WEBVTT - The Biggest Lesson Investors Should Have Learned From the Crisis 0:00:09.200 --> 0:00:13.480 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:13.560 --> 0:00:17.600 I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, I'm 0:00:17.600 --> 0:00:19.520 a little worried that the next few years are going 0:00:19.560 --> 0:00:23.920 to be kind of annoying. Annoying in what sense? Joe, Well, 0:00:24.320 --> 0:00:27.760 you know, it's like we're coming on ten years since 0:00:27.800 --> 0:00:31.319 the financial crisis, and so every day it's gonna be 0:00:31.360 --> 0:00:35.000 another story about ten years since this went under, and 0:00:35.080 --> 0:00:38.000 ten years since this went under, and everyone's gonna be 0:00:38.040 --> 0:00:41.400 retelling war stories about where they were, and journalists are 0:00:41.440 --> 0:00:43.600 gonna be talking about how they're in the office till 0:00:43.640 --> 0:00:46.000 two am. I'm already kind of dreading it all a 0:00:46.000 --> 0:00:49.639 little bit, really, But I mean, aren't those fond memories 0:00:49.680 --> 0:00:52.440 as a financial journalist? You know? Two thousand seven, two 0:00:52.440 --> 0:00:55.600 thousand eight, those were the sort of glory years. People 0:00:55.600 --> 0:00:57.640 couldn't even keep up with the news flow. There was 0:00:57.680 --> 0:01:01.080 so much happening. No, I see, I'm excited about telling 0:01:01.120 --> 0:01:03.360 my stories. I just don't want to hear everyone else's. 0:01:03.480 --> 0:01:05.800 You know, I'm just very selfish. I just I love 0:01:05.920 --> 0:01:08.960 my memories. I just don't want to hear everyone else's stories. Well, 0:01:09.000 --> 0:01:13.440 I applaud your honesty, Joe. Yeah, that being said, despite 0:01:13.480 --> 0:01:15.119 the fact that you know, we're going to have all 0:01:15.120 --> 0:01:18.840 of these anniversaries coming up over the next couple of years, 0:01:19.200 --> 0:01:22.800 it has been obviously an extraordinary time, and I think 0:01:22.840 --> 0:01:25.840 all of us have learned a ton about how markets 0:01:25.880 --> 0:01:30.400 and economics work during this period. Yeah, you could definitely 0:01:30.400 --> 0:01:32.440 say that. I guess you could also argue it the 0:01:32.440 --> 0:01:35.440 other way and say that the financial crisis and the 0:01:35.520 --> 0:01:40.160 period after it were so um special or so unprecedented 0:01:40.200 --> 0:01:43.840 that we've all learned massively new things, right, like how 0:01:43.840 --> 0:01:49.280 many people were really experts on quee before two thousand nine? 0:01:49.320 --> 0:01:51.200 And I mean, I guess you could argue there aren't 0:01:51.320 --> 0:01:53.640 that many people who truly understand it now, But in 0:01:53.680 --> 0:01:56.080 any case, at least people know what it kind of is. 0:01:56.880 --> 0:01:59.920 Maybe we've just exposed how little we know. A frame 0:02:00.040 --> 0:02:02.120 me this way, because today we're going to be talking 0:02:02.480 --> 0:02:07.200 to a long time industry veteran, someone who worked for 0:02:07.240 --> 0:02:10.400 the I m F, who's involved in mutual funds, who's 0:02:10.440 --> 0:02:14.080 been a global macro trader for several years, uh, and 0:02:14.320 --> 0:02:17.880 someone who has uh you know, sort of catalogued all 0:02:17.919 --> 0:02:21.600 of the things that we should have learned since the crisis, 0:02:22.000 --> 0:02:24.760 and I think that his perspective and sort of what 0:02:24.840 --> 0:02:28.440 he's observed has sort of been an extremely offering some 0:02:28.520 --> 0:02:32.359 extremely important lessons from the last ten years. So, Joe, 0:02:32.400 --> 0:02:34.560 I think I know who you're talking about. And if 0:02:34.600 --> 0:02:37.320 it's who I think it is, I'm very excited. He's 0:02:37.400 --> 0:02:39.680 the guy who's very active on Twitter and he has 0:02:39.680 --> 0:02:42.840 a great blog as well, and we all read it. Yeah, 0:02:42.880 --> 0:02:46.040 we're going to be talking to Mark dow He. Anyone 0:02:46.120 --> 0:02:49.160 who's involved in finance Twitter has certainly seen him. He 0:02:49.200 --> 0:02:52.799 has this awesome blog called Behavioral Macro where he talks 0:02:52.840 --> 0:02:56.600 about big macro topics. He recently wrote a post about 0:02:56.680 --> 0:03:01.120 fifteen things that every investor should have learned from the 0:03:01.160 --> 0:03:03.880 financial crisis and it's aftermath, and we're going to be 0:03:03.919 --> 0:03:07.280 talking through a few of those things. That sounds great, 0:03:17.240 --> 0:03:20.080 Marked Out, thank you very much for joining us. Thanks 0:03:20.080 --> 0:03:23.200 for having me. Guys, before we get started, you know, 0:03:24.160 --> 0:03:27.440 many of us in media and finance Twitter have interacted 0:03:27.440 --> 0:03:29.520 with you for a long time, read your stuff, read 0:03:29.520 --> 0:03:33.040 your tweet, talked to you on TV or whatever. But 0:03:33.320 --> 0:03:35.840 for those of the people who don't know who you 0:03:35.840 --> 0:03:38.360 are yet, why don't you give us the very brief. 0:03:38.800 --> 0:03:43.720 The brief bio. Yeah, the thumbnail sketch is. I started 0:03:43.760 --> 0:03:46.200 my career at the Treasure Department as an international economist, 0:03:46.320 --> 0:03:50.440 working on financial disasters and emerging markets primarily. That's where 0:03:50.720 --> 0:03:53.040 they were then, UH. And then I moved to the 0:03:53.040 --> 0:03:55.480 International Monetary Fund, where I worked on a lot of 0:03:55.480 --> 0:03:59.080 different countries and the same kind of sustainability issues. After that, 0:03:59.160 --> 0:04:01.600 I managed money to mutual fund for a number of 0:04:01.680 --> 0:04:05.440 years fixed income, primarily emerging markets. And then I moved 0:04:05.480 --> 0:04:08.160 to a global macro hedge fund for about seven years 0:04:08.760 --> 0:04:11.840 UH and basically ran part of the book. You know. 0:04:11.880 --> 0:04:14.120 I had my own portfolio where I ran risk and 0:04:14.160 --> 0:04:17.960 all kinds of asset classes, primarily currency in emerging markets, 0:04:18.080 --> 0:04:21.160 interest rates, commodities, that that kind of thing. And now 0:04:21.240 --> 0:04:26.760 I run glorified private UH family office from from my 0:04:26.800 --> 0:04:30.920 hometown in California. What strikes me is important about your 0:04:30.960 --> 0:04:33.840 background before we get into the various lessons, is that 0:04:33.880 --> 0:04:37.040 you've seen the eco side and the trading side, and 0:04:37.120 --> 0:04:40.440 often the two sides can't really speak to each other 0:04:40.800 --> 0:04:42.960 very well. A lot of traders can be very good, 0:04:43.160 --> 0:04:46.880 but they don't really understand economics. A lot of economists 0:04:46.880 --> 0:04:49.200 have a deep understanding of how things work, but they 0:04:49.240 --> 0:04:52.320 have no idea how markets really work. As you describe 0:04:52.360 --> 0:04:56.240 your career, you've really seen and bridged the two worlds. 0:04:56.600 --> 0:05:00.000 This has been a massive advantage to me over my career. 0:05:00.080 --> 0:05:03.160 You see a lot of shops, particularly big ones, where 0:05:03.160 --> 0:05:07.719 there's a stark divide between thought leaders and risk takers, 0:05:08.400 --> 0:05:11.120 and not that many people speak both languages. So the 0:05:11.120 --> 0:05:14.360 thought leaders are great for framing things and providing frameworks 0:05:14.360 --> 0:05:19.240 and backdrop ways to analyze issues and to communicate with 0:05:19.320 --> 0:05:22.120 clients who want who want to understand the world better, 0:05:22.320 --> 0:05:25.719 but they often don't have that market savvy, that psychological 0:05:25.800 --> 0:05:30.360 dimension that makes a good risk taker. Uh, that defines 0:05:30.400 --> 0:05:34.240 a good risk taker. Speaking of framing ideas, you did 0:05:34.400 --> 0:05:37.480 pen this blog post about the fifteen things that investors 0:05:37.520 --> 0:05:41.440 should have learned after the Financial Crisis, and one of 0:05:41.480 --> 0:05:44.720 the ones that really struck me. Um, and these are 0:05:44.760 --> 0:05:47.000 all you know their number, they're in bullet points, they're 0:05:47.040 --> 0:05:49.120 relatively short, so we really want you to dig into 0:05:49.160 --> 0:05:51.520 them a bit more. But one of the ones was 0:05:51.560 --> 0:05:55.800 this idea that the interest rate sensitivity of economic activity 0:05:56.240 --> 0:06:00.760 is less than what was previously believed to be the case. 0:06:00.880 --> 0:06:03.320 And I want to tie that in with another one, 0:06:03.440 --> 0:06:07.080 which is the idea that, uh, the economic channel of 0:06:07.160 --> 0:06:11.360 monetary policy and the financial channel of monetary policy, uh 0:06:11.760 --> 0:06:15.960 kind of might be operating and existing separately. Can you 0:06:16.000 --> 0:06:18.159 walk us through those points for me? That might be 0:06:18.200 --> 0:06:21.599 the most important portion of the post really from a 0:06:21.640 --> 0:06:23.840 policy a policy standpoint. I wrote this because I was 0:06:23.839 --> 0:06:27.120 a little frustrated I had from given my background, I'd 0:06:27.160 --> 0:06:29.280 climbed into so many central banks all over the world, 0:06:29.320 --> 0:06:31.359 I had seen so many things, like you know, a 0:06:31.440 --> 0:06:33.200 doctor in the e R with a lot of experience 0:06:33.760 --> 0:06:35.960 that I was kind of a hit of the curve 0:06:36.000 --> 0:06:38.400 on a lot of a lot of these issues, just 0:06:38.440 --> 0:06:41.240 because you've seen financial crisis and money printing and all 0:06:41.279 --> 0:06:44.080 these things before. But when it came to the when 0:06:44.080 --> 0:06:46.000 it came to the US, a lot of people who 0:06:46.000 --> 0:06:52.200 were really deeply steeped in nineties economics had a very 0:06:52.240 --> 0:06:56.480 fixed view of of of money supply and interest rates 0:06:56.600 --> 0:07:01.120 and economic activity. And what we know really is what 0:07:01.760 --> 0:07:04.800 the element that was lacking was behavior. The models that 0:07:04.839 --> 0:07:07.320 were taught in the eighties and were perpetuated throughout really 0:07:07.400 --> 0:07:11.640 until the Great Financial Crisis was a very rational way 0:07:11.720 --> 0:07:14.200 of looking at it. A lower price for money means 0:07:14.240 --> 0:07:16.600 more borrowing, both in the fin in the in the 0:07:16.600 --> 0:07:19.880 financial sector and in the real economy, and higher rates 0:07:19.920 --> 0:07:22.520 means less. And if you just look at what happened 0:07:23.520 --> 0:07:25.560 before and after the crisis, you'll see that this doesn't 0:07:25.560 --> 0:07:27.320 really hold that. The other factors that are that are 0:07:27.360 --> 0:07:30.080 more important. You know, from two thousand and four to 0:07:30.160 --> 0:07:33.960 two thousand and seven or so, people were borrowing like crazy, 0:07:34.120 --> 0:07:37.320 and the said funds rate was around five. Everyone wanted 0:07:37.360 --> 0:07:40.240 to borrow, everyone wanted to lend, everybody was on the money. 0:07:40.280 --> 0:07:43.880 Supply was scoring rapidly because thanks were lending and people 0:07:43.880 --> 0:07:47.200 were borrowing. After the crisis, for a long period of time, 0:07:47.280 --> 0:07:51.440 rates were zero and nobody was lending. Nobody was borrowing. Uh. 0:07:51.440 --> 0:07:53.280 And this isn't just a US phenomenon. You see it 0:07:53.280 --> 0:07:56.080 around the world. So you have to ask yourself, you know, 0:07:56.120 --> 0:07:59.920 why is that and why aren't we more sensitive to interest? 0:08:00.040 --> 0:08:03.800 It's and the simple answers risk appetite. Uh, people were 0:08:04.800 --> 0:08:09.040 We're much more sensitive to our risk appetite whether we 0:08:09.240 --> 0:08:12.080 feel secure in our jobs than we are to the 0:08:12.080 --> 0:08:13.880 interest rate. If you're securing your job and you know 0:08:13.920 --> 0:08:15.840 you've got a good income for the next ten years, 0:08:16.200 --> 0:08:17.760 you're more likely to go out and buy that house 0:08:17.840 --> 0:08:20.960 even if the interest rate is five instead of three. Uh. 0:08:21.400 --> 0:08:23.360 That's just the way human nature works. So I think 0:08:23.880 --> 0:08:29.080 that's why people overstated the sensitivity of economic activity uh 0:08:29.240 --> 0:08:32.080 to to interest rates. UH. And if you factor that in, 0:08:32.120 --> 0:08:34.680 if you look more at people's risk appetite, then you'll 0:08:35.120 --> 0:08:38.439 you'll get a better picture of of what's going to happen, 0:08:38.679 --> 0:08:40.959 you know, to the transmission of monetary policy into the 0:08:41.040 --> 0:08:45.120 economy or into finance. Now, with respect to the two 0:08:45.120 --> 0:08:48.240 different channels, if you just think about it, uh, the 0:08:48.280 --> 0:08:51.520 financial channel happens fast. These are liquid positions that you 0:08:51.559 --> 0:08:55.160 can get out of, very sensitive often to the funding rate. Right, 0:08:55.240 --> 0:08:57.880 you can leverage something that yields three if you're if 0:08:57.880 --> 0:09:01.480 you're funding rate is one. Uh. So the financial channel 0:09:01.720 --> 0:09:06.200 tends to uh react quickly. Interest rates are quicker. On 0:09:06.240 --> 0:09:09.600 the economic side, you need a much higher higher level 0:09:09.640 --> 0:09:13.480 of risk appetite to build that factory or to set 0:09:13.559 --> 0:09:16.400 up a new shop or new branches because you're gonna 0:09:16.400 --> 0:09:18.200 be stuck with that investment for quite some time. It 0:09:18.240 --> 0:09:20.840 just requires a lot more confidence. So that can be 0:09:20.920 --> 0:09:24.760 even stickier. UM in response, so it's it's just it 0:09:24.840 --> 0:09:28.960 really maps back to a behavioral uh just uh, a 0:09:28.960 --> 0:09:32.240 behavioral phenomenon uh. And for a policymaker, it's super important 0:09:32.280 --> 0:09:34.600 because you can have points in time when the financial 0:09:34.640 --> 0:09:39.559 channel has responded sufficiently and even excessively, but the economic 0:09:39.640 --> 0:09:43.080 channel is still inching its way up the curve. And 0:09:43.080 --> 0:09:44.800 in fact, I would argue, now we're in that kind 0:09:44.800 --> 0:09:47.800 of situation where the financial channel has responded quite well, 0:09:48.160 --> 0:09:50.960 pretty fully. I wouldn't say it's gone crazy, but it's 0:09:51.000 --> 0:09:54.120 it's respond responded well, and the economic side is just 0:09:54.200 --> 0:09:56.120 you know, we're still not seeing robust investment, and we're 0:09:56.120 --> 0:09:58.360 still not seeing wages, and we're still not seeing people 0:09:58.400 --> 0:10:01.800 are still getting to that mind that where they want 0:10:01.840 --> 0:10:04.439 to take risk and propulse maker, what do you do 0:10:04.600 --> 0:10:08.600 when the financial channel is too far ahead of the 0:10:08.640 --> 0:10:14.040 economic channel. Now, it's my belief that the way recessions 0:10:14.080 --> 0:10:18.520 happen in the modern world is we get too optimistic 0:10:18.559 --> 0:10:21.480 in the financial channel, and we also get too optimistic 0:10:21.520 --> 0:10:23.400 in the economic channel, and at some point we have 0:10:23.440 --> 0:10:26.360 a financial disruption from kind of shock. It can be 0:10:26.400 --> 0:10:29.240 a small one, but it triggers a sell off in 0:10:29.320 --> 0:10:33.360 the financial markets, and that forces a retrenchment or a 0:10:33.400 --> 0:10:36.920 rethink of people in the real economy about how extended 0:10:36.960 --> 0:10:40.160 they are with respect to risk, and they start laying 0:10:40.200 --> 0:10:43.440 people off and cutting back on investment, which has a 0:10:43.600 --> 0:10:46.439 multiplier effect throughout the economy, leading to more layoffs and 0:10:46.520 --> 0:10:49.280 more cutbacks and investment, and you get a real recession. 0:10:49.880 --> 0:10:53.720 But you really, if you don't have the real economy extended, 0:10:53.760 --> 0:10:57.520 the real that that channel very optimistic if you need 0:10:57.559 --> 0:11:02.880 a much bigger financial impulse to push the economy into recession. 0:11:02.880 --> 0:11:04.280 And I think that's where we are right now. And 0:11:04.280 --> 0:11:07.440 this is why my view all along has been as 0:11:07.480 --> 0:11:10.480 long as I've been on Twitter long the We're gonna 0:11:10.480 --> 0:11:14.040 have the longest and slowest expansion you know, uh shallow 0:11:14.080 --> 0:11:17.200 and slow Uh that that that we've ever seen. Because 0:11:17.679 --> 0:11:19.280 people are still looking in the mirror, even on the 0:11:19.320 --> 0:11:22.520 financial channel. I would argue, when we get excited, uh, 0:11:22.800 --> 0:11:25.199 we we kind of check ourselves and say, no, no, no, 0:11:25.280 --> 0:11:26.880 this is a bubble. I mean, we hear people talking 0:11:26.880 --> 0:11:29.240 about bubbles all the time. We're afraid of getting caught out. 0:11:29.600 --> 0:11:31.760 When I talk to guys right now, big investors, the 0:11:31.800 --> 0:11:35.440 word you hear is caution, Something's gonna happen. We don't 0:11:35.440 --> 0:11:37.439 know what this is long in the two those kinds 0:11:37.440 --> 0:11:39.000 of things, and it's funny after and that's through the 0:11:39.000 --> 0:11:41.680 financial channel, which is the one that's more sensitive uh 0:11:41.720 --> 0:11:44.840 to uh to the stimulative policies that we've had for 0:11:44.840 --> 0:11:46.720 for for so long. So that tells me that the 0:11:46.760 --> 0:11:49.480 economic channel is just not there and it's gonna it 0:11:49.559 --> 0:11:53.880 would take a much bigger financial shock other things equal 0:11:54.000 --> 0:11:56.000 to push us into recessions. So the odds of recession 0:11:56.000 --> 0:11:59.440 are still uh in my mind's I'm very very low, 0:11:59.480 --> 0:12:02.960 even though don't expect robust girls. So for a policymaker, 0:12:02.960 --> 0:12:06.200 it's these two different channels. Is something people haven't dealt 0:12:06.240 --> 0:12:09.000 with because the FED in particular and most and most 0:12:09.040 --> 0:12:13.120 central banks more broadly, their mandate is key to the 0:12:13.160 --> 0:12:16.840 economic channel, and the FED only only over the past 0:12:16.840 --> 0:12:18.760 ten years have started to really think about how the 0:12:18.760 --> 0:12:21.720 financial channel feeds back into monetary policy and in their 0:12:21.720 --> 0:12:25.080 formal modeling, Mark, I feel like that answer explained so 0:12:25.160 --> 0:12:28.400 much about what we've seen in the you know, obviously 0:12:28.400 --> 0:12:30.319 that's the whole point of this in terms of lessons, 0:12:30.360 --> 0:12:32.319 but you know, you said, this is a really big one, 0:12:32.720 --> 0:12:35.600 and you know, just all this stuff about oh, we're 0:12:35.640 --> 0:12:38.800 in a bubble, or all these macro hedge fund managers 0:12:38.880 --> 0:12:42.679 who think that the FED has behaved irresponsibly by keeping 0:12:42.720 --> 0:12:45.440 interest rates low and are you know, causing all kinds 0:12:45.440 --> 0:12:47.920 of distortions. I feel like if they had all listened 0:12:48.000 --> 0:12:51.959 to that answer, you know, several years ago. Unfortunately it's 0:12:52.080 --> 0:12:55.200 too late for them now in seventeen, a lot of 0:12:55.280 --> 0:13:00.280 mistakes would have been avoided on this theme of the 0:13:00.280 --> 0:13:03.920 gap between the financial channel and the real channel. Another 0:13:04.000 --> 0:13:07.760 one of your lessons is commodity markets, and you point 0:13:07.760 --> 0:13:11.240 out that they're driven first by speculation and that that 0:13:11.320 --> 0:13:15.800 overwhelms fundamentals. What's the lesson there? Two different things. One 0:13:16.160 --> 0:13:18.600 is just the market market structure, So the story of 0:13:18.640 --> 0:13:23.560 commodities was in right around them. They would electronic so 0:13:23.760 --> 0:13:25.600 you didn't have to be in the pits and know 0:13:25.720 --> 0:13:28.360 all the secret handshakes uh to trade them. You could 0:13:28.360 --> 0:13:31.800 trade them electronically from your office UH and then now 0:13:31.880 --> 0:13:36.520 from from from home UH. And that allowed people to 0:13:36.520 --> 0:13:39.320 to get involved in a way they hadn't been easily 0:13:39.360 --> 0:13:42.199 able to before. UM. And then around two three, two 0:13:42.520 --> 0:13:43.960 and four there were there were a lot of there 0:13:44.000 --> 0:13:46.959 were academics talking about diversified the divers supplying properties of 0:13:47.160 --> 0:13:50.000 owning commodities as an asset class, and that gained a 0:13:50.040 --> 0:13:52.719 lot of traction. At the same time, you had the 0:13:52.800 --> 0:13:55.640 emerging markets plugging into the grid. China joined the w 0:13:55.800 --> 0:13:59.319 t O and that whole emerging markets theme, you know, 0:13:59.360 --> 0:14:02.000 the paradigm is changed, were starting to take off, and 0:14:02.320 --> 0:14:05.559 people associated that with commodities. So we we moved into 0:14:05.600 --> 0:14:07.320 a world where you know, China was going to take 0:14:07.360 --> 0:14:10.199 over that We're gonna eat all our commodities, uh and 0:14:10.679 --> 0:14:13.880 mL dousing way and uh, therefore you had to own it. 0:14:13.920 --> 0:14:17.480 So as consultants were peddling the story about diversifying through 0:14:17.559 --> 0:14:21.280 commodities as an asset class, commodities were going up. And 0:14:21.320 --> 0:14:25.600 when guys are pitched a story about an asset class 0:14:25.640 --> 0:14:28.240 that's going up rapidly, it makes them want to get 0:14:28.240 --> 0:14:31.000 more involved faster. So we we kind of had this 0:14:31.480 --> 0:14:35.320 boom in investment speculation whatever you want to call it, 0:14:35.760 --> 0:14:38.520 in in commodities from two thousand and three until really 0:14:38.600 --> 0:14:41.000 until two thousand and you could argue two thousand and eleven, 0:14:41.520 --> 0:14:45.000 um and Mark, I want to interrupt you real quickly. 0:14:45.160 --> 0:14:47.560 We're gonna do something. I want to do something really special. 0:14:47.680 --> 0:14:52.320 So for listeners, we are recording this episode on August 0:14:52.480 --> 0:14:58.240 four in the morning. It's am on a Friday. That 0:14:58.280 --> 0:15:03.240 means we're about, let's just under four minutes away from 0:15:03.440 --> 0:15:06.200 the monthly non farm payrolls report, which is of course 0:15:06.560 --> 0:15:09.800 the most important economic data point of the month. So 0:15:09.800 --> 0:15:12.200 we're gonna do something a little different. We're gonna take 0:15:12.200 --> 0:15:15.440 a little interlude from the podcast. Will return to the 0:15:15.520 --> 0:15:19.120 lessons in a moment, but we are going to talk 0:15:19.480 --> 0:15:22.280 through the jobs report as it comes out, because I 0:15:22.280 --> 0:15:25.160 think this is very exciting, the chance to be talking 0:15:25.200 --> 0:15:30.120 to a sort of experienced macro trader about a report 0:15:30.360 --> 0:15:33.400 as it's coming out. It's coming out in um just 0:15:33.560 --> 0:15:36.840 over three minutes now, and so we'll look at the data, 0:15:36.960 --> 0:15:39.120 we'll talk about it, we'll talk about the market reaction. 0:15:39.240 --> 0:15:42.400 People will get this snapshot of how you see things, 0:15:42.440 --> 0:15:44.720 how you interpret the data, and then of course we 0:15:44.840 --> 0:15:48.040 can come back to it. But ahead of the data, 0:15:48.080 --> 0:15:50.120 we just about a little less than three minutes. You 0:15:50.160 --> 0:15:52.760 have any sort of early thoughts about the data, I 0:15:52.800 --> 0:15:57.280 should just note the economists are looking for k jobs 0:15:57.360 --> 0:16:00.360 for July, the unemployment rates to fall to four point 0:16:00.360 --> 0:16:04.080 three percent, and two point four percent wage growth. What 0:16:04.120 --> 0:16:06.760 are you looking at in the minutes ahead of the release. Well, 0:16:07.200 --> 0:16:08.840 the way I tend to approach these things is I 0:16:08.880 --> 0:16:10.880 look at where the areas in which the market is 0:16:10.920 --> 0:16:14.280 heavily positioned, what are the trends that have been working uh, 0:16:14.280 --> 0:16:17.480 and what kind of data would would be required to 0:16:17.960 --> 0:16:21.600 trigger either a shakeout or reversal of these Of the 0:16:21.680 --> 0:16:24.040 of the recent trends, and the biggest recent trend has 0:16:24.160 --> 0:16:28.000 has been short dollar, both against the funding currencies like 0:16:28.040 --> 0:16:31.800 the euro and the pound UH and swissy UH, and 0:16:31.960 --> 0:16:35.520 against the risk currencies for emerging markets have done quite well. 0:16:35.800 --> 0:16:38.960 The answer antipodeans in New Zealand and the Key. We 0:16:39.000 --> 0:16:41.400 are always somewhere in the middle between those two the 0:16:41.480 --> 0:16:44.960 two camps. But because dollar has been on a on 0:16:45.000 --> 0:16:46.520 a run in in a negative way, I'm going to 0:16:46.600 --> 0:16:49.240 call it that. It wouldn't take much one data, one 0:16:49.280 --> 0:16:53.520 strong number could could trigger a shakeout that could last 0:16:53.560 --> 0:16:55.480 a day or two or three or a week or whatever. 0:16:55.520 --> 0:16:57.280 I still think the longer term trends for the dollar 0:16:57.720 --> 0:17:00.600 is down because we're in that phase of the cycle. 0:17:01.000 --> 0:17:04.879 You know, the US has recovered, valuations are fairly full. 0:17:05.200 --> 0:17:07.480 Let's move further out the risk of the spectrum to 0:17:07.520 --> 0:17:10.400 places that haven't been fully fished out, and that's where 0:17:10.400 --> 0:17:13.800 people that's why people have gravitated to emerging markets in Europe. Tracy, 0:17:13.880 --> 0:17:15.840 are you excited about the number we're about to get 0:17:15.840 --> 0:17:18.720 in less than sixty seconds? I'm very curious to hear 0:17:19.280 --> 0:17:22.520 Mark's sort of play by play, a minute by minute analysis. 0:17:22.600 --> 0:17:25.360 Mark really really quickly, because it's less than a minute. Now, 0:17:25.600 --> 0:17:29.119 would you try to trade around the immediate jobs report 0:17:29.240 --> 0:17:31.399 or do you just try to, you know, think about 0:17:31.440 --> 0:17:34.359 the implications for your portfolio. It depends on what I'm 0:17:34.400 --> 0:17:36.359 what I'm thinking. If there's a situation where the position 0:17:36.480 --> 0:17:38.960 is really offside and I don't think it would take 0:17:39.040 --> 0:17:42.320 much to trigger a reversal, I might drive something. Often. 0:17:42.359 --> 0:17:45.440 I like to see the market react before jumping in 0:17:45.640 --> 0:17:47.800 if it's a trade. I also do investments, which is 0:17:47.800 --> 0:17:50.680 a different different story, but from the trading side, I can. 0:17:50.840 --> 0:17:53.040 I can be active right now. I have some short 0:17:53.040 --> 0:17:55.440 dollar positions. I've paired back a little bit to get 0:17:55.440 --> 0:17:56.960 my size and right make sure I don't get hurt. 0:17:56.960 --> 0:17:59.400 I've had a nice run. Here we go, numbers out, 0:18:00.000 --> 0:18:03.879 O Wow, two hundred nine K jobs so that's a 0:18:03.920 --> 0:18:07.840 beat versus eighty k last month. Last month revised up 0:18:07.840 --> 0:18:10.119 from two twenty two to to thirty one case of 0:18:10.240 --> 0:18:13.879 very nice. Unemployment rate falls to four point three percent 0:18:14.040 --> 0:18:17.520 from four point four percent. That's in line with expectations. 0:18:17.600 --> 0:18:22.400 And UH average really earnings growth at two point five percent, 0:18:22.880 --> 0:18:25.159 that's a little bit ahead of the expectations of two 0:18:25.200 --> 0:18:28.640 point four percent. And the labor force participation rate, which 0:18:28.680 --> 0:18:30.359 is many people would argue has been one of the 0:18:30.720 --> 0:18:34.320 weak spots of concerning long term trend up to sixty 0:18:34.320 --> 0:18:36.959 two point nine percent. We are seeing rates pick up, 0:18:37.000 --> 0:18:40.120 tenure yield a little bit higher, not dramatically, from two 0:18:40.119 --> 0:18:42.760 point to three to two point to five percent. Mark 0:18:42.800 --> 0:18:44.720 give us your take. So I take is this is 0:18:44.720 --> 0:18:47.520 that kind of shakeout the bondswork position and short dollars 0:18:47.520 --> 0:18:49.480 were position, so now we get we get a test 0:18:49.480 --> 0:18:51.840 of that shakeout. These aren't massively strong numbers, but they're 0:18:51.880 --> 0:18:54.440 definitely stronger than what people were looking for. I think 0:18:54.440 --> 0:18:57.600 what will stand out at average hourly earnings that that's up. 0:18:57.640 --> 0:19:01.800 People have been very sensitive to labor labor inflation here, um, 0:19:02.000 --> 0:19:06.120 so all the all everything is skewed towards stronger than expected, 0:19:06.160 --> 0:19:08.840 but not massively. So so this is a decent test 0:19:09.440 --> 0:19:12.680 for the short dollar thesis and for the long bond thesis. 0:19:13.800 --> 0:19:15.000 What I would do in a case and what I 0:19:15.000 --> 0:19:16.359 will do in a case like this, I just stand 0:19:16.359 --> 0:19:18.560 back and let it play out. And if I want 0:19:18.600 --> 0:19:20.920 to add to my positions, I wait until I think 0:19:21.080 --> 0:19:24.600 that this shakeout is over. But it's really the thing 0:19:24.640 --> 0:19:26.680 you have to feel your way through. You never know. 0:19:26.960 --> 0:19:29.960 I mean, this is a behavioral animal, this market, and 0:19:30.000 --> 0:19:32.480 you have to stand back and and and watch it 0:19:32.520 --> 0:19:34.639 and see how it plays out, and look for correlations 0:19:34.680 --> 0:19:38.800 breaking down, and look for weakness and in volume and 0:19:38.920 --> 0:19:41.760 other signs that the story is getting tired before trying 0:19:41.760 --> 0:19:43.960 to take it on. So, Mark, I think you mentioned 0:19:43.960 --> 0:19:46.560 that you had some short dollar positions. Would this be 0:19:46.680 --> 0:19:50.080 enough for you to reconsider those No, particularly in the 0:19:50.080 --> 0:19:53.080 emerging markets, where my positions are more important. Because even 0:19:53.080 --> 0:19:56.240 though this is so, I mentioned earlier the distinction between 0:19:56.320 --> 0:19:59.720 risk currencies and and and funding currencies. This is bad 0:19:59.760 --> 0:20:02.560 for the funding currencies, but not necessarily bad for the 0:20:02.600 --> 0:20:06.960 emerging markets because strong U S data, uh, it's good 0:20:06.960 --> 0:20:09.400 for risk in a certain sence. You see, equity markets 0:20:09.440 --> 0:20:13.080 aren't down right so the risky currencies trade off of 0:20:13.160 --> 0:20:15.439 risk and the trade off of bonds, whereas the funding 0:20:15.440 --> 0:20:18.840 currencies trade mostly off of bonds. And to your point 0:20:19.000 --> 0:20:23.119 about you know, sort of US equities, we mentioned that 0:20:23.160 --> 0:20:25.639 all the dollar is up, rates were up, but we 0:20:25.680 --> 0:20:29.919 haven't seen a sell off in US futures at this moment. 0:20:29.960 --> 0:20:34.720 We still see risk assets rising up, not not much out. 0:20:34.840 --> 0:20:36.959 So you know the which if you were to take 0:20:36.960 --> 0:20:38.760 a maquar ree from all of this, you would say, Okay, 0:20:38.840 --> 0:20:40.480 people say the numbers a little bit stronger, but it's 0:20:40.480 --> 0:20:42.320 not going to change the FEDS terminal rate which has 0:20:42.320 --> 0:20:44.720 been coming down. Right, It's not going to make rate 0:20:44.760 --> 0:20:47.919 hikes come that much sooner necessarily, but it might not 0:20:47.960 --> 0:20:50.840 be dubbish forever the way people have been had been 0:20:50.840 --> 0:20:54.360 pricing in. So it's a modestly strong number that we'll 0:20:54.359 --> 0:20:56.720 shake some people out of their funding currency shorts. I 0:20:56.720 --> 0:21:00.400 would suspect the Japanese en um is a on one. 0:21:00.800 --> 0:21:03.800 Euro is another that's had a nice run, But I 0:21:03.840 --> 0:21:06.320 don't think it's going to hit the emerging markets that hard. 0:21:07.000 --> 0:21:09.760 One of the fears in emergency markets emerging markets has 0:21:09.840 --> 0:21:12.680 been that, you know, the FED will have to raise rates, 0:21:12.680 --> 0:21:14.680 and we know when raising when they when they raise rates, 0:21:14.680 --> 0:21:17.120 it hurts emerging markets. I think that's a backwards looking view. 0:21:17.600 --> 0:21:19.600 In fact, one of the points and in the blog 0:21:19.720 --> 0:21:23.200 was emerging markets are structurally UH different. Now. I don't 0:21:23.240 --> 0:21:25.200 think that the Fed's gonna raise rates all that much, 0:21:25.200 --> 0:21:27.320 first of all, but more importantly, even if they did, 0:21:27.640 --> 0:21:30.040