Yields Aren’t Done Yet

value in cyclical stocks. Our guest will share some thoughts on this issue, as well as explain why he's looking at stocks in the United Kingdom among other international markets. But before we get to that, since Sarah abandoned us all here sadly, I've decided we will bring in sort of a rotating cast of reporters, editors, and strategists from throughout the Bloomberg universe to fill in for her on

a sort of rotating basis. And as listeners know, I can't resist a good gimmick, so I'm going to call it the mystery co host of the week. So Charlie Pellett take it away and tell us who this week's mystery co host is. This week's mystery co host is pretty gup dog Pretty as a reporter for Bloomberg's Market Live blog and a regular on Bloomberg TV and radio. She's a texting at heart and owns a dog that resembles an old man. It is true, and I'm very

proud of it. Even when I got him as a puppy, he was only a month old, and he still looked like he had, you know, twenty years of experience, which, to be honest, is actually pretty interesting because when I was a little that's what my mom used to say about me. So I think it's only fitting that I got this dog. It's fitting for me because I'm an old man who looks like a dog. So I feel comradeship here. I think we all have our weak points. Mike,

I'm just not going to comment on yours. So but anyways, though that's enough about my dog. I do want to introduce our guests though. This week's guests the head of investment strategy for City Personal Wealth Management. His name is Shawn Snyder. Sean, Welcome to the show. Thank you so

much for joining us. I do want to dive right in here to the tech slash yields component, and we've been talking about it for weeks, this inverse correlation that you're seeing, and the narrative seems to be that if text kind of future earnings are based on longer term growth, based on this idea that all of their growth is coming in the future, therefore they're more going to be

more sensitive to yield. But how can you make that argument when perhaps the last ten years of growth you've seen a tech isn't necessarily indicative of the same margin of growth you're going to see in the same sector for the next ten years. So how how do you how do you justify that? Sure? I think the most simplistic way to think about what's happening is essentially, if you have inflation rising, a dollar today is worth more

than a dollar in the future. And technology stocks are generally considered long duration assets, so they're particularly sensitive to the rising yields. But not just us the rise in tenure nominal yields, but really the tenure real yield. That's what it matters the most. They've actually tracked fairly well together in an inverse correlation over the last say six months or so, so it's really what's happening to the real yell that matters most. For technology, I will argue

that you are right. Technology today looks very different than it did in the past. Right when we had the technology bubble, you have really extreme valuations and not a lot of earnings. A lot of these companies now actually have significant earnings, so it is different. I would say that maybe a little bit less vulnerable than they were back then. Seans it's this all sort of the lynchpins who to all this rotation is in the bond market. Um. This week we did see that that ten year yield

sort of come down a little bit. Walk us through what you're thinking about the long end of the curve and the yield curve. I know you've done some some work looking about looking at that and thinking about it. I don't think anyone is very confident that this surgeon yields is over yet. I mean, is this kind of a head fake that we're saying this week? What's your take on on this sort of uh many correction back

lower yields that we're seeing. I think the last week or so it could probably be chalked up to COVID jitters. You've seen some renewed lockdowns in Germany, although very short lived. I think they end. Uh. You know, you know, in a week or two. I think it's April eighteenth or something. I don't remember the exact date. But it's not a long lived lockdown. Uh. You saw it's a very similar thing in France. UH. And I think there's some concerns that these you know, new strains, UH, maybe spreading a

bit more rapidly than we initially anticipated. So I don't think that delays the recovery significantly. You know, you heard President Biden talk about raising his goal from a hundred million shots to two million today. Um, they are on pace to get there at the current pace, about two and a half million doses per day. Uh. To get that extra seventy million needed to hit his target, it

only takes about twenty eight days. But I do think that's sort of y Yields have kind of backed up a little bit, UM when you mentioned what's going to happen, and over the long run, this is not a new phenomenon to see the yield curve steepen. It's happened when the U. S economy exited recession during the last four recessions. UH, And eventually the spread between the ten year yield and the two year yield, which is what we call the yield curve, actually peaked at about two point four percenter.

So during those last four recessions. Right now the spread is about one and a half percent, so that would imply there's probably further upside here to go. And if we look at the past four recessions again, it took about twenty two months on average from the end of the recession to the yield curve peaking. Now, the recession has probably ended a while ago, right it may have

ended in September. I'm not the one who's the arbitr of when recession visually ended, but we're probably at least several months into the recovery, so some of this has already been priced in. The yield curve has already steep end, but we probably have further to run based on what's happened in historical example. That's fascinating that you say that, because you've talked about post recessionary periods. But something else that's pretty common in post recessionary periods is this idea

that value stocks continue to rise. And I think the connection to that, for example, with the yield picture, is going to be that financials will rise as well in line with those yield curves. But how do you decide how long that that rally runs up? I mean it makes sense to buy things like financials like I mentioned, or commodities or e M for example. But when do you decide that that period about performance is over? When do you decide that we're now going to be in

a growth environment? Again, that is an absolutely great question to determine when exactly something ends. I think there's further room to run if you just look on a very very basic level, the Russell one thousand growth index versus the Russell one thousand value index and you look at how they perform. Since the end of the growth index is up about the value index is only up about ten. So to me, that suggests that there's further room to

run in the value space. And it really is picular for financials because you think that steepening yield curve benefits them through net interest income. And they also took a lot of loan loss reserves in anticipation of this pandemic causing credit issues, and because we've got so much significant stimulus, they really haven't quite seen that. So eventually that's going

to be released, and that will turn into profits. Now, some of that's priced in, probably, but I still think there's some room to run there for financials, particularly for talking about another one percent higher or steepening in the yield curve. You're shut. I keep thinking of a word that I haven't used or heard in a in a long time, and that's goldilocks. I feel like the market

is really hoping for sort of this goldilocks recovery. If it gets a little too hot, if inflation is a little too hot, that's obviously going to raise rates and be an issue. But as you point out now, with Germany locking down even here in my home state of New Jersey, they've kind of halted the reopening to some degree. I wonder, you know which is sort of a more

painful event for the market. Is it too hot of a recovery that that causes yields to rise and people bring forward their timeline for the fed UH normalizing policy, or is it that this recovery is not as robust as sort of this rotation and and the excitement over the rotation into cyclicals and value sort of implies, which

which one kind of scares you more. I think what scares me the most is if we're wrong about the path of the virus, that changes everything, Right, If these strains come out spread more rapidly than we expect or aren't covered by the vaccines, then that's kind of a game change. Or now that's not the base case. It doesn't seem like that's happening, you know, And I do think that our treatment levels have improved greatly, number of hospitializations,

deaths likely come down. And I think really importantly, you have a very significant portion of the sixty five plus population already vaccinated. So you know, I think they're right to be optimistic about the future. And you know, if we do get six and a half percent growth, like the fattest projecting, then you're looking at the strongest growth since the early nine and I think we will hit that. Um So, to me, I think that's the most important point of all of this. It's not rising bond yields.

It's that we are exiting a recession and this is probably just the beginning of a new economic cycle, and those tend to last five, six years, maybe longer. That's really the important point because that's what's going to create earnings, and that's what's going to sustain the stock market over a longer period of time. Do you see corrections because of bond yields? Maybe, But at the end of the day, it's really about the economy recovering in the beginning of

a new economic cycle. De Sean, what's the trade here? And here's why I ask. I'm on a team that's filled with X trader and they always ask me what's the trade? Uh? So I'm very curious when you have this risk, or this continuing risk of this virus of perhaps more variants, can you really dive into the deep end with the value play or do you still have to have some sort of exposure to things like tech, to things like utilities, those kind of names that you

can really continue to rely on. Sure, I don't think you just abandoned technology or growth stocks. I mean, over time, they will continue to provide growth as they're called, uh and you will see positive earnings in those spaces. So I don't think it makes sense to completely get rid of technology. But you know, you have a lot of people that have been heavily invested in technology since the beginning of the pandemic, and that scenario where we're all

staying at home is potentially unwinding. So it's not all technology companies, right. There's some that i've really strong cash cash on their balance sheet, they have strong curpet earnings. There's some that don't have a lot of earnings. There's also some that are uniquely benefiting from the pandemic exercise equipment. So it really it's not just tech, it's which type of tech. Yeah, I feel like the really the most speculative sort of earnings way off in the in the

distant future type of tech. Uh, really the the arc you know, Cathy Woods type of of hopes and dreams type of stocks that are really getting hit the hardest. Is there something I mean? Is that all simply a reverse of the side of the coin to the yields picture? I mean, what would it take to get that kind of really gung ho, uh gusty spirit towards those those types of stocks brewing? Again? Is it? Is it just as a simple matter of which way rates are going now?

I think it's valuations. I think if you see those stocks correct enough, you'll get people back into the space. I just don't think they feel completely confident yet that it's over, that it's corrected enough where the valuations are really appealing at this point. Uh, And it's not so that people are kind of nervous about how things look as we exit this recession. There's a lot of uncertainty.

We don't know what's going to happen with inflation. We think we know you can look at gasoline prices alone and that will point towards the CPI that's about three for the remainder of the year. So there's really high probability that we get higher inflation, but we don't know if it's simply going to be for a couple of quarters and then moderate, or if it's going to be something more significant. And that's really the uncertainty that keeps you from maybe going all back in on these high

valuation areas. So tell me you talked about valuations. How much does liquidity play into this, because I think in the middle parts of last year have to say there were companies who were just in free access of the debt market here. I mean you had airlines really basing a cash bunch and then getting these kind of massive amounts of cash and issuing these bonds for ten premiums.

Tech coming in issuing bonds for literally no premium So what here's the role here of those extra cash cushions that tech may have, but now other kind of battered sectors have to from airlines to cruise, lene etcetera. Where does the liquidity piece of the equation come in? Sure? So I'm not sure I'm going to answer this exactly

the way you'd want me to. But if you think of how much stimulus has been done, you've seen personal income rise one point one trillion dollars last year for the nation as a whole, and a lot of that money went into some of these technology things, exercise equipment, all those stay at home type stock. So that is liquidity in the sense that it actually reached consumers. Consumers actually spent it. But are they going to continue that same behavioral pattern or they going to move towards the

services sector the economy. Are they going to start booking trips? Are they going to start going back to hotels? Are they're going to do those types of things? Um So, to me, that's kind of where the liquidity plays. And you're absolutely right when you talk about technology and airlines and some of these with debt. But if you look at the SP five, nowhere near the same performance for

the other four hundred and ninety stocks. Right, So you had significant run up, maybe a hundred and thirty percent return in those top five stocks, and then maybe not even half of that, maybe six and the other four. So when I hear about liquidity just insanely driving up the market, it's not all of the market. There's plenty of areas that are still beaten down. Yeah, So I wanted to get to that notion about the value in in overseas markets, and you would pointed out the UK market,

you know, looking at the foot see here. Uh never did quite reclaim that that record back I think it was two thousand and eighteen. I mean, I guess there's always handwringing over Brexit and the trade situation and that sort of thing. But yeah, we're still down a good fifteen percent for the foot see from from that peak, Um, walk us through what is attractive there? Obviously, valuations, I'm sure part of it is it is a kind of hand in hand with the the rotation into the more

cyclical parts of the of the market. Is that kind of the story for the UK and and a lot of the bullishness towards uh, you know the rest of the world compared to the US at this point. Yeah, that's right. So what I think of UK equities, I'm not thinking that it's going to be some hot stock so to speak, that you get rich on, right. This

is not one of those types of investments. But what it is is something that trades about fourteen times earnings, which is about discount the U S stocks UH significant weighting of the foot Seed one hundred is an energy and financials which are both positively correlated with yields. That means the fields go up, those sectors tend to benefit, and it doesn't have a lot of exposure to technology.

It's under a two percent waiting in the index of the foot So it's not that it's necessarily going to make you rich instantly, but if you're looking for an area that is still offers value probably as upside to hear, we think it's attractive. And I also want to point out that this has been a rolling healthcare crisis the

entire time. Right it started in China, then it spread to Italy, then it spread to the U S. We're essentially seeing the reversive that now where you're going to have lots of vaccinations in the US, then you're going to have vaccinations in Europe that maybe it moves to Latin America, so those areas will recover, but slower and later than we do in the US. I love that you brought up vaccinations because that's been something that people saying,

how do you trade on this? Uh? Something back in that was happening is people were trading to the opposite direction about in terms of case counts. They were buying US markets because Europe and China was more supposed to the virus in the US was at the time, and then it kind of got flipped on its head. So how do you trade the opposite We're to talk about vaccinations, for example, where you have perhaps the US or even the UK leading in those vaccinations. But like you said,

e M is not well. I guess one way to think about it in the gain not sure and perfectly answering the question. But the more vaccinations you have, then it's more likely that you're going to pull back on some of the stimulus over time. Right, So eventually these central banks are going to start to exit from the massive amounts of stimulus they've provided, and I think that that will be a considered not necessarily immediately we hear in Fuss just talking about it in the US right now.

What the Federal Reserve is gonna do. Are they really going to wait until the end of three to raise interest rates or they're going to do it towards the end of Will they start to taper asset purchases at the end of this year or is it early? And I think those things will be issues for markets down the road. UM. So as far as vaccinations increasing, it's a great thing. We all want to get back to life. I think that's important, um. And I also would point

out economy is not the stock market. Stock market is not the economy that old adage. Um. I think there may be more truth to that as we get further along in this where the vaccinations increase the economic outlook and the growth outlook, but kind of decreases the amount of stimulus that we're seeing in the market. You know, Sean, I think it's a it's a fascinating time to try to figure out what the Federal reserves next move will be. As you point out, you know, everyone trying to determine

when that tapering begins. I mean, it seems to me that they're gonna have a hard time tapering, uh, without causing some adjecta, as they say, in the market one way or the other. But I also wonder, you know, is there an equal chance that we get a surprise from them in the other directions, some kind of yield curve control or some kind of operation twist to keep those that long end tam is that I wonder if the market is in some way almost begging for that

or wishful thinking for that type of scenario. What do you think? Yeah, I think it's fascinating that you bring that up. I was thinking about this the other day, and you know, it almost feels like investors are kind of this mindset that the Federal Reserve is on the sidelines and they're not going to help us out and can't count on them anymore. But if you think about what they're saying, they're saying, we need to see either substantial for the progress and the recovery or a market

deterioration in financial conditions. What would get you a market deterioration and financial conditions is if the stock market sells off sharply. So if the stock market sells sells off sharply and corrects because of these rising bond yields, then you actually have more impetus for the FETE to step in and do a program like QI twist where it would actually once again help markets. So I think there's support there that people are maybe ignoring. It's almost like

the the proverbial poal put. You know, we're we're all trying to figure out what that type of altility would look like to to get us there. I don't. I guess no one knows once we see, right. I mean maybe if you get you know, real tenure treasury yields in your zero, that would maybe be concerning. I don't think there's much appetite for a positive real yield or if you saw stock market sell off, you know, I do think you'd see action. So it's not like they're

completely gone. The Federal Reserve has not disappeared. They're comfortable with their stance for now, but things could change. So speaking of a fifteen stock correction, what might be the catalyst of that if not the FED and a deterioration from there, and what else could possibly create that kind of move. That's a really good question. I do think the tapering is something that you know, I don't think it would create a bear market. I just don't see that.

I think there's such strong tail winds right now, but a goat, any change in the path of the virus would be something to consider. Maybe if earning is really disappoint maybe if you saw these rising yields become a credit market issue, which I don't think there's really signs of that yet, um, but it could be something. It's it's always tough to say what exactly the catalyst is going to be when you have stretched valuations. It doesn't always take a whole lot, and it usually comes out

of nowhere, you know. Sure, I am picturing the clients, the city wealth clients as being you know what, sophisticated as far as individual investors somewhat let's imagine deeper account balances than the robin Hood set out there. Um. But there's a lot of speculation these days about what the individual investor is gonna do next, especially all these you know, new gung ho younger retail traders on Reddit and on

robin Hood. Is there any insight you have from sort of the clients how you deal with like again, I think it's not exactly a complete overlap with that that type of trader, but you know, just from the sense of individuals kind of what their their sentiment is like that these days are they are they still willing to chase this rally to embrace risk, or you know, is that sort of wearing off to some degree. I think

it's wearing off to some degree. You've actually seen retail investors seemingly step back a little bit over the past few weeks or so. Uh. And I have to tell you, someone just asked me to speak to their high school because there the student the students in the fine dance club are all, you know, just talking to each other about hot stock tips and trying to figure out what

to do. And they're trying to convince them that that's not how you invest, that you should look over the long term and not just risk money at any any throw it at anything. So it's still going on. I think it's encouraging to actually have retail investors in the market. It's just when you get into these speculative areas, Uh, you really need to know your risk tolerance. And I don't think people actually understand their risk tolerance until it

really collapses on them. And I'm not sure that that's going to happen anytime soon. Um, but you know, it almost feels too like that check that landed in people's and it feels like house money to some degree, I imagined to some traders, you know, what better use of it than to to let it ride on something risky I suppose, right, Yeah, stimulus chocks, And I know there's other banks that put out research saying that you know, at least a portion of that is going to go

into retail trading. So let me ask you how insulated or not insulated is the market from that, because I mean we saw just a few weeks ago during this whole game stop saga, the market literally sold off because of that. They were freaking out, is what is what my understanding was, to what extent is some of these bigger tech stocks, for example, that have these bigger waitings insulated from the retail bid who maybe can't afford a

share of Amazon with their checks. You know, I don't think it anything that would lead to broad market contagion. And the reason I say that is when you think of the company that you just mentioned, Uh, there's just about zero point seven percent of the market cap is shorted names, so it's not a huge section. So there's opportunity to kind of, you know, create this scenario where you can drive it up. But it's not in a lot of names. It's only a few names that you

can actually do that in. Luckily, thank you, miss I guess it would be a crazy world if if it uh for other eyes, which is our perfect segue, pretty to the craziest things we saw in markets this week, as Charlie Pelt will tell us, stand clear of the craziest things we saw in markets this week. Pretty, no pressure on you. This is your first one co hosting bin'd lie. There's a lot of pressure on you. I'm

expecting you to bring it with the crazy thing. But before we get to that, I know we have a voicemail into the hotline, So let's let's listen to that and see what that's all about. Hey guys, it's Katie gray Slid. I couldn't resist popping by because the craziest thing I've seen in markets this week and just in general is the Suez Canal situation, and I'm dying to talk about it. Basically, there's a boat as long as the Eiffel Tower is stuck in the Suez and it's

causing this whole thing. There's oil tankers and container ships piled up behind it, calling a mess in the crude market. And I'm at home with my family this week and they're tired of hearing me talk about it, so I thought i'd tell you, guys. I hope the show is going well. I love Katie's enthusiasm for this story. She she's bored the parents and her boyfriend at home talking about it. I can't. I'll talk about it all day.

I think it's fascinating. This is the commodity traffic jam that I did not see coming, and I love it. And I love that Katie obsesses about it, because after the show, I'm going to message her about it. And it's fascinating that it's the size of, or bigger than the size of the Eiffel Tower, which is honestly beyond uh beyond imagination. I mean, the memes alone just make the story so interesting. Um. I think what's interesting about it for me, the craziest thing in market is the

fact that people are actually playing this. Now. You ousually saw a little bit of an oil pop on it, because you know oils backed up. It makes that just a little bit more create a little bit more demand. But there's this e t F that I really thought was interesting. Shout out to Rachel Evans who pointed this out to me, called b Dry b d r Y. That's the ticker is the Baltic Dry Shipping Index, and on this news it's a it's biggest inflow in years now.

This isn't the A t F that necessarily moves market. This isn't the q q Q or anything. But I thought it was interesting that people are actively trading on this idea that there's a ship stuck in a canal.

It is. It's fantastic that the JP Morgan's famous strategist Marco Klonovitch even had a note out on it saying there's a chance the ship could just break that in the process of delodging it, they'll just break the thing and then the canal will be closed for weeks or months, and it could cause shipping rates to go up, oil to go up. And he's got trades, like you said, recommended uh based on on the potential for that hedge

hedge with oil and oil stop. It's so funny because our colleague Joe Wisenthal wrote about this that this is actually a function of ships just getting bigger and bigger and bigger. Into was like economies of scale. No one actually thought that maybe they should account for the size of the actual canal. I think the canal a little wider, and yeah it is. It's certainly one of the craziest things. And we've seen a lot of crazy things here what

goes up in the rest here. But that's pretty good, Seurean. How about you got anything crazy first? Well, Katie came in and stole mine, and I have a couple other ones, but it is absolutely Fascinating's like the butterfly effect where wind blows the ship and gets it stuck right. It's nuts, isn't It completely screws up to the market. So I have two things, and one is ready to n f t S, and I'll be really quick on that one

because it's probably been beaten to death. I was watching sixty Minutes the other day where people actually said he thought the n f t S were in an asset bubble, which which I find fascinating because I think no one would know about n f t S and it wasn't

for people beyond that. And this is ripped from the headlines and Bloomberg news the world is potentially facing a coffee deficit because of again and supplied and so coffee supplies in the US are actually shrinking due to a shortage of shipping containers and supply bottlenecks, and the coffee stockpiles have sunk to a six year low. So, now who knows what that happens to. You know what happens

to coffee inflation. But if you're going to get gas at the gas station, that prices there have went up, and then you cup of coffee price goes up. Wait, so does that mean my cup of coffee could actually be more expensive than the five dollars I already spend on a great cup of coffee? Maybe you millennials will never be able to afford the house now if they haven't hedged their costs. And just when I was going to give up avocado toast, come on, that's unrelated to

the Suez Canal. That's just a separate that's pretty good, all right, Well, you guys are good. I don't think I can beat it, but I've got a good one that's kind of out of left field here, And this is courtesy of the always brilliant Matt Levine's Money Stuff newsletter, and he wrote a about the SEC and the Justice Department started investigating the quote unquote dark web, which I always hear about. I don't really know much about that. I don't think I've ever actually been on the dark Web.

I don't know how to get there if I need a different computer or something. I don't know much about it, but it's fascinating. And they found some message board where people were trading insider tips insider stock tips and paying each other in bitcoin as one does you know what else are you gonna pay uh for for something shady like that? Um. So they caught this guy who's actually a employee of SpaceX, of of Elon Musk's SpaceX. He's an engineer for them, and they arrested him for collecting

payment and bitcoin for insider tips. But here's the crazy part is they were fake insider tips, and the SEC said he's being fraudulent by selling insider tips that were actually fake. It was just stuff that you know, the guy I think found in public documents and whatnot and purported it to be insider tips. Uh. And the fraud, according to the SEC and the Justice Pariment is like these are fake inside your tips. You can't do this.

So I thought that was pretty good. You know what that reminds me of, if I can just throw in my little two cents here is so I'm a big fan of anything related to the Royals, which I know when this gets published, I'm going to get a ton of backlash on I just know it. But there's this thing that I saw on like a Hallmark movie of the Royals, where a prince who shall be unnamed, put out you know, a secret, a fake secret, to see

who his real friends were and who's worked. And this kind of sounds a little similar to similar to that, to see if there is actually good behavior out there or or people are just tricked. I guess that's pretty good. Well, I'm glad you like the Royals. Well, we'll have to talk about my kids. Apparently on TikTok the young kids are all fascinated with Prince Philip for some reason, I don't know. I don't know why, but I read his wook PD page. What a fascinating the guy. The guy's

got more titles than anyone I know. He's the print. He was the Prince of Denmark and Greece, and then he married Elizabeth and they made him Prince of the UK too. He's got more never never get the king title apparently, but enough more titles than anyone else I've ever heard. Well, as long as it's not like Overlord of the World, we'll save that title for you. Critty, you work your way up. I'm gonna hold you up and I'm gonna hold you to it. But with that,

I think that's all the time we had. Seawan as always a great pleasure to have you on the show. We hope you can come back again. Uh really enjoy your insights and you're good humor. Thank you. I'd love to thank you and Critty, thank you for filling in for Sara there admirably. We'll have you back as well. Thank you for having me this one programming note, What Goes Up is taking next week off for spring break.

We'll see you again on Friday, April ninth. 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. And you can find us on Twitter, follow me, at Reaganonymous. Pretty is at at Pretty Groupta News. You can also follow Bloomberg Podcasts at at podcasts and thank you to Charlie Pellett of Bloomberg Radio and the voice of the

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