Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. We've
Speaker 1: gotta get to staying natives in this morning snacks banks,
Speaker 1: Ceio waiting patiently staying up. Just kick things off. Your
Speaker 1: take on the last couple of days in this market, please.
Speaker 1: I think it's super interesting and I think it plays
Speaker 1: into the bigger narrative. It's in place that we have
Speaker 1: a social revolution going on between the halfs and the
Speaker 1: half not in the words of the people who played
Speaker 1: the stock market, the Wall Street suits and and and
Speaker 1: the retailers. We have the fact a fat that continues
Speaker 1: to play a game where they ignore facts. I guess
Speaker 1: Paul's next statement, we're be that the world is flat
Speaker 1: or that gravity is something that was invented in terms
Speaker 1: of fake news. And finally, I think most most importantly,
Speaker 1: we have the fact that you know, fat needs to
Speaker 1: stand out one day soon together with the treachery secretary
Speaker 1: that's incoming and realized that the financial repression that goes
Speaker 1: on today creates a market which is in its nature
Speaker 1: is a one size bet with the market at old times.
Speaker 1: So you have created by virtue of this extended policy,
Speaker 1: and look into the future of even more extension of
Speaker 1: the same policy tool. With the financial repression, you create
Speaker 1: a betting market, a betting market. And just to fill
Speaker 1: in people who did not hear jr. Own Power yesterday,
Speaker 1: you are throwing shaded his comment where he said, if
Speaker 1: you look at what's really been driving asset prices really
Speaker 1: in the last couple of months, it isn't monetary policy.
Speaker 1: The connection between low interest rates and asset values is
Speaker 1: probably something that's not as tight as people think. Steve,
Speaker 1: given that we are in this betting market, do you
Speaker 1: think that this populist shift, this ang her that you're
Speaker 1: talking about that seems to be a hallmark, whether in
Speaker 1: actuality in terms of who's doing the trading, or at
Speaker 1: least in the sentiment on these chat rooms, how else
Speaker 1: will be expressed in markets? In other words, is this
Speaker 1: going to be a pervasive feature that does affect where
Speaker 1: prices end up going? It does, and I'd already done it.
Speaker 1: Of course you're all aware of a few hedgephones that's
Speaker 1: been in trouble. And if you look at the whole
Speaker 1: construction in the inside the fund management business of long
Speaker 1: short portfolios, if you have and and attacked the list
Speaker 1: of the most fifty most shortest stocks, you're also attagging
Speaker 1: the nominal names that everyone has in the short portfolio
Speaker 1: of the big hedge fund. So we will see, and
Speaker 1: we saw yesterday and particularly in the green transformation space,
Speaker 1: the energy space, that a lot of names came down
Speaker 1: inside today simply because the collateral value of the shorts
Speaker 1: blew up, or the lag of value in the shorts
Speaker 1: blew up, and they need to sell collateral against meaning
Speaker 1: that they had to sell the profity position. And I
Speaker 1: think at Lisa is very important to note that we
Speaker 1: had in percentage term, the single biggest move in VIC
Speaker 1: yesterday we've ever seen, not in nominal terms, but in
Speaker 1: in in in percentage terms, which is a clean indication.
Speaker 1: And for the record, if you look at the curve
Speaker 1: in the VIC futures, the indication of what is to come,
Speaker 1: we have seen that the front end contract is now
Speaker 1: of course, a gradually being priced relatively Steve part of
Speaker 1: your charm is unlike a lot of c I O s.
Speaker 1: You have massive trading experience of enjoying the bid, walking
Speaker 1: away the challenges a bid, and you can't find an
Speaker 1: ask out there. Right now, I want you to talk
Speaker 1: about what we're seeing hedge funds, short retail, the guys
Speaker 1: on the couch, and I think they're way more sophisticated
Speaker 1: than people think. But I want you to talk about
Speaker 1: the cost to short. The big guys clear their short
Speaker 1: everybody else's reshorting game stop right now, and the so
Speaker 1: called borrow too short is immense. What is that signal
Speaker 1: to you? It signals that you know, if there's one
Speaker 1: component of the market which and I agree with you, Tom,
Speaker 1: we have to give credit to these people in the
Speaker 1: retail spills. Not only are they going after the short
Speaker 1: names where the vulnerability is because you have to deliver
Speaker 1: these stocks back to the owners and they can get
Speaker 1: call on that, so they have, you know, a counterparty risk,
Speaker 1: but they also using the optionality, the convexity of options,
Speaker 1: which translated into plain English means that they're getting a
Speaker 1: massive leverage of just buying the nearby calls. And don't
Speaker 1: forget this is a generation of people, young people who
Speaker 1: primarily probably came from the betting industry. In the betting industry,
Speaker 1: the probability on a bed is at best fifty minus
Speaker 1: the house. Now they're they're aggurgating their voices, their money
Speaker 1: in a game against the short interest as you allude to,
Speaker 1: with a game that says, you know, we're playing this
Speaker 1: like a lottery ticket. We can buy the calls forever
Speaker 1: and we will lose, as we always start in the
Speaker 1: begging in the betting, you know, once in a while,
Speaker 1: but as long as the gains out with that. So
Speaker 1: we have changed the dynamics. And I think for us,
Speaker 1: all suits, as they call us, we need to realize
Speaker 1: that the game has changed and and and that and
Speaker 1: I have to go back to fit because sorry, Jonathan,
Speaker 1: just we have to go back to fit. It is
Speaker 1: a repression market. We have the repression of the markets.
Speaker 1: We have no price discovery. Of course we get to
Speaker 1: a betting situation. Well, let's add to that for Chairman
Speaker 1: Powell once it really get on his radar, staing, because
Speaker 1: in the last twenty four hours in that news conference,
Speaker 1: that was just the strug of the shoulders. We've got
Speaker 1: bigger things to worry about, and they do, and absolutely
Speaker 1: and I think probably also we should get credit to
Speaker 1: Powell to then connecting it to the full employment mandate
Speaker 1: that he's trying to operate. He put it in the
Speaker 1: context that despite the fact we run a very low
Speaker 1: interest rate and we have you know, on hold for
Speaker 1: at least into twenty four in terms of changes to
Speaker 1: that interst rate, we still have six million people who
Speaker 1: are unemployed. So the market disagree with Paul on the
Speaker 1: fact that you can go back to a a model
Speaker 1: where you have full employment. And for the record, you know,
Speaker 1: if you ask any future is to anyone who wants
Speaker 1: to look into the future, they all expect that by
Speaker 1: we'll have people maybe not unemployed, but deployed. Alternatively, So
Speaker 1: to creating a model now that drives towards full employment,
Speaker 1: full capacity under the headlines of the technology and and
Speaker 1: and and on the cult demographic is going the other way,
Speaker 1: I think just makes off a huge policy mistakes incoming Stein.
Speaker 1: I love what you said. They're about the conflation year
Speaker 1: of quantitative finance, and literally at Thorpe like betting over
Speaker 1: the people trying to play a game, as we heard
Speaker 1: from Villier, the hunted the hunter being hunted as well.
Speaker 1: I want you to conflate Paul Wilmon of Imperial College,
Speaker 1: the great Nacien Talab and also what we heard from
Speaker 1: the legend or dairy ed Thorpe, which is it's okay
Speaker 1: to take a loss. I know I'm going to take
Speaker 1: a loss, but I've got the upper hand right now.
Speaker 1: Explain that. Yeah. So, so it's really optionality. I mean crypto.
Speaker 1: The crypto space is another example. So let's use crypto
Speaker 1: as an optionality. And it's thoughts and these comments. If
Speaker 1: you play the game of crypto, you don't even need
Speaker 1: to understand crypto. You don't need to understand stocks. If
Speaker 1: you're betting every time five percent of your wage, five
Speaker 1: of your total amount, and you have an optionality that says,
Speaker 1: yet once in a while you get a fifty two
Speaker 1: hundred payback on that exactly bet, then you will always
Speaker 1: be ahead because you can control the destruction of your
Speaker 1: capital relative to your earning. So you have a very
Speaker 1: very high optionality game in the market. And that optionality,
Speaker 1: of course is being not only supported but being extended
Speaker 1: in terms of guarantees the length the death by by
Speaker 1: the Federal Reserve, who of course has a different agenda,
Speaker 1: but one of the unattended consequences being that the support
Speaker 1: that very optionality itself. Steve always great to catch up,
Speaker 1: Sir Stean Jacipson, Saxa Bank see io Steve, Thank very much.
Speaker 1: Shan across rights blisteringly straightforward tech reports. They're wonderfully clear.
Speaker 1: I love when it's seven pages, it's actually seven pages
Speaker 1: and not filled with a lot of fillers. She's across
Speaker 1: at Research and joins us now Shannon off of Microsoft
Speaker 1: and off of Apple. Let's just start with the big,
Speaker 1: big tech. What have you learned? Well, I mean, I
Speaker 1: think what we've learned is that certainly the consumer has
Speaker 1: been extremely resilient. UM. You know, iPhones were up seventy year.
Speaker 1: PC sales were very strong at at Microsoft, UM, you know.
Speaker 1: And I think we've also learned that the cloud is
Speaker 1: a big focus UM services within Apple on which we're up,
Speaker 1: we're driven partially by the cloud services they have. You know,
Speaker 1: obviously Azure was up fifty so UM. I think both
Speaker 1: of those trends are are strong. Enterprise a little weaker, UM,
Speaker 1: not a little weaker, but it remains remains a little
Speaker 1: bit shaky. Year I would say, in the game of extrapolation,
Speaker 1: what is your conviction out two years or five years
Speaker 1: on these names. They're getting a pandemic pop. How do
Speaker 1: you recalibrate your conviction out to to five years? You know,
Speaker 1: I actually I've remained really positive on both of these companies.
Speaker 1: I think you know, Apple is is. I mean, they're
Speaker 1: they have a billion iPhones out there, um and they're installed.
Speaker 1: They say at one point six billion devices that people
Speaker 1: are utilizing. Their services continue to grow. UM. They're spending
Speaker 1: you know, aggressively in R and D, which is continuing
Speaker 1: to support their product pipeline. You know, they came out
Speaker 1: with the their AirPod maxes. They're continuing to be sold
Speaker 1: out some of the Again, some of these products don't
Speaker 1: necessarily move the needle a lot, but in agg aggregate
Speaker 1: they do. UM. For Microsoft, you know, I think they're
Speaker 1: Azure is is quickly becoming, you know, one of the
Speaker 1: obviously the top choices from a cloud perspective. UM companies
Speaker 1: continue to shift to cloud services like Office three, six five.
Speaker 1: And you know the interesting thing about PCs is that
Speaker 1: where I don't know, a few years ago, everybody said
Speaker 1: they were dead and everybody was going to go to
Speaker 1: a tablet. Now the PC companies are all talking about
Speaker 1: one PC per person, that one PC per household. So
Speaker 1: there's still a long ways to go in terms of
Speaker 1: PC adoption and penetration. So then can we just take
Speaker 1: a step back. The shares are lower today because they
Speaker 1: didn't provide a forecast, and yet they had a revenue
Speaker 1: for the quarter of more than a hundred billion dollars,
Speaker 1: surpassing revenues for full years as recently as two thousand
Speaker 1: and eleven. And people are selling the shares because they
Speaker 1: don't have visibility in the near term that they're going
Speaker 1: to absolutely crush it the same way that they have.
Speaker 1: There is a question of what they have to do
Speaker 1: with their money with all of that cash in order
Speaker 1: to keep crushing it. At a time when Facebook views
Speaker 1: Apple is potentially it's biggest competitor, in Volkswagen views Apples
Speaker 1: its biggest competitor with Eye Message and the Apple Car, respectively.
Speaker 1: Is Apple investing its cash in enterprises that will lead
Speaker 1: it to that dominance in those particular industries in a
Speaker 1: different way than it is now. Well, I look, I
Speaker 1: think Apples running the playbook they've been running for several years,
Speaker 1: and it's clearly worked very well. So I don't think
Speaker 1: they need to go and buy something, um, you know,
Speaker 1: and be aggressive from an acquisition standpoint. You know, you
Speaker 1: look at their their R and D spend. It's it's significant.
Speaker 1: You know, we hear chatter about autos. You know, they're
Speaker 1: they're obviously investing heavily in healthcare. UM. I'm not sure
Speaker 1: that they need to really change what they're doing. I mean,
Speaker 1: you know, if you look at the trajectory of the revenue.
Speaker 1: You know, last year they did two billion, and this
Speaker 1: year we have them doing three two billion. UM. The
Speaker 1: numbers are staggering. I still remember when they gave us
Speaker 1: a model that said, you know, we're going to do
Speaker 1: eight to twelve billion over the next few years annually.
Speaker 1: So it's working. Um. And you know, I think that
Speaker 1: they will come out with They've always said they will
Speaker 1: come out with products when they're ready to release them,
Speaker 1: and they're the best product out there. They weren't the
Speaker 1: first product on PCs, they weren't the first product on iPods,
Speaker 1: they weren't the first products on tablets, and yet they
Speaker 1: have come out and and iPhones. I would say you
Speaker 1: can make the argument there they were at first with
Speaker 1: with the product they had, but you know, they have
Speaker 1: continued to take significant share and become dominant leaders in
Speaker 1: the categories, and I think we will see that again
Speaker 1: in some of these other products, but it will take
Speaker 1: some time. Shannon, we gotta go. There's an aline go
Speaker 1: into space. Shannon Cross Cross race an analyst. The gains
Speaker 1: and losses are not fifty fifty. You can have a
Speaker 1: you can have or eight percent or seven percent of
Speaker 1: the people capture the game and leasa to your point.
Speaker 1: Everybody else loses money on the way out. Ander Sheets
Speaker 1: studied this at Brown University. You're gonna get right to
Speaker 1: in futures of negative thirteen the vics thirty three, Ander Sheets,
Speaker 1: Let's open up, and I don't want to get you
Speaker 1: in trouble with Mr Gorman. You're really good at this mathematics.
Speaker 1: Your thoughts on this moment is the hedge funds get clovered? Well,
Speaker 1: I think it's important to to separate that there are
Speaker 1: you overlapping storylines in this market. There's a storyline around
Speaker 1: the strength of the recovery and will there be issues
Speaker 1: or delays with the rollout of vaccine, And then I
Speaker 1: think there's a separate discussion now around the concentration of
Speaker 1: positioning which I think has been a discussion now for
Speaker 1: some time. I think we've this has been a very
Speaker 1: unequal market for for years really, with very uneven valuations
Speaker 1: across sectors, across styles, and very uneven positioning among active
Speaker 1: investors to try and take advantage of that, and so
Speaker 1: I think it's important to separate those things out, and ultimately,
Speaker 1: in my view, the macroeconomic picture still looks good. We
Speaker 1: at Morgan Stanley are still very constructive on the growth backdrop,
Speaker 1: and that makes makes us think that this is a
Speaker 1: more modest adjustment rather than some larger um challenge for
Speaker 1: the market. Bear with me here, Andrew, I want to
Speaker 1: think this out with you. Live on at just one
Speaker 1: of the conversations that you and I have been having
Speaker 1: for the best part of the decade need to change.
Speaker 1: We see market moves, we talk about the stories that
Speaker 1: are driving those moves. We often draw a line back
Speaker 1: to the fundamentals, the outlook, the story, so to speak.
Speaker 1: And I just wanted sometimes at the moment, particularly I
Speaker 1: think back to late August early September, that maybe it's
Speaker 1: just this explosion in short dated call options, and it's
Speaker 1: the tailwack in the dog, and we'll sit around trying
Speaker 1: to come up with these fundamental reasons for any given
Speaker 1: moving in markets, because that's what we've done for decades.
Speaker 1: But I wonder Andrew, whether we just need to change
Speaker 1: our approach and the way we actually consider what's happening
Speaker 1: around us and the way we talk about the price action. Yeah. Look,
Speaker 1: I think that's a very good point, and I think
Speaker 1: this is a case where we're more than one thing
Speaker 1: can be true. I think it can be true that
Speaker 1: you're seeing an unusually large amount of retail industrial activity
Speaker 1: of call options activity that you're seeing, you know, on
Speaker 1: an unusually amount of large amount of liquidity that that's
Speaker 1: going into the market. And yet you know, viewed, I
Speaker 1: think from from other lenses, market is behaving and has
Speaker 1: been behaving for some time, I think in a very rational,
Speaker 1: fundamental way. My favorite example is if you look over
Speaker 1: the last decade, you know, the market that's performed the
Speaker 1: best by far has been the SMP five hundred, which
Speaker 1: has had the best earnings growth by far of the
Speaker 1: international markets. And so it's not the case that you know,
Speaker 1: the SMP is only up because rates are low or
Speaker 1: the set is doing que the the SMP has had
Speaker 1: significantly superior earnings growth to those other major markets. So
Speaker 1: I think it's a case of kind of both things
Speaker 1: can can be true. You can have shifts and market behavior,
Speaker 1: you can have um uh, you know, changing patterns of behavior.
Speaker 1: But I do think overall, those those broader fundamental trends
Speaker 1: remain intact and remain important. Andrew, I love that you
Speaker 1: started by talking about the different narratives going at the
Speaker 1: same time. It is a very difficult market to sum
Speaker 1: up in one word. One of the narratives is the
Speaker 1: concentration of markets, and we're seeing this both on a
Speaker 1: specific stock basis as well on as a consensus view
Speaker 1: perspective as well. For example, coming into the year, the
Speaker 1: weaker dollar call was very much consensus. The higher rate
Speaker 1: call was very much consensus. Both of those have been
Speaker 1: turned on their heads in the first few weeks. One
Speaker 1: how important is it to look at the concentration of
Speaker 1: positioning and move against that in order to avoid such
Speaker 1: violent repositioning going forward. Yeah, I think this is a
Speaker 1: really important point. And again I think a theme that
Speaker 1: that interestingly varies across markets. I think we find there
Speaker 1: are some views where I think we're in the consensus.
Speaker 1: We like a lot of people think interest rates in
Speaker 1: the US go higher. There's some areas where I think
Speaker 1: we're we're out of the consensus, or think some what differently,
Speaker 1: We're not in that week dollar camp. Um we we
Speaker 1: think that the equally weighted SMP five hundred while outperform
Speaker 1: the SMP five hundred. I e. You'll see a broadening
Speaker 1: of the market and and underperformance of some of those
Speaker 1: larger um those larger weighted stocks, as as often happens
Speaker 1: coming coming out of a recession. And again I think
Speaker 1: if you look at some of the recent price action,
Speaker 1: you know, again I think this is, you know, an
Speaker 1: interesting thing to uh to, an interesting or an important
Speaker 1: way to die diagnosed. What's going on is what's leading
Speaker 1: the market the most widely held stocks or is it
Speaker 1: the more economically sensitive ones? And there were all students
Speaker 1: of the mop up books on all these crisis I
Speaker 1: think of Stanley Fisher's classic book on inder sheets in
Speaker 1: the derivative space, whether notional or the small amount of
Speaker 1: actually derivatives issued traded, however you want to phrase it.
Speaker 1: What are the shadows out there for a guy like you?
Speaker 1: What are the unknowns? Are the mysteries of the derivative
Speaker 1: space right now. So I think this is this is
Speaker 1: quite fascinating actually because even you know, a week ago
Speaker 1: or two weeks ago and things seemed much calmer, the
Speaker 1: equity options market was still expecting quite a bit of
Speaker 1: volatility at the overall index level and was quite worried
Speaker 1: about a larger draw down. Right that that skew was
Speaker 1: was historically very steep, and so I don't think this
Speaker 1: is a case where you could say the market was
Speaker 1: completely blindsided. There was, you know, an elevated amount of
Speaker 1: uncertainty expected by the options market, and then what we
Speaker 1: saw yesterday was an even larger adjustment of that. You
Speaker 1: had a much larger move in the vix um than
Speaker 1: you did versus credit or other asset classes. So and
Speaker 1: I think that also speaks to the positioning nature of
Speaker 1: it that this has I think the hallmarks of a
Speaker 1: var shock or a kind of positioning shock, more so
Speaker 1: than a than a real economic shift in view, Well
Speaker 1: put Andrew interesting ty Andrew shas that of moments down
Speaker 1: Andrew right to catch up, Sir, I was in one
Speaker 1: of my fancy breakfasts that I have where I hold
Speaker 1: court yesterday with the entourage and I got a phone call.
Speaker 1: It's from Pharaoh, so I had to take it, of course,
Speaker 1: and he's screaming at me, Tom, forget about all these pundits.
Speaker 1: Get us a rocket scientist. So we came close. We've
Speaker 1: had a wonderful set of conversations. Mr Gartman on the
Speaker 1: history of the moment. Steve Jacobson, I thought was lights
Speaker 1: out at Saxel Bank. And now James Angel he is
Speaker 1: at Georgetown, Jim Angel. And what's so important here is
Speaker 1: he is a rocket scientist, is engineering out of cal Tech,
Speaker 1: his brilliance and mathematics at Berkeley, among others. And we're
Speaker 1: thrilled that the finance professor could join us this morning.
Speaker 1: I've got to go, Jim right away to you with
Speaker 1: a Bloomberg down the hallway at Georgetown about whether you're
Speaker 1: participating in this, if you enjoyed being long or short
Speaker 1: game stuff. Well, I was long until yesterday, but when
Speaker 1: the stock went crazy, I decided to go short just
Speaker 1: a little bit. Although I see that it is doubled overnight,
Speaker 1: so I've proven to myself once again I am a
Speaker 1: lousy trader. Now we need a booker here on surveillance,
Speaker 1: so if they throw you out the door Georgetown. You've
Speaker 1: got a job up here, Jim Angel. If that's the
Speaker 1: If that's the reality, are you worried that the people
Speaker 1: on the couches are dumb or are they as sophisticated
Speaker 1: as you are? Um, I'm sure they're more sophisticated than me,
Speaker 1: that's for sure. But I mean, what we have here
Speaker 1: is a confluence of events. Yeah, we have the mother
Speaker 1: of all short squeezes going on, you know, at the
Speaker 1: same time we have a retail herd. But I'm also
Speaker 1: hearing that hedge funds are jumping on board. As one
Speaker 1: hedge he told me, he said, Hey, when the herd
Speaker 1: moves through the gate, get on a cow. So I
Speaker 1: think what we're seeing is this move is being amplified
Speaker 1: by other hedge funds that are jumping on board. They
Speaker 1: smell the blood in the water, they can see that
Speaker 1: some that shorts are overexposed, and they're playing a game
Speaker 1: of musical chairs to ride it until it turns well.
Speaker 1: But Professor Angel, this goes to a broader issue here,
Speaker 1: which is the question of democratizing the market, allowing smaller
Speaker 1: traders to participate in a rally that has been unprecedented
Speaker 1: and phenomenal in equities fueled by policies versus protecting the
Speaker 1: individual and muster from institutional investors who are manipulating the
Speaker 1: herds to do their bidding right. And that's sort of
Speaker 1: the question. How do you distinguish one from the other.
Speaker 1: It's very hard, there's no easy way. Personally, I think
Speaker 1: investors should have the right to invest in anything they want,
Speaker 1: So I'm very literally about people who want to protect
Speaker 1: people from themselves. Your litera of people protecting people from
Speaker 1: their themselves. In other words, you think that there is
Speaker 1: nothing wrong with what's currently going on, and you disagree
Speaker 1: with Senator Warren in saying that the SEC regulators do
Speaker 1: your job, get involved because there is nothing for them
Speaker 1: to do. This is just markets the way that they
Speaker 1: ought to be a running Is that correct? Not completely?
Speaker 1: There are things that regulators should be doing. You know,
Speaker 1: they should be investigating what's going on because we see
Speaker 1: a stock price that is clearly disconnected reality and who's
Speaker 1: driving it now is a test of a new consolidated
Speaker 1: out a trail. It's not fully up in thing, but
Speaker 1: it's partially running. Let's see if it's giving us good data. Also,
Speaker 1: what's causing the short squeeze. This is not the first
Speaker 1: time we've seen these kind of spikes in prices, and
Speaker 1: let's face it, an overpriced stock is nobody's friend. When
Speaker 1: the market or a single stock is overpriced, all you're
Speaker 1: doing is locking in future losses for investors when that
Speaker 1: stock comes back to its proper level. So we don't know.
Speaker 1: Super high prices are not good for anybody. Now, the
Speaker 1: SEC should also be looking at imperfections in the market
Speaker 1: that are driving the short squeeze. I think we need
Speaker 1: improvements in the customer Protection Rule fifteen three Dash three.
Speaker 1: I think we also need to upgrade Rule two oh
Speaker 1: four on regulation SHO. These are things that I think
Speaker 1: can be done to improve customer protection and smooth out
Speaker 1: some of the wrinkles that are leading to these kind
Speaker 1: of price spikes. James terrifically smart and we appreciate your time,
Speaker 1: so please come back soon. Professor James Angel that of
Speaker 1: George Town came out of New York City, studied under
Speaker 1: stand Fisher at m I T and went on to
Speaker 1: a sterling academics side at Columbia University. I'm out has
Speaker 1: passed as a governor of the Federal Reserve System and
Speaker 1: we are thrilled on our new policy that Rick Michigan
Speaker 1: could join us this morning. Rick, I've got a two
Speaker 1: hour interview ahead of me with you, and I don't
Speaker 1: have a time for it as well. Do you see
Speaker 1: the construction of possible policy in Washington or is it
Speaker 1: going to be gridlock as we've known. I think they're
Speaker 1: gonna get something's done, but I think that, uh, there's
Speaker 1: gonna be issues on sub parts of what the Biden
Speaker 1: administration wants. So I think what they definitely will do, uh,
Speaker 1: and I think do it quickly is to get funding
Speaker 1: for uh more vaccinations, better testing and so forth. Uh.
Speaker 1: I agree with J. Powell on this, which is what's
Speaker 1: happening to kind of. It's really all about the COVID.
Speaker 1: That's the deal that that if we get COVID under
Speaker 1: control quickly, the economy will come back and actually can
Speaker 1: come back fairly strongly because of all the pent up
Speaker 1: saving and uh uh you know me and many others.
Speaker 1: The day that I can start traveling, man, I'm I'm
Speaker 1: out there. I want to spend some money. I'd like
Speaker 1: to go out to restaurants. Uh that uh right now,
Speaker 1: I'm living the dream and uh I want to live
Speaker 1: a much better dream in terms of after COVID gets
Speaker 1: more under control, and I think that's really the key.
Speaker 1: So I think that we are going to get a
Speaker 1: quick progress on that. Where we'll become more complicated will
Speaker 1: be on some other elements of this bill. I do
Speaker 1: think we're gonna have some uh expansive fiscal policy. Some
Speaker 1: checks will get set out, but there are other elements
Speaker 1: of that legislation that may not get past, particularly minimum
Speaker 1: wage and so forth, So we'll have to see. I
Speaker 1: think that's one of the key issues for the federal
Speaker 1: Reserve and for the economy, which is uh, is the
Speaker 1: partnership in Washington going to be a problem or not? Remarkably,
Speaker 1: it wasn't when the never first occurred. What was extraordinary.
Speaker 1: Within two weeks of the pandemic being declared, we had
Speaker 1: a two trillion dollar bill from Congress and it wasn't
Speaker 1: any less petit partisan then it is than it is now.
Speaker 1: So I actually optimistic that that that they'll do reasonable
Speaker 1: things on this regard. But I think the real key
Speaker 1: issue is gonna be how quickly do we get the
Speaker 1: vaccine out? The Boden administration says by the end of
Speaker 1: the summer, we may have everybody vaccine. That would be
Speaker 1: good news if it happens. Uh, then there's this issue
Speaker 1: the variance. How effective with the vaccine be against the variants?
Speaker 1: Will we have to have new shots in order to
Speaker 1: deal with some of these variants. So I think all
Speaker 1: of this is basically, uh, the key to what's going
Speaker 1: to happen to the economy. It's it dominates everything else.
Speaker 1: And I think that that's why the FED is basically
Speaker 1: in a holding pattern. They're not going to tighten and
Speaker 1: they're not gonna depart from their expansionary policy regime that
Speaker 1: they've set in place until there's really good information that
Speaker 1: COVID starts to get under control, and we don't have
Speaker 1: that yet. So that's why I think they're taking the
Speaker 1: position they're in and why we're all waiting for a
Speaker 1: hopefully better times but we don't know. Recollare me to
Speaker 1: jump in just quickly. You mentioned the speed, the pace
Speaker 1: of the snap back, the recovery. What is it about
Speaker 1: the nature of this specific shock that dictates the snap
Speaker 1: back the speed at which we recover. Okay, so it's
Speaker 1: what's actually really unique about this, uh, this recession, the
Speaker 1: COVID recession UH is UH not that we have a
Speaker 1: sharp down turn in in UH in the economy, but
Speaker 1: that this is actually a case of where what we
Speaker 1: call a supply shock, the fact that that basically UH,
Speaker 1: there's problems in terms of production and production of certain
Speaker 1: types of goods, particularly things like that are service type
Speaker 1: industry which involved one to one contact. The supply shock
Speaker 1: is driving demand. So indeed, the dom thing is that
Speaker 1: people aren't spending. But it's not because of of of
Speaker 1: of typing, monetary policy or something else. It's because of
Speaker 1: the fact that the COVID actually causes people not to
Speaker 1: be able to spend. So once you release that, once
Speaker 1: you get people back able to spend again, they've been
Speaker 1: doing a lot of savings, they're gonna they're gonna start
Speaker 1: spending and probably spending very strongly, which will be the
Speaker 1: economy back fairly quickly. The problem is until people feel
Speaker 1: comfortable with going and traveling, getting on an airplane, they
Speaker 1: feel comfortable with going inside a restaurant, UH, and so forth.
Speaker 1: This is gonna actually be key to what happens. So
Speaker 1: I've just been vaccinated, so once the back I get
Speaker 1: the second dose, I'm going to be much more willing
Speaker 1: to go out and uh and travel for example. When
Speaker 1: that happens to everybody, that's gonna be a big fan
Speaker 1: thing to affect their demands. So it's it's unique because
Speaker 1: what's happening on the book, we call the supply side
Speaker 1: is actually driving demand, which is a very unusual situation,
Speaker 1: almost unique to this recession, because we really never had
Speaker 1: a pandemic recession before, at least in the modern era. Well,
Speaker 1: congratulations on getting vaccinated. Oh yeah, absolutely, I'm free, free
Speaker 1: at last. I know that's I look forward to that day.
Speaker 1: There is a question though, in the mean time, when
Speaker 1: people are sitting at home looking for something to do,
Speaker 1: their trading stocks, and we've been talking about that all morning. Uh,
Speaker 1: And it's not just individuals, it's also institutions who are
Speaker 1: playing around with all of this money that has washed in. J.
Speaker 1: Powell yesterday said, if you look at what's really been
Speaker 1: driving asset prices really in the last couple of months,
Speaker 1: it isn't monetary policy. The connection between low interest rates
Speaker 1: and asset values is probably something that's not as hight
Speaker 1: as people think. Is that true. I think in general,
Speaker 1: when you look at the data of a long period
Speaker 1: of time, that's basically true. Uh, there is an issue
Speaker 1: that there could be an interaction in terms of UH
Speaker 1: expential policy and UH what people call irrational exuberance. Uh,
Speaker 1: and so there was always a concern about that. I
Speaker 1: actually think that people overdo their focus on the stock
Speaker 1: market as as UH is driving things. In fact, bobos
Speaker 1: in the stock market per se are and when they
Speaker 1: burst are not really the problement for the economy. They
Speaker 1: can be dealt with. It's when it involves the credit
Speaker 1: credit credit markets uh and UH, and that's what what
Speaker 1: the the thing that caused the problem in terms of
Speaker 1: the last global financial crisis was not the stock market
Speaker 1: knot not the the fact that there were changing in
Speaker 1: asset prices per se. It was the fact that when
Speaker 1: that happened, it really affected the credit markets to cause
Speaker 1: them to seize up. That's not where we are right now.
Speaker 1: So I think that people focus on on the market. Uh.
Speaker 1: People can lose money, they can do stupid things. We
Speaker 1: can have bubbles, their crazy things, that's having a game
Speaker 1: stop and so forth. But that's actually very rarely past
Speaker 1: a major effect in economy unless it interacted the credit markets,
Speaker 1: which I don't think is what we're seeing right now
Speaker 1: ricks And I don't want to go all Sandy Grosser
Speaker 1: and Joe Stiglasonia, but let's go. It's a Columbia moment here,
Speaker 1: and I want to talk about the informations out there.
Speaker 1: Do we have too much information visible now? Or are
Speaker 1: we still drowning out in the equity markets in and
Speaker 1: all our long short and all the silliness or is
Speaker 1: it still information we can't see? Are we drowning invisible
Speaker 1: information from all this trading volume. I don't think we're
Speaker 1: drowning it invisible information. But there is an issue that
Speaker 1: that you know the nature of markets, this is sometime
Speaker 1: times people go a little bit crazy. I mean, that's
Speaker 1: just uh, the history of financial markets. It was Charlie
Speaker 1: Kinderberg was one of my professors. Lifeful professor by the way,
Speaker 1: uh quite a character. Uh in this book pat uh
Speaker 1: many patents, medeas and crashes. This is just what what
Speaker 1: what happens. People sometimes get a little nutsy. That's one
Speaker 1: of the reasons why you actually want central banks to
Speaker 1: be there to make sure that if there's a uh
Speaker 1: people get nutsy, that central banks can actually come into
Speaker 1: basically stabilize the situation of bad things. Happen. And and
Speaker 1: actually this is what has been able to do various successfully,
Speaker 1: particularly extremely successful in this COVID crisis. Uh. That one
Speaker 1: of the things that people that realize how lucky we
Speaker 1: are that COVID didn't occur fifteen years ago before the
Speaker 1: last financial crisis, right because it took eighteen months for
Speaker 1: the FED to figure out what to do. Uh, in
Speaker 1: this case, it didn't. They did in two weeks. Is
Speaker 1: actually extremely important in terms of the economy doing much
Speaker 1: better than otherwise. What Ricky Michigan just because the time
Speaker 1: this is so so so important. And I want to
Speaker 1: move from Kindleburger over to Hyman Minsky, who darkened the
Speaker 1: door Columbia, I believe as well. Would you suggest that
Speaker 1: the distortions and derivatives and calls inputs in a long
Speaker 1: short hedge fund battle could be something our central bank
Speaker 1: we'll have to focus on down the road. Again, I
Speaker 1: think that the issue isn't what Hyman Minsky was talking
Speaker 1: about was these credit cycles. That's really what we have
Speaker 1: to worry about, is these these big booms in credit
Speaker 1: that crash. That's where we get into real trouble. Other bubbles,
Speaker 1: UH typically are not really as important if they converned
Speaker 1: the combodies market, they do create some lost is. But
Speaker 1: but think about the following that during the UH, the
Speaker 1: precursor to the global financial crisis, that basically we're lost
Speaker 1: about five billion in the subprime market. That basically triggered
Speaker 1: the whole thing. So that was a credit market distortion
Speaker 1: which spread. If the stock market moves one percent or
Speaker 1: just a couple of percents, that's way more than the
Speaker 1: five billion dollars. So stock market moves all the time,
Speaker 1: and yet it doesn't create these kind of problems. It's
Speaker 1: really when it's the credit markets that get it get from.
Speaker 1: It's bubbles in the credit markets that we have to
Speaker 1: worry about, not bubbles in asset markets per se, although
Speaker 1: sometimes they do occur at the same time, and that's
Speaker 1: when you get into real trouble. And that's it where
Speaker 1: I think that that we're I have less concerned now
Speaker 1: UH that I did for example, during the Global Financial Crisis,
Speaker 1: where the bubbles really spread very much into the credit markets,
Speaker 1: and that's where we were in deep trouble. Rick would
Speaker 1: have to continue this conversation on the credit market another time.
Speaker 1: Rick Fontanasa to catch up. Rick Michigan of columb University.
Speaker 1: Thank you. Thanks for listening to the Bloomberg Surveillance podcast.
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Speaker 1: I'm Bloomberg Radio