Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, I'm
Speaker 1: a little worried that the next few years are going
Speaker 1: to be kind of annoying. Annoying in what sense? Joe, Well,
Speaker 1: you know, it's like we're coming on ten years since
Speaker 1: the financial crisis, and so every day it's gonna be
Speaker 1: another story about ten years since this went under, and
Speaker 1: ten years since this went under, and everyone's gonna be
Speaker 1: retelling war stories about where they were, and journalists are
Speaker 1: gonna be talking about how they're in the office till
Speaker 1: two am. I'm already kind of dreading it all a
Speaker 1: little bit, really, But I mean, aren't those fond memories
Speaker 1: as a financial journalist? You know? Two thousand seven, two
Speaker 1: thousand eight, those were the sort of glory years. People
Speaker 1: couldn't even keep up with the news flow. There was
Speaker 1: so much happening. No, I see, I'm excited about telling
Speaker 1: my stories. I just don't want to hear everyone else's.
Speaker 1: You know, I'm just very selfish. I just I love
Speaker 1: my memories. I just don't want to hear everyone else's stories. Well,
Speaker 1: I applaud your honesty, Joe. Yeah, that being said, despite
Speaker 1: the fact that you know, we're going to have all
Speaker 1: of these anniversaries coming up over the next couple of years,
Speaker 1: it has been obviously an extraordinary time, and I think
Speaker 1: all of us have learned a ton about how markets
Speaker 1: and economics work during this period. Yeah, you could definitely
Speaker 1: say that. I guess you could also argue it the
Speaker 1: other way and say that the financial crisis and the
Speaker 1: period after it were so um special or so unprecedented
Speaker 1: that we've all learned massively new things, right, like how
Speaker 1: many people were really experts on quee before two thousand nine?
Speaker 1: And I mean, I guess you could argue there aren't
Speaker 1: that many people who truly understand it now, But in
Speaker 1: any case, at least people know what it kind of is.
Speaker 1: Maybe we've just exposed how little we know. A frame
Speaker 1: me this way, because today we're going to be talking
Speaker 1: to a long time industry veteran, someone who worked for
Speaker 1: the I m F, who's involved in mutual funds, who's
Speaker 1: been a global macro trader for several years, uh, and
Speaker 1: someone who has uh you know, sort of catalogued all
Speaker 1: of the things that we should have learned since the crisis,
Speaker 1: and I think that his perspective and sort of what
Speaker 1: he's observed has sort of been an extremely offering some
Speaker 1: extremely important lessons from the last ten years. So, Joe,
Speaker 1: I think I know who you're talking about. And if
Speaker 1: it's who I think it is, I'm very excited. He's
Speaker 1: the guy who's very active on Twitter and he has
Speaker 1: a great blog as well, and we all read it. Yeah,
Speaker 1: we're going to be talking to Mark dow He. Anyone
Speaker 1: who's involved in finance Twitter has certainly seen him. He
Speaker 1: has this awesome blog called Behavioral Macro where he talks
Speaker 1: about big macro topics. He recently wrote a post about
Speaker 1: fifteen things that every investor should have learned from the
Speaker 1: financial crisis and it's aftermath, and we're going to be
Speaker 1: talking through a few of those things. That sounds great,
Speaker 1: Marked Out, thank you very much for joining us. Thanks
Speaker 1: for having me. Guys, before we get started, you know,
Speaker 1: many of us in media and finance Twitter have interacted
Speaker 1: with you for a long time, read your stuff, read
Speaker 1: your tweet, talked to you on TV or whatever. But
Speaker 1: for those of the people who don't know who you
Speaker 1: are yet, why don't you give us the very brief.
Speaker 1: The brief bio. Yeah, the thumbnail sketch is. I started
Speaker 1: my career at the Treasure Department as an international economist,
Speaker 1: working on financial disasters and emerging markets primarily. That's where
Speaker 1: they were then, UH. And then I moved to the
Speaker 1: International Monetary Fund, where I worked on a lot of
Speaker 1: different countries and the same kind of sustainability issues. After that,
Speaker 1: I managed money to mutual fund for a number of
Speaker 1: years fixed income, primarily emerging markets. And then I moved
Speaker 1: to a global macro hedge fund for about seven years
Speaker 1: UH and basically ran part of the book. You know.
Speaker 1: I had my own portfolio where I ran risk and
Speaker 1: all kinds of asset classes, primarily currency in emerging markets,
Speaker 1: interest rates, commodities, that that kind of thing. And now
Speaker 1: I run glorified private UH family office from from my
Speaker 1: hometown in California. What strikes me is important about your
Speaker 1: background before we get into the various lessons, is that
Speaker 1: you've seen the eco side and the trading side, and
Speaker 1: often the two sides can't really speak to each other
Speaker 1: very well. A lot of traders can be very good,
Speaker 1: but they don't really understand economics. A lot of economists
Speaker 1: have a deep understanding of how things work, but they
Speaker 1: have no idea how markets really work. As you describe
Speaker 1: your career, you've really seen and bridged the two worlds.
Speaker 1: This has been a massive advantage to me over my career.
Speaker 1: You see a lot of shops, particularly big ones, where
Speaker 1: there's a stark divide between thought leaders and risk takers,
Speaker 1: and not that many people speak both languages. So the
Speaker 1: thought leaders are great for framing things and providing frameworks
Speaker 1: and backdrop ways to analyze issues and to communicate with
Speaker 1: clients who want who want to understand the world better,
Speaker 1: but they often don't have that market savvy, that psychological
Speaker 1: dimension that makes a good risk taker. Uh, that defines
Speaker 1: a good risk taker. Speaking of framing ideas, you did
Speaker 1: pen this blog post about the fifteen things that investors
Speaker 1: should have learned after the Financial Crisis, and one of
Speaker 1: the ones that really struck me. Um, and these are
Speaker 1: all you know their number, they're in bullet points, they're
Speaker 1: relatively short, so we really want you to dig into
Speaker 1: them a bit more. But one of the ones was
Speaker 1: this idea that the interest rate sensitivity of economic activity
Speaker 1: is less than what was previously believed to be the case.
Speaker 1: And I want to tie that in with another one,
Speaker 1: which is the idea that, uh, the economic channel of
Speaker 1: monetary policy and the financial channel of monetary policy, uh
Speaker 1: kind of might be operating and existing separately. Can you
Speaker 1: walk us through those points for me? That might be
Speaker 1: the most important portion of the post really from a
Speaker 1: policy a policy standpoint. I wrote this because I was
Speaker 1: a little frustrated I had from given my background, I'd
Speaker 1: climbed into so many central banks all over the world,
Speaker 1: I had seen so many things, like you know, a
Speaker 1: doctor in the e R with a lot of experience
Speaker 1: that I was kind of a hit of the curve
Speaker 1: on a lot of a lot of these issues, just
Speaker 1: because you've seen financial crisis and money printing and all
Speaker 1: these things before. But when it came to the when
Speaker 1: it came to the US, a lot of people who
Speaker 1: were really deeply steeped in nineties economics had a very
Speaker 1: fixed view of of of money supply and interest rates
Speaker 1: and economic activity. And what we know really is what
Speaker 1: the element that was lacking was behavior. The models that
Speaker 1: were taught in the eighties and were perpetuated throughout really
Speaker 1: until the Great Financial Crisis was a very rational way
Speaker 1: of looking at it. A lower price for money means
Speaker 1: more borrowing, both in the fin in the in the
Speaker 1: financial sector and in the real economy, and higher rates
Speaker 1: means less. And if you just look at what happened
Speaker 1: before and after the crisis, you'll see that this doesn't
Speaker 1: really hold that. The other factors that are that are
Speaker 1: more important. You know, from two thousand and four to
Speaker 1: two thousand and seven or so, people were borrowing like crazy,
Speaker 1: and the said funds rate was around five. Everyone wanted
Speaker 1: to borrow, everyone wanted to lend, everybody was on the money.
Speaker 1: Supply was scoring rapidly because thanks were lending and people
Speaker 1: were borrowing. After the crisis, for a long period of time,
Speaker 1: rates were zero and nobody was lending. Nobody was borrowing. Uh.
Speaker 1: And this isn't just a US phenomenon. You see it
Speaker 1: around the world. So you have to ask yourself, you know,
Speaker 1: why is that and why aren't we more sensitive to interest?
Speaker 1: It's and the simple answers risk appetite. Uh, people were
Speaker 1: We're much more sensitive to our risk appetite whether we
Speaker 1: feel secure in our jobs than we are to the
Speaker 1: interest rate. If you're securing your job and you know
Speaker 1: you've got a good income for the next ten years,
Speaker 1: you're more likely to go out and buy that house
Speaker 1: even if the interest rate is five instead of three. Uh.
Speaker 1: That's just the way human nature works. So I think
Speaker 1: that's why people overstated the sensitivity of economic activity uh
Speaker 1: to to interest rates. UH. And if you factor that in,
Speaker 1: if you look more at people's risk appetite, then you'll
Speaker 1: you'll get a better picture of of what's going to happen,
Speaker 1: you know, to the transmission of monetary policy into the
Speaker 1: economy or into finance. Now, with respect to the two
Speaker 1: different channels, if you just think about it, uh, the
Speaker 1: financial channel happens fast. These are liquid positions that you
Speaker 1: can get out of, very sensitive often to the funding rate. Right,
Speaker 1: you can leverage something that yields three if you're if
Speaker 1: you're funding rate is one. Uh. So the financial channel
Speaker 1: tends to uh react quickly. Interest rates are quicker. On
Speaker 1: the economic side, you need a much higher higher level
Speaker 1: of risk appetite to build that factory or to set
Speaker 1: up a new shop or new branches because you're gonna
Speaker 1: be stuck with that investment for quite some time. It
Speaker 1: just requires a lot more confidence. So that can be
Speaker 1: even stickier. UM in response, so it's it's just it
Speaker 1: really maps back to a behavioral uh just uh, a
Speaker 1: behavioral phenomenon uh. And for a policymaker, it's super important
Speaker 1: because you can have points in time when the financial
Speaker 1: channel has responded sufficiently and even excessively, but the economic
Speaker 1: channel is still inching its way up the curve. And
Speaker 1: in fact, I would argue, now we're in that kind
Speaker 1: of situation where the financial channel has responded quite well,
Speaker 1: pretty fully. I wouldn't say it's gone crazy, but it's
Speaker 1: it's respond responded well, and the economic side is just
Speaker 1: you know, we're still not seeing robust investment, and we're
Speaker 1: still not seeing wages, and we're still not seeing people
Speaker 1: are still getting to that mind that where they want
Speaker 1: to take risk and propulse maker, what do you do
Speaker 1: when the financial channel is too far ahead of the
Speaker 1: economic channel. Now, it's my belief that the way recessions
Speaker 1: happen in the modern world is we get too optimistic
Speaker 1: in the financial channel, and we also get too optimistic
Speaker 1: in the economic channel, and at some point we have
Speaker 1: a financial disruption from kind of shock. It can be
Speaker 1: a small one, but it triggers a sell off in
Speaker 1: the financial markets, and that forces a retrenchment or a
Speaker 1: rethink of people in the real economy about how extended
Speaker 1: they are with respect to risk, and they start laying
Speaker 1: people off and cutting back on investment, which has a
Speaker 1: multiplier effect throughout the economy, leading to more layoffs and
Speaker 1: more cutbacks and investment, and you get a real recession.
Speaker 1: But you really, if you don't have the real economy extended,
Speaker 1: the real that that channel very optimistic if you need
Speaker 1: a much bigger financial impulse to push the economy into recession.
Speaker 1: And I think that's where we are right now. And
Speaker 1: this is why my view all along has been as
Speaker 1: long as I've been on Twitter long the We're gonna
Speaker 1: have the longest and slowest expansion you know, uh shallow
Speaker 1: and slow Uh that that that we've ever seen. Because
Speaker 1: people are still looking in the mirror, even on the
Speaker 1: financial channel. I would argue, when we get excited, uh,
Speaker 1: we we kind of check ourselves and say, no, no, no,
Speaker 1: this is a bubble. I mean, we hear people talking
Speaker 1: about bubbles all the time. We're afraid of getting caught out.
Speaker 1: When I talk to guys right now, big investors, the
Speaker 1: word you hear is caution, Something's gonna happen. We don't
Speaker 1: know what this is long in the two those kinds
Speaker 1: of things, and it's funny after and that's through the
Speaker 1: financial channel, which is the one that's more sensitive uh
Speaker 1: to uh to the stimulative policies that we've had for
Speaker 1: for for so long. So that tells me that the
Speaker 1: economic channel is just not there and it's gonna it
Speaker 1: would take a much bigger financial shock other things equal
Speaker 1: to push us into recessions. So the odds of recession
Speaker 1: are still uh in my mind's I'm very very low,
Speaker 1: even though don't expect robust girls. So for a policymaker,
Speaker 1: it's these two different channels. Is something people haven't dealt
Speaker 1: with because the FED in particular and most and most
Speaker 1: central banks more broadly, their mandate is key to the
Speaker 1: economic channel, and the FED only only over the past
Speaker 1: ten years have started to really think about how the
Speaker 1: financial channel feeds back into monetary policy and in their
Speaker 1: formal modeling, Mark, I feel like that answer explained so
Speaker 1: much about what we've seen in the you know, obviously
Speaker 1: that's the whole point of this in terms of lessons,
Speaker 1: but you know, you said, this is a really big one,
Speaker 1: and you know, just all this stuff about oh, we're
Speaker 1: in a bubble, or all these macro hedge fund managers
Speaker 1: who think that the FED has behaved irresponsibly by keeping
Speaker 1: interest rates low and are you know, causing all kinds
Speaker 1: of distortions. I feel like if they had all listened
Speaker 1: to that answer, you know, several years ago. Unfortunately it's
Speaker 1: too late for them now in seventeen, a lot of
Speaker 1: mistakes would have been avoided on this theme of the
Speaker 1: gap between the financial channel and the real channel. Another
Speaker 1: one of your lessons is commodity markets, and you point
Speaker 1: out that they're driven first by speculation and that that
Speaker 1: overwhelms fundamentals. What's the lesson there? Two different things. One
Speaker 1: is just the market market structure, So the story of
Speaker 1: commodities was in right around them. They would electronic so
Speaker 1: you didn't have to be in the pits and know
Speaker 1: all the secret handshakes uh to trade them. You could
Speaker 1: trade them electronically from your office UH and then now
Speaker 1: from from from home UH. And that allowed people to
Speaker 1: to get involved in a way they hadn't been easily
Speaker 1: able to before. UM. And then around two three, two
Speaker 1: and four there were there were a lot of there
Speaker 1: were academics talking about diversified the divers supplying properties of
Speaker 1: owning commodities as an asset class, and that gained a
Speaker 1: lot of traction. At the same time, you had the
Speaker 1: emerging markets plugging into the grid. China joined the w
Speaker 1: t O and that whole emerging markets theme, you know,
Speaker 1: the paradigm is changed, were starting to take off, and
Speaker 1: people associated that with commodities. So we we moved into
Speaker 1: a world where you know, China was going to take
Speaker 1: over that We're gonna eat all our commodities, uh and
Speaker 1: mL dousing way and uh, therefore you had to own it.
Speaker 1: So as consultants were peddling the story about diversifying through
Speaker 1: commodities as an asset class, commodities were going up. And
Speaker 1: when guys are pitched a story about an asset class
Speaker 1: that's going up rapidly, it makes them want to get
Speaker 1: more involved faster. So we we kind of had this
Speaker 1: boom in investment speculation whatever you want to call it,
Speaker 1: in in commodities from two thousand and three until really
Speaker 1: until two thousand and you could argue two thousand and eleven,
Speaker 1: um and Mark, I want to interrupt you real quickly.
Speaker 1: We're gonna do something. I want to do something really special.
Speaker 1: So for listeners, we are recording this episode on August
Speaker 1: four in the morning. It's am on a Friday. That
Speaker 1: means we're about, let's just under four minutes away from
Speaker 1: the monthly non farm payrolls report, which is of course
Speaker 1: the most important economic data point of the month. So
Speaker 1: we're gonna do something a little different. We're gonna take
Speaker 1: a little interlude from the podcast. Will return to the
Speaker 1: lessons in a moment, but we are going to talk
Speaker 1: through the jobs report as it comes out, because I
Speaker 1: think this is very exciting, the chance to be talking
Speaker 1: to a sort of experienced macro trader about a report
Speaker 1: as it's coming out. It's coming out in um just
Speaker 1: over three minutes now, and so we'll look at the data,
Speaker 1: we'll talk about it, we'll talk about the market reaction.
Speaker 1: People will get this snapshot of how you see things,
Speaker 1: how you interpret the data, and then of course we
Speaker 1: can come back to it. But ahead of the data,
Speaker 1: we just about a little less than three minutes. You
Speaker 1: have any sort of early thoughts about the data, I
Speaker 1: should just note the economists are looking for k jobs
Speaker 1: for July, the unemployment rates to fall to four point
Speaker 1: three percent, and two point four percent wage growth. What
Speaker 1: are you looking at in the minutes ahead of the release. Well,
Speaker 1: the way I tend to approach these things is I
Speaker 1: look at where the areas in which the market is
Speaker 1: heavily positioned, what are the trends that have been working uh,
Speaker 1: and what kind of data would would be required to
Speaker 1: trigger either a shakeout or reversal of these Of the
Speaker 1: of the recent trends, and the biggest recent trend has
Speaker 1: has been short dollar, both against the funding currencies like
Speaker 1: the euro and the pound UH and swissy UH, and
Speaker 1: against the risk currencies for emerging markets have done quite well.
Speaker 1: The answer antipodeans in New Zealand and the Key. We
Speaker 1: are always somewhere in the middle between those two the
Speaker 1: two camps. But because dollar has been on a on
Speaker 1: a run in in a negative way, I'm going to
Speaker 1: call it that. It wouldn't take much one data, one
Speaker 1: strong number could could trigger a shakeout that could last
Speaker 1: a day or two or three or a week or whatever.
Speaker 1: I still think the longer term trends for the dollar
Speaker 1: is down because we're in that phase of the cycle.
Speaker 1: You know, the US has recovered, valuations are fairly full.
Speaker 1: Let's move further out the risk of the spectrum to
Speaker 1: places that haven't been fully fished out, and that's where
Speaker 1: people that's why people have gravitated to emerging markets in Europe. Tracy,
Speaker 1: are you excited about the number we're about to get
Speaker 1: in less than sixty seconds? I'm very curious to hear
Speaker 1: Mark's sort of play by play, a minute by minute analysis.
Speaker 1: Mark really really quickly, because it's less than a minute. Now,
Speaker 1: would you try to trade around the immediate jobs report
Speaker 1: or do you just try to, you know, think about
Speaker 1: the implications for your portfolio. It depends on what I'm
Speaker 1: what I'm thinking. If there's a situation where the position
Speaker 1: is really offside and I don't think it would take
Speaker 1: much to trigger a reversal, I might drive something. Often.
Speaker 1: I like to see the market react before jumping in
Speaker 1: if it's a trade. I also do investments, which is
Speaker 1: a different different story, but from the trading side, I can.
Speaker 1: I can be active right now. I have some short
Speaker 1: dollar positions. I've paired back a little bit to get
Speaker 1: my size and right make sure I don't get hurt.
Speaker 1: I've had a nice run. Here we go, numbers out,
Speaker 1: O Wow, two hundred nine K jobs so that's a
Speaker 1: beat versus eighty k last month. Last month revised up
Speaker 1: from two twenty two to to thirty one case of
Speaker 1: very nice. Unemployment rate falls to four point three percent
Speaker 1: from four point four percent. That's in line with expectations.
Speaker 1: And UH average really earnings growth at two point five percent,
Speaker 1: that's a little bit ahead of the expectations of two
Speaker 1: point four percent. And the labor force participation rate, which
Speaker 1: is many people would argue has been one of the
Speaker 1: weak spots of concerning long term trend up to sixty
Speaker 1: two point nine percent. We are seeing rates pick up,
Speaker 1: tenure yield a little bit higher, not dramatically, from two
Speaker 1: point to three to two point to five percent. Mark
Speaker 1: give us your take. So I take is this is
Speaker 1: that kind of shakeout the bondswork position and short dollars
Speaker 1: were position, so now we get we get a test
Speaker 1: of that shakeout. These aren't massively strong numbers, but they're
Speaker 1: definitely stronger than what people were looking for. I think
Speaker 1: what will stand out at average hourly earnings that that's up.
Speaker 1: People have been very sensitive to labor labor inflation here, um,
Speaker 1: so all the all everything is skewed towards stronger than expected,
Speaker 1: but not massively. So so this is a decent test
Speaker 1: for the short dollar thesis and for the long bond thesis.
Speaker 1: What I would do in a case and what I
Speaker 1: will do in a case like this, I just stand
Speaker 1: back and let it play out. And if I want
Speaker 1: to add to my positions, I wait until I think
Speaker 1: that this shakeout is over. But it's really the thing
Speaker 1: you have to feel your way through. You never know.
Speaker 1: I mean, this is a behavioral animal, this market, and
Speaker 1: you have to stand back and and and watch it
Speaker 1: and see how it plays out, and look for correlations
Speaker 1: breaking down, and look for weakness and in volume and
Speaker 1: other signs that the story is getting tired before trying
Speaker 1: to take it on. So, Mark, I think you mentioned
Speaker 1: that you had some short dollar positions. Would this be
Speaker 1: enough for you to reconsider those No, particularly in the
Speaker 1: emerging markets, where my positions are more important. Because even
Speaker 1: though this is so, I mentioned earlier the distinction between
Speaker 1: risk currencies and and and funding currencies. This is bad
Speaker 1: for the funding currencies, but not necessarily bad for the
Speaker 1: emerging markets because strong U S data, uh, it's good
Speaker 1: for risk in a certain sence. You see, equity markets
Speaker 1: aren't down right so the risky currencies trade off of
Speaker 1: risk and the trade off of bonds, whereas the funding
Speaker 1: currencies trade mostly off of bonds. And to your point
Speaker 1: about you know, sort of US equities, we mentioned that
Speaker 1: all the dollar is up, rates were up, but we
Speaker 1: haven't seen a sell off in US futures at this moment.
Speaker 1: We still see risk assets rising up, not not much out.
Speaker 1: So you know the which if you were to take
Speaker 1: a maquar ree from all of this, you would say, Okay,
Speaker 1: people say the numbers a little bit stronger, but it's
Speaker 1: not going to change the FEDS terminal rate which has
Speaker 1: been coming down. Right, It's not going to make rate
Speaker 1: hikes come that much sooner necessarily, but it might not
Speaker 1: be dubbish forever the way people have been had been
Speaker 1: pricing in. So it's a modestly strong number that we'll
Speaker 1: shake some people out of their funding currency shorts. I
Speaker 1: would suspect the Japanese en um is a on one.
Speaker 1: Euro is another that's had a nice run, But I
Speaker 1: don't think it's going to hit the emerging markets that hard.
Speaker 1: One of the fears in emergency markets emerging markets has
Speaker 1: been that, you know, the FED will have to raise rates,
Speaker 1: and we know when raising when they when they raise rates,
Speaker 1: it hurts emerging markets. I think that's a backwards looking view.
Speaker 1: In fact, one of the points and in the blog
Speaker 1: was emerging markets are structurally UH different. Now. I don't
Speaker 1: think that the Fed's gonna raise rates all that much,
Speaker 1: first of all, but more importantly, even if they did,
Speaker 1: the emerging markets are in a much better position to
Speaker 1: weather it because they have a lot less dollar denominated
Speaker 1: debt hanging over hanging over their heads, particularly the sovereigns
Speaker 1: UH then then used to be then used to be
Speaker 1: the case, so it shouldn't be too bad for her.
Speaker 1: And if you look at the Mexican page, so it's
Speaker 1: still up on the day, the Brazilian realities flat for
Speaker 1: for for so far in the futures UH. The ones
Speaker 1: getting hit and not even massively is the euro UH
Speaker 1: and UH and the pound and the end right the
Speaker 1: funding currency. So this is a pretty good number. We
Speaker 1: want to see the economy continued. We've had some week
Speaker 1: data here and there. UM. It's also worth noting that
Speaker 1: the last last month stuff got got revised, revised stuff
Speaker 1: a little bit, so that's not bad. So you know,
Speaker 1: we've had some soft stuff with the autos and other areas.
Speaker 1: And uh, it's it's nice to see a little a
Speaker 1: little counterweights to that. But this doesn't nothing, and this
Speaker 1: doesn't anything earth shaking. Uh, this isn't something's gonna it's
Speaker 1: gonna rock our worlds. Let's return to the lessons we
Speaker 1: all should have learned, Tracy, do you want to pick
Speaker 1: another lesson from Mark's list for us to go? I
Speaker 1: was going to ask the oil question. Yeah, we'll get okay,
Speaker 1: let me I'll finis to the commodities and then come
Speaker 1: onto oil. So the trading was enabled to trying to
Speaker 1: trading was enabled. The asset class was being pitched as
Speaker 1: a diversifier. At the same time, emerging markets were kind
Speaker 1: of plugging into the grid, and this led to a
Speaker 1: lot of enthusiasm and commodities at the beginning. You know,
Speaker 1: if you go back and that point in time, the
Speaker 1: breakdown and people trading oil, for example, was uh, you know,
Speaker 1: the people were financial, uh, and seventy of the people
Speaker 1: were commercial. That is to say, they were hedging either
Speaker 1: their needs for for oil or their production of oil.
Speaker 1: Now that numbers roughly reversed. It's like the people involved
Speaker 1: in oil are trading it and are the commercial guys
Speaker 1: just because there's so many more people have gotten involved
Speaker 1: over over the years, and that means that the asset
Speaker 1: is gonna be wilder, it's gonna do crazier things, it's
Speaker 1: gonna be left linked to fundamentals for longer periods of time. Uh.
Speaker 1: And I think we've we've we've seen a lot of that.
Speaker 1: And the extremes have feedback effects, you know, the the
Speaker 1: extreme buying of oil, a lot of which interestingly was
Speaker 1: blamed on low FED rates. Even though we we got
Speaker 1: two hundred fifty dollars in barrel with FED funds five
Speaker 1: percent back in two thousand and whatever thou eight or
Speaker 1: so um. Uh, it's lead to are incentivized. A lot
Speaker 1: of the shale production was coming on online because they
Speaker 1: didn't care about interest rates, these guys because they were
Speaker 1: looking to make fortyfold on their investment. And if you
Speaker 1: want to make forty fold in your investment, if you
Speaker 1: don't care if you're funding rates, three and seven is
Speaker 1: the same number, right. Uh. They were borrowing because the
Speaker 1: price of oil was high, and it went to a
Speaker 1: much higher rate than ever otherwise would have been the case.
Speaker 1: Because of the amount of speculation UH and investment in
Speaker 1: commodities as as a theme. So I think that's a
Speaker 1: super important point. The second important point to make about
Speaker 1: commodities is that over time we find ways, technology finds ways.
Speaker 1: The substitute for commodity consumption. Our oil consumption, and this
Speaker 1: relates to the oil point is one in the home
Speaker 1: home homeowner basket is one less than a half of
Speaker 1: what it was in the in the eighties. Our consumption
Speaker 1: of oil UH is less than half of what it
Speaker 1: used to be UH in the household level. And that's
Speaker 1: true of all commodities to some degree. People don't have
Speaker 1: gold teeth, people don't use copper as much as that
Speaker 1: is to over time we find substitution UM the things
Speaker 1: to substitute for our commodity consumption because it's cleaner, because
Speaker 1: it's cheaper, because it's better UH, and commodities should go
Speaker 1: down in real terms over time. Right, So you have,
Speaker 1: on the one hand, speculation that leads to larger swings
Speaker 1: that have predominantly been to the upside over the past
Speaker 1: fifteen years, and you have less of a fundamental UH driver. Yes,
Speaker 1: you have the emerging markets plugging into the grid, and
Speaker 1: they're less less commodity efficient. But I met you the
Speaker 1: new houses in China are using PVC and not copper
Speaker 1: for the most part when when they're being built out. Yeah,
Speaker 1: to some extent, human progress is the story of making
Speaker 1: fewer commodities to maintain the standard. In a very real way.
Speaker 1: It's kind of the inverse of commodities, kind of the
Speaker 1: inverse of technology, right, shorten commodities are it's a uh
Speaker 1: pro technology that. Now you know the case with oil
Speaker 1: if you remember, you know people were saying when oil
Speaker 1: fell dramatically from over two thousand and fourteen and two
Speaker 1: US and fifteen. Uh, they said, oh, this is really bad.
Speaker 1: This is first of all, it was misdiagnosed as demand. People.
Speaker 1: One of the mistakes that we make in markets is
Speaker 1: we read way too much fundamental information uh to two
Speaker 1: moves to price moves. So people were saying, oh, no,
Speaker 1: this isn't demand story. The US is going to have
Speaker 1: a recession, etcetera, etcetera. But it was a lot of
Speaker 1: guys that got the shale producers and other guys that
Speaker 1: got excited about a high price of oil, and they
Speaker 1: got caught. They got caught out speculating. Now, the people
Speaker 1: who were bullish, uh, of the US economy in general.
Speaker 1: We're saying, gospel oil falling is gonna be really good
Speaker 1: for the consumer, and I was making the point, uh,
Speaker 1: quite strongly, that it won't help very much because it's
Speaker 1: become such a small share of our overall basket. The
Speaker 1: oil intensity of our GDP has declined significantly over the
Speaker 1: past twenty or thirty years. So it just doesn't matter. Uh,
Speaker 1: it just doesn't matter so much. It's not going to
Speaker 1: turn that. It's not going to turn the dial. And
Speaker 1: in fact it didn't in the same way, it didn't
Speaker 1: hurt consumption very much when it with you know, up
Speaker 1: to a hundred hundred and fifty. So as oil becomes
Speaker 1: a smaller share of of our consumption, it's oscillations are
Speaker 1: are are going to help us less? Help us and
Speaker 1: hurt us less and less. The real problem is people,
Speaker 1: you know, in markets, we say we look at something
Speaker 1: new and have to process it, and we look backwards
Speaker 1: first and say, what looks vaguely similar to this in history?
Speaker 1: And the first thing that they they'll find when they
Speaker 1: look back in oil and consumption is the early eighties
Speaker 1: and the late seventies, and those data and they end
Speaker 1: up anchoring on that reality and those coefficients no longer
Speaker 1: obtained for the reasons uh we just discussed. So Mark
Speaker 1: is very energetically and very eloquently connecting all the dots
Speaker 1: in all his lessons for post crisis investors. So let
Speaker 1: me see if I can get in there with one
Speaker 1: more that I think is connected to all of this.
Speaker 1: And that's your very first lesson about potential growth and
Speaker 1: developed economies being lower than it was before the crisis. Well,
Speaker 1: go back to the ear the early eighties, and we
Speaker 1: had a situation where we have four factors really that
Speaker 1: we're driving growth in a really positive way, creating significant
Speaker 1: pail winds. One with demography, baby boomers were plugging into
Speaker 1: the grid. Uh. And the labor force was growing at
Speaker 1: a rapid rate. And as we know, your potential potential
Speaker 1: growth is a function of the growth in your labor
Speaker 1: force and a productivity number. You know, how productive that
Speaker 1: labor in the capital that you bring in with it is.
Speaker 1: So that was going for us. On top of that,
Speaker 1: we had a secular factor of women joining the working
Speaker 1: the workforce. That's kind of a one off. Now women
Speaker 1: can join it, come, you know, they can join and
Speaker 1: they can uh and leave just like a men used to.
Speaker 1: But at that time female participation in labor force was
Speaker 1: was very low, and they spent the eighties and nineties
Speaker 1: coming on online. I think it peaked in probably or
Speaker 1: ninety seven or ninety nine according to the artistics. So
Speaker 1: it became normalized then. So it is what it is.
Speaker 1: It oscillates with with everything else. But over that period
Speaker 1: when they were coming in, it created effectively a growth
Speaker 1: uh in the labor force much faster than what the
Speaker 1: actual labor force growth suggested. So that was another tale wind.
Speaker 1: On top of that, very powerfully, we had a decline
Speaker 1: in interest rates and a decline in inflation. Remember the
Speaker 1: eighties had a very high inflation, uh. And that means
Speaker 1: that people had clean balance sheets. No one had borrowed
Speaker 1: anything because the rates were just too high and we
Speaker 1: could borrow, so people borrow more. When rates come down,
Speaker 1: people borrow more. When inflation is more is more stable,
Speaker 1: and when people don't have any debt on the balance sheets.
Speaker 1: And then the fourth point is we adopted with Reagan
Speaker 1: deregulatory mindset. And you know, people complain a lot about regulation.
Speaker 1: I mean people always do, but uh, you know lately,
Speaker 1: it's been a boogeyman for a lot of things, but
Speaker 1: people forget that back in the seventies, we had real obstacles.
Speaker 1: We uh, really regulatory obstacles. There were price controls, there
Speaker 1: were wage controls. We were rationing gasoline. We had to
Speaker 1: buy every other day depending on your license plate. I mean,
Speaker 1: you guys are probably too young to remember this, but
Speaker 1: I was a little boy. I remember waiting with my dad, uh,
Speaker 1: you know, in line for to buy to buy guests.
Speaker 1: So we had a lot of the relationship between labor
Speaker 1: and capital was very different, so they need to regulatory
Speaker 1: mindset led to a lot of financial innovation. Consumers and
Speaker 1: businesses had clean balance sheets so we can borrow. So
Speaker 1: you had rapid credit deepening along with these labor force phenomena.
Speaker 1: Let the really rapid growth that kind of ended, or
Speaker 1: at least the demographic portions slowed down by the end
Speaker 1: of the of the nineties and stopped being a tail wind.
Speaker 1: The credit, though, continue to deepen, and so we didn't
Speaker 1: see the underlying weakness in demography because we had this
Speaker 1: credit deepening for a long time, giving us this and
Speaker 1: you know, we had stagnating income. But it didn't feel
Speaker 1: like that because everybody could borrow. We were getting more
Speaker 1: credit cards and we were buying uh cars and houses
Speaker 1: and and everything on credit. So that papered over. Um.
Speaker 1: Really the change in the in the demographic headwinds that
Speaker 1: all got exposed when the when the when the GFC
Speaker 1: hit us. Uh, that crisis meant, okay, the credit machine,
Speaker 1: the credit tail wind is done. It's over. Now it's
Speaker 1: a headwind. So now we've uncovered the demographic weakness and
Speaker 1: we have a credit headwind. Uh. This is labor force
Speaker 1: is growing at a slower rate. We don't have the
Speaker 1: benefit of women structurally coming into the labor force. Uh
Speaker 1: and uh, we no longer have the credit machine on.
Speaker 1: That's why we have to grow lower. So at first
Speaker 1: after the crisis, it was cyclical. We had to work
Speaker 1: our way out from the credit boom and the typical
Speaker 1: cyclical problems. But on top of that, we structurally have
Speaker 1: a slower growth rate. And this is what you know
Speaker 1: Mohammed Hilarion calls the new normal and what at the
Speaker 1: same actually around the same time, I was referring to
Speaker 1: it as reversion to a different meed back at my firm.
Speaker 1: But it's the same phenomenon, UH, and recognizing this has
Speaker 1: been super important. UH. Policymakers always want to believe they
Speaker 1: can do more uh to change the growth break than
Speaker 1: they can because that's what they have to sell. Right.
Speaker 1: Both Hillary Clinton and Donald Trump were promising four percent growth,
Speaker 1: different ways to get there, but that's what they were promising.
Speaker 1: But recognizing that policy can't do that much about it,
Speaker 1: and that all developed economies are probably going to have
Speaker 1: the same demographic phenomenon and similar structural credit headwinds or
Speaker 1: at least no longer the tail winds is a is
Speaker 1: a very important observation when you're thinking globally about where
Speaker 1: to allocate uh your risk. All Right, Mark, I'm gonna
Speaker 1: ask you one more question, and it's going to be
Speaker 1: really unfair because I'm going to ask you the most
Speaker 1: controversial question. But we all we have to do like
Speaker 1: a speed round. Okay, So I'm gonna make you we
Speaker 1: This is a question we probably could have done a
Speaker 1: whole episode on, but we're gonna have it's gonna have
Speaker 1: to be very short. Number thirteen. I'm fascinated by you say.
Speaker 1: Very few investors can disentangle their political preferences from economic analysis.
Speaker 1: What's the story there. It's just people re Daniel cannonman.
Speaker 1: I mean, we we get so deep into our own narratives,
Speaker 1: and the confirmation bias is so strong. I mean, look
Speaker 1: at how many guys became bullish when Donald Trump became president,
Speaker 1: and how many people turned barrassed when he became president,
Speaker 1: and how many people have objected or were fighting the
Speaker 1: stock markets for the whole period under Obama because they
Speaker 1: didn't like his policies. Uh, and how many people like
Speaker 1: the policies. Right, So this is what you see, and
Speaker 1: you see it time and time again, and the season
Speaker 1: investor just kind of gets past that. I didn't think
Speaker 1: Trump was gonna get elected and definitely someone I don't
Speaker 1: I don't think is suited for the for the job.
Speaker 1: That's my personal, my personal view. But I didn't think
Speaker 1: he was going to cause a recession. But a lot
Speaker 1: of guys. I saw a lot of guys fall into
Speaker 1: that trap, and a lot of people have been embarrassed
Speaker 1: for eight years. He saw them flip the switch and say, oh,
Speaker 1: I'm bullish now, and they mumbled something about tax cuts
Speaker 1: that have materialized. But we can see now in the
Speaker 1: data that you know what really happened is we went
Speaker 1: into the election coiled right. Everyone was ready to take risk,
Speaker 1: and uh, it played out a little bit differently than
Speaker 1: most people thought. But you know, the economy underlying economy
Speaker 1: is doing okay, and the fact that Trump's policies didn't
Speaker 1: materialize and we're still holding up is a sign that
Speaker 1: that that things are okay. All right, Mark, phenomenal conversation.
Speaker 1: Gotta leave it there. Uh, great talking to you. I
Speaker 1: loved how we did that jobs report thing. That was
Speaker 1: really cool. I feel like I learned a lot there.
Speaker 1: Really appreciate you coming on my pleasure. It was great
Speaker 1: talking to you guys, Tracy. I thought that was really fun.
Speaker 1: Mark obviously knows way more about so many things than
Speaker 1: you know, sort of we do, or even a lot
Speaker 1: of uh, you know, typical people in finance do. I
Speaker 1: thought that was a pretty cool conversation. Yeah, And I
Speaker 1: thought the way he put this idea of um sort
Speaker 1: of the financial world and the real economy running at
Speaker 1: two different speeds. The way he framed that is really
Speaker 1: really useful. And it kind of amazes me now that
Speaker 1: it feels like others, and in particular the Federal Reserve,
Speaker 1: are only just beginning to think of it in that way,
Speaker 1: but uh, it seems like a pretty big deal. Yeah,
Speaker 1: And I think that that's sort of like the underlying
Speaker 1: theme of all of this, which is that human behavior.
Speaker 1: I mean, his blog is called Behavioral Macro, and so
Speaker 1: the sort of traditional macro ignores what he you know,
Speaker 1: these sort of behavioral things that humans do things because
Speaker 1: we're animals and we run in herds and we have
Speaker 1: fear and greed that don't necessarily correspond with supply and demand.
Speaker 1: But that trying to really like suss out which of
Speaker 1: those uh, you know, factors are driving what has sort
Speaker 1: of been a key aspect of understanding the post crisis period. Yeah.
Speaker 1: And also the idea that human beings have a tendency
Speaker 1: to cling on to um their previously understood notions of
Speaker 1: how they were old works is really important. So, I know,
Speaker 1: we were talking about the financial crisis anniversary coming up.
Speaker 1: I remember when I first started writing about quantitative easing
Speaker 1: in two thousand nine, you know, writing analysis about how
Speaker 1: this was going to push up financial asset prices through
Speaker 1: a substitution effect. And I remember people getting really really
Speaker 1: outraged about that idea, And now it's just common knowledge, right. Well,
Speaker 1: and also it's like everyone just assumed that it was
Speaker 1: hyper inflationary, like all these sort of deep seat oh
Speaker 1: printing money, that's gonna cause Weimar, just like all these
Speaker 1: things that we you know, Mark refer to as like
Speaker 1: we anchor on certain periods. So when it comes to
Speaker 1: money creation, we might anchor on some hyper inflationary period.
Speaker 1: When it's oil, we might think about the late seventies
Speaker 1: and just without very little thoughts, sort of draw that
Speaker 1: one thing we know to the current thing. And of course, uh,
Speaker 1: you know, history is never quite the same as the
Speaker 1: first time rove. Yeah, human beings are we weak entities
Speaker 1: flawed And on that note, that's the perfect way to
Speaker 1: uh you know, sort of set the stage for the
Speaker 1: next few years. Just a reminder that we're week week
Speaker 1: flawed entities. All right. Uh well, this has been another
Speaker 1: episode of the All Thoughts podcast. You can follow me
Speaker 1: on Twitter at Tracy Alloway and you can follow me
Speaker 1: on Twitter at the Stalwart, and you can follow Mark
Speaker 1: Dow on Twitter at Mark Dow. You should also check
Speaker 1: out his blog marked out dot tumbler dot com and
Speaker 1: follow our producer Sarah Patterson Sarah Pett with two teas,