Speaker 1: Hello, and welcome to What Goes Up a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at Bloomberg,
Speaker 1: and I'm Aldana hire Across as a reporter with Bloomberg.
Speaker 1: And this week on the show. Well, as you've probably
Speaker 1: heard by now, for the last two weeks, trouble in
Speaker 1: the US and European banking sectors, not to mention the
Speaker 1: responses to it from authorities, has captivated the intention of investors,
Speaker 1: and it's sparking fears of a credit crunch that could
Speaker 1: ultimately drag the economy into a recession. It doesn't yet
Speaker 1: appear to be as big of a train wreck as
Speaker 1: the global financial crisis in two thousand and eight knock
Speaker 1: on wood, fingers crossed and all that. Still, it's hard
Speaker 1: not to get flashbacks to that troubling era. So we're
Speaker 1: gonna do a little comparing and contrasting to that ugly
Speaker 1: time with a veteran market strategist who was helping to
Speaker 1: manage a three point four billion dollars market making book
Speaker 1: back then. But first, Phil donna Um, I did hear
Speaker 1: from a loyal listener because you left us with a
Speaker 1: little bit of a Cliffhanger last week, and he was
Speaker 1: worried about you. You had told us you were just
Speaker 1: about to close on a mortgage with dot First Republican. Yeah,
Speaker 1: so how did it go? Tell what was the resolution?
Speaker 1: You have no idea? How's trusted? I was like a
Speaker 1: nutcase last week. I was so worried about First just
Speaker 1: last just last week, more so than usual, like way
Speaker 1: more so than usual. And I I like, when something's
Speaker 1: really weighing on me, I can't help but bring it
Speaker 1: up all the time. So I would run Iran into
Speaker 1: the radio. I've never noticed. Yes, but even like the
Speaker 1: radio producer Paul Brennan. We took the escalator up at
Speaker 1: the Bloomberg office. He was like, how are you? And
Speaker 1: I was like, I'm not. Well. First republic is my bank.
Speaker 1: He was like, okay, well, it's it's stressful enough to
Speaker 1: close on a new home in normal time, so I
Speaker 1: can't even imagine. Yeah, but oh so we closed. We
Speaker 1: rushed it, and we closed in front. Rushing is not
Speaker 1: a good thing, obviously, but in this case, I think
Speaker 1: it's okay to make an exception. So it's closed, it's done.
Speaker 1: It's good as a Friday night. Yeah, but you know
Speaker 1: even our guests on the podcast this week, I told
Speaker 1: because I couldn't help myself but to to to tell
Speaker 1: him about all my troubles. When I was talking to
Speaker 1: him last week and I told him, I was like, oh,
Speaker 1: I have this mortgage pending with the First Republic, And
Speaker 1: all he said back was oh, And then we never
Speaker 1: spoke again, which was not a good sign of confidence.
Speaker 1: I thought you were going to be looking for a
Speaker 1: couch to crash rone. Oh my gosh, stop it, Oh
Speaker 1: my gosh. No. But maybe maybe our guests can explain
Speaker 1: why he just left me hanging like that when I
Speaker 1: was looking for reassurances. I want to bring in Steve Sausnick,
Speaker 1: chief strategists at Interactive Brokers. Thanks so much for joining us.
Speaker 1: It's great to be here, Valdona. Great to be here, Mike.
Speaker 1: If just in my own defense, I figured, if I
Speaker 1: had nothing constructive to say, and I could sort of
Speaker 1: sense the nervousness even via the via the interview, you know,
Speaker 1: the IB messages, I figured it was best not to
Speaker 1: say anything. But fortunately it worked out because I really
Speaker 1: had no idea what would happen. I think nobody knows.
Speaker 1: But and you did the opposite of what Mike did.
Speaker 1: Mike would find really bad stories and then copy paste
Speaker 1: the worst parts of people panicking, and he would send
Speaker 1: them to me highlighted with the worst parts. And I'm
Speaker 1: sure you already saw this, but just FYI, you better
Speaker 1: start double apping at, which is a new word. I
Speaker 1: learned people with pending mortgages at First Republic were applying
Speaker 1: for other mortgages double apping, they call it. Yeah. I
Speaker 1: was like, Phildoni better, why aren't you double lapping? But
Speaker 1: hey came through. Hey, yeah, you know, shout out to
Speaker 1: my banker, Kyle. One thing I was going to say
Speaker 1: was already too late because once you'd already closed was
Speaker 1: once they got the lifeline, you figured you got a
Speaker 1: three to four month window because well I figured they're
Speaker 1: not going anywhere for a while, They're not going immediately out,
Speaker 1: and uh but you know, not knowing how long, not
Speaker 1: knowing how far along you are in the process. I
Speaker 1: just you know, if I don't have anything helpful to say,
Speaker 1: it's best not to say. And I would also assume,
Speaker 1: you know, if if you're if you're getting a mortgage
Speaker 1: at you know, I know you got a pretty good rate,
Speaker 1: but at any rate sort that's sort of a perfect
Speaker 1: prevailing market rate or close to it. They're gonna want
Speaker 1: to close on that, regardless of the buildings on fire,
Speaker 1: I would think, you know at this point, So there's that, okay. So, Steve,
Speaker 1: the reason I was talking to you last week and
Speaker 1: some of my teammates is because we've been asking people
Speaker 1: where were you in two thousand and eight and what
Speaker 1: were some of the lessons learned that you can apply
Speaker 1: to today? And obviously we're getting a ton of comparisons
Speaker 1: to that period of time. I think Jonathan Pharaoh from
Speaker 1: Bloomberg TV said something just to put it a bit
Speaker 1: more in perspective, because maybe it's sort of like panicky
Speaker 1: to make comparisons to two thousand and eight at this point.
Speaker 1: So he said something like, you know, it's like saying,
Speaker 1: oh I broke my foot. It really hurts, but it's
Speaker 1: all right. It's not as bad as like that time
Speaker 1: I got shot, you know, So like, can you can like,
Speaker 1: is it warranted at this point to be making those comparisons,
Speaker 1: and maybe you can tell us about some of those
Speaker 1: lessons learned from two thousand and eight to that you're
Speaker 1: applying to today. It's not unwarranted. You know the problem
Speaker 1: is we're always looking for a historical precedent, and you know,
Speaker 1: it behooves us to think about what paradigm because we
Speaker 1: all need to think in terms of some sort of paradigm.
Speaker 1: What paradigm is most is most like what we're seeing. Well,
Speaker 1: the last bank crisis, you know that we that we know,
Speaker 1: you know that really took hold was in two thousand
Speaker 1: and eight. We're not there yet. We're not at that
Speaker 1: full flat and I hope we don't get there. Let
Speaker 1: me be very clear. We're not at the point where
Speaker 1: things you know, have really begun to metastasize. And I
Speaker 1: do think because we've set up some firewalls systemically, you know,
Speaker 1: Dodd Frank and and and you know, some of the
Speaker 1: um exotic products that cause the last crisis are not
Speaker 1: really as prevalent. We're not. You know, subprime mortgages UM
Speaker 1: are not are not a thing this time. I assume
Speaker 1: you went through all kinds of nice credit checks to
Speaker 1: get your mortgage bill, Donna. You know they weren't just
Speaker 1: handing them out. Banks this time around have not been
Speaker 1: using credit to fault swaps to substitute for permanent capital
Speaker 1: that sort of thing. So so it is different. There's
Speaker 1: a lot so far the banks that have come out
Speaker 1: under crisis it's a little more straightforward. I mean, we'd
Speaker 1: silver Gate and the Culprit there as crypto as part
Speaker 1: of so of the ongoing crypto troubles, which you know
Speaker 1: you can speak to better than I can. But then
Speaker 1: you had SBB, which you know, we all know the
Speaker 1: story there. It's a classic mismatch. It's really they had
Speaker 1: too much. They had too many deposits that they couldn't
Speaker 1: actually loan out in sort of an efficient way, but
Speaker 1: they kept taking them in any way, and so that
Speaker 1: was sort of a plain vanilla type of a problem.
Speaker 1: Really duration risk, which always is a risk for banks.
Speaker 1: You know, along the way you had Signature Bank, which
Speaker 1: you know was not only a little bit of crypto
Speaker 1: and a little bit of they seem to have their
Speaker 1: finger in every sort of odd pot, you know, oddball
Speaker 1: place in the banking system, taxi loans, etc. Etc. And
Speaker 1: then of course Credit Squeeze, which has been choose my
Speaker 1: words carefully, they've been under some stress for first quite
Speaker 1: some time, love me put it that way, and so
Speaker 1: that's a nice way to put it. So in that sense,
Speaker 1: we're not at the level where you started to work,
Speaker 1: where we started to worry about banks like City Group
Speaker 1: and Deutsche Bank and things like that, although I guess
Speaker 1: Credit suieces analogous to Deutsche Bank and UBS, which ironically
Speaker 1: had its own issues back then and is now the acquirer.
Speaker 1: So there's definitely you know, history. They say history doesn't repeat,
Speaker 1: but it often rhymes, and I think there's there's a
Speaker 1: certain rhyme to it. But we're not there yet, and
Speaker 1: I certainly hope we don't get there. But so, I mean,
Speaker 1: I was at that point my responsibility was making markets
Speaker 1: and being a specialist in bank options, and so that
Speaker 1: was a very it was a very challenging time. I
Speaker 1: do think we actually, I will say we did. We
Speaker 1: did rather well then I you know, I know that's
Speaker 1: really counterintuitive, and especially when systemic risk is a foot. Um.
Speaker 1: But the thing that really got us on the right
Speaker 1: foot was almost a random conversation I had Yeah tell
Speaker 1: us about this because we talked about this, and UM,
Speaker 1: I want to give credit to Katie Garfield who originally
Speaker 1: asked you this question and you told this story, so
Speaker 1: if you wouldn't mind, not at all, we you know,
Speaker 1: we're in a we're in a small office building in Greenwich,
Speaker 1: and you know, you park in the garage underneath because
Speaker 1: you know that's everybody commutes by car because it's Connecticut. UM.
Speaker 1: And so you know, get in the elevator and there's
Speaker 1: Thomas Patterfie who founded the firm and UM, you know,
Speaker 1: whom I'm sure the listeners are familiar with. UM. Get
Speaker 1: in the elevator. UM. You know what's new? UM, And
Speaker 1: you know Thomas's Thomas is not a man who's big
Speaker 1: on small talk. So it's it's you know, that was
Speaker 1: I think more. You know, I took that as a
Speaker 1: business related question rather than you know, tell them about
Speaker 1: you know, tell them about the kids and stuff. And
Speaker 1: I said, you know what's really interesting to me is UM,
Speaker 1: this story that the story that that that I'm reading
Speaker 1: this morning about how bear Stearns may have as much
Speaker 1: as twenty billion in losses at some of their hedge funds.
Speaker 1: And he said twenty billion. I said, I said, no,
Speaker 1: that's that's the number that's being thrown around. I don't,
Speaker 1: you know, I obviously I don't know if it's one
Speaker 1: hundred percent true, but I trust I trust the reporting
Speaker 1: um and he said, how big is you know? What's
Speaker 1: their market cap? And I said, I think about twenty billion.
Speaker 1: Now at this point, it's only like a it's only
Speaker 1: like a four story building. So we're out of the
Speaker 1: elevator at this point, walking down the hall um, you know,
Speaker 1: and I said it, I think it's about twenty billion
Speaker 1: ish and he looks at me. He said, he are
Speaker 1: you telling me bear Stearns is broke? And I said,
Speaker 1: I wasn't going to put it that way. But now
Speaker 1: that you you know this, this is why Thomas is.
Speaker 1: You know this why Thomas is the success he is. He's,
Speaker 1: you know, because he sees right through these situations. I said,
Speaker 1: I I guess I am, aren't I? And he looked
Speaker 1: at me and he said, don't sell any puts on
Speaker 1: banks until you hear until you hear from me otherwise,
Speaker 1: And that was that was probably you know, I don't
Speaker 1: think I heard from a motherwise for about a year
Speaker 1: and a half. But which is not to say I
Speaker 1: never sold a put. It's impractical. You can't do that
Speaker 1: as a market maker. But what it means is don't
Speaker 1: be a net seller puts. If you sell them, replace them,
Speaker 1: adjust the models so that we are not the best
Speaker 1: offer on them. And one of the interesting features that
Speaker 1: came out in two thousand and eight was because credit
Speaker 1: to fault swaps were pretty new, and really, you know,
Speaker 1: I believe that every new financial innovation gets a real
Speaker 1: world test, and some of them pass, and some of
Speaker 1: them fail, and some of them get rejiggered as a
Speaker 1: result of it. And that was credit to fault swaps
Speaker 1: real world test, and they were being used in inappropriate
Speaker 1: ways and the market wasn't ready for a full scale
Speaker 1: test of credit default of the how they work. But
Speaker 1: the logical hedge if you're trading credit to fault swaps
Speaker 1: is to buy long term out of the money puts
Speaker 1: on equities. And so the big trade there was people
Speaker 1: buying whatever the lowest strike leap put was on insert
Speaker 1: bank name here, because that would be you know, if
Speaker 1: I had sold credit to fault swaps on um Lehman Brothers.
Speaker 1: You know, the bond. Because of the way a capital
Speaker 1: structure works, the bonds bonds go bad before stocks. And
Speaker 1: I know that's an issue here with credits WEE and
Speaker 1: the Coco bonds, etc. We'll get it. You know, I'm
Speaker 1: not a restructuring expert. My brother actually is you know,
Speaker 1: I haven't gotten a straight answer at it. I haven't
Speaker 1: asked him actually how that all is working out. But um,
Speaker 1: but what happens is, you know what happened there is
Speaker 1: so if the bonds are going to go bad, well
Speaker 1: then the stock is going to go bad. The stock
Speaker 1: is going to go worse. So um, so people were
Speaker 1: really clamoring for those So it just basically kept ratcheting
Speaker 1: up that volatility and kept ratcheting it up and and
Speaker 1: but as a result, we went into this um and
Speaker 1: stayed into it pretty you know, pretty much on on
Speaker 1: a decent footing um, which is not to say there
Speaker 1: weren't hiccups and accidents and everything else. As a market maker,
Speaker 1: you you you sort of expect that you're going to
Speaker 1: have your bad days and your bad weeks, and you
Speaker 1: know you're even your bad months, but you keep tight
Speaker 1: risk parameters and over time, um, if you're doing it right,
Speaker 1: it pays off. You know. You you you collect a
Speaker 1: lot of change along the way, and sometimes you you know,
Speaker 1: sometimes you make pennies and give back dollars, but you
Speaker 1: have to manage the dollars that you give back and
Speaker 1: We fortunately were able to um not give back to dollars.
Speaker 1: And those days we ran pretty much a we always
Speaker 1: pretty much did, ran a long volatility UM model. Just
Speaker 1: that was the way we traded. It could be expensive UM.
Speaker 1: A lot of a lot of people don't do that UM.
Speaker 1: But in an era where volatility was constantly UM, constantly
Speaker 1: rising more or less UM, and skew was getting extraordinarily steep,
Speaker 1: it was. It was the right It worked for us,
Speaker 1: and we were we were in a good place at
Speaker 1: the right time. Something to be said for taking the
Speaker 1: elevator ride with the boss. I guess this is a
Speaker 1: good argument for everyone getting back into the office. I
Speaker 1: guess I say, yes, I'm working for a moment, but
Speaker 1: big picture wise too, I'm thinking about the difference in
Speaker 1: the reaction function from the government and the central banks
Speaker 1: to this occasion versus two thousand and eight. Yeah, I'm
Speaker 1: thinking back to that original vote. I think it was
Speaker 1: in the House on the TARP bill. There was a
Speaker 1: lot of optimism in the market that, of course they're
Speaker 1: gonna pass this bill, the TARP build to in chect
Speaker 1: capital into all the biggest banks, and it failed on
Speaker 1: the first vote, and the market just you know, went
Speaker 1: down instantly in a big way. I forget the exact numbers,
Speaker 1: but this response to me seems much quicker, much more
Speaker 1: focus and um targeted and sort of able to put
Speaker 1: out the fire a lot quicker. Is that is that
Speaker 1: your impression too? Absolutely? Yes, yeah. Once you know, they
Speaker 1: were writing the playbook in two thousand and eight, and
Speaker 1: I think to a certain extent they've been using that playbook,
Speaker 1: particularly in twenty twenty, and they're using it now, um,
Speaker 1: you know, and that was essentially monetary and fiscal shock
Speaker 1: and awe, and I think you know, in two thousand
Speaker 1: and eight, Um, you know, remember there was the you know,
Speaker 1: they ridiculed helicopter ben um, but that actually he wasn't wrong,
Speaker 1: you know, and and the Nobel Committee eventually agreed. But
Speaker 1: that was you know, real world test at one of
Speaker 1: his theories, which was essentially dropped money out of helicopters
Speaker 1: in the time of a crisis. Um. And I think
Speaker 1: now they've realized, well it works, um. And that was
Speaker 1: you know, and that was that was why it had
Speaker 1: worked during COVID, and that really wasn't much complaint about
Speaker 1: what the FED was doing. And then it was certainly
Speaker 1: you know, the fiscal bills were generally passed along bipartisan
Speaker 1: lines um, so there wasn't. So by now we sort
Speaker 1: of we're going to use that playbook, which I think
Speaker 1: is a good thing. That's that's kind of the that's
Speaker 1: that means we're actually learning from our you know, from
Speaker 1: our efforts you know, societally. Now we can argue to
Speaker 1: what extent it's appropriate. We can you know, we can
Speaker 1: certainly question whether there was moral hazard in the way
Speaker 1: they um in the way they guaranteed all deposits sort
Speaker 1: of with the stroke of a pen um at at
Speaker 1: silic at Silicon Valley Bank, and and and who benefited
Speaker 1: from that. I mean, you know, we're going to be
Speaker 1: arguing about this for a while. And of course we're
Speaker 1: still you know, with the FED meeting yesterday, we're still
Speaker 1: dealing with the idea of did the Fed and the
Speaker 1: and the you know, and the and the and Congress,
Speaker 1: the fiscal authorities overdo it in their response to COVID.
Speaker 1: I mean, these are that'll be that'll be the stuff,
Speaker 1: you know, when when Vildonna's my age, she'll be having
Speaker 1: that discussion. She'll be having that discussion with the in
Speaker 1: a couple of years, right, you got a waste to
Speaker 1: go to your catch up to me. Um, but but
Speaker 1: that's really the you know, she'll still be talking about
Speaker 1: her mortgage, I think, Steve. So she'll still be telling
Speaker 1: that story. Yeah, yeah, well that's you know mortgage. Well,
Speaker 1: you know it added twenty years to my life just
Speaker 1: from yeah, Steve. One thing. Um, there's almost this knee
Speaker 1: jerk reaction in the market, I think, to this notion
Speaker 1: of the Fed's balance sheet. You know, a bunch of
Speaker 1: banks went to the discount window at the FED and
Speaker 1: borrowed I I don't know what the exact number is
Speaker 1: at the moment, but call it hundreds of billions of dollars.
Speaker 1: The thinking in many quarters is that, well, that's almost
Speaker 1: like quantitative easing, or at least a reversal of the
Speaker 1: quantitative tightening tightening that the central bank was doing. Sure,
Speaker 1: if that's the same the appropriate way to look at it,
Speaker 1: You know, the FED increasing its balance sheet by extending
Speaker 1: discount window loans versus buying treasuries and mortgage securities. Is
Speaker 1: that the wrong way to think about that? Do you
Speaker 1: think it's interesting because I've had this exact debate with
Speaker 1: my colleague Jose Torus, who was an economist and you
Speaker 1: know his his He pointed out after the last h
Speaker 1: dot four dot one report, which is something I actually,
Speaker 1: you know, in a nerdy way, look a look at
Speaker 1: every Thursday afternoon. But but you're even Mike, You're probably
Speaker 1: not old enough to remember on Thursday afternoons everybody stopped
Speaker 1: to wait for the M two report. When I started
Speaker 1: out in the business, you know, that was the thing
Speaker 1: everybody was looking forward to. So so we've had this debate,
Speaker 1: and you know, he said, well, look, you know, the
Speaker 1: deposits went up by I think it was three hundred
Speaker 1: billion or something, which which um, you know, would eradicate
Speaker 1: essentially the QT that's done year to date. Meanwhile, though
Speaker 1: they did continue to let securities roll off the balance sheet.
Speaker 1: So I think that the differentiating factor here is the
Speaker 1: deposit stuff is meant to be a band aid, um,
Speaker 1: whereas the QT is meant to be more of a
Speaker 1: permanent shift in the way the Fed is is approaching that,
Speaker 1: you know, tightening and easing of their balance sheet. But
Speaker 1: they use their balance sheet and a crisis, and so
Speaker 1: I don't think it's apples to apples, but certainly it
Speaker 1: was they did throw money into the system. You know,
Speaker 1: they need to do it to keep lubricating the gears.
Speaker 1: I just think it's a little bit in theory. This
Speaker 1: three hundred billion can roll itself off. I don't think
Speaker 1: it has yet. Well, well, we'll know this afternoon, I guess.
Speaker 1: But I think as long as their stress in the
Speaker 1: banking system, it's going to the FED. The feed is
Speaker 1: you know, is and can be the guaranteur of you know,
Speaker 1: the lender of last resort. And it's to me, this
Speaker 1: is one of the fascinating things. Right we've talked about
Speaker 1: the we we haven't yet, but the Fed's dual mandate
Speaker 1: is stable prices and full employment. Yet it's very clear
Speaker 1: that the fed's real job and why they were created,
Speaker 1: was to maintain the safety and stability of the banking system. Now,
Speaker 1: without a safety and stability the banking system, you can't
Speaker 1: have stable prices and full employment. But their real mandate
Speaker 1: is sort of unspoken, and I think that's but it's
Speaker 1: important that that mandate really comes into play when there's
Speaker 1: a crisis going on, and that's what we're seeing now. Steve.
Speaker 1: I'm curious because everything keeps changing so much, so fast.
Speaker 1: How you're thinking has evolved since the start of the year.
Speaker 1: And obviously we even had some economists at some of
Speaker 1: the big banks coming out before this week's FED meetings
Speaker 1: saying they're not going to be hiking rates, and obviously
Speaker 1: they're raised by twenty five basis points. So how are
Speaker 1: you thinking about all of the changes? Everything we've seen,
Speaker 1: everything we've heard from the FED, the bank turmoil, everything,
Speaker 1: and how it's you're thinking about what we might be
Speaker 1: seeing for the remainder of the year has evolved. Thinking
Speaker 1: really hasn't changed all that much. You know. I'm still
Speaker 1: of the belief that we're in a period where if
Speaker 1: the FED is raising rates and if the FETE is
Speaker 1: shrinking their balance sheet, things are things are going to
Speaker 1: break and you're going to have accidents. Well we did,
Speaker 1: you know? And I think that the problem here is
Speaker 1: that I'm going to take a little victory lot because
Speaker 1: literally what I wrote yesterday was that, um, let me
Speaker 1: just pull it up, was that my base case was
Speaker 1: for a twenty five basis point hike. The FED doesn't
Speaker 1: typically surprise market. No, no hike would be considered a
Speaker 1: surprise if they stood pat with people would worry about
Speaker 1: what's wrong. Um, you know that, but but you now
Speaker 1: have the dot plot. I won't go into the whole thing,
Speaker 1: but basically then said the dot plot was going to
Speaker 1: be relatively unchanged, which was very much at odds with
Speaker 1: FED funds futures, and that um he would play down
Speaker 1: concerns about, you know, the banking crisis metastasizing, which would
Speaker 1: actually potentially disappoint people. I think, you know, I think
Speaker 1: that all fits, and I think that's still what we
Speaker 1: see now. We saw sort of the way that zero
Speaker 1: dated options can cause, you know, microverse of volatility. That's
Speaker 1: a new feature. It's it's not as dire as I
Speaker 1: think a lot of other people I believe it is.
Speaker 1: I really don't think it's a stemic. I just think it's,
Speaker 1: you know, buckle up and get used to it. But
Speaker 1: I still think this is the issue, and right now
Speaker 1: what I'm wrestling with our two basic things. One thing
Speaker 1: I didn't really foresee was that the January effect would
Speaker 1: be quite so lasting. I think we're still seeing the
Speaker 1: January effect. I think the risk on move that we're
Speaker 1: seeing occurred largely because some of your biggest, most you know,
Speaker 1: most followed, most popular stocks both within individuals and institutions
Speaker 1: got the crap kicked out of them in twenty twenty two,
Speaker 1: and that led to a lot of tax last selling
Speaker 1: in December, which then made it even worse. They got
Speaker 1: deeply oversold. They were the first to bound as well
Speaker 1: they should have. And I think that that bounce then
Speaker 1: turned into a full fledged risk on rally, which I
Speaker 1: didn't actually foresee the amount of the legs that this
Speaker 1: would have. And I think that's what we're wrestling with now,
Speaker 1: and I think that you know, we're still seeing it.
Speaker 1: You know, we're also getting though tremendous concentration to you know,
Speaker 1: Apple and Apple and Microsoft or together just those two
Speaker 1: stocks are about thirteen percent of SMP right now and
Speaker 1: about twenty five percent of of the qqqs. Nuts. You know,
Speaker 1: I think back, you know, you want a bigger historical precedent.
Speaker 1: Certainly I wasn't active then, but I've read up on
Speaker 1: it was the nifty fifty or the one decision stocks
Speaker 1: back in the sixties and those. You know, Eventually, every
Speaker 1: time you've had narrowing leadership, it tends to work out
Speaker 1: somewhat poorly um and end in a bad way. And
Speaker 1: I'm not I don't know. I'm not going quite so far.
Speaker 1: But but if but if we're that top heavy in
Speaker 1: two stocks, that's not the it's not a great sign. Um.
Speaker 1: But another thesis of mind that I've really been laying
Speaker 1: out recently is that I think it's generational. Um. And
Speaker 1: I think, you know, we can debate that with different
Speaker 1: generations here on this podcast. UM. I think if you
Speaker 1: were not around in two thousand and eight, Um, well,
Speaker 1: if you were around in two thousand and eight, you're
Speaker 1: you're you're wary because you've you've been through this before.
Speaker 1: And as we said, it's not the same, it's not
Speaker 1: as bad yet, but it could. It's too early to
Speaker 1: give the all clear. It could get worse before it
Speaker 1: gets better. You know. My theory, which I've grossed out
Speaker 1: two of your colleagues, but I'm going to say it
Speaker 1: again anyway, UM, is you know, if you see one,
Speaker 1: if you see one cockroach, there's probably plenty more hiding
Speaker 1: out of hiding, just out of sight. Um. And so
Speaker 1: I think the older crowd, those who've those who've been
Speaker 1: through a crisis like this, have that in the back
Speaker 1: of their minds. And I was out to dinner with
Speaker 1: some friends of mine a week ago. Um, you know,
Speaker 1: and that was sort of the theory. You know, what
Speaker 1: else is lurking out there? If you're younger, you've only
Speaker 1: really ever lived through a period where the FED has
Speaker 1: been your friend and where there's been no inflation. You know.
Speaker 1: That's the part of that's the part of my main
Speaker 1: thesis that that I think is still has to be
Speaker 1: worked out, is that they're not the FED is at
Speaker 1: every given turn, they're they're telling you that they're fighting
Speaker 1: inflation first, and Powell told us that yesterday, and yet
Speaker 1: and yet there's a certain amount of disbelief, and there's
Speaker 1: certainly a big amount of disbelief in the FED funds futures,
Speaker 1: which which I think we could bat'll merit its own
Speaker 1: part of the conversation. But you know, generationally, you look
Speaker 1: at anything that might look as the FED coming into
Speaker 1: the market as Fed, you know, Fed easing this is good,
Speaker 1: and like you said, it's it's tough to say it's
Speaker 1: exactly the same thing. The Fed's not necessarily easing for
Speaker 1: the best reasons, and it's not clear that they're really easing,
Speaker 1: especially if they're raising rates at the same time. You know,
Speaker 1: any investor who's sort of under forty, has never been
Speaker 1: in a period where the FED has not been a tailwind,
Speaker 1: with the exception of like a few months here and there,
Speaker 1: And that's a very It's so I think you're getting
Speaker 1: two very different mindsets at work. Um, not a bad thing,
Speaker 1: but but it'll have to get resolved, you know, when
Speaker 1: we find out if it gets in favored of the
Speaker 1: younger set or the older set. And the problem also
Speaker 1: is none of us, unless you're you know, unless you're
Speaker 1: sort of in your seventies or older, have been investing
Speaker 1: in a period where inflation was problematic. And so no
Speaker 1: one knows what that playbook is like firsthand. You know,
Speaker 1: I can talk about what the playbook was like firsthand
Speaker 1: in twenty twenty, in two thousand and eight. I can't
Speaker 1: talk about what the playbook was like in nineteen seventy eight,
Speaker 1: nineteen seventy nine. And the historical data is not as
Speaker 1: complete for back then. You know, it's it's hard to
Speaker 1: even as if you're a quant to go back and
Speaker 1: you know, parse it and pick it apart the way
Speaker 1: you do with modern data. One note to listeners. We
Speaker 1: are recording this episode on Thursday, March twenty third, So
Speaker 1: keep that in mind when any references to yesterday and today.
Speaker 1: In case I don't know, Voldana, maybe some people are
Speaker 1: listening to this on Saturday night and they're having a
Speaker 1: party and this is their soundtrack. I listened to podcast
Speaker 1: on Saturday night. Yeah, yeah, I'm sure you do. But Steve,
Speaker 1: I always love to sort of cut to the chase
Speaker 1: here and get to the well. Man, Just tell me
Speaker 1: what to do with my money right now? What are
Speaker 1: you advising? What's the best way to position right now
Speaker 1: the markets? I mean, you've got money market funds that
Speaker 1: are finally sporting a yield that's three or four percent?
Speaker 1: You know, is it cash? Is it you're excited about
Speaker 1: long duration bonds? Is it defensive stocks? But what would
Speaker 1: you be doing right now? I've tended toward risk averse,
Speaker 1: which has meant that I've missed, you know, a lot
Speaker 1: of the NASDAK move higher. I don't feel like I've
Speaker 1: missed too much in terms of the SMP, you know,
Speaker 1: in the SMP and the broader stuff. Let's go back
Speaker 1: and think of what the theses have been for investing
Speaker 1: over the last few years. Number One, don't fight the FED.
Speaker 1: So what does that mean right now? Does that mean
Speaker 1: loading up on risk? No, because the FED is not
Speaker 1: your friend at this point, and whatever market friendly things
Speaker 1: they may be doing now, it's crisis response, not true stimulus.
Speaker 1: There is no alternative, Yes, there is, now there is.
Speaker 1: I think we're in. The situation we're in is because
Speaker 1: for so long there was no alternative. And so money,
Speaker 1: you know, liquidity, like financial liquidity, is like real liquids.
Speaker 1: It finds the lowest level. And we're still working through
Speaker 1: a lot of liquidity that found the lowest level during
Speaker 1: you know, during twenty twenty one, etc. Is the economy.
Speaker 1: The economy is generally robust. Um, you know. I think
Speaker 1: we can argue whether whether we're going to come in
Speaker 1: for a soft landing or hard landing. My gut tells
Speaker 1: me this probably doesn't end all that well. But the question,
Speaker 1: of course is when, and the question is how much. Now.
Speaker 1: I think it's great that on the job front um
Speaker 1: things things are going along swimmingly. It's also not so terrible,
Speaker 1: by the way, if you have a job to see
Speaker 1: the fact that wages are are strong, Um, you know,
Speaker 1: so it is that that, let me preface it that way.
Speaker 1: But I think the problem you have now is you've
Speaker 1: got a lot of you really have this this dissonant
Speaker 1: factor going on. You've got stock markets happy because they
Speaker 1: see the idea that rates might come down, But you
Speaker 1: have to ask yourself, why are they going to come down?
Speaker 1: The Fed, as we've mentioned in the dot plot, the
Speaker 1: FED governors who have been saying all along, we don't
Speaker 1: see any rate hikes through the end of the year,
Speaker 1: pretty much said the same thing yesterday. The dot plot's
Speaker 1: telling us, you know, rate cuts, rather, we're not cutting
Speaker 1: rates by the end of the year. Yet at one
Speaker 1: point at the end of the day, late in the day,
Speaker 1: it's bounced back a little bit. The FED funds futures
Speaker 1: for you know, for the for the January twenty four meeting,
Speaker 1: we're showing three ninety nine. Yeah, that's a lot of cuts.
Speaker 1: So ask yourself, what do we have to do to
Speaker 1: get those cuts? More cockroaches? Well, that's kind of my worry.
Speaker 1: Is nothing good unless we magically beat inflation, in which
Speaker 1: case I still don't think the FED is going to
Speaker 1: be racing to cut rates. You know, if if you've
Speaker 1: just won the if you've just won the war, you're
Speaker 1: not gonna start a new one, you know, which which
Speaker 1: is what rate cutting would do if you just sort
Speaker 1: of arbitrarily said, you know, let me just say this.
Speaker 1: My pause does not mean pivot, you know, under normal circumstances.
Speaker 1: So so otherwise, what we would need to be is
Speaker 1: some sort you either have to have some sort of
Speaker 1: financial accident or some sort of recession, neither of which
Speaker 1: is particularly market friendly. So that to me is a
Speaker 1: huge cognitive dissonance out there in terms of in terms
Speaker 1: of what what's being priced in certain places, what's being
Speaker 1: priced in in order to justify, you know, the rallies
Speaker 1: we're having. If stocks are supposed to be looking six
Speaker 1: to twelve months down the road, what are you looking at?
Speaker 1: And that's that's the tricky part right now. Steve Sasnik,
Speaker 1: chief strategist at Interactive Brokers. All right, Steve, Oh, we
Speaker 1: can't let you go just yet. As a veteran of
Speaker 1: the show, you know, we've got to hear about the
Speaker 1: craziest thing you saw in markets. Well, Dotta, I have
Speaker 1: a funny feeling we're all going to pick the same
Speaker 1: crazy thing. So I'm gonna scoop us all and go first.
Speaker 1: How about that? Yes, we often talk about these futures
Speaker 1: contracts in the market, oil, soybeans, corn, whatever it is.
Speaker 1: You don't often think about what it means to take
Speaker 1: the livery of those contracts. And at the London Metal
Speaker 1: Exchange they had a little bit of an issue on
Speaker 1: that front. They announced they had canceled nine nickel contracts
Speaker 1: worth about one point three million dollars after discovering quote
Speaker 1: unquote irregularities. Now you know what the irregularities were. When
Speaker 1: they went and looked at these bags of nickel, it
Speaker 1: was just a bunch of bags of rocks. You we're
Speaker 1: going to go with this story, which is why I
Speaker 1: one of my favorite stories, uh ever, of JP Morgan
Speaker 1: turned out to be the owner of I think at
Speaker 1: least some of these nickel contracts. You know, whenever there's
Speaker 1: a Nickel's crazy nickel story in the market, you can
Speaker 1: on JP Morgan and the LM being at the center
Speaker 1: of it. So I don't think they've figured out why
Speaker 1: there were bags of rocks instead of bags of nickels.
Speaker 1: But I'm dying to know. I wonder if I had
Speaker 1: something to do with that short squeeze. I would love
Speaker 1: to know who've found it, Like we found the bags
Speaker 1: of rocks. Yeah, I don't know. There's there's so much
Speaker 1: more we need to know about this period. Absolutely, I
Speaker 1: mean the idea well, first of all, I mean, just
Speaker 1: think of all the craziness. You know, when when nickel
Speaker 1: prices were going insane. It would behoove some scammy person
Speaker 1: to say, you know what if I just delivered about
Speaker 1: what if I just you know what if I sell
Speaker 1: short and you know, sell them and I got nothing
Speaker 1: to live for, so you know, maybe maybe no one
Speaker 1: will catch me and I wouldn't do it. Someone had
Speaker 1: to sneak into this warehouse removed I don't know, or
Speaker 1: maybe it came from the spire. Who knows. We'll have
Speaker 1: to stay tuned and see how this all resolves itself.
Speaker 1: Hopefully they figure out what happened. But I don't know.
Speaker 1: One of my favorites. That's a good one. What do
Speaker 1: you know you were gonna go with it? Okay? Mine
Speaker 1: is not markets related. Okay, this is seriously, I'll happily
Speaker 1: be a loser of this game this week because it
Speaker 1: has absolutely nothing to do with anything. It's just it's
Speaker 1: my favorite story of the week. It's a ninety year
Speaker 1: old tortoise named Mister pickles. He's the new dad of three,
Speaker 1: so he has three brand new tortoise babies and they're
Speaker 1: named Dill Gerkin and Hella penyol Gert. He's ninety years
Speaker 1: old and his wife is fifty three. I think why
Speaker 1: wife is a generous term. I just really like this story.
Speaker 1: And they're so small and extremely cute, and they can
Speaker 1: fit like in the palm of your hand. They're so tiny.
Speaker 1: All right, that's pretty good. You can't, I mean, nobody
Speaker 1: can see. I'm looking at pictures. There's I'm sure there's
Speaker 1: a market for I don't know, turtle meat, so maybe
Speaker 1: maybe that's but oh my god. They're an endangered species.
Speaker 1: And one of the reasons that Galapagos turtles are endangered
Speaker 1: is because there was a market for it. Because if
Speaker 1: you were sailing along and stuck in the Middle Pacific,
Speaker 1: they would let Galapagos in Spanish means tortoise, and they
Speaker 1: would land on the Galapagos islands, put a couple of
Speaker 1: tortoises on the boat. They didn't need much care and feeding,
Speaker 1: and you could feed your crew for months. That actually
Speaker 1: is it's it's just you know, see, we see where
Speaker 1: you brought the conversation, Mike. I know we were talking
Speaker 1: about nice little turtles and I should were on there. Sorry,
Speaker 1: these were This is how you become a chief strategist.
Speaker 1: By the way, if you you know, you need a
Speaker 1: meal on a boat, you know the Galapagos, Steve, Steve's
Speaker 1: got you covered, not anymore if they're endangered. I wouldn't.
Speaker 1: I wouldn't do that. How about you, Steve, what's the
Speaker 1: craziest thing you saw? I came with two because I
Speaker 1: figured one of you might beat me to the bag
Speaker 1: of rock story. So mine is that perhaps the best
Speaker 1: investment in markets right now is swag in defunct banks.
Speaker 1: You know, as someone I know who still has a
Speaker 1: Solomon Brothers rugby shirt and I think I have from
Speaker 1: my summer intern days in La Rothschild umbrella still m
Speaker 1: I know, from my default defunct securities firm swag And
Speaker 1: apparently if you had, you know, apparently there was some
Speaker 1: sort of credit squeeze hat that was very popular. Um
Speaker 1: that's going for good money and they're not even defunct.
Speaker 1: They're not even defunct, but SVB stuff, and so I think,
Speaker 1: you know, the ebayers are having some fun with the swag,
Speaker 1: and so that's I think that's financially market financial markets
Speaker 1: related enough. Now, that's pretty good. Yeah, no, yeah, In fact,
Speaker 1: I think that's been a consenter in the past, so
Speaker 1: it's it's always good to revisit that market. I once
Speaker 1: found an MF Global golf ball out on the course,
Speaker 1: and I've meant to throw that up on eBay, but
Speaker 1: I think I lost it. I have a country I
Speaker 1: have a country wide that I that I found, and
Speaker 1: I keep it in my golf bag just as a
Speaker 1: reminder of, you know, what can go wrong on the
Speaker 1: golf course too. It's a good metaphor. The takeaway at
Speaker 1: the end of all of the of this segment always
Speaker 1: is that it's good and it pays off to be
Speaker 1: a hoarder. That's right, that's right, that's right. I'm hoping
Speaker 1: one day my wife will listen and realize why I
Speaker 1: heard so much stuff around here. But hey, you know,
Speaker 1: take that free hat when you're at the conference, Vildanna,
Speaker 1: you never know, you never know. I should go through
Speaker 1: my crypto swag. Yeah, yeah, don't don't throw it out.
Speaker 1: Don't throw it, throw everything out. Steve Sasnick of Interactive
Speaker 1: Brokers always a pleasure to catch up with you, Steve.
Speaker 1: Thanks so much, my pleasure, My pleasure. Bill Donna, thank
Speaker 1: you so much for inviting me today. I can't remember.
Speaker 1: I can't believe how fast at the timeline I hope
Speaker 1: it went. It's fast for the listeners as it did
Speaker 1: for me sitting here. We'll catch you next time What
Speaker 1: Goes Up. We'll be back next next week and so
Speaker 1: then you can find us on the Bloomberg Terminal website
Speaker 1: and app, or wherever you get your podcasts. We'd love
Speaker 1: it if you took the time to rate and review
Speaker 1: the show on Apple Podcasts so more listeners can find us.
Speaker 1: And you can find us on Twitter. Follow me at Reaganonymous.
Speaker 1: Bill Donna Hirich is at Bildonna Hirich. You can also
Speaker 1: follow Bloomberg Podcasts at Podcasts. What Goes Up is produced
Speaker 1: by Stacy Wong. Thanks for listening, See you next time.