WEBVTT - A Market Wearing 'Rose-Colored Glasses' 0:00:00.400 --> 0:00:03.840 Strap on your parachute. It's time for What Goes Up 0:00:04.120 --> 0:00:13.920 with Sarah Ponzick and Mike Reagan. Hello and welcome to 0:00:14.000 --> 0:00:17.960 What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah pons, 0:00:18.280 --> 0:00:21.320 a reporter on the Cross Asset team, and I'm Mike Reagan, 0:00:21.480 --> 0:00:24.159 a senior editor at Bloomberg. And you can think of 0:00:24.200 --> 0:00:27.960 me as the bon Iver to Sarah's Taylor Swift. There 0:00:28.000 --> 0:00:33.360 we go, Mike, I believe it's bony verking. I finally 0:00:33.400 --> 0:00:38.120 had a contemporary reference, and I totally bone boni vera. 0:00:38.159 --> 0:00:40.320 I believe that's how it's pronounced. Maybe I'm wrong, but 0:00:40.360 --> 0:00:42.800 I'm pretty sure for all of us fans of the 0:00:42.800 --> 0:00:45.920 new Taylor Swift album, Mike had a good pairing for 0:00:46.400 --> 0:00:51.000 my coming back from my week off. But this week 0:00:51.040 --> 0:00:53.519 on the show, Mike, a pioneer of research on the 0:00:53.600 --> 0:00:56.120 yield curve, now has some words of wisdom to share 0:00:56.120 --> 0:00:59.240 about gold as the spot price of the precious metal 0:00:59.320 --> 0:01:01.880 trades at rerec levels. Our guests wrote a paper on 0:01:01.960 --> 0:01:05.400 gold just this month, and he says massive passive ownership 0:01:05.760 --> 0:01:09.800 could possibly lead to a period of quote unquote irrational exuberance, 0:01:10.440 --> 0:01:13.000 and as always, will close out the episode with our 0:01:13.000 --> 0:01:16.280 tradition the craziest thing I saw in markets this week. 0:01:16.400 --> 0:01:19.040 So if you saw something crazy and want to give 0:01:19.120 --> 0:01:20.880 us a heads up, give us a call on the 0:01:20.880 --> 0:01:25.479 Bloomberg Podcast hotline at six four six three to four 0:01:26.120 --> 0:01:29.120 three four nine, oh, and leave us a voicemail. Maybe 0:01:29.200 --> 0:01:31.920 we'll play it on the show. And as far as 0:01:31.920 --> 0:01:35.399 you mentioned, you're back from vacation. Uh, listeners don't realize this, 0:01:35.440 --> 0:01:38.400 but you're also back in New York City, back in 0:01:38.480 --> 0:01:42.319 your apartment. I think the last time we recorded a 0:01:42.400 --> 0:01:44.960 podcast with you in your apartment, your neighbors started playing 0:01:45.000 --> 0:01:48.160 some jazz upstairs. So I'm kind of I'm figures across. 0:01:48.160 --> 0:01:50.559 I'm kind of hoping that happens again. If we're lucky, 0:01:50.600 --> 0:01:53.000 maybe he'll play some Taylor Swift. Trust. That's that's right. 0:01:53.800 --> 0:01:55.680 And I you know, I was watching some videos of 0:01:55.760 --> 0:01:58.440 our guests this week and I noticed he has which, uh, 0:01:58.800 --> 0:02:01.160 you know, there's this service or this thing on Twitter, 0:02:01.200 --> 0:02:03.040 and it's not a service. It's some guy on Twitter 0:02:03.640 --> 0:02:06.680 called room Raider Sarah where they go and they look 0:02:06.720 --> 0:02:09.480 at the rooms people are doing their zoom meetings from 0:02:10.120 --> 0:02:12.200 our guests this week has one of the coolest rooms 0:02:12.240 --> 0:02:15.680 I've seen, very well appointed. But I think there's either 0:02:15.919 --> 0:02:18.840 a cello or a stand up base behind him, So 0:02:18.960 --> 0:02:21.840 maybe he'll get on and jam with the guy above 0:02:21.919 --> 0:02:24.920 you if if the jazz breaks out, that's what I'm hoping. 0:02:25.280 --> 0:02:27.200 Let's introduced our guests and see if his his room 0:02:27.240 --> 0:02:29.119 has been rated. I personally give it a high rating 0:02:29.120 --> 0:02:31.359 because I was watching his videos and I kept get 0:02:31.520 --> 0:02:35.679 getting distracted by his uh his cool room. Anyway. He 0:02:35.840 --> 0:02:39.040 is a finance professor at Duke University's Business School. He's 0:02:39.040 --> 0:02:43.240 also a senior advisor at Research Affiliates. You may remember 0:02:43.360 --> 0:02:46.239 him from the show about a year ago. He was 0:02:46.320 --> 0:02:48.399 a guest, and we're gonna talk to him a little 0:02:48.400 --> 0:02:49.840 bit about some of the things he had to say 0:02:49.919 --> 0:02:53.720 back then because uh, they ended up being pretty prescient. Anyway, 0:02:53.760 --> 0:02:56.239 his name is Cam Harvey Kim. Welcome to the show. 0:02:56.600 --> 0:02:59.760 Great to be on the show. Okay, I wanted to 0:02:59.760 --> 0:03:03.040 start enough. Sarah talked about this new paper you have 0:03:03.280 --> 0:03:07.960 out on the Gold and it's pretty fascinating to me because, 0:03:08.000 --> 0:03:10.400 as you point out in some of the discussions about 0:03:10.400 --> 0:03:13.919 this paper, Gold, we have a data set that goes 0:03:14.040 --> 0:03:17.200 back I don't know what thousands of years. Basically, you know, 0:03:17.480 --> 0:03:19.480 if you if you want to know the price of 0:03:19.639 --> 0:03:23.120 gold in Roman times, we know what it was. And 0:03:23.240 --> 0:03:26.320 one of the really interesting things, as Sarah point out, 0:03:26.320 --> 0:03:29.040 I tend to latch onto the craziest things in reports 0:03:29.120 --> 0:03:31.600 like this, and one of the craziest and most interesting 0:03:31.680 --> 0:03:35.640 things you pointed out was that the price of gold 0:03:35.960 --> 0:03:40.480 paid as a wage two soldiers in ancient Rome, if 0:03:40.520 --> 0:03:43.600 you translate it to sort of the modern value of 0:03:43.720 --> 0:03:48.040 gold today, it's basically similar to the wage that an 0:03:48.080 --> 0:03:50.800 officer in the army would be making right now if 0:03:50.840 --> 0:03:53.160 they were paid in gold, which to me kind of 0:03:53.280 --> 0:03:56.800 blows my mind, uh, since it sort of backs up 0:03:57.240 --> 0:04:00.320 one of the common theses for go old and that 0:04:00.440 --> 0:04:04.720 it's it's a good store of value. Um. Clearly it's 0:04:04.760 --> 0:04:09.760 hedged inflation on wages since Roman times, but as you 0:04:09.840 --> 0:04:13.600 also point out, it's a very unreliable inflation hedge. I 0:04:13.640 --> 0:04:17.160 guess if you're holding period is measured in centuries, it's perfect, 0:04:17.640 --> 0:04:22.239 but otherwise it's not as a reliable uh store value 0:04:22.320 --> 0:04:27.000 inflation hedge as people might think. Walk us through basically 0:04:27.120 --> 0:04:29.800 the main points of that paper along those lines, because 0:04:29.839 --> 0:04:32.920 I really find it to be a really fascinating look 0:04:33.120 --> 0:04:37.160 on something that has been a cornerstone of financial assets 0:04:37.240 --> 0:04:42.520 for forever pretty much. Sure, and essentially two papers, um 0:04:42.920 --> 0:04:46.719 and my paper of two thousand thirteen in the Financial 0:04:46.720 --> 0:04:50.080 Analyst Journal with Claude Herb we actually did this exercise 0:04:50.240 --> 0:04:54.880 that you described that the Romans kept great records and 0:04:55.680 --> 0:04:59.679 you could figure out exactly what a Roman centurion was paid, 0:05:00.200 --> 0:05:02.640 and we actually have the coins so you can figure 0:05:02.640 --> 0:05:05.640 out what the gold content or the silver content actually is, 0:05:06.200 --> 0:05:09.560 and we worked out that they were paid thirty eight 0:05:10.240 --> 0:05:14.200 troy ounces of gold a year and and you're right 0:05:14.320 --> 0:05:18.640 that that's approximately the wage of a US Army captain. 0:05:19.240 --> 0:05:23.640 So that means that gold has held its value. Um, 0:05:23.960 --> 0:05:27.600 we've got another example of a loaf bread from the 0:05:27.720 --> 0:05:30.920 time of Nebuka desert, so it's even earlier, and that 0:05:31.080 --> 0:05:34.320 translates into about five dollars and fifty cents um in 0:05:34.480 --> 0:05:37.400 terms of the gold equivalent today, which is about what 0:05:37.560 --> 0:05:40.800 I pay at a boutique bakery for a high end 0:05:40.880 --> 0:05:44.080 a loaf of bread. So over the very long term, 0:05:44.600 --> 0:05:48.840 gold is something that holds its value. So another way 0:05:49.320 --> 0:05:53.240 to think about this is that the inflation adjusted value 0:05:53.279 --> 0:05:56.440 of gold is approximately constant are three times, so it 0:05:56.520 --> 0:06:01.400 doesn't degrade. But the problem is that gold is volatile. 0:06:01.839 --> 0:06:05.000 So gold has the same volatility as the SNP five. 0:06:05.800 --> 0:06:10.000 So there can be large swims in value where it 0:06:10.200 --> 0:06:14.320 is a poor inflation hedge for decades or potentially centuries, 0:06:14.680 --> 0:06:16.440 and then all of a sudden it's a good inflation 0:06:16.520 --> 0:06:20.280 hedge for a decade or maybe a century. So it's 0:06:20.560 --> 0:06:25.200 very unreliable in terms of hedge and inflation. So we've 0:06:25.279 --> 0:06:28.760 seen this pretty mad rush to gold in recent weeks. 0:06:28.839 --> 0:06:31.800 I mean your paper recently you looked at the inflation 0:06:31.839 --> 0:06:34.960 adjusted price of gold near the highs of nine eighties, 0:06:35.160 --> 0:06:39.040 right at the levels that we saw back inn. If 0:06:39.160 --> 0:06:44.200 gold currently is priced at such high levels relative to inflation, 0:06:45.120 --> 0:06:48.760 should investors rightly be believing that this will actually be 0:06:49.440 --> 0:06:54.600 a good inflation hedge going forwards. So again, our analysis 0:06:54.880 --> 0:06:59.400 and our most recent paper which was just posted, actually 0:06:59.520 --> 0:07:02.440 it was the day of gold's all time high that 0:07:02.560 --> 0:07:07.160 we posted this paper. And so uh, and this is 0:07:07.560 --> 0:07:10.760 also with claud Urban and taught us Wisconta. And we 0:07:10.840 --> 0:07:17.200 do not then gold um gold in I guess uh, 0:07:17.720 --> 0:07:21.240 nineteen eighty in today's prices was about two thousand, two 0:07:21.320 --> 0:07:25.520 hundred and in two thousand eleven, in August it was 0:07:25.560 --> 0:07:28.520 about two thousand, one hundred, So we're very close to 0:07:28.640 --> 0:07:33.240 the all time high in UH inflation adjusted terms. So 0:07:33.640 --> 0:07:36.680 we hit an a nominal high UH, not taking the 0:07:36.720 --> 0:07:40.360 inflation into a camp, but in nineteen eighty it was 0:07:40.720 --> 0:07:45.480 It was definitely bad news for investors. If you're buying 0:07:45.560 --> 0:07:48.320 in nineteen eighty, over the next five years, you lost 0:07:48.400 --> 0:07:52.600 fifty If you're a buyer in two thousand and eleven 0:07:52.840 --> 0:07:55.920 in August, over the next five years, you lost twenty 0:07:56.080 --> 0:08:00.280 eight percent. So what you see, and this is in 0:08:00.360 --> 0:08:03.400 our paper, what do you see are these fluctuations. So 0:08:03.560 --> 0:08:07.200 we look at the average inflation adjusted price, and sometimes 0:08:07.280 --> 0:08:11.600 you're above and sometimes you're below, but there's a tendency 0:08:11.880 --> 0:08:16.320 to revert to the mean, and right now we're way 0:08:16.720 --> 0:08:20.800 above that average price. So think of that average price 0:08:21.320 --> 0:08:27.720 as the constant inflation adjusted price of gold. Sometimes you're above, 0:08:28.040 --> 0:08:33.720 sometimes you're below, and today you're way above. Okay. One 0:08:33.760 --> 0:08:36.800 of the things you talk about is UH. You know, 0:08:36.960 --> 0:08:40.040 you sort of quote Warren Buffett and describe them as 0:08:40.200 --> 0:08:44.880 as bandwagon type of investors who pile into gold because 0:08:44.960 --> 0:08:46.880 it's had such a good run sort of. I guess 0:08:46.920 --> 0:08:50.280 you could consider them momentum investors to some degree. Um 0:08:50.400 --> 0:08:54.520 and you talk about how um the ETFs holding gold 0:08:54.760 --> 0:08:58.599 perhaps play uh, playing a large role in this this 0:08:58.720 --> 0:09:01.319 boom in the prices. Now to me, I would think, well, 0:09:01.440 --> 0:09:04.040 if ETFs are here to stay, that's kind of a 0:09:04.160 --> 0:09:09.920 permanent new source of investors and speculators in gold. Would 0:09:09.960 --> 0:09:13.920 that suggest to sort of a permanent higher inflation adjusted 0:09:14.080 --> 0:09:18.400 price or would it suggest more of the violatility you're 0:09:18.440 --> 0:09:22.040 talking about? Would it perhaps accentuate the volatility when there 0:09:22.160 --> 0:09:24.480 is all this money in e t f s chasing gold. 0:09:25.240 --> 0:09:30.199 So basically what we do in our paper is the 0:09:30.360 --> 0:09:35.600 show that there's a very strong correlation between the real 0:09:35.760 --> 0:09:38.240 price of gold, or the inflation adjusted press of gold, 0:09:38.760 --> 0:09:42.800 and the number of Troy ounces that the leading gold 0:09:42.960 --> 0:09:47.800 ETFs hold. So this time might be different, as you say, 0:09:47.920 --> 0:09:53.280 So we didn't have any gold e t s and 0:09:53.640 --> 0:09:56.400 retail investors the whole gold It was very difficult to do. 0:09:56.800 --> 0:10:01.160 You can buy coins, but they're very expense of relative 0:10:01.240 --> 0:10:03.679 to the bullion price. You can buy bullion, but then 0:10:03.760 --> 0:10:05.839 you have to vault it and pay for that, and 0:10:05.880 --> 0:10:09.319 it's really difficult to buy and sell gold. So the 0:10:09.400 --> 0:10:13.280 e t s made it a lot easier for investors 0:10:13.559 --> 0:10:18.440 to actually hold gold and UM. And they do think 0:10:18.600 --> 0:10:22.000 that in the diversified portfolio, people should have some real 0:10:22.080 --> 0:10:24.319 assets and gold is one of those real assets, and 0:10:24.679 --> 0:10:28.520 other commodities, real estate, things like that makes sense. The 0:10:28.640 --> 0:10:32.800 problem is the following. The problem is that this strong 0:10:32.880 --> 0:10:38.080 correlation between the price and the holdings of the gold 0:10:38.160 --> 0:10:42.559 ETFs is very suggestive of the following type of behavior. 0:10:43.320 --> 0:10:48.319 As the price goes up, investors buy more, and that 0:10:48.440 --> 0:10:52.360 the price goes up even more, investors continue to buy. 0:10:52.920 --> 0:10:56.959 And this is the opposite to what I teach. So 0:10:57.280 --> 0:11:01.719 what I teach is a good investments strategy is to 0:11:01.960 --> 0:11:06.040 buy low and sell high. It appears what's going on 0:11:06.240 --> 0:11:10.160 here is that investors are buying high. And I do 0:11:10.320 --> 0:11:14.160 quote buffets of famous line and and that is um. 0:11:14.600 --> 0:11:19.360 He's referring to gold investors as bandwagon investors, and he says, 0:11:19.480 --> 0:11:24.520 as bandwagan investors join any party, they create their own 0:11:24.600 --> 0:11:29.079 truth for a while. And what that means is that 0:11:30.000 --> 0:11:33.520 you see the price going up, you jump on the bandwagon. 0:11:33.640 --> 0:11:36.680 You buy some of the gold DTF, and the gold 0:11:36.720 --> 0:11:40.600 TTF has to purchase gold and the price actually goes up, 0:11:41.160 --> 0:11:45.640 and that is creating their own truth. Their investment thesis 0:11:46.000 --> 0:11:49.160 is validated as the price goes up, but the party 0:11:49.440 --> 0:11:54.319 just doesn't last forever. So I do worry about this. 0:11:54.559 --> 0:11:57.679 You mentioned, Uh, this is like a momentum effect and 0:11:57.800 --> 0:12:01.719 not quite um trend fall Followers are really careful on this, 0:12:02.320 --> 0:12:06.080 and that when the trend is really really strong, they 0:12:06.280 --> 0:12:11.320 d risk. So this is much different than a bandwagon 0:12:11.920 --> 0:12:15.640 effect where people just piling into this risky asset. And 0:12:15.679 --> 0:12:18.200 to be clear, this is just like a risk asset. 0:12:18.559 --> 0:12:24.599 Look in March of the stock market tanked, gold plummeted, 0:12:25.320 --> 0:12:31.079 and the new gold bitcoin lost over its value. And 0:12:31.160 --> 0:12:33.720 then when we got to risk on, people got more 0:12:33.800 --> 0:12:37.360 comfortable that we're gonna get through the COVID nineteen. Uh, 0:12:37.480 --> 0:12:40.640 the stock market goes up and gold goes up. So 0:12:40.800 --> 0:12:45.480 this is just a speculative tool. And as for speculation, 0:12:45.559 --> 0:12:47.679 there will be some winners and there's going to be 0:12:47.800 --> 0:13:04.880 some loosers. I was looking at total assets in g 0:13:05.040 --> 0:13:07.600 l D which is a really popular GOLDDTF just now 0:13:07.840 --> 0:13:11.120 well recently hitting a record high above eighty billion dollars. 0:13:11.240 --> 0:13:13.880 So it's pretty unbelievable. But Cam, I want to get 0:13:13.920 --> 0:13:16.200 your take because I feel like whenever we hear from 0:13:16.240 --> 0:13:19.640 investors lately who are now bullish on gold, pretty much 0:13:19.679 --> 0:13:22.680 every single time, they point to the level of real 0:13:22.760 --> 0:13:25.920 interest rates right now tenual real yield at negative one 0:13:25.960 --> 0:13:29.560 percent or so, at record lows. How do you factor 0:13:29.800 --> 0:13:35.640 this in to any analysis on gold and what we 0:13:35.800 --> 0:13:39.920 might see as it pertains to volatility in real assets 0:13:40.080 --> 0:13:42.120 when you consider the fact that we do have real 0:13:42.200 --> 0:13:45.439 interest rates at levels pretty much never seen before. So 0:13:46.520 --> 0:13:51.839 we've addressed this and there it is true that since 0:13:52.000 --> 0:13:55.240 let's say two thousand and four, there is a strong 0:13:55.360 --> 0:13:58.920 negative correlation between the price of gold and the level 0:13:59.120 --> 0:14:03.520 of real or or nominal interest rates, so that correlation 0:14:03.960 --> 0:14:09.440 is really clear. However, that correlation is unstable, so if 0:14:09.480 --> 0:14:12.679 you go back before two thousand and four, that correlation 0:14:13.240 --> 0:14:17.559 could be zero or it could be positive. So looking 0:14:17.600 --> 0:14:19.960 at the most recent data, you need to be really 0:14:20.120 --> 0:14:25.480 careful because that correlation could be what we call spurious. 0:14:26.080 --> 0:14:29.240 So I'd be very very careful on this. I'm much 0:14:29.320 --> 0:14:33.080 more faith in our analysis of the holdings of gold 0:14:33.200 --> 0:14:35.800 e t s. That kind of makes sense. They're holding 0:14:35.840 --> 0:14:38.400 more gold, they gotta buy more gold. And uh, the 0:14:38.560 --> 0:14:42.680 price it is positively correlated with that. So yes, there 0:14:42.920 --> 0:14:47.760 is using the most recent data um this negative correlation 0:14:47.920 --> 0:14:52.840 between the rates and and gold prices. But I would 0:14:53.000 --> 0:14:56.160 just be pretty pretty careful on that. Okay, one more 0:14:56.280 --> 0:14:57.760 question on gold and then I think we want to 0:14:57.800 --> 0:15:00.520 move on to the yield curve. And I know you know, 0:15:00.920 --> 0:15:03.440 a guy like you, you like to study the math, 0:15:03.720 --> 0:15:07.560 the statistical relationships, and the and the hard data, So 0:15:07.720 --> 0:15:10.400 this might be a question that is not answerable from 0:15:10.600 --> 0:15:12.920 that sort of approach, But I'm just curious if you 0:15:13.040 --> 0:15:15.680 have thoughts on it. And it's something that's I've never 0:15:15.800 --> 0:15:17.920 quite been able to wrap my head around when it 0:15:18.000 --> 0:15:22.040 comes to gold. Is what explains the appeal of gold 0:15:22.440 --> 0:15:25.440 over literally centuries? Like you said, why why is it 0:15:25.600 --> 0:15:28.360 that Roman soldiers were willing to get paid in gold 0:15:28.480 --> 0:15:32.080 way back when and that value of that pay day 0:15:32.160 --> 0:15:34.680 is the same as it is today. I mean, does 0:15:34.720 --> 0:15:37.720 it all relate back just to the simple sort of 0:15:37.800 --> 0:15:41.760 physical demand for gold that it's it's a shiny, pretty metal, 0:15:41.880 --> 0:15:44.560 it's good for jewelry. Is it all? Does it all 0:15:44.640 --> 0:15:47.560 hinge around that? Do you think? Or is it just 0:15:47.680 --> 0:15:50.680 impossible to explain? It is true? That gold has been 0:15:50.680 --> 0:15:54.360 around for thousands of years, and I think part of 0:15:54.440 --> 0:15:59.320 it is that it does have this usefulness. So gold 0:15:59.560 --> 0:16:04.080 seventy percent of gold is using jewelry. Um, it's used 0:16:04.200 --> 0:16:08.200 in some electronic parts also, so there is actually utility 0:16:08.360 --> 0:16:11.520 directly associated with gold. But I think part of the 0:16:11.600 --> 0:16:15.760 story is the safe haven to this, uh, this mystique 0:16:15.880 --> 0:16:21.320 that gold is the ultimate safe haven. So in in 0:16:21.440 --> 0:16:27.920 our research we actually um reject that hypothesis. And we've 0:16:27.960 --> 0:16:32.880 got this great example UM called the Hawksknew Horde and 0:16:33.080 --> 0:16:38.120 it's from the countryside of England. Somebody's repairing offense and 0:16:38.280 --> 0:16:41.680 they dropped their hand. They look down and pick up 0:16:41.760 --> 0:16:46.320 the hammer, but they see a gold coin. They scrape 0:16:46.360 --> 0:16:51.040 the ground and they see more gold coins. Uh. This 0:16:51.520 --> 0:16:54.400 this's can only happen in England. But they immediately go 0:16:54.520 --> 0:16:59.080 to the university and seek out an archaeologist and they 0:16:59.200 --> 0:17:04.160 excavate and they find this treasure chest field with gold 0:17:04.920 --> 0:17:08.320 and they dated to the time that the Romans were 0:17:08.440 --> 0:17:13.879 leaving England. So basically this was the safe haven. So 0:17:14.160 --> 0:17:17.080 some family, uh, they took their wealth, they buried it 0:17:17.800 --> 0:17:20.840 in the field, in the treasure chest. And the fact 0:17:20.960 --> 0:17:25.679 that we discovered it recently shows that it failed as 0:17:25.720 --> 0:17:28.840 a safe haven, that family never got access to it. 0:17:29.200 --> 0:17:32.480 So there is this mystique of a safe haven. There 0:17:32.600 --> 0:17:37.119 is this, uh, this myth the gold is a short 0:17:37.280 --> 0:17:40.720 term inflation hedge when it isn't. So I think that 0:17:40.880 --> 0:17:44.920 gold is is very poorly understood. But you're correct that 0:17:45.320 --> 0:17:49.359 given that it's got such a long history and is 0:17:49.520 --> 0:17:53.720 part of our history, that uh, that it gets treated 0:17:53.800 --> 0:18:00.200 differently and people are willing to ignore the evidence. This okay, 0:18:00.240 --> 0:18:01.719 And we really can't have you on the show, as 0:18:01.760 --> 0:18:05.439 Mike alluded to, without discussing the yield curve. You are 0:18:05.480 --> 0:18:07.960 one of the pioneers of doing research on the subject. 0:18:08.320 --> 0:18:12.640 Your dissertation on the subject is also very very widely cited, 0:18:13.080 --> 0:18:15.159 and we had you on the show to discuss it 0:18:15.840 --> 0:18:19.120 last mayor so. And of course, after the yield curve 0:18:19.200 --> 0:18:23.840 inverted last year, we did achieve or accession. Now, of course, 0:18:24.000 --> 0:18:26.520 this could all be seen as hoopla or whatever you 0:18:26.680 --> 0:18:28.800 might want to call it, considering the fact that no 0:18:28.960 --> 0:18:33.800 one could predict the coronavirus. However, is it safe to 0:18:33.960 --> 0:18:37.720 say that sure, I mean, the inversion of the yield 0:18:37.800 --> 0:18:41.880 curve did its job in predicting a recession. So yeah, 0:18:41.960 --> 0:18:45.600 you're correct that last year. Uh, it was code bread 0:18:45.880 --> 0:18:48.119 on the yield curve, So we had an aversion for 0:18:48.200 --> 0:18:53.800 a full quarter. And my model um over the period 0:18:53.880 --> 0:18:57.360 since in nineteen sixties, every time the yield curve inverted, 0:18:57.840 --> 0:19:00.400 U of recession followed and there were no falls signals. 0:19:00.840 --> 0:19:04.400 So it was seven out of seven and it got 0:19:04.520 --> 0:19:10.240 the number eight signal, which suggested recession. And you're correct, 0:19:10.280 --> 0:19:13.280 we're obviously in a recession right now. Did deal curve 0:19:13.359 --> 0:19:17.560 predict the coronavirus? No, obviously not. I will never know 0:19:17.680 --> 0:19:24.280 the counter factual. We do know that recession was largely expected, 0:19:24.320 --> 0:19:28.080 at least from the Duke's CFO survey where up to 0:19:29.160 --> 0:19:32.520 of the CFOs so a recession would start by the 0:19:32.600 --> 0:19:37.920 first quarter of So again we won't Actually no, we 0:19:38.000 --> 0:19:42.359 can never know the counter factual. UM. But I guess, uh, 0:19:43.119 --> 0:19:44.560 we didn't know there was going to be an oil 0:19:44.600 --> 0:19:50.760 embargo in nine three either. So the indicator is eight 0:19:50.840 --> 0:19:54.280 for eight. I'm counting it as a win. Cam I'm 0:19:54.320 --> 0:19:57.280 putting it in the wind column. Sometimes you get lucky 0:19:57.520 --> 0:20:02.879 and sometimes unlucky. Uh, I'll take some of that, that's right. Well, 0:20:02.920 --> 0:20:04.240 I don't know how lucky it is to have a 0:20:04.320 --> 0:20:07.520 recession to be able to predict it. But I will 0:20:08.160 --> 0:20:11.679 I'll count it as win now cam obviously, now as 0:20:11.800 --> 0:20:15.119 we do start to take baby steps to to get 0:20:15.200 --> 0:20:18.680 the economy reopened and back on track, there's a lot 0:20:18.800 --> 0:20:24.280 of very uh you could call it uh exuberance in 0:20:24.359 --> 0:20:26.560 the stock market, not just the gold market. You never 0:20:26.640 --> 0:20:32.119 seen this really rip wearing rally in stocks um recently, Lee, 0:20:32.240 --> 0:20:34.600 we have seen the long end of the curve sort 0:20:34.640 --> 0:20:37.480 of come off the floor a little bit and rise 0:20:37.520 --> 0:20:39.600 a little bit, a little bit of steepening in the curve, 0:20:40.280 --> 0:20:43.320 and that has everyone sort of turning their attention to 0:20:43.440 --> 0:20:47.199 the Federal Reserve will have the Jackson Hole Symposium at 0:20:47.200 --> 0:20:50.080 the end of the month, And I think I feel 0:20:50.080 --> 0:20:54.120 like the bond market has really been speculating. I guess 0:20:54.160 --> 0:20:58.600 you can call it speculating, wishful thinking, hoping uh that 0:20:58.800 --> 0:21:02.359 the Fed will resort to some sort of yield curve 0:21:02.520 --> 0:21:06.240 control to keep that long end low in order to 0:21:06.600 --> 0:21:09.920 keep barring costs slow and keep this recovery going. As 0:21:09.960 --> 0:21:14.440 a yield curve student like yourself, does, what's your reaction 0:21:14.520 --> 0:21:17.480 to that, to the notion that the FED could potentially 0:21:18.320 --> 0:21:21.879 artificially bend the curve to to its wishes. Is that 0:21:22.240 --> 0:21:26.000 is that a good thing or a bad thing. So traditionally, 0:21:26.640 --> 0:21:30.480 the FED has had control over the short term part 0:21:30.640 --> 0:21:33.359 of the yield curve UH, and they would engage in 0:21:33.440 --> 0:21:38.120 open market operations and UH deal with the FED funds rate. 0:21:39.040 --> 0:21:44.440 But we're in extraordinary times where this time around we've 0:21:44.520 --> 0:21:49.639 got unlimited quantitative using and that means the whole curve 0:21:49.920 --> 0:21:55.680 is being influenced by the Fed. Will this be morphing 0:21:55.800 --> 0:21:59.920 into yield curve control? I certainly hope not. These acts 0:22:00.359 --> 0:22:04.879 are distortive. I don't think it's a great idea to 0:22:05.000 --> 0:22:10.200 have these really low or negative interest rates. It doesn't 0:22:10.240 --> 0:22:13.680 make any sense that in some countries you can get 0:22:14.200 --> 0:22:17.640 a mortgage where it's a negative rate, so you get 0:22:17.760 --> 0:22:21.200 you get paid every month to take out a mortgage. 0:22:21.400 --> 0:22:26.520 Does that or look at Japan? Yeah, look at Japan. 0:22:27.119 --> 0:22:30.040 That that's a great example of gild per control. Their 0:22:30.080 --> 0:22:34.640 bond markets gone, so Japanese government bonds are just bought 0:22:34.720 --> 0:22:37.399 by the Bank of Japan. Is that the model that 0:22:37.520 --> 0:22:42.959 we actually want? So it is a very unusual situation. 0:22:43.480 --> 0:22:49.800 We're in a deep recession, yet the stock market has 0:22:49.920 --> 0:22:54.960 completely blown it off, and you're correct, you see some 0:22:55.119 --> 0:23:00.240 green shoots in the bond market also, So I really worry. Um, 0:23:00.880 --> 0:23:07.040 it's I said, irrational exuperance in gold, but a minimum, 0:23:07.480 --> 0:23:11.360 it's uh, kind of a rose colored glasses effect where 0:23:11.520 --> 0:23:15.679 people are not looking at the structural damage that's been 0:23:15.760 --> 0:23:20.000 done to our economy, the potential cost of the QUEI, 0:23:20.440 --> 0:23:23.440 the potential cost of having to pay back all of 0:23:23.520 --> 0:23:29.200 the fiscal stimulus that's been completely ignored, and to me, 0:23:29.359 --> 0:23:51.000 that's very worrisome when you've got markets like this. Well, 0:23:51.040 --> 0:23:54.120 we'll likely hear more about yield curve control next month 0:23:54.359 --> 0:23:57.600 at the FED meeting. Cam looking at the yield curve 0:23:57.680 --> 0:24:00.239 though right now, is there any signal that you can 0:24:00.280 --> 0:24:02.880 actually take away from it? And combining that with other 0:24:02.960 --> 0:24:05.000 signals that you look at. You mentioned the Duke CFO 0:24:05.119 --> 0:24:08.480 survey any recent results from that as well. So the 0:24:08.560 --> 0:24:12.800 yelk curve is positively sloped, which means that it's signaling 0:24:13.160 --> 0:24:17.359 economic growth, and I believe that's what's going to happen. 0:24:17.840 --> 0:24:20.399 So the recovery is not going to be V shaped, 0:24:21.320 --> 0:24:25.840 but it will be a very strong recovery. And I 0:24:26.000 --> 0:24:29.159 think that that's consistent of with the Yelk curve signal. Remember, 0:24:29.440 --> 0:24:32.080 the slope of the yeel curve is telling us about 0:24:32.760 --> 0:24:38.000 expected future growth, so it's not just signaling recessions. It's 0:24:38.000 --> 0:24:41.200 also signaling a growth. So we will see that growth. 0:24:41.600 --> 0:24:47.200 But I doubt given the slope that that growth is 0:24:47.400 --> 0:24:52.080 going to be robust. Uh. And yes, it might be 0:24:52.560 --> 0:24:54.880 that we get these really big numbers, but I think 0:24:55.480 --> 0:24:59.879 people need to understand the following. If you started a 0:25:00.080 --> 0:25:05.280 hundred and you dropped by if the next quarter you gain, 0:25:06.280 --> 0:25:10.440 you're not back to hundred, You're only at s. So 0:25:11.119 --> 0:25:14.000 so we need to carefully look at this. It'll be 0:25:14.080 --> 0:25:17.840 a while before we actually get back to where we started. Um. 0:25:18.119 --> 0:25:23.280 But again, markets don't seem to factor that in. So 0:25:24.280 --> 0:25:29.160 these head evaluations in the equity market, UM, I think 0:25:29.560 --> 0:25:32.000 a lot of people believe they're just unsustainable in the 0:25:32.119 --> 0:25:34.119 long run. You're not in the camp of believing in 0:25:34.240 --> 0:25:38.399 some sort of permanent higher plateau invaluations. I take it. Uh, No, 0:25:38.640 --> 0:25:43.160 I'm not. And as you know, it's a very uh 0:25:44.840 --> 0:25:50.680 diverse uh situation. There's a lot of dispersion. So the 0:25:50.800 --> 0:25:53.760 behavior at the top ten stop sent SMP five hundred 0:25:54.040 --> 0:25:58.200 much different than the other four hundred ninety. So what 0:25:58.400 --> 0:26:02.720 we're seeing is a sur urge in growth stocks and 0:26:03.320 --> 0:26:08.240 relative to value stocks, and that difference between the growth 0:26:08.440 --> 0:26:12.639 and the value stocks. Uh that that basically we haven't 0:26:12.760 --> 0:26:16.800 seen that ever before. So what's happening to growth stocks 0:26:17.440 --> 0:26:22.040 seems to me very similar to what's happening with gold Well. 0:26:22.080 --> 0:26:25.359 I think it's that time. It's that time, Mike stand 0:26:25.440 --> 0:26:29.240 clear of the craziest things we saw in markets this week? 0:26:29.760 --> 0:26:33.160 All right, Sarah, you're back from vacation. You had two 0:26:33.280 --> 0:26:38.080 full weeks to come up with a crazy thing hit us. 0:26:38.160 --> 0:26:40.639 What's the craziest thing you've seen? All right? So maybe 0:26:40.720 --> 0:26:43.720