WEBVTT - Long Bond Positions Are Ripe For A Reversal: Authers (Podcast) 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl podcast. I'm Paul swing you. 0:00:05.360 --> 0:00:07.680 Along with my co host Lisa Brahma Waits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:23.360 at Bloomberg dot com. This week really was driven by bonds, 0:00:23.440 --> 0:00:26.239 the yield curve, the gap between two year and ten 0:00:26.320 --> 0:00:29.320 year treasury yields inverting for the first time briefly of 0:00:29.440 --> 0:00:32.879 it UH since two thousand and seven, adding to this 0:00:33.080 --> 0:00:36.600 gloom and doom that was pervasive throughout all markets. But 0:00:36.640 --> 0:00:39.239 the question is where do we go from here? And 0:00:39.400 --> 0:00:42.560 our bonds really sending that barish of a signal. John 0:00:42.600 --> 0:00:45.720 Authors is joining us now senior editor for Bloomberg Markets, 0:00:45.840 --> 0:00:49.520 fabulous columnist for Bloomberg Opinion. I recommend you read his work. 0:00:50.000 --> 0:00:52.720 It is tremendous. John, Thank you so much for being here. 0:00:53.159 --> 0:00:56.880 What's your take on the message being sent from bond 0:00:56.880 --> 0:01:00.560 markets this week? Well, the message is plainly negative, ridiculous 0:01:00.560 --> 0:01:04.600 to try to argue any way other than that. Less 0:01:04.640 --> 0:01:07.800 perhaps the inversion. We've been inverted on the three months 0:01:07.840 --> 0:01:10.039 ten years for quite a while anyway, and we were 0:01:10.040 --> 0:01:12.120 only inverted on the two years to tenure for a 0:01:12.120 --> 0:01:15.560 matter of minutes. So that's actually, I think, less important 0:01:15.600 --> 0:01:18.760 than the show publicized minutes. Though. Yeah, well yes exactly. 0:01:18.840 --> 0:01:21.440 I I got to I gave an interview for I 0:01:21.600 --> 0:01:24.280 gave an interview for Bloomberg Radio in my pj's and 0:01:24.440 --> 0:01:26.560 the moment it happened, more or less, that's how we 0:01:26.640 --> 0:01:30.120 do it. Yes, so we we we we were there 0:01:30.160 --> 0:01:31.880 and we were not the only ones there on on 0:01:31.959 --> 0:01:36.400 that story. But but what has been more important, plainly 0:01:36.640 --> 0:01:40.200 is the remarkable falling yields, the remarkable moved to buy 0:01:40.600 --> 0:01:44.520 bonds therefore, and that has not really been reversed in 0:01:44.640 --> 0:01:50.680 any meaningful way during the week. Plainly, that can only 0:01:50.720 --> 0:01:54.360 be negative. The interesting question and the reasonable question, is 0:01:54.440 --> 0:01:57.600 whether the bond market tends to be wrong less of 0:01:57.600 --> 0:01:59.640 the time than the stock market tends to be. But 0:01:59.680 --> 0:02:02.520 it's not as though the bond market is infallible. The 0:02:02.600 --> 0:02:05.200 question is whether the bond market could be wrong about this, 0:02:05.320 --> 0:02:10.240 whether we've got into um the inverse and anti bubble 0:02:10.520 --> 0:02:14.440 where negativity takes over in the same way that optimism 0:02:14.440 --> 0:02:16.519 takes over in the top of a stock market. Yeah, 0:02:16.520 --> 0:02:19.000 I mean, and I'd like to dig into that. But 0:02:19.240 --> 0:02:21.359 before we do that, I mean, I guess I hate 0:02:21.360 --> 0:02:23.120 to be the person to say this time is different, 0:02:23.160 --> 0:02:26.000 because I think that I'd rather shoot myself than than 0:02:26.680 --> 0:02:29.280 commit to that kind of statement and say that everybody 0:02:29.280 --> 0:02:31.919 else is wrong. But you know, people are talking about 0:02:31.919 --> 0:02:35.239 the change in demographics. They're talking about the change in 0:02:35.240 --> 0:02:38.080 inflation regime, the fact that the population isn't growing as 0:02:38.160 --> 0:02:40.480 quickly in developed markets, the fact that you know, all 0:02:40.520 --> 0:02:44.120 of these types of factors leading to lower inflation, slower growth, 0:02:44.320 --> 0:02:46.799 and just lower natural yields, not to mention just the 0:02:46.800 --> 0:02:49.839 amount of dead outstanding. So you know, isn't that enough 0:02:49.880 --> 0:02:52.079 to send yields lower? Despite the fact that we may 0:02:52.120 --> 0:02:54.720 not be headed toward recession, right, all of those things 0:02:54.880 --> 0:02:57.800 certainly help send the yields lower. I would I would 0:02:58.040 --> 0:03:00.840 add the sheer technical factor of liabilar team matching, which 0:03:00.880 --> 0:03:04.240 is much more of an issue than it was even 0:03:04.240 --> 0:03:06.320 ten or eleven years ago when we had twelve years 0:03:06.360 --> 0:03:10.200 ago now, when we had the last inversion that said 0:03:10.600 --> 0:03:16.240 that said, okay, from the war through to at least, 0:03:16.240 --> 0:03:19.000 the turn of the millennium was a historically great time 0:03:19.520 --> 0:03:21.960 to be holding both stocks and bonds. And you could 0:03:22.040 --> 0:03:24.519 argue that that that we're now into a you know, 0:03:24.880 --> 0:03:28.280 argued into different period given the level of the demographics. 0:03:28.919 --> 0:03:34.200 It's only twelve months since all the logic, all the narrative, 0:03:34.720 --> 0:03:38.720 all the great bond gurus said that the direction for 0:03:38.800 --> 0:03:45.760 bonds was naturally up. Um, that the secular ballmarketing bonds 0:03:45.880 --> 0:03:50.000 was over, that pension funds as as we saw the 0:03:50.000 --> 0:03:54.480 demographics shift to people actually retiring selling their bonds as 0:03:54.520 --> 0:03:56.880 part of the process of drawing their pensions and so on. 0:03:57.240 --> 0:04:02.440 That those demographic forces might tell you something about the economics, 0:04:02.520 --> 0:04:06.640 but in terms of the technically impact on the bond market, 0:04:06.840 --> 0:04:11.000 they would still actually drive yields up. That argument is 0:04:11.040 --> 0:04:12.720 true as far as it goes, just as the one, 0:04:13.000 --> 0:04:14.680 just as the bullish argument for the bonds you just 0:04:14.720 --> 0:04:17.640 gave me is is true. Um, people seem to have 0:04:17.640 --> 0:04:19.920 put too much credence in one of them twelve months ago, 0:04:20.040 --> 0:04:22.880 and I suspect may still be putting too much greetenance 0:04:22.920 --> 0:04:24.240 to the other at the moment. So that's that's where 0:04:24.240 --> 0:04:27.200 I wanted ahead with it. So basically, are the positions 0:04:27.279 --> 0:04:32.640 Are the long bond positions crowded and overcrowded except for reversal? Yes? 0:04:32.839 --> 0:04:35.320 I think so. I mean there was a I did 0:04:35.320 --> 0:04:37.360 a column earlier this week where you if you take 0:04:37.360 --> 0:04:40.839 a look at Kindleberger's famous definitions of the guy wote 0:04:40.839 --> 0:04:45.880 this wonderful Manias, Panics and crashes book on uh investment manias, 0:04:45.960 --> 0:04:49.360 mostly stock market manias because stocks are where things really 0:04:49.400 --> 0:04:51.920 go hey why most of the time. But it could 0:04:51.920 --> 0:04:55.239 apply to two bonds. What he was talking about there 0:04:55.480 --> 0:05:00.880 was his valuation obviously extreme, which is is there a 0:05:00.960 --> 0:05:03.719 narrative to back it that makes people think that it 0:05:03.760 --> 0:05:06.279 will carry on like this, that they can justify it? Yes, 0:05:06.320 --> 0:05:11.160 there is? Is there cheap money available to fund it? Well? Duh? 0:05:11.200 --> 0:05:15.600 And perhaps the only questionable one is is investment in 0:05:16.200 --> 0:05:20.760 this market being funded by leverage? Which arguably there's I'm 0:05:20.800 --> 0:05:23.800 not sure how much leveraged money is pouring into the 0:05:23.839 --> 0:05:28.440 bond market, um, but plainly there's a good argument that 0:05:28.480 --> 0:05:31.359 what we have here is a bubble like condition that 0:05:31.480 --> 0:05:34.360 people in many cases, really if you're buying a bond 0:05:34.360 --> 0:05:38.600 with a negative yield, presumably you're at least thinking in 0:05:38.680 --> 0:05:40.720 terms of sending it to somebody else for an even 0:05:40.760 --> 0:05:45.880 more negative yield rather than happily losing some capital by 0:05:46.040 --> 0:05:50.599 holding it until maturity. That's again bubble behavior. So it 0:05:50.680 --> 0:05:54.719 does look to me as though the markets overcrowded. And similarly, 0:05:54.720 --> 0:05:56.680 if you take a look at the performance that you've 0:05:57.000 --> 0:05:59.240 also seen all the patterns that you see in the 0:05:59.320 --> 0:06:01.960 stock market kits that have been caused by people trying 0:06:01.960 --> 0:06:04.279 to deal with the bond market, you can see plenty 0:06:04.279 --> 0:06:07.480 of signs of overcrowding there. That you're talking about the 0:06:07.480 --> 0:06:09.719 bond proxies, right, yes, to talk a little bit about 0:06:09.760 --> 0:06:12.760 what we're talking about, that's utilities and reads, real estate 0:06:12.839 --> 0:06:16.040 investment trusts, etcetera. Those are the most obvious bond proxies. 0:06:16.040 --> 0:06:19.480 Companies that are boring are unlikely to give you amazing 0:06:19.680 --> 0:06:23.479 capital growth, but will actually pay you quite a well supported, 0:06:23.960 --> 0:06:28.799 predictable yield in the case of utilities from regulated Harris 0:06:28.800 --> 0:06:34.520 and reads from the from the rental yield, but it 0:06:34.640 --> 0:06:38.320 actually goes beyond there. Obviously, those companies have been doing 0:06:38.600 --> 0:06:42.080 well of late in the stock market. But I had 0:06:42.120 --> 0:06:43.880 a look at some research from sock Gen which was 0:06:43.920 --> 0:06:47.680 fascinating that they looked at this in a sector neutral fashion. 0:06:47.800 --> 0:06:51.240 So for each sector, even if it's biotech, which were 0:06:51.240 --> 0:06:54.680 the ones that were most correlated to bonds and which 0:06:54.680 --> 0:06:59.479 were the ones least correlated to bonds? Over time, and 0:06:59.680 --> 0:07:02.800 in the last year or so, the last couple of years, 0:07:02.839 --> 0:07:07.680 even on a sector neutral basis, the bonds proxies have 0:07:07.960 --> 0:07:13.480 suddenly become vastly more overvalued just using p ratio standard 0:07:13.960 --> 0:07:17.000 valuation measures, while the ones that the least like bonds 0:07:17.000 --> 0:07:21.440 have become startling lee under valued. People are so if 0:07:21.440 --> 0:07:24.840 you're more like a bond, people will buy your stock 0:07:24.880 --> 0:07:30.120 more than your closest competitor. That really does reek of um. 0:07:30.800 --> 0:07:35.240 Obviously we've people brainlessly blamed algois and so on, which 0:07:35.280 --> 0:07:37.400 can often be rather a tired way of doing these things. 0:07:37.400 --> 0:07:40.320 But plainly, lots of people are looking for yield, they're 0:07:40.320 --> 0:07:42.960 looking for bond substitutes. If they're in some kind of 0:07:42.960 --> 0:07:46.480 a market neutral strategy or whatever. That means they're buying 0:07:46.680 --> 0:07:50.680 the most bond like tech stock and shorten the least 0:07:50.680 --> 0:07:53.520 bond like tech stock. And that means we've got some 0:07:53.640 --> 0:07:57.280 weirdly overcrowded positions that are only there in the stock market, 0:07:57.480 --> 0:07:59.320 that are only there because of the weird conditions in 0:07:59.320 --> 0:08:01.760 the bond market. John Authors, thank you so much for 0:08:01.760 --> 0:08:04.080 taking the time. I love speaking with you. It's great insight, 0:08:04.240 --> 0:08:07.480 and uh, it's sort of an interesting time to be 0:08:07.800 --> 0:08:11.920 not necessarily bullish. But at the same time, it does 0:08:11.920 --> 0:08:15.680 seem like the bearishness is getting crowded, so uh, you 0:08:15.720 --> 0:08:18.000 know that's gonna be something that we're gonna be keeping 0:08:18.000 --> 0:08:20.280 an eye on. John Author's a senior editor for Bloomberg 0:08:20.280 --> 0:08:22.680 Markets and a Bloomberg Opinion columnist. You can read his 0:08:22.800 --> 0:08:26.040 columns O P. I N Go on the Bloomberg, Bloomberg 0:08:26.120 --> 0:08:40.400 dot com slash Opinion on the web. It is about 0:08:40.440 --> 0:08:42.959 ten thirty on Wall Street. That means it is time 0:08:43.000 --> 0:08:45.480 to get some opinions from Bloomberg Opinion. We are so 0:08:45.559 --> 0:08:48.680 lucky to have Brook Sutherland here with us, a columnist 0:08:48.960 --> 0:08:52.160 for US covering the deals in industrial sectors. And Brooke, 0:08:52.520 --> 0:08:54.920 it really is about GE today. I know DearS in 0:08:55.000 --> 0:08:57.040 the headlines and we're going to get there. But GE 0:08:57.080 --> 0:08:59.719 is really fascinating because yesterday it was accused of being 0:08:59.720 --> 0:09:02.800 a Zi scheme by someone who called out the burning 0:09:02.800 --> 0:09:06.400 made off Ponzi scheme, or he called it basically, someone 0:09:06.400 --> 0:09:11.200 said that the accounting issues there were were highly problematic. 0:09:11.480 --> 0:09:13.400 Today we're seeing a bit of a bounce back in 0:09:13.440 --> 0:09:17.960 the shares. Why. I think part of it is because 0:09:18.160 --> 0:09:21.520 Larry cold said yesterday that he bought two million worth 0:09:21.559 --> 0:09:24.439 of shares UM. So that is a vote of confidence 0:09:24.480 --> 0:09:26.559 by the CEO, sort of putting your money where your 0:09:26.640 --> 0:09:30.440 your mouth is. UM. He is required by the proxy 0:09:30.480 --> 0:09:33.720 to own ten times this salary in stock over the 0:09:33.760 --> 0:09:36.560 course of five years, he's supposed to build that up. UM. 0:09:36.600 --> 0:09:40.280 So clearly he's trying to incentivize the CEO to do 0:09:40.360 --> 0:09:44.679 the right thing for shareholders. UM. But you know that 0:09:44.840 --> 0:09:47.440 you also had some analysts come out and say, you know, 0:09:47.520 --> 0:09:51.520 they're not all of the report necessarily makes sense to them, 0:09:51.559 --> 0:09:54.120 and that it may be going over the top. But 0:09:54.200 --> 0:09:56.480 you also have city groups saying, you know, look, this 0:09:56.640 --> 0:10:00.600 builds on existing ongoing concerns. And that's sort of where 0:10:00.600 --> 0:10:04.760 I fall on the spectrum is, particularly with the insurance business, 0:10:04.800 --> 0:10:07.280 it is impossible to know how much money they're going 0:10:07.320 --> 0:10:09.440 to have to put into this. Give us a sense 0:10:09.440 --> 0:10:12.120 of what the report said, who did it, etcetera. Sure, 0:10:12.480 --> 0:10:16.480 So it was Harry Marcopolis, who is a whistleblower on 0:10:16.640 --> 0:10:19.600 Bernie made Off, was ignored by the SEC for years 0:10:19.600 --> 0:10:22.920 and then ultimately proven correct in his analysis there. So 0:10:23.000 --> 0:10:26.520 we published this report on GE accusing them of sort 0:10:26.520 --> 0:10:28.679 of a couple of main things. So the biggest is 0:10:28.720 --> 0:10:32.000 that he thinks that they are significantly under reserved and 0:10:32.040 --> 0:10:34.520 their long term care insurance business. Now remember this is 0:10:34.559 --> 0:10:37.520 where they had to disclose of fifteen billion dollars shortfall 0:10:38.040 --> 0:10:41.760 last year. He thinks that they ultimately need thirty eight 0:10:41.760 --> 0:10:44.280 billion dollars more there, and part of that is an 0:10:44.280 --> 0:10:47.760 eighteen point five billion immediate cash inflex and then a 0:10:47.840 --> 0:10:52.120 ten point five billion non cash gap charged in order 0:10:52.160 --> 0:10:54.800 to sort of respond to tougher accounting rules that are 0:10:54.840 --> 0:10:58.200 going to be coming out regulating this business. Um that 0:10:58.520 --> 0:11:01.240 is a very big number to put on it. And 0:11:01.280 --> 0:11:05.000 again it's this is such a black box of a 0:11:05.040 --> 0:11:08.640 business and it's entirely dependent on assumption. So it matters 0:11:08.920 --> 0:11:10.880 what you think interest rates are going to do, what 0:11:10.920 --> 0:11:13.360 are healthcare costs going to do, how many people are 0:11:13.360 --> 0:11:15.640 going to get all timers, are they going to get healthy? 0:11:15.679 --> 0:11:18.400 When are they going to die? There's so many different 0:11:18.520 --> 0:11:22.360 variables here that you can make assumptions and come up 0:11:22.440 --> 0:11:25.840 with sort of whatever number that you want. But I 0:11:25.880 --> 0:11:29.640 do agree that g E is not being conservative enough 0:11:29.679 --> 0:11:32.160 when it comes to the long term care insurance business. Um. 0:11:32.200 --> 0:11:34.520 You know, I wrote about this in February when they 0:11:34.520 --> 0:11:37.000 sort of laid out more details in their ten K 0:11:37.320 --> 0:11:39.959 of the various assumptions that they were making. And when 0:11:39.960 --> 0:11:42.720 you look at companies like Prudential, it does seem that 0:11:42.840 --> 0:11:45.800 g E is slightly on the more optimistic side. Um. 0:11:46.120 --> 0:11:48.600 So how much they're gonna have to put in there 0:11:48.720 --> 0:11:51.040 is still a question work. But this is certainly something 0:11:51.080 --> 0:11:54.480 that investors have been watching and are aware of. All right, 0:11:54.520 --> 0:11:56.640 so we'll keep watching GE and I know you will 0:11:56.720 --> 0:11:58.920 as well. I do want to shift gears to dear. 0:11:58.960 --> 0:12:02.120 Do you reported earnings today and they're uh. They cut 0:12:02.160 --> 0:12:05.800 their full year forecast, which sounded bad, And when I 0:12:05.880 --> 0:12:09.800 came in, shares were down ahead of the open. Currently 0:12:09.840 --> 0:12:14.600 they're up three point six. What happened? I think it 0:12:14.760 --> 0:12:19.680 might be an issue of expectations versus reality. I think 0:12:19.720 --> 0:12:22.480 expectations were very low for Deer, and you did have 0:12:22.520 --> 0:12:24.920 a Goldman report out this morning saying, you know, they 0:12:24.960 --> 0:12:27.920 were not that bad, particularly when you look at the 0:12:27.920 --> 0:12:31.440 profit margin ringing endorsement. I know, but I think but 0:12:31.559 --> 0:12:34.560 it is sort of you know, demonstrative of what investors 0:12:34.600 --> 0:12:36.840 are going to be focusing on for industrial companies over 0:12:36.880 --> 0:12:39.960 the coming years. Is as you know, we've now established 0:12:39.960 --> 0:12:42.280 that we're in a slowdown. There's nothing that I'm seeing 0:12:42.320 --> 0:12:45.240 that's going to arrest this slowdown, particularly when you have 0:12:45.280 --> 0:12:49.240 the ongoing trade war uncertainty. So assuming this continues, where 0:12:49.240 --> 0:12:50.840 do you put your money? And so I think the 0:12:50.920 --> 0:12:54.480 focus is now on what companies can sustain their profit 0:12:54.520 --> 0:12:58.160 margins when their sales are falling um. And you have 0:12:58.240 --> 0:13:01.120 Deer also talking about changes to its cost structure, so 0:13:01.240 --> 0:13:04.760 clearly it's concerned about that is trying to protect its profitability. 0:13:04.920 --> 0:13:06.520 But but this is, this is this is what was 0:13:06.559 --> 0:13:09.520 struck me this morning. When you start talking about cost cutting, 0:13:09.520 --> 0:13:12.360 which is essentially that cost cutting and raising prices for 0:13:12.400 --> 0:13:14.400 the customers that you do have. You can only do 0:13:14.480 --> 0:13:16.640 that so much, right, And I mean, does that sort 0:13:16.640 --> 0:13:20.440 of indicate is something bigger that is concerning to you? 0:13:21.280 --> 0:13:24.120 It does? I mean, I will say, so, You're You're 0:13:24.120 --> 0:13:26.160 absolutely right, there's only so much you can cut. But 0:13:26.200 --> 0:13:29.760 the idea is that these companies are becoming more efficient, 0:13:29.840 --> 0:13:31.720 more productive. Now a big part of that is a 0:13:31.760 --> 0:13:34.080 lot more of their operations are automated, so they don't 0:13:34.160 --> 0:13:37.000 have as many people to pay in the first place. Um. 0:13:37.240 --> 0:13:39.720 So that's their argument is that you know, they're they're 0:13:39.720 --> 0:13:42.000 sort of protected in that way. But yes, it does 0:13:42.160 --> 0:13:46.520 raise questions about longer term impact on demand and sort 0:13:46.520 --> 0:13:49.240 of supporting this cycle, because you can only do these 0:13:49.240 --> 0:13:51.760 things so long before then we do start to see 0:13:51.760 --> 0:13:54.679 this recession that you know is for the most part 0:13:54.760 --> 0:13:58.120 been sort of contained to manufacturing slip into the consumer. 0:13:58.360 --> 0:14:01.760 So with Deer, I know that in general Caterpillar is 0:14:01.840 --> 0:14:04.839 viewed more as a proxy on the economy than than 0:14:04.960 --> 0:14:06.760 Deer is. But is there anything that we can read 0:14:06.800 --> 0:14:10.320 in uh two Deer's results to give us a broader 0:14:10.360 --> 0:14:12.679 sense of what's going on in the effects of corporate 0:14:12.679 --> 0:14:15.760 balance sheets? Yeah? Absolutely, I mean I think they're a 0:14:15.840 --> 0:14:18.600 great proxy for trade war pain because of course this 0:14:18.640 --> 0:14:22.560 has really hit the agricultural sector, um. And so just 0:14:22.680 --> 0:14:27.160 looking at the general uncertainty that's pervading manufacturing, I think 0:14:27.200 --> 0:14:29.520 this is another example of that where people are just 0:14:29.760 --> 0:14:32.160 not willing to spin because they don't know what's going 0:14:32.200 --> 0:14:34.360 to happen, what's going to be out there. How do 0:14:34.400 --> 0:14:38.320 you justify spending thousands of dollars on a tractor? Yeah? Um, 0:14:38.360 --> 0:14:41.640 so right now we are talking about deer shares up 0:14:41.680 --> 0:14:44.720 at three point six percent. Next week, just real quick, 0:14:44.840 --> 0:14:47.880 what industrial news are you looking for. I'm hoping it 0:14:47.960 --> 0:14:50.440 might be a little slow next week because it's it's 0:14:50.520 --> 0:14:52.400 the middle of August. We've sort of gotten through earnings. 0:14:52.440 --> 0:14:54.840 But I think, you know, with this Trump administration, nothing 0:14:54.880 --> 0:14:57.960 can ever be totally uneventful, and so I'm sure we'll 0:14:58.000 --> 0:15:00.240 get some trade headlines which will have an impact act 0:15:00.280 --> 0:15:02.160 on on industrials. And of course we're going to keep 0:15:02.200 --> 0:15:05.080 watching g for more developments there and especially to see 0:15:05.080 --> 0:15:08.040 if they have a more robust defense point by point, 0:15:08.040 --> 0:15:09.480 because we haven't really seen that yet, And do you 0:15:09.480 --> 0:15:12.280 expect that. I think they would be wise to do that. 0:15:12.320 --> 0:15:14.560 I think they'd be smart to go in and get 0:15:14.640 --> 0:15:17.520 rid of all the earnings adjustments and their financial statements 0:15:17.560 --> 0:15:19.920 to you know, stop being quite so opaque with the 0:15:19.920 --> 0:15:22.280 way that they present their numbers. Um. They've had some 0:15:22.400 --> 0:15:25.240 unfortunate errors just over the past couple of months where 0:15:25.280 --> 0:15:28.040 they've had to go back and correct what they said 0:15:28.040 --> 0:15:32.120 in presentations, correct marketing materials that you know, had made 0:15:32.160 --> 0:15:35.520 their business sound better than it really was, and so 0:15:35.640 --> 0:15:37.360 that is not a good look. And you know, I 0:15:37.360 --> 0:15:41.200 think they have a clear opportunity here to do more 0:15:41.240 --> 0:15:44.480 to improve transparency and credibility. Brook Sutherland, thank you so 0:15:44.560 --> 0:15:47.520 much for being with as Brooks Sutherland of Bloomberg Opinion. 0:15:47.600 --> 0:15:49.040 You can read all of our columns O P I 0:15:49.160 --> 0:15:52.800 and go on the Bloomberg or Bloomberg dot com slash 0:15:52.800 --> 0:15:56.400 Opinion on the Internet. I do want to just mention 0:15:56.440 --> 0:15:59.720 that General Electrics, the biggest plunge in eleven years, came 0:15:59.760 --> 0:16:01.920 as of a bad time for a lot of hedge funds. 0:16:01.920 --> 0:16:05.200 There's a really interesting story talking about how the likes 0:16:05.240 --> 0:16:09.200 of Rhissance Technologies, Citadelle Advisors, and a Dodgy Capital Management 0:16:09.240 --> 0:16:13.480 all piled into General Electric shares right before the shares 0:16:13.600 --> 0:16:16.200 completely fell out of bed. So not the best time. 0:16:29.280 --> 0:16:35.240 Biotech is risky China is risky. Biotech in China an opportunity. 0:16:35.360 --> 0:16:38.000 That is what our next guest says. Brad at long Car. 0:16:38.120 --> 0:16:41.200 He is chief executive officer of Long Car Investments, normally 0:16:41.240 --> 0:16:44.360 in Lenox, Kansas, but joining us here in our Bloomberg 0:16:44.400 --> 0:16:48.440 Interactive Broker studios, Brad, So you invest You've been an 0:16:48.440 --> 0:16:52.080 investor in biotechnology shares for a long time, So just 0:16:52.240 --> 0:16:55.160 you give us a sense of why you were attracted 0:16:55.160 --> 0:16:59.320 to China in particular within this sector. Yeah, so thanks 0:16:59.360 --> 0:17:02.120 for having me. This does sound like something that's new, 0:17:02.240 --> 0:17:05.680 because it is. China is having a biotech boom right now, 0:17:06.400 --> 0:17:08.440 and part of what's behind it is, you know, think 0:17:08.440 --> 0:17:10.280 of the trade war and all of the headlines that 0:17:10.320 --> 0:17:13.720 are going on. China wants to shift its economy from 0:17:13.720 --> 0:17:17.680 being a manufacturing base and traditional industries like that to 0:17:17.840 --> 0:17:22.159 innovative sectors like tech and clean tech, and biotech is 0:17:22.200 --> 0:17:25.199 one of those. So your listeners might be familiar with 0:17:25.240 --> 0:17:28.800 the term made in China. Five. China has singled out 0:17:28.800 --> 0:17:31.600 pharmaceuticals as an industry that it wants to be a 0:17:31.640 --> 0:17:34.960 world leader in by that time. So the government is 0:17:35.000 --> 0:17:38.439 behind this. They've completely reformed their version of the f 0:17:38.560 --> 0:17:42.159 d A. It's called the National Medical Products Administration. The 0:17:42.240 --> 0:17:45.840 stock markets are actually allowing biotech companies to list for 0:17:45.880 --> 0:17:48.720 the first time, believe it or not before last year, 0:17:49.200 --> 0:17:51.760 like in Hong Kong. If you didn't have revenue, as 0:17:51.840 --> 0:17:55.000 most biotech companies don't, you couldn't even list on the 0:17:55.000 --> 0:17:58.440 stock exchange, and so all of these things are incubating 0:17:58.600 --> 0:18:01.240 a biotech sector for the first time. How do you 0:18:01.320 --> 0:18:05.280 evaluate a company? First of all, how do you evalue 0:18:05.280 --> 0:18:07.479 a biotech company and is potential worth when a lot 0:18:07.520 --> 0:18:09.520 of them are binary? Right? I mean you can have 0:18:09.520 --> 0:18:12.040 a binary outcome either something gets passed by the FDA 0:18:12.160 --> 0:18:16.399 and adapt adopted by the mainstream medical world where it doesn't. 0:18:17.080 --> 0:18:19.200 But in China, I feel like the bar is even 0:18:19.280 --> 0:18:21.959 hired to understand what's going on with the company. I mean, 0:18:22.040 --> 0:18:24.159 is that a big problem for you just evaluating what 0:18:24.240 --> 0:18:27.320 they actually do and how good their products actually are. Yeah, 0:18:27.359 --> 0:18:29.600 so it's a little different there and here. So here 0:18:29.680 --> 0:18:32.080 you really have to analyze the science and try to 0:18:32.119 --> 0:18:35.119 figure out what's going to work or what's not. The 0:18:35.119 --> 0:18:37.840 phase that China is in with biotech right now is 0:18:38.359 --> 0:18:41.520 a lot of the companies there are licensing drugs here. 0:18:41.680 --> 0:18:44.480 So these drugs that are innovative and being approved here 0:18:44.520 --> 0:18:47.640 for the first time, but are already proven, have already 0:18:47.680 --> 0:18:52.360 succeeded in trials. They're licensing those drugs and then commercializing 0:18:52.440 --> 0:18:55.480 them there. So the stage that we're in right now 0:18:55.640 --> 0:18:58.199 is trying to determine the size of the market and 0:18:58.240 --> 0:19:02.359 the patient population for AREUS medicines there, and then to 0:19:02.520 --> 0:19:05.280 use that to figure out the value of the companies. Now, 0:19:05.680 --> 0:19:09.080 Chinese companies are also doing what we call discovery work, 0:19:09.200 --> 0:19:12.840 and they will be inventing new medicines over the coming years, 0:19:12.880 --> 0:19:15.439 and so we're gonna have to shift our focus and 0:19:15.480 --> 0:19:19.280 focus on that scientific risk they're like we do in 0:19:19.320 --> 0:19:21.840 the US today. But that's kind of the next step. 0:19:21.880 --> 0:19:25.119 The first step is just getting innovative drugs into the 0:19:25.119 --> 0:19:28.800 country to begin with, and what are the economic ramifications 0:19:28.800 --> 0:19:32.080 of that? And for that, there's it's wide open. They're 0:19:32.119 --> 0:19:36.600 transitioning from a generics based model to an innovative based model, 0:19:36.640 --> 0:19:38.880 and so there's gonna be lots of room for many 0:19:38.920 --> 0:19:43.000 companies to succeed. I'm listening to you talk about adapting 0:19:43.960 --> 0:19:47.919 or you know, bringing over some of the established medicines here. 0:19:48.840 --> 0:19:50.760 How does this fit into the trade war and the 0:19:50.800 --> 0:19:55.320 whole intellectual theft in IP theft discussion. Yeah, well, the 0:19:55.359 --> 0:19:57.679 trade wars you classically think of it, There are no 0:19:57.960 --> 0:20:00.879 tariffs on medicines because if you think about it, that 0:20:00.880 --> 0:20:04.560 would raise drug prices and neither side wants that so 0:20:04.600 --> 0:20:08.320 this is one area that fundamentally is not affected by 0:20:08.359 --> 0:20:11.280 the trade war. Now in terms of IP theft, that's 0:20:11.320 --> 0:20:14.960 part of the trade war negotiation. So a big class 0:20:14.960 --> 0:20:18.000 of drugs here what really created the biotech sector, what's 0:20:18.000 --> 0:20:21.920 called biologics and China in the US right now are 0:20:22.000 --> 0:20:26.480 negotiating how many years of exclusivity biologics will get in China. 0:20:26.600 --> 0:20:28.560 What are biologics? Just to give us a sense of 0:20:28.560 --> 0:20:30.280 what kinds of drugs were talking about. So like a 0:20:30.280 --> 0:20:34.200 traditional traditional medicine is made by chemicals, so like a pill, 0:20:34.400 --> 0:20:38.119 biologic is like hum era, you know, drugs that are 0:20:38.160 --> 0:20:43.000 made from living organisms. And so in the US we 0:20:43.040 --> 0:20:46.320 have twelve years of protection from biologics right now. China 0:20:46.359 --> 0:20:49.040 would like to have nine years. But our industry views 0:20:49.119 --> 0:20:53.040 the negotiation as a hugely positive thing. That's that it's 0:20:53.080 --> 0:20:56.720 even taking place. So China understands that you can't have 0:20:56.760 --> 0:21:00.760 a biotech sector without IP protection, and they're starting to 0:21:00.800 --> 0:21:03.560 write that in more forcefully than they have in the past. 0:21:03.640 --> 0:21:05.639 And so I think the arrows are pointed in the 0:21:05.720 --> 0:21:08.399 right direction as far as that goes. So, you know, 0:21:09.640 --> 0:21:12.680 moving aside from the science of it, and I understand 0:21:12.680 --> 0:21:14.920 sort of the technical backdrop, the fact that the biotech 0:21:15.000 --> 0:21:17.840 industry in China is gaining new steam because of the 0:21:17.880 --> 0:21:24.959 Maid Proclamation and also just because there is a shift 0:21:25.240 --> 0:21:29.000 to a more developed economy. How do you invest in 0:21:29.119 --> 0:21:30.840 Chinese stocks? Do you do it with U N do 0:21:31.000 --> 0:21:32.879 you do it with dollars? I mean, is that a 0:21:32.920 --> 0:21:36.159 big consideration for you? Yeah? Well, I'm an index creator. 0:21:36.200 --> 0:21:38.960 I've created an index that tracks a basket of China 0:21:39.040 --> 0:21:42.760 biotech stocks, and most of them are listed in Hong Kong. 0:21:43.040 --> 0:21:45.480 Like the index that I've created, it's called the China 0:21:45.520 --> 0:21:49.600 Biopharma Index, tracks twenty nine companies and twenty three of 0:21:49.640 --> 0:21:52.399 those are listed in Hong Kong. But there's actually a 0:21:52.400 --> 0:21:55.800 handful of really good ones here listed on NASDAC. There's 0:21:55.840 --> 0:21:59.239 one called by Jane, one called zy Lab, and so 0:21:59.280 --> 0:22:02.960 they're listing in both places. And you know, I personally 0:22:03.200 --> 0:22:05.360 do a lot of on the groundwork. Over the last year, 0:22:05.359 --> 0:22:08.920