1 00:00:02,640 --> 00:00:05,360 Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul swing you, 2 00:00:05,360 --> 00:00:07,680 Speaker 1: along with my co host Lisa Brahma wits. Each day 3 00:00:07,720 --> 00:00:10,240 Speaker 1: we bring you the most noteworthy and useful interviews for 4 00:00:10,320 --> 00:00:12,520 Speaker 1: you and your money. Whether at the grocery store or 5 00:00:12,560 --> 00:00:15,480 Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple 6 00:00:15,520 --> 00:00:17,959 Speaker 1: podcast or wherever you listen to podcasts, as well as 7 00:00:17,960 --> 00:00:21,280 Speaker 1: at Bloomberg dot com. There's time for us to check 8 00:00:21,320 --> 00:00:24,120 Speaker 1: in with Bloomberg Opinion. Today we're joined by Bloomberg Opinion 9 00:00:24,160 --> 00:00:27,520 Speaker 1: columns Kathy O'Neil. She's some a mathematician and also a 10 00:00:27,600 --> 00:00:30,360 Speaker 1: columnist for Bloomberg Opinion. I want to talk about higher 11 00:00:30,480 --> 00:00:35,640 Speaker 1: education as uh the father of two college age students myself. Uh, Lisa, 12 00:00:36,000 --> 00:00:37,960 Speaker 1: you know it's really an issue here. We're paying full 13 00:00:38,000 --> 00:00:43,080 Speaker 1: tuition yet they're not getting the on campus classroom experience 14 00:00:43,080 --> 00:00:46,840 Speaker 1: and kind of calling it the question the value proposition there. So, Kathy, 15 00:00:46,920 --> 00:00:49,279 Speaker 1: thanks so much for joining us here. What do you 16 00:00:49,320 --> 00:00:52,280 Speaker 1: think is the future, at least in the near term, 17 00:00:52,320 --> 00:00:54,880 Speaker 1: of some of these decisions parents and students and colleges 18 00:00:54,920 --> 00:00:57,920 Speaker 1: need to make about pricing what is a much much 19 00:00:57,920 --> 00:01:01,480 Speaker 1: different experience. Thanks for having me yeah. I mean, I'm 20 00:01:01,480 --> 00:01:04,280 Speaker 1: looking right now at this Chronicle of Higher Education website 21 00:01:04,360 --> 00:01:07,679 Speaker 1: that says that two thirds full two thirds of colleges 22 00:01:08,120 --> 00:01:10,039 Speaker 1: are still claiming that they're going to have in person 23 00:01:10,120 --> 00:01:12,600 Speaker 1: classes in the fall. I just don't think that's realistic. 24 00:01:13,160 --> 00:01:16,400 Speaker 1: I think the ones that have copped to remaining online 25 00:01:16,440 --> 00:01:18,679 Speaker 1: for the fall, which is only at six percent right now, 26 00:01:18,680 --> 00:01:21,560 Speaker 1: are being much more honest with their students and parents, 27 00:01:22,080 --> 00:01:24,520 Speaker 1: And for for now, we're just playing a game of chicken. 28 00:01:24,880 --> 00:01:28,160 Speaker 1: We have parents and students who are strapped for cash. 29 00:01:28,520 --> 00:01:31,480 Speaker 1: We have colleges who desperately, desperately need the tuition money, 30 00:01:31,920 --> 00:01:34,320 Speaker 1: and that first tuition payment, as I'm sure you know, 31 00:01:34,520 --> 00:01:36,880 Speaker 1: is coming due in a month or two, and they're 32 00:01:36,920 --> 00:01:39,240 Speaker 1: just not going to tell us. It feels like I 33 00:01:39,280 --> 00:01:42,720 Speaker 1: also have to college students at home. Um, they feel 34 00:01:42,760 --> 00:01:43,960 Speaker 1: like they're just not going to tell us what the 35 00:01:44,000 --> 00:01:46,920 Speaker 1: actual situation is until they get that tuition payment, which 36 00:01:46,959 --> 00:01:49,320 Speaker 1: doesn't seem like a good deal for us. Well, and 37 00:01:49,360 --> 00:01:53,360 Speaker 1: it seems like increasingly parents are wondering about the value proposition. 38 00:01:53,400 --> 00:01:56,240 Speaker 1: And my kids are younger than college at age. But 39 00:01:56,320 --> 00:01:58,720 Speaker 1: I'm a little bit nervous looking at how quickly the 40 00:01:58,800 --> 00:02:03,920 Speaker 1: inflation has occurred in college price tags. I'm wondering what 41 00:02:04,160 --> 00:02:08,760 Speaker 1: the pandemic and the disruption to in class attendance might 42 00:02:08,880 --> 00:02:12,160 Speaker 1: mean in terms of colleges going out of business if 43 00:02:12,200 --> 00:02:16,200 Speaker 1: parents do decide not to pay the bills, or potentially 44 00:02:16,320 --> 00:02:20,760 Speaker 1: a rejiggering of more kind of technical colleges versus uh 45 00:02:21,040 --> 00:02:24,960 Speaker 1: liberal arts educations. What do you think, well, exactly, And 46 00:02:25,000 --> 00:02:28,359 Speaker 1: I think basically the value proposition has been for the 47 00:02:28,440 --> 00:02:32,680 Speaker 1: last few dozen years that it's not just an education, 48 00:02:32,880 --> 00:02:36,079 Speaker 1: it's a sort of certificate for the middle class or 49 00:02:36,160 --> 00:02:38,239 Speaker 1: for certificate for a better than a middle class job, 50 00:02:38,480 --> 00:02:41,280 Speaker 1: depending on which college you go to. So so parents 51 00:02:41,280 --> 00:02:44,240 Speaker 1: have been shelling out more and more and more and 52 00:02:44,240 --> 00:02:47,520 Speaker 1: and have as have students, not simply for the education, 53 00:02:47,639 --> 00:02:50,840 Speaker 1: but also for the experience, for the socializing, for the 54 00:02:50,880 --> 00:02:55,040 Speaker 1: connections if you will to good jobs afterwards, and if 55 00:02:55,080 --> 00:02:57,480 Speaker 1: it's online, you clearly don't have all of that, you 56 00:02:57,520 --> 00:03:00,560 Speaker 1: don't have the on campus experience, etcetera. And to be clear, 57 00:03:00,639 --> 00:03:04,240 Speaker 1: colleges have been cashing in on this holistic approach to 58 00:03:04,320 --> 00:03:06,760 Speaker 1: what they're offering just as much as parents have been 59 00:03:06,760 --> 00:03:10,680 Speaker 1: buying into it. So it's it's just simply not about 60 00:03:10,840 --> 00:03:13,600 Speaker 1: education and I and I hesitate to say this because 61 00:03:13,600 --> 00:03:15,760 Speaker 1: I have many, many friends who are professors who are 62 00:03:15,760 --> 00:03:19,280 Speaker 1: working their tails off in order to deliver as good 63 00:03:19,280 --> 00:03:21,960 Speaker 1: an education as they possibly can in the context of 64 00:03:22,040 --> 00:03:24,640 Speaker 1: online And it's not not to say that they're not 65 00:03:24,680 --> 00:03:27,440 Speaker 1: doing a really good job, but that's really not the 66 00:03:27,480 --> 00:03:29,680 Speaker 1: only thing we're paying for when we pay for college. 67 00:03:30,240 --> 00:03:32,120 Speaker 1: And so the question is what will happen next. And 68 00:03:32,160 --> 00:03:34,880 Speaker 1: I really do think if it becomes online, then people 69 00:03:34,880 --> 00:03:37,280 Speaker 1: will say, wait, if it's just about education, I'm simply 70 00:03:37,280 --> 00:03:40,480 Speaker 1: not willing to pay this. So, Kathy, I mean, it's 71 00:03:40,520 --> 00:03:43,040 Speaker 1: interesting you mentioned tuition, how the colleges really need tuition, 72 00:03:43,040 --> 00:03:46,200 Speaker 1: and I think that's so much about the really big universities, 73 00:03:46,240 --> 00:03:48,760 Speaker 1: well known universities that have big endowments and that can 74 00:03:48,840 --> 00:03:50,920 Speaker 1: perhaps weather the storm a little bit. I'm thinking about 75 00:03:50,920 --> 00:03:53,760 Speaker 1: that this may be the second and third tier colleges 76 00:03:53,760 --> 00:03:56,440 Speaker 1: and universities that really don't have those endowments and therefore 77 00:03:56,560 --> 00:04:00,320 Speaker 1: really rely on funding their operating budget with two ocian 78 00:04:00,840 --> 00:04:03,400 Speaker 1: What are those schools going to do? I think there's 79 00:04:03,400 --> 00:04:06,040 Speaker 1: gonna be a lot of liberal arts schools, the ones 80 00:04:06,120 --> 00:04:09,400 Speaker 1: that really like remate, like sort of rely heavily on 81 00:04:09,400 --> 00:04:12,800 Speaker 1: this in local parentis concept um that we're going to be, 82 00:04:12,840 --> 00:04:15,240 Speaker 1: you know, there for your kids, and it's going to 83 00:04:15,280 --> 00:04:18,880 Speaker 1: be a full pledged liberal arts education. Those schools that 84 00:04:18,920 --> 00:04:21,279 Speaker 1: rely that don't have a huge endowment are going to 85 00:04:21,320 --> 00:04:23,160 Speaker 1: go out of business. I expect to see a whole 86 00:04:23,200 --> 00:04:26,320 Speaker 1: a huge slew of colleges just closing shop in the 87 00:04:26,360 --> 00:04:29,919 Speaker 1: next couple of years because of this disruption. Kathy, have 88 00:04:30,080 --> 00:04:32,640 Speaker 1: you heard any of Scott Galloway's comments, the n y 89 00:04:32,720 --> 00:04:35,359 Speaker 1: U professor who's been going on the airwaves and saying 90 00:04:35,920 --> 00:04:39,080 Speaker 1: that basically a lot of colleges should go out of business, 91 00:04:39,080 --> 00:04:42,240 Speaker 1: that they're overpriced, and that finishing schools essentially are the 92 00:04:42,279 --> 00:04:45,800 Speaker 1: IVY Leagues will continue because they are sort of artificially 93 00:04:45,839 --> 00:04:47,920 Speaker 1: propping up their value. I mean, you basically was comparing 94 00:04:47,960 --> 00:04:50,480 Speaker 1: them to Gucci scarves. But I'm wondering, I mean, are 95 00:04:50,520 --> 00:04:54,400 Speaker 1: you going to see this increasing bifurcation among the IVY 96 00:04:54,480 --> 00:04:57,920 Speaker 1: League and everyone else as everyone else tries to justify 97 00:04:58,040 --> 00:05:01,200 Speaker 1: the finishing school aspect of their business as sort of 98 00:05:01,240 --> 00:05:05,080 Speaker 1: as you describe the holistic experience. Yeah, I mean I 99 00:05:05,120 --> 00:05:07,680 Speaker 1: hope so. And and what what I really hope is 100 00:05:07,720 --> 00:05:11,680 Speaker 1: that whatever we replace this with is less expensive, um 101 00:05:11,720 --> 00:05:16,679 Speaker 1: and less like arduous for me and for their parents 102 00:05:16,720 --> 00:05:18,440 Speaker 1: and I you know, like, look, there has to be 103 00:05:18,520 --> 00:05:21,240 Speaker 1: some way to decide what job who gets right. It's 104 00:05:21,240 --> 00:05:26,000 Speaker 1: a sorting mechanism, but it's just an unbelievably expensive sorting mechanisms. 105 00:05:26,080 --> 00:05:28,839 Speaker 1: So my hope would be that we really do figure 106 00:05:28,880 --> 00:05:32,440 Speaker 1: out a way, um that that works. Um. You know, 107 00:05:32,440 --> 00:05:34,440 Speaker 1: look at the German model with an enormous amount of 108 00:05:34,440 --> 00:05:37,760 Speaker 1: apprenticeships for example, where there aren't that many uh, sort 109 00:05:37,760 --> 00:05:41,680 Speaker 1: of university educated students um relative to the number of 110 00:05:41,720 --> 00:05:44,960 Speaker 1: students that take sort of apprenticeships after call after high school. 111 00:05:45,279 --> 00:05:47,919 Speaker 1: There's nothing wrong with that model, except we don't do 112 00:05:47,960 --> 00:05:51,000 Speaker 1: it whatsoever. Um. So if we could find a reasonable 113 00:05:51,440 --> 00:05:54,800 Speaker 1: system that isn't nearly as expensive, that gets people um 114 00:05:55,000 --> 00:05:58,440 Speaker 1: jobs sooner and less long term student debt, that would 115 00:05:58,440 --> 00:06:01,560 Speaker 1: be fantastic. Kat the O'Neill, thank you so much, and 116 00:06:01,680 --> 00:06:04,200 Speaker 1: uh from your lips to the higher education's ears ahead 117 00:06:04,240 --> 00:06:06,680 Speaker 1: of my children having to go to college. Cathy O'Neill, 118 00:06:06,880 --> 00:06:10,120 Speaker 1: a Bloomberg opinion columnist, a mathematician who has been a 119 00:06:10,120 --> 00:06:13,280 Speaker 1: professor as well as a hedge fund analysts and data 120 00:06:13,320 --> 00:06:17,520 Speaker 1: scientists and author of Weapons of Math Destruction. Definitely something 121 00:06:17,560 --> 00:06:20,160 Speaker 1: on the forefront of our minds the price of college education, 122 00:06:20,160 --> 00:06:24,080 Speaker 1: which is absolutely skyrocketed in relation to everything else, raising 123 00:06:24,120 --> 00:06:27,359 Speaker 1: a lot of questions, especially given the student debt load 124 00:06:27,480 --> 00:06:30,839 Speaker 1: right now that we're seeing come into the focus. Paul, Yeah, 125 00:06:30,839 --> 00:06:34,200 Speaker 1: it's really interesting. And again, those fall semester payments are 126 00:06:34,200 --> 00:06:35,600 Speaker 1: coming up, and I wonder if there's gonna be any 127 00:06:35,640 --> 00:06:38,480 Speaker 1: pricing adjustment here for what is a very different product 128 00:06:38,560 --> 00:06:44,840 Speaker 1: that we're getting now versus what we initially signed up for. Well, 129 00:06:44,880 --> 00:06:47,240 Speaker 1: the up and down relationship between the US and China 130 00:06:47,360 --> 00:06:51,560 Speaker 1: seems to be approaching another low, this time due to 131 00:06:51,800 --> 00:06:55,760 Speaker 1: the new security laws that China has imposed on Hong Kong, 132 00:06:55,760 --> 00:06:58,600 Speaker 1: and a response from the U s has not been positive, 133 00:06:58,600 --> 00:07:01,679 Speaker 1: to say the least. Michael Herson, practice head at China 134 00:07:01,760 --> 00:07:04,719 Speaker 1: and at Northwest Asia for the Eurasia Group, joins us. Michael, 135 00:07:04,760 --> 00:07:06,680 Speaker 1: thanks so much for your time here one of for 136 00:07:06,760 --> 00:07:09,600 Speaker 1: our listeners, if you could just summarize what these new 137 00:07:09,640 --> 00:07:12,600 Speaker 1: security laws are in Hong Kong and maybe why China 138 00:07:12,720 --> 00:07:18,440 Speaker 1: is doing it now. Sure so, China announced on Friday 139 00:07:18,640 --> 00:07:23,960 Speaker 1: that it's legislature the National People's Congress will implement this 140 00:07:24,080 --> 00:07:28,760 Speaker 1: law rather than go through Hong Kong's own legislature. And 141 00:07:28,840 --> 00:07:32,320 Speaker 1: this has been a long, decades long sticking point. In fact, 142 00:07:33,040 --> 00:07:36,640 Speaker 1: Hong Kong establishing a national security law and Beijing had 143 00:07:36,760 --> 00:07:39,960 Speaker 1: left that to Hong Kong to take care of but 144 00:07:40,040 --> 00:07:43,040 Speaker 1: basically ran out of patients. And there have been waves 145 00:07:43,080 --> 00:07:47,760 Speaker 1: of protest over the last year and even earlier over 146 00:07:48,640 --> 00:07:52,280 Speaker 1: Hong Kong um proposing this legislation on its own. So 147 00:07:52,400 --> 00:07:56,040 Speaker 1: essentially Beijing said time is up. We're going to do 148 00:07:56,080 --> 00:07:59,600 Speaker 1: this for you under its own interpretation of the law 149 00:08:00,040 --> 00:08:04,040 Speaker 1: that governs China's mainland China's relationship with Hong Kong. Now, 150 00:08:04,040 --> 00:08:06,880 Speaker 1: what the law actually does is well, first off, I 151 00:08:06,880 --> 00:08:09,680 Speaker 1: should say we won't know the details because the law 152 00:08:09,760 --> 00:08:12,280 Speaker 1: has not been drafted yet, and that will likely be 153 00:08:13,440 --> 00:08:15,880 Speaker 1: something that happens over the course of the summer. But 154 00:08:16,000 --> 00:08:22,320 Speaker 1: essentially it gives likely some fairly broad powers for Beijing 155 00:08:22,440 --> 00:08:25,880 Speaker 1: to extend its authority over Hong Kong in areas that 156 00:08:25,920 --> 00:08:32,760 Speaker 1: it regards as anti government uh and treasonous activity. A 157 00:08:32,800 --> 00:08:35,439 Speaker 1: lot of people are saying that the US should and 158 00:08:35,559 --> 00:08:39,280 Speaker 1: will step in. We've seen Congress come out and threatened 159 00:08:39,280 --> 00:08:44,320 Speaker 1: to take action, including potentially provoking the special trading status 160 00:08:44,360 --> 00:08:48,120 Speaker 1: that the US has with Hong Kong. What does China 161 00:08:48,320 --> 00:08:51,680 Speaker 1: stand to lose if Hong Kong loses some of its 162 00:08:51,720 --> 00:08:57,920 Speaker 1: special status with respect to its reputation financially around the world. Well, 163 00:08:57,960 --> 00:09:01,400 Speaker 1: I think for China, the economic importance of Hong Kong 164 00:09:01,520 --> 00:09:04,880 Speaker 1: has diminished quite a bit relative to the size of 165 00:09:04,960 --> 00:09:08,960 Speaker 1: China's economy, So I think the biggest threat for China 166 00:09:09,040 --> 00:09:12,240 Speaker 1: at this point would be if these actions create fundamental 167 00:09:12,320 --> 00:09:16,160 Speaker 1: financial instability in Hong Kong. That would be bad and 168 00:09:16,160 --> 00:09:20,040 Speaker 1: could have ripple effects for China's economy and financial system. 169 00:09:20,160 --> 00:09:24,720 Speaker 1: But generally speaking, losing Hong Kong's vitality as a global 170 00:09:24,800 --> 00:09:29,600 Speaker 1: business hub is not positive for China, but it doesn't 171 00:09:29,640 --> 00:09:32,200 Speaker 1: represent any kind of systemic risk. I think it's fair 172 00:09:32,240 --> 00:09:35,120 Speaker 1: to say that mainland China has has moved on beyond that. 173 00:09:36,200 --> 00:09:40,680 Speaker 1: So Michael does realistically, does Hong Kong have any recourse here? 174 00:09:43,679 --> 00:09:47,320 Speaker 1: Hong Kong, I think to be blunt, No, not really, 175 00:09:47,520 --> 00:09:50,400 Speaker 1: And of course Hong Kong's government is at this point 176 00:09:50,520 --> 00:09:54,880 Speaker 1: the the administration of Carrie Lamb is moving essentially in 177 00:09:55,000 --> 00:09:58,520 Speaker 1: lockstep with Beijing. So really the question mark at this 178 00:09:58,600 --> 00:10:02,040 Speaker 1: point is not so much whether or not Hong Kong 179 00:10:02,080 --> 00:10:05,200 Speaker 1: has recourse, but as you suggested, what the US responses. 180 00:10:06,080 --> 00:10:09,280 Speaker 1: There's also a question about other power graphs that China 181 00:10:09,440 --> 00:10:11,560 Speaker 1: is making right now. There was a one point for 182 00:10:11,640 --> 00:10:16,840 Speaker 1: a trillion dollar investment program in its technological infrastructure that 183 00:10:16,880 --> 00:10:20,959 Speaker 1: they announced. They've been trying to get a vaccine through 184 00:10:21,400 --> 00:10:24,960 Speaker 1: faster than the United States. What's behind this at this 185 00:10:25,040 --> 00:10:29,079 Speaker 1: point and is China getting the upper hand? Well, I 186 00:10:29,120 --> 00:10:31,360 Speaker 1: think there are some areas that you can call this 187 00:10:31,559 --> 00:10:33,960 Speaker 1: a power graph, but there are other areas where China 188 00:10:34,160 --> 00:10:37,800 Speaker 1: is just behaving opportunistically. The world is in crisis, China 189 00:10:37,960 --> 00:10:40,080 Speaker 1: is more stable than a lot of other countries, and 190 00:10:40,120 --> 00:10:42,480 Speaker 1: so it's it's looking to gain an edge, and I 191 00:10:42,520 --> 00:10:45,320 Speaker 1: think that's the case with the stimulus program, in the 192 00:10:45,400 --> 00:10:48,320 Speaker 1: investment and a lot of these strategically important sectors that 193 00:10:48,400 --> 00:10:52,400 Speaker 1: you mentioned. UM. Generally speaking, China is trying to use 194 00:10:52,440 --> 00:10:56,240 Speaker 1: the crisis to expand its influence, uh. And it would 195 00:10:56,240 --> 00:10:59,839 Speaker 1: do that through vaccine diplomacy, through the assistance that it's 196 00:10:59,840 --> 00:11:05,040 Speaker 1: all already offered to countries um for medical supplies. And yes, 197 00:11:05,120 --> 00:11:07,160 Speaker 1: I think it's fair to say that China see this 198 00:11:07,320 --> 00:11:10,600 Speaker 1: as an opening, especially at the time when when China's 199 00:11:10,600 --> 00:11:13,720 Speaker 1: economy is recovering earlier than most other large economies, to 200 00:11:13,760 --> 00:11:17,400 Speaker 1: really expand its influence. So I wonder if you can 201 00:11:17,440 --> 00:11:20,120 Speaker 1: just give us a sense of the the health and 202 00:11:20,160 --> 00:11:24,120 Speaker 1: the strength of the presidency of President g given the 203 00:11:24,640 --> 00:11:28,520 Speaker 1: COVID christ pandemic, given the impact to the Chinese economy, 204 00:11:28,559 --> 00:11:33,000 Speaker 1: given that some you know, international condemnation, perhaps China was 205 00:11:33,080 --> 00:11:37,480 Speaker 1: somehow involved in the origination of this pandemic. What's the 206 00:11:37,520 --> 00:11:41,600 Speaker 1: standing of the president right now? I think right now 207 00:11:41,760 --> 00:11:44,680 Speaker 1: his footing is quite secure. In fact, you can even 208 00:11:44,679 --> 00:11:47,600 Speaker 1: make the case that for now she emerges stronger from this, 209 00:11:47,840 --> 00:11:51,640 Speaker 1: and it's because of China's ability to contain the virus 210 00:11:52,320 --> 00:11:55,160 Speaker 1: and to recast the narrative at home by showing that 211 00:11:55,200 --> 00:11:58,520 Speaker 1: the party has been successful, his leadership has been successful, 212 00:11:58,960 --> 00:12:00,880 Speaker 1: whereas the U. S and West has had a far 213 00:12:01,000 --> 00:12:04,200 Speaker 1: more fumbling response to the pandemic. Now, I don't think 214 00:12:04,240 --> 00:12:06,920 Speaker 1: that means he's out of the woods. Unemployment is rising 215 00:12:06,920 --> 00:12:08,800 Speaker 1: in China. I think it's going to be a quite 216 00:12:08,840 --> 00:12:12,640 Speaker 1: gradual recovery. But what it means is that to strengthen himself, 217 00:12:12,679 --> 00:12:16,400 Speaker 1: she will continue to ramp up patriotic sentiment at home 218 00:12:17,000 --> 00:12:20,080 Speaker 1: and and portray China success whereas others have failed. And 219 00:12:20,160 --> 00:12:23,319 Speaker 1: that is going to mean that these issues like Hong Kong, 220 00:12:23,920 --> 00:12:27,760 Speaker 1: like disputes with the US over Taiwan, over the South China, see, 221 00:12:27,800 --> 00:12:29,320 Speaker 1: all of these I think are going to stay at 222 00:12:29,400 --> 00:12:32,400 Speaker 1: quite a high temperature, and it means real risks for 223 00:12:32,440 --> 00:12:35,840 Speaker 1: the relationship now through the election. This is when I 224 00:12:35,920 --> 00:12:38,840 Speaker 1: don't really understand. It seems like mark markets are shrugging 225 00:12:38,920 --> 00:12:42,720 Speaker 1: off the prospect of an escalating, escalating trade war or 226 00:12:42,760 --> 00:12:45,800 Speaker 1: cold war between the US and China, and yet it 227 00:12:45,880 --> 00:12:50,280 Speaker 1: seems like things are escalating. What's the tipping point at 228 00:12:50,280 --> 00:12:53,800 Speaker 1: which it really will bleed over into the global economic recovery. 229 00:12:55,000 --> 00:12:57,080 Speaker 1: I think it's a very good point. I think markets 230 00:12:57,120 --> 00:13:01,040 Speaker 1: tend to focus on the issue of tariffs because those 231 00:13:01,160 --> 00:13:04,080 Speaker 1: are the most visible and easy to quantify in terms 232 00:13:04,120 --> 00:13:07,880 Speaker 1: of tensions and argue at this point, and it's not 233 00:13:07,960 --> 00:13:10,520 Speaker 1: a it's not a firm conviction, but we think that 234 00:13:10,640 --> 00:13:13,520 Speaker 1: the Phase one deal will last through this year because 235 00:13:13,520 --> 00:13:16,920 Speaker 1: neither side has the incentive to to re escalate on trade. 236 00:13:17,400 --> 00:13:20,600 Speaker 1: We put that at about so I think the markets 237 00:13:20,600 --> 00:13:23,000 Speaker 1: should be aware that there's a risk of breaking down. 238 00:13:23,080 --> 00:13:25,720 Speaker 1: But they also need to keep in mind that non 239 00:13:25,800 --> 00:13:29,040 Speaker 1: tariff measures that are harder to price in are I 240 00:13:29,080 --> 00:13:31,760 Speaker 1: think having a very significant impact. I mean things like 241 00:13:32,600 --> 00:13:36,320 Speaker 1: US restrictions against Wally, new US restrictions against a further 242 00:13:36,440 --> 00:13:40,640 Speaker 1: set of Chinese technology companies, the tensions that we're seeing 243 00:13:40,640 --> 00:13:44,040 Speaker 1: in Hong Kong. These do have significant impacts on the 244 00:13:44,080 --> 00:13:47,360 Speaker 1: global economy. They just harder to price in, and I 245 00:13:47,360 --> 00:13:50,520 Speaker 1: think markets may be missing that. Michael Herson, thank you 246 00:13:50,520 --> 00:13:53,320 Speaker 1: so much for being with us. Michael Herson practice ahead 247 00:13:53,360 --> 00:13:56,480 Speaker 1: of the China and Northeast Asian regions for eur Asia 248 00:13:56,480 --> 00:13:59,680 Speaker 1: Group joining US based in New York. Definitely in the 249 00:13:59,679 --> 00:14:04,760 Speaker 1: four front as these escalating tensions, yet markets just don't care. Paul, Now, 250 00:14:04,840 --> 00:14:07,920 Speaker 1: the market, it disappears, as we've been discussing this morning, Lisa, 251 00:14:08,000 --> 00:14:10,800 Speaker 1: really focusing on the pandemic. What stage are we in 252 00:14:10,840 --> 00:14:13,720 Speaker 1: the pandemic? And I think the markets obviously looking forward 253 00:14:13,760 --> 00:14:16,440 Speaker 1: a little bit and seeing some gradual reopening around the globe, 254 00:14:16,480 --> 00:14:18,559 Speaker 1: including here in the United States, and that's where the 255 00:14:18,600 --> 00:14:21,880 Speaker 1: bed is. Yeah, people are hoping for a world that 256 00:14:21,960 --> 00:14:26,160 Speaker 1: returns to something more normal than what we've all been experiencing. 257 00:14:30,280 --> 00:14:32,440 Speaker 1: One of the big stories over the past few months 258 00:14:32,440 --> 00:14:35,880 Speaker 1: has been an unprecedented surge in borrowing, and that's from 259 00:14:35,960 --> 00:14:40,400 Speaker 1: investment grade companies that have sold a record more than 260 00:14:40,440 --> 00:14:43,800 Speaker 1: a trillion dollars of bonds so far year to date. 261 00:14:43,880 --> 00:14:46,520 Speaker 1: This just raises all sorts of questions to me. Yes, 262 00:14:46,560 --> 00:14:49,800 Speaker 1: their investment grade, but yes, they are adding leverage in 263 00:14:49,840 --> 00:14:52,040 Speaker 1: a quest to just get as much cash onto their 264 00:14:52,040 --> 00:14:55,040 Speaker 1: belt to survive through this next period. Joining us now 265 00:14:55,240 --> 00:14:57,560 Speaker 1: as someone who buys some of that debt, Josh Lomier, 266 00:14:57,840 --> 00:15:01,160 Speaker 1: head of North American investment grade credited Viva Investors, which 267 00:15:01,160 --> 00:15:04,400 Speaker 1: oversees four hundred and thirty eight billion dollars firm wide, 268 00:15:04,840 --> 00:15:08,360 Speaker 1: enjoyces from Chicago. Josh, have you been out there seeing 269 00:15:08,400 --> 00:15:11,480 Speaker 1: opportunities and some of this new issuance at a time 270 00:15:11,640 --> 00:15:16,680 Speaker 1: of so much uncertainty? Yeah, we really have. I mean 271 00:15:16,840 --> 00:15:21,160 Speaker 1: you mentioned that over a trillion dollars of new issuance 272 00:15:21,240 --> 00:15:24,560 Speaker 1: during a period of unprecedented volatility. There will always be 273 00:15:25,440 --> 00:15:29,520 Speaker 1: opportunities to find value in that kind of environment. So 274 00:15:29,600 --> 00:15:32,040 Speaker 1: Josh kind of give us a sense here, you know, 275 00:15:32,120 --> 00:15:34,800 Speaker 1: given where we are in the credit in the economic cycle, 276 00:15:35,080 --> 00:15:37,400 Speaker 1: are you concerned that risk assets have gotten a little 277 00:15:37,400 --> 00:15:40,080 Speaker 1: bit ahead of themselves. I mean, it's sure to have 278 00:15:40,240 --> 00:15:45,480 Speaker 1: just more and more economic pain to come across the economy. Yeah, 279 00:15:45,680 --> 00:15:47,600 Speaker 1: I think you're right, And I think you know, if 280 00:15:47,680 --> 00:15:51,480 Speaker 1: if we just think briefly back to the last recession, 281 00:15:51,480 --> 00:15:54,840 Speaker 1: the global financial crisis, you had the first iteration of 282 00:15:55,440 --> 00:15:58,320 Speaker 1: you know, wobbling of volatility around Bear Bear Stearns in 283 00:15:58,360 --> 00:16:00,600 Speaker 1: the first quarter of tow that O than eight, and 284 00:16:00,640 --> 00:16:03,520 Speaker 1: then you know Lehman Brothers in the in the majority 285 00:16:03,560 --> 00:16:05,880 Speaker 1: of the volatility we didn't feel till the fourth quarter 286 00:16:05,960 --> 00:16:08,560 Speaker 1: of two thous eight. And so I think any recession 287 00:16:08,720 --> 00:16:11,120 Speaker 1: or recessionary environment is going to feel a lot more 288 00:16:11,160 --> 00:16:14,440 Speaker 1: like a roller coaster. Maybe that first hills the biggest 289 00:16:15,000 --> 00:16:17,880 Speaker 1: and the most scarier, perhaps, and then we we hit 290 00:16:18,040 --> 00:16:20,200 Speaker 1: different peaks and valleys throughout. But I think I think 291 00:16:20,200 --> 00:16:23,600 Speaker 1: we are at the early stages of this recession, and 292 00:16:23,640 --> 00:16:25,960 Speaker 1: it's going to take some time to really figure out 293 00:16:25,960 --> 00:16:28,840 Speaker 1: how deep the damage is done and how quickly we 294 00:16:28,880 --> 00:16:31,560 Speaker 1: can recover. Well, how worried are you about the fact 295 00:16:31,560 --> 00:16:35,320 Speaker 1: that companies that are worried about their futures, worried about 296 00:16:35,320 --> 00:16:40,240 Speaker 1: future revenues, have started odd leverage have started to reduce, uh, 297 00:16:40,280 --> 00:16:43,640 Speaker 1: this sort of emphasis on deleveraging and shoring up their 298 00:16:43,680 --> 00:16:47,720 Speaker 1: balance sheets. Right now, has that affected what you decide 299 00:16:47,760 --> 00:16:52,000 Speaker 1: to buy? It really does. And if you think about 300 00:16:52,040 --> 00:16:54,800 Speaker 1: it right now, and this is the whole market is 301 00:16:54,880 --> 00:16:59,680 Speaker 1: really just focused on ken things survive. A lot of 302 00:16:59,720 --> 00:17:03,160 Speaker 1: this reaction function of just adding as much dead as 303 00:17:03,200 --> 00:17:05,680 Speaker 1: they can to preserve liquidity is a is a survival 304 00:17:05,720 --> 00:17:08,080 Speaker 1: technique and I just want to get through the next 305 00:17:08,119 --> 00:17:12,040 Speaker 1: couple of quarters, and that's fine. But the reality is 306 00:17:12,040 --> 00:17:14,399 Speaker 1: is when you do start to recover, when economies do 307 00:17:14,560 --> 00:17:16,800 Speaker 1: start to open back up. Now, what we have, what 308 00:17:16,840 --> 00:17:18,960 Speaker 1: we will have to worry about then is what are 309 00:17:19,000 --> 00:17:22,119 Speaker 1: the second derivative impacts of all of this Because now, 310 00:17:22,920 --> 00:17:26,680 Speaker 1: best case scenario, we enter a shallow recession. And when 311 00:17:26,720 --> 00:17:29,640 Speaker 1: you enter a shallow recession and companies are a half 312 00:17:29,680 --> 00:17:32,879 Speaker 1: a turn one turn two turned higher leverage into that 313 00:17:33,000 --> 00:17:36,840 Speaker 1: slower growth shallow recession, if you start to have to 314 00:17:36,840 --> 00:17:39,480 Speaker 1: worry about their ability to earn their way out of 315 00:17:39,520 --> 00:17:43,159 Speaker 1: that larger hole, if you will. So, what are you 316 00:17:43,200 --> 00:17:46,440 Speaker 1: are you seeing in terms of credit quality across your portfolio? 317 00:17:46,440 --> 00:17:49,200 Speaker 1: We've seen a couple of bankruptcies just over the last 318 00:17:49,320 --> 00:17:51,480 Speaker 1: several weeks gives a snapshot of kind of that where 319 00:17:51,520 --> 00:17:55,760 Speaker 1: you think the credit quality is in the space you 320 00:17:55,760 --> 00:17:59,119 Speaker 1: look at. Yeah, so there's you know, there's gonna be 321 00:17:59,320 --> 00:18:01,520 Speaker 1: a lot of fit stuations where you know, we all 322 00:18:01,640 --> 00:18:05,640 Speaker 1: we all can see, you know, real estate, retail sectors 323 00:18:05,640 --> 00:18:07,640 Speaker 1: are some of the biggest you know, on the very 324 00:18:07,640 --> 00:18:11,159 Speaker 1: front lines of this, and other sectors like telecom and 325 00:18:11,280 --> 00:18:15,440 Speaker 1: cable um and certain areas of healthcare and even packaged 326 00:18:15,480 --> 00:18:17,880 Speaker 1: goods where you're not really as an impact because you're 327 00:18:17,920 --> 00:18:20,480 Speaker 1: actually getting some tail winds from this environment. And so 328 00:18:20,840 --> 00:18:24,760 Speaker 1: what we're really thinking through is who does have who 329 00:18:24,840 --> 00:18:28,480 Speaker 1: who is less impacted, who is the most impacted? And 330 00:18:28,560 --> 00:18:30,959 Speaker 1: for the ones that are the most impacted, you know, 331 00:18:31,080 --> 00:18:33,960 Speaker 1: you can start to steal how big of a drop 332 00:18:34,000 --> 00:18:35,720 Speaker 1: in their ratings are they going to have as you 333 00:18:35,760 --> 00:18:40,800 Speaker 1: start to project out significantly reduced earnings and revenues relative 334 00:18:40,920 --> 00:18:43,479 Speaker 1: to these higher debt metrics. And that's kind of all 335 00:18:43,520 --> 00:18:45,639 Speaker 1: the hard credit work that needs to go into making 336 00:18:45,680 --> 00:18:49,240 Speaker 1: decisions in over the next two quarters. So let's talk 337 00:18:49,320 --> 00:18:52,120 Speaker 1: about where you're seeing opportunities. What have you actually been 338 00:18:52,119 --> 00:18:54,000 Speaker 1: buying recently? You don't I know, you don't want to 339 00:18:54,040 --> 00:18:57,160 Speaker 1: talk specific securities, but if you could talk sectors, types 340 00:18:57,200 --> 00:19:00,560 Speaker 1: of ratings, etcetera, that would be awesome. Yeah. I think 341 00:19:00,640 --> 00:19:03,720 Speaker 1: one one important strategy we've deployed over the last couple 342 00:19:03,720 --> 00:19:07,520 Speaker 1: of months is really to go down in quality into 343 00:19:07,600 --> 00:19:10,600 Speaker 1: some of the sectors that we feel have been least impacted, 344 00:19:10,680 --> 00:19:14,480 Speaker 1: and I mentioned some telecommon cable as as an area 345 00:19:14,600 --> 00:19:18,119 Speaker 1: where that that can work, including some healthcare, and then 346 00:19:18,200 --> 00:19:20,480 Speaker 1: going up in quality in some of the sectors that 347 00:19:20,520 --> 00:19:23,840 Speaker 1: are most impacted, i e. In the energy space, focusing 348 00:19:23,840 --> 00:19:26,800 Speaker 1: more on the high up and quality integrated companies or 349 00:19:27,280 --> 00:19:31,000 Speaker 1: the stronger midstream credits where you have much more forward 350 00:19:31,040 --> 00:19:33,480 Speaker 1: looking or they have more levers they can pull to 351 00:19:33,560 --> 00:19:36,520 Speaker 1: reduce leverage, as well as a bit clearer cash flow 352 00:19:36,520 --> 00:19:39,520 Speaker 1: guidance in the current environment for commodity prices and so 353 00:19:40,040 --> 00:19:42,560 Speaker 1: kind of barbelling your risk in that regard is a 354 00:19:42,600 --> 00:19:47,639 Speaker 1: way to keep some beta in your portfolio while avoiding 355 00:19:47,680 --> 00:19:50,320 Speaker 1: the lowest echelons of quality and some of the most 356 00:19:50,440 --> 00:19:55,440 Speaker 1: impacted sectors. What kind of returns are you looking for 357 00:19:55,640 --> 00:19:58,320 Speaker 1: given the pretty significant returns that we've seen. It just 358 00:19:58,400 --> 00:20:03,240 Speaker 1: gives people a perspective. So far in May investment grade 359 00:20:03,280 --> 00:20:06,240 Speaker 1: bonds in the United States have returned to ten point 360 00:20:06,440 --> 00:20:09,960 Speaker 1: eight percent. I mean, it's been a dramatic increase, and 361 00:20:10,000 --> 00:20:11,919 Speaker 1: it's been both on the right side as well as 362 00:20:11,960 --> 00:20:15,399 Speaker 1: on the credit spread size side. Is it basically a 363 00:20:15,480 --> 00:20:20,200 Speaker 1: coupon clipping exercise from here? I think so. I think 364 00:20:20,240 --> 00:20:22,119 Speaker 1: we've you know, if you just looked at the credit 365 00:20:22,160 --> 00:20:25,440 Speaker 1: spreads on the market as a whole, it's still wider 366 00:20:25,480 --> 00:20:29,600 Speaker 1: than you know, um the types we've seen even year today, 367 00:20:29,440 --> 00:20:32,760 Speaker 1: by a pretty meaningful amount. And so as the market 368 00:20:32,800 --> 00:20:37,080 Speaker 1: recovers longer term, you can still see value in the 369 00:20:37,119 --> 00:20:39,920 Speaker 1: compression of spreads. I think rates have come down a ton, 370 00:20:40,359 --> 00:20:42,240 Speaker 1: so you probably won't get as much of a kicker 371 00:20:42,240 --> 00:20:45,400 Speaker 1: from a rally, and just broad interest rates and spreads 372 00:20:45,400 --> 00:20:48,000 Speaker 1: are still wide, but I think spreads are more fairly 373 00:20:48,040 --> 00:20:51,960 Speaker 1: and accurately reflecting the risks we still have in front 374 00:20:51,960 --> 00:20:54,119 Speaker 1: of us, and so there's not going to be easy 375 00:20:54,200 --> 00:20:56,520 Speaker 1: money left on the table, per se, from a spread 376 00:20:56,600 --> 00:21:00,320 Speaker 1: compression perspective or a yield drop perspective. And so now 377 00:21:00,680 --> 00:21:02,800 Speaker 1: we're back in that period where things might be fair 378 00:21:02,920 --> 00:21:07,440 Speaker 1: more fairly valued with lots of uncertainty, and the expectation 379 00:21:07,520 --> 00:21:09,680 Speaker 1: is we're going to see some more volatility here over 380 00:21:09,720 --> 00:21:12,240 Speaker 1: the next coming quarters. So, Josh, I know, again you 381 00:21:12,240 --> 00:21:15,280 Speaker 1: don't want to talk about individuals individual securities, but Macy's 382 00:21:15,400 --> 00:21:17,960 Speaker 1: is just out with some news does they're gonna try 383 00:21:17,960 --> 00:21:20,280 Speaker 1: to tap the markets for one point one billion dollars 384 00:21:20,280 --> 00:21:23,200 Speaker 1: and they're going to use their real estate as collateral. 385 00:21:23,240 --> 00:21:25,639 Speaker 1: What do you think of that structure? Is that is 386 00:21:25,680 --> 00:21:28,119 Speaker 1: that something that's common for the retail space or is 387 00:21:28,119 --> 00:21:33,080 Speaker 1: this something unique reflecting very unique times. I think it's 388 00:21:33,200 --> 00:21:37,200 Speaker 1: unique because it might not be that uncommon for high 389 00:21:37,240 --> 00:21:40,760 Speaker 1: yield or leveraged credits, but for investment grade credits, it's 390 00:21:40,840 --> 00:21:43,240 Speaker 1: clearly a lot less common. And I think this is 391 00:21:43,320 --> 00:21:46,159 Speaker 1: kind of back to that point we talked about earlier 392 00:21:46,160 --> 00:21:49,320 Speaker 1: around companies in survival mode, and one of the biggest 393 00:21:49,440 --> 00:21:53,480 Speaker 1: risks to unsecured deadholders, which are most of the investment 394 00:21:53,520 --> 00:21:56,760 Speaker 1: grade bonds out there, are the ability of credits when 395 00:21:56,800 --> 00:22:00,280 Speaker 1: they do see periods of stress to prime your debt, 396 00:22:00,600 --> 00:22:02,919 Speaker 1: which what what that means is put secured debt in 397 00:22:02,960 --> 00:22:05,879 Speaker 1: front of your unsecured debt. And so what that means 398 00:22:06,000 --> 00:22:08,360 Speaker 1: is if this, if this works, if this ends up 399 00:22:08,359 --> 00:22:10,920 Speaker 1: working out for someone like Maze's, it gets them through 400 00:22:10,960 --> 00:22:14,080 Speaker 1: this crisis so that they can grow at some point 401 00:22:14,080 --> 00:22:16,639 Speaker 1: in the future, then everybody's going to be okay. But 402 00:22:16,720 --> 00:22:19,399 Speaker 1: if something doesn't happen with these types of credits in 403 00:22:19,440 --> 00:22:24,600 Speaker 1: these situations, that that increases your tail risk and reduces 404 00:22:24,720 --> 00:22:28,400 Speaker 1: your return on a a bankruptcy scenario or your recovery 405 00:22:28,480 --> 00:22:32,000 Speaker 1: rate because you're now you now have another debt holder 406 00:22:32,040 --> 00:22:34,520 Speaker 1: with security on their real estate ahead of you that 407 00:22:34,640 --> 00:22:36,639 Speaker 1: wasn't there before. So it's not a good thing for 408 00:22:36,680 --> 00:22:39,800 Speaker 1: the investment grade market, unless, of course that works out 409 00:22:40,440 --> 00:22:43,919 Speaker 1: in the end. Josh Lomar, thanks so much for joining us. 410 00:22:44,000 --> 00:22:47,520 Speaker 1: Josh is head of North American investment grade credit at 411 00:22:47,560 --> 00:22:51,480 Speaker 1: Aviva Investors, talking all things across the credit spectrum at least, 412 00:22:51,480 --> 00:22:53,560 Speaker 1: so what's interesting talking about some of these lenders are 413 00:22:53,600 --> 00:22:55,919 Speaker 1: saying come to the market like a Macy's, uh, you know, 414 00:22:55,960 --> 00:22:58,640 Speaker 1: really trying to get creative and innovative to to really 415 00:22:58,680 --> 00:23:00,879 Speaker 1: short up the balance sheets. But it is certainly a 416 00:23:01,000 --> 00:23:04,320 Speaker 1: risky time for credit investors. One of the most creative 417 00:23:04,560 --> 00:23:07,159 Speaker 1: parts of the market has been the cruise liners, and 418 00:23:07,200 --> 00:23:09,800 Speaker 1: some of them have put islands up for sale. I 419 00:23:09,840 --> 00:23:12,800 Speaker 1: think Norwegian Cruise Lines put an island up not for 420 00:23:12,800 --> 00:23:16,040 Speaker 1: sale for for collateral for some of their bond sales, 421 00:23:16,040 --> 00:23:18,200 Speaker 1: and we've seen them put up cruise ships. And we've 422 00:23:18,200 --> 00:23:20,560 Speaker 1: seen this, of course in the airline industry as well, 423 00:23:21,119 --> 00:23:24,879 Speaker 1: with United not gain traction because people didn't necessarily want 424 00:23:24,960 --> 00:23:28,399 Speaker 1: the aircraft they pledged as collateral. Uh, they thought that 425 00:23:28,440 --> 00:23:32,000 Speaker 1: those those airline aircrafts were not valuable enough. But it 426 00:23:32,080 --> 00:23:35,480 Speaker 1: just highlights the desperation, right, how do you lure in 427 00:23:35,640 --> 00:23:40,440 Speaker 1: new investors at a time when leverage is already high, 428 00:23:40,480 --> 00:23:44,640 Speaker 1: at a time with such great economic uncertainty? Really question 429 00:23:44,920 --> 00:23:47,040 Speaker 1: it is. And you know, since you see the price 430 00:23:47,080 --> 00:23:49,840 Speaker 1: action today in the market, certainly gave risk on feel 431 00:23:49,920 --> 00:23:51,880 Speaker 1: to the market. And you know, it's just I think 432 00:23:51,920 --> 00:23:54,040 Speaker 1: the president, you look across the Bloomberg termina looking at 433 00:23:54,040 --> 00:23:55,479 Speaker 1: the news, a lot of it is just kind of 434 00:23:56,080 --> 00:23:59,639 Speaker 1: positive expectations for a gradual reopening of the economy and 435 00:23:59,640 --> 00:24:03,119 Speaker 1: and what that could mean for uh, you know, the 436 00:24:03,200 --> 00:24:06,800 Speaker 1: economic statistics that have been so devastating for the markets 437 00:24:07,359 --> 00:24:09,159 Speaker 1: over the last couple of months. As we've come to 438 00:24:09,200 --> 00:24:15,399 Speaker 1: grips with the economic impact from the pandemic, a lot 439 00:24:15,400 --> 00:24:17,840 Speaker 1: of people are wondering the Federal Reserve has done so much, 440 00:24:18,080 --> 00:24:21,680 Speaker 1: what more can they do? And people are definitely looking 441 00:24:21,720 --> 00:24:25,800 Speaker 1: at yield core of control. The idea of managing yields 442 00:24:25,840 --> 00:24:29,720 Speaker 1: at all different maturities of treasuries is the next likely 443 00:24:29,800 --> 00:24:34,520 Speaker 1: step for the US Central Bank. Ira Jersey Bloomberg Bloomberg 444 00:24:34,560 --> 00:24:38,280 Speaker 1: Intelligence chief interest rate strategist joining US now, Ira, I'd 445 00:24:38,320 --> 00:24:40,480 Speaker 1: love to get your take on what this will mean 446 00:24:40,720 --> 00:24:43,840 Speaker 1: for bond traders if the Federal Reserve actually does this. 447 00:24:44,240 --> 00:24:47,639 Speaker 1: How many more longer maturity bonds does the Federal Reserve 448 00:24:47,680 --> 00:24:50,760 Speaker 1: have to buy? Well, they would have to buy a lot. 449 00:24:50,800 --> 00:24:53,240 Speaker 1: I mean that the idea of yield curve control would 450 00:24:53,240 --> 00:24:55,520 Speaker 1: be for the Federal Reserve basically to say we're going 451 00:24:55,560 --> 00:24:58,680 Speaker 1: to set this rate um, you know, maybe it's thirty 452 00:24:58,760 --> 00:25:01,640 Speaker 1: year yields at two percent, or maybe it's five year 453 00:25:01,720 --> 00:25:04,200 Speaker 1: yields at one percent, I mean some number, and say 454 00:25:04,200 --> 00:25:05,960 Speaker 1: we're going to buy as many bonds as we need 455 00:25:06,000 --> 00:25:09,280 Speaker 1: to in order to keep rates there um. I think 456 00:25:09,320 --> 00:25:13,040 Speaker 1: initially the market would probably test the resolve of the 457 00:25:13,040 --> 00:25:15,800 Speaker 1: Fed and say, well, let's see if you'll really do that. 458 00:25:16,119 --> 00:25:18,320 Speaker 1: So initially, I think the Fed would have to buy 459 00:25:18,400 --> 00:25:20,440 Speaker 1: a lot of bonds, you know, a couple of hundred 460 00:25:20,480 --> 00:25:24,159 Speaker 1: billion probably over a month or two, and then after 461 00:25:24,240 --> 00:25:26,960 Speaker 1: that they probably won't have to buy as much, primarily 462 00:25:27,000 --> 00:25:30,120 Speaker 1: because the market now would know that if we get there, 463 00:25:30,280 --> 00:25:32,640 Speaker 1: we know that there's going to be an active buyer, so, 464 00:25:33,160 --> 00:25:35,360 Speaker 1: um so we're not going to be you know, very 465 00:25:35,400 --> 00:25:37,520 Speaker 1: short the markets. So I think it could be a 466 00:25:37,560 --> 00:25:40,440 Speaker 1: pretty efficient way for the FED to do that. Now, 467 00:25:40,560 --> 00:25:43,680 Speaker 1: the political challenge there is is that, you know, does 468 00:25:43,720 --> 00:25:47,639 Speaker 1: that mean that, um you know, is the Federal Reserve 469 00:25:47,720 --> 00:25:50,639 Speaker 1: doing this because it wants to keep government borrowing clus low? So, 470 00:25:50,720 --> 00:25:54,040 Speaker 1: you know, is the separation of the Federal Reserve and 471 00:25:54,080 --> 00:25:57,000 Speaker 1: the federal government has blurred even further. And I think 472 00:25:57,040 --> 00:26:00,159 Speaker 1: that that's a political challenge that that the FED ed 473 00:26:00,160 --> 00:26:05,280 Speaker 1: will have to ultimately have to tell Congress, like, you know, 474 00:26:05,320 --> 00:26:09,600 Speaker 1: explain why they're doing this exactly. So I, um, I 475 00:26:09,640 --> 00:26:14,560 Speaker 1: have not in my career seen this before. Um is 476 00:26:14,600 --> 00:26:18,640 Speaker 1: this market manipulation to some degree? Have we seen this before? Well, 477 00:26:18,680 --> 00:26:21,439 Speaker 1: it is market manipulation for sure, but so is regular 478 00:26:21,520 --> 00:26:23,840 Speaker 1: quantitative easing that the FEDS done on and off for 479 00:26:23,960 --> 00:26:27,520 Speaker 1: the left decade or so. Um so. So, Yeah, in 480 00:26:27,520 --> 00:26:30,840 Speaker 1: the nineties and fifties, during World War Two, the Federal 481 00:26:30,920 --> 00:26:34,399 Speaker 1: Reserve cap thirty year government bond yields at two and 482 00:26:34,400 --> 00:26:37,640 Speaker 1: a half percent. So UM, so there's a not unprecedented 483 00:26:37,640 --> 00:26:40,760 Speaker 1: in the US. UM. In Japan they did the same 484 00:26:40,800 --> 00:26:44,120 Speaker 1: type of yield curve control UM idea. Of course, their 485 00:26:44,160 --> 00:26:46,560 Speaker 1: their interest rates were even much lower than ours are now, 486 00:26:46,920 --> 00:26:49,639 Speaker 1: but the Japanese did it for the better part of 487 00:26:49,760 --> 00:26:53,600 Speaker 1: three or four years. So UM. So it's it's it's 488 00:26:53,720 --> 00:26:56,240 Speaker 1: it's another tool in the toolbox. And basically the the 489 00:26:56,280 --> 00:26:59,399 Speaker 1: important thing that I think something like yield curve control 490 00:26:59,440 --> 00:27:02,520 Speaker 1: would say is, firstly, we don't want long term interest 491 00:27:02,600 --> 00:27:05,280 Speaker 1: rates to go much higher because if they do, that 492 00:27:05,359 --> 00:27:08,240 Speaker 1: could be detrimental to the economy because you have the 493 00:27:08,359 --> 00:27:12,440 Speaker 1: rollover of corporate debt for example, or people getting mortgages. Um, 494 00:27:12,560 --> 00:27:14,639 Speaker 1: we don't want those interest rates to go high because 495 00:27:14,640 --> 00:27:17,159 Speaker 1: that could have a detrimental effect on the economy. UM. 496 00:27:17,240 --> 00:27:21,240 Speaker 1: But at the same time, UM, the it's in the 497 00:27:21,440 --> 00:27:23,320 Speaker 1: Federal Reserve doesn't want to have to do some other 498 00:27:23,400 --> 00:27:27,440 Speaker 1: draconian type of things like UH, cut the Fed funds 499 00:27:27,480 --> 00:27:30,479 Speaker 1: rate into negative territory, which might which they might have 500 00:27:30,560 --> 00:27:33,080 Speaker 1: to do if they don't do something like yield curve 501 00:27:33,160 --> 00:27:36,680 Speaker 1: control or more massive quantitative easing like they did back 502 00:27:36,720 --> 00:27:40,160 Speaker 1: in March. If they do yield curve control, and considering 503 00:27:40,160 --> 00:27:43,359 Speaker 1: the fact that they've purchased about se the maximum of 504 00:27:43,359 --> 00:27:47,640 Speaker 1: what they can purchase of longer term bond issuances recently 505 00:27:47,720 --> 00:27:50,680 Speaker 1: from the Treasury Department, how big do you think their 506 00:27:50,720 --> 00:27:54,600 Speaker 1: balance she could get in the next year. Yeah, so so, 507 00:27:54,960 --> 00:27:57,440 Speaker 1: I mean, we we've we've been forecasting that the FEDS 508 00:27:57,480 --> 00:28:00,600 Speaker 1: balance sheet will get well over ten trillion dollars um. 509 00:28:00,720 --> 00:28:03,800 Speaker 1: Now part of that is also predicated was predicated on 510 00:28:05,160 --> 00:28:08,160 Speaker 1: well over trillion dollars of some of these other facilities, 511 00:28:08,160 --> 00:28:10,080 Speaker 1: and it seems like maybe those other facilities, like the 512 00:28:10,080 --> 00:28:12,879 Speaker 1: credit facilities for example, won't get quite as large as 513 00:28:12,920 --> 00:28:16,800 Speaker 1: we initially thought. Um, primarily because of of what's happened 514 00:28:16,840 --> 00:28:19,000 Speaker 1: in the markets and where credit spreads have gone over 515 00:28:19,000 --> 00:28:21,200 Speaker 1: the past couple of months or the past couple of weeks, 516 00:28:21,200 --> 00:28:25,920 Speaker 1: I should say, Um, the uh, the the Even though 517 00:28:26,040 --> 00:28:28,480 Speaker 1: the Fed owns seventy of a lot of bonds, they 518 00:28:28,480 --> 00:28:30,800 Speaker 1: still there's a lot of off the run securities that 519 00:28:30,920 --> 00:28:34,120 Speaker 1: they don't own that many of yet, so they still 520 00:28:34,160 --> 00:28:36,760 Speaker 1: have plenty of room to buy um, to buy a 521 00:28:36,760 --> 00:28:40,440 Speaker 1: significant amount of maturities, and of course the FED, the 522 00:28:40,520 --> 00:28:43,000 Speaker 1: Treasury Department is also issuing a lot of new securities 523 00:28:43,040 --> 00:28:44,840 Speaker 1: as well. So you know, they just issued a new 524 00:28:44,840 --> 00:28:47,480 Speaker 1: twenty year. The FED doesn't own any of those. They 525 00:28:47,520 --> 00:28:49,680 Speaker 1: they're going to issue a new Uh, they just issued 526 00:28:49,680 --> 00:28:51,680 Speaker 1: a new thirty year. The FED also doesn't own any 527 00:28:51,720 --> 00:28:54,120 Speaker 1: of those, although it will um over the next couple 528 00:28:54,120 --> 00:28:57,080 Speaker 1: of weeks, so you have they still have a lot 529 00:28:57,240 --> 00:29:02,120 Speaker 1: of ability to buy a significant amount of So I 530 00:29:02,680 --> 00:29:06,200 Speaker 1: give us you mentioned that twenty year bond. Um, how 531 00:29:06,200 --> 00:29:09,800 Speaker 1: did that go? Because that's a new Security Act. So 532 00:29:09,800 --> 00:29:12,520 Speaker 1: so it's the first time that that the Treasury Department 533 00:29:12,600 --> 00:29:16,160 Speaker 1: issued a twenty year bond, a new twenty year since 534 00:29:17,120 --> 00:29:20,560 Speaker 1: six and it went pretty well actually so um it 535 00:29:20,600 --> 00:29:24,080 Speaker 1: came at at slightly higher yields than the market was expecting, 536 00:29:24,160 --> 00:29:26,800 Speaker 1: but within a basis point, so I call that noise 537 00:29:26,840 --> 00:29:30,280 Speaker 1: anything within a basis points basically noise and and and 538 00:29:30,400 --> 00:29:33,360 Speaker 1: the bitter statistics went pretty well. So it had um, 539 00:29:33,400 --> 00:29:36,080 Speaker 1: you know, good demand from end user investors where people 540 00:29:36,160 --> 00:29:39,480 Speaker 1: wanted to wanted to own the security. All right, thanks 541 00:29:39,480 --> 00:29:41,960 Speaker 1: so much for it. Joining us as always, Ira Jersey 542 00:29:42,080 --> 00:29:45,280 Speaker 1: Teeth us interest rate strategist for Bloomberg in talentence joining 543 00:29:45,360 --> 00:29:47,440 Speaker 1: us on the phone. At least that's I think this 544 00:29:47,520 --> 00:29:50,360 Speaker 1: is a new term for me, yield curve controls, and I 545 00:29:50,320 --> 00:29:52,560 Speaker 1: I have to brush up on that a little bit more. 546 00:29:52,640 --> 00:29:55,440 Speaker 1: But think its another tool. I guess Bank of Japan 547 00:29:55,480 --> 00:29:57,240 Speaker 1: has been doing this for a long time, and it 548 00:29:57,360 --> 00:30:01,840 Speaker 1: raises a question about frankly, quidity in the bond market. 549 00:30:01,880 --> 00:30:05,240 Speaker 1: When the Federal Reserve clamps down to such degree and 550 00:30:05,760 --> 00:30:08,880 Speaker 1: sucks up such a significant portion of the outstanding debt, 551 00:30:09,480 --> 00:30:13,280 Speaker 1: does this reduce liquidity in the existing bonds? What does 552 00:30:13,280 --> 00:30:15,000 Speaker 1: this judist how to chist? What does it do the 553 00:30:15,000 --> 00:30:18,080 Speaker 1: whole industry of of the bond market if it's completely 554 00:30:18,080 --> 00:30:21,200 Speaker 1: controlled by the central bank. Yeah, it's it's really interesting, 555 00:30:21,240 --> 00:30:23,840 Speaker 1: and I'm not sure it's something you know. I'm sure 556 00:30:23,960 --> 00:30:26,120 Speaker 1: a lot of market participants have different views about it, 557 00:30:26,160 --> 00:30:29,080 Speaker 1: but certainly, you know, we've given the Fed credit since 558 00:30:29,120 --> 00:30:31,600 Speaker 1: the beginning of this whole pandemic for taking decisive action, 559 00:30:31,680 --> 00:30:34,760 Speaker 1: for taking early action. Uh, and this appears to be 560 00:30:34,840 --> 00:30:37,480 Speaker 1: just another tool in the toolbox that they're prepared to use. 561 00:30:37,920 --> 00:30:42,040 Speaker 1: This is Bloomberg. Thanks for listening to the Bloomberg P 562 00:30:42,120 --> 00:30:44,680 Speaker 1: and L podcast. You can subscribe and listen to interviews 563 00:30:44,680 --> 00:30:48,479 Speaker 1: at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, 564 00:30:48,560 --> 00:30:51,320 Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa abram Woids. 565 00:30:51,320 --> 00:30:54,360 Speaker 1: I'm on Twitter at Lisa A. Bramwod's One before the podcast. 566 00:30:54,360 --> 00:30:56,960 Speaker 1: You can always catch us worldwide on Bloomberg Radio