Speaker 1: Strap on your parachute. It's time for What Goes Up
Speaker 1: with Sarah Ponza and Mike Reagan. Hello and welcome to
Speaker 1: What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Ponzac,
Speaker 1: a reporter on the Cross Asset Team, and I'm Mike Reagan,
Speaker 1: a senior editor at Bloomberg. This week on the show
Speaker 1: Goodbye Hello, we'll recap what drove markets in the crazier
Speaker 1: that was, discuss where we stand now, and look ahead
Speaker 1: to the new year. Spoiler alert, our guest shares the
Speaker 1: key thing the market is missing. He says the old
Speaker 1: adage don't fight the fed is on its last legs. Well, Sarah,
Speaker 1: thank goodness on his last legs. As you point out,
Speaker 1: goodbye twenty. I never thought we'd we'd lived to see
Speaker 1: the day when this year year ended. Uh, it's the
Speaker 1: year that felt like two decades. Absolutely absolutely um. And
Speaker 1: we'll of course close out the show today with our
Speaker 1: tradition The craziest thing I saw in markets this week, Sarah,
Speaker 1: I'm gonna give you a little a little teaser on mine.
Speaker 1: It's something for the crypto aficionados out there. I know
Speaker 1: we have a few of them in the listenership, and
Speaker 1: I feel like we don't give them the content they crave.
Speaker 1: So my crazy the thing this week is Crypto. Well,
Speaker 1: I will say, I don't think we've been able to
Speaker 1: go through the last five episodes or so without mentioning Crypto.
Speaker 1: So Crypto aficionados that do listen to the podcast, You're welcome,
Speaker 1: cannot be avoided. Made made itself unavoidable. But uh, this
Speaker 1: week on the show, a new guest for us. We're
Speaker 1: very happy to have him. Uh. He was the strategist
Speaker 1: for a long time at Kenner Fitzgerald. He this year
Speaker 1: started his own firm called Alpha Omega Advisors. He's the
Speaker 1: CEO and founder of that firm. His name is Peter Ceccini. Peter,
Speaker 1: welcome to the show. Thank you for having me, Mike
Speaker 1: and Sarah. So, Peter, let's let's start with that. You know,
Speaker 1: I think a lot of our listeners will remember you
Speaker 1: was the strategist at Canner. But what's tell us about
Speaker 1: Alpha Omega Advisors. What you started this year? This project? Yeah,
Speaker 1: it's it's been an awful lot of fun. Um. You know,
Speaker 1: it's an independent research and advisory firm. Um and uh,
Speaker 1: it's it's enabled me to uh focus on a number
Speaker 1: of my passions, UM, to do a bit of a
Speaker 1: bit more writing on topics uh that weren't necessarily of
Speaker 1: interest to institutional clients. UM, albeit many of those clients
Speaker 1: are obviously consumers of my research. I've also partnered with
Speaker 1: um Rosa and Rubini, which is no real Rubini's firm.
Speaker 1: I do quite a bit of writing for them as well.
Speaker 1: I am writing a book and I'm having a wonderful
Speaker 1: time doing doing that. So I've also I'm sitting on
Speaker 1: a number of boards right now which has been a
Speaker 1: lot of fun. UM. One in particular, called Encino is
Speaker 1: a clean energy firm which does environmental testing UM and
Speaker 1: providing a bunch of advisory work on a spoke basis
Speaker 1: to both hedge funds as well as two companies. Okay,
Speaker 1: the book, I assume that's a romance novel. Yes it is.
Speaker 1: It's all about my romance with the Federal Reserve. So
Speaker 1: what we all need, it's what we all need right now. Well, well, Peter,
Speaker 1: congratulations on it all. Absolutely, I would. I imagine it's
Speaker 1: been quite the year to go off on your own
Speaker 1: in many ways, and I was actually hoping that we
Speaker 1: could start by reflecting and looking back at I keep saying,
Speaker 1: but I feel as though if you had told someone
Speaker 1: what was going to happen at the start of the year,
Speaker 1: that we were going to see the unemployment rate shoot higher,
Speaker 1: that people are going to be stuck at home, what
Speaker 1: businesses we're going to have to deal with, and maybe
Speaker 1: left out what happened with the federal Reserve, what happened
Speaker 1: with fiscal policy, it would have been really hard to
Speaker 1: imagine the performance that we saw across financial markets. So
Speaker 1: hoping you could just run us through why it is
Speaker 1: that we've been able to see this unbelievable performance, really
Speaker 1: eye popping performance across the board, and and just get
Speaker 1: us caught up to where we stand now. Yeah, well, well, well,
Speaker 1: like every like everybody else, I have my two cents
Speaker 1: certainly to share. I'm not sure how how much insight
Speaker 1: frankly that that that that it provides, but you know,
Speaker 1: I think, you know, coming coming into the year, I
Speaker 1: think that's a good place to start, because one of
Speaker 1: the reasons I've been so surprised by the ferocity of
Speaker 1: the rally um was because what I perceived as being
Speaker 1: a rather weak backdrop coming into the year and so
Speaker 1: I actually came into the year UM pretty cautious, and
Speaker 1: you know, few remember, but you know, not to go
Speaker 1: back too far beyond investors memories. But but you know,
Speaker 1: at the end of two thousand and eighteen, it was
Speaker 1: quite a bit of of equity market volatility, which was
Speaker 1: prompted by ten year yields rising above three uh ten
Speaker 1: year yield went to three and a quarter. Equity markets
Speaker 1: just just could not tolerate yields at that level. UM.
Speaker 1: The FED was then forced in a way to act
Speaker 1: by the treasury market with a yield curve in version
Speaker 1: both from three months to ten year and then eventually
Speaker 1: a little later in the year from two years to
Speaker 1: ten years UM manifesting. And you know, the FED hates
Speaker 1: it when the tenure yield is below FED funds, right,
Speaker 1: so they're almost forced to cut when that happened because
Speaker 1: it's so bad for banks UM. And we saw a
Speaker 1: loan volume UM beginning to to contract into the end
Speaker 1: of two thousand nineteen, and we saw you know, flat
Speaker 1: earnings for the SMP five, deeply negative earnings for small caps,
Speaker 1: and corporate earnings overall for both private and public companies
Speaker 1: down you know, well over five. So my view was
Speaker 1: was going to be a rocky year to begin with.
Speaker 1: And I think, you know, one of the most one
Speaker 1: of the most surprising things for this year. I know
Speaker 1: we're gonna get to this topic a little later, was
Speaker 1: the fact that in some ways the pandemic UM actually
Speaker 1: forestalled I think a number of the defaults that would
Speaker 1: have happened in its absence because of the ferocity of
Speaker 1: the policy response on the both the monetary policy side,
Speaker 1: UM and especially on the fiscal policy side, and the
Speaker 1: use of Section thirteen three under the Federal Reserve Act
Speaker 1: to UM as I've written to wed the FED to
Speaker 1: the Treasury UM. So so I'll stop there. But but
Speaker 1: I think that was the backdrop we came into the
Speaker 1: year with and and and lastly, I guess you look
Speaker 1: at about on the SMP five D. I did feel
Speaker 1: the market was oversold and became somewhat constructive because because
Speaker 1: of the policy response that that I expected. But you know,
Speaker 1: in late June early July, I really became quite cautious
Speaker 1: because I just felt there was too much uncertainty to
Speaker 1: propel the rally much further than that. That obviously was
Speaker 1: not correct. So Peter, let's uh, get you up to
Speaker 1: date now with with how you're seeing the market now.
Speaker 1: I was reading some notes you sent over to Sarah,
Speaker 1: and I um, one line you say is, uh, I
Speaker 1: remain tactically bullish based on sentiment and flows near term,
Speaker 1: but the bull narrative is about as hollow as I've
Speaker 1: ever heard it. I think that makes sort of a
Speaker 1: lot of logical sense that you know, you can't really
Speaker 1: fight this tape. It's it's a it's a market that
Speaker 1: just wants to keep powering higher, whether it be sort
Speaker 1: of irrational youth work, retail flow, or whatever is causing it.
Speaker 1: But how do you position for for this type of environment?
Speaker 1: I mean, I agree with you that it seems like, um,
Speaker 1: you know, at some point the bull narrative is only
Speaker 1: going to take us so far, and that there will
Speaker 1: be kind of a comeback to earth moment um. The
Speaker 1: tricky part to me and correct me if if you
Speaker 1: think I'm wrong, But I feel like those corrections can
Speaker 1: be so fast. You know, you you wake up one
Speaker 1: morning and the futures are already down two or three percent,
Speaker 1: and you've kind of missed that opportunity to take profits
Speaker 1: if that's what you wanted. To do so, is it
Speaker 1: a matter of sort of hedging it out with options
Speaker 1: or some some volatility futures or something and and and
Speaker 1: otherwise remaining fully invested. How exactly would you sort of
Speaker 1: position yourself in this type of environment? Yeah, I think
Speaker 1: it's Um, it's it's incredibly difficult, and it has been
Speaker 1: for a number of months, given the uncertainties, right, and
Speaker 1: I'm sure we're gonna talk a little bit about the
Speaker 1: political environment that that makes it even uh more tricky,
Speaker 1: if you will, and balancing those things, um, you know,
Speaker 1: the tactical bullishness that I sort of adopted, um just
Speaker 1: before Thanksgiving was a sort of you know, hands in
Speaker 1: the air kind of moment, because you know, there are
Speaker 1: times when, uh, you know, when you're playing when you're
Speaker 1: playing chess and everyone else is playing checkers, you're actually
Speaker 1: you're the fool, right, So you you have to recognize,
Speaker 1: um when where when you know what I say, and
Speaker 1: about things like earnings growth, um, when when that is
Speaker 1: just less important than the narratives that are driving the markets.
Speaker 1: And for me, I didn't feel like there was anything
Speaker 1: to derail the narrative that the vaccines were here, um,
Speaker 1: that that growth was going to pick back up, which
Speaker 1: which it has, although strangely enough, market has continued to
Speaker 1: rally even with some of the data coming out, you know,
Speaker 1: rather weakly in my in my view, um, notwithstanding the
Speaker 1: p M I that came out, but you know, to
Speaker 1: fight that, it felt. I've lived through these, I've lived
Speaker 1: through several cycles, and you know this, this one feels
Speaker 1: a lot like I remember asking myself, how uh you
Speaker 1: know companies that had you know, no almost no earnings
Speaker 1: or negative cash flow apart me and almost no revenues.
Speaker 1: You know, it could be worth hundreds of millions of
Speaker 1: dollars And okay, it's not a perfect and allergy, but
Speaker 1: from a sentiment standpoint, it does feel quite the same.
Speaker 1: And I think you had a lot of new entrants
Speaker 1: into the market then Visa V back in the days, Mike,
Speaker 1: you and I might remember. Um, not to exclude you, Sarah,
Speaker 1: but I think we're older than now. Um, Peter, you're
Speaker 1: blowing my lip. You're you're blowing my lid here all
Speaker 1: these off as a millennial, I had all the listeners
Speaker 1: convinced I was twenty five. It's not a good thing.
Speaker 1: It's not. But you know, living through that period you know,
Speaker 1: it feels very similar to it where there was a
Speaker 1: new new set of investors entering the market, you know,
Speaker 1: and if you know that, you would trade stocks on
Speaker 1: your E trade account, which was the you know, the
Speaker 1: the early mover, then on your PC and your big
Speaker 1: CRT screen, and you know, and that made a difference.
Speaker 1: And I think that added to the froth then. And
Speaker 1: I think you've got a similar dynamic going on now. Um.
Speaker 1: I was look, I was keen to it, um as
Speaker 1: early as September nineteen. I wrote a piece called the
Speaker 1: Robin Hood Rally, and in that piece I talked about
Speaker 1: these new entrants, and I also talked about how rates
Speaker 1: are actually not necessarily a great justification for high higher
Speaker 1: PE multiples, which sets up this answer a little bit
Speaker 1: as well. And we can talk about that later if
Speaker 1: it makes sense. But to get to your question, how
Speaker 1: do you position yourself? It's very difficult to hedge the
Speaker 1: book right now, Um, when you look at the options
Speaker 1: volatility surfaces on almost any index, and and the cyclical
Speaker 1: rally in particular, and the Russell rally in particular seems
Speaker 1: way overdone. Um, it's very hard to buy put options.
Speaker 1: And so what you have to do is engage in
Speaker 1: more sophisticated strategies that really do require a delta view
Speaker 1: or a view on direction in the underlying which precisely
Speaker 1: what can generally try to avoid when you're buying volatility,
Speaker 1: right And what I mean by that is the only
Speaker 1: way to really for you know, to pursu to fund
Speaker 1: a Russell strategy is to sell a call to buy
Speaker 1: a put replix spread, so that you're selling a little
Speaker 1: bit of alatility to to to fund your downside protection.
Speaker 1: And you know you're making a directional bet that that
Speaker 1: that it's a lot more directional than if you're just
Speaker 1: buying a Russell put for example, And the same is
Speaker 1: true for the SMP. So hedging is extremely difficult right now.
Speaker 1: If you're very long, obviously you can sell calls to
Speaker 1: to sort of overwrite your portfolio. And so I think
Speaker 1: that is a good strategy for those who are long.
Speaker 1: For those who are underinvested already, the premium burn from
Speaker 1: just buying expensive put options is is probably too much
Speaker 1: to tolerate. So that's that's difficult. Um. You know, I
Speaker 1: think being a little bit heavier in cash makes sense here. UM.
Speaker 1: I do still like gold, um and you know, I'm
Speaker 1: I you know, I g is a good place to hide,
Speaker 1: but you're just not getting a heck up a lot
Speaker 1: of yields. So I mean that's sort of how I'm positioned,
Speaker 1: right I you know, uh, you know, own some investment,
Speaker 1: great credit things going to continue to get support from
Speaker 1: the Treasury and the fed um. But I wouldn't be
Speaker 1: dipping my tone into high yield. I think that's a
Speaker 1: that's a chase that's going to end poorly at the SMP.
Speaker 1: SMP ratings is predicting a nine perspective default rate and
Speaker 1: yet uh, you know, we have some of the lowest
Speaker 1: absolute yields in high yield um that we've ever seen. Yeah,
Speaker 1: this brings me to another line that you wrote that
Speaker 1: that I really loved, and I'm going to read it
Speaker 1: verbatim because I'm sure if I curse on the podcast,
Speaker 1: I'll get in a lot of trouble from my bosses.
Speaker 1: But by the bull star and signed dash t for
Speaker 1: a trade into Christmas on fun flows, but don't buy
Speaker 1: into the nonsense nonsense narratives permanently. And this leads me
Speaker 1: to ask you, would you say that at least some
Speaker 1: pockets of the market are in a bubble. I mean,
Speaker 1: we've seen the NASZAC one hundred more than double now
Speaker 1: in a year's time span. We've seen a SPA boom.
Speaker 1: We see the I p O market just on fire.
Speaker 1: As you mentioned, we've seen a retail trading phenomenon even
Speaker 1: taking advantage of the option market. One, are we in
Speaker 1: a bubble? And too? Even if we are, what can
Speaker 1: you do about that? Because bubbles, as we all know,
Speaker 1: can can last for a long time until they don't. Yeah,
Speaker 1: they they most certainly can. So you know, bubbles are
Speaker 1: about context. Right. It was interesting, um, you know for
Speaker 1: those of us nerds, and I know you guys are
Speaker 1: just like me and your nerds about this stuff too,
Speaker 1: so we you know, we listened to Chairman Powell and
Speaker 1: his press conference and he pointed to the FED model, right,
Speaker 1: he said, you know, equities actually don't look all that
Speaker 1: rich when taking too into account the fact that um
Speaker 1: greats are as low as they are. And um, you know,
Speaker 1: in in in the notes that I sent to you,
Speaker 1: and in a piece I put out, you know, I
Speaker 1: quoted Bill Dudley and you know he said, you know,
Speaker 1: I'll quote them stimulus provided by lower interest rates inevitably
Speaker 1: wears off. Cutting interest rates boost the economy of of
Speaker 1: bringing future activity into the present. Easy money encourages people
Speaker 1: to buy houses and appliances now rather than later. But
Speaker 1: when the future arrives, that activity is missing. The only
Speaker 1: way to keep things going is to lower interest rates
Speaker 1: further until that is they hit their lower bound, which
Speaker 1: in the US is zero. And that's Bill Dudley, not me.
Speaker 1: And that's a very incomplete description of how monetary policy works,
Speaker 1: but it's it's good enough for for for our conversation.
Speaker 1: So especially in that context, right in the context of
Speaker 1: the fact that the FED can't lower rates anymore and
Speaker 1: that we're really reliant I think on fiscal policy, UM,
Speaker 1: I think equities look rich as a general matter. UM.
Speaker 1: And you know, moreover, um, when when we're talking about
Speaker 1: why rates are low, rates were already quite low coming
Speaker 1: into the pandemic, because activity was already slowing because there
Speaker 1: was so little inflation. I think the FED has has
Speaker 1: proven its inability to stimulate inflation. In fact, um, one
Speaker 1: of the things I'm writing about in my book, and
Speaker 1: I've written about in pieces over time, is the fact
Speaker 1: that the FED has actually created the disinflationary environment to
Speaker 1: some extent by creating over investment UM, which leads to
Speaker 1: difficulty for firms and getting price. And when you can't
Speaker 1: get price, uh, profitability suffers. And when profitability suffers, you
Speaker 1: can't rage raise workers wages, which is at the end
Speaker 1: of the day, what the FED really cares most about.
Speaker 1: So back to the bubble question, are there areas of
Speaker 1: the market that are in a bubble? Yeah, clearly, um.
Speaker 1: And I think small caps right now have went from
Speaker 1: somewhat over sold too wildly overbought because I do not
Speaker 1: see how earnings are to come back for cyclical companies.
Speaker 1: There are clearly bubbles in tech. I actually have a
Speaker 1: sort of proprietary basket of of ten companies that I've
Speaker 1: been watching for for a while, and um, they are
Speaker 1: way into bubble uh territory. And the way that I'm
Speaker 1: not going to name names for those kind police for
Speaker 1: obvious reasons, but the way I typically look at that
Speaker 1: is I look at companies with negative cash flow, and
Speaker 1: I look at the multiple of revenue. So it's a
Speaker 1: basket of negative cash flow companies that's trading at multiples
Speaker 1: of revenue above ten times. And um. Not only the
Speaker 1: number of companies like that at at some of the
Speaker 1: highest levels I've ever seen. But the multiple multiples of
Speaker 1: revenues have expanded well above ten times in many cases.
Speaker 1: So yes, and many of those are obviously speculative technology companies. Peter,
Speaker 1: I love that analogy used. Uh just now you said, Um,
Speaker 1: you know sometimes when you're playing chess and the rest
Speaker 1: of the market is playing checkers, you're you're the one
Speaker 1: that can end up looking bad. And you know, I
Speaker 1: obviously this was a big year for for checkers players
Speaker 1: in the in the market, uh, even scrabble players as
Speaker 1: uh Dave Portnoy uh was famously picking letters out of
Speaker 1: the scrab scrabble bag to to pick stock tickers. I.
Speaker 1: You know, now we have this another jolt of fiscal
Speaker 1: spending coming. You know, as we record this, you know,
Speaker 1: we still don't know if it will be six hundred
Speaker 1: dollars or two thousand dollar checks sent out to most Americans. UM.
Speaker 1: I know you've paid a lot of attention to sort
Speaker 1: of the Dave portnoise of the world this year and
Speaker 1: and done a lot of thinking about it. Does this
Speaker 1: fiscal uh spending that's coming now, this this sort of
Speaker 1: you know checks in the mail? Um, is it gonna
Speaker 1: be off to the races again in the market? I mean,
Speaker 1: is that enough to sort of get us rallying again? Uh?
Speaker 1: You know, fundamentals be damned, just you know, grab those
Speaker 1: scrabble letters out of the bag and start picking stocks again.
Speaker 1: Is do you think that's a risk? Man? I wish
Speaker 1: I could answer that. I'll tell you, I'll tell, I will,
Speaker 1: I will. I'll give it a shot, like, um, yeah,
Speaker 1: that's all. That's that's the best we can ask. Yeah.
Speaker 1: So so if we remember, you know, uh, for a
Speaker 1: look for a while, the the stimulus package that just
Speaker 1: passed was expected, you know, quite a bit earlier that
Speaker 1: the conversation was is it coming before the election? Is
Speaker 1: not coming for it? Right? And you know, my view
Speaker 1: was likely wasn't going to come for the election, and
Speaker 1: that that probably wasn't gonna be all that good for equities.
Speaker 1: That turned out not to be the case. Right at
Speaker 1: the end of the day, no one really cared. Um.
Speaker 1: I think the mistake I made there was that there
Speaker 1: continued to be uh knock on effects from the previous
Speaker 1: uh stimulus package. And when you look at money supply
Speaker 1: money supply, there's a couple of things. Money supply actually
Speaker 1: does not expand UM in the way many people think
Speaker 1: it does in response to monetary policy. It just it
Speaker 1: simply doesn't, because monetary policy is actually not a money
Speaker 1: phenomenon the way many think it's an interest rate phenomenon.
Speaker 1: Fiscal policy, on the other hand, when you deposit money
Speaker 1: into people's checking accounts, that by definition right increases the
Speaker 1: money supply, and a lot of that additional liquidity in
Speaker 1: a real way went into the stock market UM. And
Speaker 1: that persisted for quite a bit longer, I think than
Speaker 1: many people thought. And I think what it suggested was
Speaker 1: that the amount of stimulus that came out of the
Speaker 1: first package was actually more effective than many of us
Speaker 1: believed it would be UM. And so that, you know,
Speaker 1: that leads me to my assessment of the second stimulus package,
Speaker 1: which is a two thousand dollars is a ludicrously large
Speaker 1: amount UM and it you know, we can get into
Speaker 1: the political motivations behind it, but it's just it's uh.
Speaker 1: I don't necessarily think that's a great thing, and I
Speaker 1: hate to agree with Laurence Summers, but but I will
Speaker 1: in this case and and say, you know, it's it's
Speaker 1: just not it's not warranted. Um, So will that drive
Speaker 1: equities higher? If you get a two thousand dollar check?
Speaker 1: You know, Mike, it might Uh, indeed, indeed it could,
Speaker 1: um in which to me would increase the risk of
Speaker 1: the market all the more because when the liquidity finally
Speaker 1: does run out, after we come back to a sense
Speaker 1: of normalcy sometime late next year, Um, you know that
Speaker 1: that the rug will be pulled out from under the market.
Speaker 1: The question is just kind of when that happens, and uh,
Speaker 1: you know, what are the risks of this new strain
Speaker 1: and lots of other things, but but yeah, I mean
Speaker 1: that that's clearly one of the things that could drive
Speaker 1: these drive these Marketshire. I just pulled up some data
Speaker 1: from this company investment Yodley, which is a data aggregator
Speaker 1: on how the stimulus checks were put to use in
Speaker 1: the markets the first time. Just for some background, listen
Speaker 1: to these numbers. So, people are named between thirty five
Speaker 1: dollars and seventy five dollars a year increased stock trading
Speaker 1: by more than the prior week after receiving their stimulus check.
Speaker 1: And then those making between a hundred and a hundred
Speaker 1: fifty k increased trading by eight two percent. And those
Speaker 1: that earn more than a hundred fifth K traded about
Speaker 1: fifty more often. So if you look at these numbers,
Speaker 1: it is pretty unbelievable, and there is data that shows
Speaker 1: that it did have an effect on people trading more
Speaker 1: often and getting into the market. But I also want
Speaker 1: to circle back, Peter to to a point that you
Speaker 1: made early on in the conversation, that being that before
Speaker 1: COVID nineteen hit, before any of us knew that we
Speaker 1: were going to be dealing with the pandemic this year,
Speaker 1: that we didn't necessarily have a very strong set up
Speaker 1: coming into And like you said, it feels like a
Speaker 1: lot of people forget that. And I've been looking at
Speaker 1: analysts earnings estimates for the SMP five hundred for one,
Speaker 1: looking for a hundred sixty seven dollars to share. I mean,
Speaker 1: you're right in the ballpack park again of the prior
Speaker 1: year when we were at peak earnings earnings growth. From
Speaker 1: your perspective, are are people losing site of where we
Speaker 1: were coming from the base that we were coming from
Speaker 1: before even dealing with this recession, the bear market COVID
Speaker 1: nineteen um to all of a sudden assume that it's
Speaker 1: going to be off to the races again. Yes, I
Speaker 1: mean most certainly in my opinion, UM, that that's one
Speaker 1: of the things that that just doesn't make an awful
Speaker 1: lot of sense to me. UM. The trajectory on the
Speaker 1: way in was as you just laid it out, fairly weak.
Speaker 1: And so you know, some of the earnings estimates that
Speaker 1: I'm seeing, as you said, this consensus is just below
Speaker 1: one seventy, are gonna require multiples that just don't make
Speaker 1: a lot of sense to me within the context of
Speaker 1: the fact that rates can't go any lower. So if
Speaker 1: we're looking for multiple expansion to continue to drive the rally, UM,
Speaker 1: I don't think we're going to get that because the
Speaker 1: feds um efficacy is limited, right. It can it has firepower.
Speaker 1: No one's saying the FED doesn't of ammunition. It can
Speaker 1: print money, and it can go by treasuries for as
Speaker 1: long as it would like. UM. But at the end
Speaker 1: of the day, when you're at zero, Uh, that's the
Speaker 1: stimulative impact is is muted because you can't push it
Speaker 1: below zero at least well you can. We know rates
Speaker 1: can go negative, but studies have shown that negative rates
Speaker 1: really actually don't do a heck of a lot and
Speaker 1: the FETE has stated pretty clearly it doesn't want to go.
Speaker 1: So I think, yes, I think that is one huge
Speaker 1: piece that people are missing. We're not just back to
Speaker 1: you know, this to the moon uh scenario for earnings.
Speaker 1: If if anything, we're back to a situation where UM
Speaker 1: cash flows remain challenge and by the way, debt levels
Speaker 1: have exploded UM and many of your reporters have done
Speaker 1: a pretty good job following this that they're now two
Speaker 1: trillion dollars of I think what have been characterized as
Speaker 1: zombie companies where uh, you know, many of these are
Speaker 1: larger company these where uh earnings or cash flows don't
Speaker 1: cover interest. And of course the counter argument to that
Speaker 1: is immediately, well, we're talking about a pandemic here. Uh
Speaker 1: you know, earnings are going to get better, but I
Speaker 1: would say, we can't count on that. And that's to
Speaker 1: me with this extra netload why I think SMP UM
Speaker 1: is rightly pointing out that default rates should increase considerably
Speaker 1: in yeah, you right that, Uh. I guess SMP expects
Speaker 1: UM speculative speculative grade default rates increased to nine percent
Speaker 1: by one from six point three uh this September. UM,
Speaker 1: you're thinking even higher to something like twelve. Um. You know,
Speaker 1: it's interesting to me because that those defaults tend to
Speaker 1: sort of lag the the economic downturn to to some degree,
Speaker 1: I guess, UM, so we we still could be facing
Speaker 1: this this wave of default even as the economy starts
Speaker 1: rebounding next year. Has the FED basically you know, inoculated
Speaker 1: the credit markets though with these programs this year were
Speaker 1: how do you see that all working out for the
Speaker 1: rest of the year. You know, will the Fed be
Speaker 1: able to to basically keep the corporate bond market calm
Speaker 1: even if these default rates UH spike up a little bit? Yeah?
Speaker 1: That you know, that's fantastic question. Um. Another question obviously,
Speaker 1: to which I do do not have an answer, but
Speaker 1: only an opinion. UM. That's that we're in the business
Speaker 1: of giving opinions. I suppose, but sometimes sometimes the default
Speaker 1: cycle leads the downturn and at other times it lags.
Speaker 1: I agree with you on that. So the question here
Speaker 1: becomes does the default cycle UH to some extent UH
Speaker 1: catalyze a second slowdown? Um? And does it catalyze the
Speaker 1: second slowdown because of the reason for UH the default cycle,
Speaker 1: which is that earnings are failing to grow and I
Speaker 1: actually happen to think that that may be the case. Now,
Speaker 1: this this in turn hinges on a rather esoteric top
Speaker 1: or topic which I'm sure many of your listeners are
Speaker 1: are are focused on. But it really depends whether or
Speaker 1: not the FEDS emergency powers if you will, that's not
Speaker 1: the technical term, but whether or not it can use
Speaker 1: the exigent circumstances exception under Section thirteen three of the
Speaker 1: Federal Reserve Act to continue to work with Treasury. And
Speaker 1: again Treasury has to agree to it and fund these
Speaker 1: special perfect purpose vehicles with first lost capital, which is
Speaker 1: then in turn used to extend these loans. Okay, and
Speaker 1: these these loans through the primary and secondary blending facilities
Speaker 1: are really just sort of tarp in disguise. They just
Speaker 1: decided not to call it that this time. Um. But
Speaker 1: the question becomes, will those programs which are supposed to
Speaker 1: be emergent or emergency exigent, right that's the language of
Speaker 1: the Federal Reserve Act, do they become more permanent? And
Speaker 1: interestingly enough, during the most recent pandemic relief package, Patrick
Speaker 1: Tooney actually stuck up his hand and said, you know,
Speaker 1: I want this to change. Um. So, so there are
Speaker 1: those in the legislature that that legislature that are aware
Speaker 1: of this issue UM, and whether or not the investing
Speaker 1: public becomes confident that there will be a permanent backstop
Speaker 1: in the credit markets and the corporate credit markets will
Speaker 1: clearly way on how risk plays and whether or not
Speaker 1: that the fault cycle UM is dead forever or not.
Speaker 1: You know, if it is dead forever, then I think
Speaker 1: we unfortunately have a situation where our system of capitalism
Speaker 1: is dead because I think without some level of default
Speaker 1: and recession, you know, that price discovery mechanism just doesn't
Speaker 1: work anymore. So you're you're you're begging a very deep
Speaker 1: philosophical question, which in fact is the is the topic
Speaker 1: of the book that I'm undertaking, well to be seen
Speaker 1: and Mike Love's philosophical questions I do. I like the
Speaker 1: teaser on the book too. That was well well done.
Speaker 1: He snuck that in there. Well, we can't wait for
Speaker 1: the book, I guess, uh sometime in one can we
Speaker 1: expect it? Yes, with with with any with any luck, Okay, good, Well,
Speaker 1: we'll have to have you back on when it's out,
Speaker 1: and we'll we'll do a little book club, little OpenH
Speaker 1: Oprah's book Club I love it. Hopefully I'll get her done.
Speaker 1: But with the death of capitalism, Sarah, I think that's
Speaker 1: our cue to move into the crazy things. What what?
Speaker 1: What a queue stand clear of the craziest things we
Speaker 1: saw in markets this week? So why don't you get
Speaker 1: us started, Sarah, what's the craziest thing you saw this week? So?
Speaker 1: I actually wanted to share one from a listener. First,
Speaker 1: we got an instant Bloomberg from Kendall bull Over at
Speaker 1: Bank of America Securities. Uh, he missed the cut off
Speaker 1: for last week's episode. I'll admit, just by a hair
Speaker 1: but I wanted to include it this week because it
Speaker 1: is pretty crazy. Um. So, what he points out is
Speaker 1: that if you look at Quantum Escape now, this is
Speaker 1: a Bill Gates back electric vehicle startup, but the spread
Speaker 1: between the stock price and the warrant price right now
Speaker 1: is about seventy five dollars. The stock price has gone
Speaker 1: from under twelve dollars at the beginning of November to
Speaker 1: around one dollars today at the time of his writing me.
Speaker 1: And then he says this isn't a small spack with
Speaker 1: market cup of around forty billion dollars now and the
Speaker 1: cost to currently short, the stock in the lending market
Speaker 1: is around minus n so just wild dist locations and
Speaker 1: again fits into the idea the narrative of of the
Speaker 1: spack boom that we've seen this year. Wait, the cost
Speaker 1: to borrow is mina is negative, is what he said?
Speaker 1: That's I think I want to borrow that one night.
Speaker 1: I'm not gonna sell it. I'm just gonna borrow it.
Speaker 1: That's that's pretty fascinating though. Yeah, alright, uh, Peter, you
Speaker 1: got anything crazy for us this week? Yeah? I mean
Speaker 1: I never thought i'd live to see the day when
Speaker 1: President Trump was on the same page as Nancy Pelosi.
Speaker 1: I think that wins. I think that wins. I think
Speaker 1: you're right. Who would have thought to talk about a
Speaker 1: crazy ending to a crazy year? But here we are,
Speaker 1: Here we are. That's pretty good, all right? I got one,
Speaker 1: uh as promised for our crypto and through aficionados. I
Speaker 1: guess is the proper turn not enthusiast efficient. I've been
Speaker 1: reading two headlines here, Sarah. One is from coin desk
Speaker 1: dot com and it says Carolina Panthers Russell oh Kung
Speaker 1: becomes the first NFL player to be paid in bitcoin.
Speaker 1: I saw this unbelievable. It's pretty interesting. Now here's the
Speaker 1: headline from the Verge, a another website. No NFL player
Speaker 1: Russell Okung is not being paid in bitcoin, So all
Speaker 1: right with the discrepancy? Is this guy wanted to get
Speaker 1: paid in bitcoin? E each tweeted out in two thousand
Speaker 1: and nineteen, pay me in bitcoin. And he's a real
Speaker 1: sort of crypto enthusiast. He's a computer aficionado. Yes, uh,
Speaker 1: interesting guy. He goes to two classes to high schools
Speaker 1: and stuff and and talks to their software coding club
Speaker 1: rather than the football team. And he and he says,
Speaker 1: all right, I want one of you guys to be
Speaker 1: the next creator of Facebook. So an interesting uh NFL
Speaker 1: player offensive lineman. Um. But the discrepancy is because, all right,
Speaker 1: he's getting paid by the Panthers in US dollars and
Speaker 1: there's some service uh the companies called zap and their
Speaker 1: product is called strike and it basically intercepts the payment
Speaker 1: from the NFL team and converts half of it to
Speaker 1: bitcoin and gives them half in dollars and and uh,
Speaker 1: half of his paying bitcoin. Maybe not the craziest thing,
Speaker 1: but I think it's an interesting, uh sort of part
Speaker 1: of the evolution of bitcoin. If all of a sudden,
Speaker 1: pro athletes are asking to be paid in bitcoin and
Speaker 1: there's service that actually converts half their pay instantly uh
Speaker 1: into bitcoin, I it makes you wonder about you know,
Speaker 1: this rally we've seen in crypto, and you know, you're
Speaker 1: always trying to figure out what's driving it. But uh,
Speaker 1: this guy behind this app says that other professional athletes,
Speaker 1: including he won't name them, but he says some members
Speaker 1: of the Brooklyn Nets and the Yankees are on board
Speaker 1: with that this app too, so they presumably will start
Speaker 1: getting some of their pay in bitcoin. Pretty interesting, Sarah,
Speaker 1: I don't know. I don't know if it's the craziest thing,
Speaker 1: but definitely one of the more interesting things. Very interesting.
Speaker 1: And Peter, you said that asking you about bitcoin was
Speaker 1: fair game. So as I'm looking at my terminal right
Speaker 1: now knocking on the door of twenty eight dollars again,
Speaker 1: So what's your view? Um, you know, I certainly no
Speaker 1: offense to the the athlete in question, but I think
Speaker 1: if we're relying on professional athletes uh to set the
Speaker 1: set the stage for what's uh, what's smart business practice,
Speaker 1: I think we're going to be disappointed. Um, look, I
Speaker 1: think big kind coin is is an incredible story. And
Speaker 1: what I've come to sort of believe about it is
Speaker 1: that it is really born of a desire to go
Speaker 1: back to the days of old. It's sort of of
Speaker 1: of what's it's a it's what's new is old sort
Speaker 1: of story because back in the day when the dollar
Speaker 1: was pegged to gold, there was reserved scarcity. That reserve
Speaker 1: scarcity came from a limited amount of gold. And what
Speaker 1: is bitcoin It's a I would call it, you know,
Speaker 1: fictitiously in some sense created reserve scarcity situation because only
Speaker 1: a certain amount of of of coin can be created now.
Speaker 1: So I think that's really interesting, and I think that's
Speaker 1: maybe an interesting way to take to take out. It's
Speaker 1: also a currency substitute, right because with rates of zero,
Speaker 1: you're not getting paid to her hold the currency anymore, right, um,
Speaker 1: whether it's in short treasuries or longer data treasuries, um,
Speaker 1: which is also the argument for gold. So from those standpoints,
Speaker 1: it's interesting and it's being adopted and and you know,
Speaker 1: who's to argue with that. That said, I think where
Speaker 1: the argument falls apart is that lots of different crypto
Speaker 1: can be created over time. I mean, bitcoin doesn't have
Speaker 1: a monopoly on crypto, so that reserves scarcity sort of
Speaker 1: argument falls to pieces And at the end of the day,
Speaker 1: I mean, I hate to be, you know, the old
Speaker 1: man in the room here, but I just see it
Speaker 1: as a speculative instrument that people are trying to make
Speaker 1: excuses about UM as a legitimate um instrument. Uh, let's
Speaker 1: just call it what it is. It's a great way
Speaker 1: to speculate. Uh. And I wish i'd own more of
Speaker 1: it um frankly. Uh, that that's the bottom line. You know.
Speaker 1: I wasn't smart enough to to to figure out what
Speaker 1: it was going to become as it was becoming it.
Speaker 1: But but I don't think we should again, we shouldn't
Speaker 1: fool ourselves that it's something that it's not, just because
Speaker 1: it's working now. Yeah, yeah, I think it all circles
Speaker 1: back to that exactly like you said, that speculative nature,
Speaker 1: that there's you know, Davy day traders of the world
Speaker 1: just watching watching the chart and and trading based on
Speaker 1: momentum and whatever else and fundamentals be darned. I guess
Speaker 1: for now that can happen for a while. And you
Speaker 1: hear four hundred thousand dollar calls and you really don't
Speaker 1: want to miss out on that if that's the next
Speaker 1: big thing, right, all right, I'm not going to cut
Speaker 1: myself loose, though, I'm gonna hold myself through Mike. I
Speaker 1: do have go this week. Um so this is just
Speaker 1: a nutshell. Listen to this headline sustainability spack Queen's Gambit
Speaker 1: growth Capital fires for a two d million dollar I
Speaker 1: p O. Now, I think you guys really tied me
Speaker 1: up for this one talking about chess and checkers earlier
Speaker 1: on uh in the podcast. But you get a combination
Speaker 1: of spacks, you get a combination of Queen's Gambit, which
Speaker 1: I must say was one of my best quarantine shows
Speaker 1: to watch. What could be better? Right? Something for everyone?
Speaker 1: Something for everyone? That's amazing? When does that? I p o.
Speaker 1: Uh let me see if I can pull it up
Speaker 1: right here? So it's as they filed on Tuesday of
Speaker 1: this week with the sec to raise up I PO.
Speaker 1: I don't see. Yeah, I don't seem a date yet.
Speaker 1: We don't have the effective date yet. We'll have to
Speaker 1: circle back on that one. That's that's pretty good. That
Speaker 1: that boy, it's like you think you hear the bell
Speaker 1: ringing for the top, Peter, and it just keeps getting crazier.
Speaker 1: What uh what you're hearing? I mean the Queen's Gambits back? Alright?
Speaker 1: Good one alone, Mike, Bitcoin is fair game. Queen's Gambits back.
Speaker 1: Not well with that, Sarah, I think our gambit here
Speaker 1: is over as well. Uh, Peter Chessiny. Thank you so
Speaker 1: much for joining the show. We really appreciated it. Good
Speaker 1: luck with the book, and we'll have to talk to
Speaker 1: you again when it comes out next year. Thanks a lot, Mike,
Speaker 1: I really enjoyed it. Thank you very much, Sarah, talk
Speaker 1: to you said, what goes up. We'll be back next week.
Speaker 1: Until then, you can find us on the Bloomberg Terminal
Speaker 1: website and app, or wherever you get your podcasts. We'd
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Speaker 1: review the show on Apple podcast. Some more listeners can
Speaker 1: find us, and you can find us on Twitter, follow
Speaker 1: me at at Sara Pontzack, Mike is that reaganonymous, and
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Speaker 1: you to Charlie Pellett of Bloomberg Radio and the voice
Speaker 1: of the New York City Subway System. What Goes Up
Speaker 1: is produced by tober Foreheads and the head of Bloomberg
Speaker 1: Podcast is Francesca Levie. Thanks for listening, see you next time.
Speaker 1: Thank you, mu