Surveillance: Negative Interest Rates With Kotok

see above two percent growth? Well, I think what the market is looking for generally, is this weakness that we've seen in the manufacturing side of the economy start to mean river and the rest of the economy, that the service side, the consumer that has been much more robust, just kind of continue on track. We think what we're actually likely to see is this weakness from the manufacturing side of the economy start to broaden out a little

bit to the rest of the economy. We're not looking for a recession, but we are looking for more of a pronounced slowdown than the market. They don't do this till cf A five. You know, in terms of example. But let me ask to see a five question caution gloomy. It's not mourning in America. Why are starts going up? Why are stocks going up? Well, I think what the market is doing is looking through the short term weakness

and it's very much expecting of recovery next year. And we had a very difficult year this year for earnings. SMP is rallied this year and we've had earnings growth of only one percent. If you ex out the effect of buybacks, it's actually been negative earnings growth. So why is the market able to look through that? Because it's expecting a sharp rebound next year, particularly from some of those stocks that have underperformed, the energy industrials, materials names.

You know, the market is looking for very strong earnings growth there we ca that's a view that's going to get challenged through Q one if we don't see a decent rebound in the data, and I think you will start to see downgrades comes through to those twenty when they earnings expectations, and the market at these lofty levels I think could struggle to digest that. So, Greg, I want to talk about valuation. We've had rise in the SMP yet we've had essentially, as you just mentioned, effectively

no earnings growth. Where are we in terms of valuation? It looks expensive. It looks expensive. I think if you look at, for example, growth stocks um one year four at p for growth stocks is at highs for the last thirty years x the TMT bubble. So there's an argument that in this environment of extremely easy monetary policy, low rates, that there should be evaluation premium. But the question is how much is too much? And to me

it looks over extended. So you bring up the good point, which is, you know, I'm looking at the tenure here at one point seven, I've got no choice. I gotta go buy stocks. I'm just gonna go buy Jeff Bezos. Right. Well, I think that's what's been driving the market this year. And I think as long as earnings growth is positive, even if it's low, positive, that type of attitude can can play. But the issue is if you start to see stocks under pressure, if you start to see earnings contract,

then it becomes much more challenging. It is a much more risky asset class. All right, So if I'm thinking about equities here, there's you know a lot of I'll probably have half the people to walk in this studio UM talk about defensive, get defensive, get defensive, but those are expensive, and the other half will come in and say no, no, no, there's no recession in sight, goes cyclicals. Where do you fall? I would rather fall in the more defensive camp, but I do think you have to

be careful about that. Some of the classic defensive sectors, such as the healthcare sector UM is potentially subject to a huge amount of political risk next year. So I think it's very difficult to find good value defensive stocks. I think sectors such as the consumer staples I think would weather a down term better than some of us. You do derivatives as well, Greg Bottle explain to us the convexity right now, that's the bet within the market and when on wines it goes faster. How big is

the bet right now? And the marketers are you know, the proverbial sidelines crowd, Yeah. I mean one of the things we've seen this week is that the VIX has broken down through the twilet, so it means that the expectations for future volatility are very low, and we've seen the short interest in terms of the VIX future. So the number of people betting on that basically continuing to remain. People are betting that it will be a quiet ball

market exactly. So there's a there's a larger outstanding short position on the VIX than there than there has been in recent history. So yeah, there's basically a bet that we're going to remain in this very low volatility risk on environment and that creates potentially a fierce a reaction if you do get a catalyst to break us out of that. All right, So it seems to me we are just one tweet away from this trade deal, just

going what would that mean for things? Yeah, I should have taken us there, But what could happen in that scenario is that it's still a risk of the market is a market kind of looking past trade, the markets looking past trade, which is exactly why it is a risk. I think the market is very much pricing in the idea that this phase one deal, this East fire is

going to get done. I think everyone accepts there are challenges further down the road, but in the short term, I think everyone speaking to expects these December deadline to pass without any further increase in tariffs, and that we reach a phase one deal so ready for markets the risk that if we don't then that could have a kind of a significant impact. What is the segmentation that I can take advantage of? Is it MidCap, small cap,

large cap? Is it US international? Is it you know, the twelve stocks that are going up versus value and geometric going nowhere? What's the partition that is an opportunity? Well, I think it depends on your view. If you buy into the idea that we are going to have a cyclical recovery, then I think those stocks that have lagged, whether it's energy industrials, the smaller midcaps in particular, do

look potentially interesting. The Russell broke out through the top end of its trading range last week, So if you buy into that narrative, I think the smaller midcaps could rally into the back end of the year. I think if you're worried a lot about trade, if you're worried about the US elections next year, then I do think you have to be more cautious about the nasdack some

of the fang names. As I mentioned earlier, valuations for the growth stocks are extremely elevated, and typically is the Nasdaq that has been more volatile around trade headlines, and I think could be far more impacted by the politics next year. I mentioned that the fang stocks, I mean they've been Are you concerned that the breath of the market advance this year maybe isn't as healthy as we've seen in some other advances. Yeah, I think that's that's

absolutely true. I think there's been kind of a relatively narrow sub section of the market that's been driving growth, and that very much reflects this dislocation we've seen between the manufacturing side of the economy and the service side of the economy. So absolutely it has been a very narrow ralliant that raises the risk. Big bottle, thank you so much, greatly appreciated. With B ANDP. Perry bar with Equities and derivatives there in a cautious GDP view as well.

Andrew Holland Hurst here, Andrew, the zeitgeist is okay, maybe it's a bottom and up. And of course Chairman Powell talking about a glass more than a half full? Is that what you see? You know, it's looked a lot like a glass exactly half full. And we're starting to get some of this hard data and that's looking a little bit more positive. So we've seen some positive signs on the soft data, and I would say data out this morning, you're seeing better investment in g d P,

You're seeing better signs of future investment endurables. And that's really where you want to see the strength in an area that's been weak for quite some time. With that tone, do yields as a general framework stay lower or is the huge surprise of Q one two thousand twenty up up we go finally in yields that that that would be a huge surprise. I think that's what no one

is expecting. And and and I think you know if you're listening to Governor Brainard yesterday for instance, but she said she was talking about the potential to move to an average inflation targeting regime. UM, so this is still a said that even if they see strong activity, you need to see something on the inflation front to get them thinking about hikes. I think that's where we have this scenario where it is looking a little bit better.

Equities are moving higher, but rates are staying fairly low. So Andrew, looking at the data that came out this morning, you know, US business equipment demand increases by the most since January, you know, and that's kind of car counter to the narrative that we've been having, you know, contracting, manufacturing, weak business investment. Is this the beginning of a turn do you think? Or is this not so much of a trend at this point? It's probably too early to

call it a trend. And and and we're really looking at one month of data, Like I was saying, you do have some of these leading indicators globally p m I s for manufacturing or turning up, and they're still at low levels, but they look like they're coming off of the bottom. So that's what we're hoping for. That's what we think we we're going to see. And the other thing that's going on in the US is you had this auto worker strike, which was a dragon probably even

a dragging these numbers that still look pretty positive. That's going to bounce back. Um, we know that we had aircraft production that was shut down. That's going to bounce back ball. So so you have a couple of idiosyncratic factors. And there also that coming into the first half of these numbers could look a little more positive. So I think that's going to happen. Do I see it in the data. Yet I'm not sure that we're seeing it

that clearly. Andrew wonderful to see Sherman green Span, And I think with Maria yesterday, and you know, I look at Sherman Greenspan and his economic mandate is a good stock market builds confidence. Is that still true or is the stock market the province of only the elite? Well, it is true that the games from the stock market are not that broadly shared across the economy. This this really is high income, high wealth individuals that have exposure

to the stock market. But when we look at this consumer sentiment measures, and even when you break those consumer sentiment measures down across income crew groups, UM, across demographics, you still see the pass through from higher equity prices UM to what's going on more broadly with consumer sentiments. So those two things are they are linked, um. Whether fundamentally or not, they they should be. They do seem

to be quite linked empirically UM. And so as we see equities moving higher UM, we think that should be positive for consumer sentiments. Surprising then that you know, conference or consumer sentiment has actually stayed a little bit lower here. So we're watching that to see if that bounces um, but but in general that should be a positive backdrop for the economy coming into Andrew Holland Hurst, thank you

so much. Too short to visit. He is a city group working with Catherine Man on a view on the American economy as well. It is a joy to speak to the gentleman from Pennsylvania and Florida. His name is Mr Kotak, David Kotak with Cumberland Advisers. David, before where we get to your important essay and the poisonous idea of negative interest rates, you have provided national leadership on the challenges to agriculture in China and a center around

your pioneering bird flu work years ago. Pork is stratospheric in China and as a profound impact. It's not the same as bird flu, but there's a little bit of related biology, microbiology and virology. Here. Your thoughts on the durability of this pork crisis for China. Oh my gosh. Uh, Good morning and happy Thanksgiving. And you just made the case of why Turkey is so it's important. Um. The The issue of flu is that it you takes. We know that we saw it from bird flu, we saw

it from other viruses. In this case, the shock to China is huge. Michael Jewelry, who acts those prices UH perfectly in China and has developed the whole Price Indicator based on what's happening there, describes the shock in the country. It's like the most basic food source has an inflation spike in a shortage, and of course it happens in the middle of all the agricultural components of the trade war between the United States and China. So there's a

big effect here too. So David is just to follow up out a little bit. Is China more susceptible to these types of viruses, whether it's poultry or beef for pork. I don't know whether China is more susceptible. Um, there's medical expertise on that far beyond anything I I hold. What we do see is we have these originations coming from Asia which affects and have potential of the effective world wide. And we never know with the virus. The only thing you know about a virus is it will change.

So this is a situation which is huge in China, has international effects and the results are yet to be seen, which is the case with every one of these. So David let's switch gears to your recent research note on negative interest rates, obviously a significant issue for Germany, for

Japan and some other UH countries as well. What is your basic thesis about what's going on with some of these markets with negative interest rates and their Well, yeah, we worked on the paper for a number of months to put together and verify that the thinking was supportable,

and essentially it works like this. If you have positive interest rates, the farther out you go you have a traditional yield curve, one that we're usually accustomed to in most countries and certainly the United States, then the longer out you go, the more you're paid, and therefore you have an incentive for a longer maturity. If you have negative interest rates and the yield curve is increasingly negative as maturity goes out, then the longer out you go,

the more you are penalized. And therefore, in a negative interest rate scheme such as we have in Europe, the incentive is to be very short term, because the penalty is lower. In the positive interest rate scheme such as what we have in the United States, then the you're incented to go longer, and the effect of that is to distort forward rates the notional derivatives of which there are probably five trillion worldwide, and ultimately compressed yield worldwide

to be parallel. And in fact that's what they look like today. What did you learn about extricating ourselves from a negative rate experiment? Well, Madame Legarde has the most difficult task. Now she's a superb politician and she has all the credentials, and what she has to do is herd the cats into the room and say, look, we're killing our banks, were killing our insurance companies. We are not getting much growth. There was an ECB economist out

today saying we still get some SIP stimulus. Well, I'm not so sure. John Author's column where he was kind enough to quote my work. But in John Author's column on Monday, John uh Tom, he articulated case after case after case, country after country on the damaging effects of negative rates. I thought John was marvelous document. And Mr Authors has been on fire folks, and write, I mean, he's always good, but these he gets these moments. You know,

it's like the Boston Bruins. He gets these moments where he just puts it on fire. And Mr Authors has been lights out. We've tried to effort him. He doesn't do early morning. He's such a rock star. I think the day starts like a tenage, something like David Kotak, have a wonderful Thanksgiving that regards to your family in Florida, Mr Kotak. Of course, his leadership for the years really a municible bonds the core business and also of course

in Cumberland Advisors, Paul Sweeney knows. I mean, you know, he's got the yard out there, the acreage to the west. He's got the John Deere s, a precision cut real mower. You know, it's what you do. You can do the yard like three swipes R. Yeah, that's what. Yeah, he gets the job done. Six world. So let's go industrial here and talk about the tentativeness of American industry. Why don't you bring in her extinguished guest, Karen uble Heart

Bloomberg Intelligence. She covers all things industrial. You think about the rust belt, you think, Karen uble Heart, She's been doing it for a long time. So let's just start. And I know we talked to your protege, Christilino earlier in the day about the deer numbers I'm wondering and the guidance was disappointing. They sighted China across your universe of industrial companies, agricultural companies. Is this issue really coming home to roost? I e. The trade difficulties with China

coming home to hit the farm belt. The farm belt is one of the areas that has gotten hit the most because our big grains are soybeans and corn, and and China buys half of our soybeans, so they've been really wacked. Um But companies, industrial companies across the board have seen the impact. A lot of them have big holdings, particularly large companies UM three AM. As you know, eleven percent of sales is in China, so they're seeing it in China. To the economic growth slow down there is

hitting them and it's hitting here as well. The uncertainty is making customers pull back on on some of the long, long lead time projects. So it has spread. An organic growth is uh, you know, down in just about everything except aerospace. So what are the companies that you cover saying again the you know, the big industrial companies, are they saying we're just trying to cut costs and ride this thing out or is there anything they can particularly

do here given the uncertainty. I think I think it's the former UM. A few of the companies UM have been frankly gotten in front of UM the slowdown and cut costs pretty dramatically Emerson UM Honeywell, some of the others pulled out their quote recession books to UM get ready. So margins have actually held up pretty well. The volume has not been there UM, but so far they've been

able to deliver on margins. I know you don't do biold sale, but you mentioned Minnesota Mining and Manufacture three UM. Boy is the son love two buys fifteen holes and for say go away, John Inch, Gordon Haskett, Hold, Jeff Sprague at Vertical he was brilliant one Hold, Yes Sprague. But but Karen, when does three M Do they just slog on or do they have to do a management revolution at this iconic American company? Uh? You know they

have one UM. They have a big potential legal liability with the chemical p Fast and that's one of those black hole things that is unmeasurable at this point and people are concerned about. But in addition to that, the new CEO hasn't done a great job of a communicating and be the misses um, and and he is. He's on the road more now, he is. You see him on TV and radio a lot more now because he's

got to tell the story better. What's the story to a venerable industrial forget about three M and venerable industrial company that makes a lot of different things. I mean, that's that's the game. Is the game over? Uh? You know it's funny as as you said, saw in the last two years, right all these companies are splitting up and they're becoming more focused. Ingersol next year, fordive U t X is splitting out of Ringers Ran is a hugely venerable name. I remember interviewing their dynamics CEO ten

years ago. They had twelve divisions and all that. It's just gonna it's gone. They're gonna they're gonna be focused on um, you know, h VAC and building controls and things like that. They're getting rid of all their industrial businesses. Um. You know j C I did the same thing, got rid of all the auto business, all the battery business. They're now just building controls. UM. So you're seeing pressure to focus. Emerson is under pressure right now. Activist similar

But but this is important. Is this the market speaking or hedge fund active is speaking and does it lead to true shareholder return. I think it's gonna be really interesting myself. I feel if when we have our first big bed downturn, all these companies that are now focused are going to get whacked harder exactly where I wanted to go. She said it better than me. As you look at you can focus in Bloomberg intelligence to your outlooks.

You think about some of these big industrial companies is when you do, you are you just like there their corporate development people saying, tell me what happens in with China trade, and I'll tell you what we're gonna do. Well, you know, it's had an impact, a broader impact on global growth. There are the p m I s for all the major regions are all below fifty except for Brazil, which doesn't really matter that much. So it is broad um.

Europe is very very weak, the US is the strongest, but it's now got at p m I that that is below fifty. This is critical. What we're talking about. The the the modern MBA experiment. As a consultant comes in and says, break up your multisector conglomerate, and you know Maltese. When I first started doing this, Maltese got premiums us you know, the ultimate premium to that stability because of all the businesses they were in. Now they're saying, yeah,

now they're saying, you know, a focus, focus, focus. Initially under pressure from activists, right and in some cases not. But I'm just waiting for the downturn and then they're gonna put it together because cycles are gonna hurt. What does Mr Corps Dana Her do that the others don't because danna Her gets a valuation. Well, at this point, the like let's say, New danna Her without ford of is very healthcare. So it's got you know, so we're focused.

Excuse me, it's got a stability there. I mean, they've got some other smaller businesses. I think this is a huge issue. I mean it's it's just like it's like Lemmings over a cliff where there's a strategy vogue. I'm not I'm not one to judge the vogue, but I'm I'm identifying that there is a vogue. Yeah, like remember in the sixties when there was you know, conglomerates are in and then in the eighties, conglomerates when we remember vote yeah, and I'll the only kid in school that

could spell it. And and so it's it's it Waxes and Waynes and right now it's focus, focus, focus. And you know, if you're you know, in a pure industrial business and you have no place to hide, you know, part of the balance of Honeywell having chemicals and then having aerospace and you know, um and then you know, having their buildings business. They don't all go the same way. His Honeywell still Honeywell. Where are they going to go?

Like did their clean up? I think? And as as long as performance is great, I think they're love this industrial stuff, don't you. I used to live this. Yeah. I mean you know, you know, they got their pressure. They wanted to remember, they wanted them to split aerospace, and he immediately responded to them, and he came out and got rid of his two more cyclical, low growth business. I've never seen you this fired up. It's Thanksgiving. I mean, this is it. He's reporting. You got all these big

industrial companies. Nobody's talking Uber, nobody's talking lift or we work. We're talking Dan folks. I hope send us an emails. Would you rather listen it about Uber and Left and all these unit we work in Emerson. How's Emerson doing. They've always lacked, you know, yeah, Emerson. You know they're um a lot of late cycle stuff. You know, their their process businesses. Come on, they haven't had a fire

under them in thirty years. They are have pressure now de Shaw brought in and want them to very Okay, we'll see your Friday, Karen o'bar. Thank you so much, Bloomberg Intelligence. 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 Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio two.