2008 Crisis Lesson: Be Greedy When Others Are Fearful
Welcome to the Bloomberg PNL podcast. I'm Paul Sweeney along with my co-host these Abramowicz each day, we bring you the most noteworthy in useful interviews for you and your money whether at the grocery store or the trading floor. Find the Bloomberg PL podcast on apple podcasts or wherever you listen to podcasts as well. As at Bloomberg dot com. March ninth will Mark the tenth anniversary of the market bottom during the global financial crisis on that day, the intra-day low and the s&p five hundred touch six hundred and sixty six since then the market is up over three hundred percent. So to give us a sense of kind of what has been driving the market and what to look forward to going forward. We welcome Charlie Brisco, Charlie's vice-chairman ahead of of the investment group at Ariel investments over close to fourteen billion dollars under management areas based in Chicago. But Charlie joins us here in our Bloomberg. Interactive brokers studio, Charlie welcome to our studios next family. What looking back what were some of the lessons that you guys at area you folks at aerial take from the financial crisis. And then what's happened sits over the last ten years. Yes. Some of its relearning old lessons. The biggest one is that you have to be greedy. When others are fearful and people were very fearful in two thousand and nine and it was the best time to be a buyer. But boy, it didn't feel like it. At the time. People felt great about stocks in two thousand and one. And it was a terrible time do invest in stocks. So by when others or selling cell when others you're buying greedy. Who knows if you're those are the lessons, we relearned so and right now, unfortunately, possibly for investors. Invest for for those seeking those values retail investors, don't seem either particularly greedy or particularly fearful they just kind of our following. What's going on there being almost dare I say it prudent? I'm just wondering from your perspective. Is there alpha left is there a place for an active manager to really generate significant returns? So when we make presentations to investment committees at institutional investors, they're still pretty nervous. They keep asking questions about. When is this going to end hasn't this rally gone onto long we're going to have a recession here any day? There's been a shift to fixed income L D I investing pension plans. We think the institutional investor is still pretty nervous. A lot of questions. We get about our earnings recession coming. The first two quarters. We don't see it. So I'm going to just say that the market in general is still pretty nervous. So Charlie it's interesting because the markets up the SNP is up over eleven percent this year in one of the stats that that really caught my eye is just as this round trip. We've had since early December that thirty seven percent move roughly, and yes and p from the so when you think about that one could argue that gee, maybe today now now's the time sell that kind of made eleven percent. Isn't that good enough in what's your view for the remainder major this year, for example? Yeah. So are the flexible fund of areas the area fund, which is actually up eighteen percent. When the SNP was up eleven on Tuesday. And I will say it was cheap after the drop last quarter. At the beginning of the year. We were at thirteen times forward earnings. We're not at dirty anymore. We're probably close to fair value. But there are still pockets of cheapness, and there's pockets of overvalued. We think there's still a safety bid stable, stocks are considered stable stocks. Utilities high paying consumer. Staples are still overpriced what's not expensive are anything. That's considered cyclical. Still have a lot of people thinking recessions coming. Global growth is going to close is going to slow down. So we love the alternative asset managers KKR Blackstone, which are considered a high beta and cyclical and they're very cheap right now. As are a lot of industrials sound like right now at SAP five hundred that's up more than eleven percent year to date, including reinvested dividends. How much does it have to go? What's going to be the full year return for twenty nineteen? So we think neither wean or anybody else can have good prediction on that. We can at any given time give you view on relative value. But we don't think anybody's any good at at predicting the short term, we think of frankly, the secret to investing is focusing on the long term and not spending too much time worrying about the short term. However, I certain times, however, here is an exact number for the one hundred year. But it is actually true that that market. Multiples are pretty good predictor of returns. And so when you had at the beginning of the year, our value stocks at around thirteen times that was cheap and low p es do tend to produce a high returns, even in the short term is a great statistic that when the PM ratio drops by twenty percent in the market. It's often a very good period of time to invest for even the next twelve months does aerial invested on PEOs, not usually in the reason is because we want to invest in companies that have a proven sustainable competitive advantage. We're value investors. So we look at earnings a lot of the companies are going to be coming public. This year. Have no earnings people talking about multiples of sales. So we would be very cautious on some of the valuations that we're seeing for companies that are coming Charlie. What do you feel about concentration because I've been hearing about more funds that are going into say fifteen names, and that's it? Yeah. We're very concentrated. We believe in focus. We have in the area fund on forty stocks buffet talks about why it's so much better to invest in your top twenty ideas, rather than putting money into your thirty s bet thirtieth best idea, we think it's if you're really diversified with one hundred stocks, very hard to beat the index is after fees. So we believe in focus, you can know those names better. Frankly, there's stocks like Qiqihar that are very cheap. And we'll put a lot of money into kickoff. Five percent of a position. When did you start that bet in two thousand and thirteen when the US government, downgraded when SNP downgraded the US government from AAA everybody thought, the high yield market was going to close and kick air stock went from eighteen to twelve and it became a wonderful opportunity because of the two and twenty didn't go away. But the stock reduced in price by thirty three percent. It's gone now from twelve to Twenty-three in one of the reasons was it was a partnership that index funds camp by and kick your converted into a. A corpse. And now everybody combine them vanguard. Just bought eight percent of the company in the last quarter. And I'm looking at the shares right now KTAR shares have risen more than sixty seven percent since March two thousand thirteen Charlie abo- prince, quite thank you so much for being with US Vice chair and head of the investment group in portfolio manager at Ariel investments, which is in New York City to celebrate the ten year anniversary of the financial crisis rather seller. Celebrate what's come after the financial crisis. The crisis itself. It wasn't so long ago that things were starting to look up a little bit for General Electric. There is a sense that there was going to be a restructuring path forward. What happened GE the shares having? It's their biggest two day decline right now since November in the red by more than four percent today. Care nubile heart of Bloomberg intelligence joining us here in our interactive brokers studios. Karen covers industrials here. What's going on now? Well, you know, we've had a lack of disclosure on twenty nineteen. So it has been anybody's guess, we've had no guidance for over nine months, and we are long awaiting the fourteenth where they would give us twenty nine hundred and yesterday gave a little preview of what they're going to announce next week and said that negative that cash flow, which was four point eight billion positive this year was going to be in the negative column next year, and it was a total surprise. So what's driving? This negative surprising casual which of. The remaining businesses. I know they've sold off a lot of businesses. They've really focused what's causing the problems now at all power. But in addition to that, and this is one of the problems with GE last year. The apparently got a billion plus in prepayments from their little renewable business. Okay. Which they didn't mention when cash let was better than expected. Right. This year. They have to start delivering that stuff that business at little tiny businesses going to shift from a billion positive to probably, you know, I don't know up to a billion negative. So that's two billion of the shortfall. Why didn't they tell us? There was a one time last year. But this raises another question, right? One sort of hallmark of General Electric's problems has been I don't know if accounting issues is sort of a strong way of putting it but the in accurate, accounting, statements or statements that have not fully disclosed the depth of the problems at the organization for a variety of reasons. Does this just sort of confirmed that nothing on that front has dramatically changed and that these surprises will keep coming? Well that that is. Is part of it. People are hanging their hat on. You know, this is this is a, you know, an honest guy a really good operator. He's going to he's going to give us the details. And this was like dropping a bomb, and but the second one is power power. You know, it's gonna it's taking longer to get his arms around it. I don't have any doubt that he will. But power is going to be worse this year. And again, some of that could is disclosed they these are very long term contracts. They did very bad contracts over the last few years just to get orders on the books, and guess what? Now, they've got to ship them, and they're shipping. Very probably some some deals at at losses, and that's going to be a multi year workout, you know, kinda like an engineering construction company a bad contract and takes years to work through the backlog. Right. But then also, you know, the cost structure is not anywhere near in line with where revenues revenue today, and that's ongoing. He they laid off twenty four thousand people not divisional almost year. They've cut a number of plant. It's not enough. So that's what he's telling us. They have to do more. Okay. So let's now they've done. That in terms of the the the restructuring and the company, do you think that they are done with that in terms of selling I guess people call non-core assets are the assets that GE has today is that it now they still have about fourteen billion in stock ownership of Baker Hughes that businesses already off line. It's being run independently. But they have a fourteen billion dollar ownership there. They have about another four billion that they can get out of the web tech business that they sold and then it's going to be smaller units. I think from here, but even in the power division. There's two pieces now that the the non gas piece their stuff in there that they can sell. But I think the big stuff is is probably behind us. So all right. So I, of course, I'm sorry. I I'm very focused on the debt side of this just because that is the nature of my DNA. That is I'm sorry. It is who I am. I'm looking right now General Electric perpetual, bonds five percent debt is the biggest loser. Among the investment grade universe today. Another decline in price that means higher. Implied borrowing costs how crucial is it. The General Electric gets its act together, and is able to give better disclosure, and frankly, a better view into just how much more Consol in the valuations that'll be able to achieve in order to avoid paying criminally high interest rates are prohibitively high interest rates and potential downgrade. Well, I think they bought some time with that twenty billion dollar asset sale that they announced last week that will significantly help the debt burden. They're not going to get the money until the fourth quarter of next year. But you know, there's a good shot that the credit agency agencies will say, look, we got a lot of cash common. And it's the the deal with Danaher. And I think that really bought them time the sales at selling something for three billion or five billion or four billion. There was still a lot of a worry. And now this they got a chunk of change coming which will I think alleviate some of those fares the one risk is what if some of these these unknown liabilities are much bigger than we think. There's a lot of lawsuits out there. You know, there's a number. There's a long-term healthcare insurance thing that do they really have their arms around that. So I think they're okay with this big asset sale if nothing big hit some, you know unexpectedly, but there's room for that. There's room for the unexpected here. All right. Let's no, Leslie, let's talk about the dividend. I'm looking on the Bloomberg terminal. Now, there's a forty two assent dividend. Yielding about three point eight eight percent is that safe. No, they cut the dividend to a penny. Okay. Because. Yeah. So so they had they and they're saving four billion dollars by doing that will actually it's an eight billion annual cost. That's now nothing like eight hundred million. So this this is not the GE week Rupp with building growing buying dividends for widows and orphans. That's that those desert on right? I you know, he said down the road he wants to be two and a half times leverage and competitive dividend. But that's really quite a bit down the road, so renewable heart. Thank you so much current heart senior industrial analysts been covering GE forever. Not edge you she's our best and Bloomberg intelligence. So thanks so much. As usual. There is a lot of news in the healthcare space. First. We have the announcement that the FDA has approved Johnson and Johnson nasal spray that works to alleviate symptoms of depression. And we also have news of the sudden resignation of the food and drug administration's Commissioner Scott Gottlieb, the help us break down. All that's going on healthcare. We bring in our friend, max niece and Max's biotech pharma and healthcare columnist for Bloomberg opinion. He joins us here in our Bloomberg eleven three oh studios. Max a welcome. Once again, this Johnson and Johnson news story seems like a big deal is it it deathly is. So it's the first kind of real novel depression medicine in more than a decade. And it's the first one in even longer time that has kind of genuinely different way of working on the brain. And then kind of the third differentiating factors that it's fast acting what we have generally takes weeks to kick in. You have to build a concentration of time. So this has the potential be used in a lot of interesting different ways spur for people that are kind of in an acute moment of crisis or who just don't respond to existing therapies, and that that is a pretty big population. So you know, what else is fast acting cocaine Fenton? All I mean is this ketamine is this potentially the next opioid crisis. So, you know, it's it's a it's a relative of ketamine and a close one. And I think the potential for abuse of something that the FDA definitely considered as opposed to, you know, whether it's the equivalent of just giving someone a party drug that they did run kind of you know, randomized you'll late stage trials in an controlled trials in really sick patients in it did have an impact. Well, flip it on its head. Right. Have there been studies done of people who let's say took ketamine or took other party drugs like ecstasy, and that actually helped with depression, you know, that there have been a lot of attempts to. Study this, but not in kind of the the scale and rigor of of this trial, and beyond the fact that it has this kind of psychoactive effects that that people have chased. There does seem to be some kind of you know, scientific evidence that there is an effect on the brain that, you know, there's there's like a a medical thesis that they're chasing here for why might help people with depression. It's not let's give people a happy drug and see if they get happy them some acts. I know the antidepressant market in general is a monster market. Is there a sense of how big this sub part of it is so that that's the big question, you know, treatment resistant population is potentially millions of people. The question is how many of them are going to end up getting a getting Johnson Johnson drugs. And that's that's trickier question. This is in you know, you just get a pack of pills and take them you have to go to a licensed office, take it. And then sit there for two hours. A while you're monitored for symptoms of disown. Station today Shen than you're not supposed to operate heavy machinery for the rest of the it's gotta find someone to give you a ride. So that that's a really hard thing for for people that are working to do. And then, you know, this isn't something that your average psychiatrists is quick to handle. So that that is likely to kind of keep it from reaching its full addressable market at least anytime soon, and I just want to be very clear. I mean, I've sort of been talking about this with a light tone. But it's really not frankly underscores how much the epidemic of suicides in this country has absolutely been exploding especially among the younger populations. I do want to shift gears a little bit to the food and Drug administration or just basically the the chief of the US food and Drug administration. Scott, Gottlieb resigned. Suddenly, it seems like there is nothing untoward in why he resigned there was no kind of push. It was a personal issue. How big of a loss is this an how much does it affect the industries? I think it's. Pretty significant everyone likes sky. He he, you know, there's. Even even me, you know, obviously, there's some such people that really like, you know, selling tobacco and vape pens, less spans because he eats kind of an aggressive regulatory stance on them. But he was seen as someone that understood the industry worked really hard and pushed on a lot of significant public health issues in a way that you hadn't really seen from a previous commissioners. It can be quiet job. You know, it's a technical administrative posts, but he turned into something. There was a lot more communicative in an active on the policy front us. So I think he will be missed and not just by by drugmakers who saw someone that was really pushing to modernize the agency and and make it easier for innovative therapies to make it to market, but but for for the country's a whole, you know. It is really the exception when you have kind of a relatively drama free and competent leader agency in in the stained age relative to the past. So is there any sense of who's going to replace Gottlieb in just in general, the the big farm on all their lobbyists? Do they have an influence on who gets selected? You know? I imagine we're we're not gonna get someone that they really hate just because that is a big lobby, and it's one that has a lot of influence in congress. But there is a chance that we could get a left field candidate. And I'm just thinking of, you know, the people that were rumored to be considered a long side, Scott leave I will that was could've Peter the'll affiliated investor who has some some pretty out of the mainstream. I'll save us on on regulation of medicines. Which is to say that they they shouldn't be regulated very much. That's a position that you might think that drug makers are in favor of but actually would. Potentially be pretty chaotic so that that's a potential negative. But we could just get, you know, a pretty mainstream bureaucrat as well. We'll be excited. He's got leap, but probably won't cause any harm. So we'll see you didn't you started off talking about this with respect that tobacco companies. And in vaping companies were not that excited about him being there and are more excited about him leaving. We did see a pop in their shares. Do you expect that to last or do you think that any successor would would adopt the same kinds of policies? Oh, you know. I wouldn't be surprised if they at least continue Gottlieb's efforts. Maybe they won't be as publicly energetic about them. But you know, I don't think there's much of a a push that these these companies can make to to kind of combat the general rise of kind of further regulations. Intersex on the public health impact is is pretty obvious. You don't want people getting addicted to tobacco or nicotine products one way or another, and it's the role of the FDA in one way or another to take a role nuts. So how is the FDA today's generally perceived as a good bipartisan view, or is it really in the lap of big pharma or on consumers. Where's the FDA is kind of proceed right now? You know, I think the God leave FDA lease was was kind of respected to a certain extent by by people on both sides of the aisle, which is an achievement in itself. I think you'll find people that do feel that it tends to lean too much in the way of pharma, and that was a criticism colleague who who had some industry experience. But at the same time he did things that were kind of to the detriment of industry calling people out for kind of abuses of the generic approval system for pricing things like that. And on the other hand, you have people that want to push you have to you'd have more of an active role. So we'll see Maxine said, thank you so much for being with us max Niessen biotech, pharma and healthcare communist with glimmer opinion. We always value your perspective. Good morning. Well, it as Lisa said earlier, the market seems to be discounting that the fed is done raising rates at least for the near term. But there is a interesting column out this morning by former New York fed President Bill Dudley that said don't assume that there may be room for the fed to perhaps even raise rates at some point later this year to help us dig into this issue and outlooks for rates for twenty nine thousand nine we bring in Carl Riccadonna Carl's a chief economist for Bloomberg economics. He joins us live barely in the Bloomberg eleven three oh studios here in New York. You gonna take that sitting down? Very much alive. Just ease one floor wave and he made it with the second spirit. Thanks carl. So what do you make Carl of Bill Dudley's column about rates and the outlook for twenty nine thousand nine I agree with what the former New York fed president is saying, and we've maintained that view as well. This is a pause not a peak for interest rates. We can look at the, you know, the the grand scope of history and the economy has never rolled over with interest rates as accommodative as they are at the moment. And so we look at real GDP growth, relative to real interest rates and real interest rates are essentially zero that the rise significantly higher. Maybe two hundred basis points higher to actually be depressing economic growth. All right. So let's take a little bit more into what Bill Dudley said he said that probably the economy would underperform for the first half of this year. He thinks that patients indicates the fed won't be raising rates in the first half of twenty nine thousand nine. However, he expects the economy to reaccelerate. In the second half, and basically prompt the fed to rethink its patients. Do you agree with that? I agree with that. And here's a story. So break it down for the economy grew on break it down the economy grew about three percent last year. That's well above trend growth when you grow above trend two things happen one the unemployment rate move slower and to generate inflation pressures. So you get an acceleration in inflation. We saw both of those things last year the economy is moderating this year. So we're going from two point nine or three percent growth down to my teams expecting something close to two point four percent still above trend. You get exactly what you got last year just in a slightly smaller dose. And so the expectation is right. The earning seasons. Not looking that great. If you've talked to chief equity strategist Gina Martin Adams, she'll say that we may even be potentially contending with an earnings recession not an economic recession, but an earnings recession or at the very least to solve. Patch in the first part of this year. And so we have this, you know, equity market correction in Q four soft patch for corporate earnings residual seasonality issues with the GDP numbers where we get a Asaf Prenton Q one. Once we get to mid year and central bankers. Sit back in the sense what's happening in the economy. They're going to see that we still have growth that is above trend. We have an unemployment rate heading into mid three percent territory. And the way that pressuring running it. So hottest of the cycle. They'll say in that environment. We're not done we have to keep hiking. How surprise with markets be if when the fed if the fed hikes again this year? Well, the fed doesn't want them to be surprised. So while the fed kind of lead the market to this point in terms of the rate increases, we've seen the fed got burned in Q four. This means now the fed is going to follow not lead the market to interest rates. So the Fed's going to let the market beg for it. And then be happy to oblige them in by letting the market beg for it. It means that we'll see a steepening of the yield curve the fed let's the market price in more inflation expectations. You see a bear steepening of the yield curve. And then the feds steps in and says, we'll help you address the inflation problem and layer some rate hikes in give us a sense of timing. Here is this a third quarter type environment because I think if you look at them, I think the market's discounting really nothing for twenty nine the market is saying nothing economists are saying they're still high. Coming the market better than economists. But go ahead. They're gonna beg for it. Those rate hikes go on the way, the timing of this works out, right? We have to wait until we have a sense that we're in the clear from this earnings recession, which means probably by the time. We get the cue to GDP numbers, which would be the end of July. That would be the time where you'll start to see both market participants and fed policymakers say, okay, the economy still running a little hot a little bit of additional accommodation is warranted. And so I think we see two hikes in the back half of the probably at the September meeting in the December meeting, the December is a boulder call, and so the risk is not symmetric around that the risk is we would only get one height this year. But we do have the view that we're going to be contending with a still robust economic environment in the Fed's going to have to do more. They'll just speak really fast than meeting to indicate that they're not patient any longer. I just have. I just have to ask you really and thirty seconds put how much of the slowdown that we're seeing in the first half is due to the trade skirmish at it's been going. On. That's an interesting question. I think you've have thirty seconds element to that. I think it's just a confluence of factors. I think were were blaming trade too, much and will realize it domestic economic fundamentals are still very strong, and I keep going back to that unemployment rate generating wage pressures that is a backstop to consumer spending and the domestic economic outlook is still very robust. Correct. Donna talent. Like it is here in the Bloomberg interactive brokers students. Correct Donna chief economist for Bloomberg economics talking about that Bill Dudley com. Really interesting to me the idea that the market right now has completely written off rate hikes. And yet we have a former fed officials coming out and saying you guys are. You guys are being a little premature. Thanks for listening to the Bloomberg PNL podcast. You can subscribe and listened to interviews at apple podcasts, or whatever podcast platform, you prefer on Paul Sweeney. I'm on Twitter at PT Sweeney and Lisa Abramowicz. I'm on Twitter at Lisa Abramowicz. One before the podcast. You can always catch us worldwide on Bloomberg radio.