Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway.
Speaker 2: And I'm Joe. Why isn't thal Joe?
Speaker 1: Did you see the jolts number that just came out?
Speaker 2: We are recording this May thirty first, twenty twenty three.
Speaker 2: I did job openings back up. You know. That's the thing,
Speaker 2: like they keep thinking, oh, the labor market's going to cool,
Speaker 2: it's going to cool, But here we are over ten
Speaker 2: million job openings again.
Speaker 1: Right, so job openings far exceeded I think any analyst
Speaker 1: estimate ten million openings for the last month. And I
Speaker 1: guess the question is the market seems to be of
Speaker 1: two minds here, right, you have a lot of people
Speaker 1: who seem to be talking about the inevitability of recession,
Speaker 1: and yet you have the data that's still coming in
Speaker 1: stronger than a lot of people are expecting. And of course,
Speaker 1: you know those two things are related, because if data
Speaker 1: keeps coming in stronger than expected, then maybe inflation doesn't
Speaker 1: start to go down in the FED has to hike
Speaker 1: even more and it pushes the economy into recession. But
Speaker 1: it does feel like not only is there a lot
Speaker 1: of doubt at the moment, but we're sort of heading
Speaker 1: in two possible polar opposite directions.
Speaker 2: Well, the thing that I keep coming back to is
Speaker 2: striking is if you told someone, you know, at the
Speaker 2: beginning of, you know, January twenty twenty two, you know,
Speaker 2: when right towards zero, that by spring twenty twenty three,
Speaker 2: we'd be at five and a quarter on the FED Fund, right,
Speaker 2: Everyone's like, oh, you know, the market would have crashed,
Speaker 2: we'd be in recession, et cetera. And yet here we
Speaker 2: are with ten million, more than ten million job openings.
Speaker 2: And something that we've talked a lot about is like,
Speaker 2: you know, the entire twenty tens with sluggish growth, and
Speaker 2: everyone's like, oh, this is the pickup, this is when
Speaker 2: inflation is going to come back, and it doesn't. And
Speaker 2: so far this decade it feels like, Okay, this is
Speaker 2: finally when inflation is going to roll over, this is
Speaker 2: when the recession is going to happen, et cetera. And
Speaker 2: these expectations keep get kicked forward.
Speaker 1: Absolutely, And I'm glad you mentioned interest rates just then.
Speaker 1: And I mean the implication is kind of we've had
Speaker 1: years of people warning about what that's going to happen
Speaker 1: when interest rates rise is it going to lead to
Speaker 1: an explosion in interest rate costs and things like that?
Speaker 1: And you know, we have seen some bankruptcies, but we're
Speaker 1: still sort of at this inflection point, it feels like.
Speaker 1: So I'm very pleased to say that we have the
Speaker 1: perfect guest for this episode. We are going to be
Speaker 1: speaking with the man, the myth, the legend, Jim Grant,
Speaker 1: the founder and editor of Grant's Interest Rate Observer and
Speaker 1: a long time commenter of financial markets. I've been a
Speaker 1: fan of his work for many years, so I'm so
Speaker 1: glad we can finally have him on the show. Jim,
Speaker 1: thank you for coming.
Speaker 3: It is lovely to be here. And yes, interest rates
Speaker 3: are a thing. I began to doubt the efficacy of
Speaker 3: my business model.
Speaker 2: People are observing, people want interest rates observe.
Speaker 3: It is a good time for observation.
Speaker 1: Well maybe that's a good starting place. But how would
Speaker 1: you characterize the current period in markets versus you know,
Speaker 1: the trajectory of history. You've been through and written about
Speaker 1: many interest rates cycles at this point.
Speaker 3: Well, first place, I would call it good copy journalistic.
Speaker 3: This is all we like.
Speaker 2: It doesn't matter up and down.
Speaker 3: Just give us some good cop Yeah, we don't want
Speaker 3: peace and quiet. Well, there are so many singular features,
Speaker 3: and dogmatism has been I think, I hope has been
Speaker 3: expunged from the conversation. It's hard to dogmatize after twenty twenty,
Speaker 3: twenty one and twenty et cetera. What is new and
Speaker 3: different is, for example, interest rates have gone from nothing
Speaker 3: to five plus in the short end of the yield curve.
Speaker 3: And wouldn't you suppose that the homebuilders would have taken
Speaker 3: a big but instead the home builders are right behind
Speaker 3: the video as the stocks and what you would think
Speaker 3: that they produced computer chips, grath and two by fours,
Speaker 3: But the homebuilders made new highs recently. And that you
Speaker 3: know why, because rates have kind of put interest rate
Speaker 3: handcuffs on people who are in possession of one of
Speaker 3: these sweet mortgages. Beginning with the numbers two or three
Speaker 3: or four. I think most of the homeowners now have
Speaker 3: loans have something less than five. So people aren't moving
Speaker 3: and there's no supply. Oh, I exaggerate slightly, but there's
Speaker 3: a little supply, and the home builders are hot footing
Speaker 3: it into that gap and they are coining money with
Speaker 3: huge margins and great perplexity all around.
Speaker 2: So you're speaking our language, like on multiple levels. You
Speaker 2: mentioned semiconductors with Nvidia two by four's, we've talked lumber,
Speaker 2: we've talked home building. So what is they say then
Speaker 2: about our efforts to fight inflation? You know, we think
Speaker 2: of housing as like the ultimate rate sensitive sector, and
Speaker 2: yet here we have home builders close to all time
Speaker 2: highs despite the surge. What does that say about I
Speaker 2: don't know, perhaps the fed's toolkit in fighting this kind
Speaker 2: of inflation.
Speaker 3: Well, the FED, only about two weeks ago was propagating it.
Speaker 3: All the central banks of the world for years and
Speaker 3: years were bemoaning the fact they could not hit their
Speaker 3: two percent arbitrary mind you, and the arbitrary two percent
Speaker 3: inflation target, and the FED as recently as the jackson
Speaker 3: Hole speech of what two thousand and twenty, that remote
Speaker 3: jackson Hole conference chairman Palla said, you know, we are
Speaker 3: going to search for a flexible inflation target, and if
Speaker 3: it's too low, we will we will overshoot and thereby
Speaker 3: bring the average over the cycles up to more than
Speaker 3: two percent. Now that was it seems to me that
Speaker 3: was kicking sand in the face of the fates. And
Speaker 3: so there's there's a bureaucratic dogmatism in the FED. They've
Speaker 3: got these algebraic models, like goodness, how formidable they look
Speaker 3: on a blackboard, but they don't actually function very well
Speaker 3: so far as the future is concerned. And the FED
Speaker 3: was in fact dogmatic through two thousand and twenty one
Speaker 3: into twenty twenty two, buying mortgages recently, I think as
Speaker 3: March twenty two. So you asked about their inflation fighting tools,
Speaker 3: they're rusty, Say.
Speaker 1: Well, just on that note, I mean walk us through.
Speaker 1: Why haven't the interest rate increases fed into the real economy?
Speaker 1: More like, why are you not seeing house prices go down?
Speaker 1: Why are you not seeing the much anticipated wave of
Speaker 1: bankruptcies that people were warning about for you know, many
Speaker 1: many years after the two thousand and eight financial crisis, Well.
Speaker 3: House prices have in fact gone down. Is this phrase
Speaker 3: existing house prices, that is, the ones that are not imaginary,
Speaker 3: So existing house prices or down new house prices are
Speaker 3: down from their peaks, you know, eight ten percent of
Speaker 3: memory serves. But the point is well taken, Tracy, that
Speaker 3: you know the phrase I think something will break right,
Speaker 3: And I was of the view, am of the view
Speaker 3: that try as J Powell might emulate Paul Volker. Mister
Speaker 3: Powell is not working with Paul Volker's economy. It's much
Speaker 3: more dead therefore much more fragility. You know, people are
Speaker 3: head over heels over private credit. They can tend that
Speaker 3: this is is a not quite Navidia quality breakthrough in
Speaker 3: the history of finance, but it's up there. But you know,
Speaker 3: the private credit is a manifestation of the seeming imperative
Speaker 3: to build leverage, whether it's on the federal level or
Speaker 3: the corporate level, not quite so much recent years on
Speaker 3: the individual level. So there's a lot of leverage. And
Speaker 3: I would say Tracy that with respect to the paradox
Speaker 3: of nothing breaking much yet, just be patient. I expected
Speaker 3: that much.
Speaker 1: It's coming. Where do you see vulnerabilities? You mentioned fragilities?
Speaker 3: Private equity is one. I think private credit will be
Speaker 3: shown to be rather oversold as a breakthrough. I don't
Speaker 3: think it's any such thing.
Speaker 2: How do you actually how do people think about Why
Speaker 2: do people think that there's something special about private credit?
Speaker 3: Well, I think the story goes that the vendors of
Speaker 3: private the lenders of private credit, are more flexible. They
Speaker 3: have commitments by their limited partners who supply funds. They
Speaker 3: are not constrained by banking regulations. They are kind of
Speaker 3: a new breed, so the story goes. But you know,
Speaker 3: they are lending, to an important extent, to software companies,
Speaker 3: which famously lack gap profitability. They are lending to the
Speaker 3: very same people that the public credit markets are lending to,
Speaker 3: but they're doing it at a somewhat cheaper rate. They're not
Speaker 3: doing it on a rated basis. So Moody's is not
Speaker 3: getting a ratings business it did. I don't know. The
Speaker 3: whole private credit business sounds to me as if it
Speaker 3: were the same wine in slightly more presentable bottles.
Speaker 1: Just on this topic, there's a line that you wrote
Speaker 1: many years ago now and it kind of lives for
Speaker 1: free in my head, and it's slightly random, but it's
Speaker 1: basically Invaliant of financialized age has produced a financialized pharma company.
Speaker 1: And I used to think about that quite a lot.
Speaker 1: In the context of Valiant. Of course, you know, they
Speaker 1: borrowed a lot from market cheaply. They bought a lot
Speaker 1: of companies. They used interesting accounting techniques such as adbacks
Speaker 1: to boost their valuation so that they could keep borrowing.
Speaker 1: And I wonder how much that type of financialization, in
Speaker 1: your opinion, is reflected across the market and across the economy,
Speaker 1: not just a valiant specific type thing.
Speaker 3: Well, I would say that it is rather endemic. I
Speaker 3: guess we ought to define it. What I mean by
Speaker 3: tracy is the finance for the sake of finance, not
Speaker 3: for the sake of making a better product, but finance
Speaker 3: for the sake of making money through structure, through fees
Speaker 3: and the like. That's financialization. And you see it again
Speaker 3: in private equity. There's this thing called adas. Ad Backs
Speaker 3: are a form of sly manipulation of cost structure. So
Speaker 3: you do a deal by a company and you say
Speaker 3: we will lever it, meaning we will encumber it with
Speaker 3: debt to the extent of six and a half times
Speaker 3: ebit DA. That's a kind of non gap measure of earnings.
Speaker 3: And the reason it's six point five and not nine
Speaker 3: point five is because we project savings through the great
Speaker 3: managerial improvements that private equity invariably introduces.
Speaker 1: To it, synergyes sergies everywhere.
Speaker 3: To its portfolio companies. And don't you know that S
Speaker 3: and P does an annual ad back study. That's that's
Speaker 3: the age in which we live. There is an ad
Speaker 3: back study from that you can look wait for every year,
Speaker 3: and it shows that most of these promised savings Tracy
Speaker 3: don't be shocked at, don't materialize, but the fees surrounding
Speaker 3: them are paid. So that's an example, one micro example
Speaker 3: of financializations. And I think it's all over the place.
Speaker 2: Since you mentioned in Nvidia twice already, I feel like
Speaker 2: the Nvidia chart would make very a lot of sense
Speaker 2: to me in the year twenty twenty one or maybe
Speaker 2: twenty eight, twenty nineteen, you know, during the sort of
Speaker 2: like zerp heyday when we associated low interest rates with
Speaker 2: booming tech stocks. But here we have the chart. It's
Speaker 2: not Zerp anymore. We're at five and a quarter percent,
Speaker 2: and yet that hasn't extinguished this sort of like animal
Speaker 2: spirits of the market to pile into some like really
Speaker 2: hot area because you know, AI is really exciting. What
Speaker 2: does that say about, you know, some of our assumptions
Speaker 2: about the relationships between investment and animal spirits and speculation
Speaker 2: and rates. When we see this sort of activity at
Speaker 2: a time of five and the quarter interest rates.
Speaker 3: You know, the wonderful thing about financial markets is that
Speaker 3: we keep on stepping on the same rake there's in science,
Speaker 3: you know, progress is kulative, stantles shoulders a giants, but
Speaker 3: financial history is invariably cyclical and recurrent, which helps a
Speaker 3: lot if you can recognize patterns. Scott McNeely, who's the
Speaker 3: CEO of Sun Microsystems, that gave the terrific little speech,
Speaker 3: I guess on Twitter. Maybe it was an exasperated and
Speaker 3: rueful expression. It was kind of a post mortem of
Speaker 3: the of the dot com bubble, which now is so
Speaker 3: deep in the historical miss But the Sun was trading
Speaker 3: that at ten times earnings, and mister McNeely said, what
Speaker 3: do you have to do right? Sorry revenue? Of course.
Speaker 2: Understand that's the laugh line.
Speaker 3: Or so what you would what he would have to do?
Speaker 3: What you have to break even with at ten times revenue? Well,
Speaker 3: of course ten years I would have to send you
Speaker 3: every single so no more R and D, no more
Speaker 3: salaries for the employees, no taxes, oops, no taxes, etcetera.
Speaker 3: So so he went through this exercise and he said,
Speaker 3: and at the end he said, why did you pay
Speaker 3: ten times revenues? Okay, the video is like thirty five
Speaker 3: times revenue, so it's thirty five years of.
Speaker 2: That, no cause, no employ I read no capax, no
Speaker 2: R and D. I read text.
Speaker 3: I read somewhere that Navidio is introduced AI, which is
Speaker 3: tan about in fact equal to yeah, equal to tanaa,
Speaker 3: the invention of fire.
Speaker 2: It's a new fire, tam On. That's got to be huge.
Speaker 1: That's always the warning sign, right, tam when people start
Speaker 1: talking about total addressable market size. I have a slightly
Speaker 1: personal question, but I've always wondered this, do you consider
Speaker 1: yourself more of a journalist or more of a financial analyst?
Speaker 3: Journalist journalist?
Speaker 1: And how does that influence Evan Lorenez.
Speaker 3: He's the great financial and.
Speaker 1: He's great, he's very good. But how does that inform
Speaker 1: your your own work?
Speaker 3: Evan? Well, I started not quite a one man It
Speaker 3: was never exactly a one man band. This is our
Speaker 3: fortieth year, but for many a year there was no Evan.
Speaker 3: There was often someone to lend a hand. Yeah, there
Speaker 3: were a lot of help. I have gravitated to journalism,
Speaker 3: I think more than the really deep diving financial analysis.
Speaker 3: I'm interested in history as well. Have read a lot,
Speaker 3: written some.
Speaker 1: And wrote a book on Badget right, Yes.
Speaker 3: Yeah, Welder Badget is the kind of the muse of
Speaker 3: contemporary central banking. They invoke his dictum about in a crisis,
Speaker 3: they will say the contemporary central bankers will lend freely
Speaker 3: to everybody, which is a very much a paraphrase of
Speaker 3: Badget's lend at a high rate against against suitable banking
Speaker 3: collateral to solved institutions, et cetera.
Speaker 2: I just want to say, I thought you must be
Speaker 2: have been exaggerating when you said the thirty five times revenue.
Speaker 2: But you're like, I was like, that cannot be right.
Speaker 2: It can't be thirty ex revenue. But no, fiscally, your
Speaker 2: twenty twenty four for in video revenues forty billion. It's
Speaker 2: a trillion dollar company. And so yeah, we're basically.
Speaker 3: It looks like a typo. Yeah we publish published last night,
Speaker 3: and I say, no, let's please, let's even.
Speaker 2: Like, look at fiscally your twenty twenty seven currently on
Speaker 2: the Bloomberg. I found this seventy seven billion. So even
Speaker 2: like you go out to twenty seven, you're still like
Speaker 2: a fifteen twenty twenty seven or fourteen next twenty twenty seven.
Speaker 3: Revs Lumberg, which can get anyone on the phone auto
Speaker 3: call up Scott McNeely and say, what.
Speaker 2: Now, let's do that. Let's do that. That's a that's
Speaker 2: a really good idea. Scott's really those earnings calls back
Speaker 2: and that they were really fun. Can I ask a question?
Speaker 2: You know, you mentioned dogma, You mentioned the FEDS rusty
Speaker 2: inflation fighting tools, which you know, maybe understandably because for
Speaker 2: the previous decade or really even longer, maybe the the
Speaker 2: impulse was reflation, and why are we missing on the downside,
Speaker 2: et cetera. What did that period teach you as a
Speaker 2: historian of financial market as a student and someone who's like,
Speaker 2: what did the period of like two thousand and nine
Speaker 2: through twenty twenty in which we had large deficits, we
Speaker 2: had this exploding size of the FED to balance sheet,
Speaker 2: and yet this sort of inability to generate inflation? Like
Speaker 2: what was your sort of like looking back on that decade?
Speaker 3: It end well, it was very humbling for me. What
Speaker 3: I took away from it is that the inevitable is
Speaker 3: always certain, but not always punctual. I look back in
Speaker 3: some of my work there, I was rather impatient for
Speaker 3: the inevitable difficulties and crises attending upon on you know,
Speaker 3: this credit creation jag I thought, certainly it was going
Speaker 3: to happen like Tuesday or so. But so it's like
Speaker 3: the elapsed time between the first signs of a house
Speaker 3: price is going way above trend on the one hand,
Speaker 3: and the onset of the housing related credit difficulties of
Speaker 3: two thousand and seven, eight and nine, that period of
Speaker 3: six years was approximately twenty years in journalistic time. If
Speaker 3: you were a little bit too insistent upon Yeah.
Speaker 1: Well, just on this point, let me ask a sort
Speaker 1: of devil's advocate question, because I had, you know, a
Speaker 1: similar trajectory sort of I wouldn't compare myself to you, obviously,
Speaker 1: but you know, post two thousand and eight, I wrote
Speaker 1: a lot about excesses in the corporate bond market, and
Speaker 1: it seemed very clear to me that eventually this would
Speaker 1: blow up. It didn't really, and you know, we could
Speaker 1: argue that maybe the time is coming for some of
Speaker 1: those excesses to get flushed out of the market. But
Speaker 1: it does feel like the solution to a lot of
Speaker 1: financialization is more financialization, or at least it has been
Speaker 1: so far. So for instance, with corporate bonds, when there
Speaker 1: was stress in the market, the central bank comes in
Speaker 1: props up the corporate bond market through the bond buying program?
Speaker 1: Why can't that continue forever? And like, what is the
Speaker 1: tipping point at which financial solutions to financial problems is
Speaker 1: no longer viable?
Speaker 3: A tipping point was six years ago my impatient clock.
Speaker 3: It was a long time ago, but it did not tip.
Speaker 3: So why can't it go on for a r I
Speaker 3: know they're always these excesses do crop up, they are
Speaker 3: met with additional stimulus, intervention, manipulation, and still we go on.
Speaker 3: Who was it who said there is a deal of
Speaker 3: ruin in a country? Because it was Adam Smith, And
Speaker 3: there's a great deal of ruin so to speak, in
Speaker 3: finance and manipulated finance. And one are the singularities of
Speaker 3: the present time is the is the American position in
Speaker 3: international finance? You know this is countries emits the reserve currency,
Speaker 3: which means that we consume much more than we produce.
Speaker 3: We finance the difference with dollar bills that only we
Speaker 3: can lawfully print at a most reasonable price of like nothing,
Speaker 3: and we remit the dollars to our creditors, mainly in
Speaker 3: Asia SA and those dollars don't leave the country because
Speaker 3: they come back in the shape of treasuries and moreages
Speaker 3: purchased for the portfolio interests of our crowders. So if
Speaker 3: that is kind of a new thing in the long
Speaker 3: historical it's not. It's not so new in terms of years,
Speaker 3: but in terms of phenomena, it's it's the reserve currency
Speaker 3: country being a chronic big debtor. It's kind of a
Speaker 3: different thing, reserve currency country living on the highness of strangers,
Speaker 3: so to speak. That's that's not exactly writ So the
Speaker 3: more one learns, the less dogmatic one becomes about timing.
Speaker 2: Certainly, well, well that actually leads to the exact next question,
Speaker 2: which is, you know, obviously, currently today in twenty twenty three,
Speaker 2: there's yet another round of most the dollar going to
Speaker 2: lose some its global status. But we've been hearing that forever, right,
Speaker 2: Like we you know, we heard that certainly after the
Speaker 2: Great Financial Crisis, I think, you know, pre Greade financial crisis,
Speaker 2: there was a lot to talk about the euro and
Speaker 2: we've talked about the show and like, you know, who
Speaker 2: is the model that flashed euros on the This is
Speaker 2: not a new thing. So when you think about like okay,
Speaker 2: like timing is really tough with this stuff, Like does
Speaker 2: it feel new? Does this moment feel different than past
Speaker 2: times when people had dollars datus anxiety?
Speaker 3: Well, some of the rhetorics the same, you know that.
Speaker 3: I guess by definition, the excesses are greater. The US
Speaker 3: International Financial Position, which is a piece of data that
Speaker 3: comes out every year at this time, ever, shows a
Speaker 3: deepening deficit between what we own of other countries' securities
Speaker 3: and businesses versus what they own of our securities and
Speaker 3: businesses and other security and public security. So the deficits deepen.
Speaker 3: But you know, so, what's the competition? Turkey is mad
Speaker 3: at US and wants a different currency Iran, Ditto, China
Speaker 3: and the Russia the same. But I don't see those
Speaker 3: as strong competitors for an alternative currency. I see gold
Speaker 3: as a perennial option. Unfortunately, too few people share my
Speaker 3: enthusias for that.
Speaker 2: I wish perhaps everyone else who's wrong.
Speaker 3: Perhaps bloomber could help along those lines as well.
Speaker 1: Well, just on this note, I mean, we were talking
Speaker 1: about Nvidia. When you see markets react like that, what
Speaker 1: do you think is happening there? What is the thought
Speaker 1: process of an investor who says I'm going to buy
Speaker 1: in VideA when it's up forty percent in three weeks.
Speaker 3: Well, I think a couple of things. First of all,
Speaker 3: again under the heading of you never know, which I
Speaker 3: have come to embrace as a sound journalistic and life principle,
Speaker 3: There is a possibility at this time it is the
Speaker 3: invention of fire apart two, so one holds mind share
Speaker 3: for that. I think more likely is that this is
Speaker 3: part of the muscle memory of a generation of zero
Speaker 3: percent interest rates and all you can eat credit. The
Speaker 3: great all you can eat credit buffet table was open
Speaker 3: for business for ten years. Interest rates fell from nineteen
Speaker 3: eighty one until a couple of actually a couple of
Speaker 3: weeks ago. It's called forty years. So that's a lot
Speaker 3: of muscle memory. Central banks have intervened predictably until fairly
Speaker 3: recently when markets shuttered. Look what happened in twenty nineteen,
Speaker 3: or the repull market. This obscure recondite thing caught a
Speaker 3: head cold in September and the Fed resumes QWED didn't
Speaker 3: called QW it's a qwi. Yeah, it was QWI. So
Speaker 3: naturally people assume that the upside is the side to
Speaker 3: be on. It takes a true contrarian, most bloody minded
Speaker 3: contrarian this to butt one's head against that, But it's
Speaker 3: a living So why do people do it? Because A
Speaker 3: because cyclical memories are short and cycles are recurrent, and
Speaker 3: b because it has worked. Quote that phrase out to
Speaker 3: be in quoted.
Speaker 2: It's funny, you know you talk about like the memory
Speaker 2: of ZIRP or the memory of forty years of declining
Speaker 2: interest rates. Right before you walked in, Tracy and I
Speaker 2: were talking about, like, you know, the real estate market
Speaker 2: and I've sort of been looking at maybe buying a place,
Speaker 2: and the one thing you always hear from people is like, oh, well,
Speaker 2: like rates are high now, but maybe you'll be able
Speaker 2: to refinance lower in a few years. And when every
Speaker 2: time I hear that, I'm like, I mean that would
Speaker 2: be nice, but like there's no guarantee of mean reversion.
Speaker 2: And you know what were they like eighteen percent in
Speaker 2: the nineteen eighties, Like could we go back there? Could
Speaker 2: I see teens fed rates in my life?
Speaker 3: Yes? You could. There's a property about interest rates that
Speaker 3: I find intriguing. My interest is not widely shared, but
Speaker 3: here is my reading of the question, the great question
Speaker 3: whether rates are a mean reverting So what was what
Speaker 3: characterizes interest rate movements is their generation length phasing, not
Speaker 3: necessarily cycles where there are the interest rates fell for
Speaker 3: the last quarter of the nineteenth century, rose to the
Speaker 3: first twenty years of the twentieth, fell from nineteen twenty
Speaker 3: forty six rows from forty six to eighty one, fell
Speaker 3: from eighty one to call it twenty twenty one. So
Speaker 3: at each juncture there was some mark of excess on,
Speaker 3: some mark of speculative excess blow off, Like certainly nineteen
Speaker 3: eighty one, you know, a twenty percent plus funds rate
Speaker 3: seemed excessive. A fourteen percent yield in nineteen eighty four
Speaker 3: long bond when the CPI was printing it four or
Speaker 3: five that seemed excess. If ten percentage points are really yield,
Speaker 3: that seemed a lot. So I would I speculate that
Speaker 3: we are embarked on a long cycle of rising rates.
Speaker 3: And I say that, first of all, for reasons of
Speaker 3: pattern recognition. There is no theory behind it. But I
Speaker 3: observed that in not twenty and twenty and twenty one,
Speaker 3: some unimaginably large number of debt securities were priced to
Speaker 3: yield less than nothing. Bloomberg keeps this particular figure, and
Speaker 3: I bet still perhaps you could check me. I bet
Speaker 3: still there's like one hundred billion dollars of bonds price
Speaker 3: to yield, less than nothing worldwide. But they were eighteen trillion.
Speaker 3: I think at the peak the most extraordinary expression of
Speaker 3: unqualified bullishness on an asset class because it had the
Speaker 3: name of bonds which had been falling in yield, rising
Speaker 3: and price. So no, it would not surprise me at
Speaker 3: all if we were embarked on something resembling a generation
Speaker 3: length bear market and bonds meaning rising yields and falling prices,
Speaker 3: that would fit the form.
Speaker 1: Could you get you mentioned the idea of a embarking
Speaker 1: on a long cycle of higher rates. Could that happen
Speaker 1: even with a recession in the States, because this seems
Speaker 1: to be the bet that everyone's making right that inflation
Speaker 1: isn't coming down, and so the Fed's going to have
Speaker 1: to hike and inevitably that will lead to recession.
Speaker 3: Well starting yeah, cuts, yeah. Starting in nineteen fifty eight,
Speaker 3: something strange happened and people at the time remarked on it,
Speaker 3: which is that in a recession, prices did not fall
Speaker 3: or subside, and that marked the what proved to be
Speaker 3: the beginning of the age of inflation, so fast forward
Speaker 3: to the seventies seventies. It's kind of a trite historical marker,
Speaker 3: you know, it's never going to repeat exactly, but for
Speaker 3: what it's worth, in the seventies, interest rates did fall
Speaker 3: and rise as the business cycle changed, but inflation came
Speaker 3: and rose and subsided in three different phases. It wasn't
Speaker 3: a straight line. So yeah, we could have a we
Speaker 3: could have recession and rates pulled back and then they
Speaker 3: resumed the rise. So the cycle long.
Speaker 1: Term path would be upwards in terms of interest rates,
Speaker 1: but not linearly.
Speaker 3: Yeah. For example, from nineteen forty six to fifty six,
Speaker 3: the movement up in the long data treasury was one
Speaker 3: hundred basis points one percent. That it went from three
Speaker 3: and a half basically from sorry, two and a half
Speaker 3: to three and a half over ten years. So this
Speaker 3: is this is this is rather glacial. This is kind
Speaker 3: of geologic. Yeah, so that's why one can forecast these
Speaker 3: long cycles with especially if one of seventy six and
Speaker 3: a half years old, without any anxiety about being after
Speaker 3: that less.
Speaker 2: But to your point, I mean it makes sense. I mean, look,
Speaker 2: as you mentioned that forty year cycle basically through I
Speaker 2: don't know, two dozen whatever. It's not like it was
Speaker 2: only down. I mean we had up cycles in the
Speaker 2: eighties and the nineties. Oh yes, It's just that the
Speaker 2: long term trend was lower highs easies time, and so
Speaker 2: potentially the idea here is okay, I mean, we do
Speaker 2: get a cutting cycle on a year, but it's lower less.
Speaker 3: Yeah, so what happed? So the rates peaked in nineteen
Speaker 3: eighty one and nineteen eighty four, there was what the
Speaker 3: technicians called a retest of those highs and yields, and
Speaker 3: everyone on Wall Street who was anyone was on the
Speaker 3: side of saying that rach will go back up again.
Speaker 3: And the long bond did go to fourteen percent in
Speaker 3: nineteen eighty four when inflation was less than I think
Speaker 3: less five percent. So it's I think. I think one
Speaker 3: of the least appreciated forces in markets are factors they
Speaker 3: would say is simple condition, behavior or muscle memory.
Speaker 1: So just on that note, I was thinking back. I
Speaker 1: used to have a grandparent who lived through the Great
Speaker 1: Depression and had food hoarding problems because of this, because
Speaker 1: she hadn't had a lot of food when she was
Speaker 1: growing up, and so in her later years when she
Speaker 1: had access to food she would buy a lot of
Speaker 1: it and store it our markets. I'm assuming markets are
Speaker 1: ill equipped to deal with this kind of generational shift.
Speaker 1: You have people Joe and I certainly you know, for
Speaker 1: forty years have been striving for any sort of return,
Speaker 1: any sort of field. We've only recently started earning like
Speaker 1: significant bank interest on our savings accounts.
Speaker 3: This pleasant, it's so nice.
Speaker 1: It's lovely being a wrench money for nothing.
Speaker 2: Make a lot of it. You can make some money
Speaker 2: if we like plug which online banking, But don't do it.
Speaker 2: We got to get I'm not going to until they
Speaker 2: pay us. We're not going to say right, hold out
Speaker 2: for that exactly right.
Speaker 1: And I'm aware that you know the real return is
Speaker 1: still negative, but it's still nice. But how would you
Speaker 1: expect markets to adapt to this shift?
Speaker 3: Well, if it's slow enough, they could adapt easily. The
Speaker 3: great shift of higher races I mentioned it took ten
Speaker 3: years to get started. I remember my first job on
Speaker 3: Wall Street. I just got of the Navy and I
Speaker 3: was a foe, went to college. I was a clerk
Speaker 3: on a Wall Street trading disc and I came home
Speaker 3: and the New York telephone long dated sixties, the sexy
Speaker 3: sixes of they call it. And I told my father this,
Speaker 3: What everyone says, Dad, is that these six percent yields,
Speaker 3: this is something special, and you have to avail yourself.
Speaker 3: So I'm not sure where the New York telephones were
Speaker 3: in the year nineteen eighty one, but they were not
Speaker 3: at six percent. So you have to pace yourself. But
Speaker 3: there's often plenty of time to adapt. But you know,
Speaker 3: there's opportunities in the non adaptation. In a great bond
Speaker 3: bear market, all sorts of strange things happen. For example,
Speaker 3: call protection goes for free because no one expects race
Speaker 3: to go back up again, so you can buy call
Speaker 3: protection without any premium.
Speaker 2: Right when you look at these long shifts, these multi
Speaker 2: decade moves, how much is it about maybe politics or
Speaker 2: just shifting ideas? And so you know, I'm thinking, like,
Speaker 2: part of the reason I think many people would say
Speaker 2: we had such a powerful and aggressive physcical response to
Speaker 2: the COVID shock was the memory of the weak recovery
Speaker 2: coming out of two thousand and eight, two thousand and nine,
Speaker 2: and this sort of like years of slow growth. So
Speaker 2: it's like, Okay, we're not going to like make this
Speaker 2: mistake again, make another one we'll make, we'll go we're
Speaker 2: going to overshoot in the different direction. And so how
Speaker 2: much of like these like when you look at sort
Speaker 2: of like long shifts and obviously like that vulgar era
Speaker 2: and some of those ideas, some of the supply side
Speaker 2: ideas from the early eighties, like those are ancient. Those
Speaker 2: are old memories, like people forgot it and now that
Speaker 2: people have different ideas and now people talk about like
Speaker 2: state capitalism and public investment. How much do these like
Speaker 2: long cycles sort of correspond with like essentially ideas that
Speaker 2: are in vogue.
Speaker 3: You have to wonder whether the direction of causeation. Richard Russell,
Speaker 3: who was a marvelous technician and thinker about Marcus who
Speaker 3: was no longer with us, it was the author of
Speaker 3: the of the epigram, markets make opinions, and there's I
Speaker 3: think there's something to the idea that that phases of
Speaker 3: economic life, whether it be markets or nine to five
Speaker 3: world of actually producing things as it were, that the
Speaker 3: background music of enterprise kind of conjures ideas. I'm not
Speaker 3: sure if ideas, cause maybe might these ideas are recurrent.
Speaker 3: I mean, I'm told that the generation what's comes after z.
Speaker 2: A whatever my daughter. I don't know. I got to
Speaker 2: find out what that is.
Speaker 3: They're socialists apparently, so we invent that one again. I've
Speaker 3: given you a very poor answer to an excellent question, Joe.
Speaker 1: Well, just on the notion of these long term cycles
Speaker 1: maybe starting to shift. It does feel like, you know,
Speaker 1: previous decades were about the sort of lower interest rates,
Speaker 1: and during those previous decades, we basically built the financial
Speaker 1: system around the assumption that government bonds are the safest
Speaker 1: thing out there. Yeah, bonds, you know, the yields don't
Speaker 1: move around that much. And yet in the previous year
Speaker 1: we have seen big question marks around the safety of
Speaker 1: government bonds and the stability of yields, which have resulted
Speaker 1: in a few things. Breaking to your earlier point, you know,
Speaker 1: we saw troubles at the bank, the FED reporting and
Speaker 1: accounting loss on its own balance sheet. What does it
Speaker 1: mean for the financial system as we move into potentially
Speaker 1: a higher rate environment or a higher vall environment for rates.
Speaker 3: I think one of the ideas that has sustained markets
Speaker 3: over the past, call it generation, is the idea of
Speaker 3: federal reserve competence, the notion that people have fed and
Speaker 3: know what they're doing and can make things happened there.
Speaker 3: They are weather makers in finance, and they're responsible for
Speaker 3: the great moderation. They're responsible earlier for Paul Volker responsible.
Speaker 3: So it started with Paul Volker and his mastery of
Speaker 3: the inflation problem. And so I think that the FED
Speaker 3: will be revealed as a bunch of well intended people
Speaker 3: who are involved in a kind of pseudoscience. And people
Speaker 3: will wake up one day and say, I've noticed that
Speaker 3: my weather app is accurate for a day or two,
Speaker 3: but at ten days, I wouldn't chuch. I wouldn't bet
Speaker 3: my dog's life on it. And yet we listened patiently,
Speaker 3: even reverentially, to the economists at the FED, to talk
Speaker 3: about what's going to happen next month or next year.
Speaker 3: They know nothing. I mean, the future is a closed book.
Speaker 3: The screenwriter named Goldman. Butch Cassidy and the Sundance Kid,
Speaker 3: Now they're such great And you said apropos of Hollywood's
Speaker 3: forecasting ability. Nobody knows anything, said William Goldman, correct. Correct
Speaker 3: as to the fashion of future. The difference is that
Speaker 3: the FED thinks it knows something, and thought it knew
Speaker 3: something in twenty twenty when it was going to try
Speaker 3: a little harder to produce more inflation, and thought it
Speaker 3: knew something in twenty twenty one by insisting that the
Speaker 3: problem in front of its eyes was transitory, et cetera.
Speaker 3: I don't mean to ask too much of them, but
Speaker 3: I would ask of them the confession that they really
Speaker 3: don't know. So we will, I think, have that fact,
Speaker 3: that simple, humble fact, presented to us in a way
Speaker 3: we can't deny. Not so long ago, I remember it vividly,
Speaker 3: nineteen eighty eighty one, when you should have been interested
Speaker 3: in owning these There's something called lions and tigers. These
Speaker 3: are trade names for a zero coupon treasury securities priced
Speaker 3: to yield twelve thirteen, fourteen, fifteen percent internal compounding, no
Speaker 3: reinvestment risk for thirty years. Seemed like a good investment. However,
Speaker 3: such was the burden of accumulated loss and the loathing
Speaker 3: that people felt towards this unrepaying, brutally punit of asset class.
Speaker 3: It was Certificates of confiscation was the phrase that bonds acquired.
Speaker 3: That was the people hurling anathemas at the bond market
Speaker 3: and at the Fed. And now did I tell you
Speaker 3: mentioned the Fed's broke. Now it is a hypothetical theoretical insolvency,
Speaker 3: but to me it is a symbolic It is a
Speaker 3: symbolic fact of not a little importance. You know. The
Speaker 3: only thing that looks more like the Silicon Valley balance
Speaker 3: sheet and Silicon Valley is the Fed's balance sheet. And
Speaker 3: they earn at two and they pay at five these
Speaker 3: days and every week they lose a little bit more
Speaker 3: of their capital in the form of a promise to
Speaker 3: the Treasury to one day make it up. People gloss
Speaker 3: over this, say, oh, it's a FED can print money
Speaker 3: but can't print net worth, right, So that's not going
Speaker 3: to go out of business because it is insolvent, unlike
Speaker 3: some of its charges the banks. But the fact that
Speaker 3: shouldn't the FED be maybe shouldn't it be held to
Speaker 3: the same accounting and regulatory standards as the private banks?
Speaker 3: Wouldn't that have forced all the excesses of ZERP.
Speaker 1: And can it can set its own stress test?
Speaker 3: Right? Perhaps Jamie Diamond could write a stress test for
Speaker 3: the FED.
Speaker 2: The ultimate recipe I.
Speaker 3: Heard I heard myself going off on rather a sermon.
Speaker 2: I will still no, not at all. I want to Actually,
Speaker 2: you mentioned how like if you had bought in, like
Speaker 2: you know, at some point in the late seventies or
Speaker 2: early eighties, some of these long dated zero coupon bonds,
Speaker 2: they would have done fantastically well over some length of time,
Speaker 2: like some of the greatest investments evers. But you had
Speaker 2: to deal with those first few years, and maybe you
Speaker 2: took some serious sustained losses. And I was thinking about
Speaker 2: your point about like contrarianism. This is I mean, this
Speaker 2: been devils everyone in the financial industry. The challenge of like, well,
Speaker 2: how do you maintain some sort of out of consensus
Speaker 2: position in a period, especially if you're at well there's
Speaker 2: two there's multiple things, but A there's the psychological battle
Speaker 2: of like, well am I wrong? Is the market wrong? See?
Speaker 2: Like be like you want to make money, and see
Speaker 2: you might if you're managing someone else's money, you might
Speaker 2: not have a very long leach to lose money. What
Speaker 2: is sort of like you're thinking about like that process
Speaker 2: of like okay, like this might be you don't know
Speaker 2: the exact timing of when it's going to work, and
Speaker 2: like reconciling these challenges.
Speaker 3: Well, I have some experience in this mine is it
Speaker 3: is a you know, journalists don't get margin calls. Friends
Speaker 3: of mine who do this for a living. That is
Speaker 3: to say this meaning, identify something that is not in
Speaker 3: favor or in phase, research it, gain conviction, and hold
Speaker 3: it in spite of the scorn and the vitriol of
Speaker 3: those positions. Otherwise, that's the kind of the game. Journalistically,
Speaker 3: all you have to do is have a hard shell.
Speaker 3: If you're doing it in real time with real money,
Speaker 3: you either have to have a very very loyal base
Speaker 3: of limited partners or investors or be managing your own money.
Speaker 3: It's hard. I mean, it's wearing. It is not life enhancing,
Speaker 3: but when it's right, it's really sweet.
Speaker 1: Yeah, you got to do the victory laps well, Jim.
Speaker 1: On that happy note, We're going to have to leave
Speaker 1: it there, but thank you so much for coming on.
Speaker 3: All thoughts really sure are entirely welcome. Tracy both, thank you.
Speaker 2: That's incredible. That's such a true I really appreciate you
Speaker 2: coming back on delight.
Speaker 3: Thank you.
Speaker 2: We'll have you back on in twenty years. Let's see
Speaker 2: read the interest rate cycle, Let's see what fed funds
Speaker 2: and the teams.
Speaker 3: Yeah, I hope I'll be here LifeWise.
Speaker 1: Joe that conversation was really fun.
Speaker 2: That was a lot of fun. I mean we've both
Speaker 2: read gym stuff for years. It's always educational, always historically fulfilling.
Speaker 2: It is great getting to talk in person.
Speaker 1: Also, I love that he can just throw out anecdotes like, oh, yeah,
Speaker 1: this one set of bonds from.
Speaker 2: Yeah, well there's the thing. We could talk for like
Speaker 2: three or four hours, you know about like what was
Speaker 2: it like, you know, buying corporate bonds for like you know,
Speaker 2: AT and T bonds or New York telephone bonds. It's
Speaker 2: six percent and to that, you know, like there's so
Speaker 2: many stories. It would be fun to go down with.
Speaker 1: Absolutely, but the point that stood out to me was
Speaker 1: that muscle memory idea. And I do think I think
Speaker 1: what's happened is it's not just it's not just buy
Speaker 1: the dip because the Fed's going to do something and
Speaker 1: save everyone. It's also that I think a lot of
Speaker 1: people have figured out that momentum is a thing, and
Speaker 1: even though something looks like a bubble, if you can
Speaker 1: get out early enough, you can still make money. So
Speaker 1: instead of running away from bubbles, people kind of run
Speaker 1: towards them.
Speaker 3: Now.
Speaker 2: Absolutely, I also just think that, like I mean, I
Speaker 2: definitely feel this these days, where it's like the memes
Speaker 2: tuck the zerp era of the fang ero so recently
Speaker 2: that it's like, oh, yeah, that's normal. That little dip
Speaker 2: that we had in twenty twenty two and people shunned
Speaker 2: tech that was the aberration. But yeah, you see in
Speaker 2: video and AI you gotta go back to that. And
Speaker 2: then I think this gets back to like the rates thing,
Speaker 2: which is that like five percent or like a six
Speaker 2: percent mortgage feels really high to people after fifteen years
Speaker 2: of or whatever, but it's not right, Like it's not
Speaker 2: high at all, like six percent, and they were much
Speaker 2: higher throughout much the entirety of the nineties, and they
Speaker 2: were much much higher throughout entirely the eighties. But you know,
Speaker 2: for a lot in the entire generation, their entire lives
Speaker 2: of like potentially home buying lives is like basically the
Speaker 2: zerp era.
Speaker 1: I do wonder if the novelty of earning interest on
Speaker 1: bank savings is ever going to wear off for me.
Speaker 1: You know, it's been almost forty years of not earning
Speaker 1: anything and now it's just amazing to get a few
Speaker 1: percentage points.
Speaker 2: I'm so like poisoned by the last decade. I can't
Speaker 2: be bothered to like click the buttons to move over
Speaker 2: for how much?
Speaker 1: Yeah, you can have my money money for nothing and
Speaker 1: negative real return. That's great.
Speaker 3: All right.
Speaker 1: Shall we leave it there?
Speaker 2: Let's leave it there.
Speaker 3: Okay.
Speaker 1: This has been another episode of the Audlots podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy Alloway.
Speaker 2: And I'm Jill Wisenthal. You can follow me on Twitter
Speaker 2: at the Stalwart, follow our producers at Carmen Rodriguez at
Speaker 2: Carmen Arman and dash Oll Bennett at dashbot. And check
Speaker 2: out all of the Bloomberg podcasts under the handle at podcasts,
Speaker 2: and for more odd Loots content, go to Bloomberg dot
Speaker 2: com slash odd Lots, where we have transcripts, a blog,
Speaker 2: and a newsletter. And check out the discord Discord dot
Speaker 2: gg slash odd Lots. Listeners are in their twenty four
Speaker 2: to seven and talk about all these episodes and things
Speaker 2: we talk about. I hang out there a lot, Tracy's
Speaker 2: and there are a lot.
Speaker 3: It's a lot of fun.
Speaker 2: Thanks for listening in