1 00:00:02,520 --> 00:00:15,840 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:18,440 --> 00:00:21,840 Speaker 2: Hello and welcome to another episode of the Odd Thoughts podcast. 3 00:00:22,000 --> 00:00:23,360 Speaker 2: I'm Tracy Alloway. 4 00:00:23,120 --> 00:00:24,320 Speaker 3: And I'm Joe Wisenthal. 5 00:00:24,600 --> 00:00:27,240 Speaker 2: Joe, it's my favorite time of year. It's August. 6 00:00:27,640 --> 00:00:29,840 Speaker 3: Well, I didn't know that. Why is it your favorite 7 00:00:29,840 --> 00:00:31,560 Speaker 3: time of year? I like August two. I love summer. 8 00:00:31,560 --> 00:00:32,360 Speaker 3: But what's your reason. 9 00:00:32,479 --> 00:00:34,880 Speaker 2: Well, actually it's exactly that. I love summer. 10 00:00:35,200 --> 00:00:36,840 Speaker 3: But this is why we get along. 11 00:00:37,600 --> 00:00:39,279 Speaker 2: There's an added flames say. 12 00:00:39,360 --> 00:00:42,400 Speaker 3: I don't like people who have favorite seasons of the summer. 13 00:00:42,479 --> 00:00:43,519 Speaker 3: I'm skeptical of that. 14 00:00:44,000 --> 00:00:45,440 Speaker 2: You know what I used to be. 15 00:00:45,520 --> 00:00:46,360 Speaker 3: I judge people. 16 00:00:46,560 --> 00:00:49,120 Speaker 2: Okay, that's fine. I used to be exactly like that. However, 17 00:00:49,200 --> 00:00:51,199 Speaker 2: I've found that as I've gotten older, I've kind of 18 00:00:51,280 --> 00:00:54,680 Speaker 2: come Maybe as I've gotten older and acquired a house 19 00:00:54,720 --> 00:00:57,840 Speaker 2: without air conditioning, I've also home to appreciate winter a 20 00:00:57,880 --> 00:01:02,080 Speaker 2: little bit more. Okay, I didn't actually mean to start 21 00:01:02,120 --> 00:01:04,960 Speaker 2: talking about the weather. But there's another reason I like August, 22 00:01:05,160 --> 00:01:07,600 Speaker 2: which is I feel like that's the month when weird 23 00:01:07,680 --> 00:01:09,720 Speaker 2: things in markets start to happen. 24 00:01:09,959 --> 00:01:13,959 Speaker 3: Yeah, August through October feels like that's the three month 25 00:01:14,080 --> 00:01:15,560 Speaker 3: stretch where anything can happen. 26 00:01:15,840 --> 00:01:19,240 Speaker 2: Yeah, and August especially, you know, people are on their 27 00:01:19,440 --> 00:01:24,200 Speaker 2: like mandated two weekly if you're a professional working at 28 00:01:24,240 --> 00:01:27,000 Speaker 2: a bank or something like that, you have to go 29 00:01:27,120 --> 00:01:29,640 Speaker 2: on leave for I think two weeks or something like 30 00:01:29,680 --> 00:01:33,759 Speaker 2: that every year. And there's lots of illiquidity in the market, 31 00:01:34,160 --> 00:01:37,480 Speaker 2: so you know, tiny little things can end up having 32 00:01:37,480 --> 00:01:39,840 Speaker 2: a big impact. And I feel like August is when 33 00:01:39,840 --> 00:01:43,840 Speaker 2: you get some of those strange market moves. And speaking 34 00:01:43,959 --> 00:01:47,680 Speaker 2: of strange market moves, or at least dramatic ones, in 35 00:01:47,840 --> 00:01:52,000 Speaker 2: recent days and weeks, we have seen some interesting stuff 36 00:01:52,000 --> 00:01:54,560 Speaker 2: happening in the market that has been different to the 37 00:01:54,680 --> 00:01:57,480 Speaker 2: pattern that has played out for the past year or 38 00:01:57,560 --> 00:01:58,560 Speaker 2: so totally. 39 00:01:58,600 --> 00:02:00,320 Speaker 3: First of all, we've had a little bit of weakness. 40 00:02:00,640 --> 00:02:03,240 Speaker 3: I've had a little bit of rotation that people are 41 00:02:03,240 --> 00:02:06,080 Speaker 3: talking about. Some of those red hot tech stocs have 42 00:02:06,160 --> 00:02:08,880 Speaker 3: come down. We're seeing a lot of moves on the curve. 43 00:02:09,040 --> 00:02:11,440 Speaker 3: At the time we're writing this, the tenure yield is 44 00:02:11,520 --> 00:02:15,320 Speaker 3: back below four percon So I was just saying in 45 00:02:15,360 --> 00:02:18,680 Speaker 3: the Odd Lots discord which people should go and subscribe 46 00:02:18,680 --> 00:02:22,160 Speaker 3: to and hang out, I literally said, this morning, macro 47 00:02:22,240 --> 00:02:23,600 Speaker 3: feels like it's kind of getting interesting. 48 00:02:23,639 --> 00:02:27,640 Speaker 2: Again absolutely, both macro and markets, I gotta say, And 49 00:02:27,720 --> 00:02:31,600 Speaker 2: there is this ongoing conversation about how much of what 50 00:02:31,720 --> 00:02:34,400 Speaker 2: is happening in markets at the moment is technically driven, 51 00:02:34,520 --> 00:02:37,960 Speaker 2: so you know, maybe some of those pod shops having 52 00:02:37,960 --> 00:02:42,880 Speaker 2: to cut some positioning versus people actually reacting to changes 53 00:02:42,919 --> 00:02:45,440 Speaker 2: in the macro outlook. And I should just say we 54 00:02:45,480 --> 00:02:48,440 Speaker 2: are recording this on August first, the day after the 55 00:02:48,480 --> 00:02:53,160 Speaker 2: Federal Reserve meeting, where as expected, they didn't cut interest rates, 56 00:02:53,200 --> 00:02:56,840 Speaker 2: but they certainly telegraphed an upcoming cut, So lots going 57 00:02:56,840 --> 00:02:57,560 Speaker 2: on there as well. 58 00:02:57,919 --> 00:03:01,160 Speaker 3: And the day before recording this day for non farm payrolls. 59 00:03:01,440 --> 00:03:03,600 Speaker 3: So by the time you were listening to this, we'll 60 00:03:03,600 --> 00:03:05,240 Speaker 3: know a little bit more about the labor market. 61 00:03:05,400 --> 00:03:08,320 Speaker 2: Yes, we will. So there's a lot going on. It's August. 62 00:03:08,400 --> 00:03:11,840 Speaker 2: There's the potential for even more stuff to happen, weird 63 00:03:11,880 --> 00:03:14,440 Speaker 2: stuff sometimes, And I have to say, when it comes 64 00:03:14,480 --> 00:03:18,960 Speaker 2: to diving into the intricacies of the market and what's 65 00:03:19,000 --> 00:03:22,200 Speaker 2: going on there, there's a person that I very much 66 00:03:22,320 --> 00:03:25,320 Speaker 2: like to speak to. We've had him on the show before. 67 00:03:25,639 --> 00:03:29,960 Speaker 2: It is Matt King, formerly of City Group, and he's 68 00:03:30,000 --> 00:03:34,519 Speaker 2: now started his own research shop. It is called Satory Insights, 69 00:03:34,520 --> 00:03:37,760 Speaker 2: and he is the founder and global market strategist over there. 70 00:03:37,800 --> 00:03:39,600 Speaker 2: So we're going to talk to Matt about what's going 71 00:03:39,600 --> 00:03:43,040 Speaker 2: on in markets, what the outlook is right now. Matt, 72 00:03:43,200 --> 00:03:45,120 Speaker 2: thank you so much for coming back on all thoughts. 73 00:03:45,600 --> 00:03:47,280 Speaker 4: Thank you for having me so much too kind. 74 00:03:47,920 --> 00:03:50,560 Speaker 2: Well, we are very excited to be speaking to you again. 75 00:03:50,800 --> 00:03:53,520 Speaker 2: There's a lot that's happened since we spoke to you 76 00:03:53,600 --> 00:03:57,680 Speaker 2: last I think it was in maybe in March of 77 00:03:57,840 --> 00:04:01,440 Speaker 2: last year. Talk to us about what's happened. So you've 78 00:04:01,480 --> 00:04:04,000 Speaker 2: set out on your own. You have this new thing 79 00:04:04,080 --> 00:04:06,440 Speaker 2: called Satory Insights. What are you doing over there? 80 00:04:07,080 --> 00:04:09,120 Speaker 4: I'm doing more or less what I was doing previously, 81 00:04:09,120 --> 00:04:11,240 Speaker 4: which is trying to explain what markets have done and 82 00:04:11,280 --> 00:04:13,480 Speaker 4: what markets are going to do, and generally doing it 83 00:04:13,560 --> 00:04:15,800 Speaker 4: in a rather different fashion from everybody else as far 84 00:04:15,840 --> 00:04:19,359 Speaker 4: as I can see. And I love your description of August. 85 00:04:20,000 --> 00:04:22,839 Speaker 4: In my experience, either nothing whatsoever happens or areas you say, 86 00:04:23,040 --> 00:04:25,880 Speaker 4: quite big stuff happens. But I think that the biggest 87 00:04:25,880 --> 00:04:28,159 Speaker 4: puzzles that I see people wrestling with at the moment 88 00:04:28,200 --> 00:04:31,240 Speaker 4: are are, frankly, making sense of what markets have done 89 00:04:31,360 --> 00:04:34,359 Speaker 4: year to date and therefore, and that's the context in 90 00:04:34,400 --> 00:04:36,680 Speaker 4: which you need to see the change now, because on 91 00:04:36,720 --> 00:04:38,640 Speaker 4: the one hand, the other economy is much stronger than 92 00:04:38,640 --> 00:04:41,640 Speaker 4: everyone was imagining, But on the other hand, markets have 93 00:04:41,720 --> 00:04:44,080 Speaker 4: really done much much better. And yeah, there's the whole 94 00:04:44,080 --> 00:04:46,839 Speaker 4: AI story, but it sort of feels as though it's 95 00:04:46,960 --> 00:04:49,479 Speaker 4: more than that. And I think the biggest puzzle is 96 00:04:49,560 --> 00:04:53,599 Speaker 4: why financial conditions have eased so much even as we've 97 00:04:53,600 --> 00:04:57,200 Speaker 4: had ongoing QT, even as we've had rates at twenty 98 00:04:57,200 --> 00:04:59,279 Speaker 4: three year highs. And in fact, it was the main 99 00:04:59,279 --> 00:05:02,120 Speaker 4: thing I was missing in the FOMCA last night. Nobody 100 00:05:02,160 --> 00:05:05,200 Speaker 4: asked Jay Powell about how they considered this ease in 101 00:05:05,240 --> 00:05:07,920 Speaker 4: your financial conditions on one of the Bloomberg financial conditions 102 00:05:08,360 --> 00:05:10,840 Speaker 4: is just a couple of months ago we were showing 103 00:05:10,880 --> 00:05:13,200 Speaker 4: easier conditions than two thousand and seven, And I think 104 00:05:13,200 --> 00:05:15,719 Speaker 4: you need to get your head around what's been driving 105 00:05:15,800 --> 00:05:17,520 Speaker 4: all of that before you can then come back and 106 00:05:17,520 --> 00:05:19,840 Speaker 4: think about the outlook and what markets are doing at 107 00:05:19,839 --> 00:05:20,200 Speaker 4: the moment. 108 00:05:20,800 --> 00:05:24,960 Speaker 3: All right, what's the answer? Tell us the answer for 109 00:05:25,040 --> 00:05:27,720 Speaker 3: this date of financial conditions, because it does seem weird, 110 00:05:27,760 --> 00:05:29,800 Speaker 3: and I mean, I think we've probably been talking about 111 00:05:29,839 --> 00:05:32,160 Speaker 3: this for almost two years on the show, the surprise 112 00:05:32,839 --> 00:05:35,960 Speaker 3: that perhaps fed raid hikes and the slow wind down 113 00:05:35,960 --> 00:05:38,919 Speaker 3: of the balance sheet hasn't had at least here before 114 00:05:39,040 --> 00:05:40,440 Speaker 3: more of a deleterious effect. 115 00:05:40,839 --> 00:05:43,680 Speaker 4: So, at the risk of being cheeky, it's exactly that 116 00:05:43,800 --> 00:05:46,760 Speaker 4: same thing which I heard you say had been debound 117 00:05:47,480 --> 00:05:50,040 Speaker 4: on one of the previous episodes with one of your 118 00:05:50,080 --> 00:05:50,680 Speaker 4: other guests. 119 00:05:50,800 --> 00:05:54,320 Speaker 3: So well, thank you for so I thank you for listening. 120 00:05:54,400 --> 00:05:59,560 Speaker 3: I appreciate I'm glad even though I personally offended your approach, 121 00:05:59,560 --> 00:06:02,760 Speaker 3: which I apologize, I appreciate your listening to Odd Lives, 122 00:06:02,800 --> 00:06:05,360 Speaker 3: and I appreciate you coming back and I say that 123 00:06:05,600 --> 00:06:09,400 Speaker 3: nothing is ever debunked in markets, because I actually don't. 124 00:06:09,200 --> 00:06:09,760 Speaker 1: Feel that way. 125 00:06:09,960 --> 00:06:12,680 Speaker 2: Joe is open minded, and just to be clear what 126 00:06:12,720 --> 00:06:14,720 Speaker 2: we're talking about in terms of the debunking, it was 127 00:06:14,760 --> 00:06:19,440 Speaker 2: the idea that central bank liquidity was driving asset prices. 128 00:06:19,520 --> 00:06:21,920 Speaker 2: That was the idea, which Matt is very much your 129 00:06:21,960 --> 00:06:23,960 Speaker 2: approach to analyzing markets. 130 00:06:24,120 --> 00:06:26,479 Speaker 4: And I was not offended either. In teacher became the 131 00:06:26,480 --> 00:06:28,800 Speaker 4: subject of a footnote in one of my research pieces 132 00:06:28,839 --> 00:06:33,159 Speaker 4: making the counter argument. But I think that the standard 133 00:06:33,440 --> 00:06:36,640 Speaker 4: view of what's been going on is, oh, the economy 134 00:06:36,720 --> 00:06:39,440 Speaker 4: must be much stronger than everyone thought previously. It must 135 00:06:39,440 --> 00:06:42,159 Speaker 4: be that our star and neutral rates are higher. But 136 00:06:42,200 --> 00:06:44,040 Speaker 4: then there are a couple of puzzles. It's like, oh, well, 137 00:06:44,080 --> 00:06:46,520 Speaker 4: how come actually desire to borrow in credit growth are 138 00:06:46,520 --> 00:06:49,040 Speaker 4: really quite limited. There's lots of gross issues, but actually 139 00:06:49,080 --> 00:06:52,640 Speaker 4: net borrowing is really rather lackluster. And how come many 140 00:06:52,680 --> 00:06:55,600 Speaker 4: of the arstar models, the most comprehensive ones, don't really 141 00:06:55,600 --> 00:06:59,040 Speaker 4: show this big pickup in neutral rates. And then how 142 00:06:59,040 --> 00:07:01,239 Speaker 4: do we make sense of the recent and weakness, especially 143 00:07:01,240 --> 00:07:04,200 Speaker 4: in things like credit and emerging markets? And so again, 144 00:07:04,240 --> 00:07:07,320 Speaker 4: the sort of standard explanation is maybe, and there was 145 00:07:07,320 --> 00:07:10,240 Speaker 4: a nice academic paper on this recently which maybe QT 146 00:07:10,520 --> 00:07:13,400 Speaker 4: is just not as powerful as QE. Maybe there's some 147 00:07:13,440 --> 00:07:16,800 Speaker 4: big asymmetric effect going And it was a lovely argued 148 00:07:16,840 --> 00:07:19,320 Speaker 4: paper that I happened to think drough all the wrong conclusions. 149 00:07:19,600 --> 00:07:23,040 Speaker 4: And as usual, I start from not knowing anything about this. 150 00:07:23,160 --> 00:07:25,640 Speaker 4: I just look at my charts of what markets are doing, 151 00:07:25,720 --> 00:07:27,440 Speaker 4: and I try and make sense of them. But the 152 00:07:27,480 --> 00:07:31,080 Speaker 4: way it seems to me is that market sensitivity to 153 00:07:31,440 --> 00:07:35,200 Speaker 4: central bank balance sheet changes really hasn't changed at all. 154 00:07:35,880 --> 00:07:38,360 Speaker 4: That most of the time, when we thought we were 155 00:07:38,360 --> 00:07:41,720 Speaker 4: doing QT. Actually we weren't, and indeed a lot of 156 00:07:41,720 --> 00:07:45,120 Speaker 4: the time there was almost this stealth Q effect going on. 157 00:07:45,520 --> 00:07:47,080 Speaker 4: And this is a lot of the reason why I 158 00:07:47,080 --> 00:07:49,520 Speaker 4: think that financial conditions have been so easy, notwithstanding all 159 00:07:49,520 --> 00:07:51,680 Speaker 4: of the rate hikes. And the right way to think 160 00:07:51,720 --> 00:07:54,240 Speaker 4: about this is in terms of not the security side 161 00:07:54,280 --> 00:07:57,520 Speaker 4: of the central bank balance sheet, but the changes in reserves. 162 00:07:57,840 --> 00:08:00,720 Speaker 4: And once you start thinking in those terms globally, and 163 00:08:00,720 --> 00:08:02,720 Speaker 4: you say, well, since two thousand and nine, we added 164 00:08:02,760 --> 00:08:06,480 Speaker 4: eighteen trillion dollars worth of reserves or liquidity, and we've 165 00:08:06,520 --> 00:08:09,560 Speaker 4: only dialed back about five hundred billion dollars worth. And 166 00:08:09,760 --> 00:08:12,080 Speaker 4: even if we think more recently, as you say, more 167 00:08:12,160 --> 00:08:14,360 Speaker 4: or lessons last time I was on, since the last 168 00:08:14,400 --> 00:08:18,000 Speaker 4: market trough in October twenty twenty two, even with the 169 00:08:18,040 --> 00:08:22,320 Speaker 4: supposed ongoing QT, US reserves have increased, not fallen, by 170 00:08:22,320 --> 00:08:24,640 Speaker 4: a net two hundred and fifty billion dollars, and global 171 00:08:24,680 --> 00:08:27,960 Speaker 4: reserves have increased by nine hundred and twenty billion dollars. 172 00:08:28,120 --> 00:08:32,440 Speaker 4: And not only that, but the timing just fits so perfectly, 173 00:08:32,480 --> 00:08:34,760 Speaker 4: and mostly I think my charts argue better than I 174 00:08:34,840 --> 00:08:38,760 Speaker 4: can here. But whenever reserves have actually fallen so in 175 00:08:38,800 --> 00:08:42,400 Speaker 4: twenty twenty two. Markets fell whenever they fell in say 176 00:08:42,440 --> 00:08:45,839 Speaker 4: April this year again, same thing. Risk fell back again, 177 00:08:45,920 --> 00:08:48,439 Speaker 4: and that's a little of what's happened in July as well. 178 00:08:48,600 --> 00:08:51,440 Speaker 3: Sorry, just to be clear on this, what are you 179 00:08:51,559 --> 00:08:54,400 Speaker 3: looking at when you say that reserves? Heaven? Because if 180 00:08:54,440 --> 00:08:56,360 Speaker 3: I look at just the pure chart of the FED 181 00:08:56,400 --> 00:08:59,400 Speaker 3: balance sheet on the Bloomberg, it's clearly gone down. It's 182 00:08:59,520 --> 00:09:03,000 Speaker 3: lowest twenty So when you say reserves haven't gone down, 183 00:09:03,520 --> 00:09:05,480 Speaker 3: what measure should I be looking at? 184 00:09:05,720 --> 00:09:08,000 Speaker 4: So for the FED, you just want the straight reserves 185 00:09:08,080 --> 00:09:09,959 Speaker 4: number that you're looking at, and you see a peek 186 00:09:10,000 --> 00:09:13,239 Speaker 4: in April this year, and then levels have fallen off subsequently. 187 00:09:13,600 --> 00:09:16,319 Speaker 4: And then I do the same thing globally by looking 188 00:09:16,320 --> 00:09:19,040 Speaker 4: at reserves. Occasionally it's slightly different, but basically reserves at 189 00:09:19,040 --> 00:09:21,920 Speaker 4: other central banks. I make sure I don't introduce FX 190 00:09:21,960 --> 00:09:24,959 Speaker 4: effects to the total, and I look at the changes 191 00:09:25,040 --> 00:09:27,720 Speaker 4: in those reserves. Again, you get a peak in April 192 00:09:27,720 --> 00:09:30,040 Speaker 4: and then they've come off a little bit subsequently. But 193 00:09:30,360 --> 00:09:34,240 Speaker 4: most of the time the near term market moves correspond 194 00:09:34,400 --> 00:09:36,720 Speaker 4: really quite well with those, And even though we're getting 195 00:09:36,720 --> 00:09:38,800 Speaker 4: a little bit of a decoupling at the moment in 196 00:09:38,880 --> 00:09:42,040 Speaker 4: equities are trying to break away. It's interesting that you 197 00:09:42,040 --> 00:09:44,200 Speaker 4: look at other asset classes, you look at credit, you 198 00:09:44,200 --> 00:09:46,040 Speaker 4: look at emerging markets, if you even look at things 199 00:09:46,080 --> 00:09:50,840 Speaker 4: like bitcoin. Basically that correlation with the global reserves numbers 200 00:09:50,840 --> 00:09:51,360 Speaker 4: carries on. 201 00:09:51,559 --> 00:09:54,520 Speaker 3: All right, Tracy, just to clarify, if you look at 202 00:09:54,559 --> 00:09:57,120 Speaker 3: the total size of the FED balance sheet is gone down. 203 00:09:57,360 --> 00:10:00,599 Speaker 3: But Matt is correct that if you look specifically a 204 00:10:00,800 --> 00:10:04,520 Speaker 3: US reserve balances with the Federal Reserve, it was a 205 00:10:04,679 --> 00:10:06,720 Speaker 3: peak in twenty twenty two, it fell and then it 206 00:10:06,760 --> 00:10:09,080 Speaker 3: picked back up, peaked in April, and then gone down. 207 00:10:09,160 --> 00:10:12,000 Speaker 3: So if you look at that measure, right. 208 00:10:12,000 --> 00:10:15,200 Speaker 2: And I should just say Matt mentioned his famous charts 209 00:10:15,280 --> 00:10:18,199 Speaker 2: just then, and we're going to embed some of those 210 00:10:18,280 --> 00:10:21,480 Speaker 2: in the transcript of this conversation, So if you are listening, 211 00:10:21,880 --> 00:10:24,240 Speaker 2: then please check out the transcript as well because we 212 00:10:24,280 --> 00:10:28,560 Speaker 2: will have those visuals to better illustrate the point. But Matt, 213 00:10:28,760 --> 00:10:32,360 Speaker 2: just on the bank reserves point, could you walk us through, 214 00:10:33,000 --> 00:10:38,280 Speaker 2: preferably in excruciating detail, exactly how an increase in bank 215 00:10:38,320 --> 00:10:42,480 Speaker 2: reserves translates into higher asset prices. Is it the case 216 00:10:42,520 --> 00:10:44,880 Speaker 2: that when you know banks have more reserves, maybe they 217 00:10:44,880 --> 00:10:50,400 Speaker 2: feel more comfortable lending. Maybe it changes people's risk preferences. 218 00:10:50,480 --> 00:10:54,640 Speaker 2: How exactly does that translate into concrete market action. 219 00:10:54,920 --> 00:10:57,760 Speaker 4: Well, such to the second than the first, But in 220 00:10:57,840 --> 00:11:01,520 Speaker 4: general I'm not sure anybody can do this properly, and 221 00:11:01,600 --> 00:11:04,319 Speaker 4: I'm mostly looking at the charts and then reasoning backwards. 222 00:11:04,679 --> 00:11:07,680 Speaker 4: So the most common explanations that you hear, and there's 223 00:11:07,679 --> 00:11:10,679 Speaker 4: been another paper recently by Noial Rubni try and relate 224 00:11:10,720 --> 00:11:13,439 Speaker 4: it to interest rate moves. And similarly, the FED when 225 00:11:13,440 --> 00:11:15,920 Speaker 4: they talk about this, they always focus on the levels 226 00:11:15,920 --> 00:11:20,120 Speaker 4: of reserves, and they kind of almost ignore changes in 227 00:11:20,160 --> 00:11:23,080 Speaker 4: reserves once they assume that the level of reserves is adequate. 228 00:11:23,400 --> 00:11:25,960 Speaker 4: I think that is entirely the wrong way to think 229 00:11:26,000 --> 00:11:29,040 Speaker 4: about it, intuitive though it may be. And likewise, I 230 00:11:29,040 --> 00:11:31,360 Speaker 4: think thinking in terms of the impact on interest rates 231 00:11:31,360 --> 00:11:35,199 Speaker 4: and then looking for that to cascade outwards again is wrong. 232 00:11:35,720 --> 00:11:38,280 Speaker 4: And instead, the way I think you're supposed to think 233 00:11:38,320 --> 00:11:43,200 Speaker 4: about it is that reserves are a neat way to 234 00:11:43,440 --> 00:11:48,640 Speaker 4: capture the balance between how much money the private sector 235 00:11:48,679 --> 00:11:52,920 Speaker 4: has got relative to how many assets are available to 236 00:11:53,080 --> 00:11:56,000 Speaker 4: absorb that money. Now, in the case of sort of 237 00:11:56,040 --> 00:11:58,760 Speaker 4: standard QI or QT, that's kind of straightforward enough, you 238 00:11:58,840 --> 00:12:02,360 Speaker 4: know that you are both giving the private sector more 239 00:12:02,360 --> 00:12:06,040 Speaker 4: money in the form of reserves and then giving them 240 00:12:06,040 --> 00:12:09,400 Speaker 4: fewer government bonds or bills to hold. But I think 241 00:12:09,440 --> 00:12:12,600 Speaker 4: this is also the reason why it's reserves and not 242 00:12:12,679 --> 00:12:16,520 Speaker 4: securities that count, because even when it's other factors on 243 00:12:16,559 --> 00:12:19,080 Speaker 4: central wank balance sheets going up and down, like the 244 00:12:19,120 --> 00:12:21,280 Speaker 4: Treasury General Account at the FED, or like the reverse 245 00:12:21,320 --> 00:12:24,160 Speaker 4: report program at the FED, even when those things are 246 00:12:24,160 --> 00:12:29,079 Speaker 4: seemingly innocuously moving up and down, they have this same effect. 247 00:12:29,559 --> 00:12:33,600 Speaker 4: So if the TGA is going up because they have 248 00:12:33,880 --> 00:12:37,440 Speaker 4: issued more tea bills and you have bought those tea bills, 249 00:12:37,600 --> 00:12:40,120 Speaker 4: but then the money is locked away at the FED 250 00:12:40,480 --> 00:12:43,520 Speaker 4: in a higher treasury balance, well that's the sort of 251 00:12:43,520 --> 00:12:46,439 Speaker 4: the same thing. You've taken money away from the private sector, 252 00:12:46,880 --> 00:12:50,240 Speaker 4: and there's less private money in markets, more securities needing 253 00:12:50,280 --> 00:12:52,680 Speaker 4: to be absorbed, and as a result, what we get 254 00:12:52,800 --> 00:12:55,760 Speaker 4: is a drop in the price of risk. And confusingly, 255 00:12:55,840 --> 00:12:58,160 Speaker 4: where that shows up on all of my charts is 256 00:12:58,200 --> 00:13:00,679 Speaker 4: not necessarily in a drop in the price off bond 257 00:13:00,720 --> 00:13:05,319 Speaker 4: yields where you might have anticipated or T bill rates. Actually, instead, 258 00:13:05,679 --> 00:13:08,960 Speaker 4: it shows up most clearly in the prices of equities, 259 00:13:08,960 --> 00:13:12,160 Speaker 4: in the prices of credit spreads, and even occasionally in 260 00:13:12,160 --> 00:13:14,760 Speaker 4: things like the prices of bitcoin. And for me, the 261 00:13:14,800 --> 00:13:17,280 Speaker 4: way you make sense of that that's weird because it's 262 00:13:17,280 --> 00:13:18,959 Speaker 4: not like the FED and the other central banks of 263 00:13:19,000 --> 00:13:22,160 Speaker 4: buying and selling large amounts of credit or equities, or 264 00:13:22,200 --> 00:13:25,800 Speaker 4: certainly bitcoin. But instead it's this ripple through effect. It's 265 00:13:25,840 --> 00:13:28,360 Speaker 4: that when say it's the other way around and TGA 266 00:13:28,480 --> 00:13:31,120 Speaker 4: is falling and I've just got more money in my 267 00:13:31,120 --> 00:13:33,240 Speaker 4: bank account because of a te ball matured, but there's 268 00:13:33,280 --> 00:13:36,559 Speaker 4: no new T bill for me to go out and buy. Well, 269 00:13:36,600 --> 00:13:39,040 Speaker 4: I get forced into buying something riskier, and you get 270 00:13:39,040 --> 00:13:41,000 Speaker 4: this cascading effect where the guy that would have bought 271 00:13:41,000 --> 00:13:42,800 Speaker 4: bonds buys credit, and the buyer that would have bought 272 00:13:42,800 --> 00:13:44,560 Speaker 4: investment grade buys high yeld, and the guy that would 273 00:13:44,559 --> 00:13:47,280 Speaker 4: have bought up high yield buys equities, and you can't 274 00:13:47,320 --> 00:13:50,320 Speaker 4: see all of those moving parts. It's sort of frustrating 275 00:13:50,720 --> 00:13:53,240 Speaker 4: in that respect, but that's the only way I can 276 00:13:53,280 --> 00:13:56,680 Speaker 4: make sense of these really quite consistent relationships, even from 277 00:13:56,679 --> 00:13:59,959 Speaker 4: one week to the next, even when reserves are supposedly abundant. 278 00:14:00,280 --> 00:14:02,959 Speaker 4: It's this shift in the balance and In fact, the 279 00:14:03,080 --> 00:14:05,240 Speaker 4: chart of mind that I'm probably most pleased with this 280 00:14:05,400 --> 00:14:11,040 Speaker 4: year is the one that then links through from changes 281 00:14:11,240 --> 00:14:14,920 Speaker 4: in reserves or central bank liquidity globally to changes in 282 00:14:14,960 --> 00:14:17,600 Speaker 4: the mutual fund flows, the mutual fund and the ETF flows. 283 00:14:17,800 --> 00:14:21,520 Speaker 4: It's this crowding in and crowding out effect as a 284 00:14:21,640 --> 00:14:24,760 Speaker 4: direct consequence of changes on central bank balance sheets, which 285 00:14:24,800 --> 00:14:28,680 Speaker 4: I think has been much more important than is widely recognized. 286 00:14:28,680 --> 00:14:29,880 Speaker 4: And even as you try and make sense of the 287 00:14:29,920 --> 00:14:32,240 Speaker 4: mutual fund flows, this year has been the second biggest 288 00:14:32,320 --> 00:14:34,200 Speaker 4: year on record after twenty twenty one, we've had six 289 00:14:34,280 --> 00:14:37,840 Speaker 4: hundred billion dollars of overall inflows. Again for me, until 290 00:14:37,920 --> 00:14:41,760 Speaker 4: very recently that was being driven directly by this crowding 291 00:14:41,800 --> 00:14:57,480 Speaker 4: out effect from the global central bank reserves numbers. 292 00:15:00,440 --> 00:15:03,800 Speaker 3: What is the role of rate policy in your thinking, 293 00:15:04,080 --> 00:15:06,800 Speaker 3: because again, one of the things we're talking about right 294 00:15:06,840 --> 00:15:10,840 Speaker 3: now is the timing of possible rate cuts, which doesn't 295 00:15:10,880 --> 00:15:15,000 Speaker 3: directly impact some of these monetary aggregates such as the 296 00:15:15,040 --> 00:15:18,360 Speaker 3: balance sheet or the reserves specifically, but there is a 297 00:15:18,400 --> 00:15:21,960 Speaker 3: lot of anxiety in the market, particularly today again about 298 00:15:22,120 --> 00:15:24,200 Speaker 3: whether the FED is going to be too late in 299 00:15:24,320 --> 00:15:28,000 Speaker 3: cutting rates or etc. How do you think about that, 300 00:15:28,160 --> 00:15:30,200 Speaker 3: is that, just in your view, totally irrelevant. 301 00:15:30,760 --> 00:15:33,080 Speaker 4: I didn't used to think it was irrelevant, but it's 302 00:15:33,120 --> 00:15:35,520 Speaker 4: sort of looking that way this cycle, isn't it. How 303 00:15:35,560 --> 00:15:37,520 Speaker 4: come we've had all these rate increases and then you've 304 00:15:37,560 --> 00:15:39,840 Speaker 4: not had a massive slowdown. And I think the way 305 00:15:39,880 --> 00:15:43,440 Speaker 4: I think about it is, so it's always about money creation, 306 00:15:43,480 --> 00:15:46,120 Speaker 4: it's always about credit creation. And normally that would be 307 00:15:46,200 --> 00:15:48,720 Speaker 4: driven by the private sector. It would be you and 308 00:15:48,760 --> 00:15:51,280 Speaker 4: me deciding to borrow or not to borrow based on 309 00:15:51,720 --> 00:15:55,040 Speaker 4: whether rates were restrictive or not. And this cycle, on 310 00:15:55,080 --> 00:15:59,240 Speaker 4: the other hand, has been different. The surge in credit 311 00:15:59,280 --> 00:16:01,360 Speaker 4: that we had, it never came from the private sector. 312 00:16:01,400 --> 00:16:04,680 Speaker 4: It came, if anything, from fiscal policy. And likewise, the 313 00:16:04,800 --> 00:16:06,760 Speaker 4: surge in say things like fun flows and some of 314 00:16:06,800 --> 00:16:09,960 Speaker 4: these market effects and the m zero or the reserves numbers, again, 315 00:16:10,040 --> 00:16:11,880 Speaker 4: that was never driven by the private sector. It was 316 00:16:11,920 --> 00:16:15,720 Speaker 4: never driven by interest rates. It was driven directly by 317 00:16:15,800 --> 00:16:18,640 Speaker 4: these central bank balance sheet effects. And so the flip 318 00:16:18,720 --> 00:16:23,040 Speaker 4: side of what I'm saying is that just as the 319 00:16:23,160 --> 00:16:26,840 Speaker 4: rate increases maybe had a negative effect, that's lugging in 320 00:16:26,880 --> 00:16:28,360 Speaker 4: the background, and there's a bit of a long lag 321 00:16:28,400 --> 00:16:31,000 Speaker 4: and you begin to see delinquencies picking up. But when 322 00:16:31,000 --> 00:16:33,880 Speaker 4: we eventually get to rate easing, I doubt that that 323 00:16:34,040 --> 00:16:36,640 Speaker 4: is going to do very much to stimulate private sector 324 00:16:36,640 --> 00:16:40,440 Speaker 4: credit growth either. And ultimately we may end up with 325 00:16:40,560 --> 00:16:43,680 Speaker 4: more reasoning than imagined, just because we're still extremely sensitive 326 00:16:43,680 --> 00:16:46,680 Speaker 4: to balance sheet changes. There never was that much desire 327 00:16:46,720 --> 00:16:49,200 Speaker 4: to borrow on the part of the private sector even 328 00:16:49,240 --> 00:16:51,640 Speaker 4: before all of the rate increases, and when we go 329 00:16:51,760 --> 00:16:53,720 Speaker 4: back to additional easings, I'm not sure that's going to 330 00:16:53,720 --> 00:16:56,280 Speaker 4: stimulate lots of private sector borrowing either. And this is 331 00:16:56,320 --> 00:16:59,040 Speaker 4: part of a longer term shift where even as rates 332 00:16:59,040 --> 00:17:02,040 Speaker 4: have been coming down for decades, the borrowing that there's been, 333 00:17:02,080 --> 00:17:04,760 Speaker 4: the money creation that there's been has in fact come 334 00:17:04,840 --> 00:17:09,760 Speaker 4: increasingly from fiscal authorities and from central banks directly, and 335 00:17:10,320 --> 00:17:12,680 Speaker 4: rates themselves have been effectively pushing on a string. 336 00:17:13,600 --> 00:17:15,960 Speaker 2: Can I play Devil's advocate for a second, which is 337 00:17:16,480 --> 00:17:20,760 Speaker 2: this time last year the world was a light with 338 00:17:20,960 --> 00:17:23,880 Speaker 2: talk of a potential recession, and one thing you would 339 00:17:23,920 --> 00:17:27,000 Speaker 2: hear over and over again is, you know, yield curve inversion. 340 00:17:27,040 --> 00:17:32,040 Speaker 2: We've never had an aversion without an ensuing recession. This year, 341 00:17:32,520 --> 00:17:35,399 Speaker 2: there is much much less discussion about the risk of 342 00:17:35,440 --> 00:17:39,760 Speaker 2: a recession. Couldn't this all just be people have changed 343 00:17:39,800 --> 00:17:44,160 Speaker 2: their minds about the macroeconomic outlook and that is driving 344 00:17:44,480 --> 00:17:48,600 Speaker 2: asset prices. Like a very simple Oukham's razor kind of 345 00:17:48,720 --> 00:17:50,280 Speaker 2: explanation for what we're seeing. 346 00:17:50,960 --> 00:17:53,480 Speaker 4: It could be and that must play some role, but 347 00:17:53,640 --> 00:17:58,800 Speaker 4: in general the timing doesn't fit. In general, the rally 348 00:17:58,840 --> 00:18:03,400 Speaker 4: in the markets has first, and then the improvement in 349 00:18:03,520 --> 00:18:06,720 Speaker 4: the economic conditions has come later. I guess you could 350 00:18:06,720 --> 00:18:09,520 Speaker 4: make an argument that economic surprises went negative, but in general, 351 00:18:09,840 --> 00:18:12,440 Speaker 4: and the people are starting to worry about a slow down. 352 00:18:12,720 --> 00:18:16,320 Speaker 4: But I'd argue markets are always supposed to anticipate, but 353 00:18:16,560 --> 00:18:19,040 Speaker 4: it's been stronger than that recently. Even when you take 354 00:18:19,080 --> 00:18:23,560 Speaker 4: something like earnings revisions. For example, earnings expectations have been 355 00:18:23,600 --> 00:18:26,919 Speaker 4: gradually increasing, but they seem to be doing so in 356 00:18:27,040 --> 00:18:31,399 Speaker 4: response to that. They're almost chasing the equity market higher 357 00:18:31,960 --> 00:18:36,240 Speaker 4: to buy a greater extent than previously. And as I say, 358 00:18:37,200 --> 00:18:40,280 Speaker 4: I wouldn't expect to have anything like the correlations that 359 00:18:40,320 --> 00:18:44,040 Speaker 4: I do with the central bank liquidity. I continue scratching 360 00:18:44,080 --> 00:18:46,320 Speaker 4: my head as to whether the effect could be the 361 00:18:46,359 --> 00:18:48,560 Speaker 4: other way round. It could be the market that's influencing 362 00:18:48,560 --> 00:18:50,480 Speaker 4: the Central Bank numbers, and while the lags are a 363 00:18:50,520 --> 00:18:54,080 Speaker 4: bit variable, basically no, it doesn't work that way. But 364 00:18:54,640 --> 00:18:58,199 Speaker 4: for me, fundamentals have become very much a lagging indicator. 365 00:18:58,440 --> 00:19:00,479 Speaker 4: And this, for me is all part of a longer 366 00:19:00,600 --> 00:19:05,720 Speaker 4: term story whereby up until twenty twelve or so, I 367 00:19:05,760 --> 00:19:07,919 Speaker 4: placed an awful lot more emphasis on fundamentals because it 368 00:19:07,960 --> 00:19:10,520 Speaker 4: seemed to be driving the market to a much larger extent. 369 00:19:10,960 --> 00:19:16,359 Speaker 4: Since twenty twelve, many of my favorite relationships simply broke down, 370 00:19:16,960 --> 00:19:20,320 Speaker 4: so the lending surveys were no longer a good guide 371 00:19:20,359 --> 00:19:22,920 Speaker 4: to what spreads were doing and what defaults were doing. 372 00:19:22,960 --> 00:19:24,520 Speaker 4: If anything, it was the other way around. It was 373 00:19:24,560 --> 00:19:27,600 Speaker 4: spreads would rally first, and then the lending standards was 374 00:19:27,640 --> 00:19:29,880 Speaker 4: easy afterwards, and the defaults that should have been taking 375 00:19:29,920 --> 00:19:33,520 Speaker 4: place didn't take place. Or same thing. In volatility space, 376 00:19:33,520 --> 00:19:36,160 Speaker 4: there are nice relationships that used to hold with uncertainty, 377 00:19:36,400 --> 00:19:38,920 Speaker 4: and since twenty twelve, uncertainty has often been quite high 378 00:19:38,960 --> 00:19:42,639 Speaker 4: on uncertainty metrics, a number of references to uncertainty in 379 00:19:42,640 --> 00:19:44,680 Speaker 4: the news and things like that, and yet volatility most 380 00:19:44,680 --> 00:19:47,239 Speaker 4: of the time has been super low. And all of 381 00:19:47,280 --> 00:19:50,920 Speaker 4: these dynamics, to my mind, go together with this money 382 00:19:50,960 --> 00:19:54,520 Speaker 4: creation led pattern, but where the money creation has come 383 00:19:54,640 --> 00:19:57,439 Speaker 4: directly from central banks, and that shows up in my 384 00:19:57,480 --> 00:20:00,960 Speaker 4: relationships and the swings that we've had there are just 385 00:20:01,080 --> 00:20:03,320 Speaker 4: really big relative to the sorts of swings that we 386 00:20:03,359 --> 00:20:05,240 Speaker 4: get in money creation coming from the private sector, and 387 00:20:05,240 --> 00:20:06,919 Speaker 4: that's why they end up dominating the market. 388 00:20:07,800 --> 00:20:11,719 Speaker 2: Since you mentioned timing just then, let's talk about that 389 00:20:11,760 --> 00:20:15,840 Speaker 2: a little bit more. So. Reserves peaked back in April, 390 00:20:16,280 --> 00:20:20,840 Speaker 2: it wasn't until relatively recently that we really saw significant 391 00:20:20,840 --> 00:20:23,600 Speaker 2: market weakness. So why was there that gap. Why didn't 392 00:20:23,640 --> 00:20:27,800 Speaker 2: we see equities falling earlier on as reserves started to 393 00:20:27,840 --> 00:20:28,240 Speaker 2: come down? 394 00:20:28,840 --> 00:20:31,320 Speaker 4: A couple of different things. So one of the reasons 395 00:20:31,359 --> 00:20:34,600 Speaker 4: why Joe was sounding so skeptical on the previous podcast 396 00:20:34,800 --> 00:20:38,280 Speaker 4: was because when if you just look at US reserves alone, 397 00:20:38,480 --> 00:20:40,440 Speaker 4: sometimes they correlate, but they don't always, you get a 398 00:20:40,520 --> 00:20:42,240 Speaker 4: much betefit with the global numbers. And some of what 399 00:20:42,600 --> 00:20:44,720 Speaker 4: has been going on is that there have been liquidity 400 00:20:44,840 --> 00:20:47,280 Speaker 4: editions by the BOJ and then recently from the PBOC 401 00:20:47,880 --> 00:20:50,800 Speaker 4: that have some impact. I think though the biggest story 402 00:20:51,480 --> 00:20:54,040 Speaker 4: is that the fund flows have been sort of making 403 00:20:54,040 --> 00:20:57,040 Speaker 4: an effort to decouple, even as the central bank liquidity 404 00:20:57,080 --> 00:20:59,960 Speaker 4: has faded to some extent that you often have lab 405 00:21:00,600 --> 00:21:03,280 Speaker 4: especially when there's momentum driven markets as we've had recently, 406 00:21:03,560 --> 00:21:05,119 Speaker 4: and there's a little bit of a lag before people 407 00:21:05,119 --> 00:21:09,320 Speaker 4: realize that the momentum isn't there. And even now, I 408 00:21:09,359 --> 00:21:13,159 Speaker 4: am impressed by how many inflows we've had, especially to equities, 409 00:21:13,400 --> 00:21:15,280 Speaker 4: and it is plausible that this could just carry on 410 00:21:15,320 --> 00:21:18,120 Speaker 4: by itself. It's plausible that that the belief in buying 411 00:21:18,160 --> 00:21:22,119 Speaker 4: the dip is just so strong that actually this carries 412 00:21:22,160 --> 00:21:23,920 Speaker 4: on regardless. And although we get a little bit of 413 00:21:23,920 --> 00:21:27,159 Speaker 4: a liquidity drainage from central banks, even with the quarterly 414 00:21:27,200 --> 00:21:29,439 Speaker 4: refunding announcement from the Treasure yesterday and a little bit 415 00:21:29,440 --> 00:21:32,240 Speaker 4: more bill issuance, actually that could be another factor that 416 00:21:32,320 --> 00:21:34,439 Speaker 4: drags a bit more money out of RRP and ensures 417 00:21:34,440 --> 00:21:38,640 Speaker 4: we don't have too much liquidity drainage generally speaking, though, 418 00:21:39,440 --> 00:21:42,440 Speaker 4: I think all of this is on much more fragile 419 00:21:42,480 --> 00:21:44,640 Speaker 4: ground than it was in the first half of the year, 420 00:21:45,200 --> 00:21:49,080 Speaker 4: and I think my whole way of looking at it 421 00:21:49,119 --> 00:21:52,520 Speaker 4: takes you to a very different place from if you 422 00:21:52,640 --> 00:21:55,800 Speaker 4: assume it's fundamentals driving markets and you assume people have 423 00:21:55,840 --> 00:21:59,720 Speaker 4: been buying for fundamental reasons, And what many asset managers 424 00:21:59,720 --> 00:22:03,240 Speaker 4: tell me is this fits frankly much better with where 425 00:22:03,280 --> 00:22:05,919 Speaker 4: they've been for an extended period, which is there not 426 00:22:06,040 --> 00:22:08,679 Speaker 4: buying because they think that equities are cheap or credit 427 00:22:08,760 --> 00:22:11,880 Speaker 4: is cheap at two thousand and seven type levels. On 428 00:22:11,920 --> 00:22:13,800 Speaker 4: the contrary, the reason they keep buying is because they 429 00:22:13,920 --> 00:22:17,280 Speaker 4: keep having another inflow. And as I say, when you 430 00:22:17,320 --> 00:22:21,040 Speaker 4: start looking at other asset classes or even even assets 431 00:22:21,080 --> 00:22:25,280 Speaker 4: like bitcoin that are much more in line with the 432 00:22:25,320 --> 00:22:29,960 Speaker 4: central bank liquidity numbers than the equity market is then 433 00:22:29,960 --> 00:22:33,000 Speaker 4: that you re assess the whole narrowing of the market 434 00:22:33,080 --> 00:22:34,840 Speaker 4: rally and the churn that we're getting at the moment 435 00:22:34,880 --> 00:22:37,200 Speaker 4: and the effort to retain Is this instead a sign 436 00:22:37,240 --> 00:22:40,040 Speaker 4: of a natural fundamental driven strength and the back of 437 00:22:40,040 --> 00:22:42,440 Speaker 4: a trump trade that can run and run and run, 438 00:22:43,040 --> 00:22:47,280 Speaker 4: or instead, is this actually a sign of a weakening 439 00:22:47,400 --> 00:22:49,879 Speaker 4: level of support that can push up a smaller and 440 00:22:49,920 --> 00:22:54,119 Speaker 4: smaller number of assets and ultimately is quite vulnerable to 441 00:22:54,320 --> 00:22:56,960 Speaker 4: any deterioration in those fun flows. And that hasn't really 442 00:22:57,000 --> 00:23:00,200 Speaker 4: happened yet, but I think if it does happen, then 443 00:23:00,359 --> 00:23:03,680 Speaker 4: rate heasing in itself is not going to be sufficient 444 00:23:03,800 --> 00:23:05,879 Speaker 4: to get everyone chasing back into risk again. 445 00:23:06,840 --> 00:23:10,200 Speaker 2: Joe Matt just said that the reason funds keep buying 446 00:23:10,240 --> 00:23:12,399 Speaker 2: is because there's another inflow. I feel like I have 447 00:23:12,480 --> 00:23:16,280 Speaker 2: to mention here that Matt's work was the inspiration for 448 00:23:16,440 --> 00:23:17,639 Speaker 2: flows before pros. 449 00:23:17,720 --> 00:23:19,680 Speaker 3: Oh, so now we get, yeah. 450 00:23:19,240 --> 00:23:23,320 Speaker 2: This idea that you know, flows can drive additional buying 451 00:23:23,600 --> 00:23:27,119 Speaker 2: and where markets used to maybe be more value driven, 452 00:23:27,200 --> 00:23:31,160 Speaker 2: so eventually you would say like, actually, this price isn't justified, 453 00:23:31,520 --> 00:23:34,120 Speaker 2: and so investors would sort of self limit their behavior. 454 00:23:34,440 --> 00:23:36,120 Speaker 2: Now that just doesn't happen as much. 455 00:23:36,280 --> 00:23:41,920 Speaker 3: So I believe in the flows before pros thesis theorem 456 00:23:42,760 --> 00:23:45,439 Speaker 3: saying to an extent, and I buy this, and that 457 00:23:45,520 --> 00:23:47,040 Speaker 3: makes a lot of sense to me. But here's what 458 00:23:47,080 --> 00:23:50,200 Speaker 3: I want to understand further, and that is how that 459 00:23:50,280 --> 00:23:54,040 Speaker 3: explained certain sectoral moves. Because whenever I hear about okay, 460 00:23:54,080 --> 00:23:57,960 Speaker 3: markets are divorced from fundamentals, or fundamentals don't work as 461 00:23:58,000 --> 00:24:00,800 Speaker 3: well as they might have used to. I look at 462 00:24:00,840 --> 00:24:05,359 Speaker 3: like the big winners within equity markets are companies that 463 00:24:05,480 --> 00:24:08,520 Speaker 3: are just objectively doing really well. And that's also been 464 00:24:08,560 --> 00:24:11,160 Speaker 3: the case since two thousand and nine, which is like, okay, 465 00:24:11,160 --> 00:24:13,800 Speaker 3: we have these extraordinary moves in the handful of big 466 00:24:13,840 --> 00:24:17,560 Speaker 3: tech companies. They're doing really well. They're really good businesses, 467 00:24:17,640 --> 00:24:20,679 Speaker 3: They're making tons of money. Their growth rates continue to 468 00:24:20,760 --> 00:24:25,160 Speaker 3: exceed anyone's expectations. Earnings are always being revised up. In fact, 469 00:24:25,359 --> 00:24:29,080 Speaker 3: like no companies this big in history are showing growth 470 00:24:29,200 --> 00:24:33,280 Speaker 3: rates like this given their size. So if it's all 471 00:24:33,359 --> 00:24:36,159 Speaker 3: flows and all that stuff, why do we seem to 472 00:24:36,200 --> 00:24:40,399 Speaker 3: see this connection between the companies that are frankly killing 473 00:24:40,440 --> 00:24:42,480 Speaker 3: it and the stocks that are doing really well. 474 00:24:42,840 --> 00:24:46,680 Speaker 4: I think that's a very fair point, And in general, 475 00:24:46,760 --> 00:24:50,760 Speaker 4: I would say it's not that fundamentals have no role whatsoever. 476 00:24:51,240 --> 00:24:56,440 Speaker 4: And in general I would say my relationships fit best, 477 00:24:56,480 --> 00:24:59,840 Speaker 4: or the center bank equidity numbers fit best. The broader 478 00:24:59,840 --> 00:25:02,760 Speaker 4: the number of assets that we assess them against, and 479 00:25:02,800 --> 00:25:05,200 Speaker 4: the more we take any individual asset, the more scope 480 00:25:05,240 --> 00:25:09,440 Speaker 4: there is for either idiosyncratic technicals or their own fundamentals 481 00:25:09,760 --> 00:25:14,439 Speaker 4: to have an impact. Having said that, though, I also 482 00:25:14,600 --> 00:25:19,840 Speaker 4: observe a strong tendency for the correlations to be best 483 00:25:19,960 --> 00:25:22,760 Speaker 4: with some of the names that have been hottest in 484 00:25:22,800 --> 00:25:27,120 Speaker 4: the market, let's say, like LVMH, or like Tesla, or 485 00:25:27,160 --> 00:25:30,280 Speaker 4: even like bitcoin as an asset class, and to some 486 00:25:30,359 --> 00:25:33,440 Speaker 4: extent that applies to the Magnificent seven as well. And 487 00:25:33,640 --> 00:25:36,399 Speaker 4: even as we look at those names, Yes, for Nvidio 488 00:25:36,440 --> 00:25:37,960 Speaker 4: in particular, the growth and earnings of the growth in 489 00:25:37,960 --> 00:25:41,800 Speaker 4: free cash flow has been phenomenal, but you still compare, 490 00:25:42,280 --> 00:25:45,800 Speaker 4: for example, forty or fifty times growth in net income 491 00:25:46,160 --> 00:25:49,920 Speaker 4: with gains in marketcap and share price of well over 492 00:25:49,920 --> 00:25:53,040 Speaker 4: one hundred times, or you do that same analysis for 493 00:25:53,080 --> 00:25:55,439 Speaker 4: some of the other techniums that haven't had anything like 494 00:25:55,480 --> 00:25:57,880 Speaker 4: the same growth in net income and free cash flow, 495 00:25:57,920 --> 00:25:59,840 Speaker 4: and still their market caps and share prices are up 496 00:25:59,880 --> 00:26:03,440 Speaker 4: by ten or twelve times. I think this is where 497 00:26:04,400 --> 00:26:08,080 Speaker 4: exactly that flows before pros seems to apply, and the 498 00:26:08,240 --> 00:26:11,960 Speaker 4: momentum effects have come to dominate markets, and the extent 499 00:26:12,000 --> 00:26:14,639 Speaker 4: of the rally that we're getting is more than you 500 00:26:14,640 --> 00:26:17,000 Speaker 4: can justify on the back of those underlying fundamentals. And 501 00:26:17,040 --> 00:26:19,000 Speaker 4: that's where people are just beginning to get concerned about 502 00:26:19,000 --> 00:26:21,800 Speaker 4: the Magnificent Seven. At the moment. The current earnings are great, 503 00:26:21,800 --> 00:26:24,760 Speaker 4: but actually where most of the growth is is not 504 00:26:24,840 --> 00:26:27,720 Speaker 4: in spot earnings. It's in the future years of earnings, 505 00:26:28,160 --> 00:26:31,560 Speaker 4: and we could easily end up questioning that if we 506 00:26:31,640 --> 00:26:34,000 Speaker 4: start to doubt the extent to which all of the 507 00:26:34,040 --> 00:26:36,399 Speaker 4: take investment that's taking place at the moment is actually 508 00:26:36,520 --> 00:26:49,280 Speaker 4: yielding profits. 509 00:26:52,600 --> 00:26:55,000 Speaker 2: I want to step back for a second, and I 510 00:26:55,040 --> 00:26:59,120 Speaker 2: can't remember if we've ever actually asked you this question directly, 511 00:26:59,320 --> 00:27:02,320 Speaker 2: but we've I've been talking a lot about the uniqueness 512 00:27:02,400 --> 00:27:06,480 Speaker 2: of your approach to analyzing markets. Can you maybe talk 513 00:27:06,520 --> 00:27:10,720 Speaker 2: a little bit about how you developed that approach? Because 514 00:27:10,720 --> 00:27:13,879 Speaker 2: when I think back to when I first became aware 515 00:27:14,040 --> 00:27:16,679 Speaker 2: of your research, and we've certainly talked about this on 516 00:27:16,760 --> 00:27:19,960 Speaker 2: the show before, but it was the note from I 517 00:27:19,960 --> 00:27:22,080 Speaker 2: Think the summer of two thousand and eight Are the 518 00:27:22,119 --> 00:27:27,240 Speaker 2: Brokers Broken? Which turned out to be exceptionally prescient, but 519 00:27:27,520 --> 00:27:30,880 Speaker 2: was very different to what you are writing about and 520 00:27:30,960 --> 00:27:33,960 Speaker 2: doing today. So how did you come to take this 521 00:27:34,080 --> 00:27:36,440 Speaker 2: particular analytical framework? 522 00:27:37,119 --> 00:27:38,800 Speaker 4: I make it up as I go along, and the 523 00:27:38,800 --> 00:27:41,040 Speaker 4: difference between me and other people is that I know 524 00:27:41,200 --> 00:27:43,480 Speaker 4: that I don't know anything, and therefore I have to 525 00:27:43,480 --> 00:27:46,720 Speaker 4: look at the charts and reason backwards, whereas other people 526 00:27:46,800 --> 00:27:48,880 Speaker 4: seem to they start with a theory and then they 527 00:27:48,960 --> 00:27:52,200 Speaker 4: keep flogging that theory even when it's not working in practice. 528 00:27:52,240 --> 00:27:55,240 Speaker 4: And so you're right, maybe it's because I used to 529 00:27:55,240 --> 00:27:57,440 Speaker 4: do credit strategy, and so I was always worried about 530 00:27:57,480 --> 00:28:01,399 Speaker 4: things blowing up. But back in two thousand I was 531 00:28:01,480 --> 00:28:03,840 Speaker 4: looking at corporate leverage because that was what was driving 532 00:28:03,920 --> 00:28:06,960 Speaker 4: the market. And then in seven and eight we were 533 00:28:06,960 --> 00:28:10,119 Speaker 4: looking at sieves and CDOs of abs and then brokers 534 00:28:10,160 --> 00:28:12,680 Speaker 4: and repo because that seemed to be what was really 535 00:28:12,720 --> 00:28:14,720 Speaker 4: important and was driving the market. And maybe yes, I 536 00:28:14,760 --> 00:28:16,840 Speaker 4: was lucky with the timing on that piece, but I've 537 00:28:16,880 --> 00:28:20,320 Speaker 4: shifted approach steadily, and as I say, where I've been 538 00:28:20,400 --> 00:28:23,040 Speaker 4: for the last decade is looking at all of the 539 00:28:23,080 --> 00:28:27,040 Speaker 4: central bank stuff just because that fits when nothing else does. 540 00:28:27,080 --> 00:28:30,800 Speaker 4: And it's in this period where mean reversion and value 541 00:28:30,840 --> 00:28:35,400 Speaker 4: investing has died and investors have herded into already expensive 542 00:28:35,400 --> 00:28:38,760 Speaker 4: strategies and momentum has dominated. And I hope that I 543 00:28:38,760 --> 00:28:43,520 Speaker 4: will not be doing this indefinitely, but as a strategist 544 00:28:43,560 --> 00:28:46,040 Speaker 4: and not an economists, I need to go with what 545 00:28:46,160 --> 00:28:49,720 Speaker 4: fits and then develop the theory around it. And if 546 00:28:49,720 --> 00:28:52,320 Speaker 4: the theory sounds plausible and the approach is still working, 547 00:28:52,360 --> 00:28:54,440 Speaker 4: then you continue to go with that. I fear at 548 00:28:54,480 --> 00:28:56,160 Speaker 4: some point I may need to come back and focus 549 00:28:56,160 --> 00:28:58,680 Speaker 4: on politics and debt levels and some of the really 550 00:28:58,760 --> 00:29:02,520 Speaker 4: slow burning really scary things, but hopefully not yet. 551 00:29:02,760 --> 00:29:06,200 Speaker 2: Okay, Well, let's talk about politics and how I guess 552 00:29:07,080 --> 00:29:11,200 Speaker 2: uncertainty geopolitical uncertainty might be showing up in the market. 553 00:29:11,280 --> 00:29:13,160 Speaker 2: There seems to be a bit of a debate at 554 00:29:13,160 --> 00:29:16,400 Speaker 2: the moment. In fact, we recorded an episode last week 555 00:29:16,440 --> 00:29:19,760 Speaker 2: with Victor Schwetz from McCrory, and we asked him whether 556 00:29:19,880 --> 00:29:23,480 Speaker 2: or not some fear, for instance, was being priced into 557 00:29:23,480 --> 00:29:28,160 Speaker 2: the treasury market, maybe into futures, given that markets now 558 00:29:28,200 --> 00:29:31,640 Speaker 2: seem to be pricing in like seventy basis points worth 559 00:29:31,680 --> 00:29:34,440 Speaker 2: of cuts this year, But where do you see political 560 00:29:34,560 --> 00:29:37,200 Speaker 2: risk showing up, if at all. 561 00:29:37,240 --> 00:29:42,640 Speaker 4: In general, markets are really bad at pricing political risk, 562 00:29:42,920 --> 00:29:49,160 Speaker 4: and especially the risk of regime change, and that inability 563 00:29:49,320 --> 00:29:52,480 Speaker 4: has if anything, become worse over the last decade, where 564 00:29:52,520 --> 00:29:55,280 Speaker 4: we haven't managed to price any risk premier appropriately at all, 565 00:29:55,280 --> 00:29:59,280 Speaker 4: never mind political risk premium. So the standard view is 566 00:29:59,320 --> 00:30:03,920 Speaker 4: that in theory, markets should price to a mean expected 567 00:30:04,120 --> 00:30:07,600 Speaker 4: outcome and consider all the different possibilities and reflect that 568 00:30:07,640 --> 00:30:11,080 Speaker 4: in the market price. In practice that is just too 569 00:30:11,120 --> 00:30:15,800 Speaker 4: difficult for people. Everybody goes off the modal forecast. If 570 00:30:15,840 --> 00:30:18,800 Speaker 4: you have been systematically hedging all of your downside risk, 571 00:30:18,840 --> 00:30:21,480 Speaker 4: as you probably should have done, giving the growing geopolitical 572 00:30:21,520 --> 00:30:24,360 Speaker 4: concerns and the mounting debt pile around the globe. Then Fadi, 573 00:30:24,400 --> 00:30:26,040 Speaker 4: you've gone out of business at this point, or at 574 00:30:26,120 --> 00:30:29,280 Speaker 4: least had a really difficult time because all of those 575 00:30:29,400 --> 00:30:31,680 Speaker 4: risks have been suppressed, And yet that doesn't mean that 576 00:30:31,760 --> 00:30:34,320 Speaker 4: they're not there. And I think all of this supplies 577 00:30:34,360 --> 00:30:37,560 Speaker 4: to an even greater extent than usual thanks to the 578 00:30:37,640 --> 00:30:40,760 Speaker 4: build up in debt levels, and even where private sector 579 00:30:40,800 --> 00:30:44,560 Speaker 4: is delivered a little bit, aggregate debt levels have mostly increased, 580 00:30:44,640 --> 00:30:47,120 Speaker 4: especially in the US, but also in places like China, 581 00:30:47,200 --> 00:30:51,280 Speaker 4: and you do get this worrying combination of ever more 582 00:30:51,320 --> 00:30:54,120 Speaker 4: elevated asset prices backed by ever larger amounts of debt, 583 00:30:54,800 --> 00:30:59,280 Speaker 4: and the scope for extreme regime changes or loss of confidence. 584 00:31:00,000 --> 00:31:03,120 Speaker 4: It is frankly, really difficult to affect in my core prices. 585 00:31:03,240 --> 00:31:05,959 Speaker 4: And what we've seen historically is that even when the 586 00:31:06,000 --> 00:31:09,320 Speaker 4: market does do this, it's not slow and steady and rational, 587 00:31:09,800 --> 00:31:11,880 Speaker 4: even with the election of a new government, let's say, 588 00:31:12,320 --> 00:31:15,720 Speaker 4: it's only as the market itself loses confidence. We had 589 00:31:15,720 --> 00:31:17,840 Speaker 4: this in Italy historically, we had it with list Trust's 590 00:31:17,880 --> 00:31:20,920 Speaker 4: government in the UK, there's just this moment where you 591 00:31:21,040 --> 00:31:23,320 Speaker 4: realize this isn't a tail ris this is actually happening, 592 00:31:23,520 --> 00:31:26,280 Speaker 4: and actually nobody else is buying, and therefore I shouldn't 593 00:31:26,280 --> 00:31:30,000 Speaker 4: be buying either. That's where you get this sudden repricing. 594 00:31:30,320 --> 00:31:31,960 Speaker 4: And so people are beginning to look at the moment 595 00:31:32,000 --> 00:31:33,880 Speaker 4: are things like the lack of term premium in the 596 00:31:33,960 --> 00:31:36,600 Speaker 4: US and how that might change and maybe it ought 597 00:31:36,640 --> 00:31:40,360 Speaker 4: to increase, and especially as we worry about increasing interest 598 00:31:40,360 --> 00:31:43,680 Speaker 4: payments in future. And yet for me, it's less about 599 00:31:44,320 --> 00:31:50,600 Speaker 4: the arithmetic of interest payments and the appropriate compensation for them, 600 00:31:51,120 --> 00:31:55,640 Speaker 4: and it's much more about are you actually being irresponsible 601 00:31:55,720 --> 00:32:00,120 Speaker 4: with fiscal policy? Are you actually willfully interfering with the 602 00:32:00,120 --> 00:32:02,880 Speaker 4: independence of the fad That's when you can have your 603 00:32:02,920 --> 00:32:05,040 Speaker 4: abrupt free pricing. And that's where markets have to go 604 00:32:05,120 --> 00:32:08,320 Speaker 4: from being able to ignore the politics entirely to finding 605 00:32:08,320 --> 00:32:11,000 Speaker 4: that the politics is the only thing. And I hope 606 00:32:11,040 --> 00:32:14,400 Speaker 4: we don't get there, but a number of long term 607 00:32:14,480 --> 00:32:17,520 Speaker 4: historical studies that I really respect do point to exactly 608 00:32:17,560 --> 00:32:18,920 Speaker 4: those risks becoming elevated. 609 00:32:19,120 --> 00:32:21,720 Speaker 3: Yeah, I've kind of been thinking about this lately, which 610 00:32:21,800 --> 00:32:24,240 Speaker 3: is that you know, there's all kinds of reasons to 611 00:32:24,280 --> 00:32:27,560 Speaker 3: have political anxiety. I don't mean just like this election, 612 00:32:27,720 --> 00:32:31,120 Speaker 3: but just you know, social and lack of trust and 613 00:32:31,120 --> 00:32:33,920 Speaker 3: all that stuff. But I've kind of been thinking as like, well, 614 00:32:34,560 --> 00:32:37,560 Speaker 3: you know, as long as like it doesn't break, then 615 00:32:37,640 --> 00:32:40,320 Speaker 3: probably everything is going to be fine. But maybe one 616 00:32:40,400 --> 00:32:42,160 Speaker 3: day it's gonna be break and it's gonna be really 617 00:32:42,200 --> 00:32:44,800 Speaker 3: hard to put back together again, and then it'll be 618 00:32:44,840 --> 00:32:47,120 Speaker 3: really bad in me anyway, So do we buy ourself? 619 00:32:47,320 --> 00:32:50,240 Speaker 3: Where's the market going? Like we've had this rally, it's 620 00:32:50,240 --> 00:32:52,080 Speaker 3: pulled back a little bit, but we're still having a 621 00:32:52,120 --> 00:32:55,920 Speaker 3: pretty great year in stocks. As of right now when 622 00:32:55,960 --> 00:32:58,480 Speaker 3: I'm saying this, the SMP is of fourteen point four 623 00:32:58,480 --> 00:33:00,880 Speaker 3: to four percent, which would be a great year if 624 00:33:00,920 --> 00:33:03,360 Speaker 3: we ended here. No one's going to complain about that. 625 00:33:03,800 --> 00:33:04,960 Speaker 3: What do you see happening now? 626 00:33:05,680 --> 00:33:08,080 Speaker 4: I am almost as uncertain about this as J. Powell 627 00:33:08,120 --> 00:33:09,960 Speaker 4: was last night, and I do think we need to 628 00:33:10,000 --> 00:33:12,360 Speaker 4: look at the numbers as we're going along for the 629 00:33:12,400 --> 00:33:15,080 Speaker 4: fun flows for the central mark liquidity. What I can 630 00:33:15,120 --> 00:33:18,440 Speaker 4: say with confidence is that I think the massive tailwind 631 00:33:18,480 --> 00:33:20,520 Speaker 4: that we had in twenty twenty three and in the 632 00:33:20,520 --> 00:33:24,040 Speaker 4: early part of this year is basically gone, and if 633 00:33:24,040 --> 00:33:27,320 Speaker 4: anything is likely to reverse slightly, I think the balance 634 00:33:27,400 --> 00:33:33,040 Speaker 4: of risk is therefore for higher volatility for at least 635 00:33:33,040 --> 00:33:35,640 Speaker 4: not rallying equities. I'd be happy to position for a 636 00:33:35,680 --> 00:33:38,960 Speaker 4: further rotation within the equity market. Again, the whole tech sector, 637 00:33:39,000 --> 00:33:41,680 Speaker 4: to my mind, does look stretched at this point. But 638 00:33:41,840 --> 00:33:45,200 Speaker 4: even there, it's not that I'm outright bullish on the 639 00:33:45,280 --> 00:33:47,160 Speaker 4: value sectors and the banks and the things that are 640 00:33:47,160 --> 00:33:49,000 Speaker 4: doing well at the moment and might benefit if there's 641 00:33:49,000 --> 00:33:51,800 Speaker 4: a further Trump trade. To my mind, everything ends up 642 00:33:51,880 --> 00:33:55,200 Speaker 4: rather more vulnerable than it has been because of this 643 00:33:55,360 --> 00:33:56,720 Speaker 4: tailwind is just no longer there. 644 00:33:57,640 --> 00:34:00,400 Speaker 2: I realized we'd be very remiss if we had Matt 645 00:34:00,440 --> 00:34:03,920 Speaker 2: King on the podcast talking about the impact of central 646 00:34:03,960 --> 00:34:07,560 Speaker 2: bank driven liquidity and balance sheets on the market and 647 00:34:07,840 --> 00:34:11,399 Speaker 2: we didn't talk about what's going on in repo at 648 00:34:11,400 --> 00:34:16,440 Speaker 2: the moment. So we have seen, for instance, the secured 649 00:34:16,520 --> 00:34:20,560 Speaker 2: overnight funding rate, so the libor replacement ticking up quite 650 00:34:20,600 --> 00:34:23,440 Speaker 2: a bit. Recently. There's been talk about lots of drama 651 00:34:23,560 --> 00:34:26,360 Speaker 2: in the repo market, and there's been this ongoing discussion 652 00:34:26,400 --> 00:34:29,440 Speaker 2: about whether or not some of what's happening there could 653 00:34:29,719 --> 00:34:33,960 Speaker 2: lead the FED to have to reconsider things like quantitative tightening, 654 00:34:34,040 --> 00:34:37,360 Speaker 2: or maybe at least tweak that approach. Is this something 655 00:34:37,360 --> 00:34:38,360 Speaker 2: that's been on your radar? 656 00:34:39,320 --> 00:34:45,600 Speaker 4: Yes and no. So yes, insofar as the changes in 657 00:34:45,680 --> 00:34:50,280 Speaker 4: the level of RRP, the reverse reproprogram at the FED 658 00:34:50,360 --> 00:34:53,680 Speaker 4: are a direct driver of reserves, and that feeds through 659 00:34:54,320 --> 00:34:58,359 Speaker 4: directly into my view of where markets are going. And 660 00:34:58,480 --> 00:35:02,239 Speaker 4: therefore I do look quite closely at the things I 661 00:35:02,239 --> 00:35:06,160 Speaker 4: think are driving RRP, namely the pickup on T bills, 662 00:35:06,320 --> 00:35:10,040 Speaker 4: and yes, the levels are private sector reaper in general, 663 00:35:10,200 --> 00:35:16,920 Speaker 4: though I am much less worried about things breaking, especially 664 00:35:17,200 --> 00:35:20,719 Speaker 4: with some of the new emergency facilities which are available 665 00:35:21,280 --> 00:35:23,920 Speaker 4: in than other people are. And that's because for me, 666 00:35:24,320 --> 00:35:27,319 Speaker 4: it's not that there's some magic level where reserves are 667 00:35:27,360 --> 00:35:29,359 Speaker 4: adequate and if we drop below that then bad things 668 00:35:29,400 --> 00:35:31,120 Speaker 4: happen and you see it in a spike and rate. 669 00:35:31,760 --> 00:35:35,920 Speaker 4: For me, instead, it's about that balance between the as 670 00:35:35,960 --> 00:35:37,800 Speaker 4: I say, the amount of money in private markets and 671 00:35:37,840 --> 00:35:40,799 Speaker 4: the assets available to absorb them, and that's reflected in 672 00:35:40,840 --> 00:35:44,239 Speaker 4: a much more continuous fashion with changes in reserves, even 673 00:35:44,239 --> 00:35:47,719 Speaker 4: when liquidity is supposedly abundant. So yes, I'm monitoring all 674 00:35:47,760 --> 00:35:50,720 Speaker 4: of this, but I don't have quite the same worry 675 00:35:50,800 --> 00:35:54,759 Speaker 4: about things suddenly breaking that perhaps some other people do. 676 00:35:55,200 --> 00:35:59,040 Speaker 4: And if anything, my guess would be the fact that 677 00:35:59,040 --> 00:36:03,319 Speaker 4: they've tapered the QUT means they probably will go on 678 00:36:03,520 --> 00:36:06,600 Speaker 4: for longer, and ultimately, other things being equal, that is 679 00:36:06,680 --> 00:36:08,680 Speaker 4: likely to drain reserves and is likely to lead to 680 00:36:08,719 --> 00:36:11,839 Speaker 4: a weaker market. But it would take quite a severe weakening, 681 00:36:12,280 --> 00:36:14,440 Speaker 4: I think, especially following the tapering, for them to want 682 00:36:14,440 --> 00:36:18,560 Speaker 4: to abandon the QT entirely. And indeed, i'd argue that frankly, 683 00:36:18,880 --> 00:36:21,719 Speaker 4: in almost in some broader sense, what we're wrestling with 684 00:36:21,960 --> 00:36:25,640 Speaker 4: is too much froth in markets and too much asset 685 00:36:25,680 --> 00:36:29,840 Speaker 4: price inflation. And my concern is a bit more the 686 00:36:29,840 --> 00:36:32,160 Speaker 4: opposite that they keep turning a blind eye to that, 687 00:36:32,560 --> 00:36:34,319 Speaker 4: and if we could take some of that froth out 688 00:36:34,320 --> 00:36:36,359 Speaker 4: of markets, yes, it might weaken the outlook a little 689 00:36:36,360 --> 00:36:38,319 Speaker 4: bit in the neartom, but it would lead to a 690 00:36:38,400 --> 00:36:40,680 Speaker 4: much more stable outlook over the long term. 691 00:36:40,840 --> 00:36:44,160 Speaker 2: All right, Matt King from satory insides, It was so 692 00:36:44,280 --> 00:36:47,160 Speaker 2: lovely being able to catch up with you once again. 693 00:36:47,239 --> 00:36:49,120 Speaker 2: Thank you so much for coming back on the show. 694 00:36:49,560 --> 00:37:03,480 Speaker 4: My pleasure. Thanks for having me, Joe. 695 00:37:03,440 --> 00:37:06,600 Speaker 2: I really enjoy talking to Matt I should just emphasize 696 00:37:06,640 --> 00:37:10,720 Speaker 2: again that throughout that entire conversation, even though we couldn't 697 00:37:10,719 --> 00:37:13,920 Speaker 2: see him, he was bringing up charts because he always 698 00:37:13,960 --> 00:37:15,880 Speaker 2: brings up his charts, and I kind of love it, 699 00:37:15,880 --> 00:37:18,200 Speaker 2: and I will include them in the transcript of this 700 00:37:18,320 --> 00:37:20,080 Speaker 2: conversation so everyone can see them. 701 00:37:20,320 --> 00:37:23,279 Speaker 3: Yeah, we should put out the transcript early when this 702 00:37:23,400 --> 00:37:26,120 Speaker 3: comes out, so maybe people you know, or people can 703 00:37:26,200 --> 00:37:28,319 Speaker 3: download this and then pause it and then wait for 704 00:37:28,360 --> 00:37:30,840 Speaker 3: the transcript to come out and then give it a listen. 705 00:37:31,120 --> 00:37:34,799 Speaker 3: I always enjoy Matt too. I respect how he sort 706 00:37:34,840 --> 00:37:38,520 Speaker 3: of characterized the evolving nature of his approach to looking 707 00:37:38,560 --> 00:37:42,040 Speaker 3: at markets, which is, if something isn't working, stop focusing 708 00:37:42,080 --> 00:37:44,560 Speaker 3: on that and start looking for things that are working. 709 00:37:44,960 --> 00:37:48,480 Speaker 3: And if there are relationships between measures of liquidity and 710 00:37:48,920 --> 00:37:52,600 Speaker 3: what's happening with risk assets, and they continue to work, 711 00:37:52,640 --> 00:37:54,360 Speaker 3: and they work in back tests and they work and 712 00:37:54,440 --> 00:37:56,640 Speaker 3: forward tests, then it would certainly make sense to me 713 00:37:56,680 --> 00:37:57,560 Speaker 3: to keep looking at them. 714 00:37:57,920 --> 00:38:00,839 Speaker 2: I do think he's sort of put his finger on 715 00:38:01,200 --> 00:38:04,960 Speaker 2: something important and fundamental, and I'm pretty sure I've said 716 00:38:05,000 --> 00:38:08,120 Speaker 2: it on the show before in one way or another. 717 00:38:08,440 --> 00:38:10,279 Speaker 2: I know I've written about it in the newsletter, but 718 00:38:10,320 --> 00:38:13,440 Speaker 2: it does feel like we've seen the price of money 719 00:38:13,920 --> 00:38:18,040 Speaker 2: go up via higher benchmark interest rates, but that doesn't 720 00:38:18,080 --> 00:38:22,120 Speaker 2: mean that its availability has been limited. So you know, 721 00:38:22,280 --> 00:38:26,520 Speaker 2: liquidity is still pretty abundant. It seems like people can 722 00:38:26,960 --> 00:38:30,080 Speaker 2: borrow if they need to, And so I do think 723 00:38:30,120 --> 00:38:32,920 Speaker 2: it's a valid question to be asking why there seems 724 00:38:32,920 --> 00:38:36,040 Speaker 2: to be this disconnect between interest rates the price of 725 00:38:36,160 --> 00:38:38,680 Speaker 2: money versus its availability. 726 00:38:39,200 --> 00:38:41,160 Speaker 3: No, I mean, it is really wild, right, It's a 727 00:38:41,200 --> 00:38:44,040 Speaker 3: mystery even as this price of money seems to have 728 00:38:44,080 --> 00:38:45,839 Speaker 3: gone up. I mean you could make the argument, yeah, 729 00:38:45,880 --> 00:38:48,640 Speaker 3: the price of money has gone up, but inflation's gone up, 730 00:38:48,680 --> 00:38:50,880 Speaker 3: so maybe it hasn't gone up as much. I remember 731 00:38:50,920 --> 00:38:53,080 Speaker 3: that was certainly a talking point for a while, maybe 732 00:38:53,080 --> 00:38:57,200 Speaker 3: in like twenty twenty two or twenty twenty three. But look, 733 00:38:57,360 --> 00:38:59,680 Speaker 3: no one's coming out great from the last four years, 734 00:38:59,760 --> 00:39:02,359 Speaker 3: or for the most part, nobody's theories are holding up 735 00:39:02,400 --> 00:39:05,279 Speaker 3: that well, and the market and the economy continue to 736 00:39:05,480 --> 00:39:08,520 Speaker 3: surprise people. So I do think it's important to look 737 00:39:08,520 --> 00:39:09,520 Speaker 3: at other perspectives. 738 00:39:09,760 --> 00:39:12,160 Speaker 2: What will be really interesting is when we do finally 739 00:39:12,200 --> 00:39:14,360 Speaker 2: have rate cuts and seeing if like any of the 740 00:39:14,480 --> 00:39:17,640 Speaker 2: more recent patterns actually hold, or if stuff starts to 741 00:39:17,680 --> 00:39:18,160 Speaker 2: break again. 742 00:39:18,560 --> 00:39:21,840 Speaker 3: Actually, it is funny because right in theory, the market 743 00:39:22,080 --> 00:39:24,279 Speaker 3: wants raid cuts, right like right, like we all sort 744 00:39:24,280 --> 00:39:27,680 Speaker 3: of it's just duh. But it's like the stock market's 745 00:39:27,680 --> 00:39:30,839 Speaker 3: done incredibly well during a period of rising and elevated rates, 746 00:39:30,960 --> 00:39:37,680 Speaker 3: that's right. So like you do wonder ultimately whether like okay, 747 00:39:37,800 --> 00:39:40,720 Speaker 3: something big could shift soon in terms of the direction 748 00:39:40,800 --> 00:39:43,040 Speaker 3: of the Fed. Now, of course the FED would say, 749 00:39:43,080 --> 00:39:45,920 Speaker 3: you know, it's changing directions because the underlying macro has changed. 750 00:39:46,120 --> 00:39:48,359 Speaker 3: But it is interesting, right, We've had the straight line 751 00:39:48,440 --> 00:39:50,400 Speaker 3: up and now we seem to be perhaps it's some 752 00:39:50,440 --> 00:39:53,479 Speaker 3: sort of macro turning point, and so you got to wonder, 753 00:39:53,560 --> 00:39:55,719 Speaker 3: then is the line going to also turn in some way? 754 00:39:55,960 --> 00:39:57,680 Speaker 2: Yeah? All right, shall we leave it there. 755 00:39:57,760 --> 00:39:58,439 Speaker 3: Let's leave it there. 756 00:39:58,520 --> 00:40:01,560 Speaker 2: This has been another episode the au Thoughts podcast. I'm 757 00:40:01,560 --> 00:40:04,600 Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway and. 758 00:40:04,560 --> 00:40:07,280 Speaker 3: I'm Joe Wisenthal. You can follow me at the Stalwart. 759 00:40:07,400 --> 00:40:10,640 Speaker 3: Follow our producers Carmen Rodriguez at Carman Ermann, desh O 760 00:40:10,680 --> 00:40:14,000 Speaker 3: Bennett at Dashbot and kill Brooks at Kilbrooks. Thank you 761 00:40:14,040 --> 00:40:17,040 Speaker 3: to our producer Moses On. For more odd Laws content, 762 00:40:17,120 --> 00:40:20,080 Speaker 3: go to Bloomberg dot com, slash odd lots. We're have transcripts, 763 00:40:20,120 --> 00:40:23,160 Speaker 3: a blog, and a newsletter and you can chat about 764 00:40:23,200 --> 00:40:26,040 Speaker 3: all of these topics, including all of Matt's charts in 765 00:40:26,120 --> 00:40:29,840 Speaker 3: the Discord twenty four to seven with fellow listeners Discord 766 00:40:29,880 --> 00:40:31,240 Speaker 3: dot gg, slash od. 767 00:40:31,120 --> 00:40:33,880 Speaker 2: Lots and if you enjoy all thoughts. If you like 768 00:40:33,960 --> 00:40:36,359 Speaker 2: it when we do these types of market discussions, then 769 00:40:36,400 --> 00:40:40,200 Speaker 2: please leave us a positive review on your favorite podcast platform. 770 00:40:40,520 --> 00:40:43,399 Speaker 2: And remember, if you are a Bloomberg subscriber, you can 771 00:40:43,440 --> 00:40:46,680 Speaker 2: listen to all of our episodes absolutely ad free. All 772 00:40:46,719 --> 00:40:49,080 Speaker 2: you need to do is connect your Bloomberg account with 773 00:40:49,239 --> 00:40:52,080 Speaker 2: Apple Podcasts. In order to do that, just find the 774 00:40:52,360 --> 00:40:56,239 Speaker 2: Bloomberg channel on Apple Podcasts and follow the instructions there. 775 00:40:56,480 --> 00:41:02,600 Speaker 2: Thanks for listening in