Speaker 1: Scrap on your parachute. It's time for What Goes Up
Speaker 1: with Sarah Ponzick and Mike Reagan. Hello and welcome to
Speaker 1: What Goes Up, a Bloomberg weekly market podcast. I'm Sarah Post,
Speaker 1: a reporter on the Cross Asset team, and I'm Mike Reagan,
Speaker 1: a senior editor at Bloomberg and Sarah's faithful sidekick. So
Speaker 1: we're bringing that back now, new year, back to the old.
Speaker 1: We'll call it a game that's right, That's right this
Speaker 1: week on the show. It may seem cold, but in
Speaker 1: the COVID nineteen era, the stock market has rewarded companies
Speaker 1: that are labor light, that focused on intangible asset growth
Speaker 1: and digitization, at times at the expense of the human worker.
Speaker 1: In part, it's a fact that helps so the disconnect
Speaker 1: between the stock market and the economy of late a
Speaker 1: divide that was again on display this week as stocks
Speaker 1: rally to records while the US capital was being ambushed.
Speaker 1: Today we bring you a guest who really has been
Speaker 1: at the forefront of this type of analysis over the
Speaker 1: last year, and as always, will close out the episode
Speaker 1: with our tradition, the craziest thing I saw in markets
Speaker 1: this week, Um Sarah, I think we can all agree
Speaker 1: on what the craziest thing we all witnessed was this week.
Speaker 1: Whether or not the market reaction was crazy or not,
Speaker 1: I don't know. I don't know. This week was full
Speaker 1: of crazy things that is beginning in a very mike,
Speaker 1: God help us all, but anyway to help us make
Speaker 1: sense of it all. We're very happy to welcome back
Speaker 1: to the show. He's the director of Global macro Strategy
Speaker 1: at stone X Group. His name is Vincent de Luard. Vincent,
Speaker 1: welcome back to the show. Thanks hing me. It's always
Speaker 1: a pleasure to to see you and I love your podcast,
Speaker 1: so thank you, thank you, thank you. We're blushing, well
Speaker 1: you can't see we are, you can see ash. Whatever
Speaker 1: the sound of blushing is will We'll get the producer
Speaker 1: to add some sound effects. But uh, you know, if
Speaker 1: it's an UM yes, Sarah pointed out. Sarah and I
Speaker 1: are both sort of fascinated with this uh notion who
Speaker 1: came up with this year that how it's a it's
Speaker 1: a bear market for humans UM based basically on how
Speaker 1: the stocks of companies that do not really rely as
Speaker 1: much on their human employees did so well this year
Speaker 1: compared UM to the rest of the market, and you know,
Speaker 1: specifically companies that that are much more reliant on human capital.
Speaker 1: I I'm fascinated with this because I think it has
Speaker 1: ramifications well beyond the stock market. Um and Sarah will
Speaker 1: tell you. That means I'm I'm winding up here for
Speaker 1: like a twelve part question for you. But I know, yes, yes,
Speaker 1: actually I won't make it a question. I'm just gonna
Speaker 1: monologue like like a supervillain in a hero in a movie.
Speaker 1: And uh, and you tell me, yeah, even better, you
Speaker 1: tell me where I'm right and wrong about this. But
Speaker 1: I do think we can connect this back to the
Speaker 1: events of the week, um and and hear me out,
Speaker 1: because obviously, the whole history of economic progress is littered
Speaker 1: with examples of what appeared to be very barish elements
Speaker 1: for for labor in the short term, you know, whether
Speaker 1: it be the printing press back in the fourteen hundreds
Speaker 1: or the cotton gin in the eighteen hundreds, all of
Speaker 1: this stuff seemed to, you know, basically disrupt a big
Speaker 1: source of the way people work, you know, their jobs,
Speaker 1: their labor. Um the last twenty years, I gotta say,
Speaker 1: um feels like that issue. But on steroids. Um, just
Speaker 1: with the the continued automation of everything that continued, you know, uh,
Speaker 1: move to retail online, on and on and on. And
Speaker 1: I wonder, you know, and this might take you a
Speaker 1: little bit out of your your comfort zone, but um,
Speaker 1: I wonder if if the events of this week and
Speaker 1: even of the last four year, is this sort of
Speaker 1: this embrace of economic nationalism is part of that story.
Speaker 1: You know, I know it's not a market story itself,
Speaker 1: but uh, you know, people blame sort of the economic
Speaker 1: anxiety on what's created economic nationalism. You know, I don't
Speaker 1: want to mix that up with sort of the other
Speaker 1: motivations that are are you know, uh, sort of scarier,
Speaker 1: whether it be racism or xenophobia and that sort of thing.
Speaker 1: But I do think the you know, this notion that
Speaker 1: the the opportunity set for the sort of average American
Speaker 1: labor feels like it's gone down a lot in recent years.
Speaker 1: Am I crazy to sort of connect those two dots
Speaker 1: that this this sweeping nationalism we've seen um and the
Speaker 1: bear market for humans are are sort of joined at
Speaker 1: the hip, are sort of the same story in some way. No, absolutely,
Speaker 1: I'm actually glad you burned that out. And I mean
Speaker 1: a st from the day to day market, but I
Speaker 1: think it's externally important. I actually I remember writing that
Speaker 1: piece at the Trump election looking at the percentage of
Speaker 1: drivers truck drivers in the in the counties versus the
Speaker 1: Trump vote, and that was a you know, people had
Speaker 1: come up with like a bunch of indicators. I think
Speaker 1: one of them was like whole foods, whether the county
Speaker 1: at the whole foods versus a cracker barrel, as as
Speaker 1: a predictor of Democrat versus Republican. Another one that that
Speaker 1: showed really well was two of them which I think
Speaker 1: are relevant to a point, how many truck drivers you
Speaker 1: had and the percentage of Chinese imports from that county. Um.
Speaker 1: And I think, you know, looking at the Trump phenomenon
Speaker 1: for these lands of fear about automation, fear that you know,
Speaker 1: and I think that's you know, it's not expressed correctly,
Speaker 1: but a lot of the fears are we is there
Speaker 1: a place in this country for me? Is there something
Speaker 1: that I can do? And if we've been everything on
Speaker 1: to race and to being a soul loser. And I'm
Speaker 1: not saying these things are not there, because it definitely are.
Speaker 1: But we also need to not miss what I think
Speaker 1: trumps Um truly was about, which was, you know, the
Speaker 1: forgotten man and the prospects for for you know, I
Speaker 1: guess for them became as a as a light of hope.
Speaker 1: And four years in we had this pandemic which further
Speaker 1: accelerated these trends that we talked about, automation, artificial intelligence,
Speaker 1: demise of human bear market for humans. And I think
Speaker 1: this was some sort of a curious apathosis of this movement,
Speaker 1: the curious events that happened. Do you suppose there's any
Speaker 1: chance of this sort of rebounding ricocheting back into the
Speaker 1: markets itself. You know, it's kind of hard to identify
Speaker 1: tipping points in real time, but to me, this week
Speaker 1: kind of feels like a tipping point at least culturally, politically,
Speaker 1: um in a lot of other ways. And I wonder,
Speaker 1: you know, I wonder if there are if there is
Speaker 1: the potential for sort of a backlash UM, whether be
Speaker 1: amongst the E. S G. Prone type of investors, regulators
Speaker 1: looking at Amazon sort of running rough shot over over
Speaker 1: the retail industry. Right, Okay, I think the regulation is
Speaker 1: far far, you know, regulators is far does not understand
Speaker 1: these issues UH and and the SG movement I think
Speaker 1: contributes to that. I actually had a piece following the
Speaker 1: work with Donald Sarah on the on the Bare Market
Speaker 1: for Humans, on how E s G makes the problem worse. UH.
Speaker 1: So what I did is I looked at the I
Speaker 1: think the largest thirty E s D funds equity funds
Speaker 1: in the US, and I compare their holdings UH to
Speaker 1: the rest of free thousand. And I look at the
Speaker 1: number of employees UH and the the average eh D company,
Speaker 1: so that the one the highest eh ranking, he's about
Speaker 1: thirty percent smaller than the average restauran three thousand. In
Speaker 1: spite far the biggest difference. I mean there are other
Speaker 1: small different and is like they're more profitable. Uh. They
Speaker 1: generally have better balance sheet, so there's a quality tilt
Speaker 1: which has helped them in But by and large they
Speaker 1: are companies that trans human. And again, think about how
Speaker 1: E s G works, Right, I mean that the carbony,
Speaker 1: the corbon impact of these our master card is is zero. Right,
Speaker 1: it's a financial network or the same throw Microsoft. The
Speaker 1: whole which companies can afford to be good to their
Speaker 1: workers is going to be Again, things like Microsoft that
Speaker 1: are very profitable big tech monopolies. So structurally here she
Speaker 1: is actually biased against humans and rewards the company that
Speaker 1: are already benefiting from all the strengths. So as we
Speaker 1: she more capital towards e h G phone, I think
Speaker 1: we are making the problem a lot worse. And if
Speaker 1: I were, you know, running an E s G company,
Speaker 1: I would really focus on the S and s is.
Speaker 1: You know, before you can worry about how good your
Speaker 1: governance is and and you know labor issues. Do you
Speaker 1: have workers? I think the first good thing you can
Speaker 1: do for for humans is to give them jobs. Uh.
Speaker 1: And so far sc IS is actually challenging companies towards
Speaker 1: companies that either have future to join. Yeah, it's certainly
Speaker 1: a contrarian view right now in a way to view
Speaker 1: E s G at a time when so many are
Speaker 1: pushing behind it. So thanks to you, Vincent, I've written
Speaker 1: a lot about this topic over the last year, and
Speaker 1: you created this factor where you look at intangible assets
Speaker 1: versus the amount of employees that are hired at a company,
Speaker 1: and at the end of the year, uh, around the
Speaker 1: numbers for me and the spread between companies that rely
Speaker 1: more untangible assets versus human labor versus those that rely
Speaker 1: more on human capital was twenty seven percentage points. And
Speaker 1: I want to turn to how you're viewing where markets
Speaker 1: go from here. I'm looking at your outlook right now
Speaker 1: for one, and I'll read part of this for our listeners. Um,
Speaker 1: you expect demand for returns to real goods, so well
Speaker 1: that demand will return to real goods. And you say
Speaker 1: the great disinflation of the past decade was at least
Speaker 1: partially attributable to the rise of digital goods. Contrary to
Speaker 1: their real world counter parts, digital goods have almost no
Speaker 1: marginal cost and their consumption is non exclusive. And then
Speaker 1: you go on to say that the vaccine will surely
Speaker 1: invert this trend, at least temporarily. So I'm curious this
Speaker 1: reversion of the trend, what's it actually going to look like?
Speaker 1: And you say at least temporarily, how long does it
Speaker 1: actually last? Wait? Sorry, sorry, I got a butt in
Speaker 1: a minute here. You left out the funniest line in
Speaker 1: his report that that followed that I couldn't read it.
Speaker 1: You read it, he says. He says the money which
Speaker 1: was spent on Netflix subscriptions, premium accounts, on Headspace, and
Speaker 1: don't donations on only fans. We'll go back to bars, restaurants,
Speaker 1: strip clubs, and the other venues where humans can numb
Speaker 1: their ex exstential angst. Wow, Vincent, that's a that's a
Speaker 1: very French way of looking at things, I would have
Speaker 1: to say. I'll also point out the fact that every
Speaker 1: time I tried to forward your notes, Vincent to Mike,
Speaker 1: I got flagged on Bloomer and I kept clicking send anyway. Anyway,
Speaker 1: But but talk to us about that that this you know,
Speaker 1: you're expecting a obviously, this snap back into spending on
Speaker 1: real world stuff, you know, less on digital whatever, whatever,
Speaker 1: your favorite digital time waster of choices. But before we
Speaker 1: get to that, you're expecting a real SOFTS patch and
Speaker 1: the soft spot in the economy in the first quarter,
Speaker 1: possibly even a double dip recession. So talk us through
Speaker 1: that whole outlook. And sorry to button there, Sorry, but
Speaker 1: I had to get that. I had to get that
Speaker 1: part in you're forgetting. Yeah, yeah, So I'm I'm gonna
Speaker 1: do the the outlook and then then we got to
Speaker 1: go into the stars question. So on the outlook at
Speaker 1: I think what we're looking at today is kind of
Speaker 1: the mirror opposite of of the late seventies, early eighties
Speaker 1: where it's a it's a period of transition, so in
Speaker 1: the early late seventies, early eighties or transition from inflation
Speaker 1: to disinflation, um. And this year is a transipent from
Speaker 1: disinflation or even after a deflation to inflation secular inflation.
Speaker 1: So that's kind of like the seculdar. You Now, if
Speaker 1: you remember eight eight one eighty two, there were a
Speaker 1: couple of inflation scares, like if you look at the
Speaker 1: Fed funds rate, it really got jacked up almost needlessly
Speaker 1: to do I think close to eighteen percent uh in
Speaker 1: ain eighty one, and that triggered an economic recession. So
Speaker 1: it's not uncommon as as you reach the end of
Speaker 1: a cycle to one last year, So in the seventh
Speaker 1: and the early eighties it was inflation fears uh. And
Speaker 1: I think this year we're gonna have think could be
Speaker 1: I don't know, it's not looking that way right now,
Speaker 1: but we we could see maybe my expectation would would
Speaker 1: see some some deflation fears again in H one because
Speaker 1: the impact of the lockdowns is still going to be felt,
Speaker 1: especially if you look at at cernaal commodities market like oil. Yes,
Speaker 1: it's greatly. We're adding at fifty one. But I mean,
Speaker 1: if you have all of Europe under lockdown, if you
Speaker 1: have you know, we had a record record deaf Again,
Speaker 1: I think yesterday. It's going to take some time for
Speaker 1: the vaccines to be rolled out, and in that time
Speaker 1: the economic destruction to create the illusion that we are
Speaker 1: still in that own environment of more deflation, more constuption
Speaker 1: online and things like that. And then my guess is
Speaker 1: at by maybe q Q two already Q three, then
Speaker 1: acceleration really starts popping up, and then accelerats or second
Speaker 1: inflation in the second half and then towards and at
Speaker 1: the end of the decade. UM. Now, let me let
Speaker 1: me answer Sarah's question on on digital overs is really good.
Speaker 1: So one of the reasons why I look at it
Speaker 1: is um because I view the consumption of digital goods
Speaker 1: as deflationary. So when your marginal dollar goes to digital goods,
Speaker 1: which have no marginal costs, you can just you know,
Speaker 1: the normal laws of supplant demand on the plant, right,
Speaker 1: you can keep consuming. You know, it doesn't matter how
Speaker 1: many people are watching the same movie on Netflix at
Speaker 1: the same time that there is no cost. Now, if
Speaker 1: people go to the movie there. Instead, you need to
Speaker 1: be more theaters, you need to hire more workers, and
Speaker 1: that creates inflation because you you're consuming really real goods. Um.
Speaker 1: The reason why I expect that shift is just just
Speaker 1: what what we saw in Europe this summer. Europe was
Speaker 1: a really good, good death case in my opinion, because
Speaker 1: we had you know, very nasty uh lockdowns in in
Speaker 1: Q one twenty and then by Q two it was
Speaker 1: over and then most things opened. Uh. Europe was opened
Speaker 1: for vacation this summer. I mean the Americans couldn't get there,
Speaker 1: but everywhere everyone else at a great time. Uh. And
Speaker 1: you look at the restaurant's booking, for example, in Germany,
Speaker 1: they were twenty percent over the prior year, so we
Speaker 1: actually had a better tourism season. And who would have
Speaker 1: thought that? Uh? And I think that talks to that
Speaker 1: that desire somewhat natural right after being cooked up in
Speaker 1: your house, you want to experience thing again. No, you
Speaker 1: don't want to do another Netflix and shield, you want
Speaker 1: to go to the movie. You want to go to
Speaker 1: two two restaurants, um or you know other venue where
Speaker 1: you can numb the existent cell of tanks stuff of
Speaker 1: being a human. I love that line. So, like you said,
Speaker 1: I mean, there's plenty of pent up demand. We hear
Speaker 1: this all the time. The savings right in the US
Speaker 1: is extraordinarily high right now. But how long does this
Speaker 1: trend last? I asked, just because it's underpinning what seems
Speaker 1: like a consensus understanding of where the barkets are going
Speaker 1: to go from here, and that being the fact that
Speaker 1: we're going to see cyclical assets rally. We're going to
Speaker 1: see old economy, real world assets lead this market higher.
Speaker 1: But what I'm really curious about is how long does
Speaker 1: that last? For? I mean, eventually do we turn back
Speaker 1: to this world that we've been living in where people
Speaker 1: continue to pour into companies and assets that rely on
Speaker 1: digitization and automation. Uh. And just this this trend that
Speaker 1: we've seen for years now and was just accelerated this
Speaker 1: year during COVID, And that's the next question. And I
Speaker 1: think that kind of helps us um deal with what
Speaker 1: I called the Schrodinger's market. You know, Shroddinger's cat, right,
Speaker 1: it's both dead and life at the same time. UM.
Speaker 1: I feel that about the market today. We have a
Speaker 1: Shroddinger market where if you look at the work from
Speaker 1: home in DF since November it's up thirty percent. And
Speaker 1: if you look at the reopening stops there are fully percent.
Speaker 1: So both things seem to be going at the same time. Um,
Speaker 1: and I think that that's a timeframe matter, right. I mean,
Speaker 1: if you just look at the next year, I think,
Speaker 1: you know, reopen easy office one. But then you can
Speaker 1: make the case as you do that maybe it's just
Speaker 1: a blip, like a flash in the pan, and then
Speaker 1: everything will go back to normal. I'm not in that.
Speaker 1: I'm not in that camp. I think that once you
Speaker 1: start a political transformation or secular transformation, like we are
Speaker 1: a lot of the ideas that that came up during
Speaker 1: the pandemic, the overtoned window if you want, as as
Speaker 1: as opened universal basic income, I think this is going
Speaker 1: to be it's going to have to happen. I mean
Speaker 1: we see the Stamish check. You know it's six No
Speaker 1: two thousand and after that there's going to be need
Speaker 1: to be more a student non council a s, a
Speaker 1: start at home, like the idea to pay a thick
Speaker 1: in thousand people so people can buy home, so that
Speaker 1: the notion that the government should use the central bank
Speaker 1: in order to achieve social and economic objectives explicitly, which
Speaker 1: is basically m MT. I think this is happening UM,
Speaker 1: and that's what that will keep the trend going. I
Speaker 1: really doubt that a year from now will go back
Speaker 1: to austerity. I do not see, you know, a key
Speaker 1: party movement arise from the ashes in in UH for
Speaker 1: the next mid term. We are, I think at a
Speaker 1: secular transition in terms of monetory versus fistical, in terms
Speaker 1: of wealth concentration versus wealth distribution UH, and in terms
Speaker 1: of inflate inflation to inflation well universal basic in the
Speaker 1: Revenge of the Yang Gang, I haven't heard about that
Speaker 1: in a while, but it makes sense. Listen. I don't
Speaker 1: think Sarah has any existential angst. I think she's all
Speaker 1: existential joy Sarah's are right. My exist state central angst
Speaker 1: right now is I don't know if you can see
Speaker 1: what My puppy behind me is eating everything in sight
Speaker 1: and I'm just trying to make sure that my apartment
Speaker 1: doesn't cover. But we all have our own existential angst
Speaker 1: that we we struggle with. But if it's so, I
Speaker 1: want to get UH. Speaking of angst, I I feel
Speaker 1: like the word inflation UM is such a sort of
Speaker 1: red flag word for the markets. Obviously, it's spooks stock
Speaker 1: market investors to think about the prospect of secular inflation
Speaker 1: like you're describing. Um. You know, you wrote in one
Speaker 1: note that and how and and this has been observed
Speaker 1: by a lot of people obviously that valuations tend to
Speaker 1: compress in periods of high inflation. You know, I think
Speaker 1: back of the Peter Lynch roll a twenty thing, which
Speaker 1: is maybe an oversimplified idea, but basically that the the
Speaker 1: P plus the cp I rate should equal twenty in
Speaker 1: sort of a fair market. Obviously, we're way past that
Speaker 1: point now. I mean we're peas you know, in the
Speaker 1: in the thirties, uh on the indexes. UM. But I'm
Speaker 1: curious how you see it's shaping out with equities this
Speaker 1: year specifically, because UM, that is a tried and true
Speaker 1: relationship that that high inflationary regimes tend to compress multiples. UM.
Speaker 1: But I wonder is it inflation itself that compresses the
Speaker 1: multiple or is it the assumption that interest rates are
Speaker 1: going to rise and that the Fed is gonna sort
Speaker 1: of remove the punch bowl that that does it to
Speaker 1: two valuations? And and in the scenario this year where
Speaker 1: the FED has indicated it's it's willing to let inflation
Speaker 1: run a little bit hot. Um. Is it sort of
Speaker 1: a different regime this year, a change from that relationship? Um?
Speaker 1: And I suppose a lot of it will depend on
Speaker 1: how much clarity we get from the FED about exactly
Speaker 1: how hot they'll let inflation go and for how long.
Speaker 1: But but how are you sort of viewing that whole issue?
Speaker 1: I think here and that's the only way I can
Speaker 1: make sense of this rally is I think most people
Speaker 1: by now, I figured that inflasion. You know, I made
Speaker 1: that invasion call, you know, eight months ago, and I
Speaker 1: look crazy. Now It's it's everywhere, right, you see, you
Speaker 1: see in copper prices, you see a big corner with
Speaker 1: your gold even inflasion, expectation break events rightly rising about
Speaker 1: two percent dollar index breaking Biddle ninety or at fifty.
Speaker 1: I mean, there's so many, so many triggers, even though
Speaker 1: the tenure rising about one. I mean, in two thousand
Speaker 1: and twenty one, we had so many key level that broke,
Speaker 1: which kind of just you know, go go go towards
Speaker 1: my direction of a high inflasion. Um. Of course, you
Speaker 1: know the part that I would have expected is the
Speaker 1: multiple compression is not happening. And I think that's precisely
Speaker 1: what you're saying, is why do multiple compress when you
Speaker 1: have inflation? Because you know people expect the fat to titan. Well,
Speaker 1: what if we have inflasion and the fat does not
Speaker 1: tighten um and it's surprised. There's a shocking amount of
Speaker 1: if we follow through, if you really read the speech
Speaker 1: by by power, by events, what you see behind it
Speaker 1: is an ocean and GDP nominal GDP targeting. Uh, the
Speaker 1: idea that the facts you kind of dropped the inflation
Speaker 1: target and instead of focused on on on on the
Speaker 1: level of nominal GDP. Depending on how you said that,
Speaker 1: And I just ran an experiment. If you assume that
Speaker 1: trend growth for was nominal GP between seven and then
Speaker 1: you would have to you would have kept going linearly
Speaker 1: like that GDP today would be fifty percent higher. So
Speaker 1: they can actually, I mean, if you really want to
Speaker 1: push it like crazy, you could say, well, we need
Speaker 1: a decade of seven percent inflation to get back to
Speaker 1: where we should have been absent on the financial crisis,
Speaker 1: absent COVID. So if the FED is really serious about
Speaker 1: this um, it's possible that that that inflation ran much
Speaker 1: harder than people expect for much longer um. And then
Speaker 1: that really gives us an in person on the situation.
Speaker 1: I mean, the analysis that you refer to is based
Speaker 1: on the seventies. Went back in the seventies, I think
Speaker 1: Burns was the the Thatch chairman. He actually raised rates.
Speaker 1: I mean real rates were positive, the rates get up
Speaker 1: within flash. In the seventies, we may have something completely
Speaker 1: different where you see in fashion pick up and rate
Speaker 1: stay low. Now, my expectation is that what happens is
Speaker 1: occurs will eventually stephen. So that's to me, that is
Speaker 1: the trade. If you bet on that eventually the curves stephens,
Speaker 1: and then eventually I think at some time there would
Speaker 1: be some sort of a shadow cost of capital that
Speaker 1: would be reflected into equities variation. If if really insist
Speaker 1: on on financial repression everywhere, I doubt that maybe the
Speaker 1: equity market ends up playing the role of the bond
Speaker 1: market vigilantes wha was I think, No, this is not possible.
Speaker 1: The cost of capital is not zero. By the way,
Speaker 1: another fund that point I noticed in Denmark you can
Speaker 1: borrow for twenty years at zero percent um. You know,
Speaker 1: this is at some point, some some part of the
Speaker 1: market is going to start to realize that this is
Speaker 1: not feasible. That's why we like this guy on the podcast.
Speaker 1: He just called out one of the crazy things that
Speaker 1: that a Twitter user had sent to us the Denmark
Speaker 1: uh was a T. T. J. Bellers that that the
Speaker 1: Twitter that was the one that you think, alike, mortgage
Speaker 1: rates at aer precent in Denmark. It's just it's mind boggling.
Speaker 1: But you know, Vincent, it's it's interesting because you know,
Speaker 1: there's this function on the terminal that we have that
Speaker 1: lets you see what people are reading over the last
Speaker 1: say five minutes or ten minutes, and I I tend
Speaker 1: to check it obsessively to see kind of like, you know,
Speaker 1: what everyone's focused on from minutes a minute. And it
Speaker 1: was amazing because on Wednesday here it looked like democracy
Speaker 1: was dying, that the capital was overrun by protesters. I mean,
Speaker 1: it just was the most surreal thing I think any
Speaker 1: of us have ever seen in the world. I checked
Speaker 1: this function. The most dread story at that time was
Speaker 1: the was about the FED minutes, not not the death
Speaker 1: of Jeffersonian democracy, but the FED minutes and I wonder
Speaker 1: you know it. It doesn't sound like, Okay, we don't
Speaker 1: have to worry about a rate increase any time soon.
Speaker 1: But it doesn't necessarily sound like tapering is off the
Speaker 1: off the table. Tapering of the Fed's acid purchase says
Speaker 1: the years is off the table. We all know what
Speaker 1: happened last time, the taper tantrum. Um, how do you
Speaker 1: have any idea of how you see that that happening
Speaker 1: uh going this year? If there is sort of even
Speaker 1: uh concerns about tapering, let alone if they actually do
Speaker 1: taper the purchases of treasuries and age. I mean, I'm
Speaker 1: gonna go I'm gonna go m empty on you and
Speaker 1: and say that it's at this point it's a public
Speaker 1: finance problem. Um. And that's why I don't believe we
Speaker 1: can have we cannot have a I don't think we
Speaker 1: can have a taper A don trum because I don't
Speaker 1: think I can have a taper. I think I I
Speaker 1: need to check the number. But I think for the January,
Speaker 1: February March, we have were the Treasury needs to roll
Speaker 1: up one point five trillion in debt for each one
Speaker 1: of these months. Uh, so that that you know, to
Speaker 1: all that four and a half trillion that needs to
Speaker 1: be rolled out, rolled over in three months. On top
Speaker 1: of presumably I don't even know where we stand the stimulus,
Speaker 1: but you it looks like the Georgia race is being marked.
Speaker 1: We're gonna get the checks. And then you know it
Speaker 1: was always in the Democrats. It's as always stepping stone
Speaker 1: for an augustimulus after the election. So um, the amount
Speaker 1: of insurance that there will be is just so enormous
Speaker 1: that I really don't see the fat being able to taper,
Speaker 1: and I don't see the kount of of You know,
Speaker 1: in prior decades you had excess savings for other countries
Speaker 1: that could be deployed to finance U S depicits. I
Speaker 1: mean typically the Chinese accumulation of of of U S
Speaker 1: treasuries conversing the current count surplaces UH into treasury holding
Speaker 1: or all pack doing the same thing. Well, this is
Speaker 1: not happening this time. I mean, if you'll get all
Speaker 1: the all exploring countries, they have big, big trouble of
Speaker 1: their own. You know, if anything, there are more you know,
Speaker 1: disbursing than than saving. And then China does that record
Speaker 1: current counserpaces. But it certainly not investing in U S. Treasury,
Speaker 1: So it seems just by default that the FED needs
Speaker 1: to do basically nationalized the treasury market. And that's that's
Speaker 1: going to be the reality we're going to live in
Speaker 1: for the next outsaid decade. So I want to ask
Speaker 1: you before we get to sharing our crazy things, because
Speaker 1: one of your reports is titled how the perpetual motion
Speaker 1: stock Market will break? How does that happen if all
Speaker 1: of a sudden, I mean, the Fed's kind of stuck
Speaker 1: the Fed. The FED can't go about doing anything. At
Speaker 1: the same time, we're looking at m m T, the
Speaker 1: possibility of universal basic income. I mean, how does the
Speaker 1: stock market break in an environment that is almost suited
Speaker 1: for its needs? I would have I think inflation eventually
Speaker 1: is the key risk you have to worry about, because
Speaker 1: that will eventually remove the Fed's ability to just, you know,
Speaker 1: keep bading out of the market every time. Another thing
Speaker 1: that inflation will do is that it will invert the
Speaker 1: negative cooration between stops and bonds, causing havoc for respiraty
Speaker 1: strategies and also traditional sixty four portfolios. Once saturn, including
Speaker 1: that report, which I felt was was insane is if
Speaker 1: you go on on Vanguard's website. You know they sell
Speaker 1: the starting date phones who very popular, and I've actually
Speaker 1: reversed engineer their the return assumption and they say that,
Speaker 1: you know, fixed income is gonna return five close to
Speaker 1: five percent a year until the day you retired. Now,
Speaker 1: I look at the v b t i X, the
Speaker 1: Vengar Total Bond Market Index fond, and I found that
Speaker 1: ninety nine p nine percent of the funds of the
Speaker 1: holdings of the securities in that fond yield less than
Speaker 1: two one a half percent. So you promise five and
Speaker 1: then ninety nine per time year less than two an
Speaker 1: a half. I mean, at some point this line is
Speaker 1: going to be exposed. People are going to stop questioning.
Speaker 1: I'm going to start realizing that, you know, this is
Speaker 1: just impossible, and maybe inflation is the one that does that.
Speaker 1: As I realize it, it's like, well, why my buying
Speaker 1: you know securities that yield like, you know, zero point
Speaker 1: five percent even though on promised five. Um. So I
Speaker 1: think infaction is the biggest risk if at the second
Speaker 1: race that I would mention insure mentioned professional emotion engine Um.
Speaker 1: You know, one of the reasons you can't build a
Speaker 1: perpetual motion engine the physical world is because their energy leaks, right,
Speaker 1: It's the first stor thermodynamics. You know, every time you
Speaker 1: convert something into something else, you have a little bit
Speaker 1: of energy left, whether it's heat or friction. I think
Speaker 1: in the financial markets the equivalent to that would be
Speaker 1: bitcoin on gold. These are leaks from the system, right,
Speaker 1: These are ways that people can you know that the
Speaker 1: you know, money is being injected in it, and then
Speaker 1: it leaks from goal and bitcoin and obviously we see
Speaker 1: that the leaks are making becoming bigger and bigger by
Speaker 1: the day. Um. And then the third and last point,
Speaker 1: which we only the spoke plenty about, is I think
Speaker 1: that the rise of a new political agenda that becomes
Speaker 1: much more focused on humans, on infrastructure, spending, on on deficits,
Speaker 1: on real distribution, on anti trust. And we are thinking
Speaker 1: at the very early days of that. But as the
Speaker 1: decade progress is a thing, this is going to be
Speaker 1: a shift kind of like the progressive shift in in
Speaker 1: early twentieth century until the out in the late sixties
Speaker 1: in the US, which which I think is again Donald
Speaker 1: this new year. That target date return works. If if
Speaker 1: you're planning to retire, I think right, that was that
Speaker 1: was the time to retire generation. That was that was
Speaker 1: it when we missed the boat, just put it on
Speaker 1: the fixed income and uh wow, can you imagine. Well,
Speaker 1: with all that existential lengths out of the way, Sarah,
Speaker 1: it's time for the crazy things. Angst stand clearer of
Speaker 1: the craziest things we saw in markets this week. Let's
Speaker 1: start with you, Sarah. I'd like to start with you.
Speaker 1: I like to just put you right on the hot seat.
Speaker 1: So nice of you. I actually came with a couple
Speaker 1: this week just because when I was getting ready for
Speaker 1: this recording, I was just looking around and I was like,
Speaker 1: you know what, there's too much crazy going on right now.
Speaker 1: So I'm gonna I'm gonna use a couple. So one, um,
Speaker 1: I'll go to Wednesday. So Wednesday crazy crazy day for
Speaker 1: obvious reasons, essentially when the U S. Capital is being attacked.
Speaker 1: I looked at total call options volume, uh more than
Speaker 1: twenty nine million call options traded in the stock market.
Speaker 1: That is the fourth most in history. And then of
Speaker 1: course the other three happened. Um so just in a
Speaker 1: day in which I mean, you can't believe what you're
Speaker 1: seeing on your television screens twenty nine million call options,
Speaker 1: which is stunning, and then on Thursday we get bitcoin
Speaker 1: fort and at the same time you have Tesla rawling
Speaker 1: for a temph day, which is the longest winning streak
Speaker 1: on record, and now Elon Musk is the richest man
Speaker 1: in the world, overtaking Jeff Bezos. So mind blowing stuff
Speaker 1: going on this week to kick off the new year.
Speaker 1: It is a strange new world. I agree. I agree,
Speaker 1: that's stimmy. All the robin Hood traders and they're they're
Speaker 1: buying calls. Vincent, how about you? Did you see anything
Speaker 1: crazy this week? Yes? Yes, And by the way, first one,
Speaker 1: I want to give a shout out to too, Sarah
Speaker 1: for you know covering this this retailed frenzy option trading
Speaker 1: insanity and now you were one of the first journalists
Speaker 1: to do it, and you know, at first people were
Speaker 1: looking at it skeptically and it turned out to be
Speaker 1: I think one of the driving forces of and you
Speaker 1: call it it early saw a good job, so I
Speaker 1: appreciate it. I mean, I'll be the first to admit
Speaker 1: the first time I wrote about it was right after
Speaker 1: we got first quarter earning statements from the brokers, and
Speaker 1: you just saw the account openings, and I was like,
Speaker 1: you know, I think we have something here. And I
Speaker 1: started speaking with retail investors who are new to it
Speaker 1: opening up new accounts. And then I mean, at that
Speaker 1: point in time, I don't think I could have imagined
Speaker 1: what would have turned into. But I believe let me,
Speaker 1: let me go to my crazy thing, which which I
Speaker 1: know is not something that you're familiar with, or I'd
Speaker 1: be very surprised because about strip clubs actually existential answer. Yeah,
Speaker 1: So as as part of that existential angstraight, I was
Speaker 1: actually looking at a strip club and whether there was
Speaker 1: any stock on that because I thought, hey, you know,
Speaker 1: pandemic is over, maybe maybe people want to have a
Speaker 1: good time. So that it turns out there is actually
Speaker 1: a small gap. It's called r CI Hospitality Holdings UM
Speaker 1: and again at background, we had a pandemic last year.
Speaker 1: What was the twelve month return for our CEI of
Speaker 1: Spetality Holdings, which is a strip club operator mostly out
Speaker 1: of Texas. Settle, give me a guess. I'll say, I
Speaker 1: know it's gonna be counterintuitive or you wouldn't be mentioning it,
Speaker 1: So I'll say, plus Sarah, I'll take the over on that.
Speaker 1: So I'll be smart and say any one so you'll
Speaker 1: have a year with a global pandemic and meant that
Speaker 1: they social distancing and lockdown, and a strip club operator
Speaker 1: doubles in that year all time high at any trades
Speaker 1: for a hundred times, a hundred times earnings, highest valuation
Speaker 1: on record, and so forth, and h The reason I
Speaker 1: bring that up, I think is is also to to highlight, um,
Speaker 1: how crazy the rally and small caps have been. I
Speaker 1: felt two months ago there was an opportunity on smoke
Speaker 1: caps actually compared to the you know, the big tech companies.
Speaker 1: But since November, I mean the Russell's two thousand has
Speaker 1: been on fire and pretty much every name, including strip
Speaker 1: club operators, that really increased dramatical in value, which kind
Speaker 1: of brings me to my my reopening trade. I think,
Speaker 1: you know, I still like the reopening trade. I just
Speaker 1: don't like it in the US. I think people need
Speaker 1: to look outside of the US, especially look at the
Speaker 1: country explain. I mean, to miss, Spain is like the
Speaker 1: perfect on tie COVID country, right, I mean, it's a
Speaker 1: beach bodies, clubs, restaurants, so tourism. So if you want
Speaker 1: to bet on things. Coming back to normal you buy
Speaker 1: the IBEX verty five index and here you see actually
Speaker 1: valuation by not are much lower than they work with
Speaker 1: pandemic what in the US, even the most exposed name
Speaker 1: of you know, are very expensive. So that's the case
Speaker 1: for international is the U S which I think he's
Speaker 1: kind of the one of these trends that he's a
Speaker 1: that he's already changing from the you know one to
Speaker 1: the cry day k Well that that strip club operator is.
Speaker 1: I guess it's the exception to your bear market for
Speaker 1: humans thesis. There's that one. You know, it's hard to
Speaker 1: automate that that profession. We're in the midst of the
Speaker 1: return to real assets. That's temporary. So many comments, I'm
Speaker 1: not gonna make uh for good reasons. All right, Well,
Speaker 1: that's a good one. That's a good one. I'm I
Speaker 1: don't know, sorry. I think we gotta give it to Vincent,
Speaker 1: but I'll give you mine anyway. Just in case. Our
Speaker 1: colleague vill Donna had interesting right up of a some
Speaker 1: commentary from none other than Bill Miller, you know, one
Speaker 1: of the most famous value investors of the twentieth century,
Speaker 1: and he sounds very very bullish on bitcoin um And
Speaker 1: the reason is he thinks, you know, there's been a
Speaker 1: few companies that are actually sort of keeping their cash
Speaker 1: reserves least a small portion of them on their balance
Speaker 1: sheet in bitcoin. Um, and he thinks that trend is
Speaker 1: going to accelerate. I think the quote was a torrent
Speaker 1: of corporate cash into bitcoin. And the reason I think
Speaker 1: this is crazy is I'm not saying he's he's wrong.
Speaker 1: He very well could be right. But to me, what's
Speaker 1: crazy he's just how far the pendulum swung in terms
Speaker 1: of sort of old school equity and investor types who
Speaker 1: used to just roll their eyes completely at bitcoin, so
Speaker 1: this year going you know, the opposite way and and
Speaker 1: really making a case for making a bowl case where
Speaker 1: But it so I gotta wonder. You know, people love
Speaker 1: bitcoin allegedly for where it's non correlation to other assets,
Speaker 1: but you start loading up corporate balance sheets with bitcoin. Uh,
Speaker 1: that doesn't sound like a recipe for non correlated assets
Speaker 1: to me anymore? Is uh, where do you see that
Speaker 1: trend going? Do you think this is uh, you know,
Speaker 1: something that more companies could could get on the bus with,
Speaker 1: or is it you know we'll wake up one day
Speaker 1: to a negative bitcoin day and that that's where is
Speaker 1: just gonna go away. Well wait wait, wait you go
Speaker 1: to bitcoin day. I mean it happened before, and you
Speaker 1: know hasn't ready hasn't ready done much for uh for
Speaker 1: for bitcoin. Um, I think what your point is an
Speaker 1: interesting thing is is the institutional adoption of bitcoin is
Speaker 1: something that really impresses me and and basically turning it
Speaker 1: into an asset class. And I mean it's probably not
Speaker 1: the answer you expect, but for me that the question
Speaker 1: I think is one for regulators. Um. I mean, I'm
Speaker 1: convinced that at the end of the day, Um, you
Speaker 1: know there will be some something will be done. As
Speaker 1: Bitcoin it's too much or the threat to the existing
Speaker 1: infrastructure the financial system to be let alone and to
Speaker 1: be like but but the more it grows, the harder
Speaker 1: it is going to be too to underline it. Especially
Speaker 1: if we see you know, those things actually saying open
Speaker 1: bound sheet or even like minuture fronts or you know,
Speaker 1: an accentuary product that that a little bit coins, then
Speaker 1: I mean, you know, it won't just be like cracking
Speaker 1: down on a crazy on a bunch of crazy loonies
Speaker 1: that are you know, day trading from their basement. But
Speaker 1: if it coin becomes like something that people actually use
Speaker 1: and invest in. Um, I think it will make the
Speaker 1: the unfolding which I think will need to happen again.
Speaker 1: I don't think governments can allow a parallel currency to
Speaker 1: develop and that they watch. I mean, it's an essential
Speaker 1: part of serenity. Uh. And I would really wish to
Speaker 1: know what regulators are thinking of doing. And the more
Speaker 1: the more they wait, the bigger problem grows. Yeah. I
Speaker 1: think everyone's hyped up about possibly getting that ETF this year,
Speaker 1: and maybe that could be the one, the one sort
Speaker 1: of pushback we get. I don't know, I don't know
Speaker 1: hard to say. I guess we have to hear who
Speaker 1: the SEC chairman is. Certainly, I mean, it's been unbelievable
Speaker 1: to watch. But before we let you go, Vincent, I
Speaker 1: have one more are from Twitter, and I've got to
Speaker 1: read this. This is from John Luca Sagretto and he
Speaker 1: did some serious reporting here, so I'm just gonna read
Speaker 1: this for you. Around one month ago, a post on
Speaker 1: Wall Street Bets was made regarding the fact that if
Speaker 1: everyone on Wall Street Bets bought at least twenty five
Speaker 1: shares of game Stop, they could end up owning the
Speaker 1: entire float force a short squeeze and also paying themselves
Speaker 1: out with a free PS five once they became quote
Speaker 1: owners of the company said the next day the stock
Speaker 1: was up around six percent and closed of two percent.
Speaker 1: The stock was then up for the week around two
Speaker 1: point four percent before crashing in just five days between
Speaker 1: the eighth and the fourteenth of December, which is the
Speaker 1: most he points out. Then he goes on, he says,
Speaker 1: and here is where things get interesting. Dators in Wall
Speaker 1: Street bet didn't give up. Since then, the stock is
Speaker 1: up fort and people in Wall Street bets are celebrating
Speaker 1: their gains in the classics style. Uh. And then he
Speaker 1: sent a fun video to that's some serious reporting. Uh
Speaker 1: see the deepest crazy thing message I ever got in
Speaker 1: and just goes back to the retail story of the year.
Speaker 1: I mean, it's what It's unbelievable. I feel like Reddit
Speaker 1: is to the stock market what the Trump's supporters are
Speaker 1: to the Capitol. You know, they just storming the thing,
Speaker 1: running rock shot, sitting in the big comfy chair at
Speaker 1: the front of the room, doing whatever they want. I'll
Speaker 1: let you run with that analogy, Mike, Okay, let did happen?
Speaker 1: But Vincent Delawart It's always such a pleasure to speak
Speaker 1: with you, to get your thoughts, always thought provoking, and
Speaker 1: we're so happy that we could have you on one
Speaker 1: of our first podcasts of the year. Thank you so much.
Speaker 1: Always a pleasure to keep up the great work, and
Speaker 1: I'm sure you have many more crazy things to report
Speaker 1: this year What Goes Up We'll be back next week.
Speaker 1: Until then, you can find us on the Bloomberg Terminal,
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Speaker 1: find us as You can find us on Twitter, follow
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Speaker 1: is produced by Doph Forehas. The head of Bloomberg Podcast
Speaker 1: is Francesco Levie. Thanks for listening. See you next time.