WEBVTT - Surveillance: Dudley Weighs Inflation Risk 0:00:09.840 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily 0:00:13.960 --> 0:00:17.560 we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.360 Bloomberg dot Com, and of course on the Bloomberg William Dudley, 0:00:28.640 --> 0:00:31.720 writing for Bloomberg Opinion and Yes, the former President of 0:00:31.760 --> 0:00:35.520 the New York Federal Reserve, has been quite clear in 0:00:35.600 --> 0:00:39.000 his essays on the path forward, and one of them 0:00:39.120 --> 0:00:42.320 is that the FED will have to change on inflation. 0:00:42.640 --> 0:00:45.760 Bill Dudley and your important essay yesterday, near the bottom 0:00:45.760 --> 0:00:48.600 of the essay, you made clear this is a FED 0:00:49.080 --> 0:00:52.000 that needs to be malleable and supple in their thinking. 0:00:52.200 --> 0:00:56.720 Describe that right now, it's you know, all all hands 0:00:56.720 --> 0:00:59.280 on deck quick making the economy as stimulative as possible. 0:00:59.320 --> 0:01:04.480 You got Entrey policy basically interest rates in zero. That's 0:01:04.480 --> 0:01:08.440 doing quantitative using large fistal package coming. So that's great 0:01:08.480 --> 0:01:11.200 for now. We are probably gonna, you know, if the 0:01:11.280 --> 0:01:14.000 vaccine dissemination works, we're going to see a very strong 0:01:14.000 --> 0:01:16.120 recovery in the second half of the year. And I 0:01:16.120 --> 0:01:18.720 think we're gonna see pressure on resources faster than what 0:01:19.040 --> 0:01:21.160 people participate. I understand why the Fed is doing what 0:01:21.200 --> 0:01:24.480 they're doing. I mean, they don't want to prematurely change 0:01:24.520 --> 0:01:28.720 expectations about future Maentrey policy and thereby tighten financial market conditions. 0:01:29.080 --> 0:01:31.560 But we have to recognize that if they're successful, they 0:01:31.600 --> 0:01:34.240 are going to have to change financial conditions, are going 0:01:34.240 --> 0:01:36.240 to have to tighten. There's only a number of ways 0:01:36.280 --> 0:01:38.199 to go here, Bill Dudley. But I think the heart 0:01:38.240 --> 0:01:40.360 of it is a broad public that looks at the 0:01:40.440 --> 0:01:43.560 fact of inflation is seen in their monthly payments. I 0:01:43.560 --> 0:01:46.679 would note folks rents down lower here and the last 0:01:46.720 --> 0:01:50.720 inflation report, and Bill Dudley pros like you looking at 0:01:50.760 --> 0:01:56.480 the expectation of the expectations of inflation. What are we 0:01:56.600 --> 0:02:00.840 expecting right now? What's been interest staying over the last 0:02:01.120 --> 0:02:03.760 three months or so, is that inflation expectations. If you 0:02:03.800 --> 0:02:07.240 look at the spread between ten your Treasury note yields 0:02:07.240 --> 0:02:09.440 and ten your tipsules, that's gone up by half a 0:02:09.440 --> 0:02:13.639 percentage point, that the tenure break even now is running 0:02:13.680 --> 0:02:16.720 two point two percent. That's not really very far away 0:02:16.720 --> 0:02:20.160 from the Fed's long term targets. So you know, the 0:02:20.240 --> 0:02:22.480 argument that we had to keep Monterrey policy easy to 0:02:22.520 --> 0:02:26.559 support inflation expectations that things still already have been mostly accomplished. 0:02:26.760 --> 0:02:28.639 You've lived in break this though, Bill, would you look 0:02:28.680 --> 0:02:30.880 at that as a market pricing in the risk of 0:02:30.880 --> 0:02:33.720 more inflation or actually pricing inflation? Do you see that 0:02:33.760 --> 0:02:36.120 as the outlook for inflation or just the market pricing 0:02:36.160 --> 0:02:38.680 in the risk of it you see outlook. I think 0:02:38.680 --> 0:02:41.200 it's the outlook because it's about what's going to happen 0:02:41.200 --> 0:02:43.239 over the next tenuere I mean, I think people recognize 0:02:43.240 --> 0:02:46.239 that the FED is all in. They're gonna be very accommodative. 0:02:46.520 --> 0:02:48.799 The new Mont policy regime means that they're going to 0:02:48.840 --> 0:02:53.200 push inflation above two. People find that credible, and cheer 0:02:53.240 --> 0:02:56.560 Pole is reinforcing that through its statements, and so essentially 0:02:56.600 --> 0:03:00.000 the FED is accomplishing its mission of keeping inflation expectations 0:03:00.000 --> 0:03:01.880 angry around to present. So, but what I need to 0:03:01.960 --> 0:03:04.520 understand is what they'd respond to. So, as you remember, 0:03:04.800 --> 0:03:06.560 Governor King go over the Bank of England, we had 0:03:06.600 --> 0:03:09.400 inflation north of five and twenty eleven we had it 0:03:09.440 --> 0:03:13.480 north of three percent. Under Governor County, they looked through it. 0:03:13.800 --> 0:03:15.920 They used that word transitory. But what's the kind of 0:03:15.960 --> 0:03:17.799 situation you think the FED responds to in the kind 0:03:17.800 --> 0:03:21.000 of situation they look through so to speak, Well, I 0:03:21.000 --> 0:03:22.920 think they'll look through it. If there's a little bit 0:03:22.960 --> 0:03:24.960 of a bubble of inflation, you know, the second half 0:03:24.960 --> 0:03:27.000 of the year, just because you have the surgeon activity 0:03:27.040 --> 0:03:29.760 and prices go up in some service areas, I think 0:03:29.760 --> 0:03:31.720 they look through that. I think what they're gonna watch 0:03:31.800 --> 0:03:33.400 is the labor market. I mean, at the end of 0:03:33.400 --> 0:03:36.120 the day, inflation is about pressure on resources, and so 0:03:36.160 --> 0:03:37.880 I think they'll watch the labor market. I think the 0:03:37.880 --> 0:03:40.640 thing that's different about this expansion compared to one following 0:03:40.680 --> 0:03:43.440 the Great Financial Crisis, his households have a lot more 0:03:43.480 --> 0:03:45.920 abilities spending. Businesses have a lot more ability to spend. 0:03:45.920 --> 0:03:48.240 There you don't have the kind of you know, overhang 0:03:48.240 --> 0:03:50.880 of mortgage debt that you had following the Great Financial Crisis. 0:03:51.080 --> 0:03:53.440 You don't have the So I think that the colomy 0:03:53.480 --> 0:03:56.839 could bounce back much faster than people will anticipate. Sure, 0:03:56.880 --> 0:03:58.880 Polos are absolutely right. There are about ten million people 0:03:58.920 --> 0:04:01.440 out out of a job, so the unemployer rate understates 0:04:01.440 --> 0:04:04.040 the amount of slack in the liver market. But at 0:04:04.040 --> 0:04:06.600 the same time, if we actually do conquer the pandemic 0:04:06.960 --> 0:04:10.960 allow opening up and getting people back to work. Uh, 0:04:11.000 --> 0:04:12.840 you know this could this could be a bounced much 0:04:12.840 --> 0:04:15.920 faster than people anticipate. I will say. Jared Bernstein of 0:04:15.960 --> 0:04:19.040 the White House Economic Council did say that people are 0:04:19.120 --> 0:04:21.640 saving some of that cash that they people say they're 0:04:21.640 --> 0:04:23.800 going to spend in order to make all of the 0:04:23.800 --> 0:04:25.880 debt payments that have been deferred. So there could be 0:04:25.920 --> 0:04:28.440 a little bit of that hangover as well. But it 0:04:28.480 --> 0:04:31.040 goes to a key point that you're talking about, which 0:04:31.120 --> 0:04:33.680 is the difference between reflation that a lot of people 0:04:33.720 --> 0:04:36.839 are saying is what we're seeing right now, versus inflation, 0:04:36.880 --> 0:04:39.159 which is what you're seeing we should expect later. And 0:04:39.160 --> 0:04:41.400 what a lot of people are saying, when do we 0:04:41.480 --> 0:04:45.039 shift from reflation to inflation? What do we have to 0:04:45.120 --> 0:04:48.560 see for this to be more sustainable. Well, end of 0:04:48.600 --> 0:04:49.960 the day, it's gonna be about how long does it 0:04:50.000 --> 0:04:52.440 take the economy get to get back to four percent 0:04:52.560 --> 0:04:55.240 three and a percent type of unemployer rate. I think 0:04:55.279 --> 0:04:57.520 that could actually happen a little bit faster than people think. 0:04:58.200 --> 0:05:01.240 Janet Yellen, the Treachery Secretaries, the last we talked about 0:05:01.279 --> 0:05:03.320 how if we get the fiscal package we could be 0:05:03.360 --> 0:05:07.320 at full employment next year, so this could happen much 0:05:07.400 --> 0:05:10.240 more quickly than the Fed's current forecasts. FEDS current forecast, 0:05:10.440 --> 0:05:12.920 but we don't get back to full employment until three 0:05:12.960 --> 0:05:16.880 The said doesn't even tighten until after So I think 0:05:16.920 --> 0:05:19.080 the risk to to the market is that just happened 0:05:19.120 --> 0:05:21.920 in a more compressed time frame than people are expecting. 0:05:22.120 --> 0:05:24.119 But I just want to finish on something important just quickly. 0:05:24.200 --> 0:05:27.240 We could wrap things up just how the reputation of 0:05:27.279 --> 0:05:29.760 the Federal Reserve has evolved in the last several years, 0:05:29.760 --> 0:05:32.000 and how there is now an increasing willingness to focus 0:05:32.040 --> 0:05:36.560 on society and perceived injustices as well. And I was 0:05:36.600 --> 0:05:39.320 familiar with the kind of response where a central bank 0:05:39.400 --> 0:05:41.640 would turn around and say, we can't address inequality with 0:05:41.640 --> 0:05:44.080 the brunt tool of interest rates, And now the approach 0:05:44.080 --> 0:05:48.080 feels very different. That speech yesterday from Chairman pal felt different. 0:05:48.120 --> 0:05:50.080 Do you sent a change too? And what's behind it? Bill? 0:05:51.400 --> 0:05:53.640 I think there's two things that are driving. At Number One, 0:05:54.920 --> 0:05:58.680 current FED policy is benefiting rich people more than more people, right, 0:05:58.720 --> 0:06:00.240 So it's a FED it is very aware of that 0:06:00.279 --> 0:06:01.839 and wants to make it clear that that's not really 0:06:01.880 --> 0:06:03.760 the goal of policy. The global policy is not going 0:06:03.880 --> 0:06:07.320 make people more wealthy. We're already wealthy. And the second 0:06:07.360 --> 0:06:09.200 thing I think is the fact that the last cycle, 0:06:09.480 --> 0:06:11.400 the FED pushed the one point rate very low and 0:06:11.440 --> 0:06:14.120 there was no inflation. So the Fed realizes that he 0:06:14.200 --> 0:06:16.320 wouldn't go further on the labor market than we thought 0:06:16.400 --> 0:06:19.240 and get more people employed than we thought before, And 0:06:19.279 --> 0:06:20.800 so they don't want to make the same risk of 0:06:20.800 --> 0:06:25.159 being too cautious about pushing the labor markets to a 0:06:25.240 --> 0:06:27.840 high degree of tightness, because maybe they can go further 0:06:27.880 --> 0:06:30.160 than they thought. Makes you wonder what it would look 0:06:30.200 --> 0:06:31.520 like if they have to come back in and hike 0:06:31.600 --> 0:06:34.520 sooner than people think too. Bill, that's for the next conversation, 0:06:34.560 --> 0:06:45.760 Bill adupting that former New York Fed president. There's a 0:06:45.760 --> 0:06:48.720 lot of bulls on technology, but Daniel Ives has been 0:06:48.760 --> 0:06:52.960 the most persistent, most cogent bull at web Bush on 0:06:53.080 --> 0:06:55.560 Apple and all the rest of the beasts as well. 0:06:55.960 --> 0:06:59.720 Dan i've uh, Dan I've Howard ward the acclaimed growth 0:06:59.760 --> 0:07:04.000 ga belly stop traffic a few days ago by saying 0:07:04.080 --> 0:07:10.680 we grossly underestimate the new technology knock on to other stocks? 0:07:11.040 --> 0:07:14.320 How does the Dan Ives world knock on to the 0:07:14.360 --> 0:07:17.200 rest of the stock market that leads you to a 0:07:17.240 --> 0:07:21.080 bullmarket that is underestimated. Yeah. I mean that continues to 0:07:21.080 --> 0:07:25.559 be our theme, transformational growth themes and cloud, cybersecurity, five 0:07:25.640 --> 0:07:29.320 G e commerce. It's still underestimated by the street. We're 0:07:29.360 --> 0:07:33.000 going through a massive golden age and a rereading for 0:07:33.080 --> 0:07:35.160 tech stocks. I only think we're a third of the 0:07:35.200 --> 0:07:37.680 way through, which why we think tech stocks are up 0:07:37.680 --> 0:07:41.280 another tent this year despite some of these risk off 0:07:41.400 --> 0:07:44.600 moments that we've seen, even went to Reddit robin hood situation. 0:07:46.360 --> 0:07:48.560 I look where we are and I want to dovetail 0:07:48.680 --> 0:07:53.280 dan ives into the conservative tone of the acclaim Mr Ward. 0:07:53.520 --> 0:07:58.080 Does that enthusiasm fold over into stocks we don't associate 0:07:58.120 --> 0:08:01.640 with you, like say the banking industry. But I think 0:08:01.640 --> 0:08:04.400 what you're starting to see is technology is bleeding into 0:08:04.480 --> 0:08:07.600 other areas, whether it's on healthcare, whether it's on the 0:08:07.800 --> 0:08:10.040 fine ends. And I think you're starting to see that 0:08:10.040 --> 0:08:12.680 and even on some of the dating apps and others. 0:08:12.680 --> 0:08:14.600 As we're seeing some of these I pos come out. 0:08:14.600 --> 0:08:18.480 Because right now, investors take a step back craving for growth, 0:08:18.960 --> 0:08:22.160 and that's why these tech stocks continue get rerated higher. 0:08:22.240 --> 0:08:25.240 It's a scarcity value and we're going through so many 0:08:25.360 --> 0:08:28.640 transformational growth teams, which is why we continue to see 0:08:28.640 --> 0:08:31.600 a bright green light to continue in tech stocks. Here 0:08:31.760 --> 0:08:33.559 just going through some of your kills right now, dan 0:08:33.840 --> 0:08:37.800 By holds six sound zero. One of the holds Tesla 0:08:38.080 --> 0:08:41.600 neutral and Tesla white, and oh that that continues to 0:08:41.600 --> 0:08:44.400 be one where you know, we view it as a neutral, 0:08:44.400 --> 0:08:47.680 but a bold cases twelve fifty base case nine fifty, 0:08:47.720 --> 0:08:50.360 that continues to be one. We continue to sort of 0:08:50.400 --> 0:08:54.080 put the goal posts out for investors. Overall EV we 0:08:54.200 --> 0:08:57.040 continue to be bullish, whereas one of our key teams 0:08:57.080 --> 0:08:59.800 over the next years. I also think that Chinese players, 0:09:00.200 --> 0:09:02.560 Neo x Ping and others or great play is on 0:09:02.679 --> 0:09:04.719 e V and my view is it's a you know, 0:09:04.760 --> 0:09:07.480 we're talking a trillion dollar market next three to four years. 0:09:07.880 --> 0:09:10.719 Tessa continues to be the leader of the pack. It 0:09:10.760 --> 0:09:12.880 told to me about the supply chain and what's happening 0:09:12.880 --> 0:09:14.959 in the semi space at the moment. Don Could this 0:09:15.000 --> 0:09:19.120 spa production lost, sales lost or sales delayed? What is it? Well? 0:09:19.160 --> 0:09:21.120 Could that rain on the parade? I think that's really 0:09:21.120 --> 0:09:23.760 the main question that we're getting. Whether it's across chips 0:09:23.800 --> 0:09:27.520 on supply chain on the on the car Manufacturers saw 0:09:27.520 --> 0:09:31.240 A GM said yesterday, I think it's a contained risk 0:09:31.280 --> 0:09:33.760 at this point. I think it could crimp growth a 0:09:33.800 --> 0:09:36.480 bit as we get into the next few quarters, but 0:09:36.679 --> 0:09:40.280 ultimately I still think the demand continues to be there 0:09:40.520 --> 0:09:43.360 and supply chain will normalize over the coming quarters, and 0:09:43.400 --> 0:09:46.520 investors continue to look at forestry treats and that continues 0:09:46.559 --> 0:09:49.640 to be our thesis on the supercycle with Apple and 0:09:49.679 --> 0:09:52.240 everything cook in terms of that playing out. And that's 0:09:52.280 --> 0:09:55.240 why to me, you know, across the board, whether it's 0:09:55.280 --> 0:09:59.920 on fangs, on cloud and cybersecurity, we're further bullish come 0:10:00.040 --> 0:10:02.240 being out of this earning season. That continues to be 0:10:02.280 --> 0:10:05.400 the theme. Perhaps it's a temporary disruption the supply chain issue, 0:10:05.440 --> 0:10:08.760 but it's definitely causing chief executive officers to rethink how 0:10:08.840 --> 0:10:13.000 they deal with and source their chips. Today, the CEOs 0:10:13.080 --> 0:10:16.800 of Intel, Qualcom, and Advanced micro Devices sent a letter 0:10:16.840 --> 0:10:20.280 to President Biden saying, please support the creation of chips, 0:10:20.280 --> 0:10:23.200 the development of chips on US soil because of some 0:10:23.240 --> 0:10:26.520 of the concerns having to do with security, etcetera. How 0:10:26.600 --> 0:10:28.520 much could that crimp their margins if they have to 0:10:28.600 --> 0:10:31.920 invest that much more on creating a domestic program of 0:10:32.000 --> 0:10:35.600 chip manufacturing. Given some of these concerns, it would be 0:10:35.640 --> 0:10:39.400 a massive shift. And right now, the supply chain continues 0:10:39.480 --> 0:10:42.720 to be supplanted, you know, and it continues to really 0:10:42.760 --> 0:10:45.679 be built in Asia, and I don't really see any 0:10:45.760 --> 0:10:48.960 changes there. But it also speaks to the broader issues 0:10:49.000 --> 0:10:53.000 that we're seeing with US China. Biden coming in our brands, 0:10:53.160 --> 0:10:57.040 lowering ratcheting down the tensions with China. But no doubt 0:10:57.080 --> 0:11:00.199 from a supply chain perspective, I think that continue used 0:11:00.200 --> 0:11:01.880 to be a game of high stakes pokers. You want 0:11:01.880 --> 0:11:05.760 to see more in the US, but realistically, I think 0:11:05.800 --> 0:11:08.240 that's not going to change for the foreseeable future. Age 0:11:08.280 --> 0:11:10.240 it continues to be where the supply chain is. Dan, 0:11:10.320 --> 0:11:13.120 what's the body language under conference calls on use of cash? 0:11:13.280 --> 0:11:15.560 I mean, everybody's up to their eyeballs and cash. They've 0:11:15.559 --> 0:11:18.240 got ample cash flow. They're all trying to pretend their 0:11:18.240 --> 0:11:21.040 blue chip stocks, but they're still growthy stocks from a 0:11:21.120 --> 0:11:23.960 time long ago. What are they gonna do with cash? 0:11:24.280 --> 0:11:26.000 I think it's M and A. I think we are 0:11:26.080 --> 0:11:30.920 going to go to four. They're buying bitcoin, Tom, No, No, No, 0:11:31.000 --> 0:11:33.920 that's just tessel. That's just must seriously, Dan, what are 0:11:33.920 --> 0:11:37.240 they what are they waiting for? It's a tidal wave 0:11:37.320 --> 0:11:38.760 of M and A that we're going to see him 0:11:38.760 --> 0:11:41.760 and you see reports and Microsoft pinches and and I 0:11:41.800 --> 0:11:45.920 think ultimately in cybersecurity and cloud you're going to continue 0:11:45.920 --> 0:11:49.600 to see many, many marriages because we're going to only 0:11:50.360 --> 0:11:52.320 of workload during the cloud. Today it's a two horse 0:11:52.440 --> 0:11:55.719 raised Microsoft Amazon. I believe you're gonna see aggressive M 0:11:55.720 --> 0:11:59.040 and A across the board and even financial buyers as well. 0:11:59.280 --> 0:12:01.240 And it's gonna con Can you drive these stocks higher? 0:12:01.320 --> 0:12:03.559 Ten seconds? Stand eyes, it's all the time we've got. 0:12:03.760 --> 0:12:07.520 Can Amazon increase its market share in the cloud from 0:12:07.520 --> 0:12:11.000 at thirty four percent statistic? If it wasn't for that 0:12:11.160 --> 0:12:13.720 company in Redmond, Microsoft, they would be I think right 0:12:13.760 --> 0:12:17.120 now there's a share shift when the della leading the 0:12:17.160 --> 0:12:19.080 way in Microsoft any time, we can't let you go. 0:12:19.360 --> 0:12:21.439 Not yet, not yet, a tidal wave of M and 0:12:21.480 --> 0:12:24.040 A and some of the big place participating that's got 0:12:24.040 --> 0:12:27.200 a green light from this administration. Well, I mean, I 0:12:27.200 --> 0:12:29.400 think you look at fang names, they're going to continue 0:12:29.400 --> 0:12:31.800 to be constrained. But you look at Microsoft, you look 0:12:31.840 --> 0:12:34.800 at IBM, s A P. Across the board, you can 0:12:34.840 --> 0:12:38.440 see merging of industries on financial and software. I think 0:12:38.480 --> 0:12:41.120 that's that continues to be the theme here is that 0:12:41.200 --> 0:12:43.520 you're gonna see really a tide away the M and A. 0:12:43.640 --> 0:12:45.400 That's where a lot of that cash is gonna go 0:12:47.160 --> 0:12:49.319 wet Bush down. I'm gonna say so thank you as 0:12:49.360 --> 0:13:01.360 a wife. Greg Bottle with us now B and P 0:13:01.559 --> 0:13:04.200 very about this is an important conversation to look at 0:13:04.200 --> 0:13:06.680 the dynamics of the market. Greg, I want to begin 0:13:06.840 --> 0:13:09.320 with the normalization of VIX. Johann has beat me up 0:13:09.360 --> 0:13:11.600 because to me, this is a huge deal. I got 0:13:11.640 --> 0:13:14.040 a twenty one zero VIX and it ought to be 0:13:14.080 --> 0:13:17.640 at nineteen or dare I say sixteen as well? Let's 0:13:17.679 --> 0:13:23.120 begin with the why why is the VIX unnormalized right now? Well, 0:13:23.160 --> 0:13:25.320 I mean we'll start with the most obvious response, which 0:13:25.360 --> 0:13:28.200 is that we had a massively volatile year last year. 0:13:28.280 --> 0:13:31.720 Not only was the drawdown in March extremely volatile, but 0:13:31.760 --> 0:13:34.720 the subsequent rally backup has been as well. So owning 0:13:34.720 --> 0:13:38.640 optionality paying for premium so far has paid out for investors. 0:13:40.000 --> 0:13:42.200 Just Away and Greg on a situation with the VIX 0:13:42.320 --> 0:13:44.840 right now sub twenty we haven't seen it. We haven't 0:13:44.840 --> 0:13:47.880 seen a post pandemic. We haven't closed below that twenty level. 0:13:47.960 --> 0:13:50.120 What do you make of that? Yeah, it's been a 0:13:50.160 --> 0:13:53.000 real support level for the market. But it's interesting you 0:13:53.040 --> 0:13:56.000 think about the equity spot market, the SMP. The SMP 0:13:56.080 --> 0:13:58.840 is about fifteen percent higher than where it was pre 0:13:58.960 --> 0:14:02.640 the pandemic. VIX is about ten points higher than where 0:14:02.679 --> 0:14:07.520 it was pre January February last year, so there's much 0:14:07.520 --> 0:14:10.480 more premium still in the volatility market. Twenty has been 0:14:10.520 --> 0:14:13.319 a bit of a psychological floor. If we break through that, 0:14:13.480 --> 0:14:16.040 I think it could drive an accelerated move on the downside. 0:14:16.160 --> 0:14:19.080 So help us understand this, correct the relationship between the 0:14:19.160 --> 0:14:22.040 VIX and risk assets and how you expect that to 0:14:22.040 --> 0:14:25.400 reconcile it it's all in the months quarters to come. Yeah, 0:14:25.640 --> 0:14:28.600 So clearly we normally have an inverse relationship between risky 0:14:28.600 --> 0:14:31.440 assets like equities and the VIX. When equities sell off, 0:14:31.480 --> 0:14:35.000 the VIX tends to go higher. When equities rally, the 0:14:35.080 --> 0:14:37.360 VIX tends to come off. But you have to also 0:14:37.440 --> 0:14:40.120 consider the pace of it. The VIX is a volatility index, 0:14:40.280 --> 0:14:42.600 so when you see equities moving higher at a very 0:14:42.640 --> 0:14:45.480 aggressive pace, as we saw in Q four last year, 0:14:45.480 --> 0:14:47.320 and indeed it's continued at the start of this year. 0:14:47.520 --> 0:14:50.040 That can help keep the VIX somewhat supported. So the 0:14:50.120 --> 0:14:52.560 environment where the VIX is really going to normalize, I think, 0:14:52.680 --> 0:14:54.960 is when the equity market continues to go higher, but 0:14:55.040 --> 0:14:57.720 goes higher much slower pace. Greg just to zoomer out 0:14:57.720 --> 0:14:59.720 a little bit. Perhaps the story of the week is 0:14:59.760 --> 0:15:01.960 bit coin, but the theme of the year is very 0:15:02.040 --> 0:15:04.960 much the shortage of assets, the shortage of both dead 0:15:05.040 --> 0:15:07.200 and equity instruments from people to buy because of the 0:15:07.240 --> 0:15:09.840 cash that's been created. In some ways, what we're talking 0:15:09.840 --> 0:15:12.040 about with the VIX is very much related to that 0:15:12.040 --> 0:15:14.760 that people want to hedge against declines because they can 0:15:14.800 --> 0:15:19.120 do so cheaply or more cheaply through derivatives than parting 0:15:19.280 --> 0:15:22.280 with assets, parting with their equities that they still want 0:15:22.280 --> 0:15:24.520 to hang onto for this ride because they believe in it. 0:15:24.600 --> 0:15:27.200 How much is that driving a lot of the action? 0:15:27.320 --> 0:15:30.560 How much will that keep propelling equities higher regardless of 0:15:30.600 --> 0:15:34.320 anything fundamental, I think it's the biggest single drive in 0:15:34.360 --> 0:15:36.600 the fact we have such easy monetary policy at the 0:15:36.600 --> 0:15:39.240 time we're expecting a large cyclic l up swing in 0:15:39.280 --> 0:15:41.280 the second half of the year. It creates a great 0:15:41.360 --> 0:15:44.480 environment for equity markets. But we have had some very 0:15:44.640 --> 0:15:48.520 rapid moves in equities. We've seen some big inflows. Last 0:15:48.520 --> 0:15:50.440 week in the e TP space, there was almost thirty 0:15:50.680 --> 0:15:54.080 billion dollars put to work, a three standard deviation inflow 0:15:54.160 --> 0:15:57.200 for equity markets. And that does keep volatility bid. It 0:15:57.280 --> 0:16:01.240 does give investors the incentive to and to chase upside 0:16:01.280 --> 0:16:04.040 through optionality. But if we do see a slowing rate 0:16:04.080 --> 0:16:07.000 of gain in the SMP, the risk reward of hedging, 0:16:07.040 --> 0:16:10.200 the risk reward of owning optionality becomes much less appealing. 0:16:10.400 --> 0:16:12.560 We've been talking a lot when we talk about equities 0:16:12.720 --> 0:16:15.200 of the game stop phenomenon and the meme starks, and 0:16:15.200 --> 0:16:19.200 I'm wondering how much that's representative of increasing retail participation. 0:16:19.200 --> 0:16:20.800 You talk about the e t F flows, I mean, 0:16:20.840 --> 0:16:24.000 how much we're getting a capitulation of retail investors that 0:16:24.000 --> 0:16:26.320 have been sitting on the sidelines for a decade that 0:16:26.360 --> 0:16:29.360 are finally saying we're all in. I mean, there are 0:16:29.360 --> 0:16:30.880 certainly a lot of signs of it. You see it 0:16:30.880 --> 0:16:32.520 in the e t F flows, but you also see 0:16:32.560 --> 0:16:35.000 in the option market. There's been an absolute explosion and 0:16:35.040 --> 0:16:38.480 call option activity over the last six months, and I 0:16:38.480 --> 0:16:41.120 think this is rational in some degree. We go back 0:16:41.120 --> 0:16:44.520 to the TMT bubble. If you took your money out 0:16:44.520 --> 0:16:46.480 of the equity market at the peak, then you can 0:16:46.520 --> 0:16:50.640 put it in short term rates. What like five guys 0:16:50.680 --> 0:16:53.160 been talking this morning about where short term rates are now. 0:16:53.400 --> 0:16:55.720 If you don't have money invested in the equity market, 0:16:56.000 --> 0:16:58.200 then where do you put up? I want to go 0:16:58.240 --> 0:17:00.640 on radio on television now, folks, a little technical with 0:17:00.760 --> 0:17:03.040 Mr Bible. We can do this with other gentleman from 0:17:03.080 --> 0:17:06.840 derivatives at BNP Perry bar Greg. I've always felt THET 0:17:06.880 --> 0:17:10.360 has been ignored, the passage of time of an option 0:17:10.400 --> 0:17:15.040 and a derivative in your world, has the theta changed? 0:17:15.160 --> 0:17:18.439 I mean is is theta is a Greek letter? Change 0:17:18.520 --> 0:17:22.960 the way Global Wall Street does business? Well. I think 0:17:22.960 --> 0:17:26.280 that decay is another word for yield. In some ways, 0:17:26.359 --> 0:17:28.119 you can think of the theater on an option if 0:17:28.160 --> 0:17:30.199 you sell an option is similar to the yield that 0:17:30.240 --> 0:17:32.240 you might take on in a bond. So what we 0:17:32.280 --> 0:17:35.680 saw over the last decade with QUEI and very low 0:17:35.800 --> 0:17:38.120 rate is that there has been more demand for sure 0:17:38.160 --> 0:17:41.359 optionality strategies. But Unfortunately, what we saw last year was 0:17:41.400 --> 0:17:43.440 the flip side to that trade, which is that in 0:17:43.480 --> 0:17:45.840 a risk of environment, it acts very different to a 0:17:45.880 --> 0:17:50.280 classic yielding um safe asset. So what we've seen so 0:17:50.400 --> 0:17:53.200 far over the last nine months is equity markets have recovered, 0:17:53.440 --> 0:17:57.560 is that there's been effectively less harvesting of theater. Investors 0:17:57.560 --> 0:18:01.840 seem less willing to be short convexity, short volatility to 0:18:01.880 --> 0:18:04.159 take in that yield that you can get from what 0:18:04.320 --> 0:18:07.080 is a very steep vixed curve brilliant. So if they 0:18:07.119 --> 0:18:10.120 don't want to take in that premium that yield, as 0:18:10.160 --> 0:18:14.440 you say, what do they want to do? Well, at 0:18:14.440 --> 0:18:17.679 the moment, it's been using optionality to participate for the 0:18:17.720 --> 0:18:21.240 equity rally. Whether that's to get asymmetry to protect your portfolio, 0:18:21.560 --> 0:18:23.479 or whether indeed is to do the opposite and inject 0:18:23.640 --> 0:18:27.000 leverage into your portfolio. That's a buying optionality flow and 0:18:27.000 --> 0:18:30.439 we've seen more prevalence of that since the pandemic versus 0:18:30.440 --> 0:18:33.280 the volatility harvesting and the hunt for yield, which is 0:18:33.320 --> 0:18:35.480 something that I think could start to creep back into 0:18:35.480 --> 0:18:37.960 the markets in the coming months. Greg, great to catch 0:18:37.960 --> 0:18:39.600 you up, appreciate you so I'm always good to see you. 0:18:39.720 --> 0:18:51.200 Great battle there of bempreparent butt. Thank you, sir. How 0:18:51.240 --> 0:18:54.640 do you share holes of the Economic Policy Institute publishes 0:18:55.080 --> 0:18:58.520 and any and all read it? She joins us this morning, Hi, 0:18:58.600 --> 0:19:01.800 do I really want to die into the history of 0:19:01.840 --> 0:19:05.760 the moment? How bad is it? Mike McKee just alluded 0:19:06.160 --> 0:19:08.720 to the worst of oh seven, oh eight, oh nine. 0:19:09.160 --> 0:19:12.199 How bad are we right now? Within the e p 0:19:12.320 --> 0:19:18.560 I historical framework, It's bad. The unemployment insurance claims, the 0:19:18.640 --> 0:19:21.440 number of people who need unemployment insurance benefits to get 0:19:21.440 --> 0:19:24.160 it through right, to get through this right now, we're 0:19:24.200 --> 0:19:27.440 still at historically high level. So we just to put 0:19:27.480 --> 0:19:30.040 some numbers on that. We are at the forty seventh 0:19:30.240 --> 0:19:33.600 week in a row where we have had unemployment insurance 0:19:33.600 --> 0:19:37.960 claims higher than the highest week of the Great Recession. 0:19:38.240 --> 0:19:40.320 There's all sorts of certitudes wheach here. I don't mean 0:19:40.359 --> 0:19:42.840 in a party, but this is really important. There's all 0:19:42.880 --> 0:19:45.640 sorts of certitudes that are out in the media. Were 0:19:45.720 --> 0:19:48.880 guilty of that A team surveillance like everybody else. If 0:19:48.920 --> 0:19:52.520 you could say one thing about the character of the 0:19:52.600 --> 0:19:56.800 unemployed right now, what would it be that they are 0:19:56.880 --> 0:19:59.680 people who are out of work through no fault of 0:19:59.720 --> 0:20:04.000 their during a global pandemic, people desperately need the relief 0:20:04.040 --> 0:20:07.280 of unemployment insurance benefits to get through. Until we have 0:20:07.320 --> 0:20:11.520 a vaccine that's widely distributed, the economy can fully get 0:20:11.560 --> 0:20:13.640 going again, and we can we can get things back 0:20:13.680 --> 0:20:16.680 on track. I d We've been sort of hinting at 0:20:16.720 --> 0:20:19.439 this broader issue right now. The Federal Reserve wants to 0:20:19.480 --> 0:20:22.360 run the economy hot to allow the labor market to heal, 0:20:22.800 --> 0:20:27.200 possibly and hopefully with some fiscal support from Washington d C. 0:20:27.400 --> 0:20:31.080 But if inflation does take up faster than people expect 0:20:31.440 --> 0:20:33.600 and the Fed is forced to hike, is forced to 0:20:33.720 --> 0:20:36.679 stop the rally in the markets, that could cause a 0:20:36.760 --> 0:20:38.919 big setback in the labor market that will hit the 0:20:38.960 --> 0:20:41.880 lowest income the hardest. Can you talk a little bit 0:20:41.920 --> 0:20:46.159 about the disproportionate effect of a market disruption of something 0:20:46.160 --> 0:20:49.080