WEBVTT - Surveillance: Negative Interest Rates With Kotok 0:00:00.080 --> 0:00:13.800 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom keene Jaily. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.800 Bloomberg dot Com, and of course on the Bloomberg. Greg 0:00:27.840 --> 0:00:30.120 Bottle joining us b MP Perry bad thrill that he 0:00:30.160 --> 0:00:33.320 could be with us today and one of the reasons 0:00:33.400 --> 0:00:36.559 is you have a house cautious call in the American economy. 0:00:36.760 --> 0:00:39.360 Let's start with that. Why are you cautious for others 0:00:39.400 --> 0:00:42.400 see above two percent growth? Well, I think what the 0:00:42.440 --> 0:00:45.479 market is looking for generally, is this weakness that we've 0:00:45.479 --> 0:00:48.680 seen in the manufacturing side of the economy start to 0:00:48.760 --> 0:00:51.400 mean river and the rest of the economy, that the 0:00:51.440 --> 0:00:54.280 service side, the consumer that has been much more robust, 0:00:54.360 --> 0:00:56.560 just kind of continue on track. We think what we're 0:00:56.600 --> 0:00:59.160 actually likely to see is this weakness from the manufacturing 0:00:59.160 --> 0:01:01.600 side of the economy start to broaden out a little 0:01:01.600 --> 0:01:03.600 bit to the rest of the economy. We're not looking 0:01:03.640 --> 0:01:05.920 for a recession, but we are looking for more of 0:01:05.959 --> 0:01:08.320 a pronounced slowdown than the market. They don't do this 0:01:08.440 --> 0:01:11.040 till cf A five. You know, in terms of example. 0:01:11.040 --> 0:01:15.680 But let me ask to see a five question caution gloomy. 0:01:16.080 --> 0:01:19.720 It's not mourning in America. Why are starts going up? 0:01:20.240 --> 0:01:22.640 Why are stocks going up? Well, I think what the 0:01:22.640 --> 0:01:25.280 market is doing is looking through the short term weakness 0:01:25.400 --> 0:01:28.240 and it's very much expecting of recovery next year. And 0:01:28.280 --> 0:01:30.360 we had a very difficult year this year for earnings. 0:01:30.520 --> 0:01:34.000 SMP is rallied this year and we've had earnings growth 0:01:34.000 --> 0:01:36.240 of only one percent. If you ex out the effect 0:01:36.280 --> 0:01:39.040 of buybacks, it's actually been negative earnings growth. So why 0:01:39.080 --> 0:01:41.000 is the market able to look through that? Because it's 0:01:41.000 --> 0:01:43.880 expecting a sharp rebound next year, particularly from some of 0:01:43.920 --> 0:01:48.600 those stocks that have underperformed, the energy industrials, materials names. 0:01:48.680 --> 0:01:50.840 You know, the market is looking for very strong earnings 0:01:50.840 --> 0:01:52.520 growth there we ca that's a view that's going to 0:01:52.640 --> 0:01:55.360 get challenged through Q one if we don't see a 0:01:55.360 --> 0:01:57.720 decent rebound in the data, and I think you will 0:01:57.760 --> 0:02:00.160 start to see downgrades comes through to those twenty when 0:02:00.160 --> 0:02:03.400 they earnings expectations, and the market at these lofty levels 0:02:03.400 --> 0:02:05.520 I think could struggle to digest that. So, Greg, I 0:02:05.560 --> 0:02:08.760 want to talk about valuation. We've had rise in the 0:02:08.880 --> 0:02:13.200 SMP yet we've had essentially, as you just mentioned, effectively 0:02:13.320 --> 0:02:16.639 no earnings growth. Where are we in terms of valuation? 0:02:17.080 --> 0:02:19.640 It looks expensive. It looks expensive. I think if you 0:02:19.680 --> 0:02:23.359 look at, for example, growth stocks um one year four 0:02:23.360 --> 0:02:27.400 at p for growth stocks is at highs for the 0:02:27.480 --> 0:02:30.240 last thirty years x the TMT bubble. So there's an 0:02:30.320 --> 0:02:33.840 argument that in this environment of extremely easy monetary policy, 0:02:34.080 --> 0:02:36.840 low rates, that there should be evaluation premium. But the 0:02:36.919 --> 0:02:38.680 question is how much is too much? And to me 0:02:38.720 --> 0:02:40.800 it looks over extended. So you bring up the good point, 0:02:40.800 --> 0:02:43.280 which is, you know, I'm looking at the tenure here 0:02:43.280 --> 0:02:47.160 at one point seven, I've got no choice. I gotta 0:02:47.240 --> 0:02:50.840 go buy stocks. I'm just gonna go buy Jeff Bezos. Right. Well, 0:02:50.880 --> 0:02:53.000 I think that's what's been driving the market this year. 0:02:53.200 --> 0:02:55.760 And I think as long as earnings growth is positive, 0:02:55.919 --> 0:02:59.280 even if it's low, positive, that type of attitude can 0:02:59.440 --> 0:03:01.560 can play. But the issue is if you start to 0:03:01.600 --> 0:03:05.160 see stocks under pressure, if you start to see earnings contract, 0:03:05.320 --> 0:03:07.040 then it becomes much more challenging. It is a much 0:03:07.080 --> 0:03:09.680 more risky asset class. All right, So if I'm thinking 0:03:09.680 --> 0:03:13.040 about equities here, there's you know a lot of I'll 0:03:13.040 --> 0:03:15.560 probably have half the people to walk in this studio 0:03:16.280 --> 0:03:19.519 UM talk about defensive, get defensive, get defensive, but those 0:03:19.560 --> 0:03:21.080 are expensive, and the other half will come in and 0:03:21.080 --> 0:03:24.799 say no, no, no, there's no recession in sight, goes cyclicals. 0:03:24.919 --> 0:03:27.680 Where do you fall? I would rather fall in the 0:03:27.720 --> 0:03:29.720 more defensive camp, but I do think you have to 0:03:29.720 --> 0:03:32.320 be careful about that. Some of the classic defensive sectors, 0:03:32.360 --> 0:03:35.520 such as the healthcare sector UM is potentially subject to 0:03:35.560 --> 0:03:37.760 a huge amount of political risk next year. So I 0:03:37.760 --> 0:03:40.600 think it's very difficult to find good value defensive stocks. 0:03:40.600 --> 0:03:42.840 I think sectors such as the consumer staples I think 0:03:42.840 --> 0:03:44.840 would weather a down term better than some of us. 0:03:45.040 --> 0:03:47.920 You do derivatives as well, Greg Bottle explain to us 0:03:47.960 --> 0:03:51.360 the convexity right now, that's the bet within the market 0:03:51.440 --> 0:03:55.480 and when on wines it goes faster. How big is 0:03:55.520 --> 0:03:58.120 the bet right now? And the marketers are you know, 0:03:58.160 --> 0:04:01.160 the proverbial sidelines crowd, Yeah. I mean one of the 0:04:01.160 --> 0:04:03.120 things we've seen this week is that the VIX has 0:04:03.240 --> 0:04:06.640 broken down through the twilet, so it means that the 0:04:06.720 --> 0:04:10.320 expectations for future volatility are very low, and we've seen 0:04:10.640 --> 0:04:12.880 the short interest in terms of the VIX future. So 0:04:12.920 --> 0:04:16.160 the number of people betting on that basically continuing to remain. 0:04:16.160 --> 0:04:19.039 People are betting that it will be a quiet ball 0:04:19.120 --> 0:04:22.400 market exactly. So there's a there's a larger outstanding short 0:04:22.440 --> 0:04:24.719 position on the VIX than there than there has been 0:04:24.760 --> 0:04:28.160 in recent history. So yeah, there's basically a bet that 0:04:28.160 --> 0:04:31.080 we're going to remain in this very low volatility risk 0:04:31.160 --> 0:04:34.840 on environment and that creates potentially a fierce a reaction 0:04:34.880 --> 0:04:36.320 if you do get a catalyst to break us out 0:04:36.360 --> 0:04:38.200 of that. All right, So it seems to me we 0:04:38.240 --> 0:04:41.000 are just one tweet away from this trade deal, just 0:04:41.040 --> 0:04:47.000 going what would that mean for things? Yeah, I should 0:04:47.000 --> 0:04:49.320 have taken us there, But what could happen in that 0:04:49.520 --> 0:04:51.400 scenario is that it's still a risk of the market 0:04:51.440 --> 0:04:53.680 is a market kind of looking past trade, the markets 0:04:53.760 --> 0:04:56.000 looking past trade, which is exactly why it is a risk. 0:04:56.040 --> 0:04:57.880 I think the market is very much pricing in the 0:04:57.920 --> 0:05:00.640 idea that this phase one deal, this East fire is 0:05:00.640 --> 0:05:02.520 going to get done. I think everyone accepts there are 0:05:02.560 --> 0:05:05.000 challenges further down the road, but in the short term, 0:05:05.080 --> 0:05:08.520 I think everyone speaking to expects these December deadline to 0:05:08.520 --> 0:05:11.320 pass without any further increase in tariffs, and that we 0:05:11.440 --> 0:05:13.800 reach a phase one deal so ready for markets the 0:05:13.880 --> 0:05:16.279 risk that if we don't then that could have a 0:05:16.520 --> 0:05:20.039 kind of a significant impact. What is the segmentation that 0:05:20.160 --> 0:05:23.200 I can take advantage of? Is it MidCap, small cap, 0:05:23.279 --> 0:05:27.159 large cap? Is it US international? Is it you know, 0:05:27.240 --> 0:05:29.560 the twelve stocks that are going up versus value and 0:05:29.640 --> 0:05:35.000 geometric going nowhere? What's the partition that is an opportunity? Well, 0:05:35.040 --> 0:05:36.800 I think it depends on your view. If you buy 0:05:36.800 --> 0:05:38.160 into the idea that we are going to have a 0:05:38.200 --> 0:05:41.080 cyclical recovery, then I think those stocks that have lagged, 0:05:41.080 --> 0:05:44.960 whether it's energy industrials, the smaller midcaps in particular, do 0:05:45.080 --> 0:05:48.840 look potentially interesting. The Russell broke out through the top 0:05:48.920 --> 0:05:50.600 end of its trading range last week, So if you 0:05:50.640 --> 0:05:53.160 buy into that narrative, I think the smaller midcaps could 0:05:53.240 --> 0:05:55.240 rally into the back end of the year. I think 0:05:55.240 --> 0:05:57.680 if you're worried a lot about trade, if you're worried 0:05:57.680 --> 0:05:59.840 about the US elections next year, then I do think 0:05:59.839 --> 0:06:02.400 you have to be more cautious about the nasdack some 0:06:02.480 --> 0:06:05.000 of the fang names. As I mentioned earlier, valuations for 0:06:05.040 --> 0:06:07.960 the growth stocks are extremely elevated, and typically is the 0:06:08.040 --> 0:06:11.720 Nasdaq that has been more volatile around trade headlines, and 0:06:11.760 --> 0:06:13.880 I think could be far more impacted by the politics 0:06:13.880 --> 0:06:16.320 next year. I mentioned that the fang stocks, I mean 0:06:16.440 --> 0:06:18.800 they've been Are you concerned that the breath of the 0:06:18.839 --> 0:06:23.320 market advance this year maybe isn't as healthy as we've 0:06:23.360 --> 0:06:26.400 seen in some other advances. Yeah, I think that's that's 0:06:26.400 --> 0:06:29.359 absolutely true. I think there's been kind of a relatively 0:06:29.480 --> 0:06:32.480 narrow sub section of the market that's been driving growth, 0:06:32.480 --> 0:06:35.680 and that very much reflects this dislocation we've seen between 0:06:35.800 --> 0:06:38.039 the manufacturing side of the economy and the service side 0:06:38.080 --> 0:06:40.200 of the economy. So absolutely it has been a very 0:06:40.279 --> 0:06:43.120 narrow ralliant that raises the risk. Big bottle, thank you 0:06:43.200 --> 0:06:45.440 so much, greatly appreciated. With B ANDP. Perry bar with 0:06:45.480 --> 0:06:49.360 Equities and derivatives there in a cautious GDP view as well. 0:07:03.960 --> 0:07:08.800 Andrew Holland Hurst here, Andrew, the zeitgeist is okay, maybe 0:07:08.800 --> 0:07:11.320 it's a bottom and up. And of course Chairman Powell 0:07:11.720 --> 0:07:14.480 talking about a glass more than a half full? Is 0:07:14.520 --> 0:07:17.160 that what you see? You know, it's looked a lot 0:07:17.240 --> 0:07:20.120 like a glass exactly half full. And we're starting to 0:07:20.120 --> 0:07:22.160 get some of this hard data and that's looking a 0:07:22.200 --> 0:07:24.800 little bit more positive. So we've seen some positive signs 0:07:24.800 --> 0:07:27.040 on the soft data, and I would say data out 0:07:27.040 --> 0:07:29.120 this morning, you're seeing better investment in g d P, 0:07:29.360 --> 0:07:33.240 You're seeing better signs of future investment endurables. And that's 0:07:33.280 --> 0:07:35.240 really where you want to see the strength in an 0:07:35.280 --> 0:07:38.120 area that's been weak for quite some time. With that tone, 0:07:38.760 --> 0:07:43.640 do yields as a general framework stay lower or is 0:07:43.720 --> 0:07:47.680 the huge surprise of Q one two thousand twenty up 0:07:47.720 --> 0:07:51.480 up we go finally in yields that that that would 0:07:51.600 --> 0:07:53.160 be a huge surprise. I think that's what no one 0:07:53.280 --> 0:07:56.040 is expecting. And and and I think you know if 0:07:56.040 --> 0:07:59.000 you're listening to Governor Brainard yesterday for instance, but she 0:07:59.120 --> 0:08:03.080 said she was talking about the potential to move to 0:08:03.200 --> 0:08:07.720 an average inflation targeting regime. UM, so this is still 0:08:07.760 --> 0:08:11.400 a said that even if they see strong activity, you 0:08:11.480 --> 0:08:13.760 need to see something on the inflation front to get 0:08:13.800 --> 0:08:15.640 them thinking about hikes. I think that's where we have 0:08:15.720 --> 0:08:17.720 this scenario where it is looking a little bit better. 0:08:18.040 --> 0:08:21.320 Equities are moving higher, but rates are staying fairly low. 0:08:21.880 --> 0:08:24.000 So Andrew, looking at the data that came out this morning, 0:08:24.040 --> 0:08:26.679 you know, US business equipment demand increases by the most 0:08:26.880 --> 0:08:30.760 since January, you know, and that's kind of car counter 0:08:30.800 --> 0:08:33.920 to the narrative that we've been having, you know, contracting, manufacturing, 0:08:33.920 --> 0:08:37.439 weak business investment. Is this the beginning of a turn 0:08:37.520 --> 0:08:39.360 do you think? Or is this not so much of 0:08:39.400 --> 0:08:42.520 a trend at this point? It's probably too early to 0:08:42.559 --> 0:08:44.240 call it a trend. And and and we're really looking at 0:08:44.240 --> 0:08:46.960 one month of data, Like I was saying, you do 0:08:47.040 --> 0:08:50.160 have some of these leading indicators globally p m I 0:08:50.320 --> 0:08:53.440 s for manufacturing or turning up, and they're still at 0:08:53.480 --> 0:08:55.720 low levels, but they look like they're coming off of 0:08:55.760 --> 0:08:58.120 the bottom. So that's what we're hoping for. That's what 0:08:58.200 --> 0:08:59.680 we think we we're going to see. And the other 0:08:59.679 --> 0:09:01.480 thing that's going on in the US is you had 0:09:01.559 --> 0:09:04.040 this auto worker strike, which was a dragon probably even 0:09:04.080 --> 0:09:06.800 a dragging these numbers that still look pretty positive. That's 0:09:06.800 --> 0:09:09.560 going to bounce back. Um, we know that we had 0:09:09.640 --> 0:09:11.920 aircraft production that was shut down. That's going to bounce 0:09:11.920 --> 0:09:14.240 back ball. So so you have a couple of idiosyncratic factors. 0:09:14.240 --> 0:09:17.319 And there also that coming into the first half of 0:09:17.320 --> 0:09:19.360 these numbers could look a little more positive. So I 0:09:19.360 --> 0:09:21.160 think that's going to happen. Do I see it in 0:09:21.200 --> 0:09:23.160 the data. Yet I'm not sure that we're seeing it 0:09:23.200 --> 0:09:26.080 that clearly. Andrew wonderful to see Sherman green Span, And 0:09:26.120 --> 0:09:29.559 I think with Maria yesterday, and you know, I look 0:09:29.559 --> 0:09:33.079 at Sherman Greenspan and his economic mandate is a good 0:09:33.120 --> 0:09:38.199 stock market builds confidence. Is that still true or is 0:09:38.240 --> 0:09:42.480 the stock market the province of only the elite? Well, 0:09:42.760 --> 0:09:47.000 it is true that the games from the stock market 0:09:47.000 --> 0:09:49.400 are not that broadly shared across the economy. This this 0:09:49.520 --> 0:09:53.000 really is high income, high wealth individuals that have exposure 0:09:53.040 --> 0:09:54.839 to the stock market. But when we look at this 0:09:54.920 --> 0:09:57.640 consumer sentiment measures, and even when you break those consumer 0:09:57.679 --> 0:10:02.280 sentiment measures down across income crew groups, UM, across demographics, 0:10:02.280 --> 0:10:06.040 you still see the pass through from higher equity prices 0:10:06.520 --> 0:10:09.600 UM to what's going on more broadly with consumer sentiments. 0:10:09.600 --> 0:10:11.679 So those two things are they are linked, um. Whether 0:10:11.720 --> 0:10:13.760 fundamentally or not, they they should be. They do seem 0:10:13.800 --> 0:10:16.480 to be quite linked empirically UM. And so as we 0:10:16.520 --> 0:10:19.600 see equities moving higher UM, we think that should be 0:10:19.600 --> 0:10:22.360 positive for consumer sentiments. Surprising then that you know, conference 0:10:22.480 --> 0:10:24.760 or consumer sentiment has actually stayed a little bit lower here. 0:10:24.760 --> 0:10:27.400 So we're watching that to see if that bounces um, 0:10:27.440 --> 0:10:29.840 but but in general that should be a positive backdrop 0:10:29.880 --> 0:10:32.760 for the economy coming into Andrew Holland Hurst, thank you 0:10:32.800 --> 0:10:34.840 so much. Too short to visit. He is a city 0:10:34.840 --> 0:10:37.760 group working with Catherine Man on a view on the 0:10:37.760 --> 0:10:53.439 American economy as well. It is a joy to speak 0:10:53.480 --> 0:10:56.120 to the gentleman from Pennsylvania and Florida. His name is 0:10:56.200 --> 0:11:00.160 Mr Kotak, David Kotak with Cumberland Advisers. David, before where 0:11:00.200 --> 0:11:03.520 we get to your important essay and the poisonous idea 0:11:03.559 --> 0:11:08.520 of negative interest rates, you have provided national leadership on 0:11:08.640 --> 0:11:12.720 the challenges to agriculture in China and a center around 0:11:12.720 --> 0:11:19.640 your pioneering bird flu work years ago. Pork is stratospheric 0:11:20.160 --> 0:11:23.640 in China and as a profound impact. It's not the 0:11:23.720 --> 0:11:26.600 same as bird flu, but there's a little bit of 0:11:27.000 --> 0:11:31.960 related biology, microbiology and virology. Here. Your thoughts on the 0:11:32.080 --> 0:11:38.600 durability of this pork crisis for China. Oh my gosh. Uh, 0:11:38.880 --> 0:11:42.680 Good morning and happy Thanksgiving. And you just made the 0:11:42.679 --> 0:11:46.439 case of why Turkey is so it's important. Um. The 0:11:47.120 --> 0:11:50.520 The issue of flu is that it you takes. We 0:11:50.600 --> 0:11:52.840 know that we saw it from bird flu, we saw 0:11:52.880 --> 0:11:57.199 it from other viruses. In this case, the shock to 0:11:57.559 --> 0:12:03.199 China is huge. Michael Jewelry, who acts those prices UH 0:12:03.360 --> 0:12:07.479 perfectly in China and has developed the whole Price Indicator 0:12:08.040 --> 0:12:12.800 based on what's happening there, describes the shock in the country. 0:12:13.240 --> 0:12:18.520 It's like the most basic food source has an inflation 0:12:18.679 --> 0:12:21.400 spike in a shortage, and of course it happens in 0:12:21.400 --> 0:12:25.040 the middle of all the agricultural components of the trade 0:12:25.040 --> 0:12:27.960 war between the United States and China. So there's a 0:12:27.960 --> 0:12:32.000 big effect here too. So David is just to follow 0:12:32.040 --> 0:12:35.240 up out a little bit. Is China more susceptible to 0:12:35.480 --> 0:12:39.600 these types of viruses, whether it's poultry or beef for pork. 0:12:41.320 --> 0:12:46.040 I don't know whether China is more susceptible. Um, there's 0:12:46.120 --> 0:12:50.320 medical expertise on that far beyond anything I I hold. 0:12:50.840 --> 0:12:54.880 What we do see is we have these originations coming 0:12:55.280 --> 0:12:59.200 from Asia which affects and have potential of the effective 0:12:59.280 --> 0:13:02.760 world wide. And we never know with the virus. The 0:13:02.800 --> 0:13:05.480 only thing you know about a virus is it will change. 0:13:05.920 --> 0:13:09.840 So this is a situation which is huge in China, 0:13:09.920 --> 0:13:14.319 has international effects and the results are yet to be seen, 0:13:14.440 --> 0:13:16.960 which is the case with every one of these. So 0:13:17.040 --> 0:13:20.760 David let's switch gears to your recent research note on 0:13:21.480 --> 0:13:27.480 negative interest rates, obviously a significant issue for Germany, for 0:13:27.800 --> 0:13:31.800 Japan and some other UH countries as well. What is 0:13:31.800 --> 0:13:33.800 your basic thesis about what's going on with some of 0:13:33.800 --> 0:13:37.760 these markets with negative interest rates and their Well, yeah, 0:13:37.800 --> 0:13:40.439 we worked on the paper for a number of months 0:13:40.920 --> 0:13:47.000 to put together and verify that the thinking was supportable, 0:13:47.320 --> 0:13:50.560 and essentially it works like this. If you have positive 0:13:50.679 --> 0:13:53.959 interest rates, the farther out you go you have a 0:13:54.559 --> 0:13:58.840 traditional yield curve, one that we're usually accustomed to in 0:13:59.480 --> 0:14:03.560 most countries and certainly the United States, then the longer 0:14:03.640 --> 0:14:07.600 out you go, the more you're paid, and therefore you 0:14:07.679 --> 0:14:11.040 have an incentive for a longer maturity. If you have 0:14:11.240 --> 0:14:17.199 negative interest rates and the yield curve is increasingly negative 0:14:17.400 --> 0:14:21.840 as maturity goes out, then the longer out you go, 0:14:22.360 --> 0:14:26.560 the more you are penalized. And therefore, in a negative 0:14:26.560 --> 0:14:30.520 interest rate scheme such as we have in Europe, the 0:14:30.600 --> 0:14:33.840 incentive is to be very short term, because the penalty 0:14:34.080 --> 0:14:38.760 is lower. In the positive interest rate scheme such as 0:14:38.840 --> 0:14:42.360 what we have in the United States, then the you're 0:14:42.400 --> 0:14:45.920 incented to go longer, and the effect of that is 0:14:45.960 --> 0:14:50.440 to distort forward rates the notional derivatives of which there 0:14:50.480 --> 0:14:59.320 are probably five trillion worldwide, and ultimately compressed yield worldwide 0:14:59.560 --> 0:15:02.520 to be parallel. And in fact that's what they look 0:15:02.640 --> 0:15:06.640 like today. What did you learn about extricating ourselves from 0:15:06.680 --> 0:15:13.840 a negative rate experiment? Well, Madame Legarde has the most 0:15:14.000 --> 0:15:19.000 difficult task. Now she's a superb politician and she has 0:15:19.040 --> 0:15:21.360 all the credentials, and what she has to do is 0:15:21.400 --> 0:15:24.640 herd the cats into the room and say, look, we're 0:15:24.720 --> 0:15:28.600 killing our banks, were killing our insurance companies. We are 0:15:28.720 --> 0:15:32.680 not getting much growth. There was an ECB economist out 0:15:32.720 --> 0:15:36.240 today saying we still get some SIP stimulus. Well, I'm 0:15:36.280 --> 0:15:40.040 not so sure. John Author's column where he was kind 0:15:40.200 --> 0:15:44.200 enough to quote my work. But in John Author's column 0:15:44.560 --> 0:15:51.480 on Monday, John uh Tom, he articulated case after case 0:15:51.560 --> 0:15:56.560 after case, country after country on the damaging effects of 0:15:56.680 --> 0:16:01.840 negative rates. I thought John was marvelous document. And Mr 0:16:01.880 --> 0:16:04.320 Authors has been on fire folks, and write, I mean, 0:16:04.360 --> 0:16:06.880 he's always good, but these he gets these moments. You know, 0:16:07.160 --> 0:16:09.560 it's like the Boston Bruins. He gets these moments where 0:16:09.560 --> 0:16:12.600 he just puts it on fire. And Mr Authors has 0:16:12.600 --> 0:16:14.920 been lights out. We've tried to effort him. He doesn't 0:16:14.960 --> 0:16:17.760 do early morning. He's such a rock star. I think 0:16:17.760 --> 0:16:21.280 the day starts like a tenage, something like David Kotak, 0:16:21.440 --> 0:16:25.120 have a wonderful Thanksgiving that regards to your family in Florida, 0:16:25.240 --> 0:16:27.960 Mr Kotak. Of course, his leadership for the years really 0:16:28.000 --> 0:16:31.200 a municible bonds the core business and also of course 0:16:31.200 --> 0:16:49.360 in Cumberland Advisors, Paul Sweeney knows. I mean, you know, 0:16:49.360 --> 0:16:52.880 he's got the yard out there, the acreage to the west. 0:16:52.920 --> 0:16:57.320 He's got the John Deere s, a precision cut real mower. 0:16:58.640 --> 0:16:59.920 You know, it's what you do. You can do the 0:17:00.040 --> 0:17:02.640 yard like three swipes R. Yeah, that's what. Yeah, he 0:17:02.720 --> 0:17:05.679 gets the job done. Six world. So let's go industrial 0:17:05.720 --> 0:17:09.560 here and talk about the tentativeness of American industry. Why 0:17:09.600 --> 0:17:14.000 don't you bring in her extinguished guest, Karen uble Heart 0:17:14.000 --> 0:17:17.520 Bloomberg Intelligence. She covers all things industrial. You think about 0:17:17.560 --> 0:17:19.959 the rust belt, you think, Karen uble Heart, She's been 0:17:20.000 --> 0:17:22.120 doing it for a long time. So let's just start. 0:17:22.119 --> 0:17:25.040 And I know we talked to your protege, Christilino earlier 0:17:25.040 --> 0:17:28.280 in the day about the deer numbers I'm wondering and 0:17:28.320 --> 0:17:33.160 the guidance was disappointing. They sighted China across your universe 0:17:33.160 --> 0:17:37.160 of industrial companies, agricultural companies. Is this issue really coming 0:17:37.200 --> 0:17:41.600 home to roost? I e. The trade difficulties with China 0:17:41.640 --> 0:17:44.359 coming home to hit the farm belt. The farm belt 0:17:44.400 --> 0:17:46.679 is one of the areas that has gotten hit the 0:17:46.760 --> 0:17:50.640 most because our big grains are soybeans and corn, and 0:17:50.640 --> 0:17:53.360 and China buys half of our soybeans, so they've been 0:17:53.440 --> 0:17:57.920 really wacked. Um But companies, industrial companies across the board 0:17:57.960 --> 0:18:00.679 have seen the impact. A lot of them have big holdings, 0:18:00.680 --> 0:18:04.600 particularly large companies UM three AM. As you know, eleven 0:18:04.640 --> 0:18:06.480 percent of sales is in China, so they're seeing it 0:18:06.480 --> 0:18:09.040 in China. To the economic growth slow down there is 0:18:09.119 --> 0:18:12.000 hitting them and it's hitting here as well. The uncertainty 0:18:12.040 --> 0:18:14.600 is making customers pull back on on some of the long, 0:18:14.680 --> 0:18:17.600 long lead time projects. So it has spread. An organic 0:18:17.640 --> 0:18:20.399 growth is uh, you know, down in just about everything 0:18:20.400 --> 0:18:23.600 except aerospace. So what are the companies that you cover 0:18:23.720 --> 0:18:26.479 saying again the you know, the big industrial companies, are 0:18:26.480 --> 0:18:29.240 they saying we're just trying to cut costs and ride 0:18:29.280 --> 0:18:32.159 this thing out or is there anything they can particularly 0:18:32.200 --> 0:18:34.920 do here given the uncertainty. I think I think it's 0:18:34.960 --> 0:18:37.879 the former UM. A few of the companies UM have 0:18:38.040 --> 0:18:42.200 been frankly gotten in front of UM the slowdown and 0:18:42.240 --> 0:18:45.840 cut costs pretty dramatically Emerson UM Honeywell, some of the 0:18:45.880 --> 0:18:49.399 others pulled out their quote recession books to UM get ready. 0:18:49.800 --> 0:18:52.399 So margins have actually held up pretty well. The volume 0:18:52.440 --> 0:18:54.760 has not been there UM, but so far they've been 0:18:54.800 --> 0:18:56.840 able to deliver on margins. I know you don't do 0:18:56.880 --> 0:19:00.720 biold sale, but you mentioned Minnesota Mining and Manufacture three UM. 0:19:01.359 --> 0:19:04.280 Boy is the son love two buys fifteen holes and 0:19:04.400 --> 0:19:09.480 for say go away, John Inch, Gordon Haskett, Hold, Jeff 0:19:09.520 --> 0:19:15.440 Sprague at Vertical he was brilliant one Hold, Yes Sprague. 0:19:15.920 --> 0:19:19.919 But but Karen, when does three M Do they just 0:19:20.080 --> 0:19:23.280 slog on or do they have to do a management 0:19:23.320 --> 0:19:27.040 revolution at this iconic American company? Uh? You know they 0:19:27.080 --> 0:19:30.880 have one UM. They have a big potential legal liability 0:19:30.960 --> 0:19:33.880 with the chemical p Fast and that's one of those 0:19:33.920 --> 0:19:36.639 black hole things that is unmeasurable at this point and 0:19:36.680 --> 0:19:39.240 people are concerned about. But in addition to that, the 0:19:39.320 --> 0:19:43.920 new CEO hasn't done a great job of a communicating 0:19:44.080 --> 0:19:47.880 and be the misses um, and and he is. He's 0:19:47.880 --> 0:19:49.680 on the road more now, he is. You see him 0:19:49.680 --> 0:19:51.680 on TV and radio a lot more now because he's 0:19:51.680 --> 0:19:54.520 got to tell the story better. What's the story to 0:19:54.800 --> 0:19:59.120 a venerable industrial forget about three M and venerable industrial 0:19:59.160 --> 0:20:01.800 company that makes a lot of different things. I mean, 0:20:01.840 --> 0:20:05.480 that's that's the game. Is the game over? Uh? You 0:20:05.480 --> 0:20:07.760 know it's funny as as you said, saw in the 0:20:07.800 --> 0:20:10.399 last two years, right all these companies are splitting up 0:20:10.440 --> 0:20:14.399 and they're becoming more focused. Ingersol next year, fordive U 0:20:14.480 --> 0:20:18.720 t X is splitting out of Ringers Ran is a 0:20:18.840 --> 0:20:22.680 hugely venerable name. I remember interviewing their dynamics CEO ten 0:20:22.800 --> 0:20:26.720 years ago. They had twelve divisions and all that. It's 0:20:26.760 --> 0:20:29.360 just gonna it's gone. They're gonna they're gonna be focused 0:20:29.400 --> 0:20:32.720 on um, you know, h VAC and building controls and 0:20:32.760 --> 0:20:36.200 things like that. They're getting rid of all their industrial businesses. Um. 0:20:36.280 --> 0:20:38.560 You know j C I did the same thing, got 0:20:38.640 --> 0:20:41.159 rid of all the auto business, all the battery business. 0:20:41.200 --> 0:20:44.480 They're now just building controls. UM. So you're seeing pressure 0:20:44.480 --> 0:20:47.680 to focus. Emerson is under pressure right now. Activist similar 0:20:48.080 --> 0:20:51.560 But but this is important. Is this the market speaking 0:20:51.800 --> 0:20:54.920 or hedge fund active is speaking and does it lead 0:20:54.960 --> 0:20:59.040 to true shareholder return. I think it's gonna be really 0:20:59.080 --> 0:21:01.399 interesting myself. I feel if when we have our first 0:21:01.400 --> 0:21:04.520 big bed downturn, all these companies that are now focused 0:21:04.640 --> 0:21:07.240 are going to get whacked harder exactly where I wanted 0:21:07.280 --> 0:21:09.600 to go. She said it better than me. As you 0:21:09.600 --> 0:21:13.960 look at you can focus in Bloomberg intelligence to your outlooks. 0:21:14.119 --> 0:21:16.560 You think about some of these big industrial companies is 0:21:16.680 --> 0:21:19.800 when you do, you are you just like there their 0:21:19.800 --> 0:21:22.159 corporate development people saying, tell me what happens in with 0:21:22.280 --> 0:21:24.960 China trade, and I'll tell you what we're gonna do. Well, 0:21:25.000 --> 0:21:26.720 you know, it's had an impact, a broader impact on 0:21:26.760 --> 0:21:29.359 global growth. There are the p m I s for 0:21:29.480 --> 0:21:33.399 all the major regions are all below fifty except for Brazil, 0:21:33.680 --> 0:21:36.639 which doesn't really matter that much. So it is broad um. 0:21:36.680 --> 0:21:39.440 Europe is very very weak, the US is the strongest, 0:21:39.480 --> 0:21:41.840 but it's now got at p m I that that 0:21:42.359 --> 0:21:45.760 is below fifty. This is critical. What we're talking about. 0:21:45.840 --> 0:21:49.640 The the the modern MBA experiment. As a consultant comes 0:21:49.640 --> 0:21:54.439 in and says, break up your multisector conglomerate, and you 0:21:54.480 --> 0:21:56.880 know Maltese. When I first started doing this, Maltese got 0:21:56.880 --> 0:22:00.800 premiums us you know, the ultimate premium to that stability 0:22:00.800 --> 0:22:03.880 because of all the businesses they were in. Now they're saying, yeah, 0:22:04.119 --> 0:22:06.680 now they're saying, you know, a focus, focus, focus. Initially 0:22:06.720 --> 0:22:09.160 under pressure from activists, right and in some cases not. 0:22:09.760 --> 0:22:12.080 But I'm just waiting for the downturn and then they're 0:22:12.080 --> 0:22:15.120 gonna put it together because cycles are gonna hurt. What 0:22:15.160 --> 0:22:18.440 does Mr Corps Dana Her do that the others don't 0:22:18.480 --> 0:22:22.639 because danna Her gets a valuation. Well, at this point, 0:22:22.359 --> 0:22:24.720 the like let's say, New danna Her without ford of 0:22:24.880 --> 0:22:28.240 is very healthcare. So it's got you know, so we're focused. 0:22:28.840 --> 0:22:31.200 Excuse me, it's got a stability there. I mean, they've 0:22:31.200 --> 0:22:33.399 got some other smaller businesses. I think this is a 0:22:33.520 --> 0:22:36.439 huge issue. I mean it's it's just like it's like 0:22:36.560 --> 0:22:40.720