Speaker 1: Hello, and welcome to What Goes Up, a Bloomberg weekly
Speaker 1: market podcast. I'm Sara Pottek, a reporter on the Cross
Speaker 1: Asset team, and I'm Mike Reagan, a senior editor on
Speaker 1: the Markets Team. This week on the show, monetary and
Speaker 1: fiscal policy measures have been described as unprecedented over and
Speaker 1: over again. The Federal Reserve met this week and reiterated
Speaker 1: it is quote committed to using its full range of
Speaker 1: tools to support the U. S economy, and over in Washington,
Speaker 1: d C. The deficit is ballooning. Is the government works
Speaker 1: to get cash to companies in need, But what are
Speaker 1: the long term ramifications? And should we care? I care, Sarah,
Speaker 1: I know I care, but yeah I do. And we've
Speaker 1: got a great guest who will give us some some
Speaker 1: insight on all these topics. But Sarah, before I introduce them,
Speaker 1: I need an update on your quarantine. Such way down
Speaker 1: there in Florida, how's it, Cohen? Are you? Uh? You?
Speaker 1: You live in large? Live in large? I must say,
Speaker 1: as as large as you can be. I mean, at
Speaker 1: least now I'm able to go out on my patio.
Speaker 1: I can go on walks in the neighborhood. Of course,
Speaker 1: staying six ft from other people. But but Florida's opening
Speaker 1: up pretty soon. Um, not the county that I am in,
Speaker 1: but starting on Monday, the majority of counties across the
Speaker 1: state are going to be working on reopening. So it
Speaker 1: should be pretty interesting. And I have heard from a
Speaker 1: couple of people who have been out and about on
Speaker 1: the streets more than I have that they're actually pretty crowded.
Speaker 1: So so life life continues down here in Florida already. Well.
Speaker 1: And they let your dad back in the house. Yes,
Speaker 1: my my dad. For all of those of you who
Speaker 1: are are concerned and very caring, my dad is now
Speaker 1: back in the house. Thankfully. He no longer is exiled,
Speaker 1: so he's very happy about that. We we had a
Speaker 1: nice celebration when he was welcome back. That's good, you know.
Speaker 1: I always like to get the dad perspective on this show.
Speaker 1: A lot of dad's out there listening. But let's we
Speaker 1: all care about the dad. Let's bring in our guest
Speaker 1: first time on the show. Very excited to have him.
Speaker 1: His name is Zach Griffith's. He's a macro strategist at
Speaker 1: Wells Fargo's Security. Zack, welcome to the show. Thanks for
Speaker 1: having me so Zach you might have heard, but we
Speaker 1: we have a tradition on the show where at the
Speaker 1: end of the show we talk about what we call
Speaker 1: the craziest things we saw in markets this week, and
Speaker 1: we usually leave it towards the end um because it's
Speaker 1: kind of a fun, lighthearted thing. It's like having to
Speaker 1: desert at the end of a nice healthy meal. You
Speaker 1: got to have those vegetables first. But the craziest thing
Speaker 1: I saw this week is kind of right in your wheelhouse.
Speaker 1: I'm gonna jump the gun. I'm gonna serve the cake
Speaker 1: his appetizer here and ask you what you think about
Speaker 1: this story I came out on Thursday, uh Washington Post
Speaker 1: story saying US officials are crafting retaliatory measures against China
Speaker 1: over the coronavirus. Uh. You know. The notion is that
Speaker 1: the White House thinks that China is to blame for
Speaker 1: the virus um. So they're they're talking a bunch of
Speaker 1: different measures, possibly uh, eliminating the sovereign immunity that countries
Speaker 1: enjoying the court system to allow people to sue China
Speaker 1: for damages. But the thing that really I think caught
Speaker 1: my eye. It caused a little bit of buzz on
Speaker 1: Thursdays this one line in the story. Some administration officials
Speaker 1: have also discussed having the U s cancel part of
Speaker 1: its debt obligations to China. Two people with knowledge of
Speaker 1: internal this conversation said it was not known if the
Speaker 1: President back the idea. Now, obviously the news flow out
Speaker 1: of this administration is unique in that you get this
Speaker 1: stuff floated like this, that they're considering or thinking about,
Speaker 1: and then it's promptly denied. Larry Cudlow was out almost
Speaker 1: instantly denying this. But boy, I just wonder, you know,
Speaker 1: as a macro strategist, you know, especially a guy with
Speaker 1: a rates background like yours, this must even the talk
Speaker 1: of something like this must make the blood pressure go up. Um.
Speaker 1: I think this was widely The reaction I saw from
Speaker 1: everyone was that this is nuts. There's no way they
Speaker 1: could do this. Um. But I gotta I gotta get
Speaker 1: your take on it. Is this something that we should
Speaker 1: really be worried about or is it just, you know,
Speaker 1: just sound like a bunch of rumor mongering going on.
Speaker 1: I don't think this is something we should be worried about.
Speaker 1: And when you think about the US debt, I don't
Speaker 1: think the Treasury or the White House is gonna want
Speaker 1: to do anything to call into question whether or not
Speaker 1: the US government is going to pay interest on its
Speaker 1: debt or principle on its debt. The long term ramifications
Speaker 1: of something like that are just it's not a path
Speaker 1: they want to go down. And I think that it's
Speaker 1: definitely crazy time. So you're getting a lot of news flow,
Speaker 1: and you know, you say craziest things in markets this week.
Speaker 1: It's hard to find something it's been happening that hasn't
Speaker 1: happened recently or is more severe than something that's happened recently.
Speaker 1: So I think it's it's definitely an interesting time, but
Speaker 1: I don't I don't give too much credence to that.
Speaker 1: I think the long termament ramifications would be too detrimental
Speaker 1: to really consider. Two things I have to say about that. One,
Speaker 1: it's it's kind of like this was the pre dinner drink, Mike,
Speaker 1: and then we'll get into the vegetables, then we'll get
Speaker 1: to the dessert. But but I also have to say,
Speaker 1: I think that question may have been longer than the
Speaker 1: question that you asked last week on the show, which
Speaker 1: one of our listeners did call you out. Let's all
Speaker 1: stop timing my questions here. I know they're long. You know,
Speaker 1: it's like on the soap opera where all and friends.
Speaker 1: Remember they said, you you put your hands over the
Speaker 1: face of the person you're kissing, so you get all
Speaker 1: the screen time. That's kind of my my idea with questions.
Speaker 1: But uh, you know, you gotta you gotta give him,
Speaker 1: you gotta give him some meaty questions, Sarah, so they know, Uh,
Speaker 1: let's hear you're a very short question for Zach, then, Sarah,
Speaker 1: I don't know, Well, won't be that short of it,
Speaker 1: but it only shorter than yours. I can guarantee that.
Speaker 1: But I mean, speaking speaking of debt, uh, And this
Speaker 1: past week, you guys had a note titled Bill's Barrage continues,
Speaker 1: and you revised upwards to the upside what you think
Speaker 1: the deficit is going to amount to? Uh? And you
Speaker 1: raise it to three point two trillion from two point
Speaker 1: four trillion. Now, one line that I loved though within
Speaker 1: the research report was you said, in total, we expect
Speaker 1: Treasury to issue a net one point nine trillion. This
Speaker 1: is not a misprint because everything is just so crazy
Speaker 1: right now. But I mean, seriously, you think about the
Speaker 1: amount of debt being issued right now, you think about
Speaker 1: the amount of money being pumped into the system right now,
Speaker 1: I mean, can can we continue to see this amount
Speaker 1: of money uh and this amount of debt being uh
Speaker 1: digested by the market in a smooth way? Yeah, that's
Speaker 1: a great question, and it's that we've been contemplating. And
Speaker 1: when you're talking about one point nine trillion of issuance
Speaker 1: of any type of security in a single quarter, you
Speaker 1: have to ask is there a market for it? And
Speaker 1: when we think about what's happened recently in T bill issuance,
Speaker 1: which has already been north of a trillion over the
Speaker 1: past month alone, we look at where the demand comes from.
Speaker 1: And if you look at inflows into government only money
Speaker 1: market funds over roughly the past eight weeks, inflows into
Speaker 1: those types of funds that do a lot of investing
Speaker 1: in TE bills, primarily te bills, it's been over a
Speaker 1: trillion as well. So the demand is there, fortunately for Treasury,
Speaker 1: who needs to raise these funds extremely quickly for these
Speaker 1: emergency lending programs, whether it be for unemployment insurance claims
Speaker 1: or just to cut checks to certain Americans for a
Speaker 1: certain amount. That is a deficit that needs to be
Speaker 1: raised quickly, because that's money that actually goes out the
Speaker 1: door in a very short time frame. When we think
Speaker 1: about budget deficits historically you think about spending over the
Speaker 1: next year. So they may do a trillion in spending,
Speaker 1: but that's over a year, and you have time to
Speaker 1: raise money for that. You have tax payments coming in
Speaker 1: which those have been delayed to July, so really the
Speaker 1: it's been remarkable how much they've had to raise, but
Speaker 1: up to this point it does seem like there has
Speaker 1: been a market for it. And going forward, we think
Speaker 1: as some risk appetite comes back into the market. You
Speaker 1: see credit spreads have fallen, equities have risen, people are
Speaker 1: getting a little bit more comfortable and a little bit
Speaker 1: more optimistic with some states reopening and maybe some promising
Speaker 1: drug tests. I don't pretend to have much knowledge or
Speaker 1: insight into how some of those things are progressing, but
Speaker 1: you're starting to see some of that optimism. And as
Speaker 1: people move into somewhat risk your assets, whether it even
Speaker 1: be just prime money market funds instead of government money
Speaker 1: market funds, we think that backstop of demand is going
Speaker 1: to come off a bit, and that's when the FED
Speaker 1: is going to need to come in and start shifting
Speaker 1: its asset purchases, which has been ratcheting down quite a bit.
Speaker 1: We think it will have to evolve treasury bills pretty soon,
Speaker 1: as that backstop the man kind of falls off at
Speaker 1: least a bit. Well, Zack, I'm glad you don't pretend
Speaker 1: to be an expert on the pharmaceutical end. I don't
Speaker 1: know how many epidemiologist experts have suddenly appeared out of
Speaker 1: the blue to mansplain this all to us. But um,
Speaker 1: you know, as you mentioned this, this insane amount of
Speaker 1: supply coming and the possibility that risk appetites re emerge
Speaker 1: at the same time, you know, the FED seems to
Speaker 1: be willing to basically write a blank check to the
Speaker 1: treasury market. Do you have a sense of of how
Speaker 1: that will all play out? How aggressively would they allow
Speaker 1: yields to rise? I mean, will they be trying to
Speaker 1: actually keep a lid on rates in your opinion, or
Speaker 1: more just as they described it, to keep the treasury
Speaker 1: liquidity uh functioning as it should be given this huge supply.
Speaker 1: I mean, um, because it's a you know, in a
Speaker 1: normal world, you would think this much supply would just
Speaker 1: automatically be bearish for rates um, But how do you
Speaker 1: see the Fed's role evolving as sort of the economy
Speaker 1: recovers in that risk appetite UH resumes. We think the
Speaker 1: FED is going to have to continue tapering the amount
Speaker 1: of its asset purchases. As you mentioned, We really do
Speaker 1: believe that the whole point, or at least the majority
Speaker 1: of the point this time around versus when they were
Speaker 1: doing large scale asset purchases after the global financial crisis,
Speaker 1: is restoring liquidity to the market, and they're not necessarily
Speaker 1: focusing on keeping long term yield suppressed as they were
Speaker 1: in Operation Twist, where what they were trying to do
Speaker 1: is really spur economic growth. Economic growth is essentially not
Speaker 1: possible right now. They're not looking to really jump start
Speaker 1: the economy, but build a bridge from here to the
Speaker 1: other side of when some of these virus concerns have
Speaker 1: really started to pull back, economies start to reopen. So
Speaker 1: we do think that they continue to taper their asset purchases.
Speaker 1: We think they include bills as they digest some of
Speaker 1: the supply. And the other thing that I would point
Speaker 1: out is it's not necessarily even that they need to
Speaker 1: take down this supply of T bills. We haven't seen
Speaker 1: significant signs of any market indigestion and T bills. But
Speaker 1: if you think about what their longer term plans for
Speaker 1: asset purchases are, it's to be done across treasuries proportional
Speaker 1: to what's outstanding. They haven't been doing any bills over
Speaker 1: the past month and a half, so just adding those
Speaker 1: into the mix is simply getting back to what they
Speaker 1: see as their longer term framework. And so do you
Speaker 1: see no sort of effort to control the yield curve
Speaker 1: at all going forward? Or yeah, So that's been something
Speaker 1: that's been talked about quite a bit, and from our perspective,
Speaker 1: that's not necessary and not something that the FED is
Speaker 1: looking at immediately. And you heard no mention of it
Speaker 1: Wednesday at Chairman Paul's press conference, whether it be in
Speaker 1: his prepared remarks or or I was very surprised to
Speaker 1: not hear it in the question and answer sessions. So
Speaker 1: I don't think it's something they would completely rule out,
Speaker 1: but I also don't think it's something that they're looking
Speaker 1: at and really focusing on right now. When you think
Speaker 1: about a tenure treasury yield at sixty basis points. That
Speaker 1: doesn't feel like a rate that needs to have explicit
Speaker 1: yield curve control. And I suppose you could see some
Speaker 1: type of implicit yield curve control as we go forward
Speaker 1: if rates were to really back up in what they
Speaker 1: see as an unhealthy manner, and I think that would
Speaker 1: almost be more representation of poor liquidity like we saw
Speaker 1: at the end of March, than some other issue getting
Speaker 1: out of control. And so I think what they could
Speaker 1: do in that instance is shift their purchases to the
Speaker 1: longer end of the curve without explicitly saying we are
Speaker 1: targeting zero point five on the tenure yield. I don't
Speaker 1: think that's a path that they want to go down,
Speaker 1: because when we think about the longer term implications of
Speaker 1: putting in place yield curve control, we think that probably
Speaker 1: reduces market liquidity, and you don't have of a quote
Speaker 1: unquote free market. I really don't think that's a path
Speaker 1: that the FED is looking to go down at this point,
Speaker 1: and you'd have to really see some serious issues in
Speaker 1: addition to what we've seen so far for that to
Speaker 1: come into play. So no mention of yield curve control,
Speaker 1: but essentially a few things that Powell did say was
Speaker 1: that he's not worried about risk assets right now the
Speaker 1: price of risk assets also not really to worry about
Speaker 1: inflation at this point in time. Seeing where we stand now, though,
Speaker 1: does it seem like the FED is almost stuck? They
Speaker 1: have to continue to say they're going to do whatever
Speaker 1: it takes. I mean, are we ever going to get
Speaker 1: to the point where we can actually see a tape
Speaker 1: erring of their balance sheet? Because we know they tried
Speaker 1: and they weren't able to do it. I mean, but
Speaker 1: we ever get to a point where that day actually
Speaker 1: comes and we don't see a freak out. I think
Speaker 1: we will get to that point, but I agree it's
Speaker 1: probably a long ways away still, and there really is
Speaker 1: no upside for a FED to start trying to get
Speaker 1: ahead of itself. There's still plenty of economic damage that's
Speaker 1: going to happen. And at least from seeing what the
Speaker 1: actual numbers are, our economics team is expecting a decline
Speaker 1: in GDP in the second quarter. I think that's probably
Speaker 1: somewhere in the middle of the range of estimates. You've
Speaker 1: seen some really remarkable numbers, and when you get into
Speaker 1: these annualized numbers, if you think more happens in a
Speaker 1: shorter time frame, you get a larger decline on an
Speaker 1: annualized basis in a single quarter. But I think at
Speaker 1: this point the FED has made it clear that they're
Speaker 1: going to do whatever they need to do. They're going
Speaker 1: to continue to signal that for as long as they can,
Speaker 1: or as long as they need to, I should say,
Speaker 1: And that's the right move right now. And I don't
Speaker 1: think they're really going to get pushed back from anyone
Speaker 1: regarding how accommodative there being just because of how much
Speaker 1: the economy has contracted, how much activity in all ways
Speaker 1: types shapes has shut down, and it's really an unprecedented
Speaker 1: issue to deal with and they're dealing with it with
Speaker 1: unprecedented actions, and we think that's the right way to
Speaker 1: go about it. And it's been an impressive They've been
Speaker 1: impressively quick and proactive, and Chairman Paul reiterated that they
Speaker 1: will continue to do to be that way going forward,
Speaker 1: and we think that's the right approach. So that question
Speaker 1: was nice and long. You're learning, you're learning here and
Speaker 1: learning learning from the best night. I also loved that
Speaker 1: the FED press conference was over zoom. That was pretty interesting.
Speaker 1: I was I kept expecting like a Zoom bomber to
Speaker 1: show up, you know, like Mario dragging or something to
Speaker 1: to show up and crash the party. You would you
Speaker 1: would think that someone would leak the Mario Dragon or
Speaker 1: someone like that, just leak them the code, lead them
Speaker 1: the Zoom meeting. We don't love it. So, Zack, what
Speaker 1: do you think about that notion of negative rates? I mean,
Speaker 1: did we get a pretty good indication this week that
Speaker 1: that is not something that's really on the table at
Speaker 1: the FED? Or or is it never say never type
Speaker 1: of situation? Well? I do think it's a never say
Speaker 1: never type of situation. But one thing the FED has
Speaker 1: been adamant about throughout this whole process is negative rates
Speaker 1: is not something they want to do. It's something they
Speaker 1: looked at during the global financial crisis. They didn't think
Speaker 1: it was the right approach. Then all comments by FED
Speaker 1: policymakers we have heard recently would suggest they don't think
Speaker 1: it's the right approach. Now again, I would agree it's
Speaker 1: probably a never say never time and you've seen some
Speaker 1: remarkable things, including the introduction of corporate bond purchases to
Speaker 1: their mix, to their toolbox. But I think negative rates
Speaker 1: is out of the question for now, and perhaps that changes,
Speaker 1: but we don't expect it to. I mean, after the meeting,
Speaker 1: there are a lot of people who are very quick
Speaker 1: to throw their hands up, say this was a non event. Uh,
Speaker 1: nothing new, nothing really surprising here. But I want to
Speaker 1: get your take after we did get a statement after
Speaker 1: hearing from Powell, were there any new details surrounding either
Speaker 1: previous facilities that the FED has announced um that you
Speaker 1: may be picked up on, or or any hints on
Speaker 1: what could be to come down the line in the future,
Speaker 1: should we need more than we've already gotten In the
Speaker 1: Q and A session, we did get a little bit
Speaker 1: of additional information at least on timeline for the corporate
Speaker 1: credit facilities, and it sounds like those are actually should
Speaker 1: be up and running quite soon based on Chairman Paul's comments.
Speaker 1: And in addition, he commented on the main street learning facilities,
Speaker 1: and I thought there was some interesting comments there and
Speaker 1: we actually did get Thursday morning, they released additional information
Speaker 1: expanding the availability of the main street learning facilities to
Speaker 1: more companies, larger companies. So he did allude to that
Speaker 1: a bit, and he also alluded to the fact that
Speaker 1: this these types of facilities are going to go to
Speaker 1: a lot of different companies, so they're gonna have various
Speaker 1: term sheets and tried to sort of piece it out,
Speaker 1: and that's why something like that is taking a bit
Speaker 1: long or so. I think that was an interesting look
Speaker 1: into what we can expect down the road for some
Speaker 1: of these main street learning facilities and how they're looking
Speaker 1: to tailor them to different businesses. And then I think
Speaker 1: it's reasonable to expect that the corporate credit facilities could
Speaker 1: be coming online relatively shortly, and when we think about
Speaker 1: what that means for the market, it's almost hard to
Speaker 1: separate simply them announcing them and what that's done for
Speaker 1: the corporate credit market and what bringing them online will do.
Speaker 1: You've seen primary markets are certainly open for corporate credit borrowers.
Speaker 1: You've seen a remarkable amount of issuance at the end
Speaker 1: of March in early April. So I think some of
Speaker 1: these facilities have had their desired impacts already without even
Speaker 1: becoming operational, and that could be an additional boost to
Speaker 1: market liquidity once they do. But you've seen a lot
Speaker 1: of progress so far that I think the Fed's got
Speaker 1: to be pretty happy with. It's like I was looking
Speaker 1: over some of the notes from your team, some of
Speaker 1: your recent notes. UH one um uh position you guys
Speaker 1: have that it's kind of interesting. Interesting to me is
Speaker 1: um you say that this rally in the dollar uh
Speaker 1: is running out of steam and you expect sort of
Speaker 1: a weaker dollar over I guess the medium to longer term.
Speaker 1: And I bring it up because boy, I've read a
Speaker 1: lot of dollar parish dollar takes over the years, and
Speaker 1: it's a it's a it's a very very dangerous thing
Speaker 1: to predict. But um, I think it makes sense with
Speaker 1: the dollar being so strong, if that risk appetite does resume.
Speaker 1: UM that this seems like it's in a sense and
Speaker 1: overdone rally in the dollar. But unpack that for us
Speaker 1: a little bit. Why you guys feel that way? Is
Speaker 1: it kind of that whole dollar smile notion? You know
Speaker 1: that the dollar dollar is very wrong when the economy
Speaker 1: is very weak and strong when the US is booming,
Speaker 1: but in that middle time, Um, there's room for it
Speaker 1: to weakend. Yeah, So when we look for some US
Speaker 1: dollar weakness over the medium to longer term, that that
Speaker 1: is sort of a nod to improved risk appetite, and
Speaker 1: more importantly, improved funding conditions U S dollar funding conditions
Speaker 1: abroad and here in the US, and you've seen the
Speaker 1: FED pump a ton of liquidity into the market, whether
Speaker 1: it be here in the US or abroad. I think
Speaker 1: the FX swap lines have been tapped for roughly four
Speaker 1: billion dollars. So we think that as some of the
Speaker 1: global commerce starts to pick up again, you get US
Speaker 1: dollars flowing throughout the world through typical economic ways. That's
Speaker 1: going to improve funding conditions and remove some of the
Speaker 1: U S dollars scarcely that you've seen all the while,
Speaker 1: some of these funding measures that the FED has enacted
Speaker 1: are probably gonna be slow to come off, So you're
Speaker 1: gonna have what will probably be at least a short
Speaker 1: time period of an abundance of dollars in the system.
Speaker 1: As the FED recalibrates, the economy opens back up, opens
Speaker 1: back up, and you see some of this concern and
Speaker 1: risk off tone fade more broadly. And I think one
Speaker 1: of the biggest risks to that, and it's it's a
Speaker 1: big risk to our rates call as well, is if
Speaker 1: you see some of these states opening up and it
Speaker 1: goes poorly, perhaps you see a big spike in cases
Speaker 1: or even you have fewer people coming out than expected
Speaker 1: and spending money, and and it's really going to be
Speaker 1: a slow grind back to a new normal of sorts,
Speaker 1: and people aren't spending money the way that you would expect,
Speaker 1: and you see you or an L shaped recovery, whatever
Speaker 1: you want to call it. I think that's going to
Speaker 1: be key in the direction of most financial markets going forward,
Speaker 1: is is how do some of these preliminary openings go.
Speaker 1: And if they are quite poor or if they go
Speaker 1: quite poorly, then you're gonna see probably another bout of
Speaker 1: risk off which would actually strengthen the dollars. So it's
Speaker 1: it's kind of balancing those risks. But we do think
Speaker 1: that if if things go reasonably well, you start to
Speaker 1: see risk appetite continue to improve, then you might have
Speaker 1: an oversupply of dollars at least for a short time.
Speaker 1: As as the federy calibrates, Zach, what do you and
Speaker 1: your team make of, say, the tenure pretty much being
Speaker 1: it's been anchored, it seems around the sixty basis points
Speaker 1: level or so. I mean, we've seen this immense rally
Speaker 1: in the stock market. Yet at the same time you
Speaker 1: look at the rates market, and not a whole lot
Speaker 1: is going on. I mean to you, guys, is it
Speaker 1: surprising that we haven't seen much more movement there. It's
Speaker 1: a bit surprising, we we thought, and we still expect
Speaker 1: the yields to move a little bit higher even in
Speaker 1: the near term, before moving even higher towards the end
Speaker 1: of the year, with our year end target being one
Speaker 1: point to five scent, which seems kind of crazy right now.
Speaker 1: But if you think about where we are and if
Speaker 1: things in the economy start to improve, the FED is
Speaker 1: buying less, we think that's very much in reach. So
Speaker 1: I think it's a bit surprising when you consider how
Speaker 1: much equities have rallied, credit spreads have come in, that
Speaker 1: additional risk appetite does not seem to have flowed through
Speaker 1: to the treasury market. And perhaps some of that is
Speaker 1: due to the fact that the FED has been buying
Speaker 1: in such remarkable quantities that that really puts a hard
Speaker 1: ceiling on yields. But they've really dialed back the amount,
Speaker 1: and we think that's one of the contributing factors to
Speaker 1: why rates should rise at least a touch from here
Speaker 1: over the next two to three weeks. And when we
Speaker 1: think about some of these odd correlations across markets. That's
Speaker 1: sort of an indication that while things have improved, you
Speaker 1: probably aren't back to perhaps where the FED would like
Speaker 1: to be. If you have days when treasure yields are
Speaker 1: falling but equities are also falling, so you know, it's
Speaker 1: not your typical risk on risk off relationship or using
Speaker 1: that as a little bit of a barometer for health
Speaker 1: of balance sheets, health of ability to transfer risk, and
Speaker 1: sort of the function of markets more broadly. So you're
Speaker 1: you're starting to see some of that thought. Back at
Speaker 1: the end of March, you saw some of these really
Speaker 1: odd correlations with with markets moving in the same direction.
Speaker 1: But I think all of the fed's measures are starting
Speaker 1: to have their desired impact and you're seeing improvement there,
Speaker 1: but maybe not quite to where they'd like to be.
Speaker 1: And that's sort of one of the issues restricting yields
Speaker 1: probably is that some of these correlations aren't back to
Speaker 1: what you would consider normal. I was gonna ask you
Speaker 1: about that, is they liquidity issues in the in the
Speaker 1: bond market, um sort of mission mission accomplished at this point,
Speaker 1: are you still seeing any any liquidity problems? I mean,
Speaker 1: treasuries being one thing, but elsewhere in the bond markets
Speaker 1: as well. It seems as though liquidity has improved quite
Speaker 1: a bit. And I think when we look at all
Speaker 1: that's going on, there's this focus on returning to normal,
Speaker 1: but these aren't normal times. There's only so much you
Speaker 1: can expect from the FED, from the Treasury to get
Speaker 1: things operating as close to normal as possible. But normal
Speaker 1: it's just is not going to be within reach when
Speaker 1: you have economies shut down this way. So I think
Speaker 1: for the most part, you could say that the FEDS
Speaker 1: operations in treasuries and agency mbs have been quite successful.
Speaker 1: But if you do see, like we talked about, another
Speaker 1: bout of risk off, if some of these reopenings go poorly,
Speaker 1: if expectations for perhaps a treatment or a vaccine really
Speaker 1: fall off the table, then that could really go in
Speaker 1: the other direction. And the FED is shown that it's
Speaker 1: not going to hesitate to ramp up whatever measures, alter,
Speaker 1: whatever measures, do, whatever they have to do to address
Speaker 1: any strings in the market wherever they may show up. Mike,
Speaker 1: I think we've had enough vegetables. I think we should
Speaker 1: be allowed to get to dessert. Nor well, you know me, sir,
Speaker 1: I like to have to desserts. So even though I
Speaker 1: gave one crazy thing earlier, I'm prepared the second helping.
Speaker 1: But I will let you kick it. I will let
Speaker 1: you kick it off. Go ahead, alright, mine is a
Speaker 1: very odd one this week. I will just say that
Speaker 1: up front. So central banks have gone virtual. There is
Speaker 1: a story in the Financial Times, and I'm just going
Speaker 1: to read you a few excerpts. So the headline is
Speaker 1: virtual rate cut forces Nintendo gamers into risk your assets.
Speaker 1: Shock among users as Animal crossings Bank of Nook slashes
Speaker 1: rates ten year zero. So so this is this is
Speaker 1: the start of the story. It says savers at the
Speaker 1: Bank of Nook are being driven to speculate on turnips
Speaker 1: and tarantulas as the most popular video game of the
Speaker 1: coronavirus era mimics global central bankers by making steep cuts
Speaker 1: and interest rates. The estimated twelve million players of Nintendo's
Speaker 1: cartoon fantasy Animal crossing New Horizons were informed last week
Speaker 1: about the move in which the Bank of Nook slash
Speaker 1: the interest paid on savings from around zero point five
Speaker 1: percent to just zero point zero five. And it details
Speaker 1: players of this game on Reddit saying things like I'm
Speaker 1: never going to financially recover that from this. I would
Speaker 1: sat an incoming talks about how there's this stock market
Speaker 1: s t a l K where people have to bet
Speaker 1: on turnips and people have to go out and buy
Speaker 1: tarantula's now because people aren't making enough and their savings
Speaker 1: accounts um. And it's absolutely hysterical that a video game
Speaker 1: decided to take a central bank. You know there was
Speaker 1: a video game such bank um and cut their interest
Speaker 1: rates to almost zero. Talk about going out on the
Speaker 1: risk spectrum when you're buying tarantulas is you don't even
Speaker 1: know what you're getting there. I'm assuming there's an end
Speaker 1: the Bank of Nook and audit the Bank of Nook.
Speaker 1: Uh movement ready, I don't know, but the face of
Speaker 1: Bank of Nook looks to be a raccoon, So you'd
Speaker 1: have to have it out with the raccoon, all right,
Speaker 1: Zach Sarah. Sarah clearly brought her a game when it
Speaker 1: comes to the craziest things this week, like no pressure.
Speaker 1: That's a tough one the top, but let's hear you
Speaker 1: got I'm impressed. I I don't know how I follow
Speaker 1: that up. That's that is phenomenal. I gotta I gotta
Speaker 1: give you that I I told you off the bat,
Speaker 1: Thank you. I really tried on this one. So mine
Speaker 1: is definitely less interesting and perhaps less crazy than that.
Speaker 1: But I've been watching what's going on with three month
Speaker 1: libor US dollar three month librar. It's fallen I think
Speaker 1: about thirty three basis points this week alone, and thirteen
Speaker 1: basis points from Wednesday to Thursday, and it's been a
Speaker 1: huge move. It's down almost ninety basis points in the
Speaker 1: month of April. And I was going back to see
Speaker 1: how when was the last time it's fallen this much
Speaker 1: in a short time, And sure enough, it's only been
Speaker 1: about a month and a half. You go back to March,
Speaker 1: when expectations for rate cuts really started to come into
Speaker 1: effect and into focus. Three month dollar library was falling
Speaker 1: quite a bit then. But I think this time around,
Speaker 1: it's showing that funding markets in the US are improving.
Speaker 1: You're seeing CPU rates come down. The Fed's got to
Speaker 1: be happy with what's going on there. I think credits
Speaker 1: starting to flow. In the very front end, which is
Speaker 1: one of the first places that we saw issues crop up,
Speaker 1: is corporations started to lose the ability to raise cash
Speaker 1: through commercial paper and draw down their revolvers. So I
Speaker 1: think that's another encouraging sign. And it's been quite a
Speaker 1: move over a very short time, so that's it's definitely
Speaker 1: I think something the FED will be happy with and
Speaker 1: something we've been keeping an eye on. Yeah, I was
Speaker 1: gonna say, was that that spiking library? You think is
Speaker 1: that primarily because so many corporations we're drawing down their
Speaker 1: their revolvers. Yeah, I think that's what you saw back then,
Speaker 1: is you know, think, you know, people, we're starting to
Speaker 1: get really concerned with our corporation is going to make
Speaker 1: any money? Are they going to have any money in
Speaker 1: a very short time? So I think that's that was
Speaker 1: the big story back then. And as all of these
Speaker 1: measures come on line, and if you think about the
Speaker 1: commercial paper funding facility, that's priced that oh I as
Speaker 1: plus one ten for the best borrowers. That's way above
Speaker 1: where market rates are. But it seems just the existence
Speaker 1: of this backstop facility has really improved markets. And if
Speaker 1: you look at the Fed's balance sheet, only three billion
Speaker 1: has been taken down by that commercial paper funding facility,
Speaker 1: So it's having the desired effect again without really being operational.
Speaker 1: And I think the fed's got to be pleased with that.
Speaker 1: I wonder how many of those revolvers were drawn down
Speaker 1: in sort of a moment of conic where you were
Speaker 1: worried that the corporate market, bond market was not going
Speaker 1: to be open anytime soon. And maybe there's a little
Speaker 1: regret on on some of the part of the some
Speaker 1: of those people. I would imagine if you see, if
Speaker 1: you've seen what happened at the end March and April,
Speaker 1: the markets were wide open. I think we notched record
Speaker 1: weeks of primary issuance, two to three weeks in a row.
Speaker 1: And really anecdotally we've heard these companies drew down their
Speaker 1: revolvers so that they have the cash and then parked
Speaker 1: them back at the bank. So I think you're starting
Speaker 1: to see some of that thought as people are more
Speaker 1: confident that they have access to the capital markets, and
Speaker 1: that should be good for financial markets and good for
Speaker 1: economic prospects. As we get to the other side of
Speaker 1: this virus fallout, well, you know, we're crazy times when
Speaker 1: you see a massive move like that Jack, and you
Speaker 1: look back to what is this the biggest sense and
Speaker 1: it's only a month ago. I know that happens to
Speaker 1: me almost every single day where I'm like, oh, this
Speaker 1: has got to be something. Two weeks I was thinking
Speaker 1: to myself when I was looking into this, I'm like,
Speaker 1: what is even crazy? We've struggled. We've struggled. It's true.
Speaker 1: That's why I've had to go to virtual video games.
Speaker 1: Getting creative over here. All right, Mike, I'll give you
Speaker 1: my bonus crazy thing. Uh Zach. You might not agree
Speaker 1: with me, but as Sara knows, I consider the gambling
Speaker 1: markets to be legitimate markets. I know, I know uh
Speaker 1: many on Wall Street to not like to conflate the two,
Speaker 1: but uh t purposes of crazy things, I do so.
Speaker 1: New York Coast, once again, a great source of crazy
Speaker 1: market stories, brings us the tale of a guy in
Speaker 1: Canada who got into a game of rock paper scissors
Speaker 1: with his buddy. It was a high stakes game of
Speaker 1: rock paper scissors, mind you, and this guy lost five
Speaker 1: thousand dollars playing rock paper scissors with his buddy. The
Speaker 1: crazy part is he actually paid up. He took out
Speaker 1: a mortgage on his house to uh pay this guy um.
Speaker 1: But then of course it ended up in the in
Speaker 1: the courts, uh and a court basically invalidated this gambling
Speaker 1: debt uh and the decision that forced this guy to
Speaker 1: take out the mortgage uh and and the reason why
Speaker 1: because they view gambling it has to be on something
Speaker 1: that involves skill, and rock paper scissors does not involve skill.
Speaker 1: So they invalidated this guy's half a million dollar rock
Speaker 1: paper scissors loss. I got mixed feelings on this. So
Speaker 1: if this one to court, if this one to court,
Speaker 1: then this had to have happened before coronavirus happened, right,
Speaker 1: I think yeah? So the the the actual rock paper
Speaker 1: scissors game and question was like in two thousand and eleven,
Speaker 1: and then this SIT's okay because my immediate my immediate
Speaker 1: question was how are people together playing rock paper scissors
Speaker 1: right now? Shouldn't be happening. I guess we can do
Speaker 1: it over you do whatever? Zoom? Sorry? Right? You ready
Speaker 1: for one million dollars Saturday? You ready ready? Rock paper scissors? Shoot?
Speaker 1: You get the grants? What do you have? Perss million bucks?
Speaker 1: Because my life savings and much more. I'm gonna say,
Speaker 1: you guys gotta I gotta come on and bring my
Speaker 1: a game or whatever is better than a game for
Speaker 1: my craziest thing. You guys just blew me out of
Speaker 1: the water big time next time. You know, yeah, yeah,
Speaker 1: Now Mike's dishing out the truth. But look, Mike, Mike
Speaker 1: stretches the rules a little bit, then I gotta catch up.
Speaker 1: Then Mike stretches the rule, and I gotta catch up.
Speaker 1: This is an ongoing cycle we have. Well now, I know,
Speaker 1: very friendly competition between Sarah and I are over this. Well,
Speaker 1: high expectations for you next time. I'll give her the
Speaker 1: rare w on this one with the Bank of Noah. Well,
Speaker 1: high expectations of you even higher next time, Zach so
Speaker 1: Zach Griffith, thanks so much for coming on the show today.
Speaker 1: Thank you. What goes Up? We'll be back next week.
Speaker 1: Until then, you can find us on the Blue Terminal
Speaker 1: website and app or wherever you get your podcasts. We'd
Speaker 1: love it if you took the time to rate interview
Speaker 1: the show on Apple Podcasts so more listeners can find us,
Speaker 1: and you can find us on Twitter, follow me at
Speaker 1: at Sarah Ponzack. Mike is a reaganonymous. You can also
Speaker 1: follow Bloomberg Podcast at podcast and remember we also have
Speaker 1: our very own Bloomberg Podcast hotline, which is six four
Speaker 1: six three two four three zero. What goes Up is
Speaker 1: produced by Tobur Foreheads. The head of Bloomberg Podcast is
Speaker 1: Francesca Levie. Thanks for listening, See you next time.