WEBVTT - Economic Worries Begin to Fade 0:00:13.720 --> 0:00:16.720 Hello, and welcome to What Goes Up, a Bloomberg Weekly 0:00:16.800 --> 0:00:20.280 Markets podcast. I'm Sarah Ponza, a reporter on the Cross 0:00:20.320 --> 0:00:23.319 Asset team, and I'm Mike Reagan, a senior editor on 0:00:23.360 --> 0:00:25.759 the Markets team. This week on the show, the Federal 0:00:25.800 --> 0:00:29.400 Reserve held their last meeting of the year, keeping policy unchanged, 0:00:29.680 --> 0:00:32.960 and the ECB had their first with Christine Legard at 0:00:33.000 --> 0:00:35.839 the Helm Plus. After one of the best years for 0:00:35.880 --> 0:00:38.760 the bull market in stocks, what is there now to 0:00:38.840 --> 0:00:41.440 look forward to? Well, one thing, sorry, you can look 0:00:41.479 --> 0:00:43.800 forward to is the craziest thing I saw in markets 0:00:43.800 --> 0:00:46.519 this week. Our tradition which we will end the show with, 0:00:47.040 --> 0:00:49.920 of course, and a reminder if you see something crazy 0:00:50.120 --> 0:00:54.240 in markets, uh, see something, say something? Uh specifically, call 0:00:54.360 --> 0:00:57.120 our what goes Up hotline and leave us a voicemail. Sorry, 0:00:57.160 --> 0:00:59.680 what's that number again? That number six or six three 0:00:59.760 --> 0:01:03.080 two for three four nine zero. So, as Mike said, 0:01:03.120 --> 0:01:05.680 if you see something, say something, Yeah, maybe we'll play 0:01:05.720 --> 0:01:08.959 your voicemail on the show. But let's get right to 0:01:08.959 --> 0:01:12.559 today's show. We've got a first time guest on the show. 0:01:12.760 --> 0:01:16.280 His name is Mike Schumacher. He's the head of interest 0:01:16.400 --> 0:01:18.960 rate Strategy at Wells Fargo, Mike, welcome to the show. 0:01:19.080 --> 0:01:21.640 Thanks very much, great to be here. Great, great and 0:01:21.760 --> 0:01:25.800 another guest back literally by popular demand. Um, if your 0:01:25.840 --> 0:01:27.840 listeners out there, I don't know if you realize this, 0:01:27.920 --> 0:01:32.720 you can request guests apparently, So this became a new 0:01:32.800 --> 0:01:37.479 trend in our Twitter feed when we ask for crazy things. Well, 0:01:37.520 --> 0:01:41.000 instead we have just gotten demands for our other guests. 0:01:41.000 --> 0:01:46.680 So yes, yes, and so this one goes out to you, 0:01:46.760 --> 0:01:52.800 Ellie Paname mon Underscore Singe on Twitter, who tweeted at 0:01:52.880 --> 0:01:57.040 us we demand more, give the people what they want. Well, 0:01:57.080 --> 0:01:59.960 we're given it to Ellie Paname. I'm a little susp 0:02:00.000 --> 0:02:03.440 a'cious about this account. Chris. The profile pictures is a 0:02:03.440 --> 0:02:07.800 picture Kevin McHale of the Boston Celtics wearing shorts that 0:02:07.920 --> 0:02:10.800 I cannot describe on a family podcast due to that 0:02:10.880 --> 0:02:13.760 eighties Arab basketball shorts. Chris being a Boston native, I'm 0:02:13.760 --> 0:02:15.920 a little skeptical about this, but we're gonna assume this 0:02:15.960 --> 0:02:19.760 is a real grassroots campug. Nothing to know when I've 0:02:19.760 --> 0:02:23.600 ever met in my life. Okay, did you believe that's sir? 0:02:24.000 --> 0:02:25.919 Not at all? And that voice is Chris Nagy, the 0:02:25.960 --> 0:02:28.400 executive editor of the cross asset team Man Equities here 0:02:28.440 --> 0:02:31.360 at Bloomberg and Mike, they're gonna be tweeting to demand you. 0:02:31.400 --> 0:02:36.600 I'm sure again fantastic. I will not wear funny sorts. So, 0:02:36.600 --> 0:02:38.480 like I wanted to ask you, you know, we got 0:02:38.520 --> 0:02:41.680 some inflation data this week. Um, I know the Fed 0:02:41.760 --> 0:02:45.160 prefers pc but the latest data we got was c 0:02:45.360 --> 0:02:49.320 p I. I gotta say core CPI two point three percent. 0:02:49.560 --> 0:02:53.560 Headline was about two point one percent. At what point 0:02:53.560 --> 0:02:56.359 do we have to start worrying about the Fed when 0:02:56.360 --> 0:02:58.240 it comes to inflation. I mean, this isn't the highest 0:02:58.240 --> 0:03:00.480 it's been at the cycle, but you know, we're we're 0:03:00.520 --> 0:03:03.760 getting back to sort of that target level the FED 0:03:03.760 --> 0:03:06.600 would like to see. Inflation took up frankly from Chairman 0:03:06.600 --> 0:03:10.079 Powell's discussion recently, he'd be thrilled if inflation were two 0:03:10.160 --> 0:03:12.919 two to three on a core basis for an extended period. 0:03:13.360 --> 0:03:15.640 Central bankers know what to do with inflation. They just 0:03:15.680 --> 0:03:17.440 hit it over the head. So the FED could let 0:03:17.440 --> 0:03:19.560 inflation run for a while. That would be dandy. So 0:03:19.840 --> 0:03:21.760 bottom line is, we're not concerned. I don't think the 0:03:21.800 --> 0:03:24.519 FED is either. So inflation was certainly a hot topic. 0:03:24.560 --> 0:03:26.720 It came up in many questions at the press conference 0:03:27.000 --> 0:03:30.120 on Wednesday. One point really stuck out to me from 0:03:30.200 --> 0:03:33.399 FED chair Powell. He was talking about the so called 0:03:33.440 --> 0:03:36.440 Philip's curve unemployment how it relates to inflation. It seemed 0:03:36.480 --> 0:03:38.360 as though he was saying, we can have a tight 0:03:38.440 --> 0:03:40.920 labor market, that's fine, but maybe the labor market isn't 0:03:41.080 --> 0:03:44.000 so tight and we are not seeing extreme wage growth. 0:03:44.520 --> 0:03:47.040 Did that really resonate with you. Did something from that 0:03:47.080 --> 0:03:50.880 conversation stick out to you? Yeah, it's interesting, Sarah. So 0:03:50.960 --> 0:03:53.520 essentially he's making the case of the Phillips curve with 0:03:53.600 --> 0:03:56.520 respect to wages is pretty flat, and wage growth actually 0:03:56.600 --> 0:03:59.240 has been pretty good if you look at the lower 0:03:59.280 --> 0:04:01.440 segment of the po pulation. So let's say the bottom 0:04:02.120 --> 0:04:04.280 of wages paid, they're up almost four and a half 0:04:04.320 --> 0:04:06.600 percent in the last year, which is great, and even 0:04:06.640 --> 0:04:09.560 the top runners are up almost three percent, and yet 0:04:09.600 --> 0:04:12.080 unemployments three and a half. Inflation we just heard as 0:04:12.120 --> 0:04:14.760 ticked up, but it's nothing crazy. So I think Chara 0:04:14.840 --> 0:04:17.039 Polo is right when he says we can probably tolerate 0:04:17.160 --> 0:04:20.360 lower unemployment than we thought in the past without inflation 0:04:20.400 --> 0:04:22.680 going wild. So the curve is flatter, but not totally 0:04:22.680 --> 0:04:26.360 flat like the other big news this week obviously, was 0:04:27.279 --> 0:04:29.320 what appears to be we're getting closer and closer to 0:04:29.400 --> 0:04:31.880 a trade deal now. To be honest, as we record 0:04:32.000 --> 0:04:35.960 this on a Thursday, it looks like the latest report 0:04:36.040 --> 0:04:40.280 suggests that, um, they're very close. Who knows what will 0:04:40.320 --> 0:04:44.880 happen in the half hour that we record this, right, 0:04:45.720 --> 0:04:48.800 have at it, even we deserve it if uh, you know, 0:04:51.040 --> 0:04:53.400 what are what are yields gonna look like? Though? If 0:04:53.440 --> 0:04:57.560 we do reach a piece between US and China in 0:04:58.040 --> 0:05:01.280 trade er, I mean, you know, tenure treasury is now 0:05:01.520 --> 0:05:04.960 approaching that two percent level. Um, where do you expect 0:05:04.960 --> 0:05:06.720 it to stop? If we do get good news on 0:05:06.760 --> 0:05:09.000 the trade front we've been make in the case, if 0:05:09.000 --> 0:05:11.400 there's a fairly modest trade deal, which I would call 0:05:11.440 --> 0:05:15.400 this potential thing, that the tenure treasury goes to to 0:05:15.640 --> 0:05:18.320 ten maybe two fifteen. And the way we get there 0:05:18.400 --> 0:05:20.480 is we looked at we're tend stood back on July 0:05:20.640 --> 0:05:23.240 thirty one, So that was the day of the first fetties. 0:05:23.600 --> 0:05:26.000 The tenure was too oh two. The next day, you 0:05:26.080 --> 0:05:29.279 might recall, President Trump put out his tweet really mandating 0:05:29.320 --> 0:05:33.200 in all us companies find alternatives to Chinese suppliers. So 0:05:33.240 --> 0:05:35.240 we think that something like two oh one too oh 0:05:35.240 --> 0:05:37.800 two is pretty easy to beat. But since that date 0:05:37.880 --> 0:05:40.440 there's been so much easing by central banks. Would say 0:05:40.440 --> 0:05:42.599 anything a lot higher than that's probably out of reach. 0:05:42.760 --> 0:05:45.919 So to ten, maybe two fifteen, if you're aggressive, somewhere 0:05:45.920 --> 0:05:47.920 in that range we think makes sense. Chris, I want 0:05:47.960 --> 0:05:50.520 to bring you in here on that topic. So say 0:05:50.640 --> 0:05:53.960 we do get a trade deal this weekend, all is great. 0:05:54.000 --> 0:05:55.760 All of a sudden, you see yields made me move 0:05:55.839 --> 0:05:58.960 up to ten to fifteen. Is that still a good 0:05:59.040 --> 0:06:01.440 environment for what are he's going forwards? I mean, there's 0:06:01.480 --> 0:06:04.119 still pretty low interest rate, right what's not to like? Really? 0:06:04.120 --> 0:06:05.360 I mean, the one thing you have to think about 0:06:05.400 --> 0:06:07.400 is that you've just had this gigantic here, and one 0:06:07.440 --> 0:06:10.840 interpretation of what happened is that what usually happens stock 0:06:10.880 --> 0:06:13.200 market looks ahead to the future. The market may well 0:06:13.240 --> 0:06:17.279 be saying something good about the macro. Backdrop in the 0:06:17.360 --> 0:06:19.920 question is how much more do you really expect out 0:06:19.960 --> 0:06:21.719 of stocks right now? I mean, you're going to have 0:06:23.440 --> 0:06:26.680 year here expecting tons more on top. It's certainly possible, 0:06:26.839 --> 0:06:29.559 you know, Uh, growth is not twist to fall apart. 0:06:29.600 --> 0:06:31.359 Earning supposed to be strong, but the question is how 0:06:31.440 --> 0:06:36.120 much was that baked in? And something that someone said 0:06:36.160 --> 0:06:38.000 to me this week and I found very interesting on 0:06:38.040 --> 0:06:40.679 the trade subject was that even if we do get 0:06:40.720 --> 0:06:43.560 a trade deal and sure China goes along and buys 0:06:43.560 --> 0:06:46.640 agricultural goods, things seem like they're moving along pretty nicely. 0:06:46.680 --> 0:06:49.640 Maybe phase one turns into phase two, phase three per se. 0:06:50.240 --> 0:06:53.599 The issue is that companies have are already started changing 0:06:53.640 --> 0:06:57.880 their supply chains, and that that's pretty expensive. And if 0:06:57.920 --> 0:07:00.600 they have been changing their supply chains over the past 0:07:00.720 --> 0:07:02.800 year and a half whenever this all started back in March, 0:07:03.960 --> 0:07:08.240 wouldn't it be pretty difficult then for companies to start 0:07:08.320 --> 0:07:10.720 really going back to how it was or not putting 0:07:10.720 --> 0:07:14.560 money into changing the supply chains again, and that profits 0:07:14.560 --> 0:07:17.720 could remain print from that point that could then feed 0:07:17.720 --> 0:07:20.960 into the global economy next year. Is that anything of 0:07:21.000 --> 0:07:23.120 the sort that you're thinking of with your team over 0:07:23.160 --> 0:07:26.680 at Wells Fargo, I'd say a bit. And I certainly 0:07:26.760 --> 0:07:29.200 take the point that yes, there's probably been some switch 0:07:29.280 --> 0:07:32.280 over to whether it's Vietnam, Malaysia, Indonesia, who knows, but 0:07:32.680 --> 0:07:36.760 countries ex China, but probably not anywhere near. So those 0:07:36.760 --> 0:07:38.960 companies who have not made the switch, who said, gee, 0:07:38.960 --> 0:07:41.400 we hope this blows over, they should benefit quite a 0:07:41.400 --> 0:07:43.760 bit if there's some sort of deal. So I guess 0:07:43.760 --> 0:07:46.440 the way frame it from a market standpoint is, would 0:07:46.480 --> 0:07:49.600 there be a decent uptick and confidence almost certainly, would 0:07:49.600 --> 0:07:51.880 there be a pickup and growth probably, So it should 0:07:51.920 --> 0:07:53.760 be a pretty good risk on move. Is that if 0:07:53.800 --> 0:07:57.240 this happens. You know, Mike, we're getting near the end 0:07:57.240 --> 0:08:02.400 of the year. Obviously, goodness a long one has but 0:08:02.440 --> 0:08:05.400 there's one hurdle left to go, and that is the 0:08:05.440 --> 0:08:07.680 sort of funding stress that you often see at the 0:08:07.800 --> 0:08:10.880 end of the year in the repo market. Uh, walk 0:08:11.000 --> 0:08:14.040 us through how you're thinking about that, and really, for 0:08:14.080 --> 0:08:16.960 the listeners who are not too in the weeds, UH 0:08:17.040 --> 0:08:19.880 in this market of me being one of them, for example, 0:08:20.720 --> 0:08:24.080 explain to us why this funding stress happens at the 0:08:24.160 --> 0:08:26.080 end of the year and what role the repo market 0:08:26.120 --> 0:08:29.320 plays in it. Yeah, it's been an incredibly hot topic 0:08:29.400 --> 0:08:32.200 over the last few months. Repost spiked in mid September. 0:08:32.280 --> 0:08:34.680 The fed goot very concerned about it. But to back 0:08:34.760 --> 0:08:36.520 up a little bit, the core of the problem, we 0:08:36.559 --> 0:08:38.960 would say, and probably most people would agree, is that 0:08:39.040 --> 0:08:42.280 bank balance sheets are very constrained, capital requirements are tight, 0:08:42.320 --> 0:08:45.360 they're all sorts of liquidity issues, etcetera, etcetera. So banks 0:08:45.360 --> 0:08:47.840 probably don't have as much flexibility to put cash into 0:08:47.840 --> 0:08:50.400 the repo market as you might think. Now, the way 0:08:50.440 --> 0:08:53.040 that showed up in September is that something called excess 0:08:53.080 --> 0:08:56.120 reserves has gone down a lot, and it's probably a misnomber. 0:08:56.200 --> 0:08:59.240 The reserves aren't really so excess, and at the margin, 0:09:00.160 --> 0:09:02.520 one extra dollar really tipped the market into a frenzy, 0:09:02.559 --> 0:09:04.120 and all of a sudden there was simply not enough 0:09:04.120 --> 0:09:06.640 cash to go around. Now, the FED saw this, every 0:09:06.640 --> 0:09:09.560 one in the market sought and the central bank response 0:09:09.600 --> 0:09:13.360 to a problem is put lots of liquidity into the system. Now, 0:09:13.440 --> 0:09:16.200 this addresses the symptoms, but not the underlying core of 0:09:16.200 --> 0:09:18.800 the problem. The core of the problems you need regulatory relief, 0:09:19.120 --> 0:09:21.319 but that probably takes quite a while. So the Feed 0:09:21.440 --> 0:09:23.400 is pushing a lot of liquidity into the system. Now, 0:09:23.440 --> 0:09:26.440 there was announcement not too long ago that talked about 0:09:26.520 --> 0:09:28.120 doing a bit more of that. So we think the 0:09:28.160 --> 0:09:30.680 FED is very much on the game. If you will, 0:09:30.760 --> 0:09:32.840 there are two schools of thought. We are of the 0:09:32.880 --> 0:09:35.440 mind that the fedle put enough liquidity in the system 0:09:35.520 --> 0:09:38.880 to really mitigate big problems. REPO probably goes up somewhat 0:09:38.920 --> 0:09:41.000 towards the end of the year. It was about five 0:09:41.040 --> 0:09:43.360 percent a year ago. Right now it's around four. For 0:09:43.400 --> 0:09:45.760 the turn of the year. Maybe it gets back to five, 0:09:45.800 --> 0:09:47.679 but we very much doubt it gets to nine or ten, 0:09:47.760 --> 0:09:50.200 which is where it was in September. But talking to 0:09:50.240 --> 0:09:52.160 a lot of clients, they tell me, I get it, 0:09:52.200 --> 0:09:54.760 But you still may have a case where a number 0:09:54.800 --> 0:09:57.520 of big banks really don't want to put the cash out, 0:09:57.640 --> 0:10:00.120 so any amount of liquidity will not be enough. We 0:10:00.160 --> 0:10:02.600 think that's unlikely, but it's possible. So that's really the issue. 0:10:02.600 --> 0:10:05.720 In a nutshell, is the supply of treasuries part of 0:10:05.720 --> 0:10:07.679 the issue, especially on that short end. I mean, here 0:10:07.720 --> 0:10:12.200 we are, we're running a trillion dollar deficit. UH, investors 0:10:12.200 --> 0:10:15.160 are more in the mood for risky assets. It seemed like, 0:10:15.280 --> 0:10:19.200 seems like UH, those primary dealers having a hard time 0:10:19.280 --> 0:10:23.560 funding purchases of treasuries. And here we have politicians talking 0:10:23.559 --> 0:10:27.160 about perhaps a middle class tax cut UH next year. 0:10:27.240 --> 0:10:30.320 So maybe even bigger deficits. I mean isn't that supply 0:10:30.320 --> 0:10:31.880 A treasury is part of the story too. It is 0:10:31.920 --> 0:10:33.800 a big part of the story. So long term, you 0:10:33.800 --> 0:10:35.760 look at the US budget, the episode of around a 0:10:35.760 --> 0:10:38.280 trillion dollars, Treasury has to fund it. That means lots 0:10:38.280 --> 0:10:40.959 of net issuance. Now the primary dealers have to buy. 0:10:41.000 --> 0:10:43.200 That's what it means to be a primary dealer. So 0:10:43.280 --> 0:10:45.600 if you look at primary dealer holdings of treasuries, they 0:10:45.640 --> 0:10:48.040 have roughly doubled in the last year from about a 0:10:48.160 --> 0:10:50.920 hundred and fifty billion to about three billion. Now this 0:10:51.040 --> 0:10:53.319 is just the primary dealer aspect of a bank, it's 0:10:53.360 --> 0:10:56.199 not the entire bank. So at some point you can say, well, 0:10:56.480 --> 0:10:58.760 maybe the primaries have about as much as they want 0:10:58.800 --> 0:11:00.760 they really don't want to have or treasuries on the 0:11:00.800 --> 0:11:03.560 balance sheet. Maybe the FED could come to the rescue. 0:11:03.960 --> 0:11:06.400 This is why Chairman Paul recently got the question, I 0:11:06.440 --> 0:11:10.040 think anyway about potentially expanding the universe of securities the 0:11:10.080 --> 0:11:12.480 FED would buy, maybe buying some of these short coupon 0:11:12.559 --> 0:11:15.040 bonds at dealer's own that sort of thing. So, yes, 0:11:15.080 --> 0:11:17.600 it's very much the case. The big deficit and heavy 0:11:17.640 --> 0:11:20.400 treasury supply impact the REPO situation. So should we just 0:11:20.440 --> 0:11:23.560 expect that FED balance sheet to just keep growing throughout 0:11:24.840 --> 0:11:28.360 and and beyond. I mean, I promised not to call 0:11:28.440 --> 0:11:33.320 quantitative easy. I can't callie, but I mean that balance 0:11:33.360 --> 0:11:37.280 sheet is it's hard to imagine it's shrinking again anytime soon. Right, 0:11:37.720 --> 0:11:40.000 we agree with that, And the FED really has talked 0:11:40.040 --> 0:11:44.280 about making FED funds the primary tool for conducting monetary policy. 0:11:44.360 --> 0:11:47.640 But QUI seems awfully convenient. Do a little quie, buy 0:11:47.679 --> 0:11:50.360 some treasury bills, try to help fix the repo problem, 0:11:50.840 --> 0:11:53.680 maybe expand out the curve possibly if things aren't going 0:11:53.720 --> 0:11:56.040 that well. So I think you're right, you probably will 0:11:56.040 --> 0:11:58.599 see the balance sheet expand. In a theoretical world of 0:11:58.679 --> 0:12:00.720 asking this just because over the last week, i'll call it, 0:12:00.760 --> 0:12:04.000 there was some hubbub over the repo squeeze, talking about 0:12:04.040 --> 0:12:08.120 a potential year end squeeze. Say, theoretically we did see 0:12:08.160 --> 0:12:11.439 that happen. Could we potentially see fall out to other 0:12:11.480 --> 0:12:14.080 areas of the fixed income space as well, or would 0:12:14.080 --> 0:12:17.840 it be more so concentrated you can see fallout. Repo 0:12:18.040 --> 0:12:21.000 is really like the grease that keeps the engine moving spinning. 0:12:21.120 --> 0:12:23.240 So if that really gets clawged and makes it much 0:12:23.240 --> 0:12:26.840 tougher for clients of any type to transact, and very 0:12:26.840 --> 0:12:30.000 difficult for players like hedge funds to get short term funding. 0:12:30.240 --> 0:12:33.160 Not to say it's completely unavailable, but available at really 0:12:33.480 --> 0:12:36.800 stratospheric rates, So there could be a lot of fallout. Chris, 0:12:36.800 --> 0:12:40.240 I feel like the repo market is something equity investors 0:12:40.480 --> 0:12:44.199 uh pretend doesn't exist until they have to uh cram 0:12:44.440 --> 0:12:46.839 cram their studies about what's going on, you know, and 0:12:47.320 --> 0:12:51.080 what you edit and what you read. Uh does this 0:12:51.200 --> 0:12:54.680 repo all this liquidity to the repo market? I think 0:12:54.920 --> 0:12:57.959 the um assumption from a lot of people is that 0:12:58.000 --> 0:13:01.000 this is part of this last of the rallying stocks. 0:13:01.080 --> 0:13:03.640 Is liquidity good for stocks no matter what, even if 0:13:03.640 --> 0:13:05.400 it's in the short end of the Yes, And an 0:13:05.440 --> 0:13:07.760 argument can be made to things that caught, you know, 0:13:08.280 --> 0:13:11.880 strain the system, like a gigantic budget deficit is weirdly 0:13:11.960 --> 0:13:14.720 good for stocks. It's so liquidity provider to the reason. 0:13:14.760 --> 0:13:17.520 I mean, it's a giant tax cut basically at the 0:13:17.559 --> 0:13:22.120 back of that, and that's been arguably a huge factor 0:13:22.160 --> 0:13:25.280 in the background again for the stock market. So these 0:13:25.320 --> 0:13:29.040 things are are are tail winds until they become headwinds. 0:13:29.040 --> 0:13:31.240 You never really know when a giant it's a big 0:13:31.280 --> 0:13:33.360 nebulous issue for the market. I think people are aware 0:13:33.400 --> 0:13:35.600 that the US is getting a little over its skis 0:13:35.679 --> 0:13:38.040 on some of it's borrowing, and to the extent that 0:13:38.480 --> 0:13:40.840 the whole repot thing is emblematic of that. It's a 0:13:40.880 --> 0:13:43.839 factor for the market. I would agree your average equity guy, 0:13:44.400 --> 0:13:47.000 they didn't pretend it doesn't exist, it doesn't doesn't want 0:13:47.000 --> 0:13:50.520 to talk about it beyond his capacity. I will say, though, 0:13:50.559 --> 0:13:52.920 in more and more conversations with different investors that I 0:13:53.000 --> 0:13:55.760 speak with, liquidity is coming up as a reason for 0:13:55.800 --> 0:13:58.000 this year end rally and equity. As I asked them 0:13:58.040 --> 0:14:00.080 what's going on, They talk about the balance sheet, They 0:14:00.120 --> 0:14:02.240 talk about this not being kiwi. But the fact of 0:14:02.240 --> 0:14:04.680 the matter is there's more liquidity in the system. And 0:14:04.960 --> 0:14:07.040 Davis had a pretty good research note on this, and 0:14:07.080 --> 0:14:09.680 they said, look, money flows to where it's treated best, 0:14:09.679 --> 0:14:12.480 and right now it's being treated well. And the equity 0:14:12.480 --> 0:14:13.880 were I mean, if you buy that last year or 0:14:13.880 --> 0:14:16.200 so off was the opposite, it was a reaction to 0:14:16.360 --> 0:14:18.400 power going too far in the other direction that you 0:14:18.480 --> 0:14:20.160 kind of have to you kind of have to buy 0:14:20.200 --> 0:14:22.200 that that argument for this year I mean the FED 0:14:22.320 --> 0:14:26.560 is sitting there, you know, latering liquidity into stockholders hands. 0:14:27.040 --> 0:14:29.200 So like it all gets back to what is the 0:14:29.200 --> 0:14:32.800 biggest risk of all this, of all this, these huge deficits, 0:14:33.200 --> 0:14:37.040 this huge issuance of treasuries, the FED buying, I mean, 0:14:37.120 --> 0:14:38.920 is it does it all get back to inflation? As 0:14:38.960 --> 0:14:44.120 long as inflation stays cool enough that uh, you know, 0:14:44.160 --> 0:14:47.600 these giant deficits, this giant supply doesn't matter if inflation 0:14:47.680 --> 0:14:49.800 is low and therefore borrowing costs are low. It's probably 0:14:49.840 --> 0:14:52.040 not a huge issue with respect of the US budget. 0:14:52.360 --> 0:14:55.240 And it's interesting how many presidential candidates the cycle of 0:14:55.320 --> 0:14:59.600 talked about fiscal restraint. That's right, zero, nobody not and 0:14:59.680 --> 0:15:01.520 pres and a Trump also I put in that camp. 0:15:01.560 --> 0:15:04.040 So no one at the top seems super concerned about it. 0:15:04.600 --> 0:15:07.280 We can come up with risks. It's conceivable maybe there's 0:15:07.280 --> 0:15:09.480 a foreign buyer strike, But I think you have to 0:15:09.520 --> 0:15:12.880 ask yourself what else would they buy? Do you really 0:15:12.880 --> 0:15:15.960 think investors in Japan or China or elsewhere in Asia 0:15:16.040 --> 0:15:18.200 or Latin America are going to buy a lot of 0:15:18.240 --> 0:15:21.800 European government bonds that have negative yield? Probably not. Do 0:15:21.840 --> 0:15:24.800 you really think that investors who actually need a lot 0:15:24.800 --> 0:15:27.840 of liquidity potentially and one high credit quality can go 0:15:28.200 --> 0:15:30.880 too far away from the US. Doesn't seem that likely. 0:15:31.040 --> 0:15:34.240 So the US markets by virtue of being very homogeneous 0:15:34.240 --> 0:15:37.480 for one in liquid and also having excellent credit quality, 0:15:37.680 --> 0:15:39.760 it's a home field advantage. So it's tough to lose that. 0:15:40.160 --> 0:15:43.120 I don't know if you follow the whole uh craze 0:15:43.120 --> 0:15:46.360 of modern monetary theory m M T at all, But um, 0:15:46.480 --> 0:15:48.680 you know the idea that that deficits don't matter. We've 0:15:48.760 --> 0:15:51.520 we've spent our lifetimes worrying about the deficits. Crank up 0:15:51.520 --> 0:15:55.120 that printing press Are they sort of being proven right 0:15:55.160 --> 0:15:58.520 to some degree? Do you think? Um? At least you know, 0:15:58.560 --> 0:16:00.960 for example, if you're the U S and your currency 0:16:01.040 --> 0:16:03.400 is the reserve currency, uh, and you don't have to 0:16:03.440 --> 0:16:06.280 really worry about a major devaluation in the currency if 0:16:06.320 --> 0:16:09.320 you're if you're cranking up the printing presses. Recently, it's 0:16:09.360 --> 0:16:12.160 worked out. I certainly wouldn't accept that long term. But 0:16:12.320 --> 0:16:15.360 in a world where yields are generally quite low globally 0:16:15.480 --> 0:16:18.840 and the US has a reserve currency, the US government 0:16:18.840 --> 0:16:20.640 can run a pretty big deficit, and right now it's 0:16:20.680 --> 0:16:23.000 the biggest by far across G ten. It's more than 0:16:23.040 --> 0:16:27.080 five of the US GDP, and the next biggest one 0:16:27.160 --> 0:16:29.360 is sort of a tie between Japan and France at 0:16:29.400 --> 0:16:32.160 about three. So the US is running a much bigger deficit, 0:16:32.240 --> 0:16:49.560 no doubt. So going back to the interest rate conversation, 0:16:49.600 --> 0:16:51.960 but bringing it over to equity is something that did 0:16:52.000 --> 0:16:54.120 happen this week was that the S and P five 0:16:54.160 --> 0:16:58.200 hundred financial index, very closely tied to movements and interest 0:16:58.280 --> 0:17:01.800 rates lately, finally took out It's two thousand seven high. So, Chris, 0:17:02.120 --> 0:17:04.440 what does this really tell you about how far we've 0:17:04.520 --> 0:17:07.240 come the journey that it's been over the past twelve 0:17:07.280 --> 0:17:09.280 years or so, Right, it's sort of the final chapter 0:17:09.400 --> 0:17:11.879 in that in the financial crisis. From the stock market perspective, 0:17:11.920 --> 0:17:13.680 I think you have to look at it as really 0:17:14.040 --> 0:17:16.800 mainly testament to the power of the bullmarket. The bullmarket 0:17:16.840 --> 0:17:19.719 insanely powerful thing. Pretty Much everything that you could do 0:17:19.760 --> 0:17:21.800 to you could throw up in the face of banker 0:17:22.200 --> 0:17:26.040 to impede bank earnings has been done. All the vulcar stuff, 0:17:26.680 --> 0:17:29.800 risk taking rained in, and interest rate environments the opposite 0:17:29.800 --> 0:17:32.560 of what they want pretty much, And yet those stocks 0:17:32.600 --> 0:17:35.480 still pulled above all that stuff. They rallied an insane 0:17:35.520 --> 0:17:37.400 amount from the bottom they fell the most, and they 0:17:37.480 --> 0:17:39.639 had to rise something like sixfold to get back to 0:17:39.640 --> 0:17:43.800 a record. So I think it's entirely the rising tide 0:17:43.840 --> 0:17:46.560 of the stock market, and nothing specific to bank stocks 0:17:46.560 --> 0:17:47.960 other than the fact that they're part of you know, 0:17:47.960 --> 0:17:49.920 they're part of the US economy and we're taking part 0:17:50.000 --> 0:17:54.719 in their earnings have slowly crept back. Chris, one of 0:17:54.760 --> 0:17:57.119 the stories that caught my eye from your team this 0:17:57.160 --> 0:18:00.600 week was this notion that a lot of the strategist 0:18:00.640 --> 0:18:05.560 on Wall Street are getting bullish towards small caps um Now, 0:18:05.680 --> 0:18:09.000 is that sort of you know, an unwind of the 0:18:09.080 --> 0:18:12.879 defensives versus cyclical trade in some degreem Obviously, you know 0:18:12.960 --> 0:18:15.240 the the SMP is a little bit more defensive than 0:18:15.280 --> 0:18:18.040 the Russell two thousand. Is that all part and parcel 0:18:18.119 --> 0:18:19.800 that you think that that makes sense? That there's a 0:18:19.880 --> 0:18:21.479 bunch of different ways to frame. One would just be 0:18:21.520 --> 0:18:23.080 how much more bullish can they get? As we were 0:18:23.080 --> 0:18:25.479 discussing on large caps or megacaps in the US, I mean, 0:18:25.520 --> 0:18:28.200 you set a gigantic year, you've run out of positive things. 0:18:28.200 --> 0:18:31.520 There's actually this dynamic where they've they actually set there 0:18:32.480 --> 0:18:35.960 to estimates and then the market went crazy underneath them. 0:18:35.960 --> 0:18:38.360 So all of those pretty optimistic estimates when they set 0:18:38.400 --> 0:18:40.480 them now in a percentage basis, look like nothing. This 0:18:40.640 --> 0:18:43.119 is sort of as something we've we've touched on a 0:18:43.119 --> 0:18:45.359 few times. So they've run out of things to be 0:18:45.440 --> 0:18:47.600 excited about. And if there's one thing that strategists are 0:18:47.600 --> 0:18:51.120 going to perennially do, it's try to be excited about something. 0:18:51.240 --> 0:18:52.800 Small Caps are the one thing that's kind of about 0:18:52.800 --> 0:18:54.840 performed this year, and you know, makes sense that that's 0:18:54.840 --> 0:18:56.639 what they're choosing. I do have to say there is 0:18:56.680 --> 0:18:59.320 one quote in that story about small caps that I 0:18:59.359 --> 0:19:02.520 was a little bit particle of just because one person 0:19:02.600 --> 0:19:05.240 came out and said that, well, yeah, small caps might 0:19:05.280 --> 0:19:07.919 take off in the fact that we get a trade 0:19:07.920 --> 0:19:10.480 deal and all of a sudden they're more domestically oriented 0:19:10.480 --> 0:19:12.920 and small caps which should do better. But a year 0:19:12.920 --> 0:19:15.320 and a half ago people were saying the exact opposite, 0:19:15.359 --> 0:19:18.879 that once we got a trade war, then more domestically 0:19:18.880 --> 0:19:22.040 oriented U S docks should do better, and they never did. Yeah, 0:19:22.359 --> 0:19:26.600 looking for a coherent UH, I would be against anyone 0:19:26.760 --> 0:19:29.120 like parsing the things that I say week a week 0:19:29.160 --> 0:19:33.000 on this podcast for consistency half the time. Um, you 0:19:33.040 --> 0:19:38.600 know Ellie Pennam, he would never cast any down on 0:19:38.680 --> 0:19:43.560 my my thesis. Uh. Like. If let's turn to Europe 0:19:43.560 --> 0:19:46.159 a little bit. Christine Legarde made her debut at the 0:19:46.240 --> 0:19:51.000 ECB this week. Uh clearly she didn't make she didn't 0:19:51.040 --> 0:19:54.400 break anything, you know, Uh, no major freak outs in markets. 0:19:54.400 --> 0:19:57.280 Do you see uh much of a change of the 0:19:57.280 --> 0:20:00.280 guard there or is it sort of steady as she 0:20:00.359 --> 0:20:05.320 goes in Europe? It's a change of Luguard. But there 0:20:05.320 --> 0:20:09.240 you go right into that. You did, Thank you. I 0:20:09.280 --> 0:20:12.760 thought she was very smooth. She's a super seasoned politician 0:20:12.800 --> 0:20:14.840 as we know, so as far as being able to 0:20:14.880 --> 0:20:17.520 present and get a message across, she might already be 0:20:17.560 --> 0:20:20.040