Speaker 1: Vis is Master's in Business with Barry rid Holts on
Speaker 1: Bloomberg Radio. Hey, this week on the podcast, I have
Speaker 1: an old friend as a guest. Jim Bianco is one
Speaker 1: of the few people who understood what the Federal Reserve
Speaker 1: was doing post financial crisis in o eight oh nine
Speaker 1: and made a very pressing call as to the impact
Speaker 1: of KWI and ZURP on equities. UH. He is one
Speaker 1: of those rare bond analysts that covers the stock market,
Speaker 1: and because of that, he does so from a unique perspective.
Speaker 1: I always find his analysis and commentary elucidating. He is
Speaker 1: one of the rare people that makes you think about
Speaker 1: things that you have not thought about before. With no
Speaker 1: further ado. My conversation with Jim Bianco VI is Masters
Speaker 1: in Business with Barry rid Holts on Bloomberg Radio. My
Speaker 1: special guest this week is Jim Bianco. He is president
Speaker 1: and macro strategist at Unco Research, where he covers such
Speaker 1: broad areas as monetary policy, the intersection of markets and politics,
Speaker 1: fund flows, and market positioning. Jim was a market strategist
Speaker 1: in both the equity and the fixed income research group
Speaker 1: at UBS Securities. UH. He was equity technical analyst at
Speaker 1: First Boston and Scherson Lehman Brothers. He is both a
Speaker 1: CMT and a member of the Market Technicians Association. James Bianco,
Speaker 1: Welcome back to Masters in Business on Bloomberg Radio. Thanks
Speaker 1: for having me, very really appreciate it. So I've been
Speaker 1: looking forward to having a conversation with you about the
Speaker 1: present circumstances for a while. For people who may not
Speaker 1: be familiar with you, um, not only do you have
Speaker 1: a background as a technician, but you were also a
Speaker 1: fixed income analyst for a long time. And I find
Speaker 1: that bond analysts look at equities very different than stock
Speaker 1: guys do. Is that is that a fair assessment? It's
Speaker 1: more than a fair assessment. I think we're wired a
Speaker 1: little bit different than stock guys. Vind guys are always
Speaker 1: worried about the return of their money, where stock guys
Speaker 1: are the return on their money. So you start off
Speaker 1: by thinking about things very differently than you would from
Speaker 1: an equity investors standpoint. And and let me just give
Speaker 1: you some props about your analysis post financial crisis. I
Speaker 1: think you were the first person I recall reading who
Speaker 1: were describing quantitative easements and zero interest rate policy as
Speaker 1: there is no option. It's going to send stocks appreciably higher.
Speaker 1: For those of you who are pushing back on the
Speaker 1: FED action, just lay back and put your money to
Speaker 1: work and let the FED make it go higher. Is
Speaker 1: that a Is that a fair assessment? Yeah? Early on,
Speaker 1: I did definitely think that, Like you know, in the
Speaker 1: two thousand and ten to two thousand and fifteen era,
Speaker 1: I was definitely on that ball. Um. To be honest,
Speaker 1: I've been a little bit surprised at twelve years later
Speaker 1: it seems to work as well as it did. Uh,
Speaker 1: you know early on that the market hasn't adjusted at
Speaker 1: all to the idea that, um, there's there's this fet
Speaker 1: put and it will always work as veriently as it
Speaker 1: did the first time. Every single time has tried that,
Speaker 1: there's been no um, you know, to use the word
Speaker 1: of the day, there's been no immunity to it in
Speaker 1: the market. That the FED is not as effective as
Speaker 1: it used to be. Now they have to do larger doses,
Speaker 1: but it does seem to still work, and that's been
Speaker 1: very surprising. Hey, every junkie requires a bigger and bigger
Speaker 1: dose if they want the same high. Isn't that a
Speaker 1: fair analogy? Oh? Yeah. In fact, that was the uh.
Speaker 1: That was the analogy that I was using early on,
Speaker 1: was that you know, the markets are a junkie and
Speaker 1: the FED is a pusher, and that seems to have
Speaker 1: worked in it um as it works like I said
Speaker 1: to this day. So here's where the metaphor maybe goes
Speaker 1: off the rails a little bit. Every time I see
Speaker 1: a consensus of people discussing the FED put and why
Speaker 1: markets can never go down, it usually means we're getting
Speaker 1: pretty close to markets going way down. Think back to
Speaker 1: the end of all we heard is Hey, the Greenspan
Speaker 1: put means that that you could be more aggressive and
Speaker 1: take more risks, and that was fantastic right up till
Speaker 1: that drop in the tech sector. Yeah, that's right, and
Speaker 1: I do think that that we might be getting very
Speaker 1: close to that period one more time that the FED
Speaker 1: the FED put might have run into some trouble here. Ultimately,
Speaker 1: at the end of the day, I think there is
Speaker 1: one other thing that people need to remember about markets
Speaker 1: that there is a fair value. There is um uh,
Speaker 1: you know, a level that you would look at to
Speaker 1: say that this is where the market should trade if
Speaker 1: the FED is successful in keeping the market relatively near
Speaker 1: those levels. I think that then the ft point is successful.
Speaker 1: And that's largely been the case over the last ten
Speaker 1: or twelve years, that as the market has gone up
Speaker 1: and as the FED is pushed um, they were fairly
Speaker 1: close to what you would consider fair value. But today
Speaker 1: now the real question is what is the true value
Speaker 1: of the market. Where should a trade if the FED
Speaker 1: wasn't in the market right now? And the big debate
Speaker 1: is how much of a long term effect is this
Speaker 1: shelter in place pandemic gonna have on the economy. Do
Speaker 1: you believe that this is a supply issue? What I
Speaker 1: mean by that is all we really need to do
Speaker 1: is have the governors just allow all these businesses to
Speaker 1: unlock their doors and open them up, and we will
Speaker 1: return to something very very close to normal. That's all
Speaker 1: we need. Or do you believe that there will be
Speaker 1: some longer lasting demand issue. In other words, these businesses
Speaker 1: unlocked their doors and open up. But now we need
Speaker 1: to get people to be convinced to resume two thousand
Speaker 1: nineteen again that they're going to voluntarily stay away, voluntarily
Speaker 1: change their habits, voluntarily take a more conservative approach if
Speaker 1: you believe the latter that they are going to voluntarily
Speaker 1: take a more conservative approach, and I'm in that camp. Uh.
Speaker 1: Then I think the markets might be a little bit
Speaker 1: ahead of themselves if you believe the former. No, they
Speaker 1: just just let these businesses open up and everybody will return.
Speaker 1: Memories are short. Uh, then I think that these markets
Speaker 1: are probably appropriately valued. So to me, that's kind of
Speaker 1: the crux of the question is how much of this
Speaker 1: is being held back by just the rules, or how
Speaker 1: much of it is being held back by people's attitudes
Speaker 1: that have now changed. Quite interesting. I have so many
Speaker 1: different places to go with you, the technical sides, some
Speaker 1: of the other more interesting aspects, but I have to
Speaker 1: stay with this supply versus demand from a framework perspective.
Speaker 1: Last week was the beginning of May. A number of
Speaker 1: states have begun to reopen, either partially or or more aggressively,
Speaker 1: and at the same time, on Sunday we saw the
Speaker 1: highest level of new infections that we've seen, um since
Speaker 1: this whole thing started. You seem to be raising the
Speaker 1: possibility that we're gonna look back a month or two
Speaker 1: from now and suddenly when there's another surge of infections,
Speaker 1: it's gonna frighten consumers into staying home. Is that sort
Speaker 1: of the scenario you're thinking about. Yeah, I would even
Speaker 1: say it's even one step before that. It's not that
Speaker 1: you know, a wave of infections is going to is
Speaker 1: going to frighten consumers. It's the fear of a wave
Speaker 1: that might be enough to get them to change their behavior.
Speaker 1: Let me let me put this in the context for you. Um,
Speaker 1: the worst recession in the post World War two period
Speaker 1: was the last one two thousand seven to two thousand nine.
Speaker 1: At its worst point, real GDP, real economic activity was
Speaker 1: four percent down from its high. Or we retained nine
Speaker 1: of the activity that we had at the high at
Speaker 1: the low. But yet a four percent drop off was
Speaker 1: enough to produce a fifty retracement in the stock market
Speaker 1: at ten percent unemployment rate. Um, you know the social
Speaker 1: unrest that led to Brexit and Trump and the political
Speaker 1: polarization that we had, and a lot of and bailout
Speaker 1: schoolore effect. I think you might wrote a book about
Speaker 1: the bail I recall I recall a few jotting down
Speaker 1: a few notes about the bailout spect and all all
Speaker 1: of that was from a four percent correction in real GDP.
Speaker 1: By the way, the worst app or was the Great
Speaker 1: Depression when we were corrected seventy so another at its
Speaker 1: worst point in ninety three, we still had seventy five
Speaker 1: percent of the economic activity that we had in nine.
Speaker 1: So the reason I bring that up is when people say, okay,
Speaker 1: we're going back. The doors are open. Hey, look at this.
Speaker 1: Three people walked into a store. It's all okay, Look,
Speaker 1: we got to get back of where we were in
Speaker 1: two thousand nineteen. Otherwise, if we make it back to
Speaker 1: and that's the cover of this week's Economist to Economy,
Speaker 1: and they've picked up on the same thing I was
Speaker 1: talking about. A n recovery is a disaster. It's it's
Speaker 1: something twice as bad. It's what two thousand seven was,
Speaker 1: and it's something that is approaching a mini depression. Now
Speaker 1: I'm not trying to be a Cassandra here, but what
Speaker 1: I'm arguing is we need to get almost all the
Speaker 1: way back, if not all the way back. Remember the
Speaker 1: way we used to do analysis before the virus, like
Speaker 1: three months ago. We used to just talk about the
Speaker 1: change of the change of the change, and if something
Speaker 1: was it was was on the third derivative moving a
Speaker 1: little bit that that was somehow significant for markets. But
Speaker 1: now we're talking about just basically the change, not the
Speaker 1: first derivative, not the third derivative. So this is the
Speaker 1: challenge that we have in the economy right now. It's
Speaker 1: not a question of unlocked the doors and activity will return.
Speaker 1: That will happen, and the warmer weather of summer will
Speaker 1: help activity return. Let's leave the virus soft for a second.
Speaker 1: It's do we get back to where we were last year.
Speaker 1: If we do, markets are okay if we make it back.
Speaker 1: To think about it in these terms, if you went
Speaker 1: through and added up every governments, state and local government
Speaker 1: said you just got a ten percent loss of revenue,
Speaker 1: every business loss of revenue, that will be devastating for them.
Speaker 1: So this is the challenge that we have. How far
Speaker 1: back are we going to go? Huh? So before we
Speaker 1: wrap up this segment, I have to ask a question
Speaker 1: not about how far we will get to in Q
Speaker 1: three a Q four. But let's stay with the second quarter.
Speaker 1: You know we got data on Q one. Really it
Speaker 1: was only one month. It was March that had such
Speaker 1: an impact. But my back of the envelope calculations, you know,
Speaker 1: you have thirty million people unemployed out of a hundred
Speaker 1: and fifty five million in the in the entire pool.
Speaker 1: That's over. And then you look at GDP for one month.
Speaker 1: If that continues for the full quarter, are we running
Speaker 1: it six capacity? And we down thirty g d P
Speaker 1: for Q two, which we are now you know barely
Speaker 1: uh a month and change too. Yeah, it looks like
Speaker 1: that that's going to be the case. And these will
Speaker 1: be the worst economic numbers ever recorded for a quarter,
Speaker 1: for a quarter, worse than the worst point the Great Depression,
Speaker 1: worse than anything we saw during the Civil War. Um. Now,
Speaker 1: the the good news is that that should not be
Speaker 1: a sustained level that that was all from the shelter
Speaker 1: in place. Obviously, when we reopened, there is going to
Speaker 1: be some uptick, a big uptick in activity. Uh as
Speaker 1: we return to something that approximates normal, which is what
Speaker 1: we're talking about. What is that going to be on
Speaker 1: the other side. But yes, we are going to see
Speaker 1: some of the worst numbers that we've ever seen. And
Speaker 1: I would also add to you the thing that I've
Speaker 1: been watching that I think is gonna be really important
Speaker 1: is going to be that unemployment number. And and if
Speaker 1: I was to speak in statistical terms, um, we're all
Speaker 1: now familiar with initial claims. That is, when somebody shows
Speaker 1: up at the unemployment office to ask for unemployment insurance.
Speaker 1: There's another number that they put out called continuing claims
Speaker 1: that means that you're still on unemployment insurance week two,
Speaker 1: week three, week four. That number would lacks a couple
Speaker 1: of weeks, but it is now approaching twenty million. It
Speaker 1: should probably approach to thirty million in the coming weeks.
Speaker 1: They'll be It'll come up a little bit short of
Speaker 1: the total of initial claims because a bunch of these
Speaker 1: companies are getting their paycheck Protection Plan loans and they're
Speaker 1: rehiring their workers. But that's only a few million out
Speaker 1: of thirty million that that's happening with. I think the
Speaker 1: real question then becomes, Okay, these twenty odd million people,
Speaker 1: how fast they get off of unemployment? Because if we're
Speaker 1: going to leave them on unemployment for months or quarters
Speaker 1: on end, I think that that's going to be an
Speaker 1: enormous stress point for our economy. Uh And so the
Speaker 1: faster we can get them off, the faster we can
Speaker 1: return to normal. Now now that I've said that, we
Speaker 1: haven't even we're not even done adding them to the
Speaker 1: to the to the unemployment roles right now, let alone
Speaker 1: talking about getting them off. So if there's one focus
Speaker 1: on that worst numbers ever, I think it's going to
Speaker 1: be that unemployment measure. My special guest this week is
Speaker 1: Jim Bianco. He is president and macro strategist at Bianco Research,
Speaker 1: where he covers all manners of markets and strategies. Jim,
Speaker 1: you and I have been fishing pals for I don't
Speaker 1: know about a decade, maybe even longer, going up to
Speaker 1: the Shadow Federal Reserve better known as Camp Kotak up
Speaker 1: in Maine. It's May, and I'm thinking about August, and
Speaker 1: I'm having a hard time imagining getting on a plane
Speaker 1: and flying from LaGuardia up to Banguora Main. Any chance
Speaker 1: that we're going to have the sort of um opening
Speaker 1: that will allow that sort of behavior. What what your
Speaker 1: plans for for August this year? I would very much
Speaker 1: like to go to um Bangor and go to Camp
Speaker 1: Kotak this year. Again. It's always been one of the
Speaker 1: highlights of my summer. Uh, not the least, which is
Speaker 1: to watch a bunch of economists try and fish and
Speaker 1: beda hook. And that's always worth the price of admission
Speaker 1: right there as well. Um, but I'm like you, I
Speaker 1: don't know, uh, if that's going to be doable. Um. Sure,
Speaker 1: I mean technically there are planes that are flying right now,
Speaker 1: and technically you and I could get on a plane.
Speaker 1: But I'll have to see what my comfort level is
Speaker 1: to get on a plane in August, just like you,
Speaker 1: And then we'll have to see how many people actually
Speaker 1: want to make it up there as well too. And
Speaker 1: this is gonna be a story that we just said.
Speaker 1: I just said is gonna be repeated in a lot
Speaker 1: of industries and for a lot of people across the
Speaker 1: economy for the next several months. And it really impacts
Speaker 1: more than anybody else, people that have large gatherings. You know,
Speaker 1: one of the things I've always been saying to people
Speaker 1: because I'm in Chicago, Um, I'll know the day that
Speaker 1: we've hit a recovery is when there's people in Wrigley
Speaker 1: Field watching a baseball game. Now, will that be this year,
Speaker 1: will that be next year, five years? Never? When will
Speaker 1: that event happen? When that event happens, then I'll know
Speaker 1: we're all the way back. But right now, you know,
Speaker 1: that's an open ended question, is to when it's gonna happen.
Speaker 1: Maybe I usually should say if well, I assume we're
Speaker 1: gonna end up with some form of treatment eventually and
Speaker 1: some vaccine. The news this week from Fiser and their
Speaker 1: partners in Germany is that they're very much on a
Speaker 1: fast track for a possible vaccine. If if we have
Speaker 1: a vaccine before the years over, do things things go
Speaker 1: back to normal? Can we rise zoom our previously scheduled
Speaker 1: lives or has this left a mark that's going to
Speaker 1: change us permanently. Um, let's say we get a vaccine.
Speaker 1: I'll answer the question by by posing the metric. Let's
Speaker 1: say we get a vaccine. Let's snap our fingers and
Speaker 1: say we've we've got to max and it happens. Um,
Speaker 1: I go back to the previous segment. We got twenty
Speaker 1: million unemployed people on continuing claims? How fast do we
Speaker 1: get that down to three or four million? It was
Speaker 1: one before this started, but let's just try and get
Speaker 1: it from twenty down to three or four. You know,
Speaker 1: if that thing can go down, that measure can go
Speaker 1: down in a few months as everybody gets massively hired back. Uh,
Speaker 1: then everything's cool and we've gone back to normal. But
Speaker 1: if companies have gone out of business, or even with
Speaker 1: a vaccine, people said, yeah, we dodged a bullet, but
Speaker 1: I got to rethink the way that I do things.
Speaker 1: And then that number stays elevated for a long period
Speaker 1: of time, then we've you know, if you would, the
Speaker 1: behavior has already been changed, the damage has already been done,
Speaker 1: and uh, it's just not a vaccine that can fix it.
Speaker 1: I don't know what the answer to that is, but
Speaker 1: I do fear that the longer we go the more
Speaker 1: without a vaccine, the longer we go with this fear
Speaker 1: of health, the more people are going to be willing
Speaker 1: to change their behavior, and that even a vaccine may
Speaker 1: not bring that back all the way, and it will
Speaker 1: be a while before we see it come back, Like
Speaker 1: you know, in markets parlance, a whole cycle that we'd
Speaker 1: have to run through before we'd have to see it return,
Speaker 1: you know. I think of it in terms of almost
Speaker 1: a science fiction book, where there are some people who
Speaker 1: have had the virus and theoretically have the anybodies and
Speaker 1: may or may not be immune, and then there are
Speaker 1: people who live with people or themselves, or people who
Speaker 1: are either older or immuno compromised or have comorbidity ease
Speaker 1: that put them in a higher risk category. Uh. And
Speaker 1: then there are people that you know, let's call it
Speaker 1: twenty to fifty otherwise healthy who haven't had it. We
Speaker 1: may end up with different groups of people with different
Speaker 1: risk factors, and the way things come back online is
Speaker 1: going to be very dependent upon which group you find
Speaker 1: yourself in, exactly. And I think that that's what I
Speaker 1: mean by that. You know that even with a vaccine,
Speaker 1: and assuming that one comes up, uh, that you might
Speaker 1: you might have already seen the behaviors, especially among different groups, um,
Speaker 1: change and change a lot. And that again, I'll go
Speaker 1: back to what I said before. You had of the
Speaker 1: activity of the high at the worst point in the
Speaker 1: Great Recession, and that produced all that stress. And so
Speaker 1: it would only take a little change at the margin
Speaker 1: to get you, you know, five percent off the high,
Speaker 1: three percent off the high, and that's all we're talking about.
Speaker 1: And that produces what we would ultimately know as a
Speaker 1: recession or recessionary type conditions. So we'll have to see
Speaker 1: where everybody is now. The last thing I mentioned, you know,
Speaker 1: is about surveys, you know, and I'm always been very
Speaker 1: skeptical of surveys too, because every time a gallant organization
Speaker 1: or somebody like that does a survey of people, are
Speaker 1: you concerned, eighty percent of the country says yes. Are
Speaker 1: you taking precautions of the country says yes. Uh. To me,
Speaker 1: that seems like that's the politically correct thing to say.
Speaker 1: I mean, no one said say no, I don't care
Speaker 1: about this, and I'm running around and asking people to
Speaker 1: breathe on me on the subway, um and so. But
Speaker 1: the question really becomes this, when things open up, do
Speaker 1: you still have that attitude? Um? And that remains to
Speaker 1: be seen at this point. I think most won't have
Speaker 1: that attitude. They'll go try and go back to some
Speaker 1: level of reality or normalness. But enough might that it
Speaker 1: could actually restrain economic activity a little more than we think. Yeah,
Speaker 1: the problem with those surveys are it's always a function
Speaker 1: of how they phrase the question. Change a word here,
Speaker 1: change an emphasis there, you get a completely uh different answer.
Speaker 1: You know. A new term just real quick on surveys
Speaker 1: is the shy bias. Um. Even the shy bias might
Speaker 1: be working here, And that is how do you answer
Speaker 1: a question when a human being asked you versus clicking
Speaker 1: on a on a radio, button on a on a
Speaker 1: web page. So when a human being ash you, you,
Speaker 1: you know, how how concerned are you about the virus?
Speaker 1: You're not. You're more willing to tell a human being
Speaker 1: a poster, yes I'm very concerned, as opposed to answering
Speaker 1: a question and anonymously saying not very concerned at all.
Speaker 1: So there could be a shy bias in there too.
Speaker 1: And we did see something very similar to that in
Speaker 1: some of the political polling in when supposedly people didn't
Speaker 1: want to say they were a Trump supporter, uh, and
Speaker 1: yet they were. That was their plans for voting, and
Speaker 1: there was a reasonable argument to be made that the
Speaker 1: polls might have been undercounting um now president Trump strength,
Speaker 1: I'm curious if this is a similar phenomena. It is,
Speaker 1: it is, and we also saw it in Brexit too.
Speaker 1: Was the same thing that um Brexit was really where
Speaker 1: the word shy bias came from, because it has that uh,
Speaker 1: British tone to it, is that people did not want
Speaker 1: to tell human polsters that they were in favor of Brexit,
Speaker 1: but in the online polls it actually pulled a lot
Speaker 1: better because when you didn't have to tell a human being,
Speaker 1: you were more likely to say, yes, I'm in favor
Speaker 1: of of Brexit as well too, so that I fear
Speaker 1: that there's something like that happening again, because it's it's
Speaker 1: almost sounds irresponsible for me to say I'm not concerned
Speaker 1: about the iris. And so therefore when a human ask you,
Speaker 1: you your natural responses yes, but in reality maybe you're not.
Speaker 1: And so we'll have to find out where people are
Speaker 1: once things open, and how we how this all shakes out.
Speaker 1: If you remember that video clip that one viral of
Speaker 1: young college dude on spring break on the beaches in
Speaker 1: Florida who basically saying exactly what you're um articulating, Hey, man,
Speaker 1: I don't really care about the virus. I'm young, I'm
Speaker 1: healthy as spring break. I'm here for a party. Man,
Speaker 1: that poor guy get xcorciated. That is a perfect example
Speaker 1: of not having the Shaw bias. Yeah, exactly, you know,
Speaker 1: and you could you could say, look, that's his opinion,
Speaker 1: and he's welcome to his opinion and it's not illegal. Um,
Speaker 1: you may want to argue a little bit on their
Speaker 1: margins about the morality, and maybe his grandparents wouldn't like
Speaker 1: to hear that or see him soon. But boy did
Speaker 1: we jump down his throat, and that that's what I
Speaker 1: mean by that we've really pushed this behavior on everybody,
Speaker 1: that that you need to change because this is a
Speaker 1: big deal, and that you know, taking this full circle,
Speaker 1: why I fear that even a vaccine, while it will
Speaker 1: get a lot of people to relax and try and
Speaker 1: return back to normal, if it has changed enough people's
Speaker 1: attitudes that even vaccinated, I still think that I want
Speaker 1: to maintain this more conservative attitude, go out less, spend
Speaker 1: less money, and the like that that could wind up
Speaker 1: pushing the economy enough off of its peak that it
Speaker 1: keeps it very, very sluggish. As we move forward from here,
Speaker 1: Let's stick with the topic of sentiment, because there's a
Speaker 1: question that keeps coming up, and you're really the perfect
Speaker 1: person to address it to. I keep reading how many
Speaker 1: people can seem to wrap their heads around a market
Speaker 1: that's rallying so strongly in the face of what looks
Speaker 1: like continual bad news. How would you explain the market's
Speaker 1: recovery to folks who are saying, I don't get it.
Speaker 1: The death count is up to seventy and higher, it's
Speaker 1: more than a million infected. How on earth can the market?
Speaker 1: What was April the one of the top twenty best
Speaker 1: months for the SMP fire. Ever, how is this possible?
Speaker 1: You know, I think what people need to do is
Speaker 1: remember what happened before. There's two things. First of all,
Speaker 1: there's the obvious answer, and that markets look forward, and
Speaker 1: the death count and payrolls are backward looking. You know,
Speaker 1: we're we're bracing ourselves for in early May to get
Speaker 1: the April payroll report. It's the April report, it's last
Speaker 1: month's report, and we know that it's going to show,
Speaker 1: if Wall Streets right, more than twenty million people have
Speaker 1: lost their jobs, far and away the worst report ever
Speaker 1: seen in The markets are looking forward, But let's also
Speaker 1: remember what they did in March. They went from an
Speaker 1: all time high in late February to down in a
Speaker 1: little more than five weeks, far and away the biggest
Speaker 1: all time high to down thirty plus percent correction. It's
Speaker 1: the fastest ever recorded. That was one of the worst
Speaker 1: collapses by that measure ever seen. So was the market
Speaker 1: overdone in late March? Man? Probably? Was the market maybe
Speaker 1: overdone um now as it recovers or wherever it's teak
Speaker 1: winds up being if it's at this level here or
Speaker 1: slightly higher probably as well too. But the market always
Speaker 1: has that irregular kind of move where it kind of
Speaker 1: goes too far one way, too far, the other way,
Speaker 1: too far back the other way one more time, and
Speaker 1: you need to look at the larger trend. And right now,
Speaker 1: the bigger question is what is the larger trend. You know,
Speaker 1: it's still fift off of its all time high that
Speaker 1: was set three months ago. That would suggest the larger
Speaker 1: trend is still still lower um at this point, and
Speaker 1: it's percent off of its March low. That would suggest
Speaker 1: that the larger trend might be back up. So I
Speaker 1: still think we're very much influx with the markets. But um,
Speaker 1: you know, don't get that nuanced with the market. I
Speaker 1: hear a lot of people get mad about the market
Speaker 1: as well too. And what I mean by that is
Speaker 1: they'll run these statistics like for every death, market cap
Speaker 1: has increased five hundred thousand, or for every job you know,
Speaker 1: the market has increased fifty dollars times the number of
Speaker 1: thirty million jobs lost, or or some number like that,
Speaker 1: And that's completely the wrong way to look at it.
Speaker 1: Um it it's it doesn't think of it in those terms.
Speaker 1: It's where are we going next? Is where it is?
Speaker 1: And right now I'd say the larger trend is it's
Speaker 1: still very mixed. You know, the market is still not
Speaker 1: telling you it's all okay or it's all real bad.
Speaker 1: It's still trying to figure it out. Right now, you
Speaker 1: are the perfect person to have this conversation with about
Speaker 1: the policy response from both the federal government and the
Speaker 1: Federal Reserve. Let's let's start with the FED. How does
Speaker 1: monetary policy look? And what do you think of what
Speaker 1: Jerome pal has done so far? Um, He's set all
Speaker 1: kind of records to FED has set all kind of
Speaker 1: records in the most extreme policies that we've ever seen. UM.
Speaker 1: You know, it's about that they threw the kitchen sink
Speaker 1: at the market. They've thrown all the kitchen sinks at
Speaker 1: the market as well too. And it's probably if UM
Speaker 1: I talked about watching financial television, UM and talking and
Speaker 1: watching professional money managers, it's probably reason number one why
Speaker 1: they think the market is up. Co invest with the
Speaker 1: FED seems to be kind of a working uh thesis
Speaker 1: that you hear repeatedly from a lot of people that
Speaker 1: the market is going to go higher. But if the
Speaker 1: question really becomes this, is he doing the right thing?
Speaker 1: But I think Warrenant Buffett this past weekend summed it
Speaker 1: up perfectly. Um that the FED actions has helped markets,
Speaker 1: and in their view, they look at the fixed income
Speaker 1: markets to corporate bond market is opened, it's a lot
Speaker 1: a lot of companies to get financing. It's allowed a
Speaker 1: lot of companies to stay in business, it's allowed a
Speaker 1: lot of people to see their losses get reduced, and
Speaker 1: that the FET is looking at that as being a positive.
Speaker 1: And what Buffett said is it is now. But the
Speaker 1: very big risk is is that as we move forward,
Speaker 1: that distortion in markets that they're creating and they think
Speaker 1: it's a distortion for the good, could wind up being
Speaker 1: a real problem down the road. And he said I
Speaker 1: think the word he used was an extreme problem down
Speaker 1: the road. But then he also said doing nothing and
Speaker 1: just allowing you know, this UH market to sort itself
Speaker 1: out with any support, could have meant that that extreme
Speaker 1: outcome happened now as opposed to later on. So his
Speaker 1: suggestion was, which is why I'm bringing it up because
Speaker 1: I'm in that same camp, is that while the FED
Speaker 1: has made things better now. It's still a very open
Speaker 1: question as if they've made things better for good and
Speaker 1: if there are problems a year or two now because
Speaker 1: of distorted markets or malinvestment meaning bad investment because the
Speaker 1: Fed old everybody, Hey, it's all okay, go ahead and
Speaker 1: paw your money into the market. And then some investments
Speaker 1: go bad because we realized that we were buying them
Speaker 1: at the wrong price or at too high a value.
Speaker 1: And then you would say a year for two from now, Yeah,
Speaker 1: they've really created problems for the economy that very well
Speaker 1: may be true. If they had done nothing, those problems
Speaker 1: would have been occurring now. So I think what he's
Speaker 1: suggesting is what they might be doing is just shifting
Speaker 1: the timelines as opposed to repairing the economy to the
Speaker 1: extent that they think they are. I would I would
Speaker 1: phrase it slightly differently. This is a hair of the
Speaker 1: dog that bit you. You wake up with a hangover,
Speaker 1: You do a quick shot, the hangar goes away, at
Speaker 1: least temporarily. We're still dealing with the hangover from O
Speaker 1: E O nine and uh lo, and behold, hair the
Speaker 1: dog is going to kick the can down the road
Speaker 1: a little bit to mixed metaphors. Is that what I'm
Speaker 1: hearing you say to some degree here, Yes, I think so.
Speaker 1: I think that they they have been able to, you know,
Speaker 1: to use that last metaphor kick the can down the road. Right,
Speaker 1: Um uh, since we're since this is the metaphor segment,
Speaker 1: there's no atheist in a foxhold, there's no capitalists in
Speaker 1: a crisis, we had to do something. If we didn't
Speaker 1: do something, that worst decline that we ever saw down
Speaker 1: thirty four percent in five weeks might have gotten even
Speaker 1: further worse in bad English there, but in that it
Speaker 1: would have created more and more problems. But by kicking
Speaker 1: the can down the road, it gives us some time
Speaker 1: to figure out what we're gonna do. Now. What I'm
Speaker 1: arguing here is that maybe at the end of the day,
Speaker 1: we're still going to have those problems, but we're just
Speaker 1: going to stretch them out over a longer period of time,
Speaker 1: as opposed to having those problems right now and in In
Speaker 1: In other words, what I'm arguing is, I don't think
Speaker 1: that the fat can really taken economy that's sick and
Speaker 1: make it better. Uh. They can't create business, they can't
Speaker 1: create revenue. If people don't want to go to the stores.
Speaker 1: If people don't want to buy, they can create liquidity
Speaker 1: to make the markets behave more in line with what
Speaker 1: you hope for for a shorter period of time. But
Speaker 1: that's all they can do, and you can hope that
Speaker 1: in that period of time that gives us time to
Speaker 1: find a vaccine, to change your behavior, to figure out
Speaker 1: what we're gonna do next, and hopefully mitigate those problems.
Speaker 1: And that's really the big question. So I'm not so
Speaker 1: sure what what they've done short term has been good
Speaker 1: because it's made what looked like a catastrophe at least
Speaker 1: stop for now. But I'm not so sure that they've
Speaker 1: prevented it forever. That remains to be seen. So they
Speaker 1: can't keep the jumbo jet in the air, but they
Speaker 1: could foam the runways, right, all right, So you're listening
Speaker 1: with a fun with metaphors on Bloomberg Radio. So so
Speaker 1: let me put one of my favorite powers to work
Speaker 1: I hereby appoint you chairman of the Federal Reserve. What
Speaker 1: would you do under these circumstances? But you mean I
Speaker 1: can't take the Gratio marks line that any organization that
Speaker 1: would have me I would immediately withdraw from that would
Speaker 1: be well if I if I was, if I was
Speaker 1: the head of the Federal Reserve, I think I wouldn't
Speaker 1: be doing the things that are vastly different than what
Speaker 1: they're doing now. But I would be asking a question,
Speaker 1: you know, kind of behind the scenes. President Trump says
Speaker 1: every time he talks about this, we have to get
Speaker 1: the economy back to where it was. Okay, I would ask,
Speaker 1: as the Federal Reserve chairman, can we go back to
Speaker 1: two thousand nineteen, even with the vaccine? Can we get
Speaker 1: everybody to say, okay, that's over with. Let's all let
Speaker 1: so I'll remember what two thousand and nineteen was like
Speaker 1: and let's go right back to that, or what I
Speaker 1: think might be the case. Can we help transition from
Speaker 1: a pre virus um mentality and economy to a post
Speaker 1: virus mentality and economy and that post virus economy is
Speaker 1: going to be something different? And what's that? Why? Why
Speaker 1: is that important? Because our job then here is not
Speaker 1: to make everybody try and maintain where they were, but
Speaker 1: help them manage to where we're supposed to be going,
Speaker 1: which means I'm going to give you some support for
Speaker 1: a while, then not forever, and while I'm giving you
Speaker 1: that support, you need to sit down and figure out
Speaker 1: your business or figure out your finances, or figure out
Speaker 1: your career and say, Okay, it's going to be different
Speaker 1: in twenty one. It's going to be different in twenty two.
Speaker 1: How and what do I do to get there? As
Speaker 1: opposed to Oh, when are we going to get back two?
Speaker 1: That's the big difference I think we need to be
Speaker 1: talking about is what is economy look like? And my
Speaker 1: fear is too many people still feel like, oh, it'll
Speaker 1: be two thousand nine all over again, and it will
Speaker 1: be you know, not but a hundred percent or in
Speaker 1: the case of Trump, hundred and five of what it
Speaker 1: was in two thousand and nineteen. And maybe it is.
Speaker 1: I mean, you know, this is unprecedented. Nobody knows, but
Speaker 1: I'm going to bet that it's going to be different.
Speaker 1: And trying to preserve a status quo that's unrealistic is
Speaker 1: where I think the problems could come. Jim, let's talk
Speaker 1: a little bit about what we were discussing earlier with
Speaker 1: the Federal Reserve and some of the new things that
Speaker 1: they're doing. I don't ever recall them buying ets that
Speaker 1: seems to be pretty new, and then buying debt of
Speaker 1: some pretty junkie companies that seems to be pretty new. Also,
Speaker 1: what do you think of what's going on? Yeah, they're
Speaker 1: not only buying the e t F, but bear in
Speaker 1: mind only e t F that are tied to corporate bonds,
Speaker 1: so no spiders, which is the sp F. UM. They're
Speaker 1: buying corporate bonds, are buying commercial paper, they're buying asset
Speaker 1: back securities, they're buying municipal bonds, UM. You know, uh,
Speaker 1: They're they're buying paycheck protection loan UM loans and trying
Speaker 1: to package them into securities as well too. This is
Speaker 1: part of the effort to try and support markets from
Speaker 1: falling much more than they can. This is them stepping
Speaker 1: in buying and trying to put a floor on markets
Speaker 1: to try and calm everything down to hopefully get us
Speaker 1: to the other side. Now, there is one thing that
Speaker 1: I worry most about with all of these programs UM.
Speaker 1: Technically the fens not allowed to do this. So how
Speaker 1: did they get away with this? UM? As I pointed out,
Speaker 1: they're actually not doing it. The Treasury is doing it.
Speaker 1: They've put together all of these special purpose vehicles or
Speaker 1: these funds and then the treasury, the taxpayer put some
Speaker 1: money into these funds, the FED offer, the FED finances it,
Speaker 1: and they go out they buy these securities. In other words,
Speaker 1: now monetary policy, and Jerome Paul says this every time
Speaker 1: he speaks about it, monetary policy needs the permission of
Speaker 1: the Treasury Department to do this stuff. So the FED
Speaker 1: is given away a lot of its independence to the administration,
Speaker 1: not just this administration, but whoever is the administration after
Speaker 1: twenty whether it's the same or different, because this program
Speaker 1: will most certainly continue well past the election um as
Speaker 1: well too, and that, I worry could cause two problems. One,
Speaker 1: it seems to be like a nationalization of markets, because
Speaker 1: it is the government that is ultimately buying corporate bonds
Speaker 1: and e T F and municipal securities. The federal government
Speaker 1: in this case and to the FED, is going to
Speaker 1: need the permission of the Treasury Department to change these
Speaker 1: programs anyway they can, and so far that's not been
Speaker 1: a problem. But later on, you know, especially in an
Speaker 1: election year, if the FEDE says, hey, we want to
Speaker 1: maybe back off of this program or not do this,
Speaker 1: the administration could say I got an election to win
Speaker 1: you're gonna keep buying this stuff and keep going because
Speaker 1: now I now have a say in your policy. So
Speaker 1: this is gonna be really an experiment that we haven't
Speaker 1: seen now. Last thing about the people say, didn't do
Speaker 1: this in a weight and the answer is yes, but
Speaker 1: not to disdagree. But we also didn't really understand it
Speaker 1: in a wad, and we had a different administration that
Speaker 1: was willing to say to Ben Burnanky, then you tell
Speaker 1: us what to do and will agree with it. Twelve
Speaker 1: years later, we've had twelve you study this, we understand it.
Speaker 1: We have a very different attitude about the Federal Reserve
Speaker 1: than we did in two thousand and eight. So I'm
Speaker 1: going to ask you two questions about that, and one
Speaker 1: is practical and one is theoretical. Answer them however you like.
Speaker 1: The practical question is what happens if the FED decides
Speaker 1: they don't want to keep buying this and and the
Speaker 1: government says, yes, you are, and the FED says, okay,
Speaker 1: good luck, We're We're done. So that's the practical side
Speaker 1: of it. The theoretical side of it is, have we
Speaker 1: just de facto created a giant experiment in modern monetary theory?
Speaker 1: Is isn't this MMT rit large to take the second
Speaker 1: one first? Yes, I refer to it as MMT version
Speaker 1: one point. Oh is what this seems to be right now? Um,
Speaker 1: And the better it goes, the more I think we're
Speaker 1: going to continue to see more of it. Uh. To
Speaker 1: stick with that question, UM, real quick, the amount of
Speaker 1: stimulus or the amount of support maybe that use that
Speaker 1: phrase that we're giving the economy, Uh, is between what
Speaker 1: the Federal Reserve has done and expanding their balance sheet
Speaker 1: with with the government is going to borrow, and they
Speaker 1: announced this week they're going to borrow three trillion dollars
Speaker 1: just in the current quarter, which is the number most
Speaker 1: bond people are having a hard time understanding. It's so
Speaker 1: such a big number right now, it's the equivalent of
Speaker 1: four years of income tax receipts. When all is said
Speaker 1: and done, If the federal government in the Federal Reserve
Speaker 1: can either borrow or print four years of tax returns
Speaker 1: and not have a problem not produce inflation. I've jokingly said,
Speaker 1: can we get rid of the I R s? Can
Speaker 1: they just print up our factors every year and just
Speaker 1: send them to the Treasury at that point, because if
Speaker 1: you can do this without having any problems, then why
Speaker 1: do we even pay taxes in the first place. And
Speaker 1: isn't that been one of the arguments that mm tears
Speaker 1: have been saying is that MMT believes that the you
Speaker 1: don't adjust monetary policy with interest rates, you adjusted with taxes,
Speaker 1: is that when there's no inflation, you print the money
Speaker 1: and tax rates go down a lot. When there's inflation
Speaker 1: and you want to remove the money from the system,
Speaker 1: you raise taxes as well too. So yes, I do
Speaker 1: think this could be version one of mm T. Now
Speaker 1: to your practical question. If the FETE says, hey, we
Speaker 1: want to back off, and the Treasury says no, and
Speaker 1: the FETE says, good luck trying to do it without
Speaker 1: us financing it, they run a real political problem because
Speaker 1: then they put the treasury the taxpayer at risk of loss,
Speaker 1: and then they would have to Joan Paula, whoever decided
Speaker 1: that policy, would have to stand there and say, you know,
Speaker 1: you agreed with the Treasury to buy hundreds of billions
Speaker 1: of dollars worth of corporate bonds or municipal securities or
Speaker 1: et F and the government and the and the Treasury
Speaker 1: wanted you to do more, and you said no, and
Speaker 1: you backed off, and now the taxpayer is sitting on
Speaker 1: an unrealized loss DROLL and that's your fault. You're causing
Speaker 1: the taxpayer to take tremendous losses. Why are you doing
Speaker 1: that to the taxpayer? That is a issue that they
Speaker 1: never want to be involved with. They don't ever want
Speaker 1: to go there, so and we I don't think we'd
Speaker 1: ever know it. I think that they'll always come to
Speaker 1: some form of an agreement. And let me emphasize, there
Speaker 1: will be no disagreement right now, you know, because we're
Speaker 1: in the process of trying to support a crisis economy.
Speaker 1: The disagreement comes later down the road, whether it's several
Speaker 1: years down the road or several months, whenever we decide
Speaker 1: that it is now getting better enough that the set
Speaker 1: can stop start reversing out of these programs. The administration,
Speaker 1: in theory has a veto over that, and I'm just
Speaker 1: opening the question that maybe they will exercise it when
Speaker 1: that time comes. But no one wants to exit these
Speaker 1: programs right now, right now, probably being in a minimum
Speaker 1: the year, so that's not going to be an issue
Speaker 1: right away. Hey, we we had ultra low rates for
Speaker 1: a decade and the administration screams when pal wanted to
Speaker 1: thike rates, wanted to normalize rates up from one and
Speaker 1: a half percent to a more normal level. I got
Speaker 1: to imagine that, no matter what the circumstances, no president
Speaker 1: is going to want to see this get normalized. Or
Speaker 1: am I now too cynical in the era of a
Speaker 1: White House Federal Reserve jaw boning contest. No, I don't
Speaker 1: think you're too cynical. I mean, if you look at
Speaker 1: the history of the Federal Reserve and the relationship that
Speaker 1: the Federal Reserve has with the White House. Um, the
Speaker 1: big difference between Trump and previous president says Trump does
Speaker 1: it out in the open on Twitter and that. But
Speaker 1: we've known from books and biographies going all the way
Speaker 1: back to Harry Truman. UM, Harry Truman inviting the entire
Speaker 1: think about this entire inviting the entire f O m
Speaker 1: c UH to the White House for lunch and telling
Speaker 1: them that if they did not cut rates, that they
Speaker 1: were doing the bidding of Joseph Stalin to Lyndon Johnson, UM,
Speaker 1: you know, throwing the Federal Reserve chairman against the wall,
Speaker 1: literally physically assaulting him and saying, boys are dying in
Speaker 1: Vietnam and Bill Martin, who was the Federal Reserve chairman
Speaker 1: at the time, can't cut interest rates to Ronald Reagan,
Speaker 1: commanding Paul Vulker. Paul Looker wrote that in his autobiography
Speaker 1: to Cut Rates in which was an election year, to
Speaker 1: George H. W. Bush, blaming Ellen Greenspan for losing the action.
Speaker 1: So this has going out for seventy years that presidents
Speaker 1: have been at odds with the Federal Reserve. The difference
Speaker 1: with Trump is he just does it in the open,
Speaker 1: real time. The rest of them did it behind closed doors.
Speaker 1: And now that we have given the administration a veto,
Speaker 1: it doesn't matter if it's Trump or Biden or whoever.
Speaker 1: They're gonna think twice when it comes back when the
Speaker 1: FETE comes to them and says it's time to leave,
Speaker 1: it's time to us to reverse these policies, and they'll
Speaker 1: maybe push back. That's a very open question. So I
Speaker 1: don't think you're being too cynical. Huh. Quite quite interesting.
Speaker 1: So I recall back in two thousand and ten, two
Speaker 1: thousand and eleven, remember the open letter to Ben bernanke
Speaker 1: Hui and Zurp are going to cause hyper inflation? What
Speaker 1: are you doing. You're going to destroy the dollar. We're
Speaker 1: gonna have crazy inflation. And of course none of that
Speaker 1: came to pass. The dollars was record ties. For the
Speaker 1: next eight years, we saw no inflation at all. If anything,
Speaker 1: deflation is this similar to that in that it's an
Speaker 1: unprecedented set of circumstances, and the natural reaction from inflation
Speaker 1: hawks is oh no, the Fed's action is going to
Speaker 1: send inflation much higher. Uh. This this is clearly different,
Speaker 1: if for no other reason than gold has spiked dual
Speaker 1: Compare and contrast between when it comes to inflation. Yeah,
Speaker 1: you know the letter. I remember the letter to UH.
Speaker 1: To be honest with you, I thought that that letter
Speaker 1: at the time it was written, was a reasonable fear
Speaker 1: that we had that we looked at what the FED
Speaker 1: was doing. If you believe the metric too much money
Speaker 1: chasing too few goods, that the FED was creating money,
Speaker 1: you could argue that it didn't have the velocity that
Speaker 1: it needed to turn over that it needed in order
Speaker 1: to create inflation. But it was a reasonable fear. And
Speaker 1: I would actually argue to you that out of that
Speaker 1: experience that they did, that episode without inflation was the
Speaker 1: catalyst for modern monetary theory to come along and saying, hey,
Speaker 1: look what we just did in two thousands, nine, ten,
Speaker 1: and eleven with all that money printing and then reversed
Speaker 1: it out and we never had inflation. Um, maybe we
Speaker 1: can start rethinking how we could run monetary theory as well.
Speaker 1: Today it's just orders in orders of magnitude larger. And
Speaker 1: today the other thing that's going on that's a little
Speaker 1: bit more different, at least on its surface, is a
Speaker 1: lot of these programs are trying to be pushed down
Speaker 1: to non Wall Street main street. We even call them
Speaker 1: the main street programs. We have p p p T
Speaker 1: PPT Personal Protection Plan loans. We're giving companies direct loans.
Speaker 1: He has they're trying to support markets, but we're trying
Speaker 1: to of those companies loans. Now. The fear here is
Speaker 1: that that lending will lead to a higher turnover of
Speaker 1: that money. Problem in two thousand and ten was the
Speaker 1: FED printing up a lot of money, pushed it into
Speaker 1: financial markets to support financial markets, but it never made
Speaker 1: it to the real economy people. That money never filtered
Speaker 1: into your pocket, or my pocket, or or a neighbor's pocket,
Speaker 1: where we want up buying a new car, or or
Speaker 1: buying a house, or spending more on vacations or something
Speaker 1: along those lines. This time around, we are trying to
Speaker 1: get it into your mind, in our neighbor's pockets for
Speaker 1: that express purpose of go spend it on a vacation,
Speaker 1: Go buy a new car with that money as well too.
Speaker 1: So I think that the risk that it does create
Speaker 1: inflation is a real one and is a concern. And
Speaker 1: it goes back to what I said before. If they
Speaker 1: can do a trillion dollars worth of borrowing and printing
Speaker 1: and it doesn't produce inflation, why do keep raising two
Speaker 1: trillion two and a half trillion dollars a year in taxes?
Speaker 1: Why don't they just print up two trillion dollars a
Speaker 1: year and just send it to the Treasury and say
Speaker 1: everybody's tax rate is now zero um at that point. So,
Speaker 1: I think there's gonna be leng lasting consequences to this.
Speaker 1: Either it produces some kind of a problem in the
Speaker 1: form of inflation, or it doesn't, and not only like
Speaker 1: we just talked about a second, either the administration or
Speaker 1: somebody else says, well, then if it didn't produce a problem,
Speaker 1: why do we stop? Why don't we just keep printing,
Speaker 1: printing more of this money, just keep going and going,
Speaker 1: And why don't we Everybody gets free college education, everybody
Speaker 1: gets free healthcare, everybody gets uh um, a much much
Speaker 1: lower tax rate. And you know, because we've shown that
Speaker 1: we can print this money without there being that consequence.
Speaker 1: So one way or the other, I think we're gonna
Speaker 1: have an issue to deal with. This quite interesting, uh
Speaker 1: the pushback against it, and I'm surprised to learn that
Speaker 1: you were a Bernie bro This is this is news
Speaker 1: to me. Um. The pushback against the inflation argument is, hey,
Speaker 1: this isn't money that's going to people to buy houses
Speaker 1: or cars or vacations or if you remember, the home
Speaker 1: equity mortgage with rural money was being used to buy
Speaker 1: big screen TVs and and do home renovations. These are
Speaker 1: people who have been forced to shelter in place. Many
Speaker 1: of them have lost their paycheck. This is going to rent.
Speaker 1: We've seen thirty of rent payments not being made. This
Speaker 1: is going to food and medicine. This is really basic survival.
Speaker 1: How does that cause inflation, especially if at best were
Speaker 1: an economy and we can't get all the way back
Speaker 1: up to so I think I I think, um, I
Speaker 1: needed to give a little bit of a of a
Speaker 1: definition when I talked about inflation. Um, there is there
Speaker 1: will be no inflation in and there probably will be
Speaker 1: no inflation in the first half of twenty one, and
Speaker 1: there is a risk of deflation exactly the way that
Speaker 1: you said. But there will be this much I think
Speaker 1: we can agree on. There will be a restart to
Speaker 1: the economy. We are not going to shelter in place
Speaker 1: for all of eternity. There is going to either be
Speaker 1: a vaccine or we're just going to get sick of
Speaker 1: this and say that we have to kind of go
Speaker 1: back to some semblance of normal. And there will be
Speaker 1: some kind of a rebound in the economy. Whether it
Speaker 1: goes to hundred remains to be seen, but there will
Speaker 1: be a rebound. And it's on the other side of
Speaker 1: that rebound. Does all this stimulus money, which is becomes
Speaker 1: mere survival money, then some people go back to work.
Speaker 1: Maybe you know, won't cool about how many don't, but
Speaker 1: a fair number of people will, uh, and there will
Speaker 1: be more economic activity plus all this other money as
Speaker 1: well too. That's where the fear that the inflation comes
Speaker 1: back and it set and a half of one twenty
Speaker 1: two in that respect, not necessarily in two thousand and twenty.
Speaker 1: In fact, not in two thousand and twenty. I wouldn't
Speaker 1: say necessarily, wouldn't put that qualifier on it, because I
Speaker 1: think with the with the economic contraction that we're having,
Speaker 1: you're not going to see it now. But the question
Speaker 1: is what about on the other side. And to me,
Speaker 1: you know, that's where I think the message of the
Speaker 1: bond mark that has been the tenure yield hit a
Speaker 1: low of March on March nine thirty basis points. Today
Speaker 1: as we talk, it's around sixty sixty six basis points. Now,
Speaker 1: he's a very little numbers, but it hasn't gone anywhere
Speaker 1: for two months, if you know, it's been trending sideways
Speaker 1: in the face of all of this terrible economic news
Speaker 1: and tremendous amount of Federal Reserve purchases of of traditional
Speaker 1: QUEUEI type of treasury securities as well too. They have
Speaker 1: purchased nearly and this is a hard number to understand,
Speaker 1: they have purchased nearly two trillion dollars worth of bonds.
Speaker 1: This is mortgages and treasuries and agencies. And I'm not
Speaker 1: talking about corporates and e T s. That's a difference
Speaker 1: program in two trillion dollars of those bonds in the
Speaker 1: last seven weeks, and yet interest rates are not falling
Speaker 1: and falling through the floor we have seen in corporate
Speaker 1: bond funds, and we have seen from foreign central banks
Speaker 1: massive liquidations of treasury securities. I think the message to
Speaker 1: market might be telling us is the bullmarket and bonds
Speaker 1: is over, and that we are now looking at not
Speaker 1: only not looking at negative interest rates, which a lot
Speaker 1: of people are wondering in the US we won't get that,
Speaker 1: but we're looking at the fear of what comes on
Speaker 1: the other side, and that fear is crushing supply and inflation,
Speaker 1: which is why I think that's a bond market has
Speaker 1: been struggling as much as it has for the last
Speaker 1: few months, that that's the signal it's trying to send us.
Speaker 1: In the wake of all that fed buying, it still
Speaker 1: cannot rally any more, and that is very concerning. So
Speaker 1: doesn't a lot of that have to do with the
Speaker 1: fact that when you're at the zero bounds, when when
Speaker 1: rates are this low at a certain point, I know
Speaker 1: it's a cliche, but you're you're pushing on a string,
Speaker 1: there's there's no impact, there's no stiffness. Um, there's a
Speaker 1: technical term to that that I'm during a blank on
Speaker 1: but you're not seeing resonance from the FED buying in prices.
Speaker 1: Is that misstating it? Tell me what's wrong with that thesis?
Speaker 1: The thesis is the thesis is right, but it's it's
Speaker 1: it's it's a measure about the real economy. Is that
Speaker 1: lower interest rate? And this gets to the negative interest
Speaker 1: rate argument too, is that lower interest rates? Um, if
Speaker 1: you're not going to buy a house at a two mortgage, Uh,
Speaker 1: why does a one percent mortgage make it more attractive
Speaker 1: for you to buy a house? And the answer it
Speaker 1: doesn't because the reason you're not willing to buy a
Speaker 1: house at a two percent mortgage doesn't have to do
Speaker 1: with interest rates. It maybe has to do with either
Speaker 1: you've lost your job, or your fear you've lost your job,
Speaker 1: or you fear that your company is going to run
Speaker 1: into trouble or something along those lines. That's why you
Speaker 1: wouldn't do it. That's the pushing on the string argument,
Speaker 1: which is which is the big pushback about negative rates. Well,
Speaker 1: if if two percent interest rates won't get me to
Speaker 1: buy a house, and one percent interest rates won't commuter
Speaker 1: buy a house. Why would zero get me to buy
Speaker 1: a house? Um? At this point, my problem is not
Speaker 1: that I need another hundred dollars or a hundred fifty
Speaker 1: dollars a month off the rent page or off the
Speaker 1: mortgage payment to get me into that house. I need
Speaker 1: concern about or I need, um um, to be less
Speaker 1: concerned about the economy or my employment situation to buy
Speaker 1: the house. So that's the pushing on a string argument.
Speaker 1: And I think that that's ultimately what the bond market
Speaker 1: has been saying is that the problem here is not
Speaker 1: that rates are too high, um the you know, and
Speaker 1: that that the fix isn't what nerion of cars collode.
Speaker 1: And the former vice or former president of the Minneapolis
Speaker 1: FET has been saying that we must go to negative
Speaker 1: interest rates in the US like they have in Europe
Speaker 1: and in Japan. The problem, I think is with a
Speaker 1: fear of the state of the economy. That's what's holding
Speaker 1: us back. And what the bond market says is, I
Speaker 1: lower rates isn't going to help you anymore. It's no
Speaker 1: point going lower, and at some point when we get
Speaker 1: a rebound, all this support money could produce inflation, could
Speaker 1: produce inflation. Now I want to emphasize that word could,
Speaker 1: because we're only sixty five basis points in the tenure note. Uh.
Speaker 1: But like I said, the fetes bought to trillion dollars
Speaker 1: to trillion with the T and that is not pushing
Speaker 1: interest rates down. That's a hard number for most bond
Speaker 1: people to understand two trillion, and let alone non bond
Speaker 1: people are understand that much. Mind cannot get the BOMO
Speaker 1: rally to continue um at this point. And so I
Speaker 1: think that what the market is fearing is that there's
Speaker 1: going to be problems on the other side. So yeah,
Speaker 1: that's how the pushing on the string thing fits into it.
Speaker 1: And I think it's a it's a right argument. I
Speaker 1: want to get away from the FED, but I can't
Speaker 1: help it because there's still one or two things I
Speaker 1: have to ask about. The arguments against the purchases and
Speaker 1: in favor of inflation seem very similar to what we
Speaker 1: heard made two the central bank in Japan. If you
Speaker 1: do this, you will cause inflation. If you do this,
Speaker 1: you will cause problems. So question one, can we avoid
Speaker 1: inflation in a similar manner to Japan? And Question two.
Speaker 1: Does that damn us to the same sort of problems
Speaker 1: that Japan and has been suffering ever since its market
Speaker 1: peaked in Yes to the first question, we can't avoid
Speaker 1: the inflation, and is that the the support money just
Speaker 1: winds up not getting You know, what you need to
Speaker 1: have inflation is two things. You need to have too
Speaker 1: much money. And then the other argument, I'm using the
Speaker 1: classic monetary line, chasing too few goods. It needs to
Speaker 1: chase something that's velocity, so you knew. You know, it's
Speaker 1: one thing for me to send you a check, but
Speaker 1: then I need you to spend it as well too.
Speaker 1: As you know, if it just sits in your bank
Speaker 1: account going good, I've got a little bit more money
Speaker 1: just in case things go bad. I'm not going to
Speaker 1: do anything but let it sit there. It's not going
Speaker 1: to produce inflation. But if you go out and you
Speaker 1: spend it, then that will helpfully get the inflation moving.
Speaker 1: And that's always been the problem in Japan, the high
Speaker 1: savings rate, the conservative attitude that most of the Upan
Speaker 1: he's have about spending money because they've been afraid about
Speaker 1: their economy. Can we damn ourselves in the other way
Speaker 1: as well? Too? Yes. One of the things that we've
Speaker 1: learned about negative interest rates, in very very low interest
Speaker 1: rates is it's very damaging to the financial system. Because
Speaker 1: I like to joke, um uh, if I was around,
Speaker 1: if you were around in the Middle Ages or in
Speaker 1: the Renaissance, and it's the fifteenth century of uh uh,
Speaker 1: and we're in Venice when we developed fractional banking. Um.
Speaker 1: It wasn't developed as an event, but it evolved over
Speaker 1: time during that period. And you said, look, here's what
Speaker 1: we do. We take in, We take in a unit
Speaker 1: of account like a dollar, and we put in eighty
Speaker 1: cents of it in the reserve account. We lend out
Speaker 1: the other twenty cents to make some money or make
Speaker 1: some return on that money. If you or I would
Speaker 1: have raised our hands in the fifteenth century said hey,
Speaker 1: this is a good theory of how bank you should work.
Speaker 1: But what happens when interest rates go negative and you
Speaker 1: lend out the money and then you have to also
Speaker 1: pay the the interest payment on it too, They would
Speaker 1: have asked us to leave the room. It doesn't work
Speaker 1: that way. But you would make the loan. What's that
Speaker 1: you wouldn't make the loan if you if that case right, well,
Speaker 1: welcome to you know, with with negative interest rates. So
Speaker 1: negative interest rates is very damaging to the financial system.
Speaker 1: It is crippled the financial system. I think in Europe
Speaker 1: it is crippled the financial system. In Japan, the Japanese
Speaker 1: stock Japanese Bank Stock index is at a forty year low,
Speaker 1: and the only reason it's at a forty year low
Speaker 1: is because they started the index forty years ago. All right,
Speaker 1: so let's jump to our favorite questions are speed round
Speaker 1: and what are you watching these days? What are you
Speaker 1: streaming on Netflix or Amazon Prime or podcasting? What are
Speaker 1: you what's keeping you entertained? Um? I am streaming a
Speaker 1: lot more than I have in the past because I'm
Speaker 1: a big sports fan and there are no sports to
Speaker 1: be a big fan of except the Last Dance on ESPN. Yes,
Speaker 1: that's been fantastic. UM. I tend to like political thrillers,
Speaker 1: and um there's one that I've been watching that's on Netflix,
Speaker 1: which is an Israeli show called Fauda, which is the
Speaker 1: Arab word for chaos. Uh. Interestingly, it's a political thriller
Speaker 1: about terrorism, Palestinian terrorism in Israel, and supposedly it is
Speaker 1: one of the most popular shows in the Arab world.
Speaker 1: So it's an Israeli show about Palestinians attacking Israel, and
Speaker 1: it was meant for Israeli's to watch, but yet the
Speaker 1: Arabs love it just as much as they do. It's
Speaker 1: dubbed show, so you know a lot of it is
Speaker 1: in Arabic with subtitles. But it's a really good show. Uh.
Speaker 1: That's been one that I've liked. I've also been a
Speaker 1: big fan of Better Call Saul and Homeland, um, and
Speaker 1: a lot of those shows. The Last Dance I've been
Speaker 1: j eating that up as well too. Amazing. By the way,
Speaker 1: Fouda is something you can't watch right before bedtime because
Speaker 1: it's so thrilling you just won't get to sleep for hours.
Speaker 1: It's that it's that exciting. Um. What about books? Are
Speaker 1: you reading anything, you're finding anything you're catching your fancy
Speaker 1: these days? Yeah, I've been trying to catch up a
Speaker 1: little bit more on some of my economic reading lately.
Speaker 1: Um as well, So I've been reading, um, you know
Speaker 1: The Economist Hour by Apple Bomb, which I've show could
Speaker 1: be a very good book. Uh as well, I've been reading, uh,
Speaker 1: the Jim Grant's book about Walter Baggett, uh, learning a
Speaker 1: lot about you know. UH. He was the founder of
Speaker 1: the Economist magazine in the nineteenth century and was a
Speaker 1: big thinker as far as what is the role of
Speaker 1: a central bank. He was the one who coined the
Speaker 1: term that they are the lender of last resort, uh
Speaker 1: and what that means as well to uh. And then
Speaker 1: my kids. I've got four kids, so I've you know,
Speaker 1: I've I'd like to say that because of my kids
Speaker 1: are all grown for but for the last twenty years,
Speaker 1: what they've done to me is they've reintroduced me to
Speaker 1: peanut butter and jelly sandwiches, and I'm still a fan
Speaker 1: of those and reading children's books. So I've recently, within
Speaker 1: the last year or so, I reread the Harry Potter series,
Speaker 1: which I think is just tremendous. Isle of the Blue
Speaker 1: Dolphins is another book that I've read. These are children's
Speaker 1: children's literature, which well done. Children's literature is just fantastic
Speaker 1: as well too. So you know, I eat my peanut
Speaker 1: butter and jelly sandwiches and I read these books and
Speaker 1: I think about that I'm doing a seventh grade homework
Speaker 1: assignment all over again. Hey, the hobbit was a children's book,
Speaker 1: and I know people who read that and the rest
Speaker 1: of The Lord of the Rings every year. Um. So
Speaker 1: our final question, what do you know about the world
Speaker 1: of investing today that you wish you knew back in
Speaker 1: when you first launched Bianco research that you need to
Speaker 1: question every assumption and be open to the idea that
Speaker 1: things that are not supposed to happen can happen. Negative
Speaker 1: interest rates, negative crude oil prices, the Federal reserved buying
Speaker 1: corporate bonds. There was time not too long ago, just
Speaker 1: to use those recent examples where if you were to
Speaker 1: say that these things were going to happen, people would
Speaker 1: have looked at you and said, you know, you're off
Speaker 1: your met because it's not the way that the world works.
Speaker 1: And you need to be open to these ideas. Now,
Speaker 1: that doesn't mean that you need to run around with
Speaker 1: a tinfoil hat on looking for all of these things
Speaker 1: to happen, but that you, as an investor or, as
Speaker 1: somebody who watches markets, to be open to the idea
Speaker 1: that things that you never thought were possible could wind
Speaker 1: up becoming possible, especially in a period of stress. Quite fascinating.
Speaker 1: We have been speaking with him. Bianco He is the
Speaker 1: founder and chief strategist at Bianco Research. If you enjoy
Speaker 1: this conversation, well just look up an incher down an
Speaker 1: inch on Apple iTunes or Google podcast, Spotify, wherever finding
Speaker 1: podcasts are sold, and you could see any of the
Speaker 1: previous three hundred plus conversations we've had over the past
Speaker 1: six years. We love your comments, feedback and suggestions right
Speaker 1: to us at m IB podcast at Bloomberg dot net.
Speaker 1: Give us a review on Apple iTunes. You can check
Speaker 1: out my weekly column on Bloomberg dot com slash Opinion,
Speaker 1: sign up for our daily reads at Rid Holtz dot com,
Speaker 1: or follow me on Twitter at rid Halts. I would
Speaker 1: be remiss if I did not thank the crack staff
Speaker 1: that helps put these conversations together each week. Charlie Bohmer
Speaker 1: is my audio engineer. Michael Batnick is my head of research.
Speaker 1: Michael Boyle is my producer, slash booker. A Tikoval Bron
Speaker 1: is our project manager. I'm Barry Ridhults. You've been listening
Speaker 1: to Masters in Business on Bloomberg Radio