Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.
Speaker 1: Daily we bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Chris
Speaker 1: MORANGI with us with Gabelly Funds or co Chief investment Officer. Chris,
Speaker 1: I want to start with sort of equity hysteria that's
Speaker 1: out there, but the media angst that's going on right now.
Speaker 1: How do you define a correction in two thousand twenty.
Speaker 1: Is it down ten percent? Or is there a new calculus?
Speaker 1: For Gabelly Funds? This is nothing, Listen, this is this
Speaker 1: is healthy. Obviously the correction is concentrated in a few stocks.
Speaker 1: Those few stocks happen to have accounted for more than
Speaker 1: of the gains of the S and P so far
Speaker 1: this year. Um, so you know this is a different
Speaker 1: correction than certainly we've seen in the past. Here's the
Speaker 1: money question for the day, Chris. And when I saw
Speaker 1: our line up earlier this morning, when I walked in
Speaker 1: hours before John Faroe and Lisa Bramo, it's I would
Speaker 1: want to point out Chris and I really went to
Speaker 1: the heart of the matter, which is, how should our
Speaker 1: listeners and viewers who are not sophisticates and derivatives, how
Speaker 1: should they adapt to the nasdack Well, the gamma, Well
Speaker 1: did they just ignore it? I am certainly not an
Speaker 1: expert on market internals and why the market is short gamma,
Speaker 1: but it certainly has introduced folatility. It's powered to move
Speaker 1: up in part along with a lot of other factors,
Speaker 1: and it appears to be driving the reduction that we're
Speaker 1: seeing a future. So um something to understand be aware of.
Speaker 1: But at the end of the day, we're looking at
Speaker 1: the fundamentals of each of these stocks, and as Jonathan
Speaker 1: pointed out earlier, the fundamentals of those Big five stocks
Speaker 1: have been terrific so far this year. The christ is
Speaker 1: just trying to work out the appropriate multiple to pay
Speaker 1: on some of these companies. Can you just give us
Speaker 1: some insign to those conversations right now of ricka Belly. Yeah,
Speaker 1: that's right. So you know, in general, obviously where rates
Speaker 1: are pinned and appear to be pinned for a very
Speaker 1: long time, you should be willing to pay a higher
Speaker 1: multiple for any stream of cash flows. Um. And the
Speaker 1: question is, you know, how durable are the cash flows
Speaker 1: of say, those Big five, if that's what we're talking about,
Speaker 1: and what you'd be willing to pay for them. Um.
Speaker 1: You know, it seems that a year ago, obviously they
Speaker 1: would have been at bargain prices. But at this point
Speaker 1: the market is making a bet that those the durability,
Speaker 1: that cash will ASTs a very long time and that
Speaker 1: they grow, you know it probably double global GDP growth
Speaker 1: for the next ten years. That's a little bit of
Speaker 1: a harder bet to make. So are you holding, are
Speaker 1: you buying or are you selling into this great dip
Speaker 1: of a tom might not it? Yeah, well we're we've
Speaker 1: been buying. We've been buying a different kind of stocks.
Speaker 1: We've been buying the smaller and unloved will be considered
Speaker 1: value stacks. Um. Some of those stocks are still off
Speaker 1: over thirty percent this year. In fact, a quarter of
Speaker 1: the Russell three thousand is still off by and that's
Speaker 1: where we're seeing bargains. You know, amongst the Big five,
Speaker 1: we've owned Google. It's a media essentially a media name
Speaker 1: that we can understand. Um, we've owned a little bit
Speaker 1: of Facebook over time, having on Amazon, unlike our patriarch,
Speaker 1: Warm Buffett, haven't been big in Apple, at least on
Speaker 1: the value side. I think there's some idiosyncratic issues there
Speaker 1: that we're very careful of, particularly around China. UM. So,
Speaker 1: you know, this hasn't really changed our view on valuation
Speaker 1: just yet, although at a certain point it does become
Speaker 1: concerning from a faith perspective, the idea of what does
Speaker 1: this due to the marginal investor who has an allocation
Speaker 1: still in safer assets, who was going to go into stocks.
Speaker 1: It suddenly sees these high flyers, these staples of certainty,
Speaker 1: being absolutely pummeled, even if it is short term, and
Speaker 1: even if you're to date the gains are tremendous. At
Speaker 1: what point do these become systemic issues? Do they become
Speaker 1: systemic selloffs that really in fact the other parts of
Speaker 1: the stock market. Well, you know it's a great question. UM.
Speaker 1: You know, coming into last week, those Big five are
Speaker 1: almost a quarter of the SPS. Been written about that.
Speaker 1: It's sort of an unprecedented level of concentration. So if
Speaker 1: you thought by buying an SMP index fund you were
Speaker 1: getting a nice diversified set of equities, you may need
Speaker 1: to rethink that. UM, you know those five companies, uh,
Speaker 1: not only are a large part of SMP, but they're
Speaker 1: all essentially driven by the same kind of dynamics. They're all,
Speaker 1: even though they're different industry classifications, all essentially Internet platform
Speaker 1: companies subject to a lot of the same risks. UH.
Speaker 1: And that's that's really unprecedented, and I think leaves the
Speaker 1: average investor exposed and maybe more risks than they were
Speaker 1: thinking they were taking going on right down to Nastac
Speaker 1: testing new loads on MOVI here, John Faroe, I give
Speaker 1: you great credit for this because I keep talking tech
Speaker 1: tech tech and through the year JP Morgan down from
Speaker 1: the February highs. That shows a damn job there. Just
Speaker 1: in the banking area alone, the banks have struggled three
Speaker 1: twenty Jamie Diamonds said months ago, and I got everybody's
Speaker 1: attention that this is an a normal recession and we
Speaker 1: haven't seen the impact of this recession just yet. It
Speaker 1: might come later this year. Chris, as you look at
Speaker 1: the financials, how do you think about that? Again? You know,
Speaker 1: these are these are obviously names that are very sensitive
Speaker 1: to the shape and absolute level of interest rates, and
Speaker 1: that's not been a good story for them. Um that
Speaker 1: interest margins. We're starting to perk up at the end
Speaker 1: of last year, and now I've compressed again and we
Speaker 1: don't see them expanding anytime soon. That being said, you
Speaker 1: know their price for that kind of outlook. Um. The
Speaker 1: other dynamice, obviously, is a lot of fear that especially
Speaker 1: came in in March about credit. Credit seems like it's
Speaker 1: probably gonna end up a little bit better than was feared,
Speaker 1: but still, you know it's going to be an ongoing
Speaker 1: issue for some time as we worked through this recovery.
Speaker 1: Chris barging new loads here this morning, negative three three
Speaker 1: point one percent, down three d and fifty NASDAC points
Speaker 1: we break down a new lows right now. When for
Speaker 1: you guys, just tech become cheap. I don't know if
Speaker 1: I can answer that at a macro level, but um,
Speaker 1: you know we're we're obviously looking at at all sectors.
Speaker 1: I think there's a lot to like in tech, A
Speaker 1: lot of those business models, particularly amongst the big five,
Speaker 1: occurring revenue models, subscription, low capital intensity, these are all
Speaker 1: things that fundamental investors should love. Again, as you as
Speaker 1: to your point, what do you pay for that? Um?
Speaker 1: And you know, we generally are looking, we're looking at tech.
Speaker 1: We're looking at technology embedded within other sectors because obviously,
Speaker 1: you know, things like everything from AI to automation UM,
Speaker 1: you know, impacting the productivity of those other sectors, and
Speaker 1: that's generally where we're looking to play tech. We're also
Speaker 1: playing tech in some derivative matters. You know, the value
Speaker 1: of broadband has been highlighted through this crisis. You can't
Speaker 1: get any of those tech services without a fast broadband connection.
Speaker 1: I couldn't be here doing this without a fast broadband connection.
Speaker 1: What am I willing to pay for that? I'm willing
Speaker 1: to pay a lot for it, So that gives those
Speaker 1: companies a lot of pricing power. That's why we like
Speaker 1: the first while cable companies now known as broadband infrastructure companies.
Speaker 1: Hi Chris writes to catch up as a wise, prest
Speaker 1: funds suband JAPA joins USEN. And of course, what's wonderful
Speaker 1: here about her skill in us race is the heritage
Speaker 1: of sock gen and the derivative space as well. Over
Speaker 1: the weekends SBANDA, you had to combine in the derivative
Speaker 1: analysis of a SoftBank gamma trade with what the fixed
Speaker 1: income market will do is there any correlation. There is
Speaker 1: there a linkage between year world and the equity derivative
Speaker 1: gamma world that we're seeing right now. It actually seems
Speaker 1: to be a very little correlation between the two markets,
Speaker 1: at least the last couple of months, because bonds had
Speaker 1: very much range bound and I think that that supported
Speaker 1: the equity reality really if anything, so uh, there seems
Speaker 1: to be a huge divergence between the signal and you're
Speaker 1: getting from these two more markets is a signaling of
Speaker 1: bonds arrogant demands diminishing. I mean, can you link it
Speaker 1: up with lower oil prices and link it up with
Speaker 1: global slowdown? Expected? Absolutely? I think that the modern markets
Speaker 1: extraordinarily cautious, which is what you would expect, and I
Speaker 1: think lower yields are are fueling the rally in equities.
Speaker 1: Broadly speaking, I think the data you know, in July
Speaker 1: and August has been sort of plateauing. You've got this
Speaker 1: sort of sharp move higher in the data in May
Speaker 1: and in June, so you know, the markets extraordinary cautious
Speaker 1: given the rise in the infection rates. Huh. And the
Speaker 1: fact that we haven't gotten in for fiscal assumers is
Speaker 1: also keeping the market somewhat reach abound. It's about it.
Speaker 1: For a while now, people have talked about the potential
Speaker 1: for the treasury market to turn into a zombie market
Speaker 1: because of the federal reserves huge moves over the last
Speaker 1: year or so, and not just the treasury market, the
Speaker 1: credit market as well. So about it from your perspective,
Speaker 1: Is the long end aligned with fundamentals and the trajectory
Speaker 1: of this recount? Three? No, because of the fact that
Speaker 1: the markets pressing in a lower for longer paradigm, given
Speaker 1: the fact that the Fed is going to keep interstrates low,
Speaker 1: and there's still a lot of uncertainty about the trajectory
Speaker 1: or future Montrey policy initiatives. Will they purchase more, will
Speaker 1: they purchase more? Waded towards the long end, So the
Speaker 1: long end of the curve reflecting the tugue of war,
Speaker 1: I would say between this a lot of supply we're
Speaker 1: going to see in the second half versus the potential
Speaker 1: for the Fed to start purchasing more in the long end.
Speaker 1: So you're seeing a very range born market across the curve.
Speaker 1: But I think ultimately the supply picture is gonna is
Speaker 1: going to outweigh any sort of demand you're gonna see
Speaker 1: or or or I should say, marginal buying you're going
Speaker 1: to see from the Fed. Well, let's talk about the
Speaker 1: supply pictures of andre your basic assumptions right now going forward,
Speaker 1: and how they would need to adjust if at all
Speaker 1: if we don't get a fiscal deal another deal down
Speaker 1: in d c UM. I think that the in the
Speaker 1: August refunding the treasury um already accommodated for I would
Speaker 1: say about a trillion dollars in spending coming after after
Speaker 1: the August refunding meeting, So the supply has gone up
Speaker 1: quite meaningfully in anticipation of another deal getting passed through,
Speaker 1: and that hasn't really happened. So uh, you know. Regardless,
Speaker 1: I think that the supply is and deficits are going
Speaker 1: to be higher for the foreseeable future. So I think
Speaker 1: that that's going to be something that weighs on the
Speaker 1: long end over time, especially if the fundamentals improved and
Speaker 1: yields start to rise rise reflecting better fundamentals, and you
Speaker 1: should see steeper curves when you talk about the marginal
Speaker 1: buying by the Federal Reserve. So far it has been that,
Speaker 1: and for the past two months, the Fed's balance sheet
Speaker 1: has stayed pretty much consistent constant. At what point, if
Speaker 1: yields do rise, do you expect the Fed to step
Speaker 1: in more meaningfully? I think if they move in really
Speaker 1: in yields is somewhat erratic. You see some sharp rise
Speaker 1: in in yields like we saw, you know, after the
Speaker 1: taper tantrum, or if there's some sort of a fundamental
Speaker 1: reason for lack of liquidity, I think that's when the
Speaker 1: FED steps in. If it's a very gradual rising hills
Speaker 1: warranted from improving fundamentals, I think the Fed will be okay.
Speaker 1: So any sort of sharp move higher and yeels is
Speaker 1: when I think I see the Fed coming in uh
Speaker 1: and sort of you know, putting a lid on how
Speaker 1: high yields can go. So one of the big raging
Speaker 1: debates right now people get really hated about this is
Speaker 1: whether the sixty forty portfolio is dead, whether treasury is
Speaker 1: basically it yields this low, or an insufficient hedge against volatility.
Speaker 1: Do you agree with that thesis? I think so because
Speaker 1: you know, if you know, looking back even the last
Speaker 1: couple of decades, I mean, the suxted forty portfolio has
Speaker 1: been bounds rallying and stocks rallying right. So the the
Speaker 1: equality the fixed income portfolio has never been a strong
Speaker 1: hedge for for equities, maybe over short periods of time,
Speaker 1: but not not over the a longer rising. Now you're
Speaker 1: seeing even less of that given the fact that the
Speaker 1: FED is going to uh, you know, we have an
Speaker 1: environment where negative industrates are are are not in the cards,
Speaker 1: which means that interestrates the floor and zero. So there's
Speaker 1: only one way tragedy heelds can go either sideways from
Speaker 1: here on or higher, and that's that. I think that
Speaker 1: dynamic doesn't play into the sixty um you know portfolio paradigm.
Speaker 1: You know, I look subd at this and folks, you've
Speaker 1: got NASDAC breaking down now two point seven three und
Speaker 1: neque points where the new weakness today as well the
Speaker 1: vow that we see in the equity markets, are we
Speaker 1: going to see that in the bond markets? Probably not.
Speaker 1: I think if if you know, tennantorghields for instance, have
Speaker 1: been between you know, fifty to eighty basis points, that's
Speaker 1: probably where they're going to spend the remainder of the
Speaker 1: of this year. So I think that there's really this
Speaker 1: low for longer paradigm. Generally the Japanification, I would say
Speaker 1: of US bond yields is going to keep volatilely somewhat low.
Speaker 1: What you're seeing now is market positioning, uh, you know,
Speaker 1: for potential rising yields and origening of perhaps some of
Speaker 1: those those metrics like pair excuse but but broadly speaking,
Speaker 1: I think I think volts are going to remain low
Speaker 1: for the foresee of the future. Why is that? Why?
Speaker 1: How does it dampen down? Is it just Fed intrusion
Speaker 1: into the market where it's not a real market. I mean,
Speaker 1: I just don't buy the idea that because should go quiet, Yeah, exactly.
Speaker 1: I think that, you know, the participation of the FED
Speaker 1: is not something that's near term. This is an open ended,
Speaker 1: you know, purchase program where they're purchasing eight billion per
Speaker 1: month and that size could potentially increase if there's volatility
Speaker 1: in the market's not decreased. So given that sort of paradigm,
Speaker 1: it's really hard to envision especially yields from two years
Speaker 1: to ten years, you know, being very volatile, given the
Speaker 1: fact that their historical lows and they're going to be low,
Speaker 1: given the fact that the FED is committed to a
Speaker 1: lower for longer strategy. SAA of Cecieta in general. It
Speaker 1: is the day after Labor Day in the United States. Normally,
Speaker 1: this is a time when people would be getting back
Speaker 1: to work, back to the office. People are just getting
Speaker 1: back to their computers where they've been at their kitchen
Speaker 1: tables all this time. Can you talk about the change,
Speaker 1: whether you're going to see any shift in positioning, any
Speaker 1: shift in strategy at this point, is people reassess in
Speaker 1: their post summer meetings or do you think that this
Speaker 1: year is just going to be different because you're just
Speaker 1: gonna get that consistent feeling of in limbo. I think
Speaker 1: it's going to, unfortunately be a consistent feeling of needing
Speaker 1: more data before you can have a clear direction on
Speaker 1: treasury yields um. You know, broadly speaking, this week we
Speaker 1: get a lot of supplies to We could see some
Speaker 1: concession into the into into the auctions, but other than that,
Speaker 1: the dynamics are going to be led by the infection
Speaker 1: rates and and not having uh, you know, clarity on
Speaker 1: the data. There's a lot of volatility. You're going to
Speaker 1: see upward divisions to data as well as downward divisions
Speaker 1: to data. Pat I'm just gonna jump in and wrap
Speaker 1: up the conversation. Thanks for j woting guess so on
Speaker 1: radio and television. Right now, we're gonna frame all of
Speaker 1: this with Barry rid Holts. We can do that not
Speaker 1: only with his wonderful book of years ago, what he's
Speaker 1: writing for Bloomer Opinion on his podcast, but rid Holes
Speaker 1: with a great sense a sense of history as well. Barry,
Speaker 1: I want to go to nassing to lab in the
Speaker 1: wonderful character Nero Tulip in his book Fooled by Randomness,
Speaker 1: who's completely taken in the opening of the book by
Speaker 1: the red Porsche the guy is driving. We have had
Speaker 1: a red Porsche market. Everybody's been able to afford red Porsche's.
Speaker 1: With the market up, up and away, and we nudge
Speaker 1: down five or six percent in the world's coming to
Speaker 1: an end, what's a real correction look like? How soon
Speaker 1: they forget right? Let's let's put some numbers on that. Uh.
Speaker 1: Since since all of this energy or most of this
Speaker 1: energy has been taking place in the big tech stocks,
Speaker 1: let's use the NAS dec one as an example. In
Speaker 1: the March lows it was barely over seven thousand, and
Speaker 1: it peaked in August at twelve four and change. That's
Speaker 1: about a seventy seven percent rally in less than six months,
Speaker 1: So straight up for sent I think a ten or
Speaker 1: of fifteen or even a tent pull back is certainly overdue.
Speaker 1: And profit taking is probably the most abuse phrase in
Speaker 1: all of finance, But in this case, it could legitimately
Speaker 1: be people who bought in March April May saying all right,
Speaker 1: I got a huge profit, Maybe I should ring the
Speaker 1: bell and take a little something off the table. Mary,
Speaker 1: do you buy that soft bank is causing this hell
Speaker 1: off about as much as I buy the fact that
Speaker 1: Robin Hood was d I having the market in the
Speaker 1: first place. Look, look, they're a hundred billion dollar funds.
Speaker 1: Most of that money is tied up in pretty liquid
Speaker 1: long term investments. So if they want to fool around,
Speaker 1: for lack of a better phrase, with a couple of
Speaker 1: billion dollars in options and derivatives, they could move a
Speaker 1: handful of stocks for a little bit. But that ignores
Speaker 1: the fact that you've just had a massive, massive move
Speaker 1: across a lot of big companies that are actually doing
Speaker 1: well during lockdown. They're doing well because they have global exposure,
Speaker 1: and they're doing well because they were built for work
Speaker 1: from home. Pandemic circumstances. So I'm not buying the soft
Speaker 1: bank whale story at all. Okay, so here's the question
Speaker 1: I was asking John. I said, you know, I'm not
Speaker 1: seeing a narrative here. What's the narrative? And he said,
Speaker 1: don't look for one. There hasn't been one. August was
Speaker 1: the problem when people were trying to find one. That's
Speaker 1: we've learned and here we don't really have a phase
Speaker 1: of narrative to explain it. It's more randomness, to your point,
Speaker 1: the fallacy of a narrative. And yet what undermines this
Speaker 1: idea that you buy the behemoths, you buy these cash
Speaker 1: fortresses that will continue to do well in a tech
Speaker 1: driven economy. Why not just buy now given the fact
Speaker 1: that they've come off. I mean, have we really up
Speaker 1: ended our questions about how to fundamentally value these companies?
Speaker 1: You know, that's really challenging question about valuation um for
Speaker 1: a couple of reasons. Clearly, valuations have gotten extended. And
Speaker 1: the prior narrative, the prior prior narrative before the whale narrative,
Speaker 1: was stocks and investors are looking over the valley of
Speaker 1: to the recovery in or perhaps uh one of the narratives.
Speaker 1: One of the few narratives that make sense is Tesla
Speaker 1: was running up in anticipation of being added to S
Speaker 1: and P five hundred and when that didn't happen because
Speaker 1: of supposed profit and revenue reasons, uh, that sell off. Okay,
Speaker 1: I can accept that, I could. I could buy into
Speaker 1: that argument because there was no indexing coming into to
Speaker 1: make up for the lack of lack of purchases. But
Speaker 1: the problem with narratives, especially after the fact hindsized, hindsight
Speaker 1: biased driven narratives, is they ignore how random so much
Speaker 1: of the market action is. And if it was easy
Speaker 1: and predictable and foreseeable, well hey, we'd all be wealthy.
Speaker 1: But the randomness is what makes it so challenging, and
Speaker 1: people who are uncomfortable with randomness spend a lot of
Speaker 1: mental and emotional energy looking for a description and a
Speaker 1: storyline that makes them comfortable. Humans are terribly uncomfortable with
Speaker 1: random outcomes, so very one of the great things here
Speaker 1: in the derivative markets, and again with soft bank, because
Speaker 1: if you issue the call, there's the put etcetera, etcetera.
Speaker 1: You know, right against the call. Fine, do you just
Speaker 1: assume there will be losses. If soft Bank takes a
Speaker 1: gain of X billion dollars, do you just assume there's
Speaker 1: a prescribed some loss against it? By Global Wall Street
Speaker 1: trading is essentially a zero sum gain so for game.
Speaker 1: So for every winner in a trade, there's a loser,
Speaker 1: the exception being not the traders but the investors who
Speaker 1: are allowing compounding and the passage of time to work
Speaker 1: in their favor. If someone sold something at ten twenty
Speaker 1: years ago and today it's being um, the person who
Speaker 1: bought it is selling it at two hundred, that's not
Speaker 1: exactly a zero sum. But if I'm a buyer and
Speaker 1: you're a seller, and then tomorrow I'm a seller and
Speaker 1: you're a buyer net net, that's gonna flatten out to
Speaker 1: zero minus whatever the trading coast suckers in. Very Rid
Speaker 1: Holtz can't wait to see you right on this, Very
Speaker 1: Rid Holts writing for Bloomberg Opinion, this course and with
Speaker 1: results wealth Management. Right now, the conversation of the day
Speaker 1: for those of you worried about fiscal dynamics. John Ferrell
Speaker 1: is going to dive into the German view. I'm gonna
Speaker 1: look more at the global view, and we can do
Speaker 1: that with Peter west Away of Vanguard, their chief economists
Speaker 1: with prodigious math abilities out of York and Cambridge and
Speaker 1: operational research Peter. The dynamics of this debate is wrapped
Speaker 1: around culture, which is austerity is good. Have we slipped
Speaker 1: away from the belief of the last number of years
Speaker 1: that austerity is a good and beautiful thing in a slowdown?
Speaker 1: I think we have definitely slipped away from that. I mean,
Speaker 1: I'm not very I'm not really convinced that was ever
Speaker 1: the economics mainstream, but it was certainly the policy mainstream.
Speaker 1: In Germany, that was very much the view, and that's
Speaker 1: why we've seen relatively tight criscal policy there. But I
Speaker 1: think here in the United Kingdom, the appetite for austerity
Speaker 1: to get the debt levels down is something that we're
Speaker 1: not going to see for a while yet. I think
Speaker 1: I think the mood of the new government in the
Speaker 1: UK and perhaps more broadly in Europe is for much
Speaker 1: much looser policy, perhaps just living with higher levels of debt.
Speaker 1: Let's not forget that the interest rates at which and
Speaker 1: much of this debt is being punted during this pandemic
Speaker 1: is incredibly low, and so the burden that is going
Speaker 1: to put on countries isn't going to be great as
Speaker 1: great as it might have been in the past. At
Speaker 1: some point, it's going to have to be paid off. Well,
Speaker 1: I don't mean it, Rubbert John. I think this is
Speaker 1: really the heart of the matter, as a low yield
Speaker 1: environments of free pass so far, so far at least
Speaker 1: and when you use that language, Peter, that at some
Speaker 1: point this will have to be paid off. What does
Speaker 1: that some point look like. Well, I think at the
Speaker 1: moment it's it's the last on the minds of government
Speaker 1: because there's still up to the areas in coping with
Speaker 1: the pandemic. I think when and if we do get
Speaker 1: to this point when economies start to recover much more quickly,
Speaker 1: when the tightening cycle begins again and again we're a
Speaker 1: long way from that yet, at that point, I think
Speaker 1: the conversations will start to be about, well, what are
Speaker 1: we going to do about fiscal policy? Are we going
Speaker 1: to tighten policy? I mean it, maybe though, as I
Speaker 1: say that, that we'll just learn to live with this,
Speaker 1: and perhaps you know this idea that some of the
Speaker 1: debt will just effectively be monetized. Let's not forget many
Speaker 1: of the central banks of sitting on this debt. At
Speaker 1: the moment, it's not putting a burden. It's not putting
Speaker 1: a burden on the government because the debt interest is
Speaker 1: being petted by by the Bank of England E actually,
Speaker 1: so at some point he has to get on what
Speaker 1: that's what makes it que Qui means that the debt
Speaker 1: eventually gets sold back into the into the private sector.
Speaker 1: When it's not sold back, that's when it's called marchi financing.
Speaker 1: And would you think of the history of qui Japan, Europe,
Speaker 1: in the US to an extent, a lot of this
Speaker 1: TV is still sitting on banks balance sheets, so we
Speaker 1: haven't really seen the cycle of que play out yet
Speaker 1: until we don't really know how it's going to play. Well,
Speaker 1: that's qui forever, isn't it, Peter. You just keep reinvesting,
Speaker 1: maturing assets, you keep doing you never forgive it. So
Speaker 1: technically it's not financing. There is another issue here, and
Speaker 1: it's not just the crisis response, Peter. It is the
Speaker 1: permanent change. That's what I'm interested in. I think we
Speaker 1: can all get our hands around what the crisis response
Speaker 1: looks like. We can see it in the last couple
Speaker 1: of months permanent shifts in the framework at the FED,
Speaker 1: permanent fiscal changes in places like Germany. Can you speak
Speaker 1: to that for us, Peter sure. I mean, let me
Speaker 1: start with as a former central banker, let's talk about
Speaker 1: what the Fed of have talk introduced, this idea of
Speaker 1: average inflation targeting or price leble targeting. I mean, at
Speaker 1: the moment, it's still not completely clear what we're going
Speaker 1: to do. Think the key message is that that is
Speaker 1: going to facilitate easier monetary policy for longer. Personally, I'm
Speaker 1: a bit of a price level targeting skeptic. I think
Speaker 1: it's a it's a difficult thing to carry off, to
Speaker 1: start worrying about inflation bygons. But that's really where where
Speaker 1: we're going with that. Sorry. So yeah, as far as
Speaker 1: fiscal policys concerned, I think we are in a new
Speaker 1: regime because I think the idea of getting down quickly
Speaker 1: the way we did after the financial crisis just isn't
Speaker 1: palatable and don't think it work very well for countries
Speaker 1: like Europe, and I just don't think the political aptite
Speaker 1: of that is there anymore. There's just too many other
Speaker 1: political problems around the you know, the distribution of income
Speaker 1: and so on. That makes fiscal policy and fiscal austerity
Speaker 1: just not a palatable policy option. Meanwhile, they've got a
Speaker 1: partner in the Central Bank, so we do have an
Speaker 1: ECB meeting on Thursday. The Bank of England, which you
Speaker 1: were a member of it has considered or talked openly
Speaker 1: about negative interest rates. Do you expect that to be
Speaker 1: a tool used by them in the not so distant future,
Speaker 1: especially given the fact that there really isn't an easy
Speaker 1: pathway to paying back some of the debt. Yeah, they've
Speaker 1: left it or open to negative interustrates, but I mean
Speaker 1: even back at my time at the Bank ten years
Speaker 1: ago now, the the idea of negative interustrates wasn't looked
Speaker 1: on very kindly. So I think they've probably got more
Speaker 1: work to do on QUI before they go down that path.
Speaker 1: But I think they could. They could do it um
Speaker 1: But I think we're getting close to the end of
Speaker 1: the road to negative rates to the e c B.
Speaker 1: I don't think rates can go that much much. For
Speaker 1: one second, that's Peter, hold on one second, and I'm
Speaker 1: sorry to interrupt, but that's a huge issue. If you're
Speaker 1: saying that they're getting close to the end of the
Speaker 1: road with negative interest rates. Do you think that they
Speaker 1: are going to at some point in our lifetimes moved
Speaker 1: to a positive indust rate regime. No, I don't mean
Speaker 1: they're going to reverse it, but they're going to keep
Speaker 1: the rates at the very low negative levels that they're at,
Speaker 1: and I think they will carry on putting que into
Speaker 1: the system to to push down yields to ease monety conditions,
Speaker 1: I think. So. I think the big policy constraint questions
Speaker 1: to the UB is at what point do they run
Speaker 1: out of government bonds to by and we'll about how
Speaker 1: to start breaking rules around which bonds they're able to buy.
Speaker 1: That that, for me, it is a big question rather
Speaker 1: than whether they're going to go a lot more deeply
Speaker 1: into negative territory. So I think at the end of
Speaker 1: the day, especially for an economy like Europe that's so
Speaker 1: dependent on the banking system, you do start bumping up
Speaker 1: against the so called reversal rate, where actually negative rates
Speaker 1: start to do more harm for the good if you
Speaker 1: to rush away. Whether us on Bloomberg Radio and Bloomberg Television,
Speaker 1: we welcome all of you to our same okays this morning.
Speaker 1: Lisa Brand was Jonathan Ferrell in the time, King, we're
Speaker 1: looking at the market's tike by tike. We'll get to
Speaker 1: that when we're done with dr west Away. Right now
Speaker 1: I need in our future is negative forty six is
Speaker 1: pretty tough out there this morning. Dr west Away to
Speaker 1: some all this up. And when you look at the
Speaker 1: fiscal policy right now, it comes back to aggregate demand.
Speaker 1: We're seeing an oil this morning, a real global issue
Speaker 1: of demand. Would you suggest the demand is threatened into
Speaker 1: que four? Well, I think the big question into four
Speaker 1: is really at the same question we've had for the
Speaker 1: last six months, which is what's going to happen to
Speaker 1: the virus, what's going to happen to the policially the
Speaker 1: consumer response to that, And at the moment, consumers firms
Speaker 1: are still very tentative about going out and spending money,
Speaker 1: and so we do have this aggregate demand shortfall, which
Speaker 1: is where the fiscal policy is piling in to try
Speaker 1: and replace that spending. And then it's it's a bit
Speaker 1: different this fiscal policy support because it's giving its inviting
Speaker 1: income to people who are who are out of work.
Speaker 1: So it's not so much about getting people out spending
Speaker 1: money that they are them that spent. It's actually just
Speaker 1: propping up their income. And as long as people are
Speaker 1: out of work on furlough, there's going to be a
Speaker 1: need for this. So I think the difficult question is
Speaker 1: going to be, you know, if if the virus drags
Speaker 1: on into the first quarter of next year, is it
Speaker 1: easily could Is it really feasible that the governments will
Speaker 1: carry on giving this exceedingly generous income support to to
Speaker 1: workers who having yet got back into into work. I
Speaker 1: think they're going to have to do, but it's gonna
Speaker 1: really put a strain on on the dead paid a
Speaker 1: greater catch up. We've got to leave it there. Peter
Speaker 1: west Away there of Vancouard. Thanks for listening to the
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keen before the podcast. You can always catch us worldwide.
Speaker 1: I'm Berg Radio