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Speaker 1: What's up, everybody. Welcome to financial heresy, where we talk

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Speaker 1: about how many works so that you can make more,

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Speaker 1: keep more, and give more. Today I have Joseph Wang.

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Speaker 1: He is known online as the Fed Guy, and he

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Speaker 1: is a former Federal Reserve insider. He worked on the

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Speaker 1: Open Markets desk there, so we've got tons of fantastic

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Speaker 1: insights for you today on how the Fed works, what

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Speaker 1: his role was there, what he learned while he was there,

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Speaker 1: how the inner workings of the banking system work, and

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Speaker 1: what that means today for what the Federal Reserve is

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Speaker 1: doing with quantitative tightening the banking system, whether it's safe

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Speaker 1: or on the verge of collapse. What the reverse repo facility,

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Speaker 1: what role it plays in the current conditions with inflation

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Speaker 1: and the money supply. Very excited to share this interview

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Speaker 1: with you guys today. Lots of great insights and without

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Speaker 1: the ADO. Joseph Wang. All right, well, thank you so

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Speaker 1: much for joining me today. I'm very excited to ask

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Speaker 1: you all about the inner workings of the system. You

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Speaker 1: are one of the one of the rare few who

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Speaker 1: actually knows what it's like inside the belly of the beast,

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Speaker 1: So thanks for joining me. Today.

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Speaker 2: My pleasure. It's great to be here. Thanks for inviting me.

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Speaker 1: Well, let's get started by briefly going over your story.

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Speaker 1: You were on the Open Market's desk, so tell us

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Speaker 1: about what it's like and what you did there.

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Speaker 3: So the Open Markets Desk is the fed's trading desk,

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Speaker 3: and that might be surprising to some, but you know,

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Speaker 3: the FED does a lot of stuff in the markets.

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Speaker 3: They go out and do que purchase trillions of dollars

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Speaker 3: in trodery securities, They do repo loans, they do emergency

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Speaker 3: ethics soft lines. So that's all done by the desk,

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Speaker 3: which is the FEDS trading desk, and so on. There

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Speaker 3: we do two things. One of course is that we

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Speaker 3: trade on behalf of the FED, and the other, which

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Speaker 3: I find more interesting, is basically asking acting as the markets.

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Speaker 2: Intel dilligence for the FED.

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Speaker 3: So, for example, if you're on the desk, you have

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Speaker 3: relationships with a wide range of market participants hedge funds,

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Speaker 3: foreign central banks, money funds, commercial banks, dealers.

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Speaker 2: And so forth.

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Speaker 3: And because you're at the FED, they're willing to speak

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Speaker 3: with you in a very candid way. So when something

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Speaker 3: happens in the markets, we could call up a wide

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Speaker 3: range of contacts, figure out what they're saying from their perspective,

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Speaker 3: and then put together a picture that we then present

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Speaker 3: to the FED, to the FOMC. So you gather market

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Speaker 3: intelligence and you implement open market operations. And I really

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Speaker 3: liked it because it was a way you can get

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Speaker 3: a really behind the curtain's look as to how the

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Speaker 3: financial markets worked.

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Speaker 2: You have access to contacts.

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Speaker 3: And data that no one else does, so it was

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Speaker 3: a really good learning experience.

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Speaker 1: Yeah, that makes a lot of sense. Now there's this

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Speaker 1: perception out there that gained popularity during twenty twenty and

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Speaker 1: twenty twenty one called the FED you know, puts their

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Speaker 1: plunge protection team out there, and that that you got.

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Speaker 1: You know, when the when the stock market starts to

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Speaker 1: fallow just a little bit too much, they start printing

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Speaker 1: a bunch of money, you go out there and just

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Speaker 1: start buying up stocks. Is that what you were doing?

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Speaker 3: I guess I would part of the plunge protection team,

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Speaker 3: But as far as I know, and you know, the

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Speaker 3: desk is not that big, we do not buy equities.

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Speaker 3: So you know, if it's done, it's not done through

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Speaker 3: the FED. It's not done through the desk, it'd be

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Speaker 3: something else. So, as far as I know, that does

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Speaker 3: not happen. It does look like that sometimes, right.

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Speaker 1: Right, yeah, all right, So let's uh, let let's bring

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Speaker 1: uh bring this around to what's going on today. Address

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Speaker 1: the economic elephant in the room. The banking system seems

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Speaker 1: to be in trouble. A lot of people are looking

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Speaker 1: at this like the repeat or you know, the sequel

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Speaker 1: to the Great Financial Crisis. Banks are in trouble, banks

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Speaker 1: are falling over, you know, dollar wise have already eclipped

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Speaker 1: two thousand and eight. And so what is your view

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Speaker 1: right now on the banking system and is the trouble

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Speaker 1: behind us or is it just starting?

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Speaker 3: Well, first, I note that there's a big disconnect between

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Speaker 3: what we see in the stock prices and what's happening

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Speaker 3: on the ground. When we look at the stock crisis,

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Speaker 3: especially the regional banks, it looks like.

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Speaker 2: Armageddon, right, they basically imploded.

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Speaker 3: But if you actually listen to what they're saying, what

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Speaker 3: their earnings calls were like, you get a very different

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Speaker 3: picture now the picture that they paint for you.

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Speaker 2: And I don't think they'd lie.

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Speaker 3: If you they lied about things like this, they would

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Speaker 3: get sued because of course they're a publicly traded company.

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Speaker 3: Is that they noted that they had big deposit outflows

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Speaker 3: in March during the big panic involving Silicon Valley Bank,

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Speaker 3: and then those depositive outflows slow down, and then they

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Speaker 3: reverted back and.

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Speaker 2: So as of early May. So I'll talk about.

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Speaker 3: Western Alliance, for example, which recently because your stock out

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Speaker 3: sold a lot, they actually had a public sayment just

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Speaker 3: to calm the market down. They're saying that, you know,

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Speaker 3: when we look at our own business, everything seems pretty sable.

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Speaker 3: We don't have meaningful deposit outflows. So that big disconnect,

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Speaker 3: I think is driving a lot of confusion. If you

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Speaker 3: think back to March, we had Silicon Valley Bank, we

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Speaker 3: had First Republic have tremendous, tremendous amounts of depositor outflow.

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Speaker 3: They have very much a bank run, and in line

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Speaker 3: with that dynamic, their stock price basically with a zero

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Speaker 3: because everyone was afraid that they might not make it.

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Speaker 2: Here.

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Speaker 3: Today people are looking at the stock prices thinking, my gosh,

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Speaker 3: there must be a bank run, but that's not happening.

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Speaker 2: That's a there's a disconnect there.

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Speaker 3: However, now if you're just a normal depositor, and you're

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Speaker 3: looking at your bank stock and you see a tanking,

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Speaker 3: you could panic. And so even if a bank is

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Speaker 3: fine at the moment, if it's stock price keeps declining,

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Speaker 3: that could actually precipitate a bank run. So I think

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Speaker 3: that's where we are today. We're at a place where

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Speaker 3: where the regional banks their deposit outflows have stabilized, but

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Speaker 3: their stock prices are going down. And if that doesn't

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Speaker 3: that doesn't also stabilize, I think we could precipitate more

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Speaker 3: bank runs. It looks like it's stabilizing. I mean, you

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Speaker 3: can't go down every day. And I think the SEC

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Speaker 3: is also making noises along with Jamie Diamond that perhaps

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Speaker 3: we should have some kind of a short cell band.

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Speaker 2: So I think that that's where we are today.

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Speaker 3: But you know, I'd also take a step back and

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Speaker 3: just kind of think about just from a top down

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Speaker 3: view of what happened over the past couple of months.

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Speaker 3: We had Silicon Value Bank fail, we had First Republic

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Speaker 3: Bank just recently fail. We had Signature Bank fail as well,

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Speaker 3: and silver Gate. What is it that connects all these

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Speaker 3: banks together? When I think about it, it seems like

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Speaker 3: these banks heavily built their business around a very speculative

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Speaker 3: aspect of the economy, specifically VC and crypto, basically the

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Speaker 3: more speculative aspects of tech that benefited tremendously from easy money.

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Speaker 3: Now that the said hyped rates and did quantity of tightening,

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Speaker 3: obviously the sectors in the economy that benefited the most

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Speaker 3: got hurt the most. And we saw the big implosion

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Speaker 3: in crypto last Tierra, and we've seen the big implosion

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Speaker 3: in a lot of the speculative tech. So it seems

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Speaker 3: like what happened was that banks that were deeply tied

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Speaker 3: to those secreturtons of the economy also got taken down.

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Speaker 3: So I don't really think of this as systemic. I

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Speaker 3: think of this as basically those banks went down, precipiting

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Speaker 3: potentially a panic that is so far at least contained

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Speaker 3: as long as the stock prices are more stabilized.

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Speaker 1: So what happened during the Great Financial Crisis was more

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Speaker 1: of an issue of the banks held assets that got

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Speaker 1: the banks in trouble, toxic assets. And now it's not

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Speaker 1: so much that it's the bank run that if the

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Speaker 1: depositors weren't pulling their money out of the banks, then

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Speaker 1: you know, as long as these assets are held to maturity,

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Speaker 1: they're good at I mean a lot of it is

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Speaker 1: just it's treasuries, and so there's not a toxic asset problem.

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Speaker 1: There's a deposit or outflow problem.

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Speaker 2: Joe, you're exactly right.

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Speaker 3: So in two thousand and eight, it was very munch

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Speaker 3: a crisis of the banking sector.

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Speaker 2: The banks had bad assets. There's a credit problem there.

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Speaker 3: That meant, as you suggested, that the banks made alone

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Speaker 3: and they wouldn't get their money back. So the banks

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Speaker 3: were sitting on losses. They were in some cases insolvent.

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Speaker 3: Now this time it's very different, and that when we

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Speaker 3: look at the banks that went down, largely they were

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Speaker 3: holding assets that were money good, but of course they

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Speaker 3: had a liquidity problem.

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Speaker 2: Now I think about a bank like this.

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Speaker 3: So a bank has let's say longer dated assets and

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Speaker 3: it has largely deposit liabilities. Now let's say you buy

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Speaker 3: a treasury or mortgage backed security. It's going to get

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Speaker 3: paid down, but it's in the future, and interest rates

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Speaker 3: go up and down. You can have unrealized losses or

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Speaker 3: unrealized gains on those assets. Okay, Now let's think about

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Speaker 3: this in two cases. Let's say that a bank borrowed

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Speaker 3: overnight money and use that to buy a ten year treasury.

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Speaker 3: When the interest rates go higher, the bank has unrealized

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Speaker 3: losses on those treasuries, and the people who lent them

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Speaker 3: money overnight could say that, hey, this bank is in soolveent,

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Speaker 3: so I want my money back now. So the bank

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Speaker 3: then would go and have to sell that treasury, immediately

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Speaker 3: realize those losses, and then go bust because obviously, let's

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Speaker 3: say you borrowed one hundred dollars to buy one hundred

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Speaker 3: dollars in treasuries, interest rates went up, treasuries are worth

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Speaker 3: ninety dollars. Well, you lost ten dollars and you go bust. Now,

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Speaker 3: let's look at another case. Let's say the bank borrows

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Speaker 3: tenyre money and goes to buy a ten year treasury security.

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Speaker 3: Interest squerates go up. They have unrealized losses on their

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Speaker 3: tursury security. But you know they have tenure. They borrow

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Speaker 3: tenure money, so in ten years the charity security gets

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Speaker 3: paid down. They have one hundred dollars and they use

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Speaker 3: it to pay one hundred dollars loan back. Now, most

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Speaker 3: banks are funded with deposits. The question is a deposit

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Speaker 3: an overnight borrowing like the first case, or is it

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Speaker 3: a tenure borrowing like the second case. So let's say

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Speaker 3: you and me, in practice we have money in the bank.

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Speaker 3: In practice, we don't go and take out all our

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Speaker 3: money back every day, right, that's nonsense. But at the

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Speaker 3: same time, we don't leave our money in the bank

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Speaker 3: forever either. So a deposit, it's not overnight money, it's

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Speaker 3: not tenure money. What is it. It's somewhere in between.

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Speaker 3: It's a term borrowing, but you just don't know what

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Speaker 3: the term is. A big part of the bank's business

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Speaker 3: is to manage its deposits to make them as sticky

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Speaker 3: as long term as possible, and there's a lot of

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Speaker 3: ways to do this. An obvious way, of course, would

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Speaker 3: be to raise interest rates they pay the depositors, but

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Speaker 3: the surprising thing is that most depositors aren't super interest

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Speaker 3: rates sensitive. Other ways that the bank can try to

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Speaker 3: make their deposit sticky is to just bring them into

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Speaker 3: the ecosystem, kind of like Google or Apple. So let's

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Speaker 3: say that you have a deposit at Chase. Well, they

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Speaker 3: give you a Chase credit card. It's linked to your

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Speaker 3: Chase account. Super convenient. They give you a Chase mortgage

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Speaker 3: also link to your Chase account. Maybe they even give

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Speaker 3: you special status, special points for being a good Chase customer,

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Speaker 3: things like that. Or they could have very fancy technology,

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Speaker 3: or it can be like Capital One, you have a

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Speaker 3: card with us, we give you coffee.

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Speaker 2: There's so many ways that a.

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Speaker 3: Bank can try to build what's called deposit or franchise

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Speaker 3: to make their deposits sticky that don't have anything to

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Speaker 3: do with interest rates. Now, these strategies sometimes are successful,

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Speaker 3: sometimes they're not. Let's talk about two times when they

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Speaker 3: were not successful. First Republic. Their strategy was to find

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Speaker 3: a lutch lots of rich people and say, I'm going

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Speaker 3: to give you a really really cheap mortgage on one condition,

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Speaker 3: I'm your bank, you keep your money with me.

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Speaker 2: Okay, there you go. That's how you build loyalty or

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Speaker 2: silicon value bank. They go.

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Speaker 3: When you find these startups where nobody wants to lend

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Speaker 3: them money, slicon value steps in, they lend them money

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Speaker 3: on one condition, I'm your bank, you keep your money

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Speaker 3: with me. Now, these are ways that they're trying to

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Speaker 3: build loyalty, trying to make their deposits sticky, trying to

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Speaker 3: turn that overnight money into like a i'd say three four,

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Speaker 3: five year loan to the bank. Those strategies were not successful,

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Speaker 3: but that doesn't mean that it's always unsuccessful, right.

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Speaker 2: So a common thing that.

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Speaker 3: Any bank, or medium or large banks do is that

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Speaker 3: they go to a corporation and say, hey, we're not

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Speaker 3: going to give you market interest rate, but this is

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Speaker 3: what we can do for you. Every month, you have

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Speaker 3: to pay your employees, right direct deposit one hundred employees.

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Speaker 3: That costs money, that's a transaction cost. Maybe you have

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Speaker 3: to do it twice a month. We'll do that for you,

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Speaker 3: but you keep your money with us. So again, banks

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Speaker 3: can have a lot of ways to manage share their

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Speaker 3: deposit liabilities to make sure that they're sticky so that

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Speaker 3: they won't be in these liquidity albs. And that's what

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Speaker 3: we are. Like you mentioned, Joe, there's no credit here.

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Speaker 3: They bought srujuries, they bought eat in CMBs, which is

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Speaker 3: stuff guaranteed by the government. What they failed to do

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Speaker 3: was to manage their liquidity properly, their deposit liabilities, and

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Speaker 3: that's that's a difficult thing to do.

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Speaker 2: But they also did it very poorly.

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Speaker 1: So far.

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Speaker 2: The other regional banks that I've looked at are doing

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Speaker 2: it much better.

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Speaker 1: Well, specifically with regional banks. I've heard that commercial real

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Speaker 1: estate could be an area of concern, especially because you know,

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Speaker 1: it's not like residential mortgages. They're not thirty year fixed,

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Speaker 1: they're you know, three year, five year, seven year adjustable

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Speaker 1: rate balloon payments at the end bridge loans. Is that

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Speaker 1: a concern for the system or just a few banks

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Speaker 1: who are overexposed.

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Speaker 3: So there was a really interesting report from the Federal

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Speaker 3: Reserve about this. So they heard everyone was worried about

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Speaker 3: commercial real estate, and so they took a deep dive

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Speaker 3: into it. Now, first you have to note that commercial

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Speaker 3: real estate is a really really broad asset class. It

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Speaker 3: includes hospitals, it includes industrial space, multi family malls, and

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Speaker 3: it also includes of course office space. Now, broadly speaking,

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Speaker 3: commercial real estate is doing fine. I mean, we have

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Speaker 3: an inflationary time, so you know the price of stuff

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Speaker 3: like real estate has gone up. The big, big exception,

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Speaker 3: of course is office space, particularly office space in really

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Speaker 3: big cities, and inconnection to that, also retail in big cities.

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Speaker 3: So if you don't have workers going into those offices,

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Speaker 3: all those other businesses like let's say restaurants and so

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Speaker 3: forth that are dependent upon those workers also do poorly.

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Speaker 3: So the question is not so much commercial real estate,

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Speaker 3: is that who has exposure to all these downtown office

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Speaker 3: space in downtown retail. So when the FED broke it down,

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Speaker 3: they came up with a really interesting finding. Well, first

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Speaker 3: of all, the big banks, the JESIPS so ADJESIP is

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Speaker 3: like a globally systemically important bank, have very small exposure.

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Speaker 3: And also though the big regionals also have a very

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Speaker 3: small exposure. So when you're thinking about a regional like

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Speaker 3: P and C, like M and T, like hunting tents,

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Speaker 3: they have small exposure to that segment of the markets.

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Speaker 3: Where's the exposure. The exposure is in the small banks

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Speaker 3: that many people have never heard of. So in the

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Speaker 3: US we have over four thousand banks we've heard of,

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Speaker 3: you know, the gpms and cities, but there are thousands

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Speaker 3: of banks that we've never heard of before. And those

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Speaker 3: banks collectively hold about five hundred billion dollars of exposure

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Speaker 3: too to this sensitive sector. That's pretty bad because they're

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Speaker 3: small banks. But before we go and panic, I will

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Speaker 3: know two things. One is that you don't actually know

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Speaker 3: how how well they underwrote this. Maybe they lent against

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Speaker 3: a lot of collateral, so their loan to value is

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Speaker 3: very low. And of course, something that's very positive is

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Speaker 3: that because these banks are so small, it's not systemic,

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Speaker 3: so it's not going to spread into the financial system

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Speaker 3: the way that the two thousand and eight financial crisis would. Again,

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Speaker 3: if these office buildings really go bust, there's potential for

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Speaker 3: a credit.

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Speaker 2: Issue, but it's just the potential.

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Speaker 3: And first, and of course it's not going to be

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Speaker 3: systemic because not even the regionals are that involved. It's

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Speaker 3: really the small banks according to the report.

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Speaker 1: Okay, so I know that within the next year and

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Speaker 1: a half there's something like one and a half trillion

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Speaker 1: dollars worth of commercial real estate debt that is needing

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Speaker 1: to get rolled over. But because the size of the

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Speaker 1: large banks, if only five hundred billion is with the

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Speaker 1: small the other trillion is with the larger banks that

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Speaker 1: spread out, then it's like these banks don't have like overexposure,

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Speaker 1: They've got very little exposure. Is that is that what.

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Speaker 3: I'm the big banks? So again, first, commercial real estate

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Speaker 3: is broad. We have one area that is in a

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Speaker 3: lot of trouble. The others are fine. Now among the

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Speaker 3: recommercial real state that gets through that has to be

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Speaker 3: rolled over. I'm not exactly sure how much of that

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Speaker 3: is this downtown office in retail, So I'm not exactly sure.

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Speaker 3: But with thele with respects to the broader question about

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Speaker 3: whether or not, let's say, interest rates are higher if

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Speaker 3: people are able to roll it over, I'll make one

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Speaker 3: observation is that over the past few years, because we

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Speaker 3: have been in an inflationary period, real estate prices have

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Speaker 3: gone up a lot. So let's say five years ago,

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Speaker 3: maybe your bank and you lent fifty dollars to fifty

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Speaker 3: dollars to a developer, and the developer took fifty dollars,

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Speaker 3: added fifty dollars in equity, and bought one hundred dollars building.

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Speaker 3: Well fast forward five years from now, that building has

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Speaker 3: appreciated a lot. So that means that the borrower has

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Speaker 3: a lot more equity in the deal, and that makes

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Speaker 3: the lender of the bank a lot more secure.

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Speaker 2: So we have to keep that in mind as well.

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Speaker 3: So you know, when you have inflation that it kind

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Speaker 3: of washes away the debt in a sense. So sure,

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Speaker 3: I'm not that concerned about about that at the moment.

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Speaker 1: Okay, for the specifically the office space, and if it's

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Speaker 1: you know, concentrated with some of the small banks that

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Speaker 1: you know, basically worst case scenario, there are going to

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Speaker 1: be some small banks that are in trouble as a

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Speaker 1: result of this, which means that it's not systemic, like

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Speaker 1: you said. And also with these small banks, they're probably

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Speaker 1: not in the same situation that First Republic or Silicon

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Speaker 1: Value where most of their deposits are uninsured. Most of

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Speaker 1: their deposits are probably under that you know, hundred and

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Speaker 1: fifty thousand FDIC limit, so we don't have the risk

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Speaker 1: of depositors losing their money and triggering a bank run. However,

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Speaker 1: in my mind, let's say, you know, in this worst

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Speaker 1: case scenario, one of the risks is that we continue

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Speaker 1: to have a lot of consolidation. I mean, even just

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Speaker 1: the fact that we don't know, we don't have the

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Speaker 1: visibility into these all of this data from all the

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Speaker 1: small banks. That lends towards more consolidation, more regulation that

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Speaker 1: makes it harder for small business is maybe small banks

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Speaker 1: among and then consolidation towards the big banks. Do you

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Speaker 1: view that as a risk.

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Speaker 3: First of all, Joe, you're absolutely correct that the smaller

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Speaker 3: banks have a much stronger deposit base.

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Speaker 2: Are looked into the data and it's pretty shocking.

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Speaker 3: Basically, the smaller the bank you are, the higher the

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Speaker 3: percentage of your deposits that are ensured.

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Speaker 2: And that kind of makes sense, right you go to a.

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Speaker 3: Small community bank, you don't have big corporations baking there.

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Speaker 3: It's mostly mom and pop and they don't have more

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Speaker 3: than two hundred and fifty thousand. Now on your question

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Speaker 3: about consolidation, so I think that's mixed in my view. So,

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Speaker 3: first of all, I think it's good that we have

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Speaker 3: a lot of small banks being able to serve a

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Speaker 3: broad range of people. If you are a big bank,

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Speaker 3: obviously you want to make big loans. Be kind of

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Speaker 3: a waste of time for you to be making these

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Speaker 3: small ten thousand dollars loans and so forth. So having

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Speaker 3: small banks I think better serves our community. But on

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Speaker 3: the other hand, though, it's very clear that small banks

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Speaker 3: sometimes they're not very sophisticated and they can make really

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Speaker 3: bad decisions. And we saw that with Silicon Valley, which

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Speaker 3: at the end of the day, was a bank that

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Speaker 3: a small bank that grew very quickly and was obviously

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Speaker 3: very unsophisticated. So when you have a lot of unsophisticated banks,

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Speaker 3: accidents can happen. So bigger banks, I think, do make

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Speaker 3: the system safer simply, if only because they are too

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Speaker 3: big to fail.

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Speaker 2: If you take a step back, you'll see that.

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Speaker 3: I think a few decades ago we had over ten

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Speaker 3: thousand banks. Now we have four thousand. So consolidation is

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Speaker 3: like it is in every other industry. Once we have

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Speaker 3: like it's like the Amazon effect. It's winner take all,

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Speaker 3: especially when you have these big technology platforms that like

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Speaker 3: a JP Morgan can have that other banks really can't

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Speaker 3: compete with. So, you know, I like to have more

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Speaker 3: small banks, but I think the strong trend is that

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Speaker 3: we're going to have fewer and fewer banks. So I

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Speaker 3: think that's that's that seems pretty clear to me.

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Speaker 1: Now, what about the what about the credit crime? Media?

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Speaker 1: Over the last I would say a month or so

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Speaker 1: has been has been talking a lot about the credit

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Speaker 1: crunch and how it could hurt small businesses. How appetite

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Speaker 1: for borrowing, maybe not from consumers like the credit cards,

403
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Speaker 1: but borrowing, you know, loans small businesses is severely declining.

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Speaker 1: Is this credit crunch an issue or is that something

405
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Speaker 1: that's overblown as well.

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Speaker 3: So I think that's the question we want to look

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Speaker 3: at and if we want to see what the macroeconomic

408
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Speaker 3: impact would be. So when a bank makes a loan,

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Speaker 3: it's basically creating money and giving it to people to

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Speaker 3: spend and invest. So the more credit that banks create,

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Speaker 3: the more money there is to spend and invest, and

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Speaker 3: that's positive for the economy so so far. So the concern,

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Speaker 3: of course, is that we have some disturbance in the

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Speaker 3: banking sector and banks are going to be more reluctant

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Speaker 3: to make loans and that will slow economic growth. So

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Speaker 3: the way that I go about looking at this is

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Speaker 3: to actually listen to what the banks are saying and

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Speaker 3: to look at the FITS Data publishes weekly data on

419
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Speaker 3: bank loans. Now, taking a step back, over the past

420
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Speaker 3: six months, banks have been tightening their lending standards and

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Speaker 3: reducing the amount of loans they make. That's been something

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Speaker 3: that's been happening far before whatever happened in March. So

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Speaker 3: this is normal because we're in an economic cyco We

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Speaker 3: had a huge boom the past couple of years, and

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Speaker 3: the banks are becoming more wary. They're prepared for potential

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Speaker 3: recession and so they're slowing down their lending. So that's

427
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Speaker 3: been happening for the past few months. From what I

428
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Speaker 3: see what happened in March, it sounds like it should

429
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Speaker 3: have an impact in further tightening, but so far I

430
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Speaker 3: haven't really seen that. First lim Befet's most recent survey

431
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Speaker 3: of loan officers, so they survey banks ask them for

432
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Speaker 3: their credit centers have changed now when it comes to

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Speaker 3: small businesses, which of course is the most sensitive era

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Speaker 3: that we're thinking of, about half the banks said that,

435
00:22:55,320 --> 00:22:59,600
Speaker 3: you know, we're tightened standards somewhat, and about half said

436
00:22:59,720 --> 00:23:02,639
Speaker 3: they and titan at all, So it doesn't seem like

437
00:23:02,680 --> 00:23:03,640
Speaker 3: it's had a big impact.

438
00:23:03,800 --> 00:23:05,760
Speaker 2: When I look at the weekly.

439
00:23:05,840 --> 00:23:09,639
Speaker 3: FED data, banks continue to make a modest amount of

440
00:23:09,680 --> 00:23:12,480
Speaker 3: loans every week, so there doesn't seem to have been

441
00:23:12,480 --> 00:23:16,040
Speaker 3: a contraction so far, and that is consistent with my

442
00:23:16,160 --> 00:23:20,240
Speaker 3: view that overall the banking system is fine. We had

443
00:23:20,440 --> 00:23:24,200
Speaker 3: some disturbance and we have huge volatility in their stock prices,

444
00:23:24,800 --> 00:23:27,520
Speaker 3: but so far on the ground, based upon what they're saying,

445
00:23:27,840 --> 00:23:32,920
Speaker 3: their underlying business hasn't been hugely disturbed. In fact, depending

446
00:23:32,920 --> 00:23:35,280
Speaker 3: on the regional bank that you ask they'll tell you

447
00:23:35,359 --> 00:23:38,040
Speaker 3: that they over there have lone growth about flat two

448
00:23:38,040 --> 00:23:41,480
Speaker 3: percent to as high as seven percent estimated for this year.

449
00:23:41,600 --> 00:23:44,520
Speaker 3: So it is, you know, it's we got one thousands

450
00:23:44,520 --> 00:23:47,320
Speaker 3: of banks. Everyone has their own little business niche, their

451
00:23:47,320 --> 00:23:50,560
Speaker 3: own little region. I would hesitate to pink too broad

452
00:23:50,560 --> 00:23:53,800
Speaker 3: a brush as to what we saw in the Bay

453
00:23:53,800 --> 00:23:56,640
Speaker 3: Area to the rest of the country.

454
00:23:57,760 --> 00:24:03,440
Speaker 1: Yeah, that makes sense. Okay, speaking of speaking of deposits again,

455
00:24:03,960 --> 00:24:09,480
Speaker 1: over the last I don't know, probably two years, well

456
00:24:09,480 --> 00:24:11,600
Speaker 1: two years ago I think is when we started seeing

457
00:24:12,280 --> 00:24:14,720
Speaker 1: a large amount of money start to flow into the

458
00:24:14,800 --> 00:24:17,000
Speaker 1: reverse repo facility at the FED. And then for about

459
00:24:17,000 --> 00:24:20,160
Speaker 1: the last I think year, it's been right sitting right

460
00:24:20,200 --> 00:24:24,640
Speaker 1: around like two to two point two trillion. And so

461
00:24:24,720 --> 00:24:28,119
Speaker 1: explain if you could for us, what is the reverse

462
00:24:28,160 --> 00:24:30,680
Speaker 1: repol facility at the FED, What is all that money

463
00:24:30,720 --> 00:24:33,040
Speaker 1: doing in there? Like why is it in there? And

464
00:24:33,119 --> 00:24:37,360
Speaker 1: then what would pause it to go up or down?

465
00:24:37,480 --> 00:24:39,760
Speaker 1: And what we the implications of if it did start

466
00:24:39,800 --> 00:24:42,760
Speaker 1: to go up more or start to decrease quickly from here.

467
00:24:42,920 --> 00:24:46,840
Speaker 3: Yeah, So, first I make an observation about the bankings,

468
00:24:46,840 --> 00:24:49,720
Speaker 3: since I've heard many people talk about this and they

469
00:24:50,000 --> 00:24:52,400
Speaker 3: say they look at the banking system and say, oh

470
00:24:52,400 --> 00:24:54,800
Speaker 3: my god, the banking system has lost a few hundred

471
00:24:54,840 --> 00:24:58,040
Speaker 3: billion in deposits over the past year. Everyone is leaving

472
00:24:58,040 --> 00:25:02,600
Speaker 3: the banking system. That's not correct. What's been happening is

473
00:25:02,640 --> 00:25:05,800
Speaker 3: that largely because the FED is doing quantative tightening, the

474
00:25:05,800 --> 00:25:09,000
Speaker 3: FED is shrinking the amount of money in the banking system,

475
00:25:09,280 --> 00:25:14,160
Speaker 3: just like here we expanded a QT shrink sets. It's

476
00:25:14,200 --> 00:25:16,560
Speaker 3: actually not easy for someone to take money out of

477
00:25:16,560 --> 00:25:19,280
Speaker 3: the banking system. For example, if I take money out

478
00:25:19,280 --> 00:25:22,000
Speaker 3: of a bank and put it in a money market fund,

479
00:25:22,400 --> 00:25:25,080
Speaker 3: the money market fund then has the money, so it

480
00:25:25,119 --> 00:25:28,359
Speaker 3: doesn't really disappear. The one place, the one way it

481
00:25:28,400 --> 00:25:30,760
Speaker 3: can disappear, though, is through the reverse.

482
00:25:30,480 --> 00:25:32,280
Speaker 2: Repot facility you mentioned.

483
00:25:33,000 --> 00:25:37,520
Speaker 3: The reverse repos facility is a recontrolled tool operated by

484
00:25:37,560 --> 00:25:41,000
Speaker 3: the FED, and so it's actually how the FED raises

485
00:25:41,040 --> 00:25:44,399
Speaker 3: interest rates. Now, for example, let's say the FED wants

486
00:25:44,600 --> 00:25:47,280
Speaker 3: short term interest rates to be five percent. How does

487
00:25:47,320 --> 00:25:50,359
Speaker 3: the FED actually do this. What they do is they

488
00:25:50,359 --> 00:25:53,639
Speaker 3: set the reverse repol facility offering rate at five percent.

489
00:25:54,320 --> 00:25:57,000
Speaker 3: So that means that anyone who has money, who wants

490
00:25:57,040 --> 00:25:59,520
Speaker 3: to make wants to lend it to someone, they always

491
00:25:59,520 --> 00:26:02,040
Speaker 3: have the offer option of lending it at five percent

492
00:26:02,240 --> 00:26:05,200
Speaker 3: to the Fed. Now, the Fed, you know, the Fed,

493
00:26:05,200 --> 00:26:07,280
Speaker 3: as a money printer, they can never default. So it's

494
00:26:07,320 --> 00:26:11,720
Speaker 3: a risk free overnight loan at a five percent annual rate. Now,

495
00:26:12,240 --> 00:26:14,600
Speaker 3: if I'm an investor and I can lend at five

496
00:26:14,600 --> 00:26:17,080
Speaker 3: percent to the Fed, well, obviously I will not be

497
00:26:17,200 --> 00:26:21,119
Speaker 3: willing to accept anyone, any anyone borrowing from less than

498
00:26:21,119 --> 00:26:24,520
Speaker 3: five percent, right, So that's how the FED controls interest rates.

499
00:26:24,600 --> 00:26:28,000
Speaker 3: They offer and they offer a risk free investment option

500
00:26:28,320 --> 00:26:29,760
Speaker 3: through the reverse repot facility.

501
00:26:30,400 --> 00:26:31,760
Speaker 2: Now, the reverse is.

502
00:26:31,760 --> 00:26:33,919
Speaker 1: Basically the floor for interest rate.

503
00:26:34,040 --> 00:26:37,679
Speaker 3: The Fed the only traits with a certain counterparties, So

504
00:26:37,760 --> 00:26:40,640
Speaker 3: only the money market funds can access the reverse repoil facility.

505
00:26:41,240 --> 00:26:44,040
Speaker 3: So over the past few years, a lot of money

506
00:26:44,119 --> 00:26:47,639
Speaker 3: has flowed into the money market funds, and well, the

507
00:26:47,640 --> 00:26:50,440
Speaker 3: money market funds they have all this money and they

508
00:26:50,440 --> 00:26:53,040
Speaker 3: want to invest it. But they look around into the

509
00:26:53,160 --> 00:26:55,560
Speaker 3: universe of investments they can buy, and they can only

510
00:26:55,560 --> 00:26:59,000
Speaker 3: buy very conservative investments. They're not seeing anything that's that's

511
00:26:59,080 --> 00:27:01,760
Speaker 3: really attract to them. So they go and they put

512
00:27:01,800 --> 00:27:05,040
Speaker 3: money in the FEDS Reverse repol facility, and that's why

513
00:27:05,040 --> 00:27:07,600
Speaker 3: it's grown so much. It's been pretty stable for the

514
00:27:07,640 --> 00:27:09,600
Speaker 3: past year about you know, let's say two point one

515
00:27:09,720 --> 00:27:15,520
Speaker 3: trillion dollars. So that though, when we look at the

516
00:27:15,720 --> 00:27:18,959
Speaker 3: rise and fall of the reverse repot facility, that's the

517
00:27:18,960 --> 00:27:21,359
Speaker 3: real marker of whether or not money is leaving the

518
00:27:21,359 --> 00:27:24,240
Speaker 3: banking system. If I take money and give it to

519
00:27:24,240 --> 00:27:26,760
Speaker 3: a money market fund, the money market fund can simply

520
00:27:26,880 --> 00:27:28,800
Speaker 3: lend it to someone else and then the money stays

521
00:27:28,800 --> 00:27:31,560
Speaker 3: into the banking system. But if the money market fund

522
00:27:31,600 --> 00:27:34,119
Speaker 3: takes the money and then puts it in the reverse

523
00:27:34,200 --> 00:27:38,280
Speaker 3: repol facility, then that that actually does take money out

524
00:27:38,280 --> 00:27:40,800
Speaker 3: of the banking system. But so far, you know, it's

525
00:27:40,840 --> 00:27:43,359
Speaker 3: been stable for the past year. I expect it to

526
00:27:43,400 --> 00:27:46,760
Speaker 3: go up, maybe meaningfully in the coming coming months, but

527
00:27:46,880 --> 00:27:49,840
Speaker 3: so far that hasn't been It's been safe over the

528
00:27:49,920 --> 00:27:50,480
Speaker 3: past year.

529
00:27:53,240 --> 00:27:56,080
Speaker 1: You do it, I expect that more thin there.

530
00:27:56,359 --> 00:27:59,480
Speaker 3: So we have a debt sealing episode, right, So when

531
00:27:59,480 --> 00:28:02,360
Speaker 3: you have a debt ceiling episode, people money market fans

532
00:28:02,400 --> 00:28:03,800
Speaker 3: also liked to buy treasury bills.

533
00:28:04,040 --> 00:28:06,840
Speaker 2: They've been buying fewer and fewer over the past year,

534
00:28:07,280 --> 00:28:08,320
Speaker 2: but they still own some.

535
00:28:08,880 --> 00:28:09,040
Speaker 1: Now.

536
00:28:09,080 --> 00:28:11,280
Speaker 3: No one wants to be cut with a trajury bill

537
00:28:11,640 --> 00:28:13,919
Speaker 3: that you know that gets defaulted upon, so you have

538
00:28:14,000 --> 00:28:17,280
Speaker 3: some risk averse behavior there. So that's going to push

539
00:28:17,320 --> 00:28:19,920
Speaker 3: people into the reverse repot facility.

540
00:28:20,080 --> 00:28:25,960
Speaker 2: And later on, of course, you might have the federal

541
00:28:26,000 --> 00:28:26,600
Speaker 2: home loan bank.

542
00:28:26,680 --> 00:28:29,280
Speaker 3: So okay, So the federal home loan banks have been

543
00:28:29,280 --> 00:28:31,320
Speaker 3: blowing from the money market funds to lend to the

544
00:28:31,359 --> 00:28:33,919
Speaker 3: banks during the March bank panic.

545
00:28:34,080 --> 00:28:36,719
Speaker 2: That's going to dive down in the coming months.

546
00:28:36,760 --> 00:28:39,200
Speaker 3: And that means again that more money that was being

547
00:28:39,280 --> 00:28:41,160
Speaker 3: lent to the home loan banks will end up back

548
00:28:41,200 --> 00:28:42,880
Speaker 3: into the reverse repo facility.

549
00:28:44,800 --> 00:28:47,880
Speaker 1: Okay, all right, So when when money flows into there,

550
00:28:48,080 --> 00:28:51,760
Speaker 1: that's money that is not in the banking system, and

551
00:28:52,360 --> 00:28:54,800
Speaker 1: so a lot of that. I mean, if you consider

552
00:28:54,880 --> 00:29:01,560
Speaker 1: the total new new monetary creation from quantitative easing since

553
00:29:01,600 --> 00:29:04,120
Speaker 1: like twenty twenty, a good chunk of that new money

554
00:29:04,400 --> 00:29:08,720
Speaker 1: would be in the reverse repo facility. Yeah, yeah, so correct.

555
00:29:08,760 --> 00:29:10,640
Speaker 3: This is actually, you know, just for the people who

556
00:29:10,680 --> 00:29:14,840
Speaker 3: are worried about banking banks losing their deposits. Two years

557
00:29:14,880 --> 00:29:18,560
Speaker 3: ago you had articles in the U in Bloomberg where

558
00:29:18,720 --> 00:29:21,480
Speaker 3: the banks were like, I have too much deposits, get

559
00:29:21,560 --> 00:29:24,160
Speaker 3: out right, right, and so that's why they all the

560
00:29:24,160 --> 00:29:26,120
Speaker 3: people like, okay, I can't. I can't put my money

561
00:29:26,160 --> 00:29:28,080
Speaker 3: in JP Morgan, I'll put it in the money market fund,

562
00:29:28,120 --> 00:29:29,720
Speaker 3: and the money market fund then puts in the reverse

563
00:29:29,760 --> 00:29:30,520
Speaker 3: repote facility.

564
00:29:30,840 --> 00:29:32,160
Speaker 2: So that's basically what happened.

565
00:29:32,160 --> 00:29:34,640
Speaker 3: It's like the it's like the DRA and the overflow

566
00:29:34,840 --> 00:29:38,080
Speaker 3: evolve for the financial system, and a lot of federal

567
00:29:38,080 --> 00:29:40,960
Speaker 3: officials will point to that and be like, how can

568
00:29:41,000 --> 00:29:43,800
Speaker 3: we have not enough money in the banking system when

569
00:29:43,800 --> 00:29:46,120
Speaker 3: there's so much sitting in the reverse repol facility.

570
00:29:46,280 --> 00:29:49,960
Speaker 2: Remember that was zero pre COVID mm hmm.

571
00:29:50,240 --> 00:29:50,600
Speaker 3: Yeah.

572
00:29:50,800 --> 00:29:53,920
Speaker 1: So if we get into a situation where suddenly there's

573
00:29:53,960 --> 00:29:58,280
Speaker 1: a huge need for liquidity, where you know, some global

574
00:29:58,320 --> 00:30:02,200
Speaker 1: event or something something happened, pins there's two trillion dollars,

575
00:30:02,200 --> 00:30:04,160
Speaker 1: the FED at any point they could say, all right,

576
00:30:04,680 --> 00:30:07,760
Speaker 1: interest rates of the reverse recoil facility zero percent, all

577
00:30:07,800 --> 00:30:09,920
Speaker 1: that money floods out and advice t bills and treasuries

578
00:30:09,920 --> 00:30:11,120
Speaker 1: goes in the banking system. Right.

579
00:30:11,320 --> 00:30:13,520
Speaker 3: Yeah, the FED wouldn't try to try to do it

580
00:30:13,560 --> 00:30:16,920
Speaker 3: that way because if they if they lower the interest rates,

581
00:30:17,120 --> 00:30:19,920
Speaker 3: well then they lose control of interest rates, right, first

582
00:30:19,920 --> 00:30:22,760
Speaker 3: principle of a central bank. So the FED has that

583
00:30:23,840 --> 00:30:26,520
Speaker 3: effects the economy through interest rates, right, that means they

584
00:30:26,560 --> 00:30:29,120
Speaker 3: have to be able to control interest rates. If they

585
00:30:29,920 --> 00:30:32,600
Speaker 3: change let's say their target is five percent and they

586
00:30:32,600 --> 00:30:35,280
Speaker 3: shift the reverse repol rate to two percent, well then

587
00:30:35,320 --> 00:30:37,760
Speaker 3: that means the all the money would flood out, like

588
00:30:37,800 --> 00:30:40,800
Speaker 3: you mentioned, but that means that people would be lending

589
00:30:40,840 --> 00:30:43,080
Speaker 3: at rates that are below the fed's target.

590
00:30:43,160 --> 00:30:45,160
Speaker 2: So the FED would lose control of interest rates.

591
00:30:45,480 --> 00:30:49,320
Speaker 3: But if the banks needed money, though, they could tap

592
00:30:49,360 --> 00:30:51,600
Speaker 3: it through the federal home loan banks, which is what

593
00:30:51,600 --> 00:30:53,760
Speaker 3: they've been doing for the past two months. So they

594
00:30:53,800 --> 00:30:56,160
Speaker 3: would borrow from a Federal Home Loan bank, which is

595
00:30:56,200 --> 00:30:59,720
Speaker 3: like a government sponsored agency, and they get Federal Home

596
00:30:59,760 --> 00:31:02,480
Speaker 3: Loan bank, then would then borrow from the money market fund.

597
00:31:02,760 --> 00:31:04,680
Speaker 2: And where does the money market fund get the money?

598
00:31:04,680 --> 00:31:06,120
Speaker 2: From the reverse repot facility.

599
00:31:06,520 --> 00:31:08,840
Speaker 3: And that's that's what's been happening to the TM of

600
00:31:08,880 --> 00:31:11,280
Speaker 3: a few hundred billion the past two months. But again,

601
00:31:11,520 --> 00:31:14,640
Speaker 3: as the panic dies down, that will reverse. So I

602
00:31:14,640 --> 00:31:16,720
Speaker 3: think that's how the banks have been tapping the reverse

603
00:31:16,760 --> 00:31:18,200
Speaker 3: revolt facility money so far.

604
00:31:20,400 --> 00:31:23,239
Speaker 1: Okay, so the FED would not lower the rate on

605
00:31:23,280 --> 00:31:26,280
Speaker 1: the reverse ary facility in isolation of everything else while

606
00:31:26,320 --> 00:31:29,680
Speaker 1: they're still tightening or raising rates. But and so the

607
00:31:29,720 --> 00:31:32,320
Speaker 1: only way we would see the rate come down in

608
00:31:32,360 --> 00:31:35,920
Speaker 1: there is is if they you know exactly the rates

609
00:31:36,200 --> 00:31:37,320
Speaker 1: across exactly Joe.

610
00:31:37,400 --> 00:31:39,640
Speaker 2: They need that for rate control. It's their tools.

611
00:31:39,680 --> 00:31:42,720
Speaker 3: Like if you're if you're a central bank, you try

612
00:31:42,760 --> 00:31:45,280
Speaker 3: to influence the economy through interest rates. So you've got

613
00:31:45,320 --> 00:31:46,800
Speaker 3: to have to be able to move interest rates up

614
00:31:46,880 --> 00:31:51,040
Speaker 3: or down when you change your target. So you kind

615
00:31:51,040 --> 00:31:53,080
Speaker 3: of really really need to have that tool there so

616
00:31:53,120 --> 00:31:55,280
Speaker 3: that you can raise interest rates we want to, and

617
00:31:55,400 --> 00:31:57,360
Speaker 3: lower interest rates when you want to as well.

618
00:31:58,000 --> 00:32:01,520
Speaker 1: You can just what about the pre because it used

619
00:32:01,560 --> 00:32:04,960
Speaker 1: to be the rate they paid used to be identical

620
00:32:05,000 --> 00:32:08,200
Speaker 1: to the floor of the Fed Funds rate range, and

621
00:32:08,240 --> 00:32:10,840
Speaker 1: now it's five basis points higher, and that's when the

622
00:32:10,840 --> 00:32:12,440
Speaker 1: money started falling in there. Would they take it?

623
00:32:12,640 --> 00:32:15,240
Speaker 2: They could, but you know, five basis totally.

624
00:32:14,920 --> 00:32:16,080
Speaker 1: To get push money out.

625
00:32:16,560 --> 00:32:19,440
Speaker 3: So I'm still skeptical about that, and I'll tell you why.

626
00:32:19,640 --> 00:32:22,680
Speaker 3: So in the short term interest rate market, remember, uh

627
00:32:23,480 --> 00:32:28,280
Speaker 3: so the RP offering rate is everyone's backup option, right,

628
00:32:28,520 --> 00:32:31,000
Speaker 3: So if you shift that backup option down to five percent,

629
00:32:31,120 --> 00:32:34,120
Speaker 3: then everything else would just trade down five percent five

630
00:32:34,120 --> 00:32:36,760
Speaker 3: basis points as well, Right, It's kind of like the

631
00:32:36,760 --> 00:32:40,080
Speaker 3: center of the of the constellation of interest rates. You

632
00:32:40,160 --> 00:32:42,320
Speaker 3: move it up, all the other rates move up as well,

633
00:32:42,640 --> 00:32:44,400
Speaker 3: you move it down, all the other the rates move

634
00:32:44,440 --> 00:32:47,480
Speaker 3: down as well. Everything trades at a spread to the

635
00:32:47,520 --> 00:32:51,400
Speaker 3: reverse facility rate. So it's it's hard to make it

636
00:32:51,520 --> 00:32:54,360
Speaker 3: relatively less or more attractive just by adjusting it.

637
00:32:56,240 --> 00:32:58,400
Speaker 1: Gotcha, okay, but you get it down five.

638
00:32:58,240 --> 00:33:00,840
Speaker 3: Basis points to the floor, like you mentioned. But I

639
00:33:00,920 --> 00:33:03,520
Speaker 3: just think that everything else would kind of treade down

640
00:33:03,520 --> 00:33:04,280
Speaker 3: a little bit as well.

641
00:33:04,520 --> 00:33:09,440
Speaker 1: Yeah, just yeah, that makes sense. Right now, the yield

642
00:33:09,520 --> 00:33:16,400
Speaker 1: curve is steeply inverted. The Fed's preferred yield curve is

643
00:33:16,400 --> 00:33:18,440
Speaker 1: the near term forward spread. I believe it's the three

644
00:33:18,440 --> 00:33:24,960
Speaker 1: months to eighteen month that one recently became became steeply inverted.

645
00:33:25,600 --> 00:33:30,000
Speaker 1: And so this would indicate the market is anticipating something

646
00:33:30,120 --> 00:33:33,520
Speaker 1: terrible happening the Fed, you know, pivoting and starting to

647
00:33:33,520 --> 00:33:37,320
Speaker 1: lower rates again, starting up QE. Is the market wrong

648
00:33:37,360 --> 00:33:39,480
Speaker 1: about this? Is this something pricing in, you know, the

649
00:33:41,000 --> 00:33:44,200
Speaker 1: interest expenses for the federal government going up? What's going on?

650
00:33:44,280 --> 00:33:46,440
Speaker 3: That's a great question, and the Fed has been asked

651
00:33:46,440 --> 00:33:49,680
Speaker 3: this a thousand times because on the one hand, so

652
00:33:49,880 --> 00:33:53,800
Speaker 3: Chuirpal and the FMC committee is on stage just telling

653
00:33:53,800 --> 00:33:57,040
Speaker 3: everyone we're going to hold its at five percent around

654
00:33:57,040 --> 00:33:59,120
Speaker 3: here for the rest of the year, and the market

655
00:33:59,240 --> 00:34:01,720
Speaker 3: is like, oh, hey, you're got to cut rates, right,

656
00:34:01,720 --> 00:34:02,200
Speaker 3: and you're going.

657
00:34:02,120 --> 00:34:07,120
Speaker 2: To cut a lot right. And so two things about this.

658
00:34:07,680 --> 00:34:10,520
Speaker 3: First is that the market always tries to guess what

659
00:34:10,560 --> 00:34:11,279
Speaker 3: the FED would do.

660
00:34:12,000 --> 00:34:12,200
Speaker 2: Marke.

661
00:34:12,520 --> 00:34:15,480
Speaker 3: Sometimes it's right, sometimes it's wrong. Over the past two years,

662
00:34:15,520 --> 00:34:18,000
Speaker 3: it's been really wrong. And it never thought the FED

663
00:34:18,040 --> 00:34:20,160
Speaker 3: could go to five percent, and I never thought the

664
00:34:20,200 --> 00:34:21,680
Speaker 3: FED could hold as long as it did.

665
00:34:22,080 --> 00:34:23,439
Speaker 2: So that's one thing. Now.

666
00:34:23,480 --> 00:34:27,560
Speaker 3: The second thing is that so the market is composed

667
00:34:27,560 --> 00:34:30,680
Speaker 3: of many market participants, so everyone buys some trades in

668
00:34:30,719 --> 00:34:33,000
Speaker 3: a different for different reasons. So we can only look

669
00:34:33,000 --> 00:34:37,360
Speaker 3: at the price action and we tell stories. One common

670
00:34:37,400 --> 00:34:39,600
Speaker 3: story that the FED responds to is that the market

671
00:34:39,640 --> 00:34:42,960
Speaker 3: thinks that we're going to get inflation under control very quickly,

672
00:34:43,160 --> 00:34:45,960
Speaker 3: and so we're going to cut rates. And so the

673
00:34:46,760 --> 00:34:50,440
Speaker 3: poll takes this as an explanation, and so he says that, well,

674
00:34:51,120 --> 00:34:54,640
Speaker 3: our forecast of inflation is different from the markets. We

675
00:34:54,640 --> 00:34:57,040
Speaker 3: think inflation is going to be stickier. That's why we

676
00:34:57,080 --> 00:34:59,359
Speaker 3: think we're going to hold rates higher for longer. That's

677
00:34:59,440 --> 00:35:05,040
Speaker 3: one story. Another story, and Austin goose Wlbe, the president

678
00:35:05,040 --> 00:35:07,880
Speaker 3: of FED Chicago, says, is that the market seems to

679
00:35:07,920 --> 00:35:12,040
Speaker 3: think that there's financial distress and so the FED will

680
00:35:12,080 --> 00:35:15,480
Speaker 3: have to cut rates. So that's his interpretation, and then

681
00:35:15,520 --> 00:35:18,280
Speaker 3: he'd go on to say that if there's financial distress,

682
00:35:18,560 --> 00:35:21,640
Speaker 3: the appropriate remedy is not to use blunt tools like

683
00:35:21,680 --> 00:35:22,640
Speaker 3: cutting interest rates.

684
00:35:22,880 --> 00:35:24,640
Speaker 2: But we could do targeted.

685
00:35:24,320 --> 00:35:27,759
Speaker 3: Operations, you know, kind of like the Fed's emergency lending

686
00:35:27,800 --> 00:35:30,799
Speaker 3: facility it gave to banks, or we could do more

687
00:35:31,440 --> 00:35:35,239
Speaker 3: supervision regulation stuff like that, it wouldn't be the cut rates.

688
00:35:35,880 --> 00:35:38,600
Speaker 2: And you can also have market participants who come up

689
00:35:38,600 --> 00:35:41,320
Speaker 2: with a story and saying that, you know, the market

690
00:35:41,360 --> 00:35:42,719
Speaker 2: is hedging their bets.

691
00:35:42,600 --> 00:35:45,040
Speaker 3: So they think the most likely outcome is the FED

692
00:35:45,239 --> 00:35:49,400
Speaker 3: staying at five percent longer. But there's also some outside

693
00:35:49,480 --> 00:35:53,200
Speaker 3: chance of great catastrophe. And so you have five percent

694
00:35:53,280 --> 00:35:55,920
Speaker 3: and you have a great catastrophe where the FED will

695
00:35:55,960 --> 00:35:58,080
Speaker 3: cut a lot. You know, you weigh that a little

696
00:35:58,080 --> 00:35:59,920
Speaker 3: bit and you get end up with two or three cuts.

697
00:36:00,560 --> 00:36:04,839
Speaker 3: So people have different stories to tell. My own, so

698
00:36:05,080 --> 00:36:07,960
Speaker 3: that's how people explain it. My own sense is that

699
00:36:08,000 --> 00:36:11,040
Speaker 3: I think the market misunderstands that there's just this fundamental

700
00:36:11,120 --> 00:36:14,280
Speaker 3: sea change in how inflation will work in this country

701
00:36:14,320 --> 00:36:17,480
Speaker 3: and in the West. For the foreseeable future. We're heading

702
00:36:17,520 --> 00:36:20,160
Speaker 3: into a world we're going to have higher inflation than

703
00:36:20,320 --> 00:36:23,319
Speaker 3: in the past, and because of that, we're heading into

704
00:36:23,360 --> 00:36:25,200
Speaker 3: a world we're interest rate to stay higher than in

705
00:36:25,239 --> 00:36:29,319
Speaker 3: the past. So I think that my own impression is

706
00:36:29,320 --> 00:36:32,040
Speaker 3: that people are always fighting the last war. They always

707
00:36:32,040 --> 00:36:34,720
Speaker 3: think the present and the future looks like the past,

708
00:36:35,719 --> 00:36:38,319
Speaker 3: and for the most part they are right, because we

709
00:36:38,400 --> 00:36:41,759
Speaker 3: don't often have big regime changes. But I think we

710
00:36:41,880 --> 00:36:44,480
Speaker 3: have one now. So I'm with the Fed here, and

711
00:36:44,520 --> 00:36:46,680
Speaker 3: I think that interest rates I will stay higher for

712
00:36:46,719 --> 00:36:47,560
Speaker 3: longer this year.

713
00:36:50,160 --> 00:36:52,840
Speaker 1: Okay, all right, Yeah, that makes sense. One of the

714
00:36:52,880 --> 00:36:59,279
Speaker 1: biggest drivers I think that people tend to overlook is

715
00:36:59,280 --> 00:37:04,839
Speaker 1: is fiscal over monetary policy. And you recently pointed out

716
00:37:04,880 --> 00:37:09,360
Speaker 1: in a tweet that projections from the government and private

717
00:37:09,400 --> 00:37:11,439
Speaker 1: sector indicate, you know, one and a half to two

718
00:37:11,480 --> 00:37:16,280
Speaker 1: trillion in treasury issuance every year for the foreseeable future,

719
00:37:17,920 --> 00:37:22,160
Speaker 1: and yet the tenure is at three and a half percent,

720
00:37:23,080 --> 00:37:28,680
Speaker 1: and meanwhile we're rolling over I don't know, a very

721
00:37:28,719 --> 00:37:32,080
Speaker 1: low interest rate debt into you know, three and a

722
00:37:32,120 --> 00:37:36,480
Speaker 1: half percent, let's say, and interest rate costs on you know,

723
00:37:36,520 --> 00:37:39,080
Speaker 1: the debt service costs for the government is skyrocketing. It's

724
00:37:39,120 --> 00:37:43,640
Speaker 1: now almost equal to defense spending. And that's that's not

725
00:37:43,719 --> 00:37:46,840
Speaker 1: going to stop, especially if the FED is right and

726
00:37:46,880 --> 00:37:51,600
Speaker 1: they're not lowering rates anytime soon. And you then talked

727
00:37:51,600 --> 00:37:56,399
Speaker 1: about more of like instead of a sledgehammer approach, they're

728
00:37:56,760 --> 00:37:59,759
Speaker 1: more and more leaning towards scalpel like approaches instead of

729
00:38:00,120 --> 00:38:04,120
Speaker 1: unforced instruments will address the specific issues. So do you

730
00:38:04,280 --> 00:38:08,879
Speaker 1: see a potential outcome here where the Fed has to

731
00:38:08,920 --> 00:38:13,480
Speaker 1: restart QE just to keep the government solvent, but keeps ratcheting,

732
00:38:13,520 --> 00:38:15,440
Speaker 1: you know, tightening everything for the private fact.

733
00:38:15,480 --> 00:38:21,280
Speaker 3: I think that's definitely a possibility. So, like you mentioned, Joe,

734
00:38:21,440 --> 00:38:23,760
Speaker 3: the FED, and not just the FED, but central banks

735
00:38:23,760 --> 00:38:27,319
Speaker 3: in general, have begun to use more targeted approaches in

736
00:38:27,480 --> 00:38:30,080
Speaker 3: monetary policy. I'll give you the Bank of England as

737
00:38:30,080 --> 00:38:33,040
Speaker 3: an example. So last year, as we know, the Bank

738
00:38:33,040 --> 00:38:36,600
Speaker 3: of England's guilt market, their sovereign debt market with Haywire,

739
00:38:36,960 --> 00:38:38,680
Speaker 3: we saw their youth skyrocket.

740
00:38:38,800 --> 00:38:42,239
Speaker 2: There was some serious stress there. So what did the

741
00:38:42,239 --> 00:38:44,880
Speaker 2: Bank of England do. They went out, they bought a

742
00:38:44,880 --> 00:38:47,640
Speaker 2: whole bunch of guilts, so like a mini QI operation,

743
00:38:48,200 --> 00:38:50,960
Speaker 2: and then they turned around and went right back to hiking.

744
00:38:51,320 --> 00:38:54,799
Speaker 2: So they viewed that as some local disturbance in their

745
00:38:54,840 --> 00:38:57,359
Speaker 2: bond market. They fixed it, and then they went back

746
00:38:57,400 --> 00:39:02,200
Speaker 2: to maintaining a very strict, very restrictive monetary policy stance.

747
00:39:02,600 --> 00:39:05,759
Speaker 2: Now in the US, if we were to have some

748
00:39:05,880 --> 00:39:08,640
Speaker 2: kind of accident in the bond market, I think they

749
00:39:08,640 --> 00:39:11,880
Speaker 2: could do the same thing. Now, I think your deeper

750
00:39:12,000 --> 00:39:16,720
Speaker 2: question is, you know, what, if yields will come really high,

751
00:39:17,320 --> 00:39:19,920
Speaker 2: how will the FED handle that?

752
00:39:20,000 --> 00:39:22,400
Speaker 3: And I think they could ultimately if they wanted to

753
00:39:22,640 --> 00:39:25,960
Speaker 3: implement something like yield curve control, like what they did

754
00:39:26,000 --> 00:39:29,040
Speaker 3: in Japan and in Australia. So people have done that before.

755
00:39:29,640 --> 00:39:31,640
Speaker 3: Central bit can easily do that if they want to.

756
00:39:31,760 --> 00:39:35,239
Speaker 3: So I don't actually ever worry of the government not

757
00:39:35,320 --> 00:39:37,760
Speaker 3: being able to afford their debt, but I do worry

758
00:39:37,800 --> 00:39:43,080
Speaker 3: about the inflationary consequences of it, because obviously the government,

759
00:39:43,280 --> 00:39:44,600
Speaker 3: you know, at the end of the day, if no

760
00:39:44,640 --> 00:39:46,160
Speaker 3: one wants to buy it, the FED will buy it.

761
00:39:46,400 --> 00:39:50,560
Speaker 3: But we've seen what fiscal policy can do, it can

762
00:39:50,600 --> 00:39:54,360
Speaker 3: be very inflationary. We're living through the aftermath of inflationary

763
00:39:54,360 --> 00:39:56,200
Speaker 3: fiscal policy this past two.

764
00:39:56,120 --> 00:39:58,520
Speaker 2: Years, and it doesn't seem like it's getting better.

765
00:39:58,640 --> 00:40:01,880
Speaker 3: That chart that you mentioned, where we're going to issue

766
00:40:02,040 --> 00:40:04,279
Speaker 3: between one point five to two trillion dollars of debt

767
00:40:04,280 --> 00:40:08,520
Speaker 3: every year, that's unthinkable that thirty years ago we had

768
00:40:09,480 --> 00:40:13,120
Speaker 3: budget surpluses. In fact, we had money left, we had

769
00:40:13,120 --> 00:40:13,879
Speaker 3: money left over.

770
00:40:14,080 --> 00:40:14,640
Speaker 2: The turgery.

771
00:40:14,760 --> 00:40:16,960
Speaker 3: They went out and they bought higher you thing, debt,

772
00:40:17,000 --> 00:40:18,960
Speaker 3: they bought it back just so they can save the

773
00:40:19,000 --> 00:40:21,520
Speaker 3: taxpayers and interest rate paym and they're like, we're caring

774
00:40:21,520 --> 00:40:24,719
Speaker 3: about the taxpayer. Now you never hear people say about again, Right,

775
00:40:24,719 --> 00:40:25,640
Speaker 3: that doesn't make any sense.

776
00:40:25,760 --> 00:40:27,000
Speaker 2: We're issuing one point.

777
00:40:26,800 --> 00:40:30,839
Speaker 3: Five two trillion dollars in debt, So that to me

778
00:40:31,000 --> 00:40:34,279
Speaker 3: is kind of like a runaway train where we're going

779
00:40:34,320 --> 00:40:37,120
Speaker 3: to have a world where fiscal policy is going to

780
00:40:37,120 --> 00:40:41,560
Speaker 3: be out of control and that's very inflationating for the

781
00:40:41,600 --> 00:40:42,440
Speaker 3: next coming years.

782
00:40:42,640 --> 00:40:46,479
Speaker 2: So that's kind of something that I think is.

783
00:40:46,440 --> 00:40:49,759
Speaker 3: My biggest outlook and my biggest concern for the next decade.

784
00:40:52,040 --> 00:40:56,279
Speaker 1: Yeah, yeah, that certainly makes sense. Well, thank you so

785
00:40:56,400 --> 00:41:00,560
Speaker 1: much for joining. I know we running short on time

786
00:41:00,640 --> 00:41:07,239
Speaker 1: here with just one more question for you with this,

787
00:41:07,520 --> 00:41:10,680
Speaker 1: with this runaway train, but largely due to I think

788
00:41:10,880 --> 00:41:13,040
Speaker 1: rising interest expenses is going to be you know, a

789
00:41:13,160 --> 00:41:16,320
Speaker 1: huge story over the next year two years for the government.

790
00:41:18,280 --> 00:41:24,360
Speaker 1: Trillion dollar coin premium bonds or restart you know, restart QI,

791
00:41:24,600 --> 00:41:28,080
Speaker 1: all of these just there are different ways, it seems like,

792
00:41:28,200 --> 00:41:31,719
Speaker 1: of accomplishing the same goal, which is making sure the

793
00:41:31,760 --> 00:41:35,200
Speaker 1: government can spend the money that it's it's trying to

794
00:41:35,200 --> 00:41:39,640
Speaker 1: spend without defaulting. And then you said the inflationary consequences

795
00:41:39,640 --> 00:41:44,080
Speaker 1: of that. But right now we're we're facing you know,

796
00:41:44,200 --> 00:41:49,720
Speaker 1: economic stress, We're facing tightening conditions, We're facing higher interest

797
00:41:49,760 --> 00:41:54,440
Speaker 1: rates for for consumers, rising credit card debts. So it

798
00:41:54,480 --> 00:41:57,439
Speaker 1: seems like we have two conflicting stories here that people

799
00:41:57,480 --> 00:42:00,719
Speaker 1: are going back and forth about. We've got deflation or inflation.

800
00:42:01,280 --> 00:42:04,799
Speaker 1: Which one of these is the biggest concern in your

801
00:42:04,840 --> 00:42:07,160
Speaker 1: opinion or is it both of them just in different

802
00:42:07,239 --> 00:42:10,440
Speaker 1: time scales, So you know, the one.

803
00:42:10,360 --> 00:42:12,239
Speaker 3: Is related to the other. Because if you have a

804
00:42:12,239 --> 00:42:14,560
Speaker 3: lot of deficit that's spending, what does that mean? That

805
00:42:14,600 --> 00:42:17,000
Speaker 3: means that the government is spending money, But who is

806
00:42:17,000 --> 00:42:19,719
Speaker 3: it spending money? Who is it giving money to who's

807
00:42:19,719 --> 00:42:22,600
Speaker 3: it spending money on. If you have the government spending

808
00:42:22,600 --> 00:42:25,879
Speaker 3: a trillion dollars or two trillion dollars in deficits a year,

809
00:42:26,320 --> 00:42:28,160
Speaker 3: that money goes to the private sector.

810
00:42:28,239 --> 00:42:29,560
Speaker 2: Right, the government goes.

811
00:42:29,360 --> 00:42:31,480
Speaker 3: And they give social security payments, that goes to the

812
00:42:31,520 --> 00:42:34,160
Speaker 3: public goes and AD buys missiles, it goes and AD

813
00:42:34,200 --> 00:42:37,840
Speaker 3: buys whatever. You know, that's money that goes to the households,

814
00:42:37,880 --> 00:42:40,840
Speaker 3: to the general public. And if that happens, the general

815
00:42:40,840 --> 00:42:41,640
Speaker 3: public has.

816
00:42:41,560 --> 00:42:42,600
Speaker 2: Money that they can.

817
00:42:42,600 --> 00:42:45,600
Speaker 3: Use to pay down their debt or go and buy stuff.

818
00:42:46,200 --> 00:42:50,680
Speaker 3: So you know, there could be like a more of

819
00:42:50,680 --> 00:42:53,640
Speaker 3: a temporal lag. So let's say you spend money and

820
00:42:53,680 --> 00:42:56,680
Speaker 3: it takes time to reach households. But I'm not as

821
00:42:56,719 --> 00:43:00,800
Speaker 3: concerned of the household debt situation because, like I mentioned,

822
00:43:01,000 --> 00:43:03,760
Speaker 3: money is flowing from the public sector to the private

823
00:43:03,800 --> 00:43:06,200
Speaker 3: sector and it looks like it's going to do that

824
00:43:06,280 --> 00:43:10,960
Speaker 3: in a very big way. Also, I note that just overall,

825
00:43:11,239 --> 00:43:14,200
Speaker 3: you know, house prices are up, stock market is still

826
00:43:14,200 --> 00:43:17,560
Speaker 3: pretty elevated, so people have a lot of wealth that

827
00:43:17,560 --> 00:43:20,680
Speaker 3: they're holding on to. So I'm not concerned about the

828
00:43:20,719 --> 00:43:24,480
Speaker 3: financial situations of households and not to mention job market

829
00:43:24,520 --> 00:43:28,000
Speaker 3: is still strong and people are getting pretty sizable raises.

830
00:43:31,280 --> 00:43:33,560
Speaker 1: Gotcha. Okay, so it sounds like you you think the

831
00:43:33,800 --> 00:43:35,760
Speaker 1: larger concern, especially long time.

832
00:43:35,719 --> 00:43:39,239
Speaker 3: Inflationary inflationary stemming from the public sector, flows over into

833
00:43:39,320 --> 00:43:43,319
Speaker 3: the private sector. Right. Public sector spends money that ends

834
00:43:43,360 --> 00:43:45,399
Speaker 3: up in the pockets of the private sector, so it's

835
00:43:45,440 --> 00:43:48,359
Speaker 3: hard for I think there to be deflationary impulses when

836
00:43:48,600 --> 00:43:50,719
Speaker 3: so much money is flowing into the economy.

837
00:43:52,680 --> 00:43:55,560
Speaker 1: Yeah, yeah, that makes sense. Well, thank you so much

838
00:43:55,600 --> 00:43:58,160
Speaker 1: for all of the valuable information. Like I said, it's

839
00:43:58,239 --> 00:44:00,960
Speaker 1: rare that you get to hear directly from somebody who's

840
00:44:01,600 --> 00:44:05,800
Speaker 1: got experience actually, you know, working inside the belly of

841
00:44:05,840 --> 00:44:09,280
Speaker 1: the beast, and so I really appreciate you coming on today.

842
00:44:09,480 --> 00:44:13,640
Speaker 1: You are active on Twitter and you've got your blog.

843
00:44:13,719 --> 00:44:17,200
Speaker 1: I'll link those below. But you also recently have started

844
00:44:17,239 --> 00:44:23,719
Speaker 1: a YouTube channel, and your channel is Joseph Wang and

845
00:44:23,760 --> 00:44:26,359
Speaker 1: your handle on YouTube is fed Back exactly right.

846
00:44:26,440 --> 00:44:28,440
Speaker 3: So I give weekly updates on what I think is

847
00:44:28,440 --> 00:44:31,160
Speaker 3: happening in the markets, and I also give debriefs after

848
00:44:31,200 --> 00:44:35,080
Speaker 3: every FMC meeting to help people understand just what went on.

849
00:44:35,600 --> 00:44:37,640
Speaker 2: So if you guys are interested in that, stuff. Check

850
00:44:37,680 --> 00:44:38,000
Speaker 2: it out.

851
00:44:40,480 --> 00:44:43,680
Speaker 1: Fantastic. Yeah, I highly recommend that for everybody listening. And

852
00:44:43,920 --> 00:44:45,040
Speaker 1: thanks again for joining the show.

853
00:44:45,040 --> 00:44:47,960
Speaker 3: It's a pleasure to be here and great to meet you.