TINA's Back in Town?

outlook for corporate earnings. Does profit growth even matter when the Fed sounds like it's ready to cut rates? Also, remember the Winklevoss twins, the bitcoin billionaires and famous nemesses of Facebook's Mark Zuckerberg. We'll catch up with what they've been up to with a reporter who spent some time with them this week. And don't worry, even though Sarah's off, We'll continue the tradition of exchanging the craziest things we saw in markets. Of course, we would not give up

that tradition regardless of vacation schedules. Well, we've got some great guests here to walk us through the markets this week. Emily but I need to ask you grew up in Australia. Did anyone listen to Bruce Springstey in Australia or was he considered like the poor Man's Men at work? Well, you know, between that and what was it Minato, that was really where we focused. But Bruce Springsteen, he had

a little name little definitely. Well, I've got one of his classics, Kitty's Back, the song Kitty's Back in my head. But instead of Kitty, I keep hearing the name Tina, Tina's Back. And that's because of that famous acronym. You know, if you're a stock market pundent, you really need to

coin an acronym to make a name for yourself. And Tina, of course is there is no alternative, which I feel like is back this week with all this focus on the Federal Reserve and this hypothetical interest rate cut will get so hopefully our guests here can shed some light on that. Joining the show first off, Bloomberg columnist former Big Han show at the Financial Times. I think, um, London and England's biggest Red Sox fan there is, is that? Right?

John Author's welcome to the show. Possibly, thank you very much. I thought Tina was went back to Margaret Thatching ran my home country throughout my entire youth. Okay, the tina's in the eye of the beholders though. John the Red Sox just played the first baseball game MLB game in London. There were like thirty some runs scored. What happened there was the game before a game was it was that the metrics system of scoring runs in London what well?

My best theory. Obviously, it wasn't a huge ground, although the dimensions weren't particularly weird. There was a big final territory which you would have thought would have diminished runs. It would have been easier to catch foul pop ups.

My best guess is that the organizers followed their instructions a little too scrupulously, with the result that the the area blacked up behind the pitchers um was bigger and blacker than it is in the average um MLB stadium, with the result that the the hitters really could see the ball much more clearly than they were accustomed to. That's my best Yes, it certainly looked much more prominent and blacker as far as I could see then it normally does in a in a Major League park. That's

a great theory. I I buy it completely. And John's analysis. John's market analysis is even better than his baseball analysis. We'll get to We'll get to that soon. But also joining the show is another reporter from our markets team, Veldana Hirich. She covers all sorts of things, stocks, a lot of bitcoin. She's our reporter who who talked to the Winklevoss Twins this week, and she's also done a lot of reporting on the outlook for earning. So Voldana,

welcome to the show. Thank you, thanks for having me. Absolutely great of you. Now, John, let's let's start with you. Um. Obviously, the entire equity markets fixation has returned to the Federal Reserve, this notion that we're going to get an interest rate cut. Um, and you had an interesting column out recently and basically discussing the way you can't really look at equity valuations

in isolation. You all have to also consider the level of interest Race, and you, especially you, you looked at the famous Schiller cape ratio, which values stocks based on trailing ten years earnings rather than just uh one year's forward or backwards. So tell us how you're thinking about the equity market now, particularly with these really elevated UH

Schiller Cape valuations as they're called UH. Juxtaposed to this, this idea that rates are are going to be rock bottom going forward longer than we perhaps thought at the beginning of the year. Well thanks, Yes, I am in the very long term, very long suffering supporter of the Schiller Cape. I do actually think it makes a lot of sense, even though it has suggested that the markets are very expensive for a very long time, even as

the markets have continued to rise. Now, what is important, I don't think anybody has ever said about anything that it is a silver bullet. Plenty of people make the point correctly that the CAPE isn't a silver bullet. Schiller himself, on his website presents his calculation for CAPE, along with his measure of long term interest rates these days is a simple tenure treasury yield, and he does some very clever historical numbers to come up with long term interest

rates that cohered in eighteen seventy um. He's got continuous data series for both ever since then. What I think is important about the CAPE is that many people have said it we can ignore it, and their argument for saying that they can ignore it is that there was this epic earnings recession in two thousand and seven, two and nine, which means that the the denominator the earnings is artificially reduced, meaning that the cape looks artificially high.

So sorry, John, what's brought us back to this idea that this is now a really good measure to consider what's brought the renaissance? Now? I think, well, the Renaissance in my mind, I'm trying to I'm trying to spark a renaissance. Yeah, Johnny created the Renaissance. Yes, exactly as we say Renaissance and Renaissance Australian English upbringings. They have

terrible effects on your on your fronance station. Um. Basically, the big criticism has been that the ten years of earnings that you are comparing prices to include earnings from the Great earnings recession that accompanied the Lehman Crisis, the Great Recession, and therefore the argument was that once those numbers started to drop out of the ten year number, you would see the cape begin to reduce, because the earnings rose a lot for no good reason other than

that those numbers were dropping out from ten years ago. Now we are are now just past the point past just we've just passed the tenth anniversary of the bottom of that earnings recession. So all the earnings as we went from top to bottom have now dropped out of the calculation and low and behold, the CAPE is actually higher than it was at the tenth anniversary of the peak before the recession started. Also, quite remarkably, it has actually risen more over that time than the prospective pe has.

So the idea that this would show itself to be a pointless indicator that was obviously not relevant has actually been disproved. Now. I don't think that should be too surprising if you stop to think about it, because earnings were artificially inflated by the by artificially cheap credit before the crash. Everybody knows about kitchen sinking by companies, They were artificially low at the bottom, and then the recovery again involved artificially manipulating the Cruel's accounting to make them

look good over ten years. It's actually quite difficult to manipulate a Cruels accounting. You really got to create commit pretty serious fraud for the ten year number not to be a fairly good number. And over ten years, basically the trend has been remarkably steady. There was the biggest blip we've had since the war for the earnings recession, but beyond that, the trend has continued, absolutely enforced. That's what people could tell when they were making their numbers.

Does that mean that the stock market should not be this high? No, because interest rates, as Chilla himself and everybody else are knowledges, are very important to the valuation you put on stocks. Does it mean, however, that without that, if interest rates did what everybody was expecting until a few months ago and rise, plainly, the cape is a clear indicator that stocks have a long way to fall

should rates rise. We are utterly dependent at this point, particularly with anxiety about where endings are going in the future. We are utterly dependent on low interest rates. And you know, you make a great point there in that we came into this year everyone expecting higher rates all year, higher rates from the Fed. The knock on effect of higher treasury rates, Emily, is everyone assuming now that it's it's lower forever? Now? You know, you talked to a lot

of fixed income by bond market people. Is there a consensus towards that way, and is there a danger that whoops, they they the consensus might be wrong again. Yeah, it's really hard to see at this point anyone who actually thinks that a hike is coming any time really, for

as far as the Ken see. I mean, it seems like the debate we're now having, which is actually different to what we had yesterday, is whether or not we get a fifty basis point or a twenty five basis point cut, rather than whether the Fed will actually cut rates at all in July. So we it seems as if you know, market expectations are ramping back up again. We've got We've definitely got that fifty basis points back on the table. It's just a matter of whether or

not the Fed takes that kind of action. And I guess in a way that the rates outlook goes hand in hand with the earnings outlook, which is l DONA is pretty dismal right now, um, along with some of the softer economic data we've seen. So you've done a lot of reporting on what we can expect for the upcom coming earning season. I talked to a lot of investors, looked at the data. What are you expecting basically, and

how our investors sort of bracing for this earning season. Yeah, well, like you mentioned, there is just so much uncertainty out there, which has been around for all year basically when it comes to trade and higher dollar and higher input costs and all those things. But expectations for the second quarter are negative to negative three percent in terms of earnings and flat for the third quarter, and then we're supposed to see a pick up again and later in the

year in the fourth quarter. But out of all the companies that have been revising UM guidance either higher or lower, are actually revising lower. And we had Gina Martin Adams of Bloomberg Intelligence, who I know is um has been on the show before. She said, um two que expectations companies are cutting them to the bone, and when it comes to forecasts, they might not actually be cutting enough.

So how much Filana is the actual macro backdrop factoring into this, I mean a trade concerns, the things that people are assigning when they're talking about lower expectations. Does FED policy playing into kind of any hopes there of improvemental Yeah, well, we'll see what happens now that we have a bit more clarity from what we can expect from the FED, but certainly trade has played a part in us We we've seen a lot of reports on

companies that have been citing trade. We had B A. S F earlier in the week saying it's it's due to trade that we have to cut our profit um forecasts by thirty percent. So it really it does seem to be making its way into what companies are saying. Yeah, that B A. S F was a lot bigger cut than than I think people were expecting. John, what do

you think is this? Is this a risky setup that we're in right now going into this sarning season, or I wonder if it with rates so low, it'll be the type of situation where, uh, you might see some rotation in and out of different sectors and companies that are at risk uh to trade, but not really a full on abandonment of the stock market as a whole. It's difficult to see how I mean, cards on the table. I've I've been a long term bear for quite a while.

I'm very I find the current valuations very hard to justify. In the short term. It's difficult to see how anything too bad can happen to the stock market. I think the likelihood that companies that managed to play the earnings management game well and deliver a beat in heavily and inverted commas gets rewarded with much of a pop in the share price that day, that that's pretty low, And I suspect anybody with a truly bad surprise is really

going to get punished. That's been, in fact pattern we've seen in quite a number of earning season seasons over

the last year or two. But while we have a situation where it looks as though the FED is heading lower and people are still merrily discounting four or five rate cuts between now and the end of next year, which is what they are, and while the ECB appears to be locked down, and obviously the poor old Bank of England has to contend with the prospect of a no deal Brexit and really can't do anything hawkish, whether

it wants to or not. While we're in that minds of locked forced dubbish stance, it's difficult to see how we can get a major market break. We've had major market brakes. Well, we had two major market breakes last year, both of which one one of which was prompted by a very sharp rise in the bond market, and one was prompted by a very sharp rise in perceptions of Fed hawkishness. I doubt that is what we need in this this day and age to get a market break,

and at the moment that looks unlikely. So does this put the Tina point front and center? Then that we're not really getting anywhere away from the US at this point is does anything globally in terms of emerging markets start to look more attractive at that point or in general, if you look back to seen, which was one of the you know, the most least volatile, calmest years if you go by sharp ratios, it was possibly the best year for world stock markets ever because it was so

calm on the way upwards. That was a year when the US did actually lose to the rest of the world and emerging markets did somewhat better than developed and logically you would expect something similar to that. Again, I suppose the one wild card there is also trade. If what's bad for China on trade will also be bad for a lot of the emerging world. But in essence, if we are looking at a weakening dollar and lower US rates, that relieves pressure on some very cheap emerging markets. Interesting,

they might actually be the performer in this environment. Logically they really ought to be. Now you mentioned John being a long term bear. Looking at the fun flows this year, I don't think you're a loan. I mean there's been this exodus of cash from equity funds, a massive impouring in the in the fixed income funds. Phildano, you talked to a lot of investors every day. I mean this,

do you get sort of a consensus? Are people UM leaning towards the bearers side even though we keep seeing these these new highs or you know what are the people you you talked to really focusing on right now? Yeah, they certainly are. UM. If you look at all of the strategies that that Bloomberg tracks, Um, the majority of them are saying that the SMP will end the year

at a lower point than where we are. Where we are now, and I mean we did see the SMP across the three thousand mark for the very first time this week, and um, it's again going back to actually a few factors. One the uncertainty and trade is what a lot of people are citing. So even after we had the trade truths from UM from the g twenty meeting, we strategies at RBC coming out and saying this doesn't

really change the game for us. It's it's we're reiterating our SMP target of UM similarly at a few other shops. And then the other part of it is that we're up for the year. Half halfway through a year, we're up. That's pretty good. So it's sort of a conundrum where where investors are thinking about, well, what happens next, what happens for the next six months, considering that we've been

up so much. I think I think a lot of that is the base effect that we had a screeching correction that came to a that came to to finale on Christmas Eve, so once we're still not much above the peak from October. It's it's just an example of

the willow willow the whisper. If you can tactically time market moves like this, you would be very very rich, indeed, But if you're on a on a more realistic way where we're not just looking at the calendar this this is an unusual point where the calendar year really makes the returns, really flatters the returns, and we're flat for the past eighteen months, right, Ever since that melt up at the beginning of two thousand eighteen, we're not much

higher than that, So I guess a correction can occur over time as well as price more or less. I'm thinking about that comment that you made about conundrum the Vilvanna. It does raise sort of concerns about, you know, where do we start to get worried about where surprises are headed? Right right? But I guess that's something in the dead markets that people are thinking about all the time, financial

stability being a part of the Fed mandate. Well, I had to mention one of the one of the maddest, one of the candidates I considered for my maddest thing I saw in the market this week is that there is there is such a thing in Europe now as a negative yielding high yielding bonds, which he is. I'm crest falling out because I worked so hard to think of spoiler spoiler alert. I've got a few where I

can lend you later on. But but but but that that would be one of the that would be one sign that perhaps perhaps the the rate story has been taking the tats too far. All right, If you ask me British on the statements. I think clearly everyone is itching to get to that craziest thing they saw this week. In fact, Vildanna, my sources tell me you're you're very much a connoisseur of crazy things you've seen in markets. Okay, but first I we have to talk about the Winkle Boss,

because I'm I'm fascinated with these two guys. Um. Obviously, they won a settlement against Mark Zuckerberg years ago for their role in basically creating Facebook. Then they went on to become sort of the biggest cheerleaders for bitcoin out there. They're trying to create a bitcoin ETF. What are they up to now? What's the latest in sort of the the Winkel Boss soap opera? After after your meeting with them, that's a that's a good way to predict. Um. Yeah,

I met them um earlier this week. And and so again this is another interesting thing that's happening where a lot of people are saying, well, Zuckerberg came in and sort of bested them at Facebook. They were early bitcoin backers. In fact, it's been reported that they own about one percent of all the bitcoins that are out there, which

is a huge sum by today's UM dollars. But then we had Facebook come out and with its own cryptocurrency, Libra project, and given how many users Facebook has and um, just how much hype there's been around Facebook's Libre project, a lot of people are asking, well, is Zuckerberg sort of swooping in again and taking the spotlight even though you guys have been around for uh in the cryptosphere for a much longer time. Yeah, is that you think

there's any credence that? I mean, obviously Zuckerberg might have completely unrelayed motivations to get into crypto, But I love the conspiracy theory element of it, is that you think the tensions between those you're so so bad that Zuckerberg might be uh looking for revenge. UM. So they they spoke on a panel in New York earlier this week and the moderator asked them what would you say to Zuckerberg if you were to see him at a party, and they said, we'd say, welcome to the party. What

took you so long to get here? So? And did did they have any update on the ETF is that's that's still in limbo. I guess it is in limbo for a few of the other UM companies that have been trying to issue one. I think we're supposed to be hearing from the SEC soon again, and for those, but not not for theirs. Uh, there's was rejected a little while right, right right, that was officially rejected. I think so, yeah, I am thinking this. This sounds almost

like the Hunt Brothers and silver. Imagine somebody getting cornery one per cent of all the available gold or silver on the planet. There are people who really got big point is a similar kind of resources like something I think Mr t did that in the eighties and Neck the twins were the first bitcoin billionaires, are reportedly one of the first bitcoin billionaires, which is what's gained them some more fame again recently with with bitcoins renaissance renaissance, John,

do you follow the crypto? We're all at all? I mean that does this? Uh? Is this another world compared with what we grew up trying to think of investment as I have a line on this. My my own opinion on this is is, I'm afraid to say, somewhat close to consensus, which is that blockchain per se might be a bit overhyped, but there is plainly something there the same way as the laser and the Internet came out, and at first everybody could see they were wonderful, but

weren't quite sure how they were going to use them. Similarly, blockchain and the concept of cryptocurrencies will have great use, particularly once they've worked out ways not to use quite so much computing para electricity to to operate them. Bitcoin, per se, and particularly all the me too digital currencies seem very alarmingly to me like a classic speculative bubble. Okay, they've had several speculative bubbles. If you look at bitcoin

on a lock scale, it's quite startling. I still don't really see how it can function as a currency while its value is so variable. It's just it just cannot be this store of value, this speculative mine if it's also going to try to be a means of exchange, and those are the those are the critical things the currency can do it If it achieves one, it fails the other. At this point, right, I would go out on all them, will say, bitcoins the craziest thing I've

ever seen in my career. Possibly, And we had Powell getting questions about Libra during the testimony. Yeah, what did I miss that. What did he What did he answer? Well, he said that we really need to be cautious. It can't be a sprint forward, and that there's a lot of concerns money wandering a little less hip than Connie was when people started talking about bitcoin a while ago. It sounds like the Bank of England government was kind of out there and trying to show his cred failure

early on. But uh, well, those Brits are always hipper than us. I mean it's we're we've grown, We've we've gotten used to that. Anyway, go from the craziest thing I've ever seen in my career, Uh, let's go to the craziest thing we've seen this week. And I have to warrant you three, there's some tough competition from Twitter. We've asked Twitter to to weigh in on the craziest thing they've seen this week. And let me just say, Twitter see some crazy stuff, as we all know. I'm

gonna quote someone named Twiggy Sunday on Twitter. I'm assuming that's a real name. Twiggy Sunday gotta be right, and he's saying the craziest thing he's ever seen, and he refers to a treat a tweet by at Gregor Hunter, who points out, John, I think you'll like this one. The Argentinian yield curve has inverted. But not just any curve. It's the nine year ninety eight year yield curve in

the Argentinian depth market family. Uh. You know, classically the YELD curve inversion three months, five year or three month ten year, uh, foreshadows a recession. What does this foreshadow? Like? An alien invasion? Yeah, I mean it's a little hard to call it for Argentina really, they've been so stable for so long. Um. Yeah, I think basically an alien invasion is probably the best way to put that, hopefully

hopefully not too soon. And I think it's implying that the pampases will still be there and the herds of cattle will be still still be there ninety eight years from now. But Lord alone knows what's going to happen in the next few Maybe that maybe that off the top of my head, I've never ever thought of the dynamics of nine versus before. So all right, well, John, no press, but can you top Twiggy Sunday with the medest thing? Um? Okay to from Europe Both intimately linked

to politics. One is Greece elected a new prime minister this weekend, the third Greek prime minister this century, who is the son of a previous Greek prime minister. The country that gave the whole world the concept of democracy seems to be quite keen on heredity when it comes to choosing their prime ministers. Anyway, in the response to that, the yields on ten year Greek bonds briefly dropped below the yields on tenure treasuries. That is pretty amazing. That's

pretty amazing. And then just because I feel like although every everybody and Emily cracked me up, I'm wrong, everyone will lecture that, well, you can't compare yields on bonds and different currencies. You have to look at the swapouts. And then just stop the need to be that guy someone doesn't win along cruel history at school, where you've been that guy who makes that. Okay, that is a

little competitive with the I can say. You can see now that the other point which I don't think, which I think is not crazy in one level but is utterly nuts at another level, is if you look at the predicted market, the chances if you want to get a Boris Johnson to be UK Prime Minister by the end of next month future, you will have to pay ninety nine cents on the dollar. It is rating him as a certain to be the next Prime Minister of Britain.

I actually think the prediction market is roughly accurate in its odds. I find the fact that there is a chance that Boris Johnson will shortly be my prime minister is the craziest thing I have seen in markets in a long time. Are you applying for financialization now so that I can come somewhere with a really sensible choice of presidents with somebody, somebody who has a really good haircuts the certainly the craziest hair we've seen in markets.

I think it probably means we all have to emigrate to New Zealand if we're going to go with with prime ministers who have a certain degree of cachet. But anyway, alright, headily, Unfortunately John front ran your craziest thing. You were looking at negative yielding corporate that now well, yeah, so I

actually got some figures on this, Thanks John. I was going to dig into it right now, but we now have I can actually put the details around his beautifully pitched point, which was we went from zero to fourteen high yield European bonds and now traveling like below zero in terms of yield, which is pretty horrific in many ways. Now people will pay a high yield issuer to look after their money for them. Is it? Is it really quote unquote high yield? When we need a new name

for this stuff? All right, well I'll give you mine because I think I think Vildan is going to really bring it. I'm gonna save her for last. I think she's pressure. I think she's going to bring it with the crazy thing. Even though I started off saying there's no alternative, I'm gonna once again look into the alternative asset markets for my craziest thing. So the baseball gloves used to record the final out in Game seven of

the Chicago Cubs two thousand and sixteen World Series. They're up for auction, John Without without looking at my notes here, what would you guess the the bottom wrong prices in that auction for the two gloves used to record the final out in the two thousand and sixteen World I don't remember it was so this was from the picture to first or was there these infield gloves or the nice big outfield gloves. It was it was used third basement.

I like how it depends on what they are. John would clearly pay more for a a catcher's if it's a catcher's mit, you know, obviously that's got more of it. Was the throw from third base. Third baseman Chris Bryant stilled the ball to Anthony Rizzo on first base. Yeah, um, okay, so they're both people we've heard of quite famous. I don't know that. Does that mean it's a left and right club so you could wear them as a pair. Yes, I guess that's true. You look a little ridiculous baseball

glove on each, John get getting this right. By the way, this would maybe ten maybe ten grand each. Two hundred and fifty thousand is the nm mum bid. Wow, So a hundred thousand for each glove? How much? Does how does that compare with Steve Bartman's walkman? That's a good question, the previous most important item in in cubs anyway? Carry on, right, So what's that? What's that? So that's ten bitcoin each?

It sounds cheap and bitcoin Actually that's not bad. Good point, good point, um, all right, Valdanna show us up here. I know you've got something good for us. What's the craziest thing you saw in markets? Well, the first thing I found, I thought was so strange that I was certain one of you would also find it. So I found a second thing as well. Backup you would you are not messing around, but I didn't because I know you crown a winner last week, so I am aiming

for that this week. Um, but uh, we actually had um some reports the Taco Bell has a shortage of ten inch tortillas, which are used in Burrito's quesadillas in just about everything and a lot of their breakfast items as well. And Bank of America came out with a note saying, look at this Taco Bell is suffering with

tortillas shortage. I forget what some people call it on Twitter, tortillas. Yeah, but they raised their price target on on Young Brands, which is which owns the Taco Bell brand because of the shortage of you know, even in spite of it, in spite of it is the biggest Mexican tortiam manufacturer is called Groom. Right, and they mentioned yeah, they mentioned, uh, that's why you should be long then, right that sounds

like it's a very interesting investment. But couldn't they just have trimmed a twelve inch tortilla or use a six inch and a four inch? Yea, all right, that's pretty good. You're going for gold and silver. Yes. Now in select cities, in about forty cities, you can actually request that your Uber driver stay silent during your ride, and you have to pay about more per ride. Worth it totally. I think it's totally worth it worth I don't go to talk about it, but this is something I would definitely

plenty of good journalists would be deprived of stories. Guys. I hate to say it, I think I think Theldonna tied herself for first place. First. Yeah, first first, We're all distant third on that. But I will have to get you back for some more crazy market observations in the future. Those were really good. But I think that's our time for this week. Emily, thank you for filling Sarah Shoes, thanks for having me up, and Sarah will

be back next week. I'll actually be off, but Luke Kawa from the Cross SA team will be filling in for me, so I'm sure his ratings will be much higher. Vil Donna John Thanks so much for joining us this week. We hope you come back. Thank you. 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'd love it if you took the time to rate and review the show on Apple

Podcasts so more listeners can find us. You can find us on Twitter, follow me at Reaganonymous, Sarah Ponzac is at Sarah Ponzac, Emily Barrett is at not That a e c. B VIL, Donna Hirich is at Vildata Hirich, and John Authors is at John Author's. You can also follow Bloomberg Podcasts at at podcasts. What Goes Up is produced by Tofur Foreheads. The head of Bloomberg Podcasts is Francesco lev Thanks for listening. I hope we see you next time.