Speaker 1: Strap on your Parachute's time for What Goes Up with
Speaker 1: Sarah Ponzick and Mike Reagan. Hello and welcome to What
Speaker 1: goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Pons,
Speaker 1: a reporter on the Cross Asset team, and I'm Mike Reagan,
Speaker 1: a senior editor at Bloomberg and as Sarah's official hype man.
Speaker 1: I have to give a shout out to Sarah this
Speaker 1: week for getting the cover story of Business Week magazine Football.
Speaker 1: Our listeners rush out to the newsstand and grab it
Speaker 1: on Robin Hood. Congratulations, Sarah, Thank you. I'm flattered. Mike,
Speaker 1: I'm so lucky to know that I have such a
Speaker 1: loyal hype man. So everyone who's listening, you have to
Speaker 1: take Mike's word, even though he hasn't read the story,
Speaker 1: um and go read it yourself. Thank you so much.
Speaker 1: It's fabulous. Even though you've only seen the title, We'll
Speaker 1: take it and run with it. But it is about
Speaker 1: Robin Hood. If you haven't listened to last week's episode either,
Speaker 1: we spoke to Listen Saunders over at Schwab about the
Speaker 1: date Trader of Facts, so it's also a great episode
Speaker 1: to listen to if you haven't already, but this week
Speaker 1: on the show anyway, Mike, investors are coalescing around the
Speaker 1: idea that no matter who wins the election, there will
Speaker 1: be more stimulus down the road. But with all this
Speaker 1: government spending, will there be enough demand to meet all
Speaker 1: the supply? And of course we will close out the
Speaker 1: episode with our tradition the craziest thing I saw in
Speaker 1: markets this week. And after all, if you saw something crazy,
Speaker 1: give us a call on the Bloomberg Podcast hotline at
Speaker 1: six four six three two four three four nine. Oh,
Speaker 1: and leave us a voicemail. Maybe we'll play it on
Speaker 1: the show with your crazy thing or any other feedback
Speaker 1: you have for the show. And sorry, let's introduce that guest.
Speaker 1: Sort of a change of pace for us this week,
Speaker 1: because our guest is a real expert on fixed income
Speaker 1: currency markets, so we're gonna dive into things like inflation
Speaker 1: break evens and the yield curve and that sort of thing.
Speaker 1: But without any further ado from Wells Fargo Securities were
Speaker 1: very happy to have one of their macro strategists, Zachary
Speaker 1: Griffith's Zach, welcome to the show. Thanks for having me on.
Speaker 1: Great guy, Great to see you. Again, you know, Zach,
Speaker 1: I wanted to get in all the things Sara mentioned,
Speaker 1: but I wanted to start off with something kind of
Speaker 1: in the weeds because it's a topic that really fascinates me,
Speaker 1: and that's the interest rate swap market. We had what
Speaker 1: they call the Big Bang last weekend where basically, and
Speaker 1: this is amazing to me, Sarah, I'm not sure how
Speaker 1: much you know about the swaps market. I know a
Speaker 1: little bit, not much. I will completely be honest and
Speaker 1: admit that, right right, I I know a little bit.
Speaker 1: I happen to edit a long story on on the
Speaker 1: Big Bag. So now, of course I'm an expert. I
Speaker 1: can I can talk with with guys like Zach about
Speaker 1: it like huge market that I don't think a lot
Speaker 1: of our listeners really necessarily appreciate how it's important. Something
Speaker 1: like a hundred trillion dollars in notional value on interest
Speaker 1: rate swaps, something like eighty some trillion is through clearing.
Speaker 1: How is and what happened last weekend is it's been
Speaker 1: part of this multi year switch to get away from
Speaker 1: lib war and other interest rate benchmarks and promote the
Speaker 1: secured overnight financing rate or so for um as sort
Speaker 1: of the replacement for library. So what they did is
Speaker 1: they they switched uh, interest rate benchmarks as far as
Speaker 1: the discounting rate of how you value these swaps from
Speaker 1: the effective federal funds rate to so forth. Now it
Speaker 1: sounds like a pretty simple thing to switch, but Bory
Speaker 1: not really. I mean, you think of eighty some trillion
Speaker 1: and notional swaps out there. Having to change discount rates
Speaker 1: even a few basis points is going to cause massive
Speaker 1: sort of changes in valuations of these swaps, which is
Speaker 1: just what happened. And the clearinghouses had to sort of
Speaker 1: match up the winners and losers and sort of divert
Speaker 1: billions of dollars from people who swaps went up in
Speaker 1: value to those who went down, and they also issued
Speaker 1: tens of billions in swaps to compensate it for changes
Speaker 1: in risk in this market. Really fascinating thing that happened
Speaker 1: now is that I know you had a note on
Speaker 1: this talking about sort of the potential ripple effects. A
Speaker 1: lot of people who got basis swaps as compensations, whether
Speaker 1: whether their banks or hedge funds don't really use basis
Speaker 1: swaps to hedge the way, uh, you know, the clearinghouses
Speaker 1: view other counterparties using them. So the idea was that
Speaker 1: there were these auctions of I think was like twenty
Speaker 1: five billion worth of swaps at CME and UH a
Speaker 1: bunch more at lc H in London, and there was
Speaker 1: a lot of concern about sort of dislocations in the
Speaker 1: in the market after that. How did it all go
Speaker 1: down from your perspective, Was there any sort of market
Speaker 1: anomalies that you noticed, any sort of inkling that some
Speaker 1: hedge funds or banks might be feeling a little pain
Speaker 1: because of the switch. Well, I have some heartbreaking news
Speaker 1: to start us out. That was actually my crazy thing
Speaker 1: in markets. I figured, just like last time. I mean,
Speaker 1: any time you can say hut of them funny trillion
Speaker 1: notional of anything occurred, that's pretty crazy, right, And that's
Speaker 1: just for l H. And so far it seems like
Speaker 1: the auctions went fairly well. And we had been concerned
Speaker 1: about some potential widening in the sofa fed funds basis,
Speaker 1: and you may have seen some of that, but overall
Speaker 1: it's it's gone well. But it's really a huge step
Speaker 1: in the process towards shifting away from live or into
Speaker 1: sofa as the risk free rate and the benchmark rate
Speaker 1: in the US. So it's it's really an incredible thing
Speaker 1: that that went on over the weekend, and so far,
Speaker 1: I think it's going to be a process seeing how
Speaker 1: it all shakes out. But the initial indications are at
Speaker 1: the auction works fairly well and that the market has
Speaker 1: been stable in the wake of the huge move. So
Speaker 1: we'll put you on the spot. You have about twenty
Speaker 1: minutes now, Zack, to come up with something new by
Speaker 1: the time we get to the end of the podcast.
Speaker 1: That kidding, Zach, wasn't a long time coming though. Were
Speaker 1: there signs that this is going to happen? Yeah, it
Speaker 1: was a long time coming, and you saw some reaction
Speaker 1: in markets as certain participants were setting up for the
Speaker 1: big bang. So there's a chance that a lot of
Speaker 1: positioning around the big bang was was done and dusted
Speaker 1: before the weekend hit, and so I think that probably
Speaker 1: contributed to some of the relative stability around it. And overall,
Speaker 1: I think it's a it's a huge step towards the
Speaker 1: transition to SOFA and I think when any time that
Speaker 1: you have such a shift in these these clearing houses,
Speaker 1: which really see the majority of swaps that are done
Speaker 1: go through, then that's that's really a landmark thing. And
Speaker 1: when we talked to certain clients, it does seem like
Speaker 1: there's still skepticism that this shift from live or is
Speaker 1: going to happen. And this was I think a big
Speaker 1: step in the right direction. And yes it was widely expected,
Speaker 1: but it's just another step towards this this process that
Speaker 1: we've been kind of banging on the drum that it's
Speaker 1: very real and so of the regulators. So it's it's
Speaker 1: a big thing, and um, you know, there's there's only
Speaker 1: going to be more shifting in that direction going forward.
Speaker 1: There's that let's switch to sort of a more mundane
Speaker 1: fixed income topic, and that's the The backup in yields
Speaker 1: we've seen this week is getting interesting. I mean, we're
Speaker 1: still at very low rates in the US uh ten years,
Speaker 1: you know, eightiesome basis points, you know, thirty years, still
Speaker 1: well below two. What do you make of it? Is
Speaker 1: it sort of part of this blue wave trade idea?
Speaker 1: Is it? You know, the economic recovery is starting to
Speaker 1: perk up. What do you make out of what's going
Speaker 1: on with rates this week? Yeah, it's tough to parse
Speaker 1: out what some of these moves are really directly attributable
Speaker 1: to I think part of it comes down to the
Speaker 1: prospect of a blue wave, which equals more stimulus. The
Speaker 1: one thing that's been kind of fascinating to us over
Speaker 1: the past couple of weeks and maybe even a couple
Speaker 1: of months is how much the market has focused on
Speaker 1: headlines around fiscal stimulus, sort of expecting it to happen
Speaker 1: before the election. And we've been in the camp that
Speaker 1: that's a very unlikely outcome and has only gotten less
Speaker 1: likely as we are so close to the election now,
Speaker 1: and I think that's been a key driver of where
Speaker 1: we've gotten to today. So when we think about the
Speaker 1: risks in the near term heading into the election, you
Speaker 1: have a week that contains the US election and f
Speaker 1: O m C meeting, a Treasury refunding announcement, and non
Speaker 1: farm payrolls. We think that I can't believe that's allowed.
Speaker 1: Neither can we. It's I feel like even two of
Speaker 1: those things is too much. And and we have four
Speaker 1: Tier one super Tier one events all in one week.
Speaker 1: But when we think about the risks too yields in
Speaker 1: the near term, we think it's to the downside. And
Speaker 1: that's sort of a weighted average of these different outcomes
Speaker 1: that you can have with the election, with the fo
Speaker 1: MC meeting, with treasury re lending. And the thing that
Speaker 1: we think might not be reflected in yields right now
Speaker 1: is the possibility of a delayed election outcome or a
Speaker 1: contested election outcome where you have a big risk off move.
Speaker 1: The tenure yield shifts dramatically lower in that scenario, and
Speaker 1: that will sort of be dynamic. As you know, I
Speaker 1: don't think it's anticipated that will have the results at
Speaker 1: the end of November three, just depending on how close
Speaker 1: the race is and how many mail in ballots you have.
Speaker 1: You're really dealing with an election that is unlike any
Speaker 1: others we've had in recent past, with all of the
Speaker 1: potential mail in voting. So we think that the risks
Speaker 1: are to the downside in the near term, but over
Speaker 1: the medium term, we do think that the story remains
Speaker 1: extremely heavy heavy treasury issuance. And that's even without another
Speaker 1: fiscal package, which might become more likely once you have
Speaker 1: an election result in a better understanding of who's in
Speaker 1: the White House and in Congress, and you know that
Speaker 1: that only increases the risk of of higher yields from here.
Speaker 1: So short term you could see yields come down a
Speaker 1: bit depending on how things go with the election. Over
Speaker 1: the medium term, we think the directionally, it's yields higher
Speaker 1: and curse steeper. I am going to go ahead and
Speaker 1: head yourselves a little bit and just say, we do
Speaker 1: record this podcast on a Thursday, so if by chance
Speaker 1: something happens with stimulus on Friday, we will have recorded
Speaker 1: this beforehand. I feel like I have to say that
Speaker 1: just in case. But that's important said, very important disclosure.
Speaker 1: But going forwards, if no matter what, we do get
Speaker 1: another stimulus package and and say we do have a
Speaker 1: blue wave, and that means trillions dollars more worth of
Speaker 1: fiscal stimulus down the pipeline. I remember the last time
Speaker 1: we spoke earlier this year, we talked about the supply
Speaker 1: coming to the treasury market from that first round of stimulus,
Speaker 1: the Cares Act, and there were are a few concerns
Speaker 1: about supply or demand meeting that supply. If we got
Speaker 1: trillions and trillions dollars more worth of stimulus, what is
Speaker 1: that going to look like from US supply and demand standpoint. Yeah,
Speaker 1: that's a great point, Sarah. And if you think back
Speaker 1: to March, April, even May all of that supply was
Speaker 1: handled through the bill market. Almost all of that supply
Speaker 1: is Treasury less frequently adjusts its coupon auction sizes as
Speaker 1: it wants it's auctions to be regular and known and
Speaker 1: not very volatile. They sort of handle any shifts in
Speaker 1: issuance needs through the bill market. So that's I mean,
Speaker 1: the what they did back then as they introduced these
Speaker 1: cash management bills that they have been issuing on a
Speaker 1: regular basis since then, and they've driven up the cash
Speaker 1: balance to one point seven trillion I think it's at
Speaker 1: around now, and so the big difference going forward is
Speaker 1: of this additional stimulus will be able to be handled
Speaker 1: with the cash balance. That's that's really so high if
Speaker 1: you think about it, treasuries own forecast for the cash
Speaker 1: balance for the end of this year is eight hundred
Speaker 1: billion dollars or nine billion dollars above that. Now now
Speaker 1: Treasury has baked into its forecast one trillion dollar fiscal
Speaker 1: stimulus package, which has not materialized yet. So when we
Speaker 1: think about the next one to three trillion, a lot
Speaker 1: of that can be handled through the cash balance, and
Speaker 1: that sort of takes the edge off of the ultimate
Speaker 1: size of the new package because they can they have
Speaker 1: the cash to pay for a certain amount of that,
Speaker 1: and having that cash on hand, if they are to
Speaker 1: decide to ramp up unemployment insurance to the additional six
Speaker 1: billion per month again or right checks to certain US households,
Speaker 1: they can do that with that supply of cash. And
Speaker 1: going forward, more of that supply is going to be
Speaker 1: turned out. And and you've really seen extreme increases in
Speaker 1: long term auctions at May and August, even higher than
Speaker 1: we had anticipated. But they've gone fairly well up to
Speaker 1: this point. But we do think going forward you're gonna
Speaker 1: hit a point where some of these buyers that maybe
Speaker 1: are buying out of need and not of want, they
Speaker 1: just need the duration and they don't necessarily have to
Speaker 1: look at at the yields, which are still quite unattractive.
Speaker 1: As that starts to dry up and people can take
Speaker 1: a step back and perhaps reconsider, then, I think that's
Speaker 1: one of the contributing factors that that sends yields higher,
Speaker 1: especially if you do get another fistical stimulus package. Well, Zack,
Speaker 1: you talked about buyers in the treasury market, which I
Speaker 1: think obviously the elephant in the room there is the FED,
Speaker 1: who I still believe. Correct me if I'm wrong. But
Speaker 1: the last figures I saw, they're still buying something like
Speaker 1: eighty billion a month in UH treasury treasury notes and bonds.
Speaker 1: I mean that seems like a lot to me. And
Speaker 1: you know, the motivation originally was to restore liquidity in
Speaker 1: the treasury market. It's the liquidity still that bad that
Speaker 1: we need eighty billion of purchases a month from the Fed.
Speaker 1: Where is this kind of maybe a little bit of
Speaker 1: yield curve control in disguise in your opinion, Yeah, that's
Speaker 1: a great point. Market liquidity has largely been restored for
Speaker 1: several months now, and some of the discussion around asset
Speaker 1: purposes has shifted toward the FED needing to do more
Speaker 1: by way of accommodation, and that could involve either increasing
Speaker 1: purposes overall or shifting them further out the curve. One
Speaker 1: thing that they changed in the policy statement recently is
Speaker 1: they explicitly recognize that these purchases are not simply for
Speaker 1: stabilization and restoring market liquidity. They are providing accommodation. So
Speaker 1: when we kind of balance some of the public speeches
Speaker 1: and some speculation around shifting purchases further out the curve
Speaker 1: with with the policy statement, it would suggest that they're
Speaker 1: acknowledging what they're already doing is providing accommodation. So maybe
Speaker 1: that's an effort to buy them time to really understand
Speaker 1: what's going to happen on the fiscal side before they
Speaker 1: try to adjust their purchases, increase their purchases to become
Speaker 1: more accommodative, since they recognize now that they are already
Speaker 1: providing accommodation, and when we think about what's sort of
Speaker 1: missing from the equation on the fiscal side, the fiscal
Speaker 1: side of the equation is much more equipped to handle
Speaker 1: the issues that we have now, whether that be writing checks,
Speaker 1: providing additional unemployment insurance. I don't think that you can
Speaker 1: replace the fiscal those fiscal policies with buying more treasuries.
Speaker 1: I mean, we have seen a backup and yields, but
Speaker 1: borrowing costs are low and increasing asset purchases from I
Speaker 1: don't see that really providing the type of relief that
Speaker 1: the U. S economy needs now as we continue to
Speaker 1: deal with partially shut down economies and people there are
Speaker 1: still out of work. That's asset purchases are not really
Speaker 1: well equipped to handle that situation, which is why we
Speaker 1: think that any adjustment to the asset purchase program is
Speaker 1: probably a little ways out at this point. So when
Speaker 1: we look up at this backup and yield that we've
Speaker 1: seen this past week and its components, something I've seen
Speaker 1: highlighted is that the backup and yields that we're seeing
Speaker 1: is actually due to arise in the term premium, so
Speaker 1: that being the premium that investor holds for holding a
Speaker 1: longer dated security instead of just rolling a shorter dated one.
Speaker 1: Not so much actually inflation expectations. I want to get
Speaker 1: your take on this. Are you guys seeing the same breakdown?
Speaker 1: And if so, I mean I feel like that has
Speaker 1: a lot of implications for other trades if we're not
Speaker 1: seeing a backup and yields for inflation or growth reasons. Yeah,
Speaker 1: that's an interesting point, and it's it's tough to to
Speaker 1: break all of this down because you have seen break
Speaker 1: evens come back quite a bit, especially in you know,
Speaker 1: looking at tenure break evens moving back towards a hundred
Speaker 1: seventy bass points, and when you think about how that
Speaker 1: compares to inflation fundamentals, it's actually in excess of what
Speaker 1: you're seeing or right around what you're seeing in core inflation.
Speaker 1: So I think you are seeing some of the rising
Speaker 1: yields as as a result of rising inflation expectations, but
Speaker 1: with the economy as fragile and frail as it still
Speaker 1: is coming out of the largest shutdowns that we had
Speaker 1: back in in March and April, I think the the
Speaker 1: story remains that some of these or all of these
Speaker 1: factors are contributing at least somewhat, But the FED just
Speaker 1: saying that they are targeting average inflation is not enough
Speaker 1: to push up expectations materially until you start to see
Speaker 1: some of of it in the hard numbers, which which
Speaker 1: we haven't seen yet. And if you think back to
Speaker 1: the latest CPI figure, almost all of the growth and
Speaker 1: core CPI was in used cars and trucks. So you
Speaker 1: have a situation where court prices aren't rising broadly, you
Speaker 1: have you're still having some of this funky data, and
Speaker 1: it's sort of hard to back out what that really
Speaker 1: means for inflation going forward. But I think you know,
Speaker 1: part of part of the story is certainly an increase
Speaker 1: in expectations, and like a lot of these FED policies
Speaker 1: we saw back in March in April, just the announcement
Speaker 1: of them restored a lot of liquidity to the commercial
Speaker 1: paper markets, the corporate bond markets, and I think you
Speaker 1: get a little bit of that and in inflation expectations
Speaker 1: based on the new policy, But it remains to be
Speaker 1: seen if if the if the hard data will actually
Speaker 1: back it up. It's like, let's shift gears a little
Speaker 1: bit and talk about currencies a little bit. You know.
Speaker 1: The other big trend we've seen in recent weeks and
Speaker 1: months is uh, some pretty noticeable weakening of the dollar
Speaker 1: versus other currencies. To me, what I find interesting is
Speaker 1: you tend to have these regimes where the dollar can
Speaker 1: be sort of appreciating for months or even years at
Speaker 1: the time and then depreciating for months and years at
Speaker 1: the time. Obviously too early in this sort of phase
Speaker 1: of weakening too to say if we're a new regime
Speaker 1: or not. But but what's your take? Is this a
Speaker 1: sign of more to calm or can we expect a
Speaker 1: week er dollar, say going into one? I mean, is
Speaker 1: is this a new sort of regime for the dollar?
Speaker 1: In your opinion, we do expect to see sort of
Speaker 1: dollar weakness over the medium term. I guess, I would say,
Speaker 1: and that's as global growth starts to come back. What
Speaker 1: you've noticed over the past six months or so is
Speaker 1: the US dollar really has been the number one safe
Speaker 1: haven currency. So in times where you have a risk
Speaker 1: off tone, that's that's positive for the dollar. And and
Speaker 1: when you have risk on, the dollar has fallen. And
Speaker 1: when you think about what's happened in equity markets over
Speaker 1: the past six months, you know, we're touching new highs,
Speaker 1: and while we're off recent highs, the the story has
Speaker 1: been mostly risk on. Improved risk sentiment. You have corporate
Speaker 1: bond spreads hitting new tights and things have gotten a
Speaker 1: lot better, and that's really been a negative for the U. S. Dollar.
Speaker 1: You also have the backdrop of the FED still has
Speaker 1: all of these U. S. Dollar liquidity facilities in place.
Speaker 1: They're really not getting tapped anymore. I know the repo
Speaker 1: facility has gone down to zero. I think central bank
Speaker 1: liquidity swaps has fallen a bunch as well, not quite
Speaker 1: down to zero, but I think you have a super
Speaker 1: combinative FED, and that's that's certainly not unique. To defend
Speaker 1: all these major global central banks are are very accommodative
Speaker 1: and considering new policies every day to try to combat
Speaker 1: the fallout from the virus. But the one thing that's
Speaker 1: changed materially is if you look at the yield differential
Speaker 1: between treasuries and other major government bonds on currency unadjusted basis,
Speaker 1: that's collapsed the ton. So that's one of the things
Speaker 1: that we think had prior to all of this supported
Speaker 1: the dollar and is now more of a head and
Speaker 1: for the dollar. And we expect that to be the
Speaker 1: case going forward, as we do expect yields to rise,
Speaker 1: but the differential between European government bonds and treasure yields
Speaker 1: is going to remain pretty low on a historical basis
Speaker 1: now is and it all connected the sort of you know,
Speaker 1: your old textbook catalysts for for the dollar, meaning the
Speaker 1: trade depsit and the and the budget depthsit the twin
Speaker 1: deficits really kind of blowing out. Um, is that part
Speaker 1: of the story here or is it a matter of
Speaker 1: you know what government is really uh running a huge
Speaker 1: StarPlus now anyway? Is it? Is it? Or those catalysts
Speaker 1: not as important to say they would be in in
Speaker 1: a quote unquote normal, normal world where we're not dealing
Speaker 1: with all the drama we've dealt with this year. Yeah,
Speaker 1: I think that's safe to say. And what we've really
Speaker 1: focused on for the U s Dollar in the near
Speaker 1: term is really just general risk sentiment and thinking about,
Speaker 1: you know, tying that into the election and what might
Speaker 1: happen in the next couple of weeks. We sort of
Speaker 1: see an outcome where if it's highly contested or a
Speaker 1: very close election, that would result in US dollar strength
Speaker 1: because that's really more of a risk off story and
Speaker 1: would probably push people in into the dollar. But if
Speaker 1: you have a clear election outcome, big fiscal stimulus coming,
Speaker 1: more inflation coming, that's that's more of a dollar weakness
Speaker 1: risk on trend. And so those are those are really
Speaker 1: more of the things that we're focused on. It's almost
Speaker 1: more of a sentiment thing at this point rather than fundamental.
Speaker 1: It's just because fundamental US have shifted so drastically with
Speaker 1: these budget deficits, and you have sovereign nations that have
Speaker 1: typically run surpluses like Germany, they're they're doing deficit spending now.
Speaker 1: So the game has really changed from that perspective, and
Speaker 1: as we think about what drives the dollar in the
Speaker 1: near term, it's going to be more about broader risk
Speaker 1: sentiment Along those lines, If you look at the dollar
Speaker 1: versus the offshore Chinese you on the past a hundred
Speaker 1: day decline. I was running some calculations on the terminal
Speaker 1: the fastest decline since at least eleven, which is pretty
Speaker 1: amazing to me. And I've heard some describe that as
Speaker 1: betting on a Biden wins. So you see a stronger
Speaker 1: Chinese currency versus the US dollar, Do you buy that
Speaker 1: at all? That's an interesting perspective that I haven't delve
Speaker 1: too much into myself. But so is that from the
Speaker 1: perspective that a Biden presidency is easier on US China relations? Yeah,
Speaker 1: I could see that. That's you know, I yeah, you
Speaker 1: know I I'm not a percent sure that that's you know,
Speaker 1: that we're going to have a complete reversal of the
Speaker 1: trade war that President Trump started back in nineteen But
Speaker 1: I think from the perspective of Biden being a little
Speaker 1: bit easier on China and that being positive for the
Speaker 1: currency does make some sense. But you know, how much
Speaker 1: of the process that Trump has put in place as
Speaker 1: far as teriffs goes gets unwound quickly. I don't know
Speaker 1: that's going to be a very high priority as we
Speaker 1: have so much going on with the pandemic right now,
Speaker 1: and and President or Vice President Biden's policies of or
Speaker 1: seemed to be would be focused more on getting fistical
Speaker 1: stimulus done here first and just focusing on the public
Speaker 1: health situation much more than than perhaps immediately diving back
Speaker 1: some of the tariffs and thing is not that against
Speaker 1: it's that another note you guys had out that caught
Speaker 1: my attention, and you were talking about the correlation between
Speaker 1: inflation break evens and the SMP five hundred the stock market,
Speaker 1: And for listeners who aren't familiar with break evens, it's
Speaker 1: basically just the bond markets sort of forecast for inflation
Speaker 1: over a certain number of years by comparing the yields
Speaker 1: on nominal treasuries to the yields on on inflation linked
Speaker 1: tips treasuries. Inflation expectations by this metric have been firming up,
Speaker 1: sort of correlating with a higher stock market. You know,
Speaker 1: it kind of surprised me. You know, I took that
Speaker 1: note and I went back and looked, you know, how
Speaker 1: long has that correlation been positive? Been positive for a
Speaker 1: long time, not necessarily a one to one, super strong
Speaker 1: correlation but reliably positive for a long time. But I
Speaker 1: wonder how long does that correlation stay positive if inflation
Speaker 1: expectations really start to get up there, start getting above
Speaker 1: two percent? Say um, I mean, we know the FED
Speaker 1: is willing to allow inflation to run a little bit hot,
Speaker 1: but I wonder, you know when and if could you
Speaker 1: see that correlation breaking down where UH inflation gets so
Speaker 1: hot that that people are worried about it, that it
Speaker 1: becomes sort of a risk off thing in the in
Speaker 1: the stock market. I don't think it's tomorrow or next week,
Speaker 1: but you know where where would you sort of start
Speaker 1: to look for that to happen. What kind of break
Speaker 1: even UH inflation numbers? Would would you start to worry
Speaker 1: about that? If you would worry about it all, maybe
Speaker 1: I'm wrong and it's not something to worry about. Yeah,
Speaker 1: that's that's a great point, Mike. I certainly don't think
Speaker 1: tomorrow or any time soon is is possible or even
Speaker 1: remotely possible. But I think you will see a switch
Speaker 1: and trying to call out in the exact number on
Speaker 1: called the tenure break even is it's going to be difficult.
Speaker 1: But I think depending on where inflation expectations go relative
Speaker 1: to realized inflation. I think letting it run north of
Speaker 1: two percent, maybe north of two and a half percent,
Speaker 1: is not going to be something that really concerns the FED.
Speaker 1: But as you as you get to that point, there's
Speaker 1: definitely gonna be speculation that now is when the FED
Speaker 1: is going to start removing accommodation, maybe increasing rates. And
Speaker 1: we're talking way down the line. If if you look
Speaker 1: at the FEDS Summary of Economic Projections from September, they
Speaker 1: don't have PC inflation hitting two percent until three and
Speaker 1: at no point in their forecast horizon do they have
Speaker 1: it above two percent. So from the perspective of does
Speaker 1: higher inflation expectations result in shifting folk expectation for the
Speaker 1: FED to perhaps start tightening, I think that's a ways
Speaker 1: down the road. And if you have inflation expectations running
Speaker 1: at two and a half three percent but you're not
Speaker 1: seeing it and realized inflation, the FED is probably gonna
Speaker 1: be somewhat slow to react as they have shifted the
Speaker 1: policy to this flexible average inflation targeting. But I think
Speaker 1: they've left themselves the ability to have some subjective aspect
Speaker 1: to that because we don't know over what time frame. There,
Speaker 1: the average inflation has to hit two percent, so I
Speaker 1: think it will be definitely be a factor. But for
Speaker 1: the correlation to remain positive indefinitely is unlikely. But it
Speaker 1: should remain positive for the foreseeable future as right now.
Speaker 1: Our call, the Fed's call is not for inflation too
Speaker 1: to run super hot through um. If you do see
Speaker 1: inflation expectations go way north of that, that's definitely something
Speaker 1: that I think they'll take into account, but it's unlikely
Speaker 1: to cause on its own a risk off shift anytime soon. Yeah,
Speaker 1: they seem to be intentionally vague on how high they'll
Speaker 1: let it go and for how long. I guess. I
Speaker 1: guess there's you know, a good reason for that. You
Speaker 1: don't want to pay yourself in a corner or to
Speaker 1: some degree, And I think just the ft is isn't
Speaker 1: sure what the fiscal policy outlook is and what the
Speaker 1: economy is gonna look like, what the public health situation
Speaker 1: is gonna look like, So tying themselves too closely to
Speaker 1: any certain economic outcome seems like an unnecessary box to
Speaker 1: put themselves in. So, while it's a little bit frustrating
Speaker 1: as a forecaster to have some of this vagueness. It's
Speaker 1: a bit more understandable in this time that we're in
Speaker 1: versus a more normal time, let's say, certainly not normal times.
Speaker 1: And I think that's a great place to leave it.
Speaker 1: Then to get into our crazy things. Oh nice segway, Sarah,
Speaker 1: very good, very good. Stand clear of the craziest things
Speaker 1: we saw in markets this week? All right? Well is
Speaker 1: that god a good one? I gotta admit that the
Speaker 1: big bang in the swaps markets pretty good one. It
Speaker 1: I like it, all right, Sarah. You know what, Sara,
Speaker 1: I'll give you one and then we'll go to yours.
Speaker 1: And then I've got I feel like I'm stuck in
Speaker 1: the alternative asset class that the people are gonna be
Speaker 1: disappointed if I don't, if I don't go back to that, well,
Speaker 1: but I'll start with one from our colleague Katie Greifeld.
Speaker 1: I find these stories hilarious. It's about the NASDAC. One
Speaker 1: knew you were going to say that it's too q C.
Speaker 1: Do you Is that yours too? No, it's not mine,
Speaker 1: but it's so good. So apparently, when when these e
Speaker 1: t s were set up in the q q Q
Speaker 1: was was created in nineteen nine as a unit investment trust.
Speaker 1: And when you created an e t F under that
Speaker 1: sort of rapper back then, you had to identify I
Speaker 1: guess their trustees. They call them people that who are
Speaker 1: are basically their lifespan dictates how long the trust will
Speaker 1: be in business. So there were fifteen millennials who are
Speaker 1: named in the founding documents of the q q Q.
Speaker 1: And you know, my mind just goes in circles trying
Speaker 1: to figure out how any of this makes sense. But
Speaker 1: fifteen random millennials would determine how long the q q
Speaker 1: Q lasts their lifespan at least. Uh. They got rid
Speaker 1: of that this week and they changed it to it's
Speaker 1: gonna last until the I guess the last security it
Speaker 1: owns is liquidated or something like that. But what a
Speaker 1: bizarre sort of way to to base on et F.
Speaker 1: I don't know, it's set. Lawyers must love stuff like this.
Speaker 1: I guess it's the only explanation I would have because
Speaker 1: it was technically a trust. Uh, it's really strange and
Speaker 1: kind of funny. Um Trillions, which is Bloomberg's et podcast
Speaker 1: with Eric bel Tunis and Joe Weber. They did a
Speaker 1: great episode on this with a couple of those millennials
Speaker 1: and some of them had no idea, but this is
Speaker 1: even going on, So it's a great listen. It's a
Speaker 1: bit funny and also, um just informational. Who knew. Yeah,
Speaker 1: I remember reading about that and I wasn't. I'm not
Speaker 1: sure if it was that exact e t F for
Speaker 1: Unit Investment Trust, but it was just the kids or
Speaker 1: grandkids of people that were working on crazy that was
Speaker 1: all about the spy. I guess the SMP E t F. Yes,
Speaker 1: that's right, which I think it's only these really sort
Speaker 1: of first generation nine G s ETFs that that they
Speaker 1: did this and then they figured out another. They found
Speaker 1: a smarter lawyer to figure out how to do it
Speaker 1: where you eat enough to involve millennials, if I you know,
Speaker 1: I'm surprised that just finding out fifteen millennials were determined
Speaker 1: the fate of these et f s, that we just
Speaker 1: didn't see a market crash right there. And then Sarah,
Speaker 1: maybe that's just my maybe that's just my gen x
Speaker 1: by so I don't know, you're just really worried about
Speaker 1: leaving leaving a fund in the hands of kids no longer,
Speaker 1: that's what that's what that means old and Senile Mike. Now,
Speaker 1: but we had a we actually had someone right into
Speaker 1: us on Twitter with a really good one. So this
Speaker 1: comes from at g I Munich and they retweeted uh
Speaker 1: Sam Row who is managing at a river over at
Speaker 1: Yeahoo Finance. But basically what this was citing was a
Speaker 1: Bloomberg article and there is a quote in it that
Speaker 1: says cabbage prices are going nuts, and it says, I'll
Speaker 1: read you the whole quote. It says cabbage prices are
Speaker 1: going nuts, said Jumie, a mother of two who usually
Speaker 1: loads up on the vegetable and fall to make our
Speaker 1: own kimchi. I had to rub my eyes to see
Speaker 1: the price tag again because it didn't make any sense.
Speaker 1: So any of you big cabbage eaters, I feel bad
Speaker 1: for you. Are you a big cabbage eater? I would
Speaker 1: not put myself in that category now, only only with
Speaker 1: the corned beef around. I'm surprised there. It must be
Speaker 1: a seasonality to it. I'm gonna look that up. There's
Speaker 1: gonna be I can't imagine it's because of demand demand
Speaker 1: spike for cabbage. Hey, anything can happen this year, right,
Speaker 1: all right? So that's a good one from Twitter and
Speaker 1: Samurai was a good provider of crazy things. Good good
Speaker 1: to get get him a shout out, what are you up, Sarah?
Speaker 1: So I'm gonna do a little bit more self promotion.
Speaker 1: I didn't know you were going to help me out
Speaker 1: off the top of the show with Robin Hood story. Um,
Speaker 1: but I wrote a story this week on intangible assets
Speaker 1: and just the growth of intangible assets, and I just
Speaker 1: thought a number within the story. So really it's it's
Speaker 1: difficult to measure these things. But there was a report
Speaker 1: by Ann and Potamon Institute, who was also uh kind
Speaker 1: of picked up by Carlaw Carlisle by Bank of America.
Speaker 1: They took the SMP five hundreds market values, subtracted out
Speaker 1: its tangible book value, and came to this idea that
Speaker 1: of the SMP five hundreds of value is derived from
Speaker 1: intangible assets, which is just a crazy high number. And
Speaker 1: I know one of Bank of America's strategists. I was
Speaker 1: speaking to him about this because they cited this number,
Speaker 1: but he himself was still kind of casting some doubt
Speaker 1: on it, and I asked him, why are you casting
Speaker 1: down on this number? And he was like, it's just
Speaker 1: too high. I mean, it's really hard to believe that
Speaker 1: this is true. Um, but it's just a fascinating topic,
Speaker 1: very interesting, important, and I just thought that number was
Speaker 1: pretty wild. That's a little concerning, I'd say, if I
Speaker 1: mean intangibles, depending on what goes into that, if those
Speaker 1: can be written down, that's uh goodwill right down. So
Speaker 1: I mean, how many times have we seen, you know,
Speaker 1: aol Time Warner Goodwill write down of mammoth proportions. I
Speaker 1: would up shout out to our own Cameron Christ who
Speaker 1: has written about this this topic, I think a long
Speaker 1: time ago. So he had some good columns on that.
Speaker 1: If you have a terminal, check them out. All right, Sorry,
Speaker 1: I'm gonna conclude with some very tangible assets alternative alternative assets.
Speaker 1: And this is uh via the New York Post. So
Speaker 1: there's and you know what we're gonna you know what
Speaker 1: we're gonna do. You know what's coming. We're gonna play
Speaker 1: priss al right, New York Post story about an auction
Speaker 1: of some famous movie memorabilia. And now I'm gonna tell
Speaker 1: you some of the items on auction and zach and
Speaker 1: and sorry, I want you guys to give me what
Speaker 1: do you think the highest priced item is? And and
Speaker 1: a price all right, and this is all based on
Speaker 1: what the auction house expects to get. We don't know,
Speaker 1: you know, the auction hasn't happened yet, but all right,
Speaker 1: First one on the block, the mechanical head from the
Speaker 1: nineteen seventy nine movie Alien. Alright, that's one mechanical head
Speaker 1: from Alien two. The thigh high black boots worn by
Speaker 1: Julia Roberts in nineteen nineties Pretty Woman. Okay. Then we
Speaker 1: have Shanno Reeves complete neo costume from the two thousand
Speaker 1: and three movie The Matrix Matrix reloaded. Here's one from
Speaker 1: My Day, Marty McFly's jacket from thee Back to the
Speaker 1: Future Part two movie I thought you were a vest
Speaker 1: I don't even know what jacket they're talking about. Um.
Speaker 1: And finally, the helmet worn by Tom Hanks in Saving
Speaker 1: Private Ryan, autographed by the entire cast. So we got
Speaker 1: the head from Alien, Julia Roberts boots, Shadow Reeves Matrix costume,
Speaker 1: Marty McFly's jacket or Saving Private Ryan's helmet. Zach, let's
Speaker 1: start with you. What what's your highest bid? What's the
Speaker 1: highest priced item there for you? Zach's trying to figure
Speaker 1: out how to make derivatives. Off of all these. Yeah,
Speaker 1: the wheels are really turning. I guess I think the
Speaker 1: highest priced item would be the helmet from Saving Private Ryan.
Speaker 1: And I think the autographs factor into that. Okay, the amount, yeah, amount,
Speaker 1: I'm gonna go with a hundred grand, Okay, opened my
Speaker 1: poker face. So and I'm not gonna realizing that you're
Speaker 1: doing really well. I can't, I can't really can't read
Speaker 1: you right now. I was gonna agree with Zach. I
Speaker 1: was gonna say the helmet, but because of the autographs,
Speaker 1: and if I had can I if I had to
Speaker 1: go into a second third, then I would go into
Speaker 1: Neo's Hoole Matrix costume. I'm thinking I also think the
Speaker 1: boots might be up there. I'm gonna say the alien
Speaker 1: head is last. Um goes some dollar figures here, a
Speaker 1: dollar figures. How much do you pay for those boots? So,
Speaker 1: assuming they fit you, they're the right size, how much
Speaker 1: would I pay for those boots? Um? I mean, I'm
Speaker 1: sure someone would bid way more than I would for that. Personally,
Speaker 1: what would someone bid for those days? I'm gonna I'm
Speaker 1: gonna go with uh all right, all right, I woulna
Speaker 1: agree with both of you. That, I think, and we'll
Speaker 1: see what the auction turns out. I would have I
Speaker 1: would have assumed the saving Private Ryan helmet would be
Speaker 1: the most it's got the autographs. They're only estimating thirteen
Speaker 1: and nineteen grand for that one. But I think if
Speaker 1: you think of this auction through the perspective of a
Speaker 1: sort of a tech or crypto millionaire, if you will,
Speaker 1: and then it comes easier. Canna Reeve's costume from the Matrix.
Speaker 1: They're saying fifty two to seventy eight thousand for that
Speaker 1: by high Julia Robert Broots only thirteen and nineteen thousand,
Speaker 1: and the alien mechanical head fifty two. Really yeah, wow,
Speaker 1: I've put that at the bottom. Yeah. I feel like
Speaker 1: there's just such a fan base surrounding the matrix. Yeah. Yeah.
Speaker 1: The frame of reference I was using was the one
Speaker 1: from a couple of weeks ago, the notorious B I. G.
Speaker 1: Crown That was that was in the hundred thousand's right.
Speaker 1: I was, yeah, yeah, you're right, So that was kind
Speaker 1: of my That was my starting point. But I guess
Speaker 1: that you would prefer the helmet over over the crown. No,
Speaker 1: I want the crown personally. I just thought the helmet
Speaker 1: would be valued a little higher. I would too, I
Speaker 1: would I would have guessed the helmet, but you know
Speaker 1: who knows what that's that's why we are not in
Speaker 1: the right right all right, well we will have to
Speaker 1: leave it there. But Zach Griffith, thank you so much
Speaker 1: for joining the show today. We really appreciate it. Thanks guys,
Speaker 1: God bless What Goes Up. We'll be back next week.
Speaker 1: Until then, you can find us on the Bloomberg Terminal, website,
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Speaker 1: the show on Apple podcast so more listeners can find us.
Speaker 1: And you can find us on Twitter, follow me at
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Speaker 1: also follow Bloomberg Podcasts at podcasts. Also, thank you to
Speaker 1: Charlie Pellett of Bloomberg Radio and the voice of the
Speaker 1: New York City Subway System. What Goes Up is produced
Speaker 1: by Jordan Gospore. The head of Bloomberg Podcast is Francesco Levie.
Speaker 1: Thanks for listening. See you next time.