Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg
Speaker 1: dot com, and of course, on the Bloomberg terminal. Joseph
Speaker 1: Labornia joins US within taxas C. I'd be their chief
Speaker 1: economists for the America's in this public service at the
Speaker 1: White House recently, Joe Lavorgnia, I want to talk to
Speaker 1: you about the mystery of this August. The mystery in
Speaker 1: the Q four is is, well, how opake is your
Speaker 1: Q four right now? It's somewhat opake. The look the
Speaker 1: economy has done very well in the past four quarters.
Speaker 1: GDP growth has been over twelve. But I've been of
Speaker 1: the view that the economy was at peat growth around
Speaker 1: Q two and things are going moderate. But even so, Tom,
Speaker 1: I it's hard to see growth still not being really
Speaker 1: robust in the fourth quarter. I'm more worried about growth
Speaker 1: in two and that's what the US bond market and
Speaker 1: global bond markets are sensing that growth is going to weaken.
Speaker 1: Quite sharply with his bull flattening and inflation will be transitory.
Speaker 1: That's what the markets are telling us. That's what the
Speaker 1: markets are telling us. And is it a weakening back
Speaker 1: to potential GDP or let's say three percent? Me what's
Speaker 1: the level of weakening the scale you would presume this
Speaker 1: year growth WHI thought coming in we have growth seven
Speaker 1: maybe even eight percent. But next year I'm thinking growth
Speaker 1: is only two percent, maybe even less, which isn't far
Speaker 1: from the administration's longer term forecast. And that reflects the
Speaker 1: fact that we're borrowing from the future because we've had
Speaker 1: people that have been unable to spend until recently because
Speaker 1: of the pandemic, they've been locked up. They brought spending forward.
Speaker 1: We see that in goods purchases, which are about four
Speaker 1: to five points above their long term GDP trend, and
Speaker 1: it's been predominantly con sumption led consumption. In the last
Speaker 1: fourteen quarters. If you look at fourteen months rather tom
Speaker 1: from when the savings right went from thirty percent now
Speaker 1: down to nine, we've had annualiance consumption gains of real
Speaker 1: that's amazing. It's mostly in goods, So we're borrowing from
Speaker 1: the future. And that's why growth next year will slow
Speaker 1: and slow quite sharply. John. Let's take your view of
Speaker 1: the world and I'll ask you buys the question, how
Speaker 1: do you think the Federal Reserve operates in the kind
Speaker 1: of environment that you've just described. They don't do anything, Jonathan.
Speaker 1: They stay on hold, They continue to pump liquidity in
Speaker 1: the system. They don't tape or they don't tighten. What
Speaker 1: we've seen continually since those March late March early April
Speaker 1: highs and tenure yields is the market pricing the terminal
Speaker 1: rates significantly lower. That five year five year oh I
Speaker 1: s we've talked about was around two forty back in
Speaker 1: back in early April, thinking the market would basically or
Speaker 1: the FED rather with tighten rates like they did in
Speaker 1: the last cycle. And just the other day we were
Speaker 1: below one fifty. So the market thinking that Fed does nothing.
Speaker 1: My guess is we don't get it tightening until after
Speaker 1: the next presidential election. John. And then this goes right
Speaker 1: to the heart of what you mentioned before, which is
Speaker 1: a gentleman from St. Louis disagrees, just flat out disagrees
Speaker 1: with Joe. LaVar asked us the form ahead of research
Speaker 1: I'm menching for the Saint Louis FED as well on
Speaker 1: the other side of that. Try. I imagine you don't mind,
Speaker 1: not at all. You said, no tidening, no tapering. You
Speaker 1: don't think we get a taper here, Joe, that's not
Speaker 1: until we know what the contours of of a budget
Speaker 1: deal look like, because the federal treat a lack of
Speaker 1: a deal as being contractionary. And even though we're in
Speaker 1: the midst of of debating what happens on the infrastructure side,
Speaker 1: the bigger part of the packages is family welfare bill,
Speaker 1: and we're not gonna know what that looks like if
Speaker 1: we get it, and it will likely be to reconciliation
Speaker 1: until maybe mid October early November. So no, I think
Speaker 1: the Fed's gonna sit and wait and see how things evolve.
Speaker 1: And it's gonna be really hard, Jonathan, for the FED
Speaker 1: to taper in a slower growth environment, and especially if
Speaker 1: over the next few months and the job growth slows,
Speaker 1: which I expected. Fascinating at least this one't be lost
Speaker 1: on you. No tapering the other code there, no right
Speaker 1: hike until after the next election. Yes, that's why. One
Speaker 1: of the things you know that sounds aggressive but if
Speaker 1: you look at the last two cycles, the average time
Speaker 1: from the last rate cut to the first rate hike
Speaker 1: with seven years, So this isn't really that unusual if
Speaker 1: you look at the last couple of cycles. So, Joe,
Speaker 1: why are some people wrong who are saying that the
Speaker 1: balance of risks is too much higher inflation, especially with
Speaker 1: the FEDS so devish and so willing to wait. What
Speaker 1: is wrong with that call? Because it seems like you disagree. Yeah, Well,
Speaker 1: the thing is, we've never had a basically a global
Speaker 1: lockdown of the economy where we've gotten these bottlenecks, and
Speaker 1: of course demand has been much stronger than people expect
Speaker 1: that the government has provided a tremendous amount of assistance,
Speaker 1: So it's easy to see why prices are rising if
Speaker 1: there's a concern on inflation, and if I'm wrong on inflation,
Speaker 1: it's because perhaps we we just spend too much, is
Speaker 1: a sort of the Larry Summer's argument, and maybe evidence
Speaker 1: of that is seen in what the CBO next year
Speaker 1: was saying. The output gap looks like there's forecasting an
Speaker 1: output gap of all two and forty basis points, meaning
Speaker 1: the economy is two points above its long term potential
Speaker 1: that's the highest in seventy one. So it is possible
Speaker 1: if we get more fiscal stimulus, you could build this
Speaker 1: inflation dynamic in the system. But I think most people
Speaker 1: just aren't fully appreciative of the unique situation where and
Speaker 1: the fact that much of the liquidity we've had to
Speaker 1: this point has gone into assets, both equities and of
Speaker 1: course real estate. Jo I had to use the word transitory.
Speaker 1: But let's talk transitory and at what point you start
Speaker 1: to look past some of the near term influences on
Speaker 1: the economy. I'm talking about supply chain disruptions. The gentleman
Speaker 1: from St. Louis, as Tom said, was highlighting this is
Speaker 1: one feature that forces monetary policy makers to be more nimble.
Speaker 1: How do you factor in some of these disruptions that
Speaker 1: seem overly persistent and persisting longer than many people had expected. Yeah,
Speaker 1: I would just say I would just give it time.
Speaker 1: I mean the thing as we saw with lumber, for example,
Speaker 1: which was the poster child for bottlenecks, where prices have
Speaker 1: basically collapsed as the mills were able to reopen. And
Speaker 1: I've argued we're going to see that more on the
Speaker 1: semiconductor side and other parts of the economy. It just
Speaker 1: needs to take time. The expectation side, if it's important,
Speaker 1: and we look at and when we look at the
Speaker 1: tips curve, that tips curve is actually inverted. So it's
Speaker 1: not saying the markets are always right. There's just no
Speaker 1: evidence that anybody believes this is permanent. And because expectations
Speaker 1: oftentimes can be self feeding and self sustaining. Uh, those
Speaker 1: expectations are very likely to keep inflation low and then
Speaker 1: as supply comes on, you'll start to see those prices moderate. Joe,
Speaker 1: None of this is in the economic textbooks, Advass. This
Speaker 1: is all absolutely original that we're dealing with right now.
Speaker 1: How do you interpret the real yield? Are you looking
Speaker 1: at the nominal rate? Are you taking out the inflation expectation?
Speaker 1: Which of those two dynamics will adjust the real yield? Well, this,
Speaker 1: I would say, just focus on the real yield. The
Speaker 1: real yield has been falling as inflation expectations have edged
Speaker 1: up of it, and that sort of evidence tom right there.
Speaker 1: The market does not believe that you're gonna have very
Speaker 1: very strong growth going forward. It's the I hate to
Speaker 1: say these words, but it's the secular stagnation thesis. That's
Speaker 1: really what the market saying, and you see it more
Speaker 1: broadly just in the slope of the curve, as you
Speaker 1: highlighted both in the US and Germany and elsewhere, you've
Speaker 1: got a bull flattening of the yield curve. So that's
Speaker 1: really not an inflation story. It's a growth story. And
Speaker 1: of course equities benefit from the fact that there aren't
Speaker 1: any alternatives, and it's a tremendous amount of liquidity in
Speaker 1: the market. Jo fantastic to catch up some really interesting things.
Speaker 1: Really gets ahead from you said that takes a c
Speaker 1: I being chief economists for the Americans joining us now
Speaker 1: on the Dow Jones Industrial average of Michael Holland with
Speaker 1: Holland and Company and their chairman, knowing that the standard
Speaker 1: force is more indicative of what's going on Michael Holland.
Speaker 1: I want to ask you lu U Kaiser question, and
Speaker 1: I say this with great respect to the sweat of
Speaker 1: Wall Street week years and years ago when fear was ascended.
Speaker 1: The way we saw fear in our equity ownership is
Speaker 1: to extrapolate out what successful companies do. How far out
Speaker 1: are you extrapolating right now on the companies you believe
Speaker 1: it are you out six months? Are you out six years?
Speaker 1: More like the years than the months time. But I
Speaker 1: think there are fewer and fewer companies that one can
Speaker 1: zero in on and say I think this is worth
Speaker 1: the risk of losing money because the potential for the
Speaker 1: upside is so significant. There is enough cacophony around about
Speaker 1: the economy, the FED, China, COVID and on that companies
Speaker 1: like Tyson what you were just talking about are indicating
Speaker 1: the world continues to change under our feet. Yet in
Speaker 1: the markets, because of the the tsunami of cash that
Speaker 1: has come over the markets over the best few years,
Speaker 1: we have pricing that we've lost price discovery, we've lost
Speaker 1: a real rate of return to use, free rates of
Speaker 1: return to use for econometric modeling. So the fet is flying,
Speaker 1: it's flying, is the rest of us? Interesting to me? Michael,
Speaker 1: how willing investors seem to be just isolated problem a
Speaker 1: problem emerges, they can put it over there to one
Speaker 1: side and say it won't bother us too much. And
Speaker 1: a great example of this you mentioned China. This is
Speaker 1: what Dan Ives of wet Bush had to say. My
Speaker 1: producer Jamie Ping this across to me in the last
Speaker 1: couple of minutes. This is what Dan I've says. We
Speaker 1: believe these dynamics will yet again bode well for US
Speaker 1: tech stocks, as the favorable backdrop and rotation away from
Speaker 1: Chinese tag into US tech creates an avana set up. So, Mike,
Speaker 1: we used to say a couple of years ago, what
Speaker 1: hurts some would hurt everyone because we're all buying the
Speaker 1: same basket of goods. Now we've got people saying, what
Speaker 1: hurts China will actually benefit US Tech. Let's rotate even
Speaker 1: harder into them. What do you make of that dynamic?
Speaker 1: Either dynamic is reflective of the market that has gone
Speaker 1: a negorably upward, Johnathan over the last several years. And
Speaker 1: I think the looking for the positive outcome is something
Speaker 1: that I'm always prepared to do. And in the case
Speaker 1: of China, I think, uh, it would be a fool
Speaker 1: there and to to ignore what's going on. They're a
Speaker 1: wonderful piece in Bloomberg Intelligence yesterday on the ternal about
Speaker 1: the thing that's different about China today in contrast to
Speaker 1: the last forty years and most of which I spent
Speaker 1: going over there, is that they now remember that their communists.
Speaker 1: And when they remember their communists, you end up with
Speaker 1: a situation where you're not doing things as as they've
Speaker 1: been doing for the last which which created Ali Baba,
Speaker 1: which created the opportunity for people make tons of money,
Speaker 1: but now are now becoming political and warrior like. So
Speaker 1: Michael folded into an investment thesis. If price discovery has
Speaker 1: gone away, if we have China that matters more broadly,
Speaker 1: what are you doing right now? Being very careful and
Speaker 1: Lisa and and actually we've we've kidded before about the
Speaker 1: all Weather portfolio. But I think the as you the
Speaker 1: three of you opine daily, they're things that don't make
Speaker 1: a lot of sense, can't be explained in terms of
Speaker 1: where prices are. You have a five percent earnings yield
Speaker 1: the flip of the reciprocal of the price earnings on
Speaker 1: the markets in the US, and less than a two
Speaker 1: percent ten year treasury with inflation looking like it's going
Speaker 1: to be sticky. It's somewhere around four to five to six,
Speaker 1: and or maybe two to three to four. But these
Speaker 1: things don't make sense. So what what what I do
Speaker 1: is try to identify properties that are useful. Tom asked
Speaker 1: the question about weeks and months or Jonathan as well, Um,
Speaker 1: you buy properties. I would say that the companies like
Speaker 1: General Motors, which I've been looking at recently in the
Speaker 1: last several months, I have have a plethora of things
Speaker 1: that could could go right, but evaluation that doesn't reflect
Speaker 1: the overall markets, so the risk, but there are fewer
Speaker 1: of those. They're just it's hard to do. Michael Holan,
Speaker 1: do you do some of the parts analysis on companies
Speaker 1: that have different sections they're not lying tempko vote? Michael, you,
Speaker 1: you and I are the only ones listening for watching
Speaker 1: that no what l t V is. But if they're
Speaker 1: not linked Tempo vote, do you still do some of
Speaker 1: the parts, say on Amazon, Apple or some stock. I
Speaker 1: don't know absolutely. It's it's interesting that you even have
Speaker 1: to ask the question, because that's what value is. If
Speaker 1: the three of us and the four of us, I
Speaker 1: should say, we're looking at something to buy in the
Speaker 1: in the private market, we look at what is it worth?
Speaker 1: What are we willing to pay for it? And and
Speaker 1: in the public market people have gone away from do
Speaker 1: we just which you describe. Jimmy Ling and the LTV
Speaker 1: crowd figured figure that out a long time ago. That
Speaker 1: but prices were so low back then in a lot
Speaker 1: of cases that you could find out that if you
Speaker 1: look at you listening to as genteral motors today, if
Speaker 1: you look at the the uh, the different kinds of
Speaker 1: businesses they're in um in technology, any individual one of
Speaker 1: those a few years from now could be worth a
Speaker 1: gazilla amount of money. But they're trying to do that
Speaker 1: to further the businesses. But but yes, uh, you do
Speaker 1: still have companies like General Morris that afford that opportunity
Speaker 1: to look at maybe they're some of the parts it's
Speaker 1: really worth a lot more than what the market's paying
Speaker 1: for them. But not too many of them anymore. Micro
Speaker 1: legend and it's always great a cant shop. We appreciate
Speaker 1: your time, Michael Holling that Holland and Couch chairman and
Speaker 1: I have joined us now whilst founder Security is equity strategist,
Speaker 1: So and let's talk about that. What does it mean
Speaker 1: for an equity investor the incoming economic data at the moment,
Speaker 1: I think what it means for us is that it
Speaker 1: can be interpreted sort of how you want to see
Speaker 1: the picture in the eye of the beholder. What I
Speaker 1: mean by that is that sometimes you look at the
Speaker 1: economic data, you can be really concerned it's growth slowing down.
Speaker 1: Is the amplitude of future economic GDP growth slowing down?
Speaker 1: Will that extend the cycle? And in that case is
Speaker 1: that of concern? And why it? Maybe yields are pulling
Speaker 1: back because people have a concern about whether full employment
Speaker 1: can be reached sooner. On the other hand, there are
Speaker 1: a lot of still bright spots in that economic data
Speaker 1: that support this reflation trade. I think it depends which
Speaker 1: camp you're in. And your research note is fascinating and
Speaker 1: its physics where you talk about amplitude, I want to
Speaker 1: take it over to an even larger idea of magnitude
Speaker 1: for the bulls out there in the equity market. What
Speaker 1: are the magnitudes that get you out to the emotion
Speaker 1: of sp X five thousand or the emotion of DALT
Speaker 1: forty thousand. You know, those are big, beautiful round numbers, Tom,
Speaker 1: and people love those shiny numbers. I think to get there,
Speaker 1: what you really need to see maybe two fronts. One
Speaker 1: is that when you have these kind of yields retreating,
Speaker 1: you see this kind of natural effect for a discounting
Speaker 1: model for equity growth, for equity earnings. But on the
Speaker 1: other hand, that comes with this sort of ominous side
Speaker 1: of book growth is slowing down? Is it sustainable? But
Speaker 1: to get that yield, people may be reaching into equities
Speaker 1: on the other hand, to really push equities. And I
Speaker 1: think what's been driving it more recently is expectations and estimates.
Speaker 1: As we've gone through earning season, you've seeing corporates very
Speaker 1: focused on what do these input costs mean from my margins?
Speaker 1: And for the companies that are able to pass along
Speaker 1: that price and those margins can remain fat, then you
Speaker 1: see that they're able to continue seeing some price appreciation.
Speaker 1: I think it's that upward expectation and estimate revisions that
Speaker 1: we're really keeping an eye on to get there and specifically,
Speaker 1: just to dig in a little bit more. Anna, you
Speaker 1: noted in your recent research the earnings estimate revisions continue
Speaker 1: to entire, especially for value sectors. So why is this
Speaker 1: not being reflected in our performance of these particular areas
Speaker 1: where you see growth surge ahead over the past month
Speaker 1: or so, I think growth surgeons recently has been a
Speaker 1: bit of that move in nominal yield. And what's interesting
Speaker 1: is that nominal yield move has been driven by real yields,
Speaker 1: but the inflation expectation baked in at least the tenure
Speaker 1: has remained more rather steady, So you see this growth
Speaker 1: trade has had resurgence and zeals pulled back. The question
Speaker 1: for these value stocks is is this reflation going to
Speaker 1: be a concern? And that uncertainty I think still weighs
Speaker 1: on it, that additional risk premium that you have to
Speaker 1: bag in. But when you look at estimates, you're right,
Speaker 1: these value sectors are really what's pushing the estimate revisions.
Speaker 1: And if that continues, and if that expectations or these
Speaker 1: revisions can continue outpacing what investors want out of it,
Speaker 1: I think you will see that eventual appreciation later down
Speaker 1: the road. And what leads to the downdraft you entertain
Speaker 1: With Chris Harby looking for thirty eight fifty on SMP,
Speaker 1: we've had the forty seven view just about an hour ago.
Speaker 1: What's the thirty eight fifty view. Well, if you remember
Speaker 1: us coming into the year, we talked about low volatility
Speaker 1: and defensive strategies come summer, and look what's happened in
Speaker 1: the recent month. We recommended a tactical pivot into low
Speaker 1: volatility strategy in the style because a pullback in yield
Speaker 1: could cause some of that volatility, and for us right now,
Speaker 1: it's not that necessarily our longer term view on reflation
Speaker 1: has yet changed, but we like to say be careful
Speaker 1: of perception becoming reality. Once the market really starts to
Speaker 1: doubt the potential for reflation, the potential for growth, that
Speaker 1: can kind of spiral out of control. So for us,
Speaker 1: the reason we remain cautious is that we're seeing signs
Speaker 1: of concern and that can really have a sort of
Speaker 1: uh negative and spreading effect amongst investors. So it keeps
Speaker 1: us a little bit more cautious than on our toes
Speaker 1: earlier this year, and we were pointing to retail investors
Speaker 1: is the potential swing trader when it came to certain
Speaker 1: big moves in equity markets. Are they still players or
Speaker 1: have they all gone back to taking vacations and not
Speaker 1: dealing with the robin hood accounts? Well, I think they
Speaker 1: are definitely still a player, and they may be even
Speaker 1: growing as we go several years forward. However, for now,
Speaker 1: I think a lot of the flows you're seeing, and
Speaker 1: that's been dominating more on the fixed income markets has
Speaker 1: been our institutional side has been your bigger fishes or
Speaker 1: whales in the ocean here. But when you look at equities,
Speaker 1: a lot of this sort of risk taking, a risk
Speaker 1: um seeking was pulled back last month given the additional
Speaker 1: concern about potential for full employment to be a bit
Speaker 1: further down the road, and as at risk appetite wanes.
Speaker 1: I think you may see the retail crowdbe a little
Speaker 1: quieter and maybe be a little may sit down a
Speaker 1: little bit in the stands and it gets to catch up.
Speaker 1: Always good to hear from you and I hand there
Speaker 1: of wilst Fargo's equity strategist with Chris Harvey, and that's
Speaker 1: saying this is an important conversation and it may surprise
Speaker 1: you that it's our conversation of the day. We're trying
Speaker 1: to recalibrate equities and economics into the litmus paper of
Speaker 1: the system, which is yield. And John Farrell, you've talked
Speaker 1: about global yields as being as important in their interdependencies
Speaker 1: as the US tenure benchmark. Yeah, let's get some part
Speaker 1: of Gavy on that song. Hanji had a global jet
Speaker 1: and strategy part. Oh, let's talk about ten year year
Speaker 1: old so they shouldn't be down here in the treasury market.
Speaker 1: Then you look to Germany, and yesterday the whole curve
Speaker 1: below zero, beneath zero. Part of how important is that dynamic,
Speaker 1: the European dynamic, that gravitational pull yield to lower. Oh,
Speaker 1: it's absolutely vital, it's it's it's I mean, this is
Speaker 1: an incredible set of circumstances. But you can't get away
Speaker 1: from the fact that the treasure yield is the global bounchmark.
Speaker 1: And as we're sitting here today, we're looking at that
Speaker 1: tenuere heading towards and towards one was sent. And I
Speaker 1: think the big lesson here for Europe is and Europe
Speaker 1: never really recovered from the global financial crisis as measured
Speaker 1: by monetary policy. I mean, it's just still negative. Jewey
Speaker 1: is as aggressive as it's ever been. The only hole
Speaker 1: for Europe is that the US manages to repeat what
Speaker 1: it did post the Great Financial Crisis. Stop buying government bonds,
Speaker 1: raise rates, get back to suns some elements of normality.
Speaker 1: Is what I see in Europe is a loss of
Speaker 1: hope because if the US can't do us, how can
Speaker 1: your do what I haven't done it before? A loss
Speaker 1: of hope? And is that the message from the sixteen
Speaker 1: point five trillion dollars of negative yielding debt, the highest
Speaker 1: volume globally since February. Is this representing a loss of hope?
Speaker 1: You know what, You've got to break this out as
Speaker 1: to whether the market discount is telling us something about
Speaker 1: the future or whether the market is being pushed there
Speaker 1: by an excess demand for fixed income. And I think
Speaker 1: it's a bit of both. In a sense, there is
Speaker 1: a loss of hope because we've got to accept that
Speaker 1: the marketplace, the bond market, is a discount function. But
Speaker 1: at the same time, we know center banks are huge
Speaker 1: buyers of government bonds, persistent virus of government bonds, and
Speaker 1: that's a major catalyst behind this fallen yields. Everybody wants
Speaker 1: to be on the same side as a center bank,
Speaker 1: and as long as central banks are buying bonds, that's
Speaker 1: the side want to be on. Hence we find ourselves
Speaker 1: in this incredible situation, very deviant from where microcircumstances are park.
Speaker 1: You know, we're all talking yield here, but this is
Speaker 1: a time where I flipped a price and the answer
Speaker 1: is there's a massive bid on all this paper. Is
Speaker 1: it similar to two thousand five, in two thousand six,
Speaker 1: or there a different character to the bid, the insatiable
Speaker 1: desire to move price up on fixed income. There's a
Speaker 1: whole series of players out there tomb that are buying
Speaker 1: fixed income. And you know it's not just guys buying bombs,
Speaker 1: it's also corporate setting up fixed rate receivers where they
Speaker 1: swapp from paining fixed to pain floating because they feel
Speaker 1: that by pain floating they're going to get the cheapest
Speaker 1: funding and the the the the prognosis in terms of
Speaker 1: rate high risk is really quite dim. So um, what
Speaker 1: I see is an excessive amount of treasuries and we
Speaker 1: see a lot of buying out of Tokyo for example.
Speaker 1: And you know I've said it before, if you're sitting
Speaker 1: in Tokyo, you don't care what US inflation is as
Speaker 1: long as it's not yields um. And that's the stuff
Speaker 1: I mean. If if the simplest explanation, where we where
Speaker 1: we are as an excess of the amount of supply
Speaker 1: for fings income. But it poses problems that the FED
Speaker 1: has have not spoken about this, but they will not
Speaker 1: be happy to see the ten year approach and one
Speaker 1: per saon it makes life very difficult for them. They
Speaker 1: should stop buying tips then shouldn't they park and we
Speaker 1: stopped talking about real year, It wouldn't we wouldn't we
Speaker 1: have an adjustment? No, I mean I'm asking you the question,
Speaker 1: how how distorted that market is right now? Well, the
Speaker 1: the the the entire spectrum of racists is the stort.
Speaker 1: I mean minus a hundred basis points is an absolute distortion.
Speaker 1: M one percent potentially for the tenure is a distortion.
Speaker 1: And here's the thing. Uh, the Fed wants to hide rates,
Speaker 1: not now, but they will want to hide rates. You
Speaker 1: can't hide rates for the tenure of one percent as
Speaker 1: you're you're just gonna win breath the curve. So they
Speaker 1: want to get that ten year up to two percent. Ideally,
Speaker 1: the way to do thus here and now is don't taper,
Speaker 1: just stop stop flying government moms. Will they do that? Unlikely,
Speaker 1: but that's what they probably should do. Probably he's gonna
Speaker 1: catch you up. Auntie had a glove with dead and
Speaker 1: write strategy. This is a joy, and it is a joy, John,
Speaker 1: when you are weaned out of Indiana as part of
Speaker 1: my family was David ricks Is with Eli Lily, their chairman,
Speaker 1: their chief executive officers, celebrating his twenty five year with
Speaker 1: the company. The ricks Era going back to his first
Speaker 1: day darkening the door is ninth excuse me, twelve percent
Speaker 1: per year in the last ten years of stock is
Speaker 1: Home Depot and Apple like per year. It has been
Speaker 1: an extraordinary move, David, David Ricks, I want to talk
Speaker 1: about where you are now with COVID. There's some sensitivities
Speaker 1: here with the antibodies and that when you're meeting with
Speaker 1: your head of research and science Daniel Skovronsky as well,
Speaker 1: when you look back at the last eighteen months on
Speaker 1: COVID and you look forward to the next eighteen months
Speaker 1: with this horrific pandemic, what have you learned and what's
Speaker 1: that to do right now for Eli Lily in this
Speaker 1: horrific pandemic. Yeah, Tom, thanks for having me on and
Speaker 1: Dan's a key partner for us, and as a science
Speaker 1: driven company, you know that those meetings happen a lot.
Speaker 1: As we were talking offline, um COVID. We've had a
Speaker 1: lot of ops and downs with COVID. You know, last
Speaker 1: year we had a lot of unknowns about where how
Speaker 1: this would progress, and we set to work to create
Speaker 1: therapies because that's what we do. We're not a vaccine
Speaker 1: company that could be helpful, and we did that. I
Speaker 1: think we're very proud of that. We launched Neutralizing Antibodies UM,
Speaker 1: both a single and then a combo UM. And we
Speaker 1: also have developed one of our anti inflammatory medica aaitions,
Speaker 1: Alluvian or Barrasitani, which actually today we read out results
Speaker 1: that in those on ventilation or ECMO, the most advanced
Speaker 1: patients in the hospital reduced death by over UM. But
Speaker 1: we just wanted to, you know, put our tools to
Speaker 1: work to be helpful. You know, our ongoing business is
Speaker 1: about treating other diseases. Were not a virology company UM,
Speaker 1: and so as as the the pandemic has ebbed and
Speaker 1: waned UM, those businesses have come back strongly UM as
Speaker 1: treatment for diabetes and cancer has improved. What's doctor's office
Speaker 1: is open UM. You know, we don't think about ourselves
Speaker 1: as as a COVID company, but we were happy to
Speaker 1: make a boy contribution and this year you know that
Speaker 1: that ended up in a fair amount of sales. Although
Speaker 1: in the second half you mentioned the guidance being narrowed
Speaker 1: on the on the year, that's really about reducing COVID
Speaker 1: related antibody sales and increasing UM. The performance of our
Speaker 1: underlying business. We do expect that as these waves happened,
Speaker 1: they will begin to subside, each one will be lower
Speaker 1: and a new sense of normalcy will set in. Right now,
Speaker 1: we have a problem in the US, but but you know,
Speaker 1: we think there's a way to fix it. Get everyone back,
Speaker 1: diep Ricks, tell me about Alzheimer's. An absolute uproar in
Speaker 1: Washington about the need for a solution, the whole FDA thing.
Speaker 1: I get that. Fine, you guys going back to insulin.
Speaker 1: Get these horrific diseases correct. What are you gonna do
Speaker 1: to help our listeners and viewers with Alzheimer's? Yeah? Thanks.
Speaker 1: This is an area that's very personal to many of
Speaker 1: us that Lily and our scientists have been working for
Speaker 1: over thirty years to try to create a medicine that
Speaker 1: could slow the progression of this disease. You may know this,
Speaker 1: but it's the sixth leading killer, it's a fatal disease,
Speaker 1: and it's the only one in the top ten without
Speaker 1: a medication that slows it down. Um. Recently, UH the
Speaker 1: f d A shifted their policy. They said, look um
Speaker 1: showing an ultimate benefit and a slow moving, difficult disease
Speaker 1: that we don't fully understand has been hard to prove
Speaker 1: drugs on This is really important, Mr Ricks, do you
Speaker 1: support that shift in f d A policy. So, look,
Speaker 1: the regulator needs to make that decision about risk and benefit.
Speaker 1: But of course we believe that amyloid reduction leads to
Speaker 1: slowing of the disease. We've been betting on that for
Speaker 1: some time and put billions behind it in research, and
Speaker 1: now we have a leading product in that area, don't
Speaker 1: atom ab which had the first ever clinical trial and
Speaker 1: humans read out positive in Q one. So we have
Speaker 1: launched a bigger study and we said in Q two
Speaker 1: we're planning to submit this year under that new policy,
Speaker 1: and we think patients deserve access to that medication, but
Speaker 1: we're going to prove its worth just in the following year.
Speaker 1: We have a huge study going on that we just
Speaker 1: said is is almost enrolled and we'll prove that benefit. David,
Speaker 1: the biogen drug was incredibly controversial when it came out,
Speaker 1: in large part because of its price, in addition to
Speaker 1: the f d A policy which did seem controversially if
Speaker 1: within the FDA panel, how do you plan to be
Speaker 1: different with your Alzheimer's drug in terms of the controversy
Speaker 1: in terms of the pushback and frankly in terms of
Speaker 1: the price point. But we're not gonna announce the pricing today,
Speaker 1: but I'll just point out I mean, we we tend
Speaker 1: to compete aggressively in all the markets were in and
Speaker 1: that benefits patients. And we compete by creating better molecules,
Speaker 1: better medicines themselves with different properties. In this case, are
Speaker 1: medicine works very rapidly to clear plaques. By one year,
Speaker 1: almost the vast majority of patients in our study no
Speaker 1: longer needed to take the drug. They had cleared all
Speaker 1: the plaque in their brain. UM. That's different from all
Speaker 1: the other antibodies being studied, which are really lifetime therapies. UM. Secondly,
Speaker 1: we compete on data and this is important here, and
Speaker 1: I think the source of the controversy. Few argue that
Speaker 1: the approved drug might have worth. I think the big
Speaker 1: argument is did they prove they had worth? Um? Did
Speaker 1: it really affect the disease? UM. Of course, we aremitted
Speaker 1: to complete the study. That's that's now basically enrolled. Will
Speaker 1: we'll finish enrollment this quarter UM, and we'll have that
Speaker 1: date in twenty three, which is pretty short period of time.
Speaker 1: In the trajectory of drug development. And finally, we will
Speaker 1: compete on value in the marketplace. And when we hopefully
Speaker 1: get our approval sometime next year, we'll we'll talk about
Speaker 1: our our our prices. Just quickly a minute on the clock.
Speaker 1: Are you requiring your employees to be vaccinated? Not? At
Speaker 1: this time, we're not. We believe we have very high
Speaker 1: rates of vaccination in our population. But we're tracking that
Speaker 1: issue very closely. And of course, new information just released
Speaker 1: in the US about the transmissibility of the delta virant
Speaker 1: variant um from those that are actually vaccinated is of
Speaker 1: UH concerned. We're analyzing that as we look at our
Speaker 1: policy today. We've had a very few, if not zero,
Speaker 1: in many of our facilities, uh transmission of the disease
Speaker 1: and and so it hasn't been a real problem force
Speaker 1: in h running our business. But we want to look
Speaker 1: at that and stay abreast of the latest information. Is
Speaker 1: going to catch up and get your view this morning,
Speaker 1: NY Chairman, CEO you as well. Seven. This is the
Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg