WEBVTT - 10-Yr to Hit 3% if Inflation Surprises, says Bory 0:00:00.080 --> 0:00:13.800 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jailey. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.080 Bloomberg dot Com, and of course on the Bloomberg. Let's 0:00:33.120 --> 0:00:35.199 go back to the tenure of a shorter duration than 0:00:35.280 --> 0:00:41.720 benchmark two nine, So that's now eleven basis points from 0:00:41.760 --> 0:00:45.720 three percent. George Borie with US with Wells Fargo. If 0:00:45.760 --> 0:00:48.960 I used the benchmark, George, where do I sweat? Where 0:00:48.960 --> 0:00:53.120 do we really click in with some bond damage? What yield? 0:00:53.560 --> 0:00:56.440 Thank you? Good morning Tom. Uh. Well, I think three 0:00:56.960 --> 0:00:59.360 on the ten yere yield is it's a it's somewhat 0:00:59.400 --> 0:01:02.200 of a magic number. Um. If you look back over time, 0:01:02.600 --> 0:01:07.080 there's some critical support levels where bonds you know, should 0:01:07.080 --> 0:01:10.920 be trading within certain ranges, and once you breach uh 0:01:11.000 --> 0:01:13.800 kind of call it three to three point oh five 0:01:13.920 --> 0:01:17.200 per cent on the US tenure, you start sort of 0:01:17.360 --> 0:01:19.560 entering into what I would call the danger zone. You 0:01:19.600 --> 0:01:22.759 lose a lot of technical support. You know, those folks 0:01:22.800 --> 0:01:26.600 that look at historical trends and trade based on momentum 0:01:26.640 --> 0:01:29.280 will start to lose faith uh in the ability of 0:01:29.319 --> 0:01:32.520 bond prices to go up. So you know, the expectation 0:01:32.520 --> 0:01:35.400 would be that yields go higher. And then I think 0:01:35.400 --> 0:01:38.039 also importantly as you point as you point out, you 0:01:38.040 --> 0:01:40.520 know that would be about a sixty basis point increase 0:01:40.560 --> 0:01:45.160 in yields, and so mark to market negative returns across 0:01:45.240 --> 0:01:49.560 investor portfolios become a lot more real, uh and they 0:01:49.600 --> 0:01:52.880 certainly become a lot more meaningful. And so those bond 0:01:52.880 --> 0:01:55.240 investors who open up their statements at the end of 0:01:55.240 --> 0:01:56.880 the month are going to be in for a little 0:01:56.880 --> 0:02:00.560 bit of a surprise. Well, that classic looks league, so 0:02:00.600 --> 0:02:02.600 I father this year, doesn't it. And I just wonder 0:02:02.640 --> 0:02:05.800 what that means for investor rebalancing in a common months Gewards. 0:02:06.240 --> 0:02:08.960 So I think there's a there's a major shift going on. 0:02:09.040 --> 0:02:12.520 You know, for the last ten years, the FED and 0:02:12.560 --> 0:02:16.280 other central banks have told you to effectively sell your 0:02:16.360 --> 0:02:20.520 cash and buy something else. And now, you know, a 0:02:20.520 --> 0:02:23.920 few a few years ago, but with increasing intensity, you know, 0:02:23.960 --> 0:02:27.040 the FED is starting to raise rates. And what I 0:02:27.160 --> 0:02:29.720 like to say is it's it's the long march back 0:02:29.760 --> 0:02:33.200 to cash. They're starting to encourage people to pull money 0:02:33.360 --> 0:02:36.120 back into cash. And as you know, it takes a 0:02:36.120 --> 0:02:38.800 while for markets to pick up on a particular trend 0:02:38.880 --> 0:02:40.920 or a particular theme, and then there's this sort of 0:02:40.919 --> 0:02:45.120 one instantaneous moment where everyone has the ah ha moment 0:02:45.240 --> 0:02:47.799 and and money starts to rush in a particular direction. 0:02:48.400 --> 0:02:51.240 And I think after literally ten years of of moving 0:02:51.280 --> 0:02:53.320 away from cash, you know, there's a little bit of 0:02:53.360 --> 0:02:56.720 money starting to move back, you know, towards towards cash, 0:02:56.760 --> 0:02:58.560 and and I think that is a is a very 0:02:58.639 --> 0:03:02.799 very significant shift. What's the dynamic right now of clipping 0:03:03.040 --> 0:03:07.080 a coupon versus total return? So what you know, the 0:03:07.080 --> 0:03:09.519 way I think about coupons, they do a couple of things. 0:03:09.600 --> 0:03:12.639 If you're if you're a retired investor, or if you're 0:03:12.720 --> 0:03:16.520 living on your capital, that's your income stream. If you're 0:03:16.520 --> 0:03:19.400 a if you're a long term investor though, or or 0:03:19.680 --> 0:03:22.800 an investor that has is not using that money today, 0:03:23.160 --> 0:03:25.920 you know, it's your ability to compound. Uh, it's your 0:03:25.960 --> 0:03:30.080 ability to reinvest at whatever rate happens to be available 0:03:30.080 --> 0:03:33.800 at that particular time. And so you know, bonds that 0:03:33.840 --> 0:03:35.480 have been issued over the last couple of years have 0:03:35.760 --> 0:03:39.160 very very thin coupons, so you don't have the opportunity 0:03:39.280 --> 0:03:43.280 to reinvest all that much. It's not zero. Some instances 0:03:43.320 --> 0:03:46.160 at zero, like in Europe, it's very very low. Here 0:03:46.160 --> 0:03:48.320 in the U S it's a little bit higher. But 0:03:48.400 --> 0:03:51.920 those coupons become very powerful to a portfolio. And so 0:03:52.120 --> 0:03:54.600 when you look across different parts of the market right now, 0:03:54.960 --> 0:03:58.200 that high income generation or that high coupon can be 0:03:58.240 --> 0:04:01.680 a very powerful tool to help you offset some of 0:04:01.720 --> 0:04:05.560 those capital losses, the mark to market capital losses and 0:04:05.760 --> 0:04:08.720 earn back some of that lost money due to interest 0:04:08.800 --> 0:04:11.640 rate volatility. A month ago with Tom and asked that question, 0:04:11.720 --> 0:04:14.400 what was the prospect for total return saying high yield 0:04:14.400 --> 0:04:17.400 in ten, most investors would have said, it's not that great. 0:04:17.440 --> 0:04:19.040 It's a year for coupon clipping. You're not going to 0:04:19.120 --> 0:04:21.120 get the capital returns out of high yield this year. 0:04:21.200 --> 0:04:24.799 Spread to just two tight already. We've had some widening 0:04:25.080 --> 0:04:27.080 over the last couple of weeks. Has that changed your 0:04:27.160 --> 0:04:30.640 view on the trajectory of high yield this year? It 0:04:30.760 --> 0:04:33.320 has not. Uh, you know, are when we started the year, 0:04:33.839 --> 0:04:36.760 we were expecting or we still are expecting about a 0:04:37.040 --> 0:04:39.560 five to maybe as high as six. But let's call 0:04:39.600 --> 0:04:42.840 it a five percent total return for the year. Uh, 0:04:42.920 --> 0:04:45.000 and we still feel pretty good about that. We had 0:04:45.000 --> 0:04:47.600 a very good start to the year and then obviously 0:04:47.600 --> 0:04:50.400 we've given a fair bit of that back. But what's 0:04:50.520 --> 0:04:53.440 redeeming about high yield is that it sort of throws 0:04:53.480 --> 0:04:56.600 off a higher coupon. So you know, it currently has 0:04:56.640 --> 0:05:00.839 a coupon like level of of about x to six 0:05:00.839 --> 0:05:03.960 and a quarter, which it's still early in the year, 0:05:04.040 --> 0:05:06.240 so you can sort of reinvest that money as you 0:05:06.320 --> 0:05:09.960 move through time. So a five percent type return is 0:05:10.200 --> 0:05:13.960 we still think is is still pretty realistic for this year. 0:05:14.240 --> 0:05:17.360 The prospects for this asset class determined by what's gonna 0:05:17.360 --> 0:05:19.839 happen with CREWED still just on an index level, because 0:05:19.839 --> 0:05:21.920 at the back end of last week, CREWD really broke 0:05:21.960 --> 0:05:24.440 down w t I back south of a sixty dollars, 0:05:24.480 --> 0:05:26.039 and I think that's when we really started to see 0:05:26.040 --> 0:05:28.159 how your credits start to bleed, George. So I'm just 0:05:28.160 --> 0:05:30.479 wondering to those two things start to move in tandem 0:05:30.480 --> 0:05:33.680 again and whether they haven't in previous months. So UM 0:05:33.760 --> 0:05:36.919 high yield is an asset class does have relatively high 0:05:37.760 --> 0:05:42.840 UM contribution from from energy related companies. So I think 0:05:42.839 --> 0:05:45.680 it's roughly about twelve percent of the high old market 0:05:45.720 --> 0:05:49.400 is somehow is basically energy links. So we do have 0:05:49.800 --> 0:05:53.200 a fair bit of sensitivity to oil prices um and 0:05:53.200 --> 0:05:55.600 and with oil prices coming down, that did put a 0:05:55.680 --> 0:05:58.000 little bit of pressure. But I think the important thing 0:05:58.080 --> 0:05:59.919 is keep in mind a lot of those companies that 0:06:00.040 --> 0:06:03.560 had meaningful problems, they sort of restructured a couple of 0:06:03.640 --> 0:06:06.800 years ago. Today's sort of stock of companies, if you will, 0:06:07.040 --> 0:06:09.760 are in pretty good shape and uh AND should be 0:06:09.800 --> 0:06:13.680 able to weather the recent volatility and oil prices from 0:06:13.720 --> 0:06:17.160 the Lehman Low's I'm looking at the Bloomberg Barkley's uh 0:06:17.760 --> 0:06:21.200 US Total Aggregate Index. I'm gonna get it out on 0:06:21.240 --> 0:06:24.600 Twitter for all of Bloomberg Radio and maybe the worst 0:06:24.839 --> 0:06:27.400 since two thousand and eight is two thousand and twelve thirteen, 0:06:27.839 --> 0:06:30.520 where we went down four point six percent on the 0:06:30.560 --> 0:06:34.360 index roughly seven point three percent and them. So that's 0:06:34.440 --> 0:06:37.760 roughly one third of a bear market. That's a pullback. 0:06:38.000 --> 0:06:40.200 And the way I look at that, George, is that's 0:06:40.240 --> 0:06:42.880 a year and a half for two years of coupon. 0:06:43.560 --> 0:06:46.840 I mean, that's really in terms of risk taken. Your 0:06:46.960 --> 0:06:49.159 risk is to give up two years of coupon and 0:06:49.160 --> 0:06:52.000 a pullback, right, you know, I think that's exactly right. 0:06:52.040 --> 0:06:53.680 And I think as you talk, you know, sort of 0:06:53.720 --> 0:06:58.479 the aggregate bond market has you know, a relatively long duration, 0:06:58.600 --> 0:07:00.920 and and just simply thinking about duration is kind of 0:07:00.920 --> 0:07:03.600 that you know, that break even if you will, relative 0:07:03.720 --> 0:07:07.000 to um uh to sensitivity to changes in interest rates. 0:07:07.080 --> 0:07:10.360 So as prices go down, a small coupon, you know, 0:07:10.440 --> 0:07:13.480 requires a lot longer period of time to earn back 0:07:13.880 --> 0:07:16.120 that kind of that kind of loss. And and so 0:07:16.160 --> 0:07:19.080 one of the strategies we've been advocating is is actually 0:07:19.120 --> 0:07:23.080 staying closer to higher coupon UH like entities. And and 0:07:23.120 --> 0:07:25.320 we just kind of remind people the economy is doing 0:07:25.360 --> 0:07:28.800 pretty well. Companies are actually earning a tremendous amount of 0:07:28.800 --> 0:07:31.920 money and that's going up, so their ability to pay 0:07:32.160 --> 0:07:36.000 is getting better and should enable those high coupon companies 0:07:36.160 --> 0:07:38.320 to continue paying you those coupons. I mean, I mean, 0:07:38.400 --> 0:07:41.160 johnn I just think it's fabist. Doug cass uh sends 0:07:41.160 --> 0:07:44.200 in a nice messagers just saying, look good hot heels 0:07:44.280 --> 0:07:47.520 versus treasures and historically tight they are your folts on that, 0:07:47.600 --> 0:07:51.080 Joch Well, I mean, spreads are still you know, they're 0:07:51.160 --> 0:07:55.120 relatively tight um. But but as as yields go up 0:07:55.560 --> 0:07:58.600 in in an expanding economy or you know, we we 0:07:58.640 --> 0:08:01.920 will tend to see credit spreads actually tightened. Default rates 0:08:01.960 --> 0:08:05.520 are coming down at a very sharp rate. Uh, and 0:08:05.560 --> 0:08:07.800 we expect them to continue to come down over the 0:08:07.800 --> 0:08:10.560 course of the year. So you can look back and say, 0:08:10.640 --> 0:08:13.760 historically credit spreads are tight, that's true. But when you 0:08:13.760 --> 0:08:17.360 have corporate profitability expanding by let's call it ten twelve 0:08:17.440 --> 0:08:20.200 percent paranum, you know, not a lot of companies are 0:08:20.200 --> 0:08:22.600 going to be defaulting in that kind of environment. George 0:08:22.600 --> 0:08:25.640 Bori final word on treasuries big CPI print on Wednesday, 0:08:26.280 --> 0:08:28.360 is this a market that's primed a whole lot better 0:08:28.520 --> 0:08:31.480 for an inflation surprise? This weakening United States? I do 0:08:31.520 --> 0:08:34.160 not think we're primed for an inflation surprise if we 0:08:34.240 --> 0:08:37.080 break to the upside, if inflation comes out above consensus. 0:08:37.120 --> 0:08:39.800 So anything above one point seven percent, I think you 0:08:39.920 --> 0:08:41.960 get to three percent of the treasury and a hurry 0:08:42.000 --> 0:08:44.160 and probably a bit more. George boris quite a catch 0:08:44.520 --> 0:08:46.520 to get your thoughts on the fixed income universe from 0:08:46.559 --> 0:08:48.760 self rings all the way through the credit George Bori. 0:08:48.800 --> 0:09:05.040 The Wilds Fani Securities, head of Credit Strategy. I would 0:09:05.080 --> 0:09:10.079 suggest this is the interview of the day. Mr Bernstein 0:09:10.200 --> 0:09:14.280 was an advisor for Vice President Biden. He is someone 0:09:14.400 --> 0:09:17.400 with a tilt to the Democrats or left that all 0:09:17.440 --> 0:09:21.800 conservatives read. Senior fellow the Center on Budget and Policy Priorities, 0:09:21.800 --> 0:09:24.960 and of course for years of the Economic Policy Institute. 0:09:25.120 --> 0:09:28.920 Jared honored to have you on after the beginning weekend 0:09:29.040 --> 0:09:32.320 of literature. I want to cut to the chase, which is, 0:09:32.520 --> 0:09:36.240 how do you define and what does it mean if 0:09:36.280 --> 0:09:41.959 we have chronic one trillion dollar deficits. First of all, 0:09:42.040 --> 0:09:44.440 it's always the best way to start today talking to 0:09:44.480 --> 0:09:48.120 you too, so thank you. Uh well uh. I like 0:09:48.240 --> 0:09:50.599 to put these things in the context of g d 0:09:50.800 --> 0:09:54.240 P uh and we're looking at a deficit to GDP 0:09:54.480 --> 0:09:57.720 that's between four or five over the next couple of years. 0:09:58.080 --> 0:10:03.240 That's extremely unusual to have deficits of that magnitude with 0:10:03.280 --> 0:10:06.480 an unemployment rate this low. In fact, we've almost never 0:10:06.520 --> 0:10:09.840 done it before. So it means we're stimulating an economy 0:10:09.880 --> 0:10:13.200 that's closing in on full employment. I totally agree with 0:10:13.240 --> 0:10:15.680 the point that was just made that the Ken indicator 0:10:15.760 --> 0:10:18.800 to watch will be inflation, but since we don't really 0:10:18.840 --> 0:10:22.160 know where we are relative to full employment, it's not 0:10:22.400 --> 0:10:26.520 necessarily uh an inflationary move. But it's a lot more 0:10:26.600 --> 0:10:30.240 Kinzie than Kines himself would engage in. Andrew Vandam, among 0:10:30.320 --> 0:10:34.160 other sources in the Washington Post this weekend did Jared 0:10:34.160 --> 0:10:39.880 Bernstein treatment on charts ratios of deficit. What is the 0:10:40.080 --> 0:10:45.000 ratio besides deficit to GDP that Jared Bernstein is watching 0:10:45.120 --> 0:10:50.280 as we begin our analysis of two thousand twenty. Well, 0:10:50.320 --> 0:10:53.719 I think I'm I'm looking interestingly. It's called the unemployment rate, 0:10:53.720 --> 0:10:56.440 the ratio of the unemployed to the labor force, and 0:10:56.600 --> 0:10:58.400 I think that could get down to three and a 0:10:58.440 --> 0:11:01.080 half percent by the end really year. That's a number 0:11:01.160 --> 0:11:04.439 we haven't seen since the nineteen sixties. The question is, 0:11:04.559 --> 0:11:08.680 will that unweash pressures and inflation and interest rates that 0:11:08.720 --> 0:11:11.800 will cause to move from tapping the brakes to hitting 0:11:11.840 --> 0:11:14.160 them much harder. Let's go a little won because here, 0:11:14.240 --> 0:11:19.480 Jared Bernstein, some would suggest we may get stimulus, tax 0:11:19.559 --> 0:11:25.679 cut stimulus, budgets, silliness stimulus, two bouts of stimulus, and 0:11:25.679 --> 0:11:29.199 we get domestic stimulus, but we give it all back 0:11:29.360 --> 0:11:33.160 over at minus n x where the trade deficit expands, 0:11:33.200 --> 0:11:36.160 et cetera. Off dollar dynamics. Could we have a two 0:11:36.200 --> 0:11:41.040 part economy, a boom domestic America and the controrational component 0:11:41.120 --> 0:11:44.160 it's weak. I'm really glad you brought that up, because 0:11:44.200 --> 0:11:46.080 I haven't heard it enough. But you guys look at 0:11:46.080 --> 0:11:48.640 so much data that you're always looking under under rocks 0:11:48.640 --> 0:11:51.560 that others miss. I've been writing about this myself. I 0:11:51.600 --> 0:11:54.440 see it differently, though. I do think that the magnitude 0:11:54.440 --> 0:11:56.480 of the trade deficit is going to be a drag 0:11:56.640 --> 0:11:59.640 on growth this year, and those who are looking at 0:11:59.679 --> 0:12:02.080 this stimulus, which by the way, it's not a chance 0:12:02.120 --> 0:12:03.720 of whether we're going to get it. We are going 0:12:03.800 --> 0:12:06.280 to get it. We're gonna get more physical stimulus than 0:12:06.320 --> 0:12:08.920 we've probably ever had at an unemployment rate this low. 0:12:09.559 --> 0:12:12.600 That will help to offset the drag on GDP growth 0:12:12.600 --> 0:12:14.600 from the growing trade deficits. So I don't know that 0:12:14.600 --> 0:12:18.480 that's such a downside Jared. Typically it's emerging markets, the 0:12:18.559 --> 0:12:21.559 fear twin deficits. Why should the United States for America 0:12:21.640 --> 0:12:25.720 fear twin deficits. I don't think they should, for precisely 0:12:25.760 --> 0:12:27.440 the reason I just said. I mean, if you have 0:12:27.720 --> 0:12:31.040 the h If you have the trade deficit as a 0:12:31.160 --> 0:12:34.760 drag on GDP road, which is definitional, then having the 0:12:34.840 --> 0:12:37.160 government step in and offset that, you know you you 0:12:37.200 --> 0:12:40.560 either have to offset your trade deficit with consumption investment 0:12:40.840 --> 0:12:44.040 or government spending. Again, a lot of this depends on 0:12:44.120 --> 0:12:46.520 whether we're closing it on full employment, because then the 0:12:46.559 --> 0:12:49.920 extra spending just shows up as inflation and higher interest rates. 0:12:49.960 --> 0:12:51.800 But if there's still some room to run, and I 0:12:51.840 --> 0:12:55.160 think there's there is uh, then that offset is actually 0:12:55.200 --> 0:12:58.920 a useful one. So jared market participants won't fear twin deficits. 0:12:58.920 --> 0:13:01.600 They probably won't fear one trillion dollar budget deficit either. 0:13:01.720 --> 0:13:04.280 Five percent of GDP, well, they will be concerned about 0:13:04.320 --> 0:13:07.560 is the trajectory where we're going the destinations. Just several 0:13:07.640 --> 0:13:09.600 years ago, the UK had a budget deficit of five 0:13:09.600 --> 0:13:12.120 percent of GDP, but it was closing and that was 0:13:12.160 --> 0:13:15.800 the important factor. This one's getting wider and wider. How 0:13:15.880 --> 0:13:17.440 much Why do you think that can get? Could we 0:13:17.480 --> 0:13:21.080 approach say almost ten percent of GDP before the next 0:13:21.120 --> 0:13:23.560 down term, which would be absolutely no, we can And 0:13:23.600 --> 0:13:25.520 that that's exactly the way to look at this. I 0:13:25.600 --> 0:13:28.720 I distinguished between the near term and the long term. 0:13:28.920 --> 0:13:31.600 In the near term, I hear a lot of people, UH, 0:13:31.840 --> 0:13:34.080 creating a lot of anxiety that I don't share. In 0:13:34.120 --> 0:13:36.640 the long term, I'm right with them. And it's precisely 0:13:36.679 --> 0:13:39.920 for the reason you suggest, at some point after a 0:13:39.960 --> 0:13:42.720 few years, you have to start squaring your outlays with 0:13:42.760 --> 0:13:46.520 your receipts. That's not a sustainable pattern. And and there's 0:13:46.559 --> 0:13:49.240 no way, uh, And I should say there's no way. 0:13:49.000 --> 0:13:52.600 I would be very surprised if larger budget deficits are 0:13:52.600 --> 0:13:54.679 the ones we currently have a few years from now 0:13:54.679 --> 0:13:57.559 are not problematic, in no small part from the reason 0:13:57.600 --> 0:14:00.160 you suggested, we're going to lack fiscal space or at 0:14:00.200 --> 0:14:03.199 least when we hit the next down front. I've never 0:14:03.240 --> 0:14:06.760 asked this question. Are Patrick Ley of Vermont in Richard 0:14:06.840 --> 0:14:10.000 Shelby of the South? Are they on the same page 0:14:10.000 --> 0:14:12.880 on this budget? Between them, they have seventy five years 0:14:12.880 --> 0:14:16.800 of senatorial experience. Are Lady and Shelby on the same 0:14:16.880 --> 0:14:21.520 page on this booming budget deficit? I don't think that 0:14:21.560 --> 0:14:24.280 they've been I think that the politicians just haven't been 0:14:24.320 --> 0:14:27.840 able to resist the spending, and at least for Democrats, 0:14:27.840 --> 0:14:30.880 so I can speak to most authoritatively they'd actually have 0:14:30.920 --> 0:14:32.880 a have a good rationale. I mean, the share of 0:14:32.880 --> 0:14:37.640 the budget that we're devoting to domestic priorities is it 0:14:37.680 --> 0:14:40.400 an all time low. Let's come back Jared Burnstein with 0:14:40.480 --> 0:14:43.720 a smart discussion on the deficit, whatever your politics. We 0:14:43.800 --> 0:14:46.000 like that of course with the Center on Budget and 0:14:46.040 --> 0:14:49.040 Policy Priorities. And you know they and many other think 0:14:49.040 --> 0:14:52.040 tanks are going to provide wisdom in the coming weeks. 0:15:04.840 --> 0:15:08.680 He is uh laurea from Yale on economics. And there 0:15:08.680 --> 0:15:11.920 are always too many things to talk about with Robert Schiller, 0:15:12.400 --> 0:15:14.200 so let us focus in on one of the things 0:15:14.320 --> 0:15:18.920 he's been focusing on, which is the simplicity and failure 0:15:19.000 --> 0:15:23.080 of the price earnings relationship. And maybe there's a better 0:15:23.080 --> 0:15:25.560 way to do this, Professor Schiller. Wonderful to have you 0:15:25.600 --> 0:15:30.480 with us. How do you teach extrapolation at Yale University? 0:15:30.840 --> 0:15:35.720 The dangers of extrapolation? Uh, the suspect nature of the 0:15:35.920 --> 0:15:39.880 value of extrapolation. When you got a chalk piece in 0:15:39.920 --> 0:15:43.120 your hand and a chalkboard, what do you actually say 0:15:43.160 --> 0:15:48.000 to the cherubs at Yale? Well, I don't think extrapolation 0:15:48.200 --> 0:15:51.960 is mostly mechanical. It's not like people are charting the 0:15:52.040 --> 0:15:57.000 data and drawing lines. It's more intuitive. People like to 0:15:57.000 --> 0:16:02.200 think about investments in satisfying way that sounds common sensical, 0:16:02.680 --> 0:16:07.200 And they just remember recent years and they don't study history, right, 0:16:07.880 --> 0:16:11.520 And if the last ten years has been up, then 0:16:11.720 --> 0:16:13.960 they kind of think that's the way the world works, 0:16:14.760 --> 0:16:17.160 and if it's been down, they think that the world 0:16:17.240 --> 0:16:22.320 is a dangerous place. And if Robert Fogel was so 0:16:22.360 --> 0:16:25.840 good at in Angus Madison of looking back and how 0:16:25.880 --> 0:16:29.400 we try to guess forward, are we any good at 0:16:29.440 --> 0:16:34.360 guessing forward in the markets? Well? And you know, I 0:16:34.400 --> 0:16:38.040 always say that efficient markets is a half truth. To 0:16:38.160 --> 0:16:42.000 some extent. We do, especially individual stocks you know, that 0:16:42.080 --> 0:16:46.800 have promising story. The market gets that somewhat that maybe 0:16:46.840 --> 0:16:49.800 they overreact to the story. But it's you know, we 0:16:49.880 --> 0:16:54.240 do have I am pro market some sense. It's just 0:16:54.400 --> 0:16:58.520 not perfect. Professor Schiller, I wonder if you could speak 0:16:58.520 --> 0:17:01.600 a little bit about the word itself, the word finance, 0:17:01.640 --> 0:17:05.600 and how it is misunderstood and misapplied to the idea 0:17:05.680 --> 0:17:10.960 of wanting to make money. Well, okay, I teach a 0:17:11.040 --> 0:17:14.200 finance course here at Yale and online. By the way, 0:17:14.320 --> 0:17:17.879 it's for free, of course, Sarah, But I emphasize that 0:17:18.400 --> 0:17:22.320 finance isn't really about making money in the sense that 0:17:22.400 --> 0:17:28.639 many people think it's about. It's a technology for allocating resources, 0:17:29.200 --> 0:17:33.800 for incentivizing people to do something for other people according 0:17:33.840 --> 0:17:38.439 to someone that someone else's desires. Uh. And it's a 0:17:39.800 --> 0:17:45.480 it has powerful implications. Risk management is a powerful tool 0:17:45.560 --> 0:17:49.600 to improve human welfare. Having said that, I'm wondering if 0:17:49.640 --> 0:17:53.959 you could then apply that attitude towards the prices that 0:17:54.040 --> 0:17:58.120 are paid for stocks and why you describe some markets 0:17:58.200 --> 0:18:01.440 as so pricey that really the way we mentioned them 0:18:01.560 --> 0:18:06.640 is not really accurate. Well, I don't you know, take 0:18:06.720 --> 0:18:11.000 my course, You don't. You don't need to, Oh, yes, 0:18:11.080 --> 0:18:16.840 I do. Uh. I think that Uh. Finance went through 0:18:16.880 --> 0:18:22.240 a phase. Uh. Theoretical finance went through a phase uh, 0:18:22.280 --> 0:18:25.760 which was you might say a turning point was Eugene 0:18:25.760 --> 0:18:31.280 Fama's Efficient Market series around seventy and then the Random 0:18:31.280 --> 0:18:36.320 Walk down Wall Street with Malkiel. Uh. It was a 0:18:36.400 --> 0:18:41.639 model that it was a little bit too self satisfied, uh, 0:18:42.320 --> 0:18:46.920 too mechanical. And now there's been a behavioral finance revolution, 0:18:47.000 --> 0:18:53.040 which is still going on. Professor Schiller. Everybody's equity focused 0:18:53.119 --> 0:18:56.680 on the exuberance of Robert Schiller, when you see high 0:18:56.760 --> 0:18:59.359 yield bonds b double a industrials, to go back to 0:18:59.440 --> 0:19:03.520 my grandfather, other priced this narrow in tight to full 0:19:03.560 --> 0:19:07.600 faith and credit ten years. Does that Does that define 0:19:07.680 --> 0:19:11.800 for you a bond bubble, that bonds are priced to perfection? Is? Maybe, 0:19:11.800 --> 0:19:16.000 Sir John Templeton would mention it. Well, the bond market 0:19:16.680 --> 0:19:22.520 has had a peculiar tendency to track lagged inflation. So 0:19:22.640 --> 0:19:27.000 there's a I think it's a sevent correlation between bond 0:19:27.080 --> 0:19:30.440 yields and the last ten years of inflation, but not 0:19:30.560 --> 0:19:34.439 much correlation with the next ten years inflation. So the 0:19:34.480 --> 0:19:38.680 bond market is is backward looking, just like the stock 0:19:38.720 --> 0:19:42.280 market is I I look, professor, showed all this. Just 0:19:42.359 --> 0:19:45.560 what were your comments? Quickly here and once again the 0:19:45.680 --> 0:19:49.600 certain thing, the short fixed trade, and then down we 0:19:49.720 --> 0:19:53.560 go with sevent losses. How what was your response when 0:19:53.600 --> 0:19:58.000 you saw those charts eight days ago? Uh, it was 0:19:58.840 --> 0:20:02.520 not surprising to me that volatility would suddenly shoot up 0:20:03.160 --> 0:20:10.879 after a period of historic low volatility. Uh. This is Uh, 0:20:10.920 --> 0:20:12.760 it's kind of what happens in about the same thing 0:20:12.800 --> 0:20:16.800 happened in ninety nine, although volatility wasn't really low in 0:20:16.880 --> 0:20:20.520 the late nineteen twenties. It was not high uh and 0:20:20.560 --> 0:20:23.760 so uh and earnings were growing. I hate to bring nine. 0:20:24.320 --> 0:20:27.320 I love that story. So does everyone else. Took a 0:20:27.480 --> 0:20:31.320 dramatic story. Everything looked fine, volatility was low, and then 0:20:31.480 --> 0:20:34.520 suddenly the market dropped. The one thing that was wrong 0:20:34.920 --> 0:20:37.840 was that people thought the market was overpriced. The same 0:20:37.880 --> 0:20:41.760 thing happened recently here just now, very good, Robert Shorey, 0:20:41.840 --> 0:20:44.280 thank you so much, greatly appreciate with Yale University. Just 0:20:44.359 --> 0:21:03.359 some perspective there from the academic end. And now, really, folks, 0:21:03.400 --> 0:21:05.520 what we love to do, which give you an important 0:21:05.560 --> 0:21:10.920 conversation across these markets for a judicious length of time. 0:21:11.040 --> 0:21:15.919 Yakum fills with this. Pimco. Yakum, you're claimed for the 0:21:16.000 --> 0:21:19.879 synthesis of the three bees, the three cs. Are you 0:21:20.080 --> 0:21:22.280 under the three d s? I mean we're going through 0:21:22.280 --> 0:21:25.879 the alphabet here. How do you write an essay about 0:21:25.920 --> 0:21:30.399 what we've witnessed in the last ten days? Well, Tom, 0:21:30.440 --> 0:21:33.199 I think what we're seeing here is that markets have 0:21:33.280 --> 0:21:38.120 to come to grips with the very tricky transition from 0:21:38.119 --> 0:21:41.400 the world where monetary policy was the only game in town. 0:21:41.920 --> 0:21:45.560 Um lifted all asset prices in order to support the 0:21:45.560 --> 0:21:49.240 real economy. And now we're transitioning from monetary policy to 0:21:49.320 --> 0:21:53.400 fiscal policy. And you know, ironically, this is what economists 0:21:53.440 --> 0:21:56.920 and central bankers had been calling for for a long time, 0:21:57.000 --> 0:22:01.560 that fiscal policy steps into support economy, so monetary policy 0:22:01.560 --> 0:22:04.760 can step back. But I think what we're learning is 0:22:04.800 --> 0:22:07.960 and what markets are learning that this is a very 0:22:08.000 --> 0:22:13.280 tricky transition. The reason is fiscal policy supports the economy directly. 0:22:13.840 --> 0:22:18.120 It does not work through uh financial markets. It does 0:22:18.160 --> 0:22:22.760 not work through asset prices, and more fiscal stimulus can 0:22:22.800 --> 0:22:27.200 actually be bad for asset prices. The reason is that, well, 0:22:27.560 --> 0:22:31.320 we're seeing rising budget deficits, the treasury has to issue 0:22:31.400 --> 0:22:34.199 more debt into the market. This could push up the 0:22:34.280 --> 0:22:36.800 term premium and bond yields, and it could lead to 0:22:36.800 --> 0:22:40.920 what I would call a reverse portfolio rebalancing effect where 0:22:41.119 --> 0:22:44.760 markets have to absorb the additional bond supply um and 0:22:44.840 --> 0:22:48.840 that means investors could move out of risk assets, and 0:22:49.160 --> 0:22:51.320 you know, this could backfire on the real economy. And 0:22:51.359 --> 0:22:53.560 I think this is what markets are currently trying to 0:22:53.600 --> 0:22:57.040 come to grips with. These are the set of expected, 0:22:57.400 --> 0:23:01.880 unexpected and even true unexpected unexpected it could be out there. 0:23:02.600 --> 0:23:05.280 So much of this has a background of gurus and 0:23:05.400 --> 0:23:10.480 pundits yakham fells suggesting that we can do all this smoothly, 0:23:10.760 --> 0:23:13.879 and that the glide pass of adjustment from QUEI to 0:23:14.000 --> 0:23:18.040 QT or whatever the theory may be, or the theme 0:23:18.320 --> 0:23:21.760 may be, that we can all do this smoothly. I 0:23:21.880 --> 0:23:25.000 see no evidence of that in history. Where did we 0:23:25.160 --> 0:23:29.479 get this belief in splooth, smooth glide pass to a 0:23:29.480 --> 0:23:36.679 new regime? Well, I think we've seen it working in Japan, um, 0:23:36.840 --> 0:23:40.360 So it is possible to do it smoothly. But what 0:23:40.400 --> 0:23:43.720 it requires is that the central bank, you know, has 0:23:43.760 --> 0:23:47.520 to get in bed with the government, so there has 0:23:47.560 --> 0:23:51.199 to be monetary and fiscal coordination. The Bank of Japan 0:23:51.240 --> 0:23:55.320 did this beautifully by just pegging the ten year BONDI 0:23:55.400 --> 0:23:59.320 it and inviting the government to do more fiscal expansion. Um. 0:23:59.440 --> 0:24:01.440 But this is not what we're doing in the US, 0:24:01.640 --> 0:24:04.560 at least not. But we can't make the comparison to Japan, 0:24:04.600 --> 0:24:10.480 where they've got such an absolutely original savings culture, can we? Culturally? 0:24:10.480 --> 0:24:13.880 They're different? Right? Yeah, that's right. And you know they've 0:24:13.920 --> 0:24:19.200