Surveillance: Hunt For Yield With Goldman's Swell

I don't know when Mr Laidler is going to say here in a moment, but John, I looked at the pull back, if you will, that we're seeing in the market, and it only gets you at wors is like the nastack on to a centered tendency of the recent volatility. There's not a lot of gloom and doom on the tape. It's just sort of range bound center tendency. Off this morning, we know what Ben's going to say. He's going to

say by but he's going to say bicyclicals. Let's bring it him right now, Ben Laidla Sama Hudson Research, see a bank right to have you with us? Uh. That is a change. Then later and it's not just about buying growth equities getting into some cyclicality. Why Ben, Because I think I think the election has held well back. I think all this talk are we gonna getus or not has just been a huge distractions has helped people back. Um, you know we're waiting for a vaccine. We don't have

that yet. I think, you know, roll forward, let's get the election out of the way. That's got a bit of certainty there, and then let's look forward and what does that look like. One you're gonna get three to four percent GDP grow, if you're gonna get earnings, and you're gonna a mountain more than that off these sort of deep cyclical stops people until very recently basically being ignored. And I think those are the sort of the big beneficiaries of um, you know, the vaccine, which we're going

to get something some more fiscal stimulus. I think we're gonna at something, um, you know, Biden winds and it's a blue wave you know, obviously gonna get a lot

more than that. I think these are the sectors of the market which are cheap, which are out of favorite, and have just huge operation in lee bridge to this sort of base case scenario that I have from here, and it hasn't really moved yet because I think people have been very distracted by you know, by by this fiscal well of talk in the election and everything else.

Then the challenge of people trying to catch up with Ben Laidler is on an absolute or relative basis, do you shift, do you shift away from big tech and tech completely, or do you do both together and still own both areas? Yeah, I mean I think you you know, you bring down those sort of quality growth sort of big tech healthcare a bit. But you know, I think that we're talking different instruments here. I mean I think that I think the tech is just a vac story.

You know, it's with a long time. It's going to continue to look very good with these bound sheeets, with the structural growth outlook. But absolutely, I mean it's it's where everybody now there needs to be a ship. But you know, the seconds I'm asking, I'm telling people to shift into you know, industrial, stalk out real estate. I

mean these are pretty small sectors. Um, you know, a little bit of money is going to go a very long way, and I think you're gonna get an awful lot of bang for your buck just because I mean just look at what's going on in third quarter earnings right now, which we're all sort of ignoring because there's a lot else going on. Um, you know, these cyclical sectors, industrials, energy, You have beaten expectations by over a dent so far. I mean, you're just getting huge leverage on the upside.

There is, of course, the counter argument that the pandemic is accelerating and worsening dramatically in Europe and in places in the United States with a record number of cases, and that we're not out of the woods. Even if we get a vaccine, the rule out is going to be complicated, The efficacy is questionable. So how long can we stay in this environment with a pandemic still very much present and pushing people away from the public realm? How long does that have to go on before you

change your view? Yeah, I mean I think that the relative surprise and the which is certainly given me, you know, a lot of a lot of hope has really just been the resilience of of the of the consumer, the resilience of the economic activity. I mean, just at a U s p M I for October last week at fifty five, I mean, very expansionary, you know, savings right, sort of retail sales are sort of back to pre sort of pandemic levels. I mean, we're in pretty good

shape here. I mean I'm not naive enough to think that you know this, uh you know, this can go on forever. But I think, you know, the story so far has been one of just extreme resilience, and I certainly think that can go forward a little bit further. I mean, at some point, you know, we do need we do need some more physical stimulus. And and I think we're seeing, you know, everywhere that this second wave is uh you know, is having less deaths and less

impact on economic activity. But but your points well taken, I mean obviously can't go on forever. I mean, I am looking for a vaccine. I am looking for some more physical stimulus, and I am looking for this sort of second wave to have less of an impact than, certainly than the first wave did. Equity features, as Ben speaks,

ticking higher still negative, I hate tense. If one per cent on the SMP five hundred, Ben, just to wrap this conversation up, the correlation between cases increasing in the United States and what you think happens with consumer engagement. How loose or tight will that be? UM? I think, well, my previous point, I think that's a lot looser than it was previously. I mean, I think, you know, we've

just learned to live with this to a certain degree. Um, those that have jobs, which clearly is not you know, it's not everybody, but those that do have a lot more money in their pocket than than they have done historically. So so again, you know, I think the consumer is going to be pretty resilient. Here's certainly for the next couple of months. I mean, at some point we are going to need we are going to need more stimulus. We are going to need these sort of cases to

come down. But I think what we've seen so far is that, you know, we have a little bit of time here. Been great to catch up. As always staying bullish. Ben Later of Twahudson Research, Our next guest is really good look identifying when you come out of those ranges, and we haven't. We can bring Mike Swelling now, please bring the head a global fixed income portfolio management might greater to catch out with the SA I'm sure you've

had a part of that. Can we just start with this ten year treasury range have been stuck in for a number of months now between fifty basis points and ninety five at a high end in early June. Might you think you've got the set up in front of us to break out of that, Sure, Jonathan, I don't think I can match last week's piano in my office is not large enough per piano, but like a play

because if that makes your week um. In terms of the range on the bond market, I think that the death of the bond market rally has been just that story has been written way too many times. They're still they're still yield, They're still balanced in fix income relative

to equities and other risk assets. And as long as you have investors that are long risk assets and need some level of diversification, as long as rates are zero negative almost everywhere in the world, the tenure Treasury at eighty basis points offers number one, balance for your portfolio and some hash efficacy. And secondly, there is yield in the thick thincome market. An eighty basis point may not sound like a lot, but if it rallies to thirty,

that's a significant, significant total return. So I think that people are writing off the bottom market too early, and I think that right now with the tenure at eighty basis points, there is value there with a bit on hold for the pursuable future, and that's right where I wanted to go is within the internals of the market. We do that in the equity market all the time. What do you see on your desks of the appetite

and the bid ask. I mean, there's a lot of money out there, I get that, But what are the internals you see in that bid that demand for fixed income paper? So we'll see a lot of the fixed income universe way overweight duration or way overweight treasuries. What we look at is we look at a lot of the funds that are out there and to see how much where they stand relative to the benchmark. And you're seeing investors right now anywhere between flat and somewhat short duration.

So that from a technical standpoint is a very positive technical for for the bottom market. I would say that the other very very important point is kind of the volatility that we're seeing now in equity markets and that we're likely to see going into your end. It's likely to have a positive impact on the treasury market as investors look for flight to quality, and a near term it may even have a positive u uh tail wind towards the dollar as well as the flight to quality

currency Here's what I'm struggling with, Mike. You say that there is probably going to be buying of treasuries, and you know, I was reading your notes and your bullish on high yield, your bush on the riskiest credit. Isn't there a contradiction here that if people are looking for the safety of treasuries at sub one yields, why would they be confident that they're going to get any of

their money back with a high yield bond. Well, first off, um, there is a lot of merit to owning growth related assets and things like high yield that are have not benefited as much from the FED coming in buying everything in the investment grade universe, buying treasuries and buying mortgages. They've kind of been left out there, and there's still a decent amount of yield in the hospital market. The benefit of treasuries paired with credit is very, very significant.

When you go long duration paired with credit, you actually create better balance in a portfolios. So the event that there is a risk off, actually treasuries would rally, and then the event that there is a improvement in growth and treasuries made back up, you would see credit spreads tighten very significantly. So number one, I don't think that

that's an inconsistency. Secondly, I think that when you invest in things like high yield and other fixt income related assets that are not treasuries or agency mortgages that are very liquids, you think longer term and longer term, we do believe that you're gonna have um improvements in care for COVID, We're gonna get back to better growth next year, and so as a result, you want to stay long

growth related assets. But as we look at what's setting up right now in terms of the potential for election volatility, the potential for funding issues at the end of the year, as banks are not in a great capital position to be able to provide a lot of liquid into markets, we actually want to be in a position where we have a little duration going into that. But you're also in a position where you have dry powder and take advantage of this location coming into at the end of

the year. Hold on a second, let's unpack some of that you said dislocation into the end of the year. In other words, you're expecting some of the riskier credit to potentially sell off and potentially significantly heading into your end, and then you're gonna be buying what's your entry point. So I'm trying to divide the fixing com universe into two. One is the credit related assets, where you're relying upon growth improving next year, earning is improving on the margin

and just getting paid back. And in trading credit, it's very hard to jump in and jump out pre election, post election going into your end. So long term, we still very much like owning credit. In the very mere term, though, we look at factors like volatility, and so we look at we look at vis we look at bit offer spread as Tom was talking about earlier, and we get a little concerned that there's gonna be bolatility going to the election, and it's likely to be baltilly going to

your funding stamp on. So what we've done is instead of reducing positions in credit related assets which are going to be dependent upon growth and longer term, we're trying to free up balance sheet and portfolios to be in a position to take a match just location, and that may be even things that basic at um cash futures basis in the treasury market, something that blew up during the COVID crisis, blew up in previous funding crisis where you can earn very very attractive a term by deploying

your on your balunt on radio and television. This morning our simulcast Michael Swell with us with Goldman Sex out of Brandis and LS a few years back. Mike Swell right now at LESA and I know with John Farrow's interview after interview, everybody says they're buying China debt. All my radars up just because everybody seems to be in the trade. What's the risk or what's the thought you have on what could be out there in two thousand

for the certitude of owning China debt? Well, I think we have two factors that are risk to owning Chinese debt. One is the risk that growth and that the Chinese economy is very insular and continues to recover at a pace very different than the rest of the global economy, and the event that that does occur, that could create a situation where the Chinese Central Bank provides less accommodation and you actually see rates rides and inflation pick up

in China. That's a that's a real risk. The other risk is that um from a credit standpoint, people get concerned again about China kind of the other side, and while the central bank has the ability to lower rate, you could have a situation where there's credit concern. I think that's less of a concern. In the end, rates are attractive in China. Rates are in the three and a quarter area. They're meaningfully higher than they are on

the rest of the globe. We don't expect to see inflation running away in China, and so the real rate in a country like is actually somewhat attractive. I'm not overly concerned. That doesn't feel like a crowd of trade. Aren't a lot of investors that have the ability to be able to invest in China debt that you're that you're overly concerned that it can be one of these crowd of trade. But obviously, Mike Well, I got a question.

You were a ginormous basketball player at Brandeis. Did you really cut practice once because you wanted to go see Al Gore? Did you really do that? Oh my god, you really did? Um nineteen eight the eight election, and uh, actually it was true. I actually worked on one of the presidents of campaigns and was very active and involved.

There were about eight Democratic candidates at the time, and um, I actually did go to the coach, and the coach getting rolled his eyes and said, we don't do that here, We're here for basketball, and coach, no, I want to see I want to be out Gore. I want to hear about that new Green Deal thirty five years ago. Green Deal, it was really a thing, and so actually it is. And John Farrell I would say that. And ice basketball back then was the real deal. What are

they doing final four? No, but it was a real deal, very competitive program. I would I would love to know what David Solomon would have to say if Greg if Mike gave him a quick cold and said I want to go to see a I say and talk about the great deal, you might not say that. I'm worried coming sex. Thank you, thank you very much. Right now

to get things started, Gregory Peters joins us. He's with p JAM with real portfolio management, Money at Risk, FIST income ahead of multisector and strategy and he's one of Trophy set of awards over the years and and all that as well. Greg, I love, love, love what you say. This is a market assisting bondholders and not stockholders. What do you mean by that that policy and all of finance and capitalisms working for bond holders right now. Yeah.

So I think we're in this environment still and we're talking about the path of the virus and rolling shutdowns and pullbacks and fiscal similus. I think what that really does at its core, it's really keep companies conservative, right,

and being conservative benefits bond holders over equity holders. And so what you're continuing to see our companies worried about the path of the virus rightfully, so uh and so they're retrenching, uh and and and so you're not going to see the same type of activity where bond holders are put to the side, uh and equity holders are put forward. So I think that's the environment that we're in.

I know it's perverse, but that's bond market investing. We've seen some huge bond issuance, some huge bond supply through through this pandemic from both investments gride and high. Can you do a distinction on what that money is being used for this time around and whether that plays into the argument you're making. That absolutely plays into the argument. So at the surface level, you see the headlines of

all these issuance it's it's somewhat scared. But then when you look a little deeper, what you see or that companies are actually terming out their existing debt at lower coupons and paying down their higher coupon short debt. So in effect, what they're doing is that they're putting their balances in better shape, not worse shape. At the same time they are preparing for additional liquidity measures. And so those two things put together, I think put bond holders

in a better place, not a worth place. So it's really what you're using the proceeds for. It's not like you're using the proceeds like you have in the past to buy back equity, right, So you're not doing that, and I think that intent and that purpose really benefits being a bond holder in here. Greg the credit market not a monolith. You've got investment grade corporate issuers perhaps doing what you say. On the high yield side, I've read an increasing number of articles about pick toggle deals.

Basically if they don't want to pay their interests, they just put it on their debt balance. You see also recap divida a dividend recapitalizations. Basically private equity firms having their portfolio companies borrow more money to give them a payout. How does this fit into the conservativeness that you're talking about. Yeah, so I think you're always going to see that type

of transaction, but it's not really happening in Moss. And so you can always pick to a certain deal that happened that's maybe pushing the limits, but it doesn't really tell you the broader story. And the broader story is the one that I just described, So I think that's the important piece of the puzzle. Don't don't get drawn in by these idiosyncratic kind of news stories. The broader story is want of balance sheet repair, and I think

that's the driver. Let's push the politics through this conversation as well, correct going forward sector to sector, what you're looking at the moment and the kind of permitations that you guys are talking about A page Jim. As far as the election is concerned, Yeah, so the action obviously is that the four Really it boils down to what's the new regulatory construct and the tax construct? Um uh and so look, I mean I would I think it's a still worthy of kind of examination, But I just

say a couple of things. Uh. First, and foremost is that I do think if you do have this kind of blue suite that seems to have really uh captivated the market in here, that does benefit the consumer as it could kind of fuel continued kind of wage growth and just economic growth. Um. But but the one area that we see differently than maybe the equity market in

some other areas um is the financials. Uh So, to me, it's really hard to see a situation where there could be much more regulation to damage kind of the ability for financials to operate. So so my comment has been it's hard to kill the patient twice, and so I think it's really a pretty benign environment all else equal, if there is a leadership change on the financial side. And then finally on the energy front, this is highly controversial.

Many investors are looking at energy. Obviously it was a center at the last debate, but the truth in the matter of the energy companies haven't really benefited either equity holders or bond holders over the past several years. So some kind of change in alteration in the spending mix and maybe being less profligate is isn't such a bad thing.

So I'm actually pretty excited over the alpha opportunities within the energy space going forward, Greg, the great understanding is it bonds as a hedge don't work anymore, so I gotta go find something else, whether it's preferred bank prefers, etcetera, or forty seven other intangible assets as well. Is that gonna happen? I mean, a bond is a bond if fixed income as a hedge is is just what it is, a predictable stream of of cash flows. Can there be

an alternative? I think there can, but it's way too early. So I agree with with Mike Swell who was on previously. I think it's way too early to call the death of the bond market. But this is really picking up steam as a story. But it you know, I mean, we're in an environment where real yields are negative, right, so the fact that you're getting you know, seventy fifty basis points depending on where you are in the curve,

that matters a lot relative to that. So I still think bonds add a lot of value to the portfolil uh. And there's a thing called risk adjustment, So you are, um, you know, getting a return for a lot less risk, and I think that matters. So there's this big storyline going on around the death of the bond market, and sixty forty is dead. I think it's way too early for that. Uh. And bonds do what they're supposed to do. You see it today, UH, and I'll believe you know,

you'll continue to see it. So UH. I'm so bullish on the outlook for bonds. And in fact, I mean I think it's going to be somewhat vaulatile here over the near term within a confined range. But I think that back in the curve has actually value here. UH. And so we're actually pretty constructive on the level of yields UH. In the US bond markets, bond specialists, bonds on Iva, Greg Fadist, Jim try to catch up what

he said as the wise thank you right now. It is a great joy if you go to a fancy school like Harvard and you get a bunch of fancy degrees. If you are ever so lucky, you get to go to the founding school. That would be William and Mary and their Law school of seventeen seventy nine. It was an historic moment for the nation when a number of people, including Mr Jefferson, got together and said we have to be different, and they did that at william and Mary.

Rebecca Green is at Williams Mary. She is the winner of their Acclaim Teaching Award given by graduate students, and that is a good and wonderful thing. Professor Green, thank you so much for joining us on election transparency. Can our radio listeners are television listeners? Can they be confident of safety at the voting booth on November three? Um? Well, first all, thank you for having me, um, And the

second of all, absolutely they can. Um. Election officials and local governments have been working hard to ensure that we have a safe and secure election. There have been so many elections going back to the founding of a Wilamen Mary eight particularly eighteen twenty four and then on to two thousand twenty that are this fractious. Is it normal to be this angry where there's so much tension about our voting process? Um, you know, I would not say

it's normal. We certainly do have a long history of problems at the polls, but um, it is, um the case I think that we're in, you know, a hyperpartisan mood and you know we uh, you know, we we certainly haven't seen anything um like UM. You know, regular comments emanating from the White House that there's a problem with our election administration. So so it certainly is a different tone than any previous election, at least in the

modern era. Rebecca, there's a question about November three, it will be the last day of voting, and then there's a question about the weeks after that, as both sides of this campaign get their cavalry together to fight the legal foundations of this vote. What are some of the battles that you're expecting to see in the court based on both President Trump and former Vice President Biden's comments so far. Yeah, well, so, I think the first thing

to say is that post election litigation is normal. It's part of our system. It's how we resolve disputes, and this country has a long history of resolving post election disputes in the courts. Um. You know, post election disputes are generally guided by state law, so you know it's for in in every state. How this will all unfold if it if it unfolds, Um, And you know there's there's um kind of three different Well, there's there's different

kinds of you know, there's different types of post election litigation. So, um, you know, everyone is probably familiar with recounts when when you know, elections are closed, candidates can call for recounts, and again that process is governed by state law. UM. And then there are ways that candidates and campaigns can challenge um either you know, ballots or they can allege

official misconduct. It's called different things in different states, but it's generally a contest or a protest or the words that are most often used. And so those are the various vehicles by which you can you know, challenge or um, you know, litigate an election result. And so we can we can expect, if it's close, we can expect to see um, you know one are both unfold. So there's a high likelihood that Amy Coney Barrett will get confirmed to the Supreme Court as soon as this evening, if

she does passes through the SETI today. What's your expectation about a potential case that would come between the Supreme Court the way we saw back in two thousands, Well, you know, I think it's pretty unlikely that we see a two thousand like um, you know event. I mean, there would have to be a lot of circumstances that

would coincide for that to come about. I mean, it's pretty extraordinary that the whole waste came down to Florida and that the you know, the race in Florida was was five and thirty seven votes, Um, you know spread. So I think, you know, the chances of lightning striking again seem pretty remote to me. Um. I think what's more likely is a case could end up at the Supreme Court that you know, deals with the fundamental powers

of state legislatures versus state courts. That's a that's a kind of we've already seen a premonition of that with a four or four split last week on that question, UM, and that that could re emerge as you know, there's some unsettled questions about um, you know, authority in uh in elections in states. Rebecca Green, Brian Rosenthal, and Michael Rothfeldt in the New York Times this morning have an absolutely brilliant article on the nepotism involved in this case.

It happens to be, I believe the City of New York election process and all that, how are we going to vote five or ten years? So, now do you have, in your expert view, a better way we're going to vote than the nepotism and the local, local, local politics

of this nation's electoral process. Yeah, you know, it's pretty extraordinary when when we have foreign visitors come and look at our our election system, they're often amazed that we have this very decentralized and sort of partisan based election and meditation in this country. And it is many volumes have been written about how problematic, um it is for

a lot of reasons. But on the other hand, you know, if you look two thousand sixteen and hopefully in two thousand twenty, one of the features of our system being so decentralized is that it's very hard to do anything to hermit from the outside, right because, um, you have to there's essentially ten thousand different elections in this country, and so that that kind of provides some protection in

terms of the kinds of potential harms that we see. So, um, it's sort of a two sided coin in terms of reform and like what we might you know, what changes we might have. Um, you know, ten years from now, you could imagine, after this insane election season, that Congress decides to take a little bit more of a heavy hand in terms of mandating some certain basics in terms

of how we how we run our elections. This is about a joy Rebecca Green, Thank you so much, Professor Green at the Law School of the College of William H and Mary. 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.