WEBVTT - Much Ado About Impeachment 0:00:12.560 --> 0:00:15.840 Hello, and welcome to What Goes Up, a Bloomberg Weekly 0:00:15.920 --> 0:00:19.079 Markets podcast. I'm Sarah pont Zach, a reporter on the 0:00:19.120 --> 0:00:21.880 Cross Asset team, and I'm Mike Reagan, a senior editor 0:00:21.920 --> 0:00:24.160 on the Markets team. This week on the show, old 0:00:24.280 --> 0:00:27.560 risks are alive and well your common culprits like trade 0:00:27.680 --> 0:00:30.880 and slowing global growth. But there's one new one to 0:00:30.960 --> 0:00:34.840 now throw into the mix, the prospects for presidential impeachment. 0:00:35.320 --> 0:00:38.839 What if anything at all does this mean for markets? 0:00:39.400 --> 0:00:41.440 And if you only came here to hear the craziest 0:00:41.479 --> 0:00:43.879 things that happened in markets this week, don't worry. We 0:00:43.920 --> 0:00:46.280 will not disappoint Sarah. I'll give you one hint on 0:00:46.360 --> 0:00:49.880 what my craziest thing is Switzerland. Switzerland. All right, I 0:00:49.920 --> 0:00:54.600 guess we'll have to wait like usual, and as always, 0:00:54.600 --> 0:00:58.400 remember we have our very own Bloomberg Podcast hotline. Give 0:00:58.520 --> 0:01:01.040 us a call, ask us a question, leave us a 0:01:01.080 --> 0:01:03.440 message saying the craziest things that you guys have seen 0:01:03.440 --> 0:01:06.280 in market, and maybe we'll even play your message on 0:01:06.319 --> 0:01:08.880 the show. That number is six or six three two 0:01:08.959 --> 0:01:14.000 four three for nine zero. So Sarah, I have to say, uh, 0:01:14.319 --> 0:01:18.039 I just met our first guest today for the first time, 0:01:18.160 --> 0:01:19.760 but I like them already and I'll tell you why, 0:01:20.000 --> 0:01:22.160 because I was reading the notes he sent over with 0:01:22.400 --> 0:01:24.640 sort of the thought his thoughts on the market, and 0:01:24.640 --> 0:01:28.280 they jibe with my own very very much. There's a 0:01:28.319 --> 0:01:30.800 lot of a lot of common ideas there. You love 0:01:30.880 --> 0:01:33.800 to hear your own. I'm the hot above a little 0:01:33.840 --> 0:01:38.240 confirmation bias, but he's the chief market strategist at New Texas. 0:01:38.760 --> 0:01:41.200 He's also the chair of the steering committee for the 0:01:41.240 --> 0:01:44.080 Active Managers Council, so we expect him to be very 0:01:44.080 --> 0:01:47.520 active in this podcast. And uh, he's right about everything, 0:01:48.000 --> 0:01:51.800 as we've we've already said. His name is Dave Lafferty. Dave, 0:01:51.840 --> 0:01:53.720 welcome to the show. Thank you for having me, and 0:01:53.760 --> 0:01:58.320 I appreciate the confirmation bias right wrong with a little 0:01:58.520 --> 0:02:00.680 pat yourself on the back right our other guests. I 0:02:00.760 --> 0:02:02.639 kind of like him too, even though I rarely agree 0:02:02.680 --> 0:02:06.360 with him. Yeah, he is a cross asset reporter for Bloomberg. 0:02:07.120 --> 0:02:10.360 He is I would call him the cal Ripkin of 0:02:10.480 --> 0:02:13.720 finance Twitter. I might have to explain that, explain explain 0:02:13.840 --> 0:02:15.760 for the kids that it means he shows up every 0:02:15.840 --> 0:02:18.799 day swinging. He shows up every day swinging and as 0:02:18.800 --> 0:02:21.800 we just discovered he's an intermittent faster. Luke, how tell 0:02:21.840 --> 0:02:24.320 us about that? I mean, I think it's pretty necessary 0:02:24.360 --> 0:02:26.320 if you can you can eat whatever the heck you 0:02:26.360 --> 0:02:28.320 want for eight hours a day and then do nothing 0:02:28.320 --> 0:02:31.280 for the other sixteen I think it's it's really smart. 0:02:31.320 --> 0:02:33.440 It's working. I can tell you. I sit next to 0:02:33.480 --> 0:02:35.000 Luke and I can start tell you he does not 0:02:35.040 --> 0:02:37.200 eat whatever he wants for the other sixteen hours of 0:02:37.240 --> 0:02:40.480 the day. I hate you know, some of us weren't 0:02:40.480 --> 0:02:42.800 fitting into suits we bought, you know, a year ago, 0:02:42.880 --> 0:02:47.680 and now we do again. You know, well, I fast 0:02:47.720 --> 0:02:50.000 for about twenty minutes out of time. That counts counts. 0:02:50.600 --> 0:02:52.720 You have to raise a number of daughters, though I'm 0:02:52.760 --> 0:02:56.640 sure you know that's a lot of calorie burning and 0:02:56.680 --> 0:02:59.480 a dog. Don't forget about that one. So Dave, let's 0:02:59.480 --> 0:03:02.720 start with you. Um. Obviously, the big story of the 0:03:02.760 --> 0:03:07.079 week is Nancy Pelosi, uh, sort of finally pulling the 0:03:07.120 --> 0:03:12.360 trigger on the impeachment inquiry of President Donald Trump. Um. 0:03:12.520 --> 0:03:15.239 We saw a little bit of altility around the announcement 0:03:15.240 --> 0:03:18.280 and before it, as as the rumors started swirling. Walk 0:03:18.360 --> 0:03:20.240 us through how you're thinking about this? Is this a 0:03:20.360 --> 0:03:23.000 risk that sort of the average investor has to worry 0:03:23.000 --> 0:03:26.440 about in the long term or even the short term. Uh, 0:03:27.240 --> 0:03:29.560 how are you thinking about impeachment? Well, I think when 0:03:29.600 --> 0:03:31.440 you bring up the horizon, that is the right way 0:03:31.440 --> 0:03:32.760 to think about it. And when I think in the 0:03:32.840 --> 0:03:36.120 near term, it doesn't strike me as something that's very tradeable, 0:03:36.920 --> 0:03:38.760 I think it's gonna be a lot of he said, 0:03:38.840 --> 0:03:41.520 she said, we don't know what we don't know at 0:03:41.560 --> 0:03:43.400 this point. We don't know what the revelations will be, 0:03:43.440 --> 0:03:45.160 So I think it's really tough to kind of trade 0:03:45.200 --> 0:03:50.360 around this. Uh. I do think that in the long run. Uh, 0:03:50.400 --> 0:03:54.440 this is really setting up the key debate around the election. 0:03:54.880 --> 0:03:57.120 And I think it's pretty clear that Speaker Pelosi has 0:03:57.200 --> 0:03:59.480 kind of been dragged, kicking and screaming into this, and 0:03:59.520 --> 0:04:02.360 I think she has some pretty good instincts. Uh. The 0:04:02.640 --> 0:04:08.000 the Democrats can either make a really compelling, concise and 0:04:08.120 --> 0:04:11.800 coherent argument and really put the pressure on the president, 0:04:12.320 --> 0:04:15.920 or they could present a very mixed and muddled and 0:04:16.000 --> 0:04:20.920 confused presentation to the American public and really help out 0:04:20.960 --> 0:04:24.600 the president's chances. So if I was a Democratic strategist, 0:04:24.600 --> 0:04:27.160 I wouldn't be hiring lawyers. I'd be hiring a PR 0:04:27.240 --> 0:04:30.159 firm because the they need to wrap this up in 0:04:30.200 --> 0:04:33.279 a real good sound bite, a real good bumper sticker, 0:04:33.600 --> 0:04:36.279 and then I think it has real market implications going 0:04:36.320 --> 0:04:40.039 into the election. But right now it feels like a 0:04:40.080 --> 0:04:42.760 lot of much ado about nothing. I know, you guys 0:04:43.120 --> 0:04:48.000 covered some Shakespeare on last week's podcast, so like like 0:04:48.000 --> 0:04:50.240 like most people who have never read it, I love 0:04:50.279 --> 0:04:54.400 to quote Shakespeare. So much ado about nothing. In the meantime, 0:04:54.720 --> 0:04:56.400 we could do the Macbeth full of sound and fury 0:04:56.520 --> 0:04:58.640 signifying nothing too if we want. That isn't done for 0:04:58.680 --> 0:05:00.760 the moment. I think that was last week. We've heard, 0:05:00.960 --> 0:05:03.560 I've heard many times from investors this past week that 0:05:03.760 --> 0:05:08.039 it's not about politics, it's about policies. So when we 0:05:08.160 --> 0:05:10.599 talk about what this could mean for markets when it 0:05:10.640 --> 0:05:13.400 comes to impeachment or at least the proceedings, um and 0:05:13.440 --> 0:05:16.000 the sound and fury of it is where it really 0:05:16.040 --> 0:05:19.760 matters what it does for actual policies like trade or 0:05:19.800 --> 0:05:22.800 other policies in that matter. Yeah, I would certainly think so, 0:05:22.839 --> 0:05:25.560 and I'd agree, And that's why it's interesting to see 0:05:26.120 --> 0:05:29.920 market moves just based on you know, I'm refreshing predicted 0:05:30.120 --> 0:05:33.720 like every other crazy person in markets because they predicted 0:05:33.800 --> 0:05:36.800 and UH and SMP five futures were for a point 0:05:36.800 --> 0:05:39.680 in time this week, they were moving in tandem perfectly. 0:05:39.960 --> 0:05:43.000 What's been interesting throughout this though, is that even as 0:05:43.040 --> 0:05:45.760 the odds of just impeachment by the House have certainly 0:05:45.800 --> 0:05:49.560 gone up this week, you haven't seen a corresponding decline 0:05:49.560 --> 0:05:53.040 and online prediction markets about Donald Trump's chances of winning 0:05:53.080 --> 0:05:57.479 the elections. That's a big part of policy. So what 0:05:57.600 --> 0:05:59.720 is a policy that could change and still not have 0:06:00.160 --> 0:06:03.159 those odds changed. Certainly, trade, I think would be would 0:06:03.200 --> 0:06:05.720 be the top one. And in talking with people about 0:06:05.720 --> 0:06:08.359 you know, market reactions to these uh, these kind of 0:06:08.360 --> 0:06:12.560 political hijinks we've had, seems everyone wants to treat it 0:06:12.920 --> 0:06:16.560 as potential buying opportunity. And the part of the thinking 0:06:16.600 --> 0:06:19.720 here is, well, if you know Trump's engaged and full 0:06:19.800 --> 0:06:23.360 out war against the Democrats, then you know it's gonna 0:06:23.400 --> 0:06:26.080 be harder to fight a two front war really aggressively 0:06:26.400 --> 0:06:29.040 there with China. He might have to play more to 0:06:29.160 --> 0:06:32.279 his Republican base, make sure a lot of senators stay 0:06:32.320 --> 0:06:35.039 on his side. And you know, the Republican senators, although 0:06:35.040 --> 0:06:37.479 they have not been a huge check on the President 0:06:37.480 --> 0:06:40.839 on trade. They certainly do not uh share all of 0:06:40.880 --> 0:06:44.360 his hawkish leanings on that subject. Dave. I was listening 0:06:44.440 --> 0:06:47.960 to TV interview you did on this subject, and you 0:06:48.040 --> 0:06:50.760 brought up the notion of game theory. And I gotta say, 0:06:50.760 --> 0:06:53.800 whenever I hear a financial type start talking about game theory, 0:06:53.800 --> 0:06:56.279 I'm like, all right, okay, son zoo take it easier, 0:06:56.920 --> 0:06:58.880 but but I know you have to do it. Um. 0:06:59.279 --> 0:07:01.440 The problem I see is that the star of this 0:07:01.480 --> 0:07:06.560 game is Donald Trump, who plays what's the word for it, sarah, 0:07:06.600 --> 0:07:11.640 an unorthodox game. We'll go with that. Um. So everyone's 0:07:11.680 --> 0:07:14.720 doing sort of a similar mental exercise on game theory. 0:07:14.720 --> 0:07:17.720 But how how confident can you be, Um, in what 0:07:17.800 --> 0:07:20.400 you you conclude when you think about the trade tensions. 0:07:20.440 --> 0:07:22.560 It's a great point, not very confident. The point that 0:07:22.600 --> 0:07:24.840 I was trying to make was that there's been a 0:07:24.880 --> 0:07:28.680 view that we've heard that basically this will kind of 0:07:28.720 --> 0:07:31.760 impede the timeline, that all this impeachment talk will kind 0:07:31.760 --> 0:07:34.800 of push push policy out into the future. There won't 0:07:34.800 --> 0:07:37.400 be have enough enough time to get any of this done. 0:07:37.840 --> 0:07:40.080 And all I was sort of bringing up was you 0:07:40.120 --> 0:07:42.520 also have to think about what the reaction function is. 0:07:42.560 --> 0:07:44.880 That's sort of the link to game theory, and what 0:07:44.920 --> 0:07:47.680 I'm thinking about there is how did the Chinese react 0:07:47.720 --> 0:07:50.120 to this? Is this a chance for them to uh? 0:07:50.160 --> 0:07:52.760 Do they see the president as weak and more willing 0:07:52.800 --> 0:07:55.640 to cut a deal, so maybe they offer an olive branch. 0:07:56.080 --> 0:07:57.760 So what I was really getting at was kind of 0:07:57.800 --> 0:07:59.800 the reaction function. I don't think we can be a 0:08:00.120 --> 0:08:03.040 we can have confidence in any outcome. I think that 0:08:03.160 --> 0:08:06.520 is kind of the underlying message of the entire Trump presidency. 0:08:07.240 --> 0:08:10.080 Don't don't bank on anything. But I do think it's 0:08:10.080 --> 0:08:13.560 not simply uh. Is easy as saying, well, this is 0:08:13.600 --> 0:08:16.160 going to delay everything it's gonna make, as Luke was saying, 0:08:16.280 --> 0:08:18.800 and as all kinds of policy implications, maybe these will 0:08:18.960 --> 0:08:21.600 will get delayed. The other side of this coin is 0:08:21.680 --> 0:08:24.360 it might give an opportunity for some people to step in. 0:08:25.000 --> 0:08:27.280 We did get a trade deal this week with Japan. 0:08:27.360 --> 0:08:30.480 It kind of got glossed over, lost in the fray. However, 0:08:30.520 --> 0:08:32.640 we still have not really seen much movement on the 0:08:32.720 --> 0:08:35.040 U S m c A. Is there anything that we 0:08:35.080 --> 0:08:38.719 can take away from other trade jewel deals that are 0:08:38.800 --> 0:08:41.640 moving through the system to get a sense of what 0:08:41.840 --> 0:08:46.079 might be coming with China, I don't know. I really 0:08:46.080 --> 0:08:48.880 think these all progressive at their own pace. I I 0:08:48.960 --> 0:08:52.439 have had for a long time now very limited expectations 0:08:52.480 --> 0:08:55.559 around some type of grand bargain between the US and China. 0:08:56.000 --> 0:08:59.400 I think what the US ultimately wants is for the 0:08:59.480 --> 0:09:03.120 Chinese not to be China. Uh. We we sort of 0:09:03.320 --> 0:09:07.040 we're asking them to do something that really isn't in 0:09:07.120 --> 0:09:09.079 their nature. And I think that was always going to 0:09:09.200 --> 0:09:11.240 make a really grand bargain. I mean, when it comes 0:09:11.240 --> 0:09:15.640 to ip the AFT right again into law. Yes, domestic subsidies, 0:09:15.679 --> 0:09:18.640 industry champions, all of those things that they really feel 0:09:18.679 --> 0:09:22.720 are inherent to their industrial policy. It's it's uh, they 0:09:22.800 --> 0:09:25.240 might they might give us, uh, you know, they might 0:09:25.280 --> 0:09:27.120 buy some more soybeans from US, But I don't think 0:09:27.120 --> 0:09:29.880 they're gonna change who they fundamentally are. That's a bridge 0:09:29.920 --> 0:09:32.480 too far from me. Uh. The way I've always thought 0:09:32.520 --> 0:09:35.520 about it is the uh, the impact of this deal 0:09:35.600 --> 0:09:38.679 will be proportional to how long it takes to get done. 0:09:38.880 --> 0:09:41.439 The faster it gets done, the less it really means. 0:09:42.200 --> 0:09:45.760 I wanted to talk about sort of what the ground 0:09:45.840 --> 0:09:48.000 zero of the trade war seems to be and it's 0:09:48.040 --> 0:09:51.480 it's manufacturing. Uh. And I was gonna read from from 0:09:51.480 --> 0:09:55.199 one of your notes. Uh. Globally, manufacturing is probably in recession, 0:09:55.679 --> 0:09:57.880 but we're watching for signs that it may spill over 0:09:57.920 --> 0:10:01.200 into broader consumption trends. It hasn't happened yet. This is 0:10:01.200 --> 0:10:03.839 a theme we've talked about a few times on this show. Um, 0:10:03.960 --> 0:10:06.280 this concern of when do we start to see this 0:10:06.320 --> 0:10:10.680 manufacturing weakness bleed into the consumer space. You know, we 0:10:10.679 --> 0:10:14.000 did see the Conference boards consumer Confidence index take a 0:10:14.000 --> 0:10:17.160 pretty big dip uh this week, granted still at a 0:10:17.240 --> 0:10:21.480 very elevated level expectations. Uh, an even bigger dip again, 0:10:21.600 --> 0:10:25.280 still elevated level. UM. I was reading a note from Nicholas, 0:10:25.280 --> 0:10:27.920 who we had on the show, and he he finds 0:10:27.960 --> 0:10:31.280 the craziest stats. But he was talking about Halloween consumption 0:10:31.800 --> 0:10:34.720 and how the National Retail Federation is expecting a dip 0:10:35.120 --> 0:10:38.600 in Halloween purchases and people actually believe it or not 0:10:38.640 --> 0:10:42.000 blaming it on the trade ward. I mean, is this 0:10:42.200 --> 0:10:45.440 enough to start worrying about the consumer? Obviously the job 0:10:45.480 --> 0:10:48.600 markets still strong, but where where would you look forward 0:10:48.600 --> 0:10:51.560 to see that sort of infection into the consumer space. Well, 0:10:51.600 --> 0:10:54.000 from my standpoint, it's really about how long it takes 0:10:54.040 --> 0:10:56.000 and and sort of coming back to your point, if 0:10:56.000 --> 0:10:58.679 you look at the size of the US external sector, 0:10:59.040 --> 0:11:01.480 you know, the the x sports sectors about ten twelve 0:11:01.840 --> 0:11:04.880 of the U s economy, manufacturing sector something like a 0:11:05.160 --> 0:11:09.640 just under under twenty. In isolation, those don't seem big 0:11:09.760 --> 0:11:12.480 enough to bring down the US economy, but it is 0:11:12.559 --> 0:11:16.360 the spillover effects. How long until the lock up in 0:11:16.480 --> 0:11:20.240 trade and supply chains spills over into manufacturing while we're 0:11:20.240 --> 0:11:24.480 seeing it, How long until the manufacturing slowdown spills over 0:11:24.559 --> 0:11:27.760 into now they you know that that person that works 0:11:27.760 --> 0:11:30.440 on the factory floor isn't going out to dinner. Now 0:11:30.480 --> 0:11:33.840 we've got waiters and waitresses being laid off. When does 0:11:33.920 --> 0:11:37.120 this begin to hit the consumption side? When does it really, 0:11:37.160 --> 0:11:40.080 in my mind, hit sort of labor and wage trends. 0:11:40.400 --> 0:11:43.800 We don't see that yet, but at the front end 0:11:43.800 --> 0:11:45.480 of some of the labor markets we don't see it. 0:11:45.520 --> 0:11:48.440 And say the weekly jobless claims which have remained very strong, 0:11:48.679 --> 0:11:50.559 but we do see it in some of the survey 0:11:50.679 --> 0:11:54.960 data where uh jobs hard to get minus easy to get. Uh, 0:11:55.000 --> 0:11:59.120 that's beginning to deteriorate the employment components of some of 0:11:59.120 --> 0:12:01.800 the surveys are beginning to deteriorate. So we're not in 0:12:01.800 --> 0:12:04.400 the recession camp. We don't see a ton of spill over, 0:12:04.720 --> 0:12:07.120 but we might be at the very front tip of 0:12:07.120 --> 0:12:09.680 that iceberg. And so that's what we're kind of keeping 0:12:09.720 --> 0:12:12.240 an eye on. That weekly jobless claims number, to me, 0:12:12.320 --> 0:12:14.839 is kind of the thing I look for first on 0:12:14.880 --> 0:12:18.000 Thursday mornings. I think there's kind of two interesting points 0:12:18.040 --> 0:12:21.559 to piggyback off of that in terms of the data 0:12:21.600 --> 0:12:24.680 and the divide between hard and soft data, or almost 0:12:24.720 --> 0:12:27.880 at the diametrically opposite position that we were at the 0:12:27.920 --> 0:12:31.360 start of the Trump presidency, when it's essentially consumer confidence 0:12:31.400 --> 0:12:34.440 gauges CEO confidence gauges were absolutely shooting up in the 0:12:34.440 --> 0:12:37.240 hard data didn't match if you actually look at what 0:12:37.440 --> 0:12:40.800 US industrial production is doing and the deceleration, which it's 0:12:40.800 --> 0:12:44.480 been real. Uh, it's nowhere near the level of deceleration 0:12:44.520 --> 0:12:47.200 and contraction you would assume is happening if you just 0:12:47.280 --> 0:12:50.560 looked at I S M and then to kind of use, well, 0:12:50.600 --> 0:12:53.680 what barometer could we use to maybe see when we 0:12:53.800 --> 0:12:57.040 get the spell over from manufacturing to services. I think 0:12:57.080 --> 0:12:58.719 they've made a great point look at the size of 0:12:58.720 --> 0:13:01.360 the US external sector. Why not look at economies that 0:13:01.440 --> 0:13:04.560 have a much bigger manufacturing and external sector and see 0:13:04.559 --> 0:13:06.680 when it spells over there, because it's not reasonable to 0:13:06.679 --> 0:13:09.720 suggest it's really going to hit US consumers before it 0:13:09.800 --> 0:13:13.480 materially hits European consumers, in particular Germany. It seems like 0:13:13.520 --> 0:13:17.960 we're constantly talking about these headwinds, either sentiment deteriorating or 0:13:18.080 --> 0:13:20.640 you think about the oil spike, Middle East tensions over 0:13:20.960 --> 0:13:25.120 caused by Iran. Also, we've talked about slowing economic growth overseas, 0:13:25.160 --> 0:13:28.120 particularly this week we sell weaker economic data out of Europe. 0:13:28.160 --> 0:13:30.880 Now you're dealing with all this impeachment talk. Trade continues, 0:13:31.360 --> 0:13:33.800 but the market is still near its record highs. I mean, 0:13:33.800 --> 0:13:36.160 the market has been very resilient. Do you get the 0:13:36.240 --> 0:13:40.520 sense that that's actually the tone from underlying investors that 0:13:40.559 --> 0:13:44.480 people feel good right now or do people still feel 0:13:44.520 --> 0:13:48.000 pretty downtrodden and that means there's room to move further? Well, 0:13:48.040 --> 0:13:50.840 I think again, coming back to the sentiment indicators, I 0:13:50.880 --> 0:13:53.160 do feel like they've weakened, and I think people are 0:13:53.320 --> 0:13:56.400 very worried. I think even people that don't understand or 0:13:56.440 --> 0:13:59.400 even know what an inverted yield curve. Ore could still 0:13:59.440 --> 0:14:01.200 stop you on the street and ask you what this 0:14:01.240 --> 0:14:04.160 means for their four oh one K. So I do 0:14:04.240 --> 0:14:10.560 think sentiment has has clearly uh deteriorated in that sense. Uh. 0:14:10.679 --> 0:14:14.280 I think more important, though, is what are the underlying trends? 0:14:14.760 --> 0:14:18.480 And I think this really has people concerned because because frankly, 0:14:18.920 --> 0:14:21.880 for all the news that's been buffeting the stock market, 0:14:22.040 --> 0:14:25.160 what we aren't talking a lot about are the earning strends, 0:14:25.240 --> 0:14:28.360 which frankly haven't been that great. It's been positive, but 0:14:28.440 --> 0:14:32.160 they've been the forward earnings estimates have been gradually deteriorating 0:14:32.360 --> 0:14:36.040 for about three or four quarters now, and valuations which 0:14:36.080 --> 0:14:39.400 we don't see as as exorbitant, but they're certainly not cheap. 0:14:39.880 --> 0:14:43.040 So all this stuff is buffeting the equity markets, but 0:14:43.120 --> 0:14:46.480 it's buffeting it in a context where those two kind 0:14:46.480 --> 0:14:50.360 of drivers of equity returns margin expansion or contraction in 0:14:50.400 --> 0:14:54.040 the underlying earnings, neither of those variables is really in 0:14:54.080 --> 0:14:58.000 the favor right now of equity holders. So I think 0:14:58.000 --> 0:15:00.720 you need to sort of look underneath the way and 0:15:00.760 --> 0:15:03.320 everything that's happening to see kind of those underlying trends, 0:15:03.480 --> 0:15:20.160 and they're stable, but they're not great. One really interesting 0:15:20.200 --> 0:15:23.240 point you brought up in your notes was, uh, and 0:15:23.400 --> 0:15:25.760 I'm quoting you here, you say we think central banks 0:15:25.760 --> 0:15:28.440 have run out of real ammunition. Uh. And you talk 0:15:28.520 --> 0:15:31.160 about the credit impulse, which and correct me if I'm 0:15:31.240 --> 0:15:34.080 bungling this definition. But it's basically the year over year 0:15:34.120 --> 0:15:37.880 growth in credit as a percentage of growth in GDP, 0:15:38.440 --> 0:15:41.280 and it's really been pinned at a very low level. 0:15:41.320 --> 0:15:44.560 The trend of it seems to just have flatlined, uh 0:15:44.920 --> 0:15:48.600 and and gone lower over the years, despite the FED 0:15:49.480 --> 0:15:52.440 returning to an easy posture. What do you think is 0:15:52.480 --> 0:15:56.240 behind that? So what you described as an even better 0:15:56.240 --> 0:15:58.720 definition of the credit impulse than what I would think, 0:15:58.840 --> 0:16:06.400 I I actually think a bit much. For me, the 0:16:06.440 --> 0:16:10.320 credit impulse is just the the uh, the impetus to 0:16:10.360 --> 0:16:13.800 want to take on more debt as interest rates get lower. 0:16:14.160 --> 0:16:17.280 So how much credit will really be sort of uh 0:16:17.640 --> 0:16:20.640 demanded as rates go lower? And so the point that 0:16:20.720 --> 0:16:22.960 I was really making is, you know, when interest rates 0:16:23.000 --> 0:16:25.400 go from four percent to two percent, CEO say, hey, 0:16:25.440 --> 0:16:28.120 I can fund that new plant, I can buy that 0:16:28.200 --> 0:16:31.160 new software, maybe I can hire some more workers. But 0:16:31.240 --> 0:16:33.560 when rates are pretty close to zero in some parts 0:16:33.560 --> 0:16:36.280 of the world if you haven't gone out and borrowed yet. 0:16:36.600 --> 0:16:39.000 As you get closer to the zero bound, does lowering 0:16:39.040 --> 0:16:43.040 interest rates really create this new demand for credit? That 0:16:43.160 --> 0:16:45.200 was really what I was getting at. And so I 0:16:45.240 --> 0:16:47.600 think the idea, you know, we we've heard this constantly, 0:16:47.640 --> 0:16:49.800 and this is one of the narratives I've pushed back 0:16:49.840 --> 0:16:51.600 on for about a year and a half now, was 0:16:51.640 --> 0:16:54.800 the idea that more a committy of central banks would 0:16:54.880 --> 0:16:58.280 somehow be good for the stock market. I don't necessarily 0:16:58.280 --> 0:17:01.840 think it's bad, but I think we've lost more credit impulse, 0:17:02.120 --> 0:17:05.320 and I actually think we're reaching a point where, uh, 0:17:05.359 --> 0:17:09.280 the more accommodative and the more frantic this begins to 0:17:09.359 --> 0:17:14.240 look super accommodative policy at ten years on now serves 0:17:14.280 --> 0:17:18.400 to undermine investor and consumer confidence more than it does 0:17:18.480 --> 0:17:21.320 to instill it. And those are the two reasons why 0:17:22.040 --> 0:17:24.639 I'm a little bit hesitant about thinking. I certainly think, hey, 0:17:24.680 --> 0:17:27.120 if you take rates lower and do a bunch of quwi, yeah, 0:17:27.119 --> 0:17:29.520 at the margin, we get some stimulus. I just don't 0:17:29.520 --> 0:17:32.640 think it looks anything like it did in previous episodes 0:17:32.880 --> 0:17:36.520 of this super accommodative policy. Sticking with the topic, of debt. 0:17:36.560 --> 0:17:39.199 I want to get your take on this phenomenon that 0:17:39.280 --> 0:17:42.000 we've been seeing. So Goldman Sacks has these two different 0:17:42.040 --> 0:17:46.199 baskets of stocks. One has stocks that are extremely highly levered, 0:17:46.320 --> 0:17:49.200 the other has stocks that have extremely strong and healthy 0:17:49.200 --> 0:17:52.840 balance sheets. And since June we've actually seen this sudden 0:17:52.920 --> 0:17:57.960 outperformance of these highly levered stocks right before the FED 0:17:58.040 --> 0:18:01.119 cut interest rates. To you, when you see these stocks 0:18:01.160 --> 0:18:04.560 that might be seen as low quality stocks doing better, 0:18:04.840 --> 0:18:09.200 I should say, then your higher quality a strong balance 0:18:09.200 --> 0:18:12.520 sheet companies. Is that sustainable or does it seem more 0:18:12.600 --> 0:18:15.160 like a head fake it will look. I think it's 0:18:15.200 --> 0:18:18.200 probably unsustainable in the sense that we're still going to 0:18:18.280 --> 0:18:21.760 have an economic cycle, and ultimately, when the credit cycle turns, 0:18:22.160 --> 0:18:24.840 those names are going to get punished the most. I 0:18:24.920 --> 0:18:27.760 do think that as you take interest rates lower and 0:18:27.840 --> 0:18:32.480 lower than natural compounding companies that aren't as strong financially 0:18:32.600 --> 0:18:35.200 but they have sort of this growth bent, that that 0:18:35.280 --> 0:18:38.919 growth is is further out there into the future. You know. Uh, 0:18:39.000 --> 0:18:41.439 the unicorns have all been kind of taking it on 0:18:41.480 --> 0:18:44.360 the chin in recent weeks. Uh. The idea that you're 0:18:44.400 --> 0:18:48.159 not discounting those cash flows as much gives these levered 0:18:48.200 --> 0:18:51.960 companies more leeway. I think investors give them a little 0:18:52.000 --> 0:18:56.159 bit more leeway. But Sarah, that can't last forever. Ultimately, 0:18:56.280 --> 0:18:58.680 we don't know when the credit cycle will begin to bite, 0:18:58.680 --> 0:19:00.840 but it will come back at some point, So no, 0:19:00.960 --> 0:19:03.640 it can't last forever. It's probably important to note that 0:19:03.680 --> 0:19:07.480 this isn't necessarily being validated by the bond market right now. 0:19:07.560 --> 0:19:10.480 For instance, the you know, the riskiest credits triple cs, 0:19:10.520 --> 0:19:13.520 they've been underperforming in high yield UH you know, a 0:19:13.600 --> 0:19:16.359 clear lagger this year, but especially in the last few weeks, 0:19:16.400 --> 0:19:18.600 so credits supposed to be the smart money, and those 0:19:18.640 --> 0:19:21.560 guys are going, hey, like, maybe you're just reevaluating the 0:19:21.600 --> 0:19:25.320 upside prospects and the equity. But we aren't necessarily very 0:19:25.359 --> 0:19:28.160 convinced here as the ones first in the UH first 0:19:28.160 --> 0:19:30.760 in the recoup line. Luke, you write a lot about 0:19:30.920 --> 0:19:33.760 options in the volatility market, and we're talking a little 0:19:33.760 --> 0:19:36.280 bit earlier about it, and you're saying that there's there's 0:19:36.320 --> 0:19:39.719 just really nothing to talk about there. There's this heightened 0:19:39.760 --> 0:19:43.200 uncertainty with the impeachment and the trade tensions. The VIX 0:19:43.280 --> 0:19:46.520 is still kind of where it's been fifteen sixteen, you know, 0:19:46.560 --> 0:19:48.399 I was looking at the skew the option skew on 0:19:48.440 --> 0:19:53.080 the spy ETF a little elevated, not really anything to 0:19:53.119 --> 0:19:56.520 write home about. Is that surprising to you? Um? And 0:19:57.960 --> 0:20:00.080 how would you you know, how would you explain a 0:20:00.280 --> 0:20:04.400 given uh, the scary headlines floating around. So the fun 0:20:04.440 --> 0:20:07.000 thing about looking at skew now is it's been sticky 0:20:07.080 --> 0:20:09.880 high for a while. Just looking at put call skew 0:20:09.920 --> 0:20:12.120 out of the money. And this is because just how 0:20:12.240 --> 0:20:15.360 especially in and this is especially acute for the SMP five, 0:20:16.040 --> 0:20:19.399 just very like market structure has mattered a ton. And 0:20:19.440 --> 0:20:21.879 what we have more and more, especially as we're in 0:20:21.880 --> 0:20:26.159 a very choppy range bound market, is institutional call overwriting. 0:20:26.200 --> 0:20:28.080 You know, you own the stock, then you sell the 0:20:28.119 --> 0:20:30.280 you know, five percent out of the money call to 0:20:30.320 --> 0:20:33.200 collect some premium along the way. So that's something that's 0:20:33.240 --> 0:20:35.919 going to keep a lid on the applied volatility of 0:20:35.960 --> 0:20:40.159 calls relative to put that's been a pretty steady dynamic. 0:20:40.400 --> 0:20:42.200 What you have, then, on the other side, is look 0:20:42.200 --> 0:20:45.480 at wings pricing, So look at essentially the implied volatility 0:20:45.480 --> 0:20:47.840 of way out of the money calls or puts versus 0:20:47.840 --> 0:20:50.400 closer to the money stuff. And that's where you see, 0:20:50.400 --> 0:20:52.320 and I think this is also a reflection of that 0:20:52.400 --> 0:20:55.240 we've been trading in a arrange. People are essentially pricing 0:20:55.280 --> 0:20:57.000 and well, we're trading in a arrange. I'm going to 0:20:57.080 --> 0:20:59.520 protect against the next five percent, not in the next 0:20:59.520 --> 0:21:02.280 ten percent, because that's the way the market's been lately. 0:21:02.320 --> 0:21:05.040 So I think it's really a market structure story why 0:21:05.080 --> 0:21:08.840 options have been as not exciting as you might expect 0:21:08.880 --> 0:21:12.200 them to be in this instance. But it makes sense 0:21:12.280 --> 0:21:14.840 when you put these pieces together. Dave Spending up forwards, 0:21:14.880 --> 0:21:16.919 I like how you describe something earlier. You said you 0:21:16.960 --> 0:21:19.240 need to look underneath the wave. So look underneath the 0:21:19.240 --> 0:21:21.760 headline risks, and look at what the economy is actually doing, 0:21:21.800 --> 0:21:24.600 the fundamentals, the corporate profits. How much of a risk 0:21:24.760 --> 0:21:29.840