WEBVTT - Matt King on the Hidden Forces Driving the Market Sell-Off 0:00:02.520 --> 0:00:15.840 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.440 --> 0:00:21.840 Hello and welcome to another episode of the Odd Thoughts podcast. 0:00:22.000 --> 0:00:23.360 I'm Tracy Alloway. 0:00:23.120 --> 0:00:24.320 And I'm Joe Wisenthal. 0:00:24.600 --> 0:00:27.240 Joe, it's my favorite time of year. It's August. 0:00:27.640 --> 0:00:29.840 Well, I didn't know that. Why is it your favorite 0:00:29.840 --> 0:00:31.560 time of year? I like August two. I love summer. 0:00:31.560 --> 0:00:32.360 But what's your reason. 0:00:32.479 --> 0:00:34.880 Well, actually it's exactly that. I love summer. 0:00:35.200 --> 0:00:36.840 But this is why we get along. 0:00:37.600 --> 0:00:39.279 There's an added flames say. 0:00:39.360 --> 0:00:42.400 I don't like people who have favorite seasons of the summer. 0:00:42.479 --> 0:00:43.519 I'm skeptical of that. 0:00:44.000 --> 0:00:45.440 You know what I used to be. 0:00:45.520 --> 0:00:46.360 I judge people. 0:00:46.560 --> 0:00:49.120 Okay, that's fine. I used to be exactly like that. However, 0:00:49.200 --> 0:00:51.199 I've found that as I've gotten older, I've kind of 0:00:51.280 --> 0:00:54.680 come Maybe as I've gotten older and acquired a house 0:00:54.720 --> 0:00:57.840 without air conditioning, I've also home to appreciate winter a 0:00:57.880 --> 0:01:02.080 little bit more. Okay, I didn't actually mean to start 0:01:02.120 --> 0:01:04.960 talking about the weather. But there's another reason I like August, 0:01:05.160 --> 0:01:07.600 which is I feel like that's the month when weird 0:01:07.680 --> 0:01:09.720 things in markets start to happen. 0:01:09.959 --> 0:01:13.959 Yeah, August through October feels like that's the three month 0:01:14.080 --> 0:01:15.560 stretch where anything can happen. 0:01:15.840 --> 0:01:19.240 Yeah, and August especially, you know, people are on their 0:01:19.440 --> 0:01:24.200 like mandated two weekly if you're a professional working at 0:01:24.240 --> 0:01:27.000 a bank or something like that, you have to go 0:01:27.120 --> 0:01:29.640 on leave for I think two weeks or something like 0:01:29.680 --> 0:01:33.759 that every year. And there's lots of illiquidity in the market, 0:01:34.160 --> 0:01:37.480 so you know, tiny little things can end up having 0:01:37.480 --> 0:01:39.840 a big impact. And I feel like August is when 0:01:39.840 --> 0:01:43.840 you get some of those strange market moves. And speaking 0:01:43.959 --> 0:01:47.680 of strange market moves, or at least dramatic ones, in 0:01:47.840 --> 0:01:52.000 recent days and weeks, we have seen some interesting stuff 0:01:52.000 --> 0:01:54.560 happening in the market that has been different to the 0:01:54.680 --> 0:01:57.480 pattern that has played out for the past year or 0:01:57.560 --> 0:01:58.560 so totally. 0:01:58.600 --> 0:02:00.320 First of all, we've had a little bit of weakness. 0:02:00.640 --> 0:02:03.240 I've had a little bit of rotation that people are 0:02:03.240 --> 0:02:06.080 talking about. Some of those red hot tech stocs have 0:02:06.160 --> 0:02:08.880 come down. We're seeing a lot of moves on the curve. 0:02:09.040 --> 0:02:11.440 At the time we're writing this, the tenure yield is 0:02:11.520 --> 0:02:15.320 back below four percon So I was just saying in 0:02:15.360 --> 0:02:18.680 the Odd Lots discord which people should go and subscribe 0:02:18.680 --> 0:02:22.160 to and hang out, I literally said, this morning, macro 0:02:22.240 --> 0:02:23.600 feels like it's kind of getting interesting. 0:02:23.639 --> 0:02:27.640 Again absolutely, both macro and markets, I gotta say, And 0:02:27.720 --> 0:02:31.600 there is this ongoing conversation about how much of what 0:02:31.720 --> 0:02:34.400 is happening in markets at the moment is technically driven, 0:02:34.520 --> 0:02:37.960 so you know, maybe some of those pod shops having 0:02:37.960 --> 0:02:42.880 to cut some positioning versus people actually reacting to changes 0:02:42.919 --> 0:02:45.440 in the macro outlook. And I should just say we 0:02:45.480 --> 0:02:48.440 are recording this on August first, the day after the 0:02:48.480 --> 0:02:53.160 Federal Reserve meeting, where as expected, they didn't cut interest rates, 0:02:53.200 --> 0:02:56.840 but they certainly telegraphed an upcoming cut, So lots going 0:02:56.840 --> 0:02:57.560 on there as well. 0:02:57.919 --> 0:03:01.160 And the day before recording this day for non farm payrolls. 0:03:01.440 --> 0:03:03.600 So by the time you were listening to this, we'll 0:03:03.600 --> 0:03:05.240 know a little bit more about the labor market. 0:03:05.400 --> 0:03:08.320 Yes, we will. So there's a lot going on. It's August. 0:03:08.400 --> 0:03:11.840 There's the potential for even more stuff to happen, weird 0:03:11.880 --> 0:03:14.440 stuff sometimes, And I have to say, when it comes 0:03:14.480 --> 0:03:18.960 to diving into the intricacies of the market and what's 0:03:19.000 --> 0:03:22.200 going on there, there's a person that I very much 0:03:22.320 --> 0:03:25.320 like to speak to. We've had him on the show before. 0:03:25.639 --> 0:03:29.960 It is Matt King, formerly of City Group, and he's 0:03:30.000 --> 0:03:34.519 now started his own research shop. It is called Satory Insights, 0:03:34.520 --> 0:03:37.760 and he is the founder and global market strategist over there. 0:03:37.800 --> 0:03:39.600 So we're going to talk to Matt about what's going 0:03:39.600 --> 0:03:43.040 on in markets, what the outlook is right now. Matt, 0:03:43.200 --> 0:03:45.120 thank you so much for coming back on all thoughts. 0:03:45.600 --> 0:03:47.280 Thank you for having me so much too kind. 0:03:47.920 --> 0:03:50.560 Well, we are very excited to be speaking to you again. 0:03:50.800 --> 0:03:53.520 There's a lot that's happened since we spoke to you 0:03:53.600 --> 0:03:57.680 last I think it was in maybe in March of 0:03:57.840 --> 0:04:01.440 last year. Talk to us about what's happened. So you've 0:04:01.480 --> 0:04:04.000 set out on your own. You have this new thing 0:04:04.080 --> 0:04:06.440 called Satory Insights. What are you doing over there? 0:04:07.080 --> 0:04:09.120 I'm doing more or less what I was doing previously, 0:04:09.120 --> 0:04:11.240 which is trying to explain what markets have done and 0:04:11.280 --> 0:04:13.480 what markets are going to do, and generally doing it 0:04:13.560 --> 0:04:15.800 in a rather different fashion from everybody else as far 0:04:15.840 --> 0:04:19.359 as I can see. And I love your description of August. 0:04:20.000 --> 0:04:22.839 In my experience, either nothing whatsoever happens or areas you say, 0:04:23.040 --> 0:04:25.880 quite big stuff happens. But I think that the biggest 0:04:25.880 --> 0:04:28.159 puzzles that I see people wrestling with at the moment 0:04:28.200 --> 0:04:31.240 are are, frankly, making sense of what markets have done 0:04:31.360 --> 0:04:34.359 year to date and therefore, and that's the context in 0:04:34.400 --> 0:04:36.680 which you need to see the change now, because on 0:04:36.720 --> 0:04:38.640 the one hand, the other economy is much stronger than 0:04:38.640 --> 0:04:41.640 everyone was imagining, But on the other hand, markets have 0:04:41.720 --> 0:04:44.080 really done much much better. And yeah, there's the whole 0:04:44.080 --> 0:04:46.839 AI story, but it sort of feels as though it's 0:04:46.960 --> 0:04:49.479 more than that. And I think the biggest puzzle is 0:04:49.560 --> 0:04:53.599 why financial conditions have eased so much even as we've 0:04:53.600 --> 0:04:57.200 had ongoing QT, even as we've had rates at twenty 0:04:57.200 --> 0:04:59.279 three year highs. And in fact, it was the main 0:04:59.279 --> 0:05:02.120 thing I was missing in the FOMCA last night. Nobody 0:05:02.160 --> 0:05:05.200 asked Jay Powell about how they considered this ease in 0:05:05.240 --> 0:05:07.920 your financial conditions on one of the Bloomberg financial conditions 0:05:08.360 --> 0:05:10.840 is just a couple of months ago we were showing 0:05:10.880 --> 0:05:13.200 easier conditions than two thousand and seven, And I think 0:05:13.200 --> 0:05:15.719 you need to get your head around what's been driving 0:05:15.800 --> 0:05:17.520 all of that before you can then come back and 0:05:17.520 --> 0:05:19.840 think about the outlook and what markets are doing at 0:05:19.839 --> 0:05:20.200 the moment. 0:05:20.800 --> 0:05:24.960 All right, what's the answer? Tell us the answer for 0:05:25.040 --> 0:05:27.720 this date of financial conditions, because it does seem weird, 0:05:27.760 --> 0:05:29.800 and I mean, I think we've probably been talking about 0:05:29.839 --> 0:05:32.160 this for almost two years on the show, the surprise 0:05:32.839 --> 0:05:35.960 that perhaps fed raid hikes and the slow wind down 0:05:35.960 --> 0:05:38.919 of the balance sheet hasn't had at least here before 0:05:39.040 --> 0:05:40.440 more of a deleterious effect. 0:05:40.839 --> 0:05:43.680 So, at the risk of being cheeky, it's exactly that 0:05:43.800 --> 0:05:46.760 same thing which I heard you say had been debound 0:05:47.480 --> 0:05:50.040 on one of the previous episodes with one of your 0:05:50.080 --> 0:05:50.680 other guests. 0:05:50.800 --> 0:05:54.320 So well, thank you for so I thank you for listening. 0:05:54.400 --> 0:05:59.560 I appreciate I'm glad even though I personally offended your approach, 0:05:59.560 --> 0:06:02.760 which I apologize, I appreciate your listening to Odd Lives, 0:06:02.800 --> 0:06:05.360 and I appreciate you coming back and I say that 0:06:05.600 --> 0:06:09.400 nothing is ever debunked in markets, because I actually don't. 0:06:09.200 --> 0:06:09.760 Feel that way. 0:06:09.960 --> 0:06:12.680 Joe is open minded, and just to be clear what 0:06:12.720 --> 0:06:14.720 we're talking about in terms of the debunking, it was 0:06:14.760 --> 0:06:19.440 the idea that central bank liquidity was driving asset prices. 0:06:19.520 --> 0:06:21.920 That was the idea, which Matt is very much your 0:06:21.960 --> 0:06:23.960 approach to analyzing markets. 0:06:24.120 --> 0:06:26.479 And I was not offended either. In teacher became the 0:06:26.480 --> 0:06:28.800 subject of a footnote in one of my research pieces 0:06:28.839 --> 0:06:33.159 making the counter argument. But I think that the standard 0:06:33.440 --> 0:06:36.640 view of what's been going on is, oh, the economy 0:06:36.720 --> 0:06:39.440 must be much stronger than everyone thought previously. It must 0:06:39.440 --> 0:06:42.159 be that our star and neutral rates are higher. But 0:06:42.200 --> 0:06:44.040 then there are a couple of puzzles. It's like, oh, well, 0:06:44.080 --> 0:06:46.520 how come actually desire to borrow in credit growth are 0:06:46.520 --> 0:06:49.040 really quite limited. There's lots of gross issues, but actually 0:06:49.080 --> 0:06:52.640 net borrowing is really rather lackluster. And how come many 0:06:52.680 --> 0:06:55.600 of the arstar models, the most comprehensive ones, don't really 0:06:55.600 --> 0:06:59.040 show this big pickup in neutral rates. And then how 0:06:59.040 --> 0:07:01.239 do we make sense of the recent and weakness, especially 0:07:01.240 --> 0:07:04.200 in things like credit and emerging markets? And so again, 0:07:04.240 --> 0:07:07.320 the sort of standard explanation is maybe, and there was 0:07:07.320 --> 0:07:10.240 a nice academic paper on this recently which maybe QT 0:07:10.520 --> 0:07:13.400 is just not as powerful as QE. Maybe there's some 0:07:13.440 --> 0:07:16.800 big asymmetric effect going And it was a lovely argued 0:07:16.840 --> 0:07:19.320 paper that I happened to think drough all the wrong conclusions. 0:07:19.600 --> 0:07:23.040 And as usual, I start from not knowing anything about this. 0:07:23.160 --> 0:07:25.640 I just look at my charts of what markets are doing, 0:07:25.720 --> 0:07:27.440 and I try and make sense of them. But the 0:07:27.480 --> 0:07:31.080 way it seems to me is that market sensitivity to 0:07:31.440 --> 0:07:35.200 central bank balance sheet changes really hasn't changed at all. 0:07:35.880 --> 0:07:38.360 That most of the time, when we thought we were 0:07:38.360 --> 0:07:41.720 doing QT. Actually we weren't, and indeed a lot of 0:07:41.720 --> 0:07:45.120 the time there was almost this stealth Q effect going on. 0:07:45.520 --> 0:07:47.080 And this is a lot of the reason why I 0:07:47.080 --> 0:07:49.520 think that financial conditions have been so easy, notwithstanding all 0:07:49.520 --> 0:07:51.680 of the rate hikes. And the right way to think 0:07:51.720 --> 0:07:54.240 about this is in terms of not the security side 0:07:54.280 --> 0:07:57.520 of the central bank balance sheet, but the changes in reserves. 0:07:57.840 --> 0:08:00.720 And once you start thinking in those terms globally, and 0:08:00.720 --> 0:08:02.720 you say, well, since two thousand and nine, we added 0:08:02.760 --> 0:08:06.480 eighteen trillion dollars worth of reserves or liquidity, and we've 0:08:06.520 --> 0:08:09.560 only dialed back about five hundred billion dollars worth. And 0:08:09.760 --> 0:08:12.080 even if we think more recently, as you say, more 0:08:12.160 --> 0:08:14.360 or lessons last time I was on, since the last 0:08:14.400 --> 0:08:18.000 market trough in October twenty twenty two, even with the 0:08:18.040 --> 0:08:22.320 supposed ongoing QT, US reserves have increased, not fallen, by 0:08:22.320 --> 0:08:24.640 a net two hundred and fifty billion dollars, and global 0:08:24.680 --> 0:08:27.960 reserves have increased by nine hundred and twenty billion dollars. 0:08:28.120 --> 0:08:32.440 And not only that, but the timing just fits so perfectly, 0:08:32.480 --> 0:08:34.760 and mostly I think my charts argue better than I 0:08:34.840 --> 0:08:38.760 can here. But whenever reserves have actually fallen so in 0:08:38.800 --> 0:08:42.400 twenty twenty two. Markets fell whenever they fell in say 0:08:42.440 --> 0:08:45.839 April this year again, same thing. Risk fell back again, 0:08:45.920 --> 0:08:48.439 and that's a little of what's happened in July as well. 0:08:48.600 --> 0:08:51.440 Sorry, just to be clear on this, what are you 0:08:51.559 --> 0:08:54.400 looking at when you say that reserves? Heaven? Because if 0:08:54.440 --> 0:08:56.360 I look at just the pure chart of the FED 0:08:56.400 --> 0:08:59.400 balance sheet on the Bloomberg, it's clearly gone down. It's 0:08:59.520 --> 0:09:03.000 lowest twenty So when you say reserves haven't gone down, 0:09:03.520 --> 0:09:05.480 what measure should I be looking at? 0:09:05.720 --> 0:09:08.000 So for the FED, you just want the straight reserves 0:09:08.080 --> 0:09:09.959 number that you're looking at, and you see a peek 0:09:10.000 --> 0:09:13.239 in April this year, and then levels have fallen off subsequently. 0:09:13.600 --> 0:09:16.319 And then I do the same thing globally by looking 0:09:16.320 --> 0:09:19.040 at reserves. Occasionally it's slightly different, but basically reserves at 0:09:19.040 --> 0:09:21.920 other central banks. I make sure I don't introduce FX 0:09:21.960 --> 0:09:24.959 effects to the total, and I look at the changes 0:09:25.040 --> 0:09:27.720 in those reserves. Again, you get a peak in April 0:09:27.720 --> 0:09:30.040 and then they've come off a little bit subsequently. But 0:09:30.360 --> 0:09:34.240 most of the time the near term market moves correspond 0:09:34.400 --> 0:09:36.720 really quite well with those, And even though we're getting 0:09:36.720 --> 0:09:38.800 a little bit of a decoupling at the moment in 0:09:38.880 --> 0:09:42.040 equities are trying to break away. It's interesting that you 0:09:42.040 --> 0:09:44.200 look at other asset classes, you look at credit, you 0:09:44.200 --> 0:09:46.040 look at emerging markets, if you even look at things 0:09:46.080 --> 0:09:50.840 like bitcoin. Basically that correlation with the global reserves numbers 0:09:50.840 --> 0:09:51.360 carries on. 0:09:51.559 --> 0:09:54.520 All right, Tracy, just to clarify, if you look at 0:09:54.559 --> 0:09:57.120 the total size of the FED balance sheet is gone down. 0:09:57.360 --> 0:10:00.599 But Matt is correct that if you look specifically a 0:10:00.800 --> 0:10:04.520 US reserve balances with the Federal Reserve, it was a 0:10:04.679 --> 0:10:06.720 peak in twenty twenty two, it fell and then it 0:10:06.760 --> 0:10:09.080 picked back up, peaked in April, and then gone down. 0:10:09.160 --> 0:10:12.000 So if you look at that measure, right. 0:10:12.000 --> 0:10:15.200 And I should just say Matt mentioned his famous charts 0:10:15.280 --> 0:10:18.199 just then, and we're going to embed some of those 0:10:18.280 --> 0:10:21.480 in the transcript of this conversation, So if you are listening, 0:10:21.880 --> 0:10:24.240 then please check out the transcript as well because we 0:10:24.280 --> 0:10:28.560 will have those visuals to better illustrate the point. But Matt, 0:10:28.760 --> 0:10:32.360 just on the bank reserves point, could you walk us through, 0:10:33.000 --> 0:10:38.280 preferably in excruciating detail, exactly how an increase in bank 0:10:38.320 --> 0:10:42.480 reserves translates into higher asset prices. Is it the case 0:10:42.520 --> 0:10:44.880 that when you know banks have more reserves, maybe they 0:10:44.880 --> 0:10:50.400 feel more comfortable lending. Maybe it changes people's risk preferences. 0:10:50.480 --> 0:10:54.640 How exactly does that translate into concrete market action. 0:10:54.920 --> 0:10:57.760 Well, such to the second than the first, But in 0:10:57.840 --> 0:11:01.520 general I'm not sure anybody can do this properly, and 0:11:01.600 --> 0:11:04.319 I'm mostly looking at the charts and then reasoning backwards. 0:11:04.679 --> 0:11:07.680 So the most common explanations that you hear, and there's 0:11:07.679 --> 0:11:10.679 been another paper recently by Noial Rubni try and relate 0:11:10.720 --> 0:11:13.439 it to interest rate moves. And similarly, the FED when 0:11:13.440 --> 0:11:15.920 they talk about this, they always focus on the levels 0:11:15.920 --> 0:11:20.120 of reserves, and they kind of almost ignore changes in 0:11:20.160 --> 0:11:23.080 reserves once they assume that the level of reserves is adequate. 0:11:23.400 --> 0:11:25.960 I think that is entirely the wrong way to think 0:11:26.000 --> 0:11:29.040 about it, intuitive though it may be. And likewise, I 0:11:29.040 --> 0:11:31.360 think thinking in terms of the impact on interest rates 0:11:31.360 --> 0:11:35.199 and then looking for that to cascade outwards again is wrong. 0:11:35.720 --> 0:11:38.280 And instead, the way I think you're supposed to think 0:11:38.320 --> 0:11:43.200 about it is that reserves are a neat way to 0:11:43.440 --> 0:11:48.640 capture the balance between how much money the private sector 0:11:48.679 --> 0:11:52.920 has got relative to how many assets are available to 0:11:53.080 --> 0:11:56.000 absorb that money. Now, in the case of sort of 0:11:56.040 --> 0:11:58.760 standard QI or QT, that's kind of straightforward enough, you 0:11:58.840 --> 0:12:02.360 know that you are both giving the private sector more 0:12:02.360 --> 0:12:06.040 money in the form of reserves and then giving them 0:12:06.040 --> 0:12:09.400 fewer government bonds or bills to hold. But I think 0:12:09.440 --> 0:12:12.600 this is also the reason why it's reserves and not 0:12:12.679 --> 0:12:16.520 securities that count, because even when it's other factors on 0:12:16.559 --> 0:12:19.080 central wank balance sheets going up and down, like the 0:12:19.120 --> 0:12:21.280 Treasury General Account at the FED, or like the reverse 0:12:21.320 --> 0:12:24.160 report program at the FED, even when those things are 0:12:24.160 --> 0:12:29.079 seemingly innocuously moving up and down, they have this same effect. 0:12:29.559 --> 0:12:33.600 So if the TGA is going up because they have 0:12:33.880 --> 0:12:37.440 issued more tea bills and you have bought those tea bills, 0:12:37.600 --> 0:12:40.120 but then the money is locked away at the FED 0:12:40.480 --> 0:12:43.520 in a higher treasury balance, well that's the sort of 0:12:43.520 --> 0:12:46.439 the same thing. You've taken money away from the private sector, 0:12:46.880 --> 0:12:50.240 and there's less private money in markets, more securities needing 0:12:50.280 --> 0:12:52.680 to be absorbed, and as a result, what we get 0:12:52.800 --> 0:12:55.760 is a drop in the price of risk. And confusingly, 0:12:55.840 --> 0:12:58.160 where that shows up on all of my charts is 0:12:58.200 --> 0:13:00.679 not necessarily in a drop in the price off bond 0:13:00.720 --> 0:13:05.319 yields where you might have anticipated or T bill rates. Actually, instead, 0:13:05.679 --> 0:13:08.960 it shows up most clearly in the prices of equities, 0:13:08.960 --> 0:13:12.160 in the prices of credit spreads, and even occasionally in 0:13:12.160 --> 0:13:14.760 things like the prices of bitcoin. And for me, the 0:13:14.800 --> 0:13:17.280 way you make sense of that that's weird because it's 0:13:17.280 --> 0:13:18.959 not like the FED and the other central banks of 0:13:19.000 --> 0:13:22.160 buying and selling large amounts of credit or equities, or 0:13:22.200 --> 0:13:25.800 certainly bitcoin. But instead it's this ripple through effect. It's 0:13:25.840 --> 0:13:28.360 that when say it's the other way around and TGA 0:13:28.480 --> 0:13:31.120 is falling and I've just got more money in my 0:13:31.120 --> 0:13:33.240 bank account because of a te ball matured, but there's 0:13:33.280 --> 0:13:36.559 no new T bill for me to go out and buy. Well, 0:13:36.600 --> 0:13:39.040 I get forced into buying something riskier, and you get 0:13:39.040 --> 0:13:41.000 this cascading effect where the guy that would have bought 0:13:41.000 --> 0:13:42.800 bonds buys credit, and the buyer that would have bought 0:13:42.800 --> 0:13:44.560 investment grade buys high yeld, and the guy that would 0:13:44.559 --> 0:13:47.280 have bought up high yield buys equities, and you can't 0:13:47.320 --> 0:13:50.320 see all of those moving parts. It's sort of frustrating 0:13:50.720 --> 0:13:53.240 in that respect, but that's the only way I can 0:13:53.280 --> 0:13:56.680 make sense of these really quite consistent relationships, even from 0:13:56.679 --> 0:13:59.959 one week to the next, even when reserves are supposedly abundant. 0:14:00.280 --> 0:14:02.959 It's this shift in the balance and In fact, the 0:14:03.080 --> 0:14:05.240 chart of mind that I'm probably most pleased with this 0:14:05.400 --> 0:14:11.040 year is the one that then links through from changes 0:14:11.240 --> 0:14:14.920 in reserves or central bank liquidity globally to changes in 0:14:14.960 --> 0:14:17.600 the mutual fund flows, the mutual fund and the ETF flows. 0:14:17.800 --> 0:14:21.520 It's this crowding in and crowding out effect as a 0:14:21.640 --> 0:14:24.760 direct consequence of changes on central bank balance sheets, which 0:14:24.800 --> 0:14:28.680 I think has been much more important than is widely recognized. 0:14:28.680 --> 0:14:29.880 And even as you try and make sense of the 0:14:29.920 --> 0:14:32.240 mutual fund flows, this year has been the second biggest 0:14:32.320 --> 0:14:34.200 year on record after twenty twenty one, we've had six 0:14:34.280 --> 0:14:37.840 hundred billion dollars of overall inflows. Again for me, until 0:14:37.920 --> 0:14:41.760 very recently that was being driven directly by this crowding 0:14:41.800 --> 0:14:57.480 out effect from the global central bank reserves numbers. 0:15:00.440 --> 0:15:03.800 What is the role of rate policy in your thinking, 0:15:04.080 --> 0:15:06.800 because again, one of the things we're talking about right 0:15:06.840 --> 0:15:10.840 now is the timing of possible rate cuts, which doesn't 0:15:10.880 --> 0:15:15.000 directly impact some of these monetary aggregates such as the 0:15:15.040 --> 0:15:18.360 balance sheet or the reserves specifically, but there is a 0:15:18.400 --> 0:15:21.960 lot of anxiety in the market, particularly today again about 0:15:22.120 --> 0:15:24.200 whether the FED is going to be too late in 0:15:24.320 --> 0:15:28.000 cutting rates or etc. How do you think about that, 0:15:28.160 --> 0:15:30.200 is that, just in your view, totally irrelevant. 0:15:30.760 --> 0:15:33.080 I didn't used to think it was irrelevant, but it's 0:15:33.120 --> 0:15:35.520 sort of looking that way this cycle, isn't it. How 0:15:35.560 --> 0:15:37.520 come we've had all these rate increases and then you've 0:15:37.560 --> 0:15:39.840 not had a massive slowdown. And I think the way 0:15:39.880 --> 0:15:43.440 I think about it is, so it's always about money creation, 0:15:43.480 --> 0:15:46.120 it's always about credit creation. And normally that would be 0:15:46.200 --> 0:15:48.720 driven by the private sector. It would be you and 0:15:48.760 --> 0:15:51.280 me deciding to borrow or not to borrow based on 0:15:51.720 --> 0:15:55.040 whether rates were restrictive or not. And this cycle, on 0:15:55.080 --> 0:15:59.240 the other hand, has been different. The surge in credit 0:15:59.280 --> 0:16:01.360 that we had, it never came from the private sector. 0:16:01.400 --> 0:16:04.680 It came, if anything, from fiscal policy. And likewise, the 0:16:04.800 --> 0:16:06.760 surge in say things like fun flows and some of 0:16:06.800 --> 0:16:09.960 these market effects and the m zero or the reserves numbers, again, 0:16:10.040 --> 0:16:11.880 that was never driven by the private sector. It was 0:16:11.920 --> 0:16:15.720 never driven by interest rates. It was driven directly by 0:16:15.800 --> 0:16:18.640 these central bank balance sheet effects. And so the flip 0:16:18.720 --> 0:16:23.040 side of what I'm saying is that just as the 0:16:23.160 --> 0:16:26.840 rate increases maybe had a negative effect, that's lugging in 0:16:26.880 --> 0:16:28.360 the background, and there's a bit of a long lag 0:16:28.400 --> 0:16:31.000 and you begin to see delinquencies picking up. But when 0:16:31.000 --> 0:16:33.880 we eventually get to rate easing, I doubt that that 0:16:34.040 --> 0:16:36.640 is going to do very much to stimulate private sector 0:16:36.640 --> 0:16:40.440 credit growth either. And ultimately we may end up with 0:16:40.560 --> 0:16:43.680 more reasoning than imagined, just because we're still extremely sensitive 0:16:43.680 --> 0:16:46.680 to balance sheet changes. There never was that much desire 0:16:46.720 --> 0:16:49.200 to borrow on the part of the private sector even 0:16:49.240 --> 0:16:51.640 before all of the rate increases, and when we go 0:16:51.760 --> 0:16:53.720 back to additional easings, I'm not sure that's going to 0:16:53.720 --> 0:16:56.280 stimulate lots of private sector borrowing either. And this is 0:16:56.320 --> 0:16:59.040 part of a longer term shift where even as rates 0:16:59.040 --> 0:17:02.040 have been coming down for decades, the borrowing that there's been, 0:17:02.080 --> 0:17:04.760 the money creation that there's been has in fact come 0:17:04.840 --> 0:17:09.760 increasingly from fiscal authorities and from central banks directly, and 0:17:10.320 --> 0:17:12.680 rates themselves have been effectively pushing on a string. 0:17:13.600 --> 0:17:15.960 Can I play Devil's advocate for a second, which is 0:17:16.480 --> 0:17:20.760 this time last year the world was a light with 0:17:20.960 --> 0:17:23.880 talk of a potential recession, and one thing you would 0:17:23.920 --> 0:17:27.000 hear over and over again is, you know, yield curve inversion. 0:17:27.040 --> 0:17:32.040 We've never had an aversion without an ensuing recession. This year, 0:17:32.520 --> 0:17:35.399 there is much much less discussion about the risk of 0:17:35.440 --> 0:17:39.760 a recession. Couldn't this all just be people have changed 0:17:39.800 --> 0:17:44.160 their minds about the macroeconomic outlook and that is driving 0:17:44.480 --> 0:17:48.600 asset prices. Like a very simple Oukham's razor kind of 0:17:48.720 --> 0:17:50.280 explanation for what we're seeing. 0:17:50.960 --> 0:17:53.480 It could be and that must play some role, but 0:17:53.640 --> 0:17:58.800 in general the timing doesn't fit. In general, the rally 0:17:58.840 --> 0:18:03.400 in the markets has first, and then the improvement in 0:18:03.520 --> 0:18:06.720 the economic conditions has come later. I guess you could 0:18:06.720 --> 0:18:09.520 make an argument that economic surprises went negative, but in general, 0:18:09.840 --> 0:18:12.440 and the people are starting to worry about a slow down. 0:18:12.720 --> 0:18:16.320 But I'd argue markets are always supposed to anticipate, but 0:18:16.560 --> 0:18:19.040 it's been stronger than that recently. Even when you take 0:18:19.080 --> 0:18:23.560 something like earnings revisions. For example, earnings expectations have been 0:18:23.600 --> 0:18:26.919 gradually increasing, but they seem to be doing so in 0:18:27.040 --> 0:18:31.399 response to that. They're almost chasing the equity market higher 0:18:31.960 --> 0:18:36.240 to buy a greater extent than previously. And as I say, 0:18:37.200 --> 0:18:40.280 I wouldn't expect to have anything like the correlations that 0:18:40.320 --> 0:18:44.040 I do with the central bank liquidity. I continue scratching 0:18:44.080 --> 0:18:46.320 my head as to whether the effect could be the 0:18:46.359 --> 0:18:48.560 other way round. It could be the market that's influencing 0:18:48.560 --> 0:18:50.480 the Central Bank numbers, and while the lags are a 0:18:50.520 --> 0:18:54.080 bit variable, basically no, it doesn't work that way. But 0:18:54.640 --> 0:18:58.199 for me, fundamentals have become very much a lagging indicator. 0:18:58.440 --> 0:19:00.479 And this, for me is all part of a longer 0:19:00.600 --> 0:19:05.720 term story whereby up until twenty twelve or so, I 0:19:05.760 --> 0:19:07.919 placed an awful lot more emphasis on fundamentals because it 0:19:07.960 --> 0:19:10.520 seemed to be driving the market to a much larger extent. 0:19:10.960 --> 0:19:16.359 Since twenty twelve, many of my favorite relationships simply broke down, 0:19:16.960 --> 0:19:20.320 so the lending surveys were no longer a good guide 0:19:20.359 --> 0:19:22.920 to what spreads were doing and what defaults were doing. 0:19:22.960 --> 0:19:24.520 If anything, it was the other way around. It was 0:19:24.560 --> 0:19:27.600 spreads would rally first, and then the lending standards was 0:19:27.640 --> 0:19:29.880 easy afterwards, and the defaults that should have been taking 0:19:29.920 --> 0:19:33.520 place didn't take place. Or same thing. In volatility space, 0:19:33.520 --> 0:19:36.160 there are nice relationships that used to hold with uncertainty, 0:19:36.400 --> 0:19:38.920 and since twenty twelve, uncertainty has often been quite high 0:19:38.960 --> 0:19:42.639 on uncertainty metrics, a number of references to uncertainty in 0:19:42.640 --> 0:19:44.680 the news and things like that, and yet volatility most 0:19:44.680 --> 0:19:47.239 of the time has been super low. And all of 0:19:47.280 --> 0:19:50.920 these dynamics, to my mind, go together with this money 0:19:50.960 --> 0:19:54.520 creation led pattern, but where the money creation has come 0:19:54.640 --> 0:19:57.439 directly from central banks, and that shows up in my 0:19:57.480 --> 0:20:00.960 relationships and the swings that we've had there are just 0:20:01.080 --> 0:20:03.320 really big relative to the sorts of swings that we 0:20:03.359 --> 0:20:05.240 get in money creation coming from the private sector, and 0:20:05.240 --> 0:20:06.919 that's why they end up dominating the market. 0:20:07.800 --> 0:20:11.719 Since you mentioned timing just then, let's talk about that 0:20:11.760 --> 0:20:15.840 a little bit more. So. Reserves peaked back in April, 0:20:16.280 --> 0:20:20.840 it wasn't until relatively recently that we really saw significant 0:20:20.840 --> 0:20:23.600 market weakness. So why was there that gap. Why didn't 0:20:23.640 --> 0:20:27.800 we see equities falling earlier on as reserves started to 0:20:27.840 --> 0:20:28.240 come down? 0:20:28.840 --> 0:20:31.320 A couple of different things. So one of the reasons 0:20:31.359 --> 0:20:34.600 why Joe was sounding so skeptical on the previous podcast 0:20:34.800 --> 0:20:38.280 was because when if you just look at US reserves alone, 0:20:38.480 --> 0:20:40.440 sometimes they correlate, but they don't always, you get a 0:20:40.520 --> 0:20:42.240 much betefit with the global numbers. And some of what 0:20:42.600 --> 0:20:44.720 has been going on is that there have been liquidity 0:20:44.840 --> 0:20:47.280 editions by the BOJ and then recently from the PBOC 0:20:47.880 --> 0:20:50.800