How U.S. Yields Could Go Negative

week or two ago? Is awkward where you and I both picked the same crazy thing? Was it awkward? I thought it was actually pretty great. I'm gonna tell you. I am guarantee you did not pick the same one as me this week, and I'll tell you why. It involves a very nerdy hobby I've gotten into lately, you never know, very saying you never know not the nerdiest hobby. I'll tell you that. I was telling a friend about it.

I said, I've just gotten sucked into the nerdiest hobby of all time and he goes, oh, are you Are you grinding your own telescope lens? Oh? Okay, it was so nerdy. I was offended, but but oddly intrigued, so I might start grinding my own telescope lenses as well. It's a thing, apparently all right, we'll be excited to hear it. And remember, we have our very own Bloomberg

Podcast hotline. So if you guys want to share your crazy market statistics or whatever it may be with us, give us a call, leave us a message at six or six three two four three four nine zero, and we may even play it on the show. And of course, our guests this week hopefully have some crazy things they brought along with us. Uh first time on the show. Joining us is Lauren Goodwin. She's an economist and multi asset portfolio strategist at New York Life Investments. Lauren, welcome

to the show. Thanks so much for having me, and I'm not gonna put you on the spot, but if you do have any really nerdy hobbies, you know you feel free to share them with us perfect anything. I'm just I love watching monetary policy meetings, does that gal? That's and also returning to the show is Bloomberg Opinion technology columnist Shira Overday. Sure, I think your nerdiest hobby is just reading ten K reports. Yeah, yeah at all though, right,

I think it's pretty normal for Bloomberg. Yeah right, right, that's that's kind of the run of the mill hobby. But uh, but learn let's start with you. I was reading some of the notes you sent over, and uh, one thing popped out at me immediately. You say there's a chance U s yields could move into negative territory. Um, don't dun't done? That is shocking. Uh, not entirely shocking. I guess it's you know, of all the craziest things we've seen in markets this year, that probably would not

be that crazy. But what it intrigued me is you also said you think the FED is done after this last rate cuts. So what takes what would take your fields negative? If not the Feds sort of helping to push them down. Well, the Fed's done for now, They're not done for forever, but we can talk about that later. I'll answer your question about yields, which is two major

things go into US yields. One of them is expectations for the FED funds rate, which could go to zero, would go to zero if we're in if we move into recession in the US. The other thing is the term premium. So that's just what investors expect to get for taking the risk of holding a bond over cash

or any other cash like instrument. So what makes term premiums zero or even negative as they've been in the US even this year, are things like investor fears um some of the concerns that we've seen about global growth, trade wars, etcetera. And so if you see the U s inch a little bit closer to recession and some of these fears take hold, add it together you can easily see US negative yields doesn't mean necessarily a negative ten year yield. I also think that the the bar

for the Fed moving policy rates negative is high. That's a completely different issue. But yields on this short end totally possible. And that's intriating to me because of this so much supply uh to fund the depth sit We're looking at a potentially another chillion dollar depth sit in every foreseeable year. A lot of that on that on the short end. But you think, would it sort of be that rush to cash money market mutual fund type

of situation that would that really crush the short end? Yeah, you know, you just you can't get positive yield anywhere in safe assets, and so it's really there is no alternative type of story when you have um as we do right now. Japanese insurance companies willing to move into an investment grade, which is credit, even if it's if it's investment grade credit, instead of being in these super safe government securities, then moving into US super safe securities

makes a lot of sense. That can totally squeeze the frienend. Let's back up the truck a little bit. So before we were to potentially get to negative interest rates, you would imagine that the data would have to worsen, maybe the FED would go back to cutting once a again. But for now, like you said, the FED is on hold. However, the market is still pricing in rate cuts as soon as next year. What is it that gets us to

that point? What brings that disconnect closer together? I think it makes sense that the market is pricing in cuts next year. We're on the last legs of this expansion. The FED has bought us time. Some of the risk on behavior, some of the risks that we've seen becoming less pronounced also helps buy us a little bit of time in investor world, that helps us rebalance our portfolios.

But we're looking at an economic cycle, and specifically a company profit cycle that is just moving closer to recession. And so while we're not calling for recession in the next twelve months, in the twelve to eighteen um time period, that's absolutely a likely scenario from from my perspective, And so the Feds on pause for now, saying, look, until

we see that data deteriorate further, we're fine. They also have seen over the course of the year, even before they actually started cutting rates, some improvement in interest rates sensitive indicators, just because folks expected it to come, um, wait and see. But once we see um, the debt burdens that companies are facing start to take hold, and those profit margins really start to see, um, the pressure that they've been under for the past couple of years.

Then then you start to see the FED getting worried again. So uh, safe to describe you is not exactly bullish these days that that is that is correct. We're um, but but I will say strategically speaking, we're defensive in our portfolios, so we invest for the long term. Most of our investors are thinking about retirement or institutional clients really thinking um in the in terms of years, not months. So strategically speaking, we've moved more defensive. I'm glad you

brought that up by you read my mind. I was going to ask you about that. You said, you know, contrary to market moves, were holding tight on our defensive portfolio positioning. This is a really fascinating topic to me because is I've heard a lot of people say this, but I'd like to unpack it a little bit what you mean by defensive and I pick it up. I

was fascinated. I looked this week at the Investco Defensive e t F, which is really done well is year it's up, uh, you know, better than the SMP itself. And I was thinking, well, when I think defensive, I think, Okay, you're gonna buy Johnson Johnson, you're gonna buy utilities, You're gonna buy those sort of state safe consumer staples. This CTF is fascinating because, okay, healthcare is ten percent. That's

kind of uh classic defensive there. But of its other allocations, um more than five percent is allocated to software, more than five percent to electronics, more than five percent to diversified financials, and we're than five percent to banks. So more than ten percent of this quote unquote defensive e t F is financial firms, which kind of blows my mind.

So that's all a long set up to just kind of help us unpack what you mean by defensive m A in the stock kid, obviously, but also outside of the stock market, you know where sort of in the treasury curve would you be looking at that sort of thing. Great, you set up an A and B for me. That's perfect in uh in in equities, defensive means and this is UM. This is a story that's gotten a lot

of airtime. Frankly, UM it means high quality companies that are making consistent earnings and they're consistently giving those earnings back to sharedholders. It doesn't necessarily mean only yield, because there can be dividend yield traps, but really security by security, not even necessarily sector by sector, identifying the companies that are going to return that value back to shareholders. From an investor perspective, when you're expecting a more volatile environment,

that's that's safer. When you move outside of UM the equity markets, defensive strategies generally include moving up in quality, but where you've seen a big shift and move up in quality like in high yield for example, you also have to go shorter duration um and so those are

the general types of secure yours. Again, when you're expecting um a lot of investor uncertainty, when you're near the end of the profits cycle and you have high debtloads within companies, you just have to be really uh secure. So it's more what companies have the balance sheets with standard recession rather than what companies are in industries that tend not to be crushed by precisely, and in which companies are going to pay you cash in the meantime.

Even within equities, right, it's not just fixed income, but where where can you get a little bit of of of carrie while you hold those equities? If, for example, you don't think recession is right around the corner, so bear with me. Then are we almost seeing a divergence in the stock market because as you mentioned, you guys

are sticking with your defensive positioning. That counter to almost what we've been seeing over the past couple of weeks where we've started to see cyclicals outperforming, those classic bond proxies like staples, like utilities like real estate underperforming, but at the same time, it does seem as though all of a sudden, investors really care about corporate profits, So investor do care about quality to a sense? Do the

two go counter to one another? Do they actually fit together? Well, we're in this part of the cycle that's really uncomfortable when the data is mixed, and so, Um, if you had a different guest on in ten minutes, they could say the exact opposite of what I'm saying, and I would think that they were reasonable. Um, what we're seeing is, uh,

we're laying in the cycle. We've already had two mid cycle slowdowns, and so not only are the structural elements of the economy we've talked about debt loads and profit margins, not only are those creeping closer and closer to recession like qualities, but also from a higher position than we've been in the other two mid cycle slowdowns, and equity prices have moved higher all along, and so you can

see as an investor short term cyclical opportunities. So, for example, um risk has been such a factor in the markets across the board this year and last year. When you get a little bit of that risk, premium pulled off because there's positive rumors about a trade deal, for example, you can have a short term cyclical opportunity, and so it does. It's not necessarily bifurcating. You're just playing sort

of a long game short game. And so what we do, for example, when we're when we're making these more defensive shifts, is um as we moved up in quality, quality gets expensive.

So when you start taking off a little bit of high beta exposure at market highs, for example, or in asset classes that we don't like as much, like high yield or bankloads, you can use that cash to take advantage of those short term cyclical opportunities without completely abandoning your long term story, which is what which is, which is where we're positioned right now. Sure, let's bring you in here and switch gears from defensive to companies that

are perhaps offensive for various reasons. And and I'm thinking of the facebooks, the alphabets, the twitters. We had a whole lot of quote unquote fang type of companies report over the last week or so. Is are there any sort of common themes, common takeaways from the whole sort

of communications and tech sector earning season. I mean, it's it's a little bit hard to draw generalities about the tech sector in general because I think the big tech companies that you mentioned, the sort of fangs or famis whatever people call them, the Facebook fam, which is includes Microsoft. I think that's the right fam um. So those large five or six technology companies seem to be doing very well.

That growth for the most part has um continued at a pretty good rate, albeit um has come down for many of those companies. Again, the profit margins have come down, but it's all relative, right. So Facebook this week reported earnings.

They are spending a lot more money. The growth rates have come down, but we're still talking out growth um year over year, and they're operating profit margins are about So if you're talking about, you know, defensive kind of companies, those giant tech companies start to look a little bit more safe, I guess. But on the other hand, you have these younger companies that are valued almost entirely on their growth rates, and there it's a little bit of

a mixed bag. So again, we had grub Hub this week that absolutely terrible and to me, the scary thing about what grub Hub said was they feel like the promise of that industry of kind of food delivery, the on demand you push a button on an app and get anything delivered to your home at almost no cost. That they really think that that string is playing out, that there is no way economically that there can be multiple companies fighting each other to get something to your

house as fast and cheap as they possibly can. And at the same time they feel like, um, the hyper growth phase of that industry is pretty much over um, which is kind of a scary one to punch. Is it a word of attrition at this point in that space? And that's what grubub thinks. And look, they're not wrong

that in the United States. I'll leave the overseas market out of this, but in the United States you have a number of companies that are all chasing the same restaurants, the same diners, right, Uber Eats, Grubhub, door Dash, Postmates, you can go on down the list and so um. Yeah, there is a little bit of a of a war of attrition going on. Lauren, I want to touch on something that Shira said, and that's that somehow these big tech companies start to look safer. Is this something that

comes up in discussion with you and your team. I mean, I can say, I've heard many investors say to me this year, oh well, now tech is defensive. It makes

a lot of sense to me. And if you think even just in traditional economic terms, to say that the model of not only economic growth but also company growth and sustainable growth has changed from you know, when we're more industrial or manufacturing focused, for example, so when we were a year ago we were really holding out on productivity in the US, that that we would that that this would be what saved the economic cycle, and that

that we'd see investment translated into productivity. We haven't seen that. But the main sort of core tenant of that argument I think is absolutely still true, which is that these big tech companies are the only ones investing in themselves and so um an interesting thing to think about is what is the next step? What is the investment strategy

of the future look like? And something I think is really compelling there is companies that are investing not through CAPEX or some of these indicators that we're used to looking at, but op X. What are the logistics companies that are investing in you know, next generation software to make sure that the supply chains disruptions with China or or EU up are are not an issue for their for their profits. That's really interesting. That's a really interesting

type of sort of secure safe investment. I think that this growth versus value, cyclical versus defensive sort of general named indicasar are starting to break down. So I completely agree with Serra, And just to say something a little bit scary though, I will just point out that of the giant tech companies that now seem a little bit safe, almost without exception, and Microsoft is the exception. Um, those companies haven't really lived through a recession, at least not

in their kind of current giant company status. So I don't think we really know what Amazon looks like, for example, in a recessionary period. And again, obviously they were around in two thousand nine, two thousand ten, but they were significantly smaller company, less sprawling, um e commerce was kind of a significantly smaller share of US spending. So I just I do not know what happens even to the biggest, safest,

most profitable giant tech companies in a recessionary environment. Well, and you add the one more giant spooky element in the room, which is the potential for regulation. And so when we're talking about these specific big tech companies. Um, the risks are are pronounced when it comes to um not. This isn't just a political issue. This is a substantial structural issue around inequality and data protection and really big

questions that I think are here to stay. And so when we talk about these specific companies, they are surely risks in the coming years. Um. When you're looking though at at an investment, that's a that's a compelling story, Lauren. I think you stole my notes because I was that was my next segue, and I was going to give a gratuitous plug to a story that Sarah worked on this week about it's kind of becoming the big buzzy zeitgeist on Wall Street now is the specter of possible

Elizabeth Warren presidency. I was like, which story are you talking about? Remember you work? But and I wrote about it to another gratuitous plug a couple of weeks ago. But um, obviously Elizabeth Warren has everyone on Wall Street freaked out and many people predicting this big bear market

if she should sort of ascend in the polls any further. Sure, let's start with you, though I'm curious if her name came up at all on any of the conference calls or any of the analyst notes UM and Part B, since if you guys will both accept A and B questions. Part B, I'm just curious, how would you go about breaking up, say a Facebook, an Alphabet, and an Amazon. Um and would that necessarily be a negative for shareholders

in this company? You know? I'm thinking, wouldn't the SMPB better off if it had a Google and uh, a YouTube and an Instagram and an Amazon Cloud and an Amazon retail I mean, you're talking about a lot of sort of interesting businesses that would suddenly be their own companies? What is what's the thinking on this from your world? Okay, so now I have to do A and B. A. UM, Yes, I think the regulation obviously is now I think a

regular part of reality for these companies. The sort of difficult thing I think, both for the companies and for investors honestly, is just it's impossible to know how this plays out and how long it takes. Right, you're talking about a federal, federal and state now antitrust investigations involving basically all the giant tech companies with the exception of Microsoft, And what if it takes ten years I don't know.

I don't know what happens. So it's one of these kind of storm clouds, but it's unclear exactly how it ends or how exactly to to play for it. Am I the only one who finds it funny that Microsoft

is the one they're not talking about. Yes, it is extremely I think if you had told like two thousand ten Shia that there would be anti trust investigations and Microsoft would be completely uninvolved, that they look like the white hats and all this, it would seem preposterous spying under the there we haven't such a part about actually breaking these com plain about part B. I definitely have seen the sell side analysts talking about, you know, we

think Facebook or would be more valuable or Google would be more valuable if it were split in pieces. I

think that is nuts. Um that I mean, I can go company by company, but if you think about a company like Facebook, and I think the Elizabeth Warren types who were talking about Facebook and antitrust, what they're talking about largely is pulling out the companies that Facebook acquired in the last ten years, so that's primarily Instagram and WhatsApp and uh to say that Facebook is more valuable. If you pull out those two companies is just bad.

It is wrong that, particularly on the usage side right um, Instagram is the growth story for Facebook right now. It's important with younger people, it's important with advertisers who want to reach younger people. And what's app is also an important element of Facebook's growth outside of North America in countries like India, like the Middle East where what's app

is extremely popular. And look, Facebook hasn't successfully figured out how to make money from what'sapp, but that's an asset that has um more and we don't know exactly how many, but more than a billion users worldwide, and that is extremely valuable to Facebook and that's an extremely important part

of the investment thesis for Facebook. Lauren, what about your guys take not on just the regulatory aspect and the risks that poses not even just to the tech companies but the market at large, but also just everything going on in politics right now, whether it is impeachment, press eatings, are looking forwards to the election. When you have the likes of Paul Tutor Jones for example this past week coming out and saying if it's if Elizabeth Warren wins

the SMP will drop. I mean, how can you even go about making predictions like this or trying to at least take these ideas and inform your investments. I'll make a shameless plug for myself and that we UH wrote a piece on political and geopolitical risk and portfolio management and found that not only do investors UM and again I'm I'm thinking investors for the medium or longer term tend not to pay very close attention but probably shouldn't. Um, we may maybe we get a sell off if Elizabeth

Warren gets the nomination or wins the election. We thought the same thing about Donald Trump. UM, we don't know, but and maybe we do. But the really what this is about is looking past politics and towards policy, and when it comes to the pace and likelihood that some of these suggestions would be implemented, we know it's really

challenging to share his point. Maybe it takes ten years, and so we have the enormous luxury of keeping a pulse on things but not letting it impact our portfolio management decisions until that policy again not politics, but policy change actually should impact our portfolios. So in that sense, UM trade even a year and a half ago, UH flipped into our radar is something that we need to monitor on an ongoing basis because it threatened companies and

it threatened the consumer. Right now, this the political situation, whether it's the election or impeachment, etcetera in the US doesn't impact companies, and so we we treat it as such. Al Right, well, I think it's that time. I'm really excited for years, Mike. I want to know what a new nerdy thing. You're interesting nerdything. All right, well, let's save mindful us. I want to build up the suspense. Sure, let's start with you. I think you brought a crazy

thing along. Well. I was very surprised this week there were news stories about Apple making a you know, a pretty significant change in its UM strategy to one of its important products. UM. So it emerged this week that Apple is tiptoeing and what's been called kind of a bundling strategy for its internet services that at least for students, it's going to offer for five dollars a month UM.

Students can have a subscription to both Apple Music and to Apple's upcoming TV Plus service, which is it's kind of its answer to Netflix, a kind of web video entertainment service. And the way that this came out was not you know, Apple reported earnings and they announced this or Tim Cook went on TV to talk about it. Sarah No Hayley Steinfeld, who's an actress and singer. Um. She put it in an Instagram story that this was going to be a new policy change, at least an experiment.

That was That was the that was the first word of this. This is the world we live in now. Yes, she is a She's in Dickinson. She plays Emily Dickinson in one of Apple's upcoming television series. So I guess that's why she was chosen to make this announcement. But yes, it's a strategist. Who do I need to follow these days? What our investment strategy? I mean, I mean investors don't just automatically get alerts for Hailey Steinfeld's Instagram stories. She had a big hit on the radio. It wasn't It

wasn't called me maybe was it? No? No, No, She she is a singer. She was in US. She was in Bumblebee, the Transformers movie that no one saw in the United States. That's pretty good that you're in the lead so far. But well, I'm the only maybe Lauren the lead, so I have to one is one is boring, but real well, it is crazy to me. And this is again a little bit of a plug for our perspective, but it is crazy to me that recession probabilities are reaching new cycle highs and we have equity markets at

all time highs. I think that's crazy. But I brought a fun one because the point is not to be realistic. UM In in the New York Life investments world, the craziest conversation that happened this week is that UM New York band flag raw and we have a lot of conversations. One of our one of our portfolio managers is vegan and one is a very eater, and so the conversation

around alternative food companies is robust. And so when we saw this this policy change, we we lamented some of the fancy New York French restaurants, but also the potential for more alternative food companies. On the back of this, I will say it's been been a rough week for beyond curious. What your actuaries say about at you know, is that gonna elongate people's lives that they eat less fog gro You can get back close. Do we know

the reasoning fine behind a law change? I'm just curious. Um, it's it's not very nice to geese, is I think? So that's funny? This is our second craziest thing involving mistreating geese. We had the Canadian Goose company. Apparently they were beating their geese to get the feathers off them. And there's always protesters in front of that story. Oh yes, always, it's hard to be a goose. I guess yes. All right, sir, I'm less confident that I'm going to win this week's

craziest thing. But what do you have? Maybe you can talk to these guys. I don't think you really have to worry about mines. Like I said, had a long week. So what did I do to find my craziest thing? I went to find some pharmaceutical company that had a

really great showing. So um, this company called I veric Bio. Granted, even after the jump we saw this week, it's only worth like three dollars or something of that sort of share, but still they had one of their may main drugs, mean one of the trials UH meet its primary endpoint. Big deal for the company. Um, and not only did we see the stock move eight two percent on Monday? Then we saw another roughly jump on Tuesday, and a

sixty percent jump on Wednesday, So pretty crazy. The stock is up somewhere around two this week, but then again three dollars to share. So bio Pharma is a great place to go looking for crazy. It really is. All right, I'll give you mine and mine, which involves my nerdiest hobby. I don't know if a lot of listeners realized, but at Bloomberg we obviously talk a lot about stocks. We don't do a lot of trading of stocks because of

various rules. You know, if I could talk about any stock given stock on any given day, I shouldn't really be investing in that stock obviously, But the rules do not prevent me from speculating in another market. And that Shira is the market for vintage bicycles, which and this was apparently a very hipster thing to do, like in Brooklyn about a decade ago. So I'm right on time. This is my normal timing here to get involved in this.

It's a very uh, let's say, price discovery is very difficult in this market because everyone thinks they're old bike is worth a fortune. Um. So you'll see people put up an old bike for five dollars and you know it sells for a hundred dollars. So I found these Schwin, these beautiful Schwin cruisers that I thought were from the sixties or so on Facebook marketplace that's the main venue for vintage bike nerds like myself. And the guy wanted

like two hundred for the pair of them. And these things might be worth something if you scrub them up and you got the rust off and everything, but in the condition they were in, I was like, no way. I said, um, sight on seeing I'll give you seventy five for them. And we started haggling back and forth. Eventually I said, look, I'll come and see them. If I think they're worth more than seventy five, i'll i'll

give you, know, give it to you. So I get there and I'm like, tell you what, I'll give you a hundred bucks for two of them, okay, And he goes, that's fair, and I said, that's fair, right, So fifty dollars a piece I got uh these two bikes. I went home and I looked them up. Nineteen sixty three twins Uh coaster breaks as a friend of mine said, the one looks like pee Wee Herman's bike from Pewee's Big Adventure. But Sarah, this is all leading up to

the This is all leading up to the crazy part. Now, remember I spent fifty dollars a piece on these bikes. I'm gonna show you a page of the catalog from the nineteen sixty three Swin company and look at the circled number and and read how much that bike cost in nineteen Good deal, and I paid fifty for it. So I believe I've discovered the ultimate store of value here is in nineteen sixty three is dead. It's pretty unbelievable, exactly. Talk about an efficient market. Yeah, you win for narrative

value for sure. All right, I'll accept that, And you got two bikes out of it. Can you write it without dying. You're welcome in in Brooklyn anything, as long as it's safe. It takes us a while in Jersey to get the trends that you guys have in Brooklyn. Snow. Well, now you've made it. Even if it's a decade later, it's worth it the same price. But anyways, Lauren Goodwin, Chierra Ovida, thank you so much. For joining us today

What Goes Up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter. Follow me at at Sara Pontzack, Mike is at breg Anonymous, Our guest Lauren Goodwin is at l E. Goodwin, and schira Ovi Day is at schira Ovi Day. You can also follow Bloomberg

Podcasts at podcasts. What Goes Up is produced by Tofur Foreheads. The head of Bloomberg podcast is Francesca Levie. Thanks for listening, See you next time.