Surveillance: Too Early For High Yield Calls, Says Caron

interest rate environment time after time after time. It hasn't happened. Dominic Constant and Credit Sweet years ago had the mother of all charts on this. It's been the great missed call of I'm gonna say fifteen years. I think when after the CEO of a bank stops making codes about markets and makes it very awkward for every one who works at the bank when that issue comes out a little bit later telling me JP more than have nothing to do with ten year troceries. Now Mr Mr Diamond

listens and watches every morning. You guys, you know, let's let's be clear. Joyce Chang, John Norman, Young Lloyds and the rest of them. They don't agree with their CEOs call on debt, well, they didn't back in ten either, when Jamie Diamond said you'd better be prepared to deal

with rates five percent or higher. That never came around Jamie Diamond on the equity side of things when it comes to his own stock has been remember in February when we had that huge growth shock around China and he stepped back in and basically ticked the bottom of the market when he started buying JP Morgan stock. But on the Bontom market, Tom, we've seen it time and time again, the people who are expecting yields to climb

and yields keep going lower. I know you're called up with Steve Major of HSBC a little bit earlier this morning, and he's out there saying seventy five basis points into year end twenty one. Then we've got the perfect guests to carry this forward. Let's get to it. Jim carn and Morgan Stanley joining us right now, Jim way in. And now it gets so quid when the CEO of a bank starts to make a cod but it's not your CEO. And I haven't heard Goldman saying it's been

about ten yea year. It's recently, So what are you looking to happen in twenty one, So so we are looking for yield to drift a little bit higher um. But you know, I think a lot of these calls for inflation and significantly higher yields are ver very premature. I don't see this really until maybe and then let me go through the reasoning and rationale for this. The point here is that we have a pretty significant output gap. So trend growth in the US is just under two percent.

Sorry it's it's just about two percent UM, and we grew this year at about minus three so therefore we're below trend growth by five percent. Now, that missing trend growth is what we call an output gap. And the question that everybody asked themselves is when are you going to close that output gap? Because that's when aggregate demand comes back into the economy, and that's when you have more demand that pushes prices higher. So until the output

gap closes, you don't really get higher inflation. Now, by my calculations, we would have to grow at five percent in GDP in the US and five percent again in and and that's beyond most forecasters. In other words, for next year, many forecasters have five or even six percent growth. But then the following year in most forecasters have somewhere between two and a half and three percent growth. So

we're gonna fall short. So what do we need. We need a significant amount of whether it's fiscal stimulus, continued monetary support, in order to get these animal spirits moving higher, to get prices moving higher. But right now it looks like we're falling short of that. So it's not that yields can't start to rise. We're seeing that with break evens. Tenure break evens are around a hundred and ninety basis points.

Real yields are falling. All of this is a reflection of expected stimulus, whether monetary or or fiscal, but we're not actually seeing the delivered inflation really coming into the

into goods prices. And that's really the key. And unless we get that, it's going to be hard to have a sustainable rise conten your treasury yields beyond say one point to five percent or one point four percent next year, you know, for a moment, but that would just be a natural adjustment, not in inflation scare on a ten year The idea that inflation in this reflationary narrative doesn't evolve, doesn't materialize. That's your position, Jim, going against the consensus

on that point. But when it comes to risk assets, you're perfectly aligned still with the crowd gym. Why yeah, Well, because you know, I think that there's a shortaship of securities. For one UM, there's a lot of liquidity in the marketplace and not enough securities. Corporate supply next year is going to probably be lower by in terms of net issue once it's going to be about negative five billions. So we have about one point a trillion in investment

grade next year. Week we may expect around one point three trillion UM. So sorry sorry, one point eight trillion yes this year and one point three trillion prior for next year. UM. The FED is you and kwei, and the FED continues to buy you know, eighty billion per month. They may even extend their maturities UM next week. So the point here is that there's a lot of money which is by design, is out there to flood the markets, and it's just not enough security. So there is going

to be demand for yield. So yes, it is a little bit counter consensus. But but the point here is that fiscal policy and monetary policy together will actually stabilize the markets quite a bit and keep interest rates relatively below. I mean, I think rates rise a little bit, but I don't think they rise as much as what you know. Some may be thinking that they might, just because there's just so much cash on the sidelines that is looking for places, looking for yield, and it will come into

the it will come into these markets. Jim, we've gotten a little bit philosophical in the mornings on Bloomberg Surveillance, and your note had a very philosophical undertone, and the idea that there is this incredible divergence and tension between asset prices that continue to rise due to some of these interventions from policymakers, and that namentals really are not catching up. What's the breaking point for that? Yeah, well, eventually,

eventually it does break down. So so look, I mean, essentially what we need to have is aggregate demand come back into the marketplace. Right. If that doesn't happen, then all we're gonna do is stretch valuations more and more. Here, let's let's take this as an example. Investment grade credit spreads in the US is trading at about a hundred basis points high yield o A spreads is under four

hundred basis points right now. So we've brought forward a lot of the performance in the market at this point. For one, so, in other words, was about a promise fiscal stimulus, monetary stimulus, and we hope that things are going to get better in so all that performance has

been brought forward. If we don't deliver on this growth in one so is about the delivery of the promise versus the actual promise that was made in If we don't deliver on this promise in terms of growth, then these asset prices are are going to look a little bit expensive and there could be an adjustment downward in price to reflect the fact that we're not growing fast enough. And so I think we're not going to grow in

is will it be enough? And if its prices will address down I'll tell you a great story about just you white Jim carrotyping Stanley Global fixed Income right now an adult conversation on the moment in initial public offerings. Kathleen Smith has provided terrific leadership at Renaissance Capital on clarity of thought, on the frenzy of the moment and I p O S. We cleared the air with her uh this morning, Kathleen, thrilled to have you with us. You know where I am on this. I'm hugely skeptical.

Is this a manufactured boom? Is technology companies keep private ownership and and release an ever so slight public amount, thus creating a bidding lore for that ever slight public amount of shares? Sure well, you can look at it. Let me just back up by saying that is not only going to be in the record books regarding COVID, but it's going to be in the record books regarding and this year seemed really dollars I p o s

than any year on record. When you talk about the squeeze of a small amount of float to the larger value of the company, we're seeing very large deals. These aren't little deals like we all in n so they're there. And the case of door Dash, which is going to open for trading today, that was the largest ideo so for this year. They do have very big market caps and they're going to have to they'll expand their tradeable

float eventually. But your point on is it a squeeze, I think there's always a challenge of pricing right in the supply and demand, but eventually they settle in, and they have to be connected with the overall market, which

itself is pretty frothy these days. Yeah. Well, Kathleen, I want to talk about the frost, and I want to just sort of zoom out, if you will, at the hundred and sixty billion dollars raised in US I p O is so far this year, breaking records at a time of incredible economic distress, with companies that were left for dead earlier in the year cuttn't coming out as darlings with much higher valuations than expected. Do you see signs of froth in the latest valuations of Airbnb, which

is expected, in door Dash, which is going to trade today. Sure, we have specific opinions about each of those companies. We think door Dash looks price with us. We think Airbnb maybe not so much. So I think you have to look at the company and it's trajectory. But if we step back a little bit and look at overall, what is making the market so uh open right now for issuance? One does that investors have earned positive alpha returns on the existing set of IPOs that have come to market.

And we have an index, the Renaissance IPO Index, that has shown very strong returns. Now, the reason that the returns have been strong, which will actually begets more issuance. But the returns have been strong because interest rates are low, as we all all know. And then post COVID, the digital economy has really accelerated in its um integration and our and our lives and also the biotech and vaccines. So the digital stocks, the biotechs are a very common

constituent of the U S I p O market. That is why these companies have done so well. Their growth has accelerated based upon current current economic conditions. Yeah, although you're looking at the renaissance I p O E t F, which you said has performed very well understatement, it's returned about a hundred and twenty year to date. And you said that that basically people chasing returns. You've got Jamie Diamond looking for one eight hundred call me to get

any deal done of any sword. At what point they have to prove that they're worth this at a time of really economic uncertainty despite all the liquidity pumped into the market. Well, that's the challenge for door Dash. For example, with door Dash, you have a company that's growth has sword due to the pandemic everyone wants food delivery. But what's going to happen once we got stop gets back to normal life. That growth trajectory has to drop, and

that's the key challenge and an analyzing door dash. In the case of Airbnb, that company's business has totally fallen apart with COVID and they're now digging themselves out. I think in an interesting way, they've had a restructuring that's gone on with the company. So we're looking at Airbnb as a company that's going to be forward looking on

a positive note, svtuation's gonna matter, Kathleen. When I read and this is ancient history, folks, there was a thing called a red herring and you read them and the first thing you did is go to the capitalization. I'm seeing on the Bloomberg a preferred equity tranche of door dash that would choke a horse. I mean again, I look at these as manufactured transactions to create scarcity. What about the so called preferred equity in door dash? Is

that a tangible private investment controlled by private shareholders. I think you have to look at some of these are convertible preferred so they become equity at the time of the I p oh. But I would point to you when we think these companies are and they may be expensive, it will prove itself out in the market. But when when you look at companies like Zoom, that company has been public for less than two years, do you question the value of Zoom or Moderna that created a vaccine.

It's hard. These companies are new. They take time to be analyzed and figured out in the context of the overall market. Kathleen, wonderful to catch out with you. Thanks for your time this morning, Kathy Smith a nice Lon's Capital. Thank you very much. This is the interview of the day on the equity markets. Douglas Cast with his Seabreees

partners and what cast us folks. As he gets up, you know, he rolls out about nine am and he writes a quick memo, and you know, usually it's perfunctory, go along, go short in that, and then every once in a while there's a shut up. This is the real world memo. Cast wrote one of those this morning, and he joins us on shorting stocks. How bad have the shorts been hammered? Doug in this great bull market. First of all, I want to wish you a happy birthday.

Thank you. Uh Emerson said, we don't grow old. When we ceased to grow, we become old. Oh, listen to you, Doug. Doug is more appropriate. I don't want to achieve immortality through my work. I want to achieve it. We're not dying, Doug. I've come full circle. Okay. The Red Sox sucked when I was a kid, and now they suck now. So you know it's it's been. You know, it's full circle. What a shorting stocks? You're wrote a beautiful essay? What how bad has it been for the short crew? It's

been horrible? And Um I wrote n s A this morning mentioned um that shorting speculative stocks it's not fun, it's not easy, and most shouldn't bother. But if you ursh yourself in the more dangerous waters of short selling, there are some techniques or basics to employ. So much of shorting, Douglas Cass is not what to do, but what not to do? What's the biggest mistake? Paul? In time?

If you think about it, um, and I've written and I in fact, I remember a three hour lecture on short selling in Bob Schiller's course at Yale School Management back in two thousand and thirteen that I gave so, but i'll I will give you the cliff notes. White

people shouldn't show its stocks, but most people shouldn't. Stood is that stocks typically move over, move higher over time and um depending upon your time frame that you're analyzing, and major indices usually increased by seven or eight percent the year. So there's this gravitational pull of stocks higher, and that's a formidable head winter short sailing. Secondly, when long is going against an investor, their portfolio waitings are reduced,

but if shorts go against you, waiting increases. Three. Many shorts are crowded in short interest terms. You and I lived through a Bob Wilson's squeeze on Resorts International manys uh so short squeeze is a commonplace, and especially in some of the popular short names like Tesla. Finally, finally, above all, the reward versus risk is asymmetric between long and short Greek and theoretically rise an infinite percentage and

lose an infinite percentage on the short side. But you can only make up scent if the company that's called buying Amazona two, which is a cast in exactly right. So Doug, I know you started your career bad as a housing analytic kid Er Peabody, one of the all time great firms on Wall Street. Down on, however, Square, I know you've got some thoughts about the housing sector right now. I mean it's been one of the strong parts of this you know, pandemic wrecked economy. What do

you think about the sector right here? Well, I began to take a large short um position and wrote a bunch of negative commentary about a month ago. UM. And it's it's a real non consensus view because if you look at the numbers, UM, all you do is see record record releases in terms of backlogs, home price realizations and units. Soul Told Brothers was a very good example the night before last. But my notion, and after following this industry for so long, is it precisely the time

you want to be show at the stocks. UM. Basically, the large gain in home prices is a portability and it's sowing to see for an industry down turn. And this has been accompanied by a sharp move in the

stocks to new highs until recently UM. And I think it's important to note that today's stretch affordability has as its source something that's really different, palled than the problems that developed back in two thousand seven, which Tom and I used to discussed back then when I was giving out some warnings, and we're manifested over the next two years when for the first time in history, home prices fell back then, yet speculation running a monkey yet day

trading in homes. Um you had no document mortgage loan, you had high loan to value lending prices policies Today, other factors are contributing to large price increases. UM COVID nineteen obviously is serving as an accelerant of this uptrend. Yeah, it's kind of where I want to go, Doug. I mean, you know again, it just kind of amazed me as we look at all the economic data, whether it's the consumer,

whether it's manufacturing. Obviously just been really rocked hard by the pandemic induced uh, you know, disruption to the economy, but the housing market has remained extraordinary resilient, and I think people are just trying to get a sense of how much of that is record low mortgage rates versus this COVID phenomena of perhaps getting out of urban centers, getting more space, buying homes out in suburbia. Yeah, that's

that's occurring. But again, it's really important when you invest long or short sell um stocks to recognize that investment knowledge is, to quote Warren Buffett, is always one viewed in the rear view view mirror of the idea is to analyze what's going to happen. And as I said this, this really quantum increase in home prices over the last two years, especially accelerating in the last six months. I see where I am in Palm Beach, Florida. UH is sowing the seeds for a downturn. And you saw look

at the reaction. You had two Toll brothers. Everything was record can census beat heck out of consented expectations. Stock was down nine percent or over four dollars yesterday, doug On alongside, you've been long Amazon right now. The two outlook is either I'm still in tech or I'm not in tech. Are you still in tech? And critically, are you still in Amazon? Um? I'm I recently reduced from a very very large position that have had for a

long period of time to a small sized position. UM. About this time of every year, Amazon routinely puts out a non numerical piece of fluff about their holiday business activity. They have not done it this year, Tom, And perhaps it's that the company is simply scared of anti trust issues and simply deferring the announcement until next year. However, our work, our channel work indicates that Amazon shipping backlogs

maybe shrinking and that some deliveries of speeding up. I used to follow the paper industry closely, and if you look at backlogs, especially if containing board, that's all you needed to make money. And my paper industry trade sources suggests some backlog shrink and shrinkage relative expectations in packaging and contain aboard products. And we have spoken to five or seven of our local UPS stores in South Florida and they're confirming our suspicion and research conclusions. So this

is really a non consensus view on Amazon. I have a non consensus view when I bought the stock um and we'll see what happens. This is a big call, potentially, Doug. One final question, and it's simple, everybody's moving to Florida. You are a path breaker on that, and you know, don you went, do the people in Florida stay in Florida or it when the Pandemics over do they come back to the Northern Climb? I think that people it's

a great question. The people that I have spoken to, my friends that have moved here either renting or in many cases buying um properties uh and converting their residents for New York State, New Jersey, Connecticut just to Florida, um are, I would say, then, intend to stay in Florida. It's just a great quality of life. Um. It's a lot less expensive and a lot more manageable. What do you think, Paul, that's a pretty good sound, Pharaoh. Can

you imagine John Faro in Florida? That's a friend? Southeas I know. I can go watch the Socks lose to the Yankees. I went, I visited the Yankees place near in Tampa. I say, Soriano pitch? He was? He blew me away? He was, yeah, absolutely not Soriano. Yeah, Marianna, No, not Mariano. He's hurt right now. I can't remember. Brain Freeze. Doug Cass, thank you so much for joining us with Sea Breeze here. This is an important discussion him any

of you. You know, it's an important essay from Mr Cass, and you have to get that through sea breeze only. But I can't say enough about his essay this morning on shorting Douglas cass Sebres Partners. Right now, David Rubenstein joins us pure to pure conversations. And this conversation is important because Mr ruben Spine signed speaks to the gentleman who invented conversation and the modern zeiteguys. He has Klaus Schwab of Davos, and of course he has added so

much to what I have done. With his initiative to get people together to converse. They will shift from Davos to Singapore. Of course, Mr Rubinstein speaking to Dr Schwab before the announcement of Singapore. David Rubinstein, many people know who Klaus Schwab is. What is the distinction for those

that do not know him? About Dr Schwab, he was a He's a German citizen by birth, was a professor at the University of Geneva, and fifty years ago came up with the idea of bringing people together talk about global issues. It was about the UEO in one it's now thousands of people who go. It is seen as an overly elite gathering, but he has many young people, people are not yet quote elite, and it really does

a good social purpose. I should disclosed. I'm on the board of the World Economic Forum, and I do think it's a good uh operation. It does serve useful purposes. But I recognize it has been criticized by some as overly elite. I don't really think that's fair, but that's the criticism. David. I strongly agree with you, and everybody that knows me knows I'm a huge defender of what Klaus Schwab defended, and a lot of it Folcus is jealousy to go up Happy Valley. David and I have

done panels there to great success. Is well, what does devils look like in Singapore this year for Dr Schwab, Well, normally we are trooping around trying to dodge some of the snow and other ice kinds of things. This point, we won't have that in Singapore. But I think what Klaus wanted to do was to have the first gathering global gathering in person. After the virus is sort of it behind us a bit, and it wasn't possible to do it in Switzerland off because of some health reasons.

Singapore seemed like a better place, so everybody will troop there. Someone will be virtual, though, and I'll think they'll have a fair number of people in personnel. It's an interesting time to be discussing the World Economic Forum and just at large confabs that have traditionally been the birthplace of a lot of interesting ideas, often that are created behind closed doors, not necessarily in the discussions on stage, David.

It puts a highlight on how different has been. Do you think that the experience of the pandemic has put into cold relief the importance of these in person meetings or do you think that it's shown how things can migrate to a virtual type of platform. The world has changed forever, and there's no doubt that people don't want to travel quite as much, and they can do virtual meetings, and everybody realizes there's a lot more simplicity for doing it,

a lot more ease. On the other hand, for thousands of years humans have liked human contact, and I do think that that will revert to the mean, and that therefore you will have more people gathering in person, but there will be a hybrid. Some people will come and person some will do but virtually, and that's probably what the norm is going to be in the future. So sort of emerging some of these ideas here. David, you're talking about the criticism that the World Economic Forum has

had as being elitist. Do you think that this new virtual era will democratize the concept of some of these large meetings by bringing more people in and allowing them to join, if not perhaps by private jet, virtually sure people who can't afford to go to Davos or Singapore will be able to do it virtually with virtually no cost. And so I think that will help. And I think it will also attract younger people who may not be able to afford to go to places like Davos from

time to time. So I think it will be helpful. Yes, I do think so, and I think Klaus has been a genius of putting it all together. You know, think about this, how many things are are still working pretty well fifty years after they were invented. David. What this is about is capitalism in the arch reality that Dr Squab is noted, and I'm sure David Rubinstein is noted. We're not clearing markets like we used to years ago.

The zombi nous that is out there is tangible. When are we going to start clearing markets so we can get back to financial normality. Well, I don't know, because obviously there's a lot of frothiness in the markets right now, and I suspect at some point some of that will will will come down and deflate a bit. There's no doubt that the world has changed and people are looking at different kinds of companies, and people see it as a land rush. They want to be on the ground

floor of the next zoom in technology. And I think a lot of people feel the world has changing and if you're not on the ground floor, you're gonna miss out on great profits. That's why the frothiness is there. Some of these bets will be great, some won't be great. David Rubinstein, thank you so much, of course, with Carl Carlyle, and of course look for peer to peer with Klaus Schwab nine pm on Wednesday. Looking forward to that to

say the least. 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