders, one of the most liberal Democrats Josh Holley one of the most conservative Republicans on the floor together pushing for another round of fiscal support CHECKSUM because they see their

constituents suffering at this point. UH. Those type of events where it's not viewed as a one party situation, but there is a bipartisan, very strange ideological mix pushing for things in the past on these fights that seem intractable.

The only thing that works, in my mind has been shame at Mills GRD to catch up this joinas from Raymond James on a situation down in day, say, Bob Dylan was someone who reinvented time and space two, three, four or five six times And just to give you one vignette with all of his claim in the Newport Folk Festival and that he wandered on and then was dragged down to Nashville to record a set of albums.

The engineer was a guy named Neil Wilburn. Bob Johnston produced, produced it, and what was extraordinary was one of his biggest hits off Nashville Skyline, Let's listen, Lady Lane lay a great. So there is Bob Dylan with one of the chameleon moments of his life where it was like, that's not Bob Dylan, but it was. I literally earned a bar cord off that song, which I think a few other people did as well. Alex Webb joins us now from Bloomberg and this sale for the wonderful Mr

Dillon a three million of his songwriting and publishing it rights. Alex, how do you approach this? Did someone overpay? Does someone underpay? What's the journalistic thing you looked at? There are two sides of this. There's Dylan himself and then there's a buyer, which is Universal Music. And on the Dylan side the risk of sounding a little bit for all but you know he's pushing. Is he going to be around long enough to make three million in royalties? Seems hard to believe.

So for him it seems a non brainer that no brainers sell it for that money. If your Universal music, you could make the argument they've overpaid. You're forgetting that next this time next year or sometime next year. They're expected to I p O. And if you're company, you want to be able to demonstrate you've got recurring income,

predictable recurring income. Um. If this is a good side on your I p O deck, then if I add you know, centage point to your value income listing, then a million is money well space And of course David Bowie a pathbreaker here, folks, And you know we went onto doing all sorts of things. And what's so important is some of these transactions go cash on cash positive

shockingly early given hit success in that. When I saw this deal, Alex, I said to myself, they're just gonna spin off minority interests in Mr Dylan's songs to every sovereign wealth fund and hedge fund out there. Do they do? They line up at Universal and tranched this thing off

to all sorts of people to take the risk away. No. I think what they do is say, I mean, Universal is kind of very healthy cash position, I think, and um, I think what they try to do is they get their huge roster of artist everyone from you know Taylor Swift to um, you know Coldplay to to do covers? Right? Okay? Can I rick getting paid twice? Par Can I rip up the script and the road? Okay? Come on, Alex,

you know we're two hipsters. Jack happening Off is killing it this year with Taylor Swift recording a bunch of songs sitting around a pandemic living room over the digital Is your world of records in the industry? I mean, is is Abbey Road or the recording studios in l A. Are they all blowing up because of what Taylor Swift

and Jack Antonof are doing. There's always place for those because you know, you do record stuff with orchestras and there is something about the creativity because you're doing this spaceis so I think, is you know, underneable and also don't forget you know, not all recording artists are rational. They want to be in this relate which has done so much and you know, of course the it is owned by Universal Music, Abbey Road Studios. It's a it's

a kind of trophy asset for them. Um. You know, they are pretty canny on their side, and I think quite strategic and what they is owned by Vivendi of course and French media conglomerate. They would not be you know, holding onto these assets that they thought they can make money elf. Where So, Alex, we have a little bit of a trend here. We've got Stevie Nicks. She sold a majority of her catalog for I think a hundred million dollars something along those lines. And I followed David

Crosby on Twitter. He's talking about doing it. What's driving these artists and some of these you know, you know, established artists with big catalogs from going this route. It's streaming, you know, it's Spotify, Apple Music, Amazon Music, all those things.

They have given a new lease of life to trap that otherwise, you know, ultimately from a from sales to perfectives still making royalties from radio plays, but from sales perspective, they probably thought that the money had all been made already. You know, they sold albums twenty years ago, thirty years ago, fourty years ago. Extreaming. He's given them a new lease of life, is given them, as I said, dependable recurring

revenue stream And so firstly you have that factor. Then there's also a few funds that have I'm up that are buying these assets up. There's one in the UK called hYP Gnosis. They own recently half of them all I Wanted Christmas for instance, and right Carey Song and thousands of other tunes. Um. They think that they're going to be able to turn that into a sort of predictable annuity for investors by by owning vast tracts of the kind of the great global song books. I look,

it's just one more comment. You know we're going to run out of time, is well Bob Dylan's of Fossil as you said, he's hitting eighty years old. Leonard Cohen, Of course we lost again the same way. Is there going to be the publishing frenzy frenzy for the young kids? I mean, is Lady Gaga gonna get five and are million? I think it's unlikely because those guys they want to be, you know, turning money over the rest of their lives. Did you see some younger artists doing it? But not

so many? But it's still getting towards the end of your life. You get seventies, I think seventy five years from your death, that's when the copyright expires, and so you want to probably sell it before you die, because then it immediately becomes a depreciating asthlete. As long as you're still live, you know that could last a long time, forever going to buy it. So there's that kind of sweet spot and when you can make a decent amount of money or what you're in your sort of and

inheritance to make maybe a bit less. This has been wonderful else Web, Thank you so much. Look forward to catching up with you in London when the pandemic is over. Mr Webb writing on the music of our times. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, 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.