Speaker 1: Strap on your parachute. It is time for What Goes
Speaker 1: Up with Sarah Ponziic and Mike Reagan. Hello and welcome
Speaker 1: to What goes Up, a Bloomberg Weekly markets podcast. I'm
Speaker 1: Sarah Pons, reporter on the Cross Asset team, and I'm
Speaker 1: Mike Reagan, a senior editor at Bloomberg. This week on
Speaker 1: the show, we are less than three weeks away from
Speaker 1: election day. It's hard to believe, but in the lead
Speaker 1: up there's been many narratives offered regarding what the market
Speaker 1: is pricing in a blue sweep, something else, and also
Speaker 1: advice offered on what investors should do in different outcomes
Speaker 1: should you listen to them. Our guestways in, and as always,
Speaker 1: we will close out the episode with our tradition the
Speaker 1: craziest thing I saw in markets this week, So I
Speaker 1: want to introduced a new tradition too, and that is
Speaker 1: an update on your puppy. I think I think we
Speaker 1: need to know how the Golden Doodle is doing. You know,
Speaker 1: the last two nights she slept soundly through the entire night,
Speaker 1: So big props to her, but also very exciting for
Speaker 1: me because certainly, if I was going to give you
Speaker 1: an update I'd say the first three nights I was
Speaker 1: very sleep deprived and up every couple hours with a
Speaker 1: whining puppy. But she's doing great. She's getting acclimated um
Speaker 1: to the city, as acclimated as you can get after
Speaker 1: coming off of a farm in Pennsylvania. Well, well, good
Speaker 1: news that you're well arrested. How many shoes has she destroyed?
Speaker 1: What's the tally? Surprisingly not many. She's still scared of
Speaker 1: shoes at this point in time. The little game we
Speaker 1: play is I put on my sneaker so she can't
Speaker 1: bite my toes and chase her around the apartment because
Speaker 1: it gets her to run um since she's scared of
Speaker 1: shoes if I have them on my feet. So no,
Speaker 1: no shoes eaten yet. That's a that's a success. That's
Speaker 1: pretty good. That's a good, good strategy you got there.
Speaker 1: And speaking of strategy, see what I did there? I
Speaker 1: see what you did there. We're very happy to have
Speaker 1: one of the best there is. Uh. Her name is
Speaker 1: Lizzen Saunders. She's the chief investment strategist at Charles schwab
Speaker 1: Lisen And welcome back to the show. It's been a while.
Speaker 1: I don't think we've talked since all the craziness started it.
Speaker 1: How are you faring during lockdown? Faring fairly well? Thank
Speaker 1: you and thanks for having me again. I think you're right.
Speaker 1: I think it was pre pandemic, right. How things have
Speaker 1: changed in the in less than a year. Indeed, so Listte,
Speaker 1: I was reading one of your recent commentaries, you know
Speaker 1: about uh, sort of the way to look at the
Speaker 1: market with the election coming up. It's funny, but you know,
Speaker 1: as journalists and strategists, I think we're both sort of
Speaker 1: forced to to fit the election into our world view,
Speaker 1: whether we like it or not. But what really stuck
Speaker 1: out to me is a few lines you had about,
Speaker 1: you know, obviously the old standard boiler plate that past
Speaker 1: returns or no guarantee of future results, and and how
Speaker 1: in this election, particularly in this economic environment, history probably
Speaker 1: is not as much of a guide as it perhaps
Speaker 1: we would like it to be. Um. So I'm just
Speaker 1: curious how you're looking at the you know, the election.
Speaker 1: Is there a danger of people sort of focusing too
Speaker 1: much on the horse race and what it means for markets?
Speaker 1: Is that is that something that you know you worry
Speaker 1: about clients a schwab sort of worrying a little too
Speaker 1: much about what's going to happen in November and less
Speaker 1: about the bigger sort of fundamentals and trends coming up
Speaker 1: in the next year. I do worry about it a
Speaker 1: little bit, and and that's partly due to the fact
Speaker 1: that the most common version of an election related question
Speaker 1: I get as it relates to markets is should I
Speaker 1: get out now, go to cash, and then put my
Speaker 1: money back in after the election when and I'll hear,
Speaker 1: you know, the inevitable volatility dies down. And I would
Speaker 1: say this in any environment and not just specific to
Speaker 1: an election. Um, get in and get out are not
Speaker 1: investing strategies. That's gambling on a moment in time. In
Speaker 1: this case, it would be gambling on some perceived election outcome,
Speaker 1: good or bad, and that's not investing. Investing should always
Speaker 1: be a process over time. And I think, well, it's
Speaker 1: human nature to say, if X happens, then why is
Speaker 1: going to happen and try to connect dots between a
Speaker 1: variable election, economic earnings, valuation, whatever it is, and what
Speaker 1: the market has been doing or is going to do.
Speaker 1: And wouldn't it be lovely if life was as easy
Speaker 1: as that? And it isn't, so, uh, you know, there.
Speaker 1: There are certainly strategies that individuals might want to employ
Speaker 1: if they really feel like they want to limit any
Speaker 1: kind of downside. So there's hedging strategies that can be done.
Speaker 1: But the whole get out now and then get back
Speaker 1: in that that's not a strategy. So stay invested. I'm
Speaker 1: curious what you think of some of these narratives that
Speaker 1: I alluded to that have been floating around that part
Speaker 1: of the reason that we have seen the market to
Speaker 1: return to resiliency is the fact that it is pricing
Speaker 1: in a blue sweep. What that means is we could
Speaker 1: see trillions of dollars worth of fiscal stimulus down the
Speaker 1: pipes that could then lead to a rotation to small
Speaker 1: caps or value. Do you buy these narratives? I mean, like,
Speaker 1: like Mike said, as journalists also um sometimes as a
Speaker 1: strategist or investors will look at the market and try
Speaker 1: to assign a narrative or backfit a narrative to anything
Speaker 1: we are seeing. Is it possible to actually go ahead
Speaker 1: and say, sure, yeah, this is what the markets pricing
Speaker 1: in or is this just a market that happens to
Speaker 1: be rallying for any any which reason? And this is
Speaker 1: what people are deciding the narrative is considering how close
Speaker 1: we are to an election. To your point, Sarah, it
Speaker 1: is impossible to quantify, particularly if you're actually talking about
Speaker 1: a narrative, and even if you believe in your heart
Speaker 1: that that is the underlying force behind what the market
Speaker 1: is doing, actually being precise about the impact it's having
Speaker 1: and how much is priced in. But I don't think
Speaker 1: it's a stretch to say and call it a narrative,
Speaker 1: call it an actual infusion of liquidity, but that the
Speaker 1: liquidity slash, fiscal the monetary fiscal combination, stimulus relief, whatever
Speaker 1: term you want to use, I think has been a
Speaker 1: powerful force um underpinning stocks. Not necessarily on any given
Speaker 1: day or week, but I think that has been an
Speaker 1: important story because in an environment, particularly when we were
Speaker 1: in the heart of the pandemic, the entire economy was
Speaker 1: shut down, we had the FED doing unprecedented things UH
Speaker 1: and Congress doing unprecedented things, particularly in both the concept
Speaker 1: of size and scope. That money has to go somewhere,
Speaker 1: and in the absence of an economy that's humming along,
Speaker 1: that money either can just stay in the pockets of
Speaker 1: individuals or stay in the financial system or find its
Speaker 1: way into asset markets, and that is clearly what happened,
Speaker 1: and I think more recently, yeah, I think from a
Speaker 1: macro perspective, the idea of more on the fiscal side
Speaker 1: and potentially a larger sum of that in the event
Speaker 1: of a Biden win relative to the size of the
Speaker 1: package currently being negotiated, could be an underpinning. But the
Speaker 1: reality is this market is largely being driven by a
Speaker 1: small handful of stocks being traded by, in many cases,
Speaker 1: really small investors. So that's not a narrative, that's the
Speaker 1: actual mechanics to some degree of what's happening. I'm not
Speaker 1: sure that cohort is necessarily focused on the big picture, um,
Speaker 1: you know, monetary fiscal they're just you know, chasing momentum stocks.
Speaker 1: So it's a combination, you know. Listen, that's a great
Speaker 1: point about the sort of the return of the day
Speaker 1: trader and the and the small dollar trader. Um. You know,
Speaker 1: I would have to assume that the move to commission
Speaker 1: free trading is somehow amplifying that. Uh that phenomenon does
Speaker 1: that make it sort of harder for you to sort
Speaker 1: of figure out where the market's going, what's going to
Speaker 1: happen next, You know, is that now that we're almost dominated,
Speaker 1: I think retail investors are I was looking at some
Speaker 1: numbers from Larry tab or are Bloomberg intelligence analysts who
Speaker 1: digs into market structure. It's one of the biggest cohorts
Speaker 1: of investors and traders right now. I think retail mom
Speaker 1: and pop traders actually rival hedge funds for as far
Speaker 1: as how much volume is is attributed attributable to them
Speaker 1: in the market. You know, I worry is is that
Speaker 1: retail trader base sort of a fickle and hard to
Speaker 1: analyze investor base, And what does that mean going forward
Speaker 1: in the market? Is it sort of a recipe for
Speaker 1: either I don't know, higher sort of a higher plateau
Speaker 1: evaluations were or could we expect sort of more volatility
Speaker 1: as a result of of you know, sort of smaller
Speaker 1: traders chasing the momentum or maybe perhaps even chasing it
Speaker 1: on the way down if they if they're so inclined
Speaker 1: to to start shorting the market. Um is is that
Speaker 1: I know this is a twelve part question which is
Speaker 1: my my specialty, but but how does how does this
Speaker 1: sort of up and coming group of traders dominating volume
Speaker 1: affect the way the market operates and how you're how
Speaker 1: you're watching and sort of analyzing what's going on. I mean,
Speaker 1: the short answer is, we don't know, because this is
Speaker 1: a cohort of traders that are brand new, so we
Speaker 1: don't have a long history. Now they're they're part of
Speaker 1: a larger cohort of course, retail investors. But this sort
Speaker 1: of what I've been calling newly minted day traders um
Speaker 1: largely trading via apps and more recently moving to a
Speaker 1: significant degree into the options market, into call short dated
Speaker 1: call buying, naked call buying. And so we don't yet
Speaker 1: have any history of this cohort in terms of what
Speaker 1: any negative market action might do to that cohort, because
Speaker 1: most of the dominance of that cohort started in the
Speaker 1: late March early April time frame, and there were many
Speaker 1: ingredients to the recipe that of of this power of
Speaker 1: this small retail trader. You mentioned zero percent commissions, Um,
Speaker 1: we a chub might have had something perfectly so maybe
Speaker 1: just you know, maybe I seem to recall we said
Speaker 1: something about that. And then of course for actional shares,
Speaker 1: and then the combination of pandemic related forces, people being
Speaker 1: home doing much more on their digital devices. Uh, no
Speaker 1: sports betting for quite some time, So I think it
Speaker 1: was just this tsunami of things that happened to really
Speaker 1: bring out this new form of trader. Now, what we
Speaker 1: don't know again is if we get into any significant
Speaker 1: market corrective phase beyond just what we had for a
Speaker 1: short period in June and a short period of September,
Speaker 1: whether they get beholdened on the long side, which was
Speaker 1: what happened in September, or they get scared out of
Speaker 1: the market if the pain is more severe than what
Speaker 1: we experienced, or do they just shift gears and start
Speaker 1: doing the same thing on the putch side of the
Speaker 1: options equation as they did on the call side. So
Speaker 1: we don't know. What I will say is the kind
Speaker 1: of speculative fraud we're seeing among that cohort is not
Speaker 1: matched by other measures of investor sentiment, either attitudinal or behavioral.
Speaker 1: So we don't have the same kind of speculative fervor
Speaker 1: whether it's in attitudinal surveys like AII or other measures
Speaker 1: that I think are tracking more what either older individual
Speaker 1: investors not traders are doing, or across the spectrum of institutions.
Speaker 1: And in fact, it's never happened before, but very recently
Speaker 1: we've seen this huge increase in call buying um by
Speaker 1: small traders at the same time a huge increase in
Speaker 1: index put buying, and that tends to be done by
Speaker 1: the commercial hedgers and the big institutions. So we have
Speaker 1: this incredible divergence between what we used to think of
Speaker 1: as the smart money and the dumb money. So far,
Speaker 1: to the extent you think of this cohort as the
Speaker 1: dumb money, they have been so dumb because they've been right,
Speaker 1: but they also haven't been tested to any significant degree.
Speaker 1: But I also think you know, Mike, you rightly cited
Speaker 1: these statistics around what percentage they represent in trading volume.
Speaker 1: But there's feeder effects of that. So if you're if
Speaker 1: you're a small trader and you're buying a call option,
Speaker 1: the market maker selling that call option has to purchase
Speaker 1: the underlying security as a hedge, So that forces the
Speaker 1: market makers to buy the same stocks that underlie the
Speaker 1: options that the small traders are doing. And then because
Speaker 1: a small subset of stocks represents such a large share
Speaker 1: of the overall index, it pushes the index up, and
Speaker 1: traditional institutions, who might be benchmarked against the SMP have
Speaker 1: no hope of beating the SMP unless they're in those names.
Speaker 1: So there is the circle in which we live. I've
Speaker 1: heard the last couple of weeks described as deja vu
Speaker 1: to August and September. Now to be seen if it
Speaker 1: ends the same way. But something I find really interesting
Speaker 1: is that in the middle of the summer, I feel
Speaker 1: like we constantly heard this idea that the only reason
Speaker 1: that we saw these smaller retail traders really uh active
Speaker 1: in the markets was because they were bored. There were
Speaker 1: no sports on Those that were young weren't in school,
Speaker 1: uh college was out of session. Well, now we're in
Speaker 1: late October, there are plenty of sports to watch on TV.
Speaker 1: Many have gone back to school. If that's the case,
Speaker 1: if you're a college aged kid, or at least you're
Speaker 1: taking classes virtually to some extent, and we hear these
Speaker 1: relations or comparisons to the dot com days. Is it possible,
Speaker 1: And I know it's dangerous to say it's different this time,
Speaker 1: but is it possible to say the difference now is
Speaker 1: that we do have this move to zero commissions, and
Speaker 1: it's very possible that this is a trend that's here
Speaker 1: to stay. This is a new cohort of the market
Speaker 1: that isn't just going to disappear. Well, I hope it's
Speaker 1: a new cohort of the market. I hope we have
Speaker 1: finally enticed younger investors into the world of investing in
Speaker 1: the stock market, because I think pre pandemic they were
Speaker 1: sort of written off as as dead. Never we're never
Speaker 1: going to entice younger investors into the market, maybe because
Speaker 1: of either they were burned through the financial crisis, or
Speaker 1: maybe they watched parents get burned through the financial crisis
Speaker 1: in Wall Street broadly was it's been sometimes painted with
Speaker 1: a very negative brush, so long term, I'm somewhat hopeful
Speaker 1: that doesn't mean there aren't risks in the very near term. Now,
Speaker 1: I think even now that sports is back and sports
Speaker 1: betting is back, what we have to remember is that
Speaker 1: this has become Partly why this has become popular is
Speaker 1: because it's working so far and so um This sort
Speaker 1: of cohort feeds off itself. There's a lot of platforms
Speaker 1: that it exposed what there's are are doing. It's almost
Speaker 1: like the you know, pelotonification of trading or the gamification
Speaker 1: of trading. So the bells and the whistles and the
Speaker 1: excitement of of doing well and making money. That um
Speaker 1: that I think is the It's a force in the
Speaker 1: near term. But if it eventually can morph into a
Speaker 1: true educated understanding of what it means to invest long
Speaker 1: term without significant carnage on the path from point A
Speaker 1: to point B, that would be great. UM. And I
Speaker 1: don't I don't view this as some bubble that's going
Speaker 1: to burst spectacularly and uh, these folks are going to
Speaker 1: be in a world of hurt. But there are some
Speaker 1: risks associated with it. Is just a question again of
Speaker 1: whether we can sort of bridge this gap and that
Speaker 1: in that span there's appropriate education because more than just anecdotally,
Speaker 1: we know that some of these traders, particularly in the
Speaker 1: options market, UM, may not be as educate hated about
Speaker 1: what they're doing as what an ideal scenario would be. Yes,
Speaker 1: Sarah points out sports her back on TV. Except for
Speaker 1: Sarah's Miami Heat, they got their season got canceled. It
Speaker 1: was a sad ending, but you know the fact that
Speaker 1: they made it to the finals. I'll take it. I'll
Speaker 1: take it well. I'll tell you, you know, speaking of
Speaker 1: that that sort of young aggressive cohort of investors, I
Speaker 1: will point out. I haven't had my shoes my shoes
Speaker 1: shined in a long time, so I don't have this
Speaker 1: sort of shoeshine guy anecdote. But my seventeen year old
Speaker 1: daughter just got a job and a couple of paychecks
Speaker 1: into it. She came up to me and said, I'm
Speaker 1: I really want to get into the stock market. Do
Speaker 1: you know anything about the stock market? And of course
Speaker 1: I was like, not, not really though, but does your
Speaker 1: daughter know what you do? Clai? Now I clearly realized
Speaker 1: she has not been paying attention at all. And when
Speaker 1: I when I explained to her what I do, but
Speaker 1: she did she mentioned Tesla. She do someone someone knew
Speaker 1: someone who made ten thousand dollars in Tesla and then
Speaker 1: someone else made enough money to buy buy a Tesla
Speaker 1: with what they've made on Tesla, So I do you
Speaker 1: know its? And it's getting to that sort of anecdotal level.
Speaker 1: I think, where you know? Again, who's I don't know
Speaker 1: anyone who gets their shoeshine anymore, but it's it's that
Speaker 1: sort of unsophisticated. It's sort of to me. I hate
Speaker 1: to bring the parallel to the cryptocurrency craze and the
Speaker 1: bitcoin craze a few years ago, but it almost feels
Speaker 1: like that to me, is this sort of piling in,
Speaker 1: uh into the momentum um? But I wonder, you know,
Speaker 1: put aside the election, put aside sort of what retail
Speaker 1: traders do next, and you get back to the fundamentals
Speaker 1: and you look at an smp it, I don't know,
Speaker 1: was it twenty seven and change on a on a
Speaker 1: trailing earnings basis. I know you're not gonna go to
Speaker 1: cash because the election is coming up, But does that
Speaker 1: sort of valuation, given all the unknowns with how the
Speaker 1: virus and the vaccine will progress, does that give you
Speaker 1: a pause at all to to sort of d risk um,
Speaker 1: you know, ahead of sort of how we see the
Speaker 1: economy shaping up next year. I think there may be
Speaker 1: reasons to de risk, especially if your portfolio is now
Speaker 1: grown potentially via lack of rebalancing, to a heavy emphasis
Speaker 1: on those kind of hot momentum areas of the market. Um.
Speaker 1: But I wouldn't use valuation as certainly not a singular
Speaker 1: reason to do that, because valuation of any variety, whether
Speaker 1: it's trailing pe forward, pe Schiller's cyclically adjusted pe, Tobin's
Speaker 1: q FED model, price to book price to sales um terrible,
Speaker 1: terrible market timing tool um. There's there's no correlation between
Speaker 1: what valuation is at any point in time and what
Speaker 1: the market does say over the subsequent one year period
Speaker 1: of time. Correlations go higher when you look out over
Speaker 1: many years, you know, call it ten year time periods.
Speaker 1: And the reason for that is we think of valuation,
Speaker 1: particularly in when you're talking about PE ratio, is having
Speaker 1: to quantifiable components. You know what the P is certainly
Speaker 1: on a trailing basis, you know what the E is
Speaker 1: on a forward basis. You know what the expectation is
Speaker 1: because it's published. So we therefore think of it as
Speaker 1: this fundamental indicator because there's quantifiable components. The reality is
Speaker 1: that valuation is a sentiment indicator more than it is
Speaker 1: a fundamental indicator. There are times where investors are willing
Speaker 1: to pay nosebleed valuations and find ways to justify it,
Speaker 1: and there's times when investors don't even want to pay
Speaker 1: a single digit PE ratio, like in early two thousand
Speaker 1: and nine. So it's a reflection of sentiment more than
Speaker 1: anything else. I think the valuation measure or measures that
Speaker 1: the cardon ardent bulls will use in this environment are
Speaker 1: equity risk premiums given that we've got short rates pinned
Speaker 1: at zero as far as the I can see, so
Speaker 1: the discount rate you're using to discount future earnings is
Speaker 1: basically zero, and on an equity risk premium relative to
Speaker 1: treasuries relative corporate bonds, stocks look relatively inexpensive. Mike, My
Speaker 1: sort of take on the other side of that is
Speaker 1: totally agree the discount rate is pegged at zero. However,
Speaker 1: it's a discount rate discounting a future stream of earnings.
Speaker 1: We are at some point going to actually have to
Speaker 1: see that future stream of earnings. A ZIRP environment is
Speaker 1: not going to sustain the market at infinitum without an
Speaker 1: eventual return in earnings. I just think that discount rate
Speaker 1: being pegged at zero is saying to investors that pay
Speaker 1: attention to this stuff, maybe you can lengthen your time
Speaker 1: horizon in terms of the weight until earnings moved back
Speaker 1: into positive territory supported by that low interest rate environment.
Speaker 1: So I get it um, But in broadly do I
Speaker 1: think there are risks in this market valuation and otherwise
Speaker 1: absolutely so. We do have to see that return in earnings,
Speaker 1: and this week earning season did kick off. We're expected
Speaker 1: to see another decline this quarter of about another decline
Speaker 1: in the fourth quarter. However, when I look at numbers,
Speaker 1: I still see consensus analyst estimates looking for about one
Speaker 1: sixty two of earnings per share in the SMP, which
Speaker 1: is not far off where we were just last year
Speaker 1: in Do you think that it's possible people are still
Speaker 1: too optimistic about one? I mean, if if you say
Speaker 1: that at some point we have to get those earnings,
Speaker 1: clearly they're pretty optimistic that we will, and and not
Speaker 1: too far away. Even in a normal environment, analysts when
Speaker 1: you're looking a year out tend to be too optimistic.
Speaker 1: Then as you get closer to the actual season for
Speaker 1: the quarter, they cut cut, cut, cut cut, ultimately setting
Speaker 1: the bar low enough such that the beat rate is
Speaker 1: you know, typically in the UM. Unique in this environment,
Speaker 1: of course, is the lack of visibility, the fact that
Speaker 1: a record number of companies have withdrawn guidance, certainly in
Speaker 1: the second quarter. So what analysts have done, at least
Speaker 1: for this year is when you know, absent that more
Speaker 1: precise guidance from companies UM and absent even macro visibility.
Speaker 1: Given the unique circumstances as virus as they aired on
Speaker 1: the side of cutting estimates too much, so you had
Speaker 1: a six percent beat rate for the second quarter. You're
Speaker 1: running out about a similar beat rate right now. Albeit
Speaker 1: were very early in in earning season at this point,
Speaker 1: and that may be the case for the fourth quarter
Speaker 1: as well. But I do think given what we know
Speaker 1: now about the economy and its trajectory, I think the
Speaker 1: numbers as they stand right now probably are a little
Speaker 1: bit high, but as they start to come down, it
Speaker 1: wouldn't be that abnormal relative to what we typically see
Speaker 1: in history. Ells as you point out, with the equity
Speaker 1: risk premium on the discount rate being close to zero,
Speaker 1: I mean, it brings us back to that old boogeyman inflation,
Speaker 1: you know, and I I feel like it's got to
Speaker 1: be the main risk for the stock market is some
Speaker 1: surprise in inflation. But that said, it's it's kind of
Speaker 1: been a chicken little situation with inflation over the last decades.
Speaker 1: People have worried about it forever, been warning that we're
Speaker 1: we're headed for some really big inflationary environment and we
Speaker 1: just don't see it. Year after year, any sort of
Speaker 1: you know, CPI or PC above that two percent, especially
Speaker 1: on the core basis. Is there any reason I believe
Speaker 1: it's just different this time? Do you see, you know,
Speaker 1: any potential for an inflation shock given all the all
Speaker 1: the stimulus given to the economy, how low rates are,
Speaker 1: and if we do get sort of a real, real
Speaker 1: rapid recovery next year, is there any inflation risk in
Speaker 1: your mind? Well, I'll start with the with answering the
Speaker 1: question is at different this time, but but in particular,
Speaker 1: compare to the period coming out of the financial crisis,
Speaker 1: the last time we had uh massive stimulus. Now, in
Speaker 1: that case, it was purely on the monetary side, very
Speaker 1: little if any on the on the fiscal side, and
Speaker 1: there was grave concern in the quite a few years
Speaker 1: um coming out of whether it was what the FED
Speaker 1: did with rates going to zero, but particularly the what
Speaker 1: turned into three rounds of quantitative easy, and everybody was
Speaker 1: concerned about inflation with the FED, you know, printing all
Speaker 1: this money that was going to inflation accident waiting to happen.
Speaker 1: What was missing in that analysis is that the FED
Speaker 1: was pumping liquidity into the financial system during a period
Speaker 1: where the financial system, by necessity, was deleveraging. So the
Speaker 1: money that they fed pumped into the financial system stayed
Speaker 1: in the financial system. It didn't come out through the
Speaker 1: lending spigots, there was no demand for borrowing, didn't go
Speaker 1: into the economy and pick up what we call velocity.
Speaker 1: You you mathematically can't get an inflation problem when you
Speaker 1: have no velocity. Now in this cycle, right now, we're
Speaker 1: still in that boat in the sense that we've had
Speaker 1: all of this monetary liquidity pumped into the system. They've
Speaker 1: even morph more to trying to pump it into the
Speaker 1: economy too, with some of the new tools that are
Speaker 1: using on the main street lending program. That on top
Speaker 1: of that, you've had massive fiscal relief. All combined, you're
Speaker 1: talking about GDP causing money supply growth and as measured
Speaker 1: by M two to go up by UM year every
Speaker 1: year that was at the peak. However, at this point
Speaker 1: so far, the M to money velocity continues to sink
Speaker 1: like a stone. So not an inflation problem, but that
Speaker 1: may not be a permanent situation. Um eras not just
Speaker 1: the United States, but globally. Eras of monetary dominance when
Speaker 1: they end tend to end in disinflation or deflation. And
Speaker 1: we saw that after the financial crisis, and after that
Speaker 1: kind of monetary period of of of extreme stimulus, eras
Speaker 1: of fiscal dominance tend to end in inflation, especially if
Speaker 1: the fiscal spending is being done through a debt taking
Speaker 1: on more debt directly or indirectly being financed by monetary authorities.
Speaker 1: So I do think there's a risk. I don't think
Speaker 1: it's imminent. Um. I think this the nature of this
Speaker 1: crisis is more deflationary than inflationary. But I think there's
Speaker 1: two sanguine of view about inflation, kind of in the
Speaker 1: medium to longer term, and leaving aside the fiscal monetary
Speaker 1: stimulus triggers potentially for some inflation, you've also got this
Speaker 1: secular move toward deglobalization and diversification of supply chains. If
Speaker 1: you're a believer like me that part of the reason
Speaker 1: why we had declining inflation for thirty years was because
Speaker 1: of globalization, it's hard not to see the opposite potentially happening.
Speaker 1: So I do worry that we went from unfounded fears
Speaker 1: of inflation in and that was sort of the narrative.
Speaker 1: It wasn't true. Now I think the consensus is that
Speaker 1: inflation is dead and buried forever, and I can't help
Speaker 1: but wonder whether, um, you know the devil's advocate in
Speaker 1: he says, Okay, what could the conditions be that actually
Speaker 1: bring more inflation than what is currently built into expectations,
Speaker 1: and that would be a longer term risk for stocks.
Speaker 1: It's so one more question for you, Louzanne before we
Speaker 1: get to sharing our crazy things, which I know Mike
Speaker 1: is so excited about. But well, we'll we'll have to
Speaker 1: wait to see what happens on the fiscal front. But
Speaker 1: there was a comment this week from San Francisco FED
Speaker 1: President Mary daily Um that really struck a chord, and
Speaker 1: I'll read it to you. She said, I'm not willing
Speaker 1: to trade millions of jobs for people who need a
Speaker 1: ladder rung up in order to keep the stock market
Speaker 1: from going up for a few who have those holdings.
Speaker 1: And basically she was asked about whether or not the
Speaker 1: FED was creating a moral hazard by increasing asset prices,
Speaker 1: and she said the nature of this recovery is uneven,
Speaker 1: and we need to help people, not necessarily help the
Speaker 1: stock market. Although we may be inflating asset prices. What
Speaker 1: does that tell you about what the FED is willing
Speaker 1: to do here. Um. Also in relation to the type
Speaker 1: of recovery that we are seeing, I think the FED
Speaker 1: understands the moral hazard aspect of this that inadvertently, not purposefully,
Speaker 1: what they've done has been much more to the benefit
Speaker 1: of asset prices and less to the benefit of the
Speaker 1: real economy, and that it's it's widened the divide in
Speaker 1: terms of the wealth gap, and that is part of
Speaker 1: the reason why not just daily, but but Powell, as
Speaker 1: as often as he's got a microphone or a camera
Speaker 1: in front of him, is really pounding the table on
Speaker 1: the kneed for more on the fiscal side than on
Speaker 1: the monetary side. And I think they are The FED
Speaker 1: collectively is sending a very forceful message, not that they're
Speaker 1: out of tools, um, but that the tools or the
Speaker 1: efforts that are needed now to truly help small businesses
Speaker 1: in the more beleaguered industry reason individuals who are still
Speaker 1: out of work, has to be done on the fiscal side,
Speaker 1: not on the monetary side. And I think that that's
Speaker 1: the appropriate message. Whether you know, whether there are adults
Speaker 1: in the room on both sides of the aisle that
Speaker 1: actually can get together and figure this out. Maybe it's
Speaker 1: a different story, alright, Mike. I think it's that time,
Speaker 1: all right, It's the time for the crazy things. Stand
Speaker 1: clear of the craziest things we saw in markets this week,
Speaker 1: and well this is exciting. We do have a call
Speaker 1: to the What Goes Up hotline. This is Sam Kidson.
Speaker 1: Let's hear what the craziest thing he saw in markets
Speaker 1: this week. Was. The craziest thing I saw in markets
Speaker 1: this week is lumber futures. The lumber futures which trade
Speaker 1: on the SAMI are quoted in dollars per thousand board feet,
Speaker 1: and these started off the year around four hundred dollars
Speaker 1: per thousand board feet, and like all markets, you know,
Speaker 1: on April one, thanks to Day, it hit about two eight.
Speaker 1: Now it's trading around five hundred fifty kind of thing,
Speaker 1: so obviously up significantly from the beginning of the year
Speaker 1: and from the low it reached in April. But the
Speaker 1: really crazy part is that on August it was actually
Speaker 1: quoted intra day over eight hundred dollars, So we're talking
Speaker 1: about three x or so where it traded in April
Speaker 1: and double where it started the year. So that's the
Speaker 1: craziest thing I've seen in markets this week. All right,
Speaker 1: well done, Sam, lumber futures. I don't think we've had
Speaker 1: lumber futures in the crazy things yet, and it really
Speaker 1: has been a wild year for lumber futures, so we
Speaker 1: thank you for that. Sam. Sarah, can you beat the
Speaker 1: crazy week and year we've seen in lumber futures? What
Speaker 1: do you got? All right? So I wanted to highlight
Speaker 1: um q q Q this week the NAZAC one t F.
Speaker 1: My colleague Katie Greifold, who's been on the show before, UM,
Speaker 1: she wret a story about this. But I've just been
Speaker 1: watching flows day to day and three out of four
Speaker 1: of the fund's largest inflows have come within the last month,
Speaker 1: and they've been huge. They've been massive compared to what
Speaker 1: we typically see day to day. That fourth one was
Speaker 1: in two thousand, and of course I'm not making a
Speaker 1: comparison UM to now in two thousand, that's just when
Speaker 1: the other one was. But in trying to ask investors
Speaker 1: or or strategists or traders why we're seeing this, you
Speaker 1: just get a variety of answers. UM. Some of them
Speaker 1: are saying, this actually might be due to what we're
Speaker 1: seeing in the options market, because we've seen some drastic
Speaker 1: outflows to others. Just say that investors are simply just
Speaker 1: betting on big tech, considering that q Q is been
Speaker 1: as like one hundred ETF and has a very heavy
Speaker 1: tech waiting. Um. But I think it's really difficult to
Speaker 1: just look at these flows that we're seeing almost day
Speaker 1: to day now, um and and say they're not crazy.
Speaker 1: All right, I'll accept that no theories on that Q
Speaker 1: and on is involved in the q q Q. Are
Speaker 1: you going to bring that in here? I'm gonna throw
Speaker 1: that one out there, reach out. I'll tell her that
Speaker 1: she should update her story with the Q and on theory. Yeah,
Speaker 1: that that's the beauty of the Q and on theories.
Speaker 1: They don't need to make any chance. You can just
Speaker 1: you can just shoe herman, All right, listen, can you
Speaker 1: beat the flows into the q q Q as a
Speaker 1: crazy thing this week? Does mine have to be market related? Nah?
Speaker 1: For you. We'll let it slide for a blue hand.
Speaker 1: Not let it slide, thank you. M. The craziest story
Speaker 1: I saw this week was and I had not seen
Speaker 1: the pre story about an asteroid that was now in
Speaker 1: the Earth's orbit and heading towards us, and it was
Speaker 1: a fairly large one, and it was getting increasing attention.
Speaker 1: It actually turns out to be a portion of a rocket.
Speaker 1: That was a rocket that had a failed moon landing
Speaker 1: in nineteen sixty six, and it's been basically orbiting the
Speaker 1: Sun and somehow it left the Sun's orbit and now
Speaker 1: is in the Earth's orbit. Um and and it's not
Speaker 1: an asteroid potentially crashing to Earth, but a what is
Speaker 1: that a fifty four year old piece of a rocket.
Speaker 1: That's amazing. I had not heard of that. That's really interesting.
Speaker 1: Sounds safe for us to have a year old rockets
Speaker 1: it lands in the middle of your roof. I'm not
Speaker 1: sure asteroid or you know, a portion of a rocket.
Speaker 1: Maybe the same, right, it doesn't matter. We talked about
Speaker 1: momentum and velocity. I'm sure that would have plenty. Yeah,
Speaker 1: that's how we tie it to the market. Yeah, there
Speaker 1: you go. I thought it was going to be that
Speaker 1: asteroid with like a hundred gazillion dollars worth of gold
Speaker 1: and precious minerals stirred in it, which wouldn't be nice.
Speaker 1: It's just gonna fall on Earth and then it's going
Speaker 1: to make bitcoin more valuable. That's the theory. Well, that's
Speaker 1: a good one. I'm gonna have to look up that
Speaker 1: story and then I'm gonna I'm gonna like sleep in
Speaker 1: my closet under pillows or something, waiting for that thing
Speaker 1: to land. But all right, well mine, as Sarah will
Speaker 1: tell you, I like the alternative asset space. The more
Speaker 1: alternative the better. So very fascinating auction from STIs in
Speaker 1: New York. And I'll preface this by saying I had
Speaker 1: to take Shakespeare at the University of Delaware because I
Speaker 1: was an English major. I think you were a business major.
Speaker 1: I no, I was political science and economics, so I
Speaker 1: did not have to take Shakespeare. I would I would
Speaker 1: have preferred any calculus, trigonometry, stats, would throw anything at
Speaker 1: the other than Shakespeare. I did not do well. But
Speaker 1: this is courtesy of the National Post, a rare book
Speaker 1: from the year sixteen twenty three. It was the first
Speaker 1: book that brought together all of William Shakespeare's plays into
Speaker 1: one uh one edition sold at auction at Christie's. Sorry
Speaker 1: you know what time it is? What's your bid? I
Speaker 1: was just about I was just kind of trying to
Speaker 1: rack my brain and think of a price, because I've
Speaker 1: been so unbelievably off. My guess is lately, Um, what
Speaker 1: am I going to say? I'll go with one. K,
Speaker 1: I'll take over, all right, listen, Yeah, you'll. She's good,
Speaker 1: she's doing the prices right thing. She'll She'll go one.
Speaker 1: I've been way over lately, so now I've been going
Speaker 1: way under. Well, I just took the way over. So
Speaker 1: I'm not going to give a number, but I think
Speaker 1: it's way higher than that. I will tell you, based
Speaker 1: on my own experience with Shakespeare, I would have only
Speaker 1: bought this book if it came with the cliff notes
Speaker 1: he attached to it as well. Al Right, before I
Speaker 1: give you the answer, let's compare it to another alternative asset.
Speaker 1: A rare guitar used by the Beatles George Harrison and
Speaker 1: John Lennon sold at auction. This was a fretless guitar.
Speaker 1: I don't know if you guys know much about it,
Speaker 1: but that's that's very rare. It was used on the
Speaker 1: White album on three tracks on the White Album, which,
Speaker 1: if you know the Beatles, that might influence your your bidding.
Speaker 1: Not not one of my favorites of theirs, but all right, Sarah,
Speaker 1: more or less than the Shakespeare than your Shakespeare. What
Speaker 1: are you going for it? I'd be tempting to say more,
Speaker 1: but I could also be toably wrong. Okay, that's no,
Speaker 1: that's not an answer. That's okay. Spear went for more
Speaker 1: than the guitar, all right, nine point nine million for
Speaker 1: the Shakespeare book unidentified buyer. The Beatles guitar was only
Speaker 1: a hundred ninety pounds d quick. I was thinking more
Speaker 1: so due to recency. Uh, And I feel like even
Speaker 1: I feel like guitars are used as decorative aspects and
Speaker 1: that's where my head was going with this. But yeah,
Speaker 1: the Shakespeare books not very decorative. But I don't know. Listen,
Speaker 1: would you dump a sixty forty portfolio to go, say,
Speaker 1: sixty stocks Shakespeare first Edition a little bit of Beatles?
Speaker 1: I'm a rock chick, but um I would invest if
Speaker 1: if Robert Plant decided he is willing to bring back
Speaker 1: led Zeppelin for a tour with Jason Bottom, I'd be
Speaker 1: willing to invest a boatload of money in that. So
Speaker 1: that's that's how I'll tie investing into rock bands, and
Speaker 1: you'd be in the first row. I'd pay up for
Speaker 1: that show too. That would be a good one, I agree.
Speaker 1: So all right. I think that's all our time. Ohhh yeah,
Speaker 1: we got a Oh that's good. We got a crazy
Speaker 1: thing over Twitter. Let's hear it, Sarah. Yeah. So this
Speaker 1: one actually comes from Nick Carraway's Twitter handles at Carraway
Speaker 1: thirty four and he tweeted us a Wall Street Journal
Speaker 1: story with the headline um Santander bond surges as investors
Speaker 1: take a risky bet on debt redemption. And he said
Speaker 1: to us, if this doesn't qualify as the craziest thing contender,
Speaker 1: I don't know what does. And it is certainly a
Speaker 1: great contender. The lead of the story reads investors are
Speaker 1: betting that Spanish lender Banco Santander won't be able to
Speaker 1: make interest payments on a risky form of debt in
Speaker 1: a string twist of events. Instead of shunning the investors
Speaker 1: are scooping it up. So just typically not the relation
Speaker 1: that you would see a good story, good story. I
Speaker 1: do wonder about this guy's name. Isn't Nick Carraway the
Speaker 1: guy from the Great Gatsby the character and the Great Gatsby?
Speaker 1: I told you I was in English major, so no, uh,
Speaker 1: no Shakespeare, but Gatsby. Yeah, I'm not sure that's that
Speaker 1: guy's real name, but we appreciate the contribution to the
Speaker 1: Craziest things and as always, if you saw something crazy,
Speaker 1: tweet to us at at Podcasts, were at Sarah where
Speaker 1: myself and otherwise you can give us a call on
Speaker 1: the Bloomberg Podcast hotline at six four or six three
Speaker 1: to four three four nine, oh, and leave us a
Speaker 1: voicemail with your crazy thing and maybe we'll play it
Speaker 1: on the show. I think we had a great round today.
Speaker 1: I think uh, we'll give Lizzie and the win with
Speaker 1: the rocket and ties into markets because of velocity and momentum. Yeah,
Speaker 1: well we'll stretch it. But it was so great to
Speaker 1: have you on the show. Lizzie and Saunders, thank you
Speaker 1: so much, my pleasure, thanks for having me. What goes up.
Speaker 1: We'll be back next week. Until then, you can find
Speaker 1: us on the Bloomberg Terminal, website and app or wherever
Speaker 1: you get your podcasts. We'd love it if you took
Speaker 1: the time to rate and review the show on Apple
Speaker 1: podcast so more listeners can find us. And you can
Speaker 1: find us on Twitter, follow me at at Sarah Pantzack,
Speaker 1: Mike is that reaganonymous, and you can also follow Bloomberg
Speaker 1: podcasts at Podcasts. Also thank you to Charlie Pellett of
Speaker 1: Boomberg Radio and the voice of the New York City
Speaker 1: subway system. What Goes Up is produced by Jordan Gospore.
Speaker 1: The head of Bloomberg Podcast is Francesco Levie. Thanks for listening,
Speaker 1: See you next time.