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Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene

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Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. We've

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Speaker 1: gotta get to staying natives in this morning snacks banks,

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Speaker 1: Ceio waiting patiently staying up. Just kick things off. Your

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Speaker 1: take on the last couple of days in this market, please.

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Speaker 1: I think it's super interesting and I think it plays

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Speaker 1: into the bigger narrative. It's in place that we have

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Speaker 1: a social revolution going on between the halfs and the

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Speaker 1: half not in the words of the people who played

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Speaker 1: the stock market, the Wall Street suits and and and

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Speaker 1: the retailers. We have the fact a fat that continues

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Speaker 1: to play a game where they ignore facts. I guess

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Speaker 1: Paul's next statement, we're be that the world is flat

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Speaker 1: or that gravity is something that was invented in terms

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Speaker 1: of fake news. And finally, I think most most importantly,

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Speaker 1: we have the fact that you know, fat needs to

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Speaker 1: stand out one day soon together with the treachery secretary

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Speaker 1: that's incoming and realized that the financial repression that goes

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Speaker 1: on today creates a market which is in its nature

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Speaker 1: is a one size bet with the market at old times.

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Speaker 1: So you have created by virtue of this extended policy,

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Speaker 1: and look into the future of even more extension of

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Speaker 1: the same policy tool. With the financial repression, you create

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Speaker 1: a betting market, a betting market. And just to fill

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Speaker 1: in people who did not hear jr. Own Power yesterday,

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Speaker 1: you are throwing shaded his comment where he said, if

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Speaker 1: you look at what's really been driving asset prices really

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Speaker 1: in the last couple of months, it isn't monetary policy.

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Speaker 1: The connection between low interest rates and asset values is

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Speaker 1: probably something that's not as tight as people think. Steve,

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Speaker 1: given that we are in this betting market, do you

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Speaker 1: think that this populist shift, this ang her that you're

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Speaker 1: talking about that seems to be a hallmark, whether in

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Speaker 1: actuality in terms of who's doing the trading, or at

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Speaker 1: least in the sentiment on these chat rooms, how else

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Speaker 1: will be expressed in markets? In other words, is this

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Speaker 1: going to be a pervasive feature that does affect where

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Speaker 1: prices end up going? It does, and I'd already done it.

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Speaker 1: Of course you're all aware of a few hedgephones that's

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Speaker 1: been in trouble. And if you look at the whole

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Speaker 1: construction in the inside the fund management business of long

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Speaker 1: short portfolios, if you have and and attacked the list

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Speaker 1: of the most fifty most shortest stocks, you're also attagging

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Speaker 1: the nominal names that everyone has in the short portfolio

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Speaker 1: of the big hedge fund. So we will see, and

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Speaker 1: we saw yesterday and particularly in the green transformation space,

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Speaker 1: the energy space, that a lot of names came down

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Speaker 1: inside today simply because the collateral value of the shorts

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Speaker 1: blew up, or the lag of value in the shorts

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Speaker 1: blew up, and they need to sell collateral against meaning

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Speaker 1: that they had to sell the profity position. And I

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Speaker 1: think at Lisa is very important to note that we

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Speaker 1: had in percentage term, the single biggest move in VIC

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Speaker 1: yesterday we've ever seen, not in nominal terms, but in

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Speaker 1: in in in percentage terms, which is a clean indication.

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Speaker 1: And for the record, if you look at the curve

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Speaker 1: in the VIC futures, the indication of what is to come,

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Speaker 1: we have seen that the front end contract is now

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Speaker 1: of course, a gradually being priced relatively Steve part of

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Speaker 1: your charm is unlike a lot of c I O s.

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Speaker 1: You have massive trading experience of enjoying the bid, walking

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Speaker 1: away the challenges a bid, and you can't find an

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Speaker 1: ask out there. Right now, I want you to talk

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Speaker 1: about what we're seeing hedge funds, short retail, the guys

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Speaker 1: on the couch, and I think they're way more sophisticated

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Speaker 1: than people think. But I want you to talk about

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Speaker 1: the cost to short. The big guys clear their short

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Speaker 1: everybody else's reshorting game stop right now, and the so

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Speaker 1: called borrow too short is immense. What is that signal

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Speaker 1: to you? It signals that you know, if there's one

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Speaker 1: component of the market which and I agree with you, Tom,

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Speaker 1: we have to give credit to these people in the

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Speaker 1: retail spills. Not only are they going after the short

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Speaker 1: names where the vulnerability is because you have to deliver

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Speaker 1: these stocks back to the owners and they can get

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Speaker 1: call on that, so they have, you know, a counterparty risk,

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Speaker 1: but they also using the optionality, the convexity of options,

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Speaker 1: which translated into plain English means that they're getting a

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Speaker 1: massive leverage of just buying the nearby calls. And don't

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Speaker 1: forget this is a generation of people, young people who

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Speaker 1: primarily probably came from the betting industry. In the betting industry,

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Speaker 1: the probability on a bed is at best fifty minus

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Speaker 1: the house. Now they're they're aggurgating their voices, their money

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Speaker 1: in a game against the short interest as you allude to,

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Speaker 1: with a game that says, you know, we're playing this

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Speaker 1: like a lottery ticket. We can buy the calls forever

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Speaker 1: and we will lose, as we always start in the

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Speaker 1: begging in the betting, you know, once in a while,

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Speaker 1: but as long as the gains out with that. So

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Speaker 1: we have changed the dynamics. And I think for us,

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Speaker 1: all suits, as they call us, we need to realize

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Speaker 1: that the game has changed and and and that and

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Speaker 1: I have to go back to fit because sorry, Jonathan,

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Speaker 1: just we have to go back to fit. It is

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Speaker 1: a repression market. We have the repression of the markets.

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Speaker 1: We have no price discovery. Of course we get to

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Speaker 1: a betting situation. Well, let's add to that for Chairman

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Speaker 1: Powell once it really get on his radar, staing, because

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Speaker 1: in the last twenty four hours in that news conference,

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Speaker 1: that was just the strug of the shoulders. We've got

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Speaker 1: bigger things to worry about, and they do, and absolutely

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Speaker 1: and I think probably also we should get credit to

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Speaker 1: Powell to then connecting it to the full employment mandate

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Speaker 1: that he's trying to operate. He put it in the

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Speaker 1: context that despite the fact we run a very low

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Speaker 1: interest rate and we have you know, on hold for

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Speaker 1: at least into twenty four in terms of changes to

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Speaker 1: that interst rate, we still have six million people who

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Speaker 1: are unemployed. So the market disagree with Paul on the

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Speaker 1: fact that you can go back to a a model

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Speaker 1: where you have full employment. And for the record, you know,

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Speaker 1: if you ask any future is to anyone who wants

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Speaker 1: to look into the future, they all expect that by

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Speaker 1: we'll have people maybe not unemployed, but deployed. Alternatively, So

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Speaker 1: to creating a model now that drives towards full employment,

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Speaker 1: full capacity under the headlines of the technology and and

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Speaker 1: and and on the cult demographic is going the other way,

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Speaker 1: I think just makes off a huge policy mistakes incoming Stein.

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Speaker 1: I love what you said. They're about the conflation year

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Speaker 1: of quantitative finance, and literally at Thorpe like betting over

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Speaker 1: the people trying to play a game, as we heard

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Speaker 1: from Villier, the hunted the hunter being hunted as well.

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Speaker 1: I want you to conflate Paul Wilmon of Imperial College,

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Speaker 1: the great Nacien Talab and also what we heard from

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Speaker 1: the legend or dairy ed Thorpe, which is it's okay

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Speaker 1: to take a loss. I know I'm going to take

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Speaker 1: a loss, but I've got the upper hand right now.

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Speaker 1: Explain that. Yeah. So, so it's really optionality. I mean crypto.

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Speaker 1: The crypto space is another example. So let's use crypto

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Speaker 1: as an optionality. And it's thoughts and these comments. If

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Speaker 1: you play the game of crypto, you don't even need

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Speaker 1: to understand crypto. You don't need to understand stocks. If

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Speaker 1: you're betting every time five percent of your wage, five

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Speaker 1: of your total amount, and you have an optionality that says,

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Speaker 1: yet once in a while you get a fifty two

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Speaker 1: hundred payback on that exactly bet, then you will always

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Speaker 1: be ahead because you can control the destruction of your

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Speaker 1: capital relative to your earning. So you have a very

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Speaker 1: very high optionality game in the market. And that optionality,

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Speaker 1: of course is being not only supported but being extended

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Speaker 1: in terms of guarantees the length the death by by

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Speaker 1: the Federal Reserve, who of course has a different agenda,

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Speaker 1: but one of the unattended consequences being that the support

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Speaker 1: that very optionality itself. Steve always great to catch up,

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Speaker 1: Sir Stean Jacipson, Saxa Bank see io Steve, Thank very much.

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Speaker 1: Shan across rights blisteringly straightforward tech reports. They're wonderfully clear.

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Speaker 1: I love when it's seven pages, it's actually seven pages

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Speaker 1: and not filled with a lot of fillers. She's across

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Speaker 1: at Research and joins us now Shannon off of Microsoft

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Speaker 1: and off of Apple. Let's just start with the big,

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Speaker 1: big tech. What have you learned? Well, I mean, I

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Speaker 1: think what we've learned is that certainly the consumer has

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Speaker 1: been extremely resilient. UM. You know, iPhones were up seventy year.

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Speaker 1: PC sales were very strong at at Microsoft, UM, you know.

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Speaker 1: And I think we've also learned that the cloud is

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Speaker 1: a big focus UM services within Apple on which we're up,

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Speaker 1: we're driven partially by the cloud services they have. You know,

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Speaker 1: obviously Azure was up fifty so UM. I think both

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Speaker 1: of those trends are are strong. Enterprise a little weaker, UM,

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Speaker 1: not a little weaker, but it remains remains a little

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Speaker 1: bit shaky. Year I would say, in the game of extrapolation,

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Speaker 1: what is your conviction out two years or five years

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Speaker 1: on these names. They're getting a pandemic pop. How do

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Speaker 1: you recalibrate your conviction out to to five years? You know,

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Speaker 1: I actually I've remained really positive on both of these companies.

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Speaker 1: I think you know, Apple is is. I mean, they're

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Speaker 1: they have a billion iPhones out there, um and they're installed.

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Speaker 1: They say at one point six billion devices that people

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Speaker 1: are utilizing. Their services continue to grow. UM. They're spending

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Speaker 1: you know, aggressively in R and D, which is continuing

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Speaker 1: to support their product pipeline. You know, they came out

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Speaker 1: with the their AirPod maxes. They're continuing to be sold

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Speaker 1: out some of the Again, some of these products don't

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Speaker 1: necessarily move the needle a lot, but in agg aggregate

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Speaker 1: they do. UM. For Microsoft, you know, I think they're

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Speaker 1: Azure is is quickly becoming, you know, one of the

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Speaker 1: obviously the top choices from a cloud perspective. UM companies

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Speaker 1: continue to shift to cloud services like Office three, six five.

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Speaker 1: And you know the interesting thing about PCs is that

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Speaker 1: where I don't know, a few years ago, everybody said

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Speaker 1: they were dead and everybody was going to go to

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Speaker 1: a tablet. Now the PC companies are all talking about

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Speaker 1: one PC per person, that one PC per household. So

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Speaker 1: there's still a long ways to go in terms of

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Speaker 1: PC adoption and penetration. So then can we just take

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Speaker 1: a step back. The shares are lower today because they

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Speaker 1: didn't provide a forecast, and yet they had a revenue

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Speaker 1: for the quarter of more than a hundred billion dollars,

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Speaker 1: surpassing revenues for full years as recently as two thousand

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Speaker 1: and eleven. And people are selling the shares because they

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Speaker 1: don't have visibility in the near term that they're going

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Speaker 1: to absolutely crush it the same way that they have.

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Speaker 1: There is a question of what they have to do

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Speaker 1: with their money with all of that cash in order

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Speaker 1: to keep crushing it. At a time when Facebook views

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Speaker 1: Apple is potentially it's biggest competitor, in Volkswagen views Apples

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Speaker 1: its biggest competitor with Eye Message and the Apple Car, respectively.

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Speaker 1: Is Apple investing its cash in enterprises that will lead

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Speaker 1: it to that dominance in those particular industries in a

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Speaker 1: different way than it is now. Well, I look, I

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Speaker 1: think Apples running the playbook they've been running for several years,

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Speaker 1: and it's clearly worked very well. So I don't think

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Speaker 1: they need to go and buy something, um, you know,

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Speaker 1: and be aggressive from an acquisition standpoint. You know, you

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Speaker 1: look at their their R and D spend. It's it's significant.

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Speaker 1: You know, we hear chatter about autos. You know, they're

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Speaker 1: they're obviously investing heavily in healthcare. UM. I'm not sure

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Speaker 1: that they need to really change what they're doing. I mean,

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Speaker 1: you know, if you look at the trajectory of the revenue.

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Speaker 1: You know, last year they did two billion, and this

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Speaker 1: year we have them doing three two billion. UM. The

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Speaker 1: numbers are staggering. I still remember when they gave us

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Speaker 1: a model that said, you know, we're going to do

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Speaker 1: eight to twelve billion over the next few years annually.

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Speaker 1: So it's working. Um. And you know, I think that

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Speaker 1: they will come out with They've always said they will

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Speaker 1: come out with products when they're ready to release them,

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Speaker 1: and they're the best product out there. They weren't the

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Speaker 1: first product on PCs, they weren't the first product on iPods,

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Speaker 1: they weren't the first products on tablets, and yet they

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Speaker 1: have come out and and iPhones. I would say you

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Speaker 1: can make the argument there they were at first with

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Speaker 1: with the product they had, but you know, they have

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Speaker 1: continued to take significant share and become dominant leaders in

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Speaker 1: the categories, and I think we will see that again

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Speaker 1: in some of these other products, but it will take

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Speaker 1: some time. Shannon, we gotta go. There's an aline go

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Speaker 1: into space. Shannon Cross Cross race an analyst. The gains

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Speaker 1: and losses are not fifty fifty. You can have a

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Speaker 1: you can have or eight percent or seven percent of

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Speaker 1: the people capture the game and leasa to your point.

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Speaker 1: Everybody else loses money on the way out. Ander Sheets

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Speaker 1: studied this at Brown University. You're gonna get right to

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Speaker 1: in futures of negative thirteen the vics thirty three, Ander Sheets,

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Speaker 1: Let's open up, and I don't want to get you

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Speaker 1: in trouble with Mr Gorman. You're really good at this mathematics.

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Speaker 1: Your thoughts on this moment is the hedge funds get clovered? Well,

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Speaker 1: I think it's important to to separate that there are

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Speaker 1: you overlapping storylines in this market. There's a storyline around

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Speaker 1: the strength of the recovery and will there be issues

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Speaker 1: or delays with the rollout of vaccine, And then I

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Speaker 1: think there's a separate discussion now around the concentration of

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Speaker 1: positioning which I think has been a discussion now for

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Speaker 1: some time. I think we've this has been a very

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Speaker 1: unequal market for for years really, with very uneven valuations

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Speaker 1: across sectors, across styles, and very uneven positioning among active

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Speaker 1: investors to try and take advantage of that, and so

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Speaker 1: I think it's important to separate those things out, and ultimately,

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Speaker 1: in my view, the macroeconomic picture still looks good. We

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Speaker 1: at Morgan Stanley are still very constructive on the growth backdrop,

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Speaker 1: and that makes makes us think that this is a

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Speaker 1: more modest adjustment rather than some larger um challenge for

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Speaker 1: the market. Bear with me here, Andrew, I want to

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Speaker 1: think this out with you. Live on at just one

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Speaker 1: of the conversations that you and I have been having

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Speaker 1: for the best part of the decade need to change.

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Speaker 1: We see market moves, we talk about the stories that

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Speaker 1: are driving those moves. We often draw a line back

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Speaker 1: to the fundamentals, the outlook, the story, so to speak.

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Speaker 1: And I just wanted sometimes at the moment, particularly I

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Speaker 1: think back to late August early September, that maybe it's

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Speaker 1: just this explosion in short dated call options, and it's

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Speaker 1: the tailwack in the dog, and we'll sit around trying

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Speaker 1: to come up with these fundamental reasons for any given

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Speaker 1: moving in markets, because that's what we've done for decades.

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Speaker 1: But I wonder Andrew, whether we just need to change

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Speaker 1: our approach and the way we actually consider what's happening

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Speaker 1: around us and the way we talk about the price action. Yeah. Look,

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Speaker 1: I think that's a very good point, and I think

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Speaker 1: this is a case where we're more than one thing

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Speaker 1: can be true. I think it can be true that

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Speaker 1: you're seeing an unusually large amount of retail industrial activity

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Speaker 1: of call options activity that you're seeing, you know, on

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Speaker 1: an unusually amount of large amount of liquidity that that's

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Speaker 1: going into the market. And yet you know, viewed, I

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Speaker 1: think from from other lenses, market is behaving and has

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Speaker 1: been behaving for some time, I think in a very rational,

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Speaker 1: fundamental way. My favorite example is if you look over

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Speaker 1: the last decade, you know, the market that's performed the

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Speaker 1: best by far has been the SMP five hundred, which

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Speaker 1: has had the best earnings growth by far of the

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Speaker 1: international markets. And so it's not the case that you know,

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Speaker 1: the SMP is only up because rates are low or

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Speaker 1: the set is doing que the the SMP has had

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Speaker 1: significantly superior earnings growth to those other major markets. So

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Speaker 1: I think it's a case of kind of both things

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Speaker 1: can can be true. You can have shifts and market behavior,

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Speaker 1: you can have um uh, you know, changing patterns of behavior.

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Speaker 1: But I do think overall, those those broader fundamental trends

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Speaker 1: remain intact and remain important. Andrew, I love that you

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Speaker 1: started by talking about the different narratives going at the

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Speaker 1: same time. It is a very difficult market to sum

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Speaker 1: up in one word. One of the narratives is the

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Speaker 1: concentration of markets, and we're seeing this both on a

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Speaker 1: specific stock basis as well on as a consensus view

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Speaker 1: perspective as well. For example, coming into the year, the

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Speaker 1: weaker dollar call was very much consensus. The higher rate

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Speaker 1: call was very much consensus. Both of those have been

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Speaker 1: turned on their heads in the first few weeks. One

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Speaker 1: how important is it to look at the concentration of

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Speaker 1: positioning and move against that in order to avoid such

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Speaker 1: violent repositioning going forward. Yeah, I think this is a

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Speaker 1: really important point. And again I think a theme that

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Speaker 1: that interestingly varies across markets. I think we find there

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Speaker 1: are some views where I think we're in the consensus.

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Speaker 1: We like a lot of people think interest rates in

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Speaker 1: the US go higher. There's some areas where I think

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Speaker 1: we're we're out of the consensus, or think some what differently,

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Speaker 1: We're not in that week dollar camp. Um we we

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Speaker 1: think that the equally weighted SMP five hundred while outperform

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Speaker 1: the SMP five hundred. I e. You'll see a broadening

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Speaker 1: of the market and and underperformance of some of those

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Speaker 1: larger um those larger weighted stocks, as as often happens

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Speaker 1: coming coming out of a recession. And again I think

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Speaker 1: if you look at some of the recent price action,

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Speaker 1: you know, again I think this is, you know, an

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Speaker 1: interesting thing to uh to, an interesting or an important

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Speaker 1: way to die diagnosed. What's going on is what's leading

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Speaker 1: the market the most widely held stocks or is it

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Speaker 1: the more economically sensitive ones? And there were all students

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Speaker 1: of the mop up books on all these crisis I

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Speaker 1: think of Stanley Fisher's classic book on inder sheets in

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Speaker 1: the derivative space, whether notional or the small amount of

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Speaker 1: actually derivatives issued traded, however you want to phrase it.

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Speaker 1: What are the shadows out there for a guy like you?

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Speaker 1: What are the unknowns? Are the mysteries of the derivative

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Speaker 1: space right now. So I think this is this is

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Speaker 1: quite fascinating actually because even you know, a week ago

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Speaker 1: or two weeks ago and things seemed much calmer, the

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Speaker 1: equity options market was still expecting quite a bit of

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Speaker 1: volatility at the overall index level and was quite worried

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Speaker 1: about a larger draw down. Right that that skew was

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Speaker 1: was historically very steep, and so I don't think this

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Speaker 1: is a case where you could say the market was

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Speaker 1: completely blindsided. There was, you know, an elevated amount of

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Speaker 1: uncertainty expected by the options market, and then what we

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Speaker 1: saw yesterday was an even larger adjustment of that. You

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Speaker 1: had a much larger move in the vix um than

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Speaker 1: you did versus credit or other asset classes. So and

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Speaker 1: I think that also speaks to the positioning nature of

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Speaker 1: it that this has I think the hallmarks of a

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Speaker 1: var shock or a kind of positioning shock, more so

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Speaker 1: than a than a real economic shift in view, Well

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Speaker 1: put Andrew interesting ty Andrew shas that of moments down

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Speaker 1: Andrew right to catch up, Sir, I was in one

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Speaker 1: of my fancy breakfasts that I have where I hold

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Speaker 1: court yesterday with the entourage and I got a phone call.

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Speaker 1: It's from Pharaoh, so I had to take it, of course,

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Speaker 1: and he's screaming at me, Tom, forget about all these pundits.

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Speaker 1: Get us a rocket scientist. So we came close. We've

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Speaker 1: had a wonderful set of conversations. Mr Gartman on the

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Speaker 1: history of the moment. Steve Jacobson, I thought was lights

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Speaker 1: out at Saxel Bank. And now James Angel he is

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Speaker 1: at Georgetown, Jim Angel. And what's so important here is

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Speaker 1: he is a rocket scientist, is engineering out of cal Tech,

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Speaker 1: his brilliance and mathematics at Berkeley, among others. And we're

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Speaker 1: thrilled that the finance professor could join us this morning.

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Speaker 1: I've got to go, Jim right away to you with

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Speaker 1: a Bloomberg down the hallway at Georgetown about whether you're

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Speaker 1: participating in this, if you enjoyed being long or short

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Speaker 1: game stuff. Well, I was long until yesterday, but when

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Speaker 1: the stock went crazy, I decided to go short just

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Speaker 1: a little bit. Although I see that it is doubled overnight,

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Speaker 1: so I've proven to myself once again I am a

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Speaker 1: lousy trader. Now we need a booker here on surveillance,

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Speaker 1: so if they throw you out the door Georgetown. You've

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Speaker 1: got a job up here, Jim Angel. If that's the

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Speaker 1: If that's the reality, are you worried that the people

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Speaker 1: on the couches are dumb or are they as sophisticated

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Speaker 1: as you are? Um, I'm sure they're more sophisticated than me,

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Speaker 1: that's for sure. But I mean, what we have here

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Speaker 1: is a confluence of events. Yeah, we have the mother

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Speaker 1: of all short squeezes going on, you know, at the

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Speaker 1: same time we have a retail herd. But I'm also

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Speaker 1: hearing that hedge funds are jumping on board. As one

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Speaker 1: hedge he told me, he said, Hey, when the herd

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Speaker 1: moves through the gate, get on a cow. So I

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Speaker 1: think what we're seeing is this move is being amplified

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Speaker 1: by other hedge funds that are jumping on board. They

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Speaker 1: smell the blood in the water, they can see that

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Speaker 1: some that shorts are overexposed, and they're playing a game

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Speaker 1: of musical chairs to ride it until it turns well.

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Speaker 1: But Professor Angel, this goes to a broader issue here,

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Speaker 1: which is the question of democratizing the market, allowing smaller

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Speaker 1: traders to participate in a rally that has been unprecedented

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Speaker 1: and phenomenal in equities fueled by policies versus protecting the

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Speaker 1: individual and muster from institutional investors who are manipulating the

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Speaker 1: herds to do their bidding right. And that's sort of

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Speaker 1: the question. How do you distinguish one from the other.

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Speaker 1: It's very hard, there's no easy way. Personally, I think

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Speaker 1: investors should have the right to invest in anything they want,

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Speaker 1: So I'm very literally about people who want to protect

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Speaker 1: people from themselves. Your litera of people protecting people from

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Speaker 1: their themselves. In other words, you think that there is

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Speaker 1: nothing wrong with what's currently going on, and you disagree

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Speaker 1: with Senator Warren in saying that the SEC regulators do

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Speaker 1: your job, get involved because there is nothing for them

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Speaker 1: to do. This is just markets the way that they

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Speaker 1: ought to be a running Is that correct? Not completely?

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Speaker 1: There are things that regulators should be doing. You know,

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Speaker 1: they should be investigating what's going on because we see

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Speaker 1: a stock price that is clearly disconnected reality and who's

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Speaker 1: driving it now is a test of a new consolidated

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Speaker 1: out a trail. It's not fully up in thing, but

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Speaker 1: it's partially running. Let's see if it's giving us good data. Also,

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Speaker 1: what's causing the short squeeze. This is not the first

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Speaker 1: time we've seen these kind of spikes in prices, and

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Speaker 1: let's face it, an overpriced stock is nobody's friend. When

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Speaker 1: the market or a single stock is overpriced, all you're

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Speaker 1: doing is locking in future losses for investors when that

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Speaker 1: stock comes back to its proper level. So we don't know.

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Speaker 1: Super high prices are not good for anybody. Now, the

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Speaker 1: SEC should also be looking at imperfections in the market

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Speaker 1: that are driving the short squeeze. I think we need

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Speaker 1: improvements in the customer Protection Rule fifteen three Dash three.

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Speaker 1: I think we also need to upgrade Rule two oh

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Speaker 1: four on regulation SHO. These are things that I think

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Speaker 1: can be done to improve customer protection and smooth out

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Speaker 1: some of the wrinkles that are leading to these kind

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Speaker 1: of price spikes. James terrifically smart and we appreciate your time,

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Speaker 1: so please come back soon. Professor James Angel that of

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Speaker 1: George Town came out of New York City, studied under

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Speaker 1: stand Fisher at m I T and went on to

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Speaker 1: a sterling academics side at Columbia University. I'm out has

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Speaker 1: passed as a governor of the Federal Reserve System and

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Speaker 1: we are thrilled on our new policy that Rick Michigan

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Speaker 1: could join us this morning. Rick, I've got a two

430
00:23:23,680 --> 00:23:25,480
Speaker 1: hour interview ahead of me with you, and I don't

431
00:23:25,480 --> 00:23:28,600
Speaker 1: have a time for it as well. Do you see

432
00:23:29,280 --> 00:23:34,520
Speaker 1: the construction of possible policy in Washington or is it

433
00:23:34,520 --> 00:23:37,800
Speaker 1: going to be gridlock as we've known. I think they're

434
00:23:37,800 --> 00:23:41,560
Speaker 1: gonna get something's done, but I think that, uh, there's

435
00:23:41,560 --> 00:23:43,880
Speaker 1: gonna be issues on sub parts of what the Biden

436
00:23:43,880 --> 00:23:47,840
Speaker 1: administration wants. So I think what they definitely will do, uh,

437
00:23:48,000 --> 00:23:50,160
Speaker 1: and I think do it quickly is to get funding

438
00:23:50,240 --> 00:23:55,359
Speaker 1: for uh more vaccinations, better testing and so forth. Uh.

439
00:23:56,040 --> 00:23:58,720
Speaker 1: I agree with J. Powell on this, which is what's

440
00:23:58,760 --> 00:24:00,959
Speaker 1: happening to kind of. It's really all about the COVID.

441
00:24:01,359 --> 00:24:04,160
Speaker 1: That's the deal that that if we get COVID under

442
00:24:04,200 --> 00:24:06,919
Speaker 1: control quickly, the economy will come back and actually can

443
00:24:06,960 --> 00:24:09,400
Speaker 1: come back fairly strongly because of all the pent up

444
00:24:09,440 --> 00:24:12,919
Speaker 1: saving and uh uh you know me and many others.

445
00:24:13,080 --> 00:24:15,360
Speaker 1: The day that I can start traveling, man, I'm I'm

446
00:24:15,400 --> 00:24:17,520
Speaker 1: out there. I want to spend some money. I'd like

447
00:24:17,520 --> 00:24:22,040
Speaker 1: to go out to restaurants. Uh that uh right now,

448
00:24:22,080 --> 00:24:24,560
Speaker 1: I'm living the dream and uh I want to live

449
00:24:24,560 --> 00:24:27,320
Speaker 1: a much better dream in terms of after COVID gets

450
00:24:27,320 --> 00:24:29,560
Speaker 1: more under control, and I think that's really the key.

451
00:24:29,640 --> 00:24:32,000
Speaker 1: So I think that we are going to get a

452
00:24:32,080 --> 00:24:35,480
Speaker 1: quick progress on that. Where we'll become more complicated will

453
00:24:35,520 --> 00:24:38,760
Speaker 1: be on some other elements of this bill. I do

454
00:24:38,840 --> 00:24:42,119
Speaker 1: think we're gonna have some uh expansive fiscal policy. Some

455
00:24:42,200 --> 00:24:44,639
Speaker 1: checks will get set out, but there are other elements

456
00:24:44,680 --> 00:24:47,760
Speaker 1: of that legislation that may not get past, particularly minimum

457
00:24:47,760 --> 00:24:49,960
Speaker 1: wage and so forth, So we'll have to see. I

458
00:24:49,960 --> 00:24:52,320
Speaker 1: think that's one of the key issues for the federal

459
00:24:52,320 --> 00:24:54,879
Speaker 1: Reserve and for the economy, which is uh, is the

460
00:24:54,920 --> 00:24:59,000
Speaker 1: partnership in Washington going to be a problem or not? Remarkably,

461
00:24:59,000 --> 00:25:02,240
Speaker 1: it wasn't when the never first occurred. What was extraordinary.

462
00:25:02,280 --> 00:25:05,280
Speaker 1: Within two weeks of the pandemic being declared, we had

463
00:25:05,320 --> 00:25:08,120
Speaker 1: a two trillion dollar bill from Congress and it wasn't

464
00:25:08,160 --> 00:25:10,560
Speaker 1: any less petit partisan then it is than it is now.

465
00:25:10,640 --> 00:25:13,840
Speaker 1: So I actually optimistic that that that they'll do reasonable

466
00:25:14,480 --> 00:25:16,880
Speaker 1: things on this regard. But I think the real key

467
00:25:16,880 --> 00:25:19,439
Speaker 1: issue is gonna be how quickly do we get the

468
00:25:19,480 --> 00:25:22,280
Speaker 1: vaccine out? The Boden administration says by the end of

469
00:25:22,280 --> 00:25:24,159
Speaker 1: the summer, we may have everybody vaccine. That would be

470
00:25:24,200 --> 00:25:27,400
Speaker 1: good news if it happens. Uh, then there's this issue

471
00:25:27,440 --> 00:25:30,840
Speaker 1: the variance. How effective with the vaccine be against the variants?

472
00:25:30,840 --> 00:25:33,000
Speaker 1: Will we have to have new shots in order to

473
00:25:33,080 --> 00:25:35,200
Speaker 1: deal with some of these variants. So I think all

474
00:25:35,240 --> 00:25:38,040
Speaker 1: of this is basically, uh, the key to what's going

475
00:25:38,080 --> 00:25:40,760
Speaker 1: to happen to the economy. It's it dominates everything else.

476
00:25:41,359 --> 00:25:43,240
Speaker 1: And I think that that's why the FED is basically

477
00:25:43,440 --> 00:25:45,560
Speaker 1: in a holding pattern. They're not going to tighten and

478
00:25:45,600 --> 00:25:49,000
Speaker 1: they're not gonna depart from their expansionary policy regime that

479
00:25:49,000 --> 00:25:52,760
Speaker 1: they've set in place until there's really good information that

480
00:25:52,800 --> 00:25:55,280
Speaker 1: COVID starts to get under control, and we don't have

481
00:25:55,400 --> 00:25:57,080
Speaker 1: that yet. So that's why I think they're taking the

482
00:25:57,080 --> 00:26:00,040
Speaker 1: position they're in and why we're all waiting for a

483
00:26:00,160 --> 00:26:03,440
Speaker 1: hopefully better times but we don't know. Recollare me to

484
00:26:03,480 --> 00:26:05,840
Speaker 1: jump in just quickly. You mentioned the speed, the pace

485
00:26:05,880 --> 00:26:08,359
Speaker 1: of the snap back, the recovery. What is it about

486
00:26:08,359 --> 00:26:11,760
Speaker 1: the nature of this specific shock that dictates the snap

487
00:26:11,760 --> 00:26:15,120
Speaker 1: back the speed at which we recover. Okay, so it's

488
00:26:15,200 --> 00:26:18,639
Speaker 1: what's actually really unique about this, uh, this recession, the

489
00:26:18,680 --> 00:26:21,879
Speaker 1: COVID recession UH is UH not that we have a

490
00:26:21,920 --> 00:26:25,760
Speaker 1: sharp down turn in in UH in the economy, but

491
00:26:25,880 --> 00:26:28,200
Speaker 1: that this is actually a case of where what we

492
00:26:28,280 --> 00:26:32,400
Speaker 1: call a supply shock, the fact that that basically UH,

493
00:26:32,440 --> 00:26:35,040
Speaker 1: there's problems in terms of production and production of certain

494
00:26:35,080 --> 00:26:37,680
Speaker 1: types of goods, particularly things like that are service type

495
00:26:37,720 --> 00:26:41,440
Speaker 1: industry which involved one to one contact. The supply shock

496
00:26:41,680 --> 00:26:45,439
Speaker 1: is driving demand. So indeed, the dom thing is that

497
00:26:45,840 --> 00:26:49,840
Speaker 1: people aren't spending. But it's not because of of of

498
00:26:49,840 --> 00:26:53,360
Speaker 1: of typing, monetary policy or something else. It's because of

499
00:26:53,600 --> 00:26:57,280
Speaker 1: the fact that the COVID actually causes people not to

500
00:26:57,359 --> 00:27:00,520
Speaker 1: be able to spend. So once you release that, once

501
00:27:00,560 --> 00:27:03,919
Speaker 1: you get people back able to spend again, they've been

502
00:27:03,960 --> 00:27:06,240
Speaker 1: doing a lot of savings, they're gonna they're gonna start

503
00:27:06,240 --> 00:27:08,560
Speaker 1: spending and probably spending very strongly, which will be the

504
00:27:08,720 --> 00:27:12,840
Speaker 1: economy back fairly quickly. The problem is until people feel

505
00:27:12,880 --> 00:27:16,400
Speaker 1: comfortable with going and traveling, getting on an airplane, they

506
00:27:16,400 --> 00:27:19,960
Speaker 1: feel comfortable with going inside a restaurant, UH, and so forth.

507
00:27:20,320 --> 00:27:23,200
Speaker 1: This is gonna actually be key to what happens. So

508
00:27:23,640 --> 00:27:26,680
Speaker 1: I've just been vaccinated, so once the back I get

509
00:27:26,680 --> 00:27:29,719
Speaker 1: the second dose, I'm going to be much more willing

510
00:27:29,760 --> 00:27:32,520
Speaker 1: to go out and uh and travel for example. When

511
00:27:32,560 --> 00:27:35,199
Speaker 1: that happens to everybody, that's gonna be a big fan

512
00:27:35,320 --> 00:27:38,320
Speaker 1: thing to affect their demands. So it's it's unique because

513
00:27:38,480 --> 00:27:41,199
Speaker 1: what's happening on the book, we call the supply side

514
00:27:41,720 --> 00:27:45,679
Speaker 1: is actually driving demand, which is a very unusual situation,

515
00:27:46,160 --> 00:27:49,000
Speaker 1: almost unique to this recession, because we really never had

516
00:27:49,000 --> 00:27:51,720
Speaker 1: a pandemic recession before, at least in the modern era. Well,

517
00:27:51,800 --> 00:27:56,200
Speaker 1: congratulations on getting vaccinated. Oh yeah, absolutely, I'm free, free

518
00:27:56,200 --> 00:27:58,760
Speaker 1: at last. I know that's I look forward to that day.

519
00:27:58,800 --> 00:28:00,440
Speaker 1: There is a question though, in the mean time, when

520
00:28:00,440 --> 00:28:03,040
Speaker 1: people are sitting at home looking for something to do,

521
00:28:03,640 --> 00:28:06,720
Speaker 1: their trading stocks, and we've been talking about that all morning. Uh,

522
00:28:06,760 --> 00:28:09,160
Speaker 1: And it's not just individuals, it's also institutions who are

523
00:28:09,720 --> 00:28:13,119
Speaker 1: playing around with all of this money that has washed in. J.

524
00:28:13,280 --> 00:28:16,359
Speaker 1: Powell yesterday said, if you look at what's really been

525
00:28:16,440 --> 00:28:19,280
Speaker 1: driving asset prices really in the last couple of months,

526
00:28:19,320 --> 00:28:22,920
Speaker 1: it isn't monetary policy. The connection between low interest rates

527
00:28:22,920 --> 00:28:24,840
Speaker 1: and asset values is probably something that's not as hight

528
00:28:24,920 --> 00:28:29,360
Speaker 1: as people think. Is that true. I think in general,

529
00:28:29,720 --> 00:28:31,840
Speaker 1: when you look at the data of a long period

530
00:28:31,840 --> 00:28:35,840
Speaker 1: of time, that's basically true. Uh, there is an issue

531
00:28:35,840 --> 00:28:39,000
Speaker 1: that there could be an interaction in terms of UH

532
00:28:39,040 --> 00:28:44,960
Speaker 1: expential policy and UH what people call irrational exuberance. Uh,

533
00:28:45,000 --> 00:28:47,640
Speaker 1: and so there was always a concern about that. I

534
00:28:47,640 --> 00:28:50,600
Speaker 1: actually think that people overdo their focus on the stock

535
00:28:50,680 --> 00:28:53,960
Speaker 1: market as as UH is driving things. In fact, bobos

536
00:28:54,000 --> 00:28:56,959
Speaker 1: in the stock market per se are and when they

537
00:28:57,000 --> 00:28:59,880
Speaker 1: burst are not really the problement for the economy. They

538
00:29:00,080 --> 00:29:02,440
Speaker 1: can be dealt with. It's when it involves the credit

539
00:29:02,560 --> 00:29:05,960
Speaker 1: credit credit markets uh and UH, and that's what what

540
00:29:06,080 --> 00:29:08,680
Speaker 1: the the thing that caused the problem in terms of

541
00:29:08,680 --> 00:29:12,160
Speaker 1: the last global financial crisis was not the stock market

542
00:29:12,200 --> 00:29:14,560
Speaker 1: knot not the the fact that there were changing in

543
00:29:14,560 --> 00:29:17,280
Speaker 1: asset prices per se. It was the fact that when

544
00:29:17,280 --> 00:29:20,600
Speaker 1: that happened, it really affected the credit markets to cause

545
00:29:20,680 --> 00:29:23,240
Speaker 1: them to seize up. That's not where we are right now.

546
00:29:23,600 --> 00:29:26,920
Speaker 1: So I think that people focus on on the market. Uh.

547
00:29:27,400 --> 00:29:29,320
Speaker 1: People can lose money, they can do stupid things. We

548
00:29:29,360 --> 00:29:32,000
Speaker 1: can have bubbles, their crazy things, that's having a game

549
00:29:32,120 --> 00:29:36,800
Speaker 1: stop and so forth. But that's actually very rarely past

550
00:29:36,920 --> 00:29:41,080
Speaker 1: a major effect in economy unless it interacted the credit markets,

551
00:29:41,080 --> 00:29:42,680
Speaker 1: which I don't think is what we're seeing right now

552
00:29:42,880 --> 00:29:44,920
Speaker 1: ricks And I don't want to go all Sandy Grosser

553
00:29:45,000 --> 00:29:48,160
Speaker 1: and Joe Stiglasonia, but let's go. It's a Columbia moment here,

554
00:29:48,440 --> 00:29:50,800
Speaker 1: and I want to talk about the informations out there.

555
00:29:51,160 --> 00:29:55,640
Speaker 1: Do we have too much information visible now? Or are

556
00:29:55,680 --> 00:29:58,160
Speaker 1: we still drowning out in the equity markets in and

557
00:29:58,240 --> 00:30:01,640
Speaker 1: all our long short and all the silliness or is

558
00:30:01,680 --> 00:30:06,160
Speaker 1: it still information we can't see? Are we drowning invisible

559
00:30:06,240 --> 00:30:09,880
Speaker 1: information from all this trading volume. I don't think we're

560
00:30:09,960 --> 00:30:13,280
Speaker 1: drowning it invisible information. But there is an issue that

561
00:30:13,280 --> 00:30:15,560
Speaker 1: that you know the nature of markets, this is sometime

562
00:30:15,600 --> 00:30:17,960
Speaker 1: times people go a little bit crazy. I mean, that's

563
00:30:18,040 --> 00:30:23,120
Speaker 1: just uh, the history of financial markets. It was Charlie

564
00:30:23,160 --> 00:30:26,440
Speaker 1: Kinderberg was one of my professors. Lifeful professor by the way,

565
00:30:26,960 --> 00:30:30,600
Speaker 1: uh quite a character. Uh in this book pat uh

566
00:30:30,840 --> 00:30:34,640
Speaker 1: many patents, medeas and crashes. This is just what what

567
00:30:34,640 --> 00:30:37,920
Speaker 1: what happens. People sometimes get a little nutsy. That's one

568
00:30:37,920 --> 00:30:41,080
Speaker 1: of the reasons why you actually want central banks to

569
00:30:41,160 --> 00:30:44,560
Speaker 1: be there to make sure that if there's a uh

570
00:30:44,640 --> 00:30:47,600
Speaker 1: people get nutsy, that central banks can actually come into

571
00:30:47,640 --> 00:30:50,360
Speaker 1: basically stabilize the situation of bad things. Happen. And and

572
00:30:50,400 --> 00:30:54,440
Speaker 1: actually this is what has been able to do various successfully,

573
00:30:54,440 --> 00:30:59,640
Speaker 1: particularly extremely successful in this COVID crisis. Uh. That one

574
00:30:59,680 --> 00:31:01,400
Speaker 1: of the things that people that realize how lucky we

575
00:31:01,440 --> 00:31:04,600
Speaker 1: are that COVID didn't occur fifteen years ago before the

576
00:31:04,680 --> 00:31:07,800
Speaker 1: last financial crisis, right because it took eighteen months for

577
00:31:07,840 --> 00:31:10,320
Speaker 1: the FED to figure out what to do. Uh, in

578
00:31:10,440 --> 00:31:12,920
Speaker 1: this case, it didn't. They did in two weeks. Is

579
00:31:12,960 --> 00:31:16,480
Speaker 1: actually extremely important in terms of the economy doing much

580
00:31:16,480 --> 00:31:18,960
Speaker 1: better than otherwise. What Ricky Michigan just because the time

581
00:31:19,000 --> 00:31:21,160
Speaker 1: this is so so so important. And I want to

582
00:31:21,160 --> 00:31:24,240
Speaker 1: move from Kindleburger over to Hyman Minsky, who darkened the

583
00:31:24,280 --> 00:31:28,400
Speaker 1: door Columbia, I believe as well. Would you suggest that

584
00:31:28,440 --> 00:31:33,200
Speaker 1: the distortions and derivatives and calls inputs in a long

585
00:31:33,280 --> 00:31:37,120
Speaker 1: short hedge fund battle could be something our central bank

586
00:31:37,160 --> 00:31:41,200
Speaker 1: we'll have to focus on down the road. Again, I

587
00:31:41,240 --> 00:31:44,520
Speaker 1: think that the issue isn't what Hyman Minsky was talking

588
00:31:44,600 --> 00:31:48,000
Speaker 1: about was these credit cycles. That's really what we have

589
00:31:48,080 --> 00:31:50,600
Speaker 1: to worry about, is these these big booms in credit

590
00:31:50,680 --> 00:31:54,160
Speaker 1: that crash. That's where we get into real trouble. Other bubbles,

591
00:31:54,400 --> 00:31:57,520
Speaker 1: UH typically are not really as important if they converned

592
00:31:57,520 --> 00:32:01,480
Speaker 1: the combodies market, they do create some lost is. But

593
00:32:01,480 --> 00:32:04,960
Speaker 1: but think about the following that during the UH, the

594
00:32:05,000 --> 00:32:08,800
Speaker 1: precursor to the global financial crisis, that basically we're lost

595
00:32:08,880 --> 00:32:12,440
Speaker 1: about five billion in the subprime market. That basically triggered

596
00:32:12,480 --> 00:32:15,440
Speaker 1: the whole thing. So that was a credit market distortion

597
00:32:15,440 --> 00:32:20,200
Speaker 1: which spread. If the stock market moves one percent or

598
00:32:20,320 --> 00:32:21,920
Speaker 1: just a couple of percents, that's way more than the

599
00:32:21,920 --> 00:32:25,160
Speaker 1: five billion dollars. So stock market moves all the time,

600
00:32:25,200 --> 00:32:27,240
Speaker 1: and yet it doesn't create these kind of problems. It's

601
00:32:27,320 --> 00:32:30,240
Speaker 1: really when it's the credit markets that get it get from.

602
00:32:30,280 --> 00:32:32,600
Speaker 1: It's bubbles in the credit markets that we have to

603
00:32:32,600 --> 00:32:36,000
Speaker 1: worry about, not bubbles in asset markets per se, although

604
00:32:36,040 --> 00:32:38,280
Speaker 1: sometimes they do occur at the same time, and that's

605
00:32:38,280 --> 00:32:40,600
Speaker 1: when you get into real trouble. And that's it where

606
00:32:40,600 --> 00:32:43,920
Speaker 1: I think that that we're I have less concerned now

607
00:32:44,400 --> 00:32:47,400
Speaker 1: UH that I did for example, during the Global Financial Crisis,

608
00:32:47,720 --> 00:32:51,360
Speaker 1: where the bubbles really spread very much into the credit markets,

609
00:32:51,400 --> 00:32:54,800
Speaker 1: and that's where we were in deep trouble. Rick would

610
00:32:54,800 --> 00:32:57,520
Speaker 1: have to continue this conversation on the credit market another time.

611
00:32:57,600 --> 00:33:00,920
Speaker 1: Rick Fontanasa to catch up. Rick Michigan of columb University.

612
00:33:00,920 --> 00:33:04,480
Speaker 1: Thank you. Thanks for listening to the Bloomberg Surveillance podcast.

613
00:33:04,840 --> 00:33:09,760
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or

614
00:33:09,920 --> 00:33:14,240
Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom

615
00:33:14,320 --> 00:33:18,160
Speaker 1: Keene before the podcast. You can always catch us worldwide.

616
00:33:18,680 --> 00:33:19,760
Speaker 1: I'm Bloomberg Radio