Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy, you know what actually surprises me a little bit
Speaker 1: about twenty twenty four, maybe twenty twenty three.
Speaker 2: We're only we're only two weeks in, so go on, or.
Speaker 1: Maybe it's twenty twenty three. So here's what surprised. Maybe,
Speaker 1: and think about this, like we've had this a huge
Speaker 1: increase in raids. We're coming to the end, you know,
Speaker 1: the pandemic like shook up the world. But by and large,
Speaker 1: like things have normalized in some level. I'm surprised that
Speaker 1: things aren't more different than they are in fact. Yeah, Like,
Speaker 1: you know, we have the Nasdaq surging. I was just
Speaker 1: looking at It's like the Nasdaq was surging back of
Speaker 1: the day, NASA crypto is back. Like I thought the
Speaker 1: world was gonna change or turned upside down. And yet
Speaker 1: like I'm kind of surprised, like we have this seemingly
Speaker 1: different macro environment, and I'm a little surprised by how
Speaker 1: many themes actually did not go awheyre did not change.
Speaker 2: It's kind of crazy. So rates have basically like tripled
Speaker 2: or at least funding costs, yeah, tripled for companies, and
Speaker 2: yet as far as I can tell, we're sort of
Speaker 2: heading back into twenty twenty two territory. I know the
Speaker 2: S and P five hundred has been wobbling a bit.
Speaker 2: We're recording this on January seventeenth, so it's been down
Speaker 2: for the past couple days or so. But we did
Speaker 2: have a really big rally going into the end of
Speaker 2: twenty twenty three. A lot of the tech companies, the
Speaker 2: usual culprits, the ones you would recognize from twenty twenty
Speaker 2: one to twenty twenty two, were sort of leading the way.
Speaker 2: It is strange that we are in a new regime
Speaker 2: of higher interest rates, and yet the new regime looks
Speaker 2: a lot like the old regime.
Speaker 1: And then throw in some of these huge things. So
Speaker 1: I mentioned the pandemic, which had this huge disruptive effect
Speaker 1: on society. But then there's multiple wars happening right now.
Speaker 1: The war in Ukraine means ongoing, the war against Gaza,
Speaker 1: the firing against the ships in the Red Sea, et cetera.
Speaker 1: So geopolitics is back in a big way. We just
Speaker 1: had the Taiwanese election. We did a recent episode on
Speaker 1: sort of thinking about some of the geopolitical risks outside
Speaker 1: of China, Like, there's a lot going on also, speak
Speaker 1: of China today, did you see the population numbers?
Speaker 2: I did, pretty staggering statistics.
Speaker 1: Yeah, so the second year in a row that the
Speaker 1: population in China actually shrank, birth rates continue involve. There's
Speaker 1: just a lot of stuff going on, you know, throwing
Speaker 1: stuff like AI. You know, they're probably talking about I
Speaker 1: think they're talking about that in Davos right now, Like
Speaker 1: there is a lot going on.
Speaker 2: I bet they're talking about demographics to show probably and
Speaker 2: geopolitical risk. I guarantee you there's someone in Davos talking
Speaker 2: about the big risk for twenty twenty four is geopolitical.
Speaker 1: They'll probably talking about elections and elections in the US.
Speaker 1: There is a lot going on, and it's like, yeah,
Speaker 1: maybe like we'red in all the time, high in stocks
Speaker 1: are close enough, but like it still feels like everything
Speaker 1: feels very unsettled or sort of like the abilt or
Speaker 1: easily unsettled at this point.
Speaker 2: Well, I think the issue is there's sort of there's
Speaker 2: an unease about the current economy, which is that we
Speaker 2: have seen this incredibly dramatic run up in rates and
Speaker 2: yet it feels like we haven't really seen I guess,
Speaker 2: the full result of it or the shoe dropping just yet.
Speaker 2: We've had three banks failed in twenty twenty three. It's
Speaker 2: definitely not nothing. But compared to how people were talking
Speaker 2: about ten years of ultralow interest rates after the two
Speaker 2: thousand and eight financial crisis, this idea that central banks
Speaker 2: were distorting markets, there were all these zombie companies, everything
Speaker 2: was artificial because of low rates. It feels like something
Speaker 2: more should have changed in sort of twenty twenty three.
Speaker 1: Should we have a big picture macro conversation.
Speaker 3: Let's do it?
Speaker 1: All right, Well, I am really excited. We have a
Speaker 1: perfect guest. I'm thrilled that we have him here in studio.
Speaker 1: We're gonna be speaking with Jason Cumming. He is the
Speaker 1: head of research and chief economist and Brevin Howard asset Management,
Speaker 1: been there for a long time. He's also previously an
Speaker 1: economist at the Federal Reserve Board. So really the perfect
Speaker 1: guest to be speaking about some of these big macro issues. Jason,
Speaker 1: thank you so much for coming on. Odd lots.
Speaker 4: Thank you, Joe. Thanks Tracy.
Speaker 1: All Right, I'm gonna ask an embarrassing question, but maybe
Speaker 1: hopefully it's something that our listeners will find useful. What
Speaker 1: is a chief economist and a head of research at
Speaker 1: an asset manager like Brevin or specifically Brevin. What do
Speaker 1: you do and what is your role within the company
Speaker 1: and within the investment process?
Speaker 4: Okay, I think it's useful. Instead of going through a
Speaker 4: job description about what a chief economist does? Is you
Speaker 4: frame this up both for economists and for the investment
Speaker 4: management industry more generally, Sure, I make the distinction between
Speaker 4: desk generals and special operators, and whether you're an economist
Speaker 4: or operating in a hedge fund or across the asset
Speaker 4: management industry. This taxonomy is helpful to try and think
Speaker 4: about people who are big picture sure desk generals who
Speaker 4: move pieces around on a map, and people are special
Speaker 4: operators who do house to house combat every day with
Speaker 4: the data and with markets. What we do at our
Speaker 4: fund Brevan Howard is much more like house to house combat,
Speaker 4: whereas other shops, certainly a Warren Buffett or the old
Speaker 4: David Swinson model of endowment management that has more the
Speaker 4: air of a desk general moving things around strategically very
Speaker 4: long lived bets, and what we do at a hedge
Speaker 4: fund is really different from that. We don't afford ourselves
Speaker 4: the ability to just make long term bets and then
Speaker 4: walk away because we have stewardship over capital that has
Speaker 4: to be marked to market every day for our investors
Speaker 4: who face very real budget constraints. We don't manage money
Speaker 4: for the Warren Buffets of the world or the Yale
Speaker 4: endowments of the world. We manage money for shops more
Speaker 4: like the investment committee that I'm on. Two of them,
Speaker 4: Brookings and Swarthmore. Swarthmore has a really impressive endowment, Tracy.
Speaker 4: Fifty percent of the operating budget is funded by that endowment.
Speaker 4: They can't afford to have a year where their private
Speaker 4: equity partners come to them and say sorry, no distributions
Speaker 4: this year, because then the kids don't have their scholarships.
Speaker 4: They need partners more like Brevan Howard, who are doing
Speaker 4: this houseouse combat with markets every day, trying to extract
Speaker 4: risk premium in all different kinds of markets. So we
Speaker 4: are neither long risk assets all the time, nor are
Speaker 4: we sitting around just buying vall all the time, because
Speaker 4: as you well know, people overpay for options. So if
Speaker 4: you were long vall all the time, you would end
Speaker 4: up going out of business sooner rather than later. So
Speaker 4: what a chief economist does, Joe, is try and provide
Speaker 4: the framework for thinking about investment management, whatever the environment is,
Speaker 4: and then figuring out exactly the ways in which we're
Speaker 4: going to go about that on a high frequency basis,
Speaker 4: because we aren't paid for our long term views about
Speaker 4: whether we're in the new normal or the new abnormal
Speaker 4: for interest rates, we have to figure out when the
Speaker 4: FED pivot is, when the next interest rate cuts are.
Speaker 4: And so the essence of a macro hedge fund is
Speaker 4: is not figuring out the terminal destination, but it's figuring
Speaker 4: out how you get there, what the exact path is,
Speaker 4: the volatility along the way, all those different elements, and
Speaker 4: the chief economist tries to weave together all those different
Speaker 4: all those different pieces.
Speaker 2: Wait, can I ask an even a broader step back question?
Speaker 2: A step back from the step back? And you sort
Speaker 2: of touched on it just then, But what does a
Speaker 2: macro hedge fund actually do?
Speaker 3: Because I take the.
Speaker 2: Point about I take the point about, you know, being
Speaker 2: tactical and having to sort of pivot on a day
Speaker 2: to day basis, But my impression was that macro hedge
Speaker 2: funds were all about making the big bets on big
Speaker 2: changes in the global economy, macroeconomic regime shifts, that sort
Speaker 2: of thing.
Speaker 4: So a macro hedge fund is defined by the kinds
Speaker 4: of assets it's trades, so it trades foreign exchange, currency, credit,
Speaker 4: and traditionally, certainly in the kind of older style Soros
Speaker 4: big macro hedge fund bets where we broke the Bank
Speaker 4: of England. It's certainly true that in Brevin Howard's history
Speaker 4: we've had amazing returns through very difficult times in the economy,
Speaker 4: for example two thousand and eight and certainly during the pandemic.
Speaker 4: But we wouldn't be good partners with our stakeholders if
Speaker 4: we told them we were only going to make money
Speaker 4: if there's a pandemic. We can't count on a pandemic happening.
Speaker 4: We can't count on breaking the Bank of England once.
Speaker 4: So we try and make the inner girl the path
Speaker 4: integral of what goes on, and markets make money through
Speaker 4: all those different environments, which sometimes might mean tracy that
Speaker 4: your long just carry. Last year it turned out that
Speaker 4: some of our best performing parts of our fund were
Speaker 4: long credit, and that's not something that is the essence
Speaker 4: of the old style macro of let's pick a big
Speaker 4: up or down. But it is true we punctuated some
Speaker 4: of our best returns in those periods of time where
Speaker 4: being the chief economist, we looked at what was going
Speaker 4: on with the pandemic and people were enormously complacent. You'll
Speaker 4: remember that period of time in February March of twenty
Speaker 4: twenty when we went through the it's just the flu
Speaker 4: phase of things, and we were looking out across the
Speaker 4: investment landscape and saying, people are not tuned to the
Speaker 4: global economy shutting down. We were probably Tracy only a
Speaker 4: week or two ahead of people in that case, but
Speaker 4: that was all that we needed in order to be
Speaker 4: able to in one of our funds make one hundred
Speaker 4: percent during that period of time.
Speaker 2: I remember that time in early twenty twenty, and it
Speaker 2: was amazing, like how slim the edge was, but also
Speaker 2: kind of how obvious because I remember in January February
Speaker 2: twenty twenty, I mean, China shut down like a huge
Speaker 2: portion of its economy and stocks were still rising in
Speaker 2: the US and everyone was talking about the Trump impeachment,
Speaker 2: and it was kind of stunning to me that we'd
Speaker 2: been worried about a trade war with China for so
Speaker 2: many years, and then China shuts down most of its
Speaker 2: economy and everyone was like.
Speaker 3: It doesn't matter, it's fun.
Speaker 1: Can I ask a questions? So obviously making good decisions,
Speaker 1: hopefully pivoting at the right moment, being ahead of others
Speaker 1: in terms of is there a describable, persistent source of
Speaker 1: alpha that you could say across the cycle? Something like
Speaker 1: you know, and I think like some hedge funds, like
Speaker 1: maybe like they're expertise, is like all their different portfolio
Speaker 1: managers and the risk management practices that they apply to
Speaker 1: sort of allocating capital internally, and maybe their ability to
Speaker 1: do that is a source of alpha. Or maybe some
Speaker 1: of them are really good at like applying the cutting
Speaker 1: edge of technology or AI, et cetera, and that is
Speaker 1: their edge, et cetera. Is there like a describable edge
Speaker 1: that Brevin aims to exploit across the cycle.
Speaker 4: So I've thought about how to answer this question a lot.
Speaker 4: Because everyone is hard working and everyone is smart in market,
Speaker 4: So there's no real alpha from working an extra hour
Speaker 4: per week and having an extra IQ point, because that's
Speaker 4: an arms race where everyone is up to the frontier.
Speaker 4: I think about it in three different ways, going from
Speaker 4: narrowly out. So first is muscle memory. I've seen as
Speaker 4: chief economists all kinds of different things. So I was
Speaker 4: just reminded, you know, we were talking about the pandemic
Speaker 4: just a moment ago. You need to have seen a
Speaker 4: lot and be able to pull together my academic training,
Speaker 4: my policy training, or markets training to be able to
Speaker 4: make a view. So in that period right around February,
Speaker 4: when I saw that when the people who were put
Speaker 4: away in Travis Air Force Base actually started community spread
Speaker 4: at Vacaville Community Hospital a mile away, I knew that
Speaker 4: there was going to be spread everywhere. When I saw
Speaker 4: that the La Unified School District was shutting down, I
Speaker 4: knew that the whole economy was shutting down. That kind
Speaker 4: of muscle memory, knowing what happens when those developments are
Speaker 4: going to hit markets is a key source of alpha.
Speaker 4: Going back to earlier periods, you were just talking in
Speaker 4: the intro about how things seem fine. Now you flip
Speaker 4: the calendar and it doesn't really seem like anything really changes.
Speaker 4: I'll tell you another period of time where you flip
Speaker 4: the calendar and something really changed. GDP growth at the
Speaker 4: end of two thousand and seven, just a few days
Speaker 4: before the business cycle peak in December of two thousand
Speaker 4: printed four percent on a quarterly annualized rate, which was
Speaker 4: the fastest run rate of growth going in to the
Speaker 4: business cycle peak a few days later than you had
Speaker 4: seen in four years. A few weeks after that, the
Speaker 4: unemployment rate went up three tenths. The FED did an
Speaker 4: emergency seventy five basis point cut, followed just a few
Speaker 4: days later by regularly scheduled meetings fifty basis point cut.
Speaker 4: Things can change very quickly, and one of the persistent
Speaker 4: source of alpha that we have is that experience of
Speaker 4: the individuals we have in the firm, MEAs chief economists
Speaker 4: and other The two others I would just mention quickly
Speaker 4: are I think it's underappreciated how important trust is in organizations.
Speaker 4: And that may seem like something that's a very soft
Speaker 4: consideration when it comes to something right.
Speaker 1: It sounds like a car, but it's not.
Speaker 4: Which is, you can get sources of information anywhere. But
Speaker 4: if you trust me, Tracy, when I come to you
Speaker 4: and say listen, the US economy is going to shut down,
Speaker 4: that may be the difference between you putting on a
Speaker 4: trade that's one unit or ten units. And then finally
Speaker 4: the last one is there's intangible capital that is developed
Speaker 4: over a period of time. In a firm we've been
Speaker 4: around for more than twenty years, we have intangible capital
Speaker 4: in the way we structure trades, the AI, the individuals,
Speaker 4: and that is something that we have as a permanent
Speaker 4: a source of strategic ballast for us.
Speaker 2: Joe asked you about alpha. How much of global macro
Speaker 2: alpha is systematizable? Because again, I think about the landscape
Speaker 2: of hedge funds. I think about the hedge funds that
Speaker 2: have been popular in recent years. It's sort of all
Speaker 2: you know, like relative value alg driven type momentum hedge funds.
Speaker 2: And you're here, you're talking about like very specific things
Speaker 2: that have happened in the global economy. Like you know,
Speaker 2: I was watching the spread of the pandemic and I
Speaker 2: saw this one base in what was happening there. How
Speaker 2: systematizable is that kind of insight?
Speaker 4: I think almost none of it. I think that you
Speaker 4: have to there's no designer indicator. People will look at
Speaker 4: financial conditions indexes, or they'll look at regularities that they've
Speaker 4: seen in the past and hopefully be able to you know,
Speaker 4: extract some risk creamium out of the markets. But I
Speaker 4: harken back to a podcast you just did the other
Speaker 4: day with Harley Bassman, who's developed some you know, pretty
Speaker 4: sophisticated financials, but in the hands of people who aren't
Speaker 4: sophisticated investors, their weapons of mass destruction. If you just
Speaker 4: kept your p fix throughout the cycle, it's an excellent
Speaker 4: financial instrument. But what if you missed the day of
Speaker 4: the FED pivot? What if you missed the day that
Speaker 4: there's you know, essentially a failed auction, because this is
Speaker 4: the day that people decide that the US's credits is
Speaker 4: really in question. Those are the kinds of things that
Speaker 4: I think require real feel for the analysis, plus mapping
Speaker 4: into the markets. It's very difficult to systemae systematize. You
Speaker 4: might take a step back and look at markets and say, listen,
Speaker 4: most of the returns in stocks and bonds have been
Speaker 4: around FED days, But which FED days pick them? Was
Speaker 4: it just because you were able to know that J.
Speaker 4: Powell was going to do a trillion dollars of que
Speaker 4: in response to the pandemic, it was important to pick
Speaker 4: that week.
Speaker 1: Let's talk about this moment interesting times. Obviously, debates about
Speaker 1: whether the FED is gonna cut in March. We recently
Speaker 1: had the Waller speech. Waller was one of the hawks
Speaker 1: leading the way, and though he didn't say we're going
Speaker 1: to go right away, he clearly indicated that on some
Speaker 1: level he is ready for the rate cut cycle to happen.
Speaker 1: Inflation trajectory generally seems fine, labor market seems solid, lots
Speaker 1: of optimism about the soft landing. January seventeenth, here we are,
Speaker 1: how do you see just sort of the short term
Speaker 1: macro picture of the medium term.
Speaker 4: Let's weave that into the very recent Waller speech and
Speaker 4: especially his Q and A. The FED is pulled a
Speaker 4: little bit of a fast one. They told you that
Speaker 4: they are data dependent and you just needed to look
Speaker 4: at the data. So let's over the last six months
Speaker 4: look at what's happened with the data. The June sep
Speaker 4: is an important milestone. At that meeting, the median forecast
Speaker 4: for that nineteen member committee was three point nine percent
Speaker 4: for corp PC inflation. We project at the end of
Speaker 4: this month, and we, like many others, put a lot
Speaker 4: of effort into this kind of high frequency data analysis.
Speaker 4: We project at the end of the month, the release
Speaker 4: for core PC inflation will be two point nine percent.
Speaker 4: They've missed by one hundred basis points in six months.
Speaker 4: In the era of the SEPs, going back to twenty fourteen,
Speaker 4: they've never missed in that direction by that magnitude. In
Speaker 4: twenty nineteen, when they missed by a mere thirty basis points,
Speaker 4: it was enough to get a seventy five basis point
Speaker 4: mid cycle adjustment, as they called it, in an economy
Speaker 4: that was performing otherwise pretty well. It faced some shocks
Speaker 4: with obviously the Trump trade war and so on, but
Speaker 4: just a thirty basis point miss got them to cut
Speaker 4: three times starting in the summer and into the fall.
Speaker 4: They missed by one hundred basis points. Just on what
Speaker 4: we know, and furthermore, in terms of thinking about where
Speaker 4: we're going farther down the line, Monetary policy now is
Speaker 4: as tight as it's ever been on the precipice of
Speaker 4: recessions if you take the FED seriously. They think that
Speaker 4: long term neutral is two and a half percent, so
Speaker 4: rates are broadly three hundred basis points above neutral. Whenever
Speaker 4: that's been true, you've had a recession, with one small
Speaker 4: exception in nineteen eighty four. But if it's the case
Speaker 4: that monetary policy is tight, what is the natural equilorating
Speaker 4: force of the economy to bring it into equilibrium and
Speaker 4: just keep it there. Well, it's not monetary policy, because
Speaker 4: that's putting continual downward pressure on the economy. So we
Speaker 4: fully expect the economy to continue to slow. And the
Speaker 4: interesting thing about Waller's take on thing is he had
Speaker 4: obviously taken on board what's happened with inflation and what
Speaker 4: he projects to happen inflation. He's discounting the prospects of
Speaker 4: a deterioration in the labor market, which we do foresee.
Speaker 4: But he slipped in something very important Joe, especially in
Speaker 4: the Q and A, which is he went from data
Speaker 4: dependence to his own personal preference dependence, which is he said,
Speaker 4: the biggest mistake we could make is starting and then
Speaker 4: stopping or having to reverse, and in fact he used
Speaker 4: the word worst mistake. And so he talked three times
Speaker 4: in the official speech about how he had more confidence
Speaker 4: in various parts to the outlook coming together which would
Speaker 4: lead to rate cuts. But then in the Q and
Speaker 4: A he was unwittingly revealing of his own personal preferences,
Speaker 4: which is said, the worst thing we could do is
Speaker 4: stop and start, and furthermore that he had to be
Speaker 4: thoroughly convinced that inflation had been slaid. So we think
Speaker 4: that the Fed is well on its way to rate cuts.
Speaker 4: Figuring out the exact timing is going to depend upon
Speaker 4: one piece of data or another. How does the next
Speaker 4: employment report play out? But I think you can have
Speaker 4: more conviction about the ultimate destination than about the exact timing.
Speaker 4: I just remind you the last two normal rate cutting
Speaker 4: cycles started out with a bang, with a fifty basis
Speaker 4: point cut. One of them was intermeeting, followed up by
Speaker 4: in that same month in January two thousand and one,
Speaker 4: another cut. And remember the two thousand and one recession
Speaker 4: we called a recession. It you never even ultimately strung
Speaker 4: together two quarters of negative GDP, and the Fed was
Speaker 4: cutting by one hundred basis points because they kind of
Speaker 4: waited around. And then Greenspan did his thing. He said,
Speaker 4: I looked at initial claims and second week auto sales
Speaker 4: in December of two thousand and the economy's changed. He
Speaker 4: said to his colleagues, the last move is always a mistake.
Speaker 4: We need to take it back and take it back quickly.
Speaker 4: So the March versus mad debate, I think, in some
Speaker 4: ways obscure is what's really going on, because that's a
Speaker 4: guess about a policy maker's utility function and how risk
Speaker 4: averse they're going to be with regard to this really
Speaker 4: severe aversion to policy reversals, and that's tough to judge.
Speaker 2: So I take the point about timing, and in some
Speaker 2: respects it's academic whether it's March or like a few
Speaker 2: months later. But you mentioned something earlier that was really
Speaker 2: interesting to me, which was that I think you said
Speaker 2: you went long credit in twenty twenty three, and that
Speaker 2: was kind of a bold and unusual call, because again,
Speaker 2: going into twenty twenty three, towards the end of twenty
Speaker 2: twenty two, everyone the consensus was that we were going
Speaker 2: to have a recession and that corporate defaults were going
Speaker 2: to spike. And we have seen a pickup in defaults.
Speaker 2: This is true, but certainly not to the extent that
Speaker 2: a lot of people were thinking.
Speaker 3: We have seen.
Speaker 2: Spreads come in since towards the end of twenty twenty three.
Speaker 2: What went into making that specific call, I go back to.
Speaker 4: Two thousand and six, as a good template. So two
Speaker 4: thousand and six saw the end of the rate hiking cycle.
Speaker 4: Then in June of two thousand and six, there was
Speaker 4: widespread worries about the economy, and there were more manifest
Speaker 4: than they are now because housing was obviously slowing down
Speaker 4: and looking very dodgy in certain parts of the country.
Speaker 4: At that point, it appeared to be an environment that
Speaker 4: it would just be crazy to be long some of
Speaker 4: these risk assets, especially ones that were tied to housing,
Speaker 4: in the event fed stop raising rates in the middle
Speaker 4: of the earth like they did in twenty twenty three.
Speaker 4: There were lots of worries even dating back into two
Speaker 4: thousand and five, in that prior episode and in this
Speaker 4: one as well, but it was fine to be long
Speaker 4: credit because you hadn't seen the deterioration in the economy.
Speaker 4: So ultimately, in two thousand and six and in twenty
Speaker 4: twenty three, stocks were up by double digits. Credit did fine,
Speaker 4: and those indicators. Despite the market's interest in trying to
Speaker 4: find designer indicators to tell you what's going to happen
Speaker 4: somewhere down the road, financial conditions indexes predict nothing reliably.
Speaker 4: They have false negatives, they have false positives, sometimes credit
Speaker 4: is predicted a downturn or a financial market ruction. Sometimes
Speaker 4: it hasn't. Again, going back to that period of time,
Speaker 4: like in two thousand and seven, real GDP growth was
Speaker 4: four percent going into a recession. I remember one of
Speaker 4: the times that I was the most bearish in Brevan
Speaker 4: Howard history was just after bear Stearns was bailed out.
Speaker 4: We thought the economy was absolutely falling apart. And in
Speaker 4: the event, if you look back at private payrolls at
Speaker 4: that point, you were losing two hundred and fifty thousand
Speaker 4: jobs per month. In April and May. After bear Stearns failed,
Speaker 4: stocks went right up. Credit did fine, And it was
Speaker 4: only until later on in the year, and even in
Speaker 4: the week that Lehman failed stocks went up. It's oftentimes
Speaker 4: going to be the case that financial instruments and financial
Speaker 4: markets do fine until they don't.
Speaker 1: I want to get into some big pictures, but just
Speaker 1: before we do, on this sort of current moment, so
Speaker 1: we talked about the Waller speech. We talked about how
Speaker 1: the you know, historically speaking, the FED is you know,
Speaker 1: the recent overestimation I guess of the inflation trajectory is
Speaker 1: quite large. They've expected inflation to be much hotter at
Speaker 1: least I'm measured by CORPCE than it has been. So
Speaker 1: what's your sort of view, specifically in terms of rate
Speaker 1: cuts in the prospect of recession in twenty twenty four.
Speaker 4: So we are a recession shop because of the reason
Speaker 4: I mentioned earlier, Joe, which is that whenever monetary policy
Speaker 4: has been tight, you've been falling into recession again with
Speaker 4: that exception of nineteen eighty four. And I take the
Speaker 4: point that Waller was implicitly trying to make in a speech,
Speaker 4: which is that everything that has happened in the past
Speaker 4: has happened for the first time once. So maybe this
Speaker 4: is a business cycle where everything comes out with the
Speaker 4: perfect soft landing. But let me frame it this way.
Speaker 4: Even if they have the Sully Sullenberger soft landing of
Speaker 4: all anniversary of the US are eighteen forty two of
Speaker 4: soft landings, it's still the case that monetary policy is
Speaker 4: miles off in terms of its terminal destination because they
Speaker 4: should be it around neutral if you're getting a soft landing,
Speaker 4: and right now you're arguably on their own market.
Speaker 1: Pricing, and how many cuts this year right now.
Speaker 4: As of today, less than six cuts, And you think
Speaker 4: it'll be more. Listen, let me go back to twenty
Speaker 4: twenty one. In twenty twenty two, intellectual consistency that got
Speaker 4: you to the rate hikes seen during that cycle, with
Speaker 4: inflation going up and demanding that you do what turned
Speaker 4: out to be four seventy five basis point hikes in
Speaker 4: a row. Intellectual consistency demands that if you thought that
Speaker 4: that was appropriate, it's similarly appropriate to be doing cuts,
Speaker 4: not of the same magnitude in total, going back down
Speaker 4: to zero, but certainly back down to neutral. And the
Speaker 4: reason for that is because you have policy set to
Speaker 4: a very high inflation environment. Now that's no longer no
Speaker 4: longer out there whaller're said in a speech, the six
Speaker 4: month change will be around two. I'm not going to
Speaker 4: argue with the policy maker what around two is, but
Speaker 4: it'll be one point eight percent. On a three month
Speaker 4: annualized basis, it'll be one point four percent.
Speaker 2: This is exactly what I wanted to ask you, because
Speaker 2: it feels to me like rates at the moment are
Speaker 2: sort of the solution to and the cause of all
Speaker 2: the markets problems. Right, so we might get a recession
Speaker 2: because interest rates have gone up so much and the
Speaker 2: cost of financing is high. But if that starts to happen,
Speaker 2: I mean, the FED can start to cut and they
Speaker 2: can do insurance cuts even before they see a sort
Speaker 2: of durable impact from the higher rates. How much of
Speaker 2: a problem is this if the issue is kind of
Speaker 2: caused by higher rates but can also be solved by
Speaker 2: lower rates. Is the limiting factor here? Is the constraint
Speaker 2: really what happens with inflation?
Speaker 4: I think we need to bring in the other part
Speaker 4: of the dual mandate here, which is that you're playing
Speaker 4: with fire. So a very careful look at the labor
Speaker 4: market now will suggest that hiring has just ground to
Speaker 4: a halt. So if it weren't for participation falling back
Speaker 4: by a huge amount three tenths in the last report
Speaker 4: at the unemployment rate would have gone up by three
Speaker 4: tens to four percent. Would have totally change the macro conversation.
Speaker 4: Underneath that headline statistic, the gross flows within the household
Speaker 4: survey are telling you that folks who are not in
Speaker 4: the labor work force moving into hiring fell by almost
Speaker 4: a record amount. So we're seeing the underlying details of
Speaker 4: a labor market which is slowing down. You're kind of
Speaker 4: living in this twilight between recession and non recession. The
Speaker 4: FED is essentially running I know this from your compexity conversation.
Speaker 4: You'll love this, Tracy. The FED is running essentially a
Speaker 4: short Gamma position with regard to any weak data, any piece.
Speaker 2: Of feel like there's a bell we should ring when
Speaker 2: someone says.
Speaker 4: Gamma, any week data that comes out that's material, not
Speaker 4: like the Empire Survey, which is a few manufacturers in Buffalo,
Speaker 4: a really material piece of weak data, and the FED
Speaker 4: will stop and look around like they have in the past,
Speaker 4: whether it was at January two thousand and one or
Speaker 4: in January of two thousand and eight, and say, listen,
Speaker 4: we calibrated policy to a different environment that no longer
Speaker 4: apparently prevails. The thing I'm trying to provide you with
Speaker 4: is it's not just an antiseptic, technocratic reading of the
Speaker 4: data that's necessary here. You have to play the man
Speaker 4: and the ball, the man or the woman, but man
Speaker 4: in this case in j Powell gets to decide when
Speaker 4: he starts cutting rates, and that's going to depend upon
Speaker 4: his own kind of personal welfare function of what he
Speaker 4: thinks is important and if he's really averse to a
Speaker 4: policy reversal, and he wants to be that much more
Speaker 4: sure and makes it more likely that they have to
Speaker 4: do more later on.
Speaker 2: This was sort of Basman's point as well, about like,
Speaker 2: if you think about what's driving policy makers, it's probably
Speaker 2: reputation and legacy.
Speaker 4: It's a dual mandate as well. I mean, they're genuine
Speaker 4: There's no greater public servant than j. Powell, who has
Speaker 4: spent his entire life around Washington trying to do good
Speaker 4: for public policy. I think he genuinely wants to do good.
Speaker 2: Oh you were at the FED, of course, how much
Speaker 2: does that experience feed into your thinking now?
Speaker 4: It's formative, It's incredibly important. So I started out my
Speaker 4: career as a PC economist and then a per and
Speaker 4: I felt like I learned in the Green Span era
Speaker 4: all about how to analyze the data and all about
Speaker 4: the sausage making of how policymaking really gets done. And
Speaker 4: so having that appreciation for how these decisions really get made.
Speaker 4: It's not about you know, the data release here or there.
Speaker 4: It's coalition building. It's how they're interpreting things, it's forward
Speaker 4: guidance and so forth. That experience I think is invaluable.
Speaker 4: Having seen how the sausages actually made really helps you
Speaker 4: be able to sample it.
Speaker 1: I want to talk about some big picture topics, but
Speaker 1: real quickly before that, as you point out, you know
Speaker 1: and the most recent non firm payils are work, there
Speaker 1: could have been a different narrative than the one that
Speaker 1: was because while the headline was good, we did see
Speaker 1: that weakening and labor force participation, we did see that
Speaker 1: increase in U six prime age employment to population did weaken.
Speaker 1: But whatever the unemployment rate did hold steady, when does
Speaker 1: it change and sort of people wake up to as
Speaker 1: you point out, that hiring is really slowed down.
Speaker 4: So Joe, listen, what's going to happ and is the
Speaker 4: recession should it unfold the way we think it unfolds,
Speaker 4: will feel like a slow down, even if we're right.
Speaker 4: So suppose we're absolutely confident that there's going to be
Speaker 4: a recession, at the start, it's going to feel just
Speaker 4: like a slowdown. And the reason for that go back
Speaker 4: to the stat I quoted you earlier on there were
Speaker 4: five hundred thousand jobs lost in the two months following
Speaker 4: the Bear Stearns failure. At the time, we didn't know
Speaker 4: that the first print was someone minus sixteen k or
Speaker 4: minus twenty four k. That month when Ben Bernanke cut
Speaker 4: by an emergency seventy five and then followed it up
Speaker 4: with another fifty basis point cut, the unemployment rate went
Speaker 4: up three tenths, which may not seem like a big deal.
Speaker 4: Private payrolls were still going along pretty well. The first
Speaker 4: draft of history is not the ultimate draft that is written,
Speaker 4: and it's a matter of kind of art and science
Speaker 4: could taste to figure out what you should be focusing on.
Speaker 4: And there's no designer statistic that you can always use.
Speaker 4: Apropos The point about there's no way to design some
Speaker 4: CTA that harvest is all the risk premium in the
Speaker 4: FED because these things change over time. For example, right now,
Speaker 4: I think it's very important to pay attention to this
Speaker 4: gross flow is finding that across the board hiring is stopped,
Speaker 4: whether it's in the jolts, whether it's in the cps
Speaker 4: or what have you. That's a key thing to be
Speaker 4: looking at because businesses tying it to inflation, which we
Speaker 4: haven't talked a ton about. Businesses probably realize they're not
Speaker 4: going to get margin increases by raising prices anymore, so
Speaker 4: how are they going to protect or raise their margins.
Speaker 4: In twenty twenty four, the good old fashioned way is
Speaker 4: firing people, and I think we're on the potential edge
Speaker 4: of that should it be the case the monetary policy remained.
Speaker 2: This sort of reminds me of the argument about war, right,
Speaker 2: which is like, it's not like suddenly war happens, or
Speaker 2: at least not usually, with some notable exceptions in recent history.
Speaker 2: But like people who live through World War One or
Speaker 2: World War it sort of sneaks up on you in
Speaker 2: many ways, and it's only when you look back that
Speaker 2: you think, like, aha, here are the signs. But okay,
Speaker 2: that was my very clumsy seg into the major changes,
Speaker 2: the big geopolitical risks, the economic regime changes. What are
Speaker 2: you looking at?
Speaker 4: I think it's important, notwithstanding the fact that I said
Speaker 4: that extracting risk premium on a daily, monthly basis what
Speaker 4: have you. It doesn't pay to be a desk general
Speaker 4: moving pieces around a giant map. I think it is
Speaker 4: important to have a general framework for how you're thinking
Speaker 4: about markets. And I think we've gone through a paradigm
Speaker 4: shift that's maybe a little bit hard to appreciate, just
Speaker 4: because so much has happened with the high frequency macro
Speaker 4: with inflation and since the pandemic. But we see three
Speaker 4: major forces that have changed. First, we were in an
Speaker 4: era of the new normal and the global savings glut
Speaker 4: and Ricardo cabe Ero's deficit of safe assets. You know what,
Speaker 4: there's no deficit of now safe assets. There are a
Speaker 4: lot of safe assets printed by the US government every month.
Speaker 4: And that new normal for interest rates a secular stagnation
Speaker 4: that Larry Summers gave a name to something that we
Speaker 4: all kind of felt but weren't really sure how to describe.
Speaker 4: In twenty fourteen, we're now out of that era. In
Speaker 4: our view. We're in a higher interest rate, higher volatility
Speaker 4: environment that makes it so that policy makers no longer
Speaker 4: have the free launch that they had POSTGFC and through
Speaker 4: the pandemic, there is a real budget constraint on sovereign debt,
Speaker 4: especially in the United States and some of the other
Speaker 4: developed market economies. And I think you're past the era
Speaker 4: of the FED put because we saw a period of
Speaker 4: time where j. Powell could say, listen, we know how
Speaker 4: to deal with inflation. Don't worry about all the QII
Speaker 4: we did, and that turned out not to be true.
Speaker 4: It turned out to be a problem that made the
Speaker 4: American people more upset than they'd ever been in the
Speaker 4: post war period. So, whether it's fiscal policy or whether
Speaker 4: it's monetary policy, I think we're in a new era
Speaker 4: that makes it so that there's no longer a kind
Speaker 4: of non economic protector of markets. That's a huge change
Speaker 4: from what we all got used to. Used to be
Speaker 4: able to go out as an investor and just kind
Speaker 4: of buy everything. Any strategy was allowed to flourish because
Speaker 4: ultimately you knew that there was a non economic actor
Speaker 4: out there fiscal or monetary policy to bail you out.
Speaker 4: And it's at least much more circumscribed now. I think
Speaker 4: the second one is China. We've all lived in an era,
Speaker 4: certainly in this century where China has been an incredible
Speaker 4: source of dynamism for the global economy, and they've taken
Speaker 4: all of the proceeds of that and recycled it into
Speaker 4: financial markets another non economic buyer of treasuries. And now
Speaker 4: Shishinping is quite clearly I mean he's doing some marketing
Speaker 4: at Davos with some of his external officials, but he
Speaker 4: just gave a speech at home talking about economic nationalism.
Speaker 4: Their goal is to have state directed capitalism, common prosperity,
Speaker 4: which is getting rid of some of the tensions that
Speaker 4: were created in a society that had very robust growth,
Speaker 4: generating more billionaires than anywhere else in the world, and
Speaker 4: the national defense. This is not something that we've seen,
Speaker 4: not something that we're used to, and has direct effects
Speaker 4: on investors because this is deglobalization right there. And I
Speaker 4: think it's right that you have people like Brad Sster
Speaker 4: going out and saying, listen, nothing's really changed now, But
Speaker 4: I think it's a snapshot apropos of what you're saying.
Speaker 4: You never really realize when you're slouching into something. Every
Speaker 4: marginal decision that's being made is one consistent with deglobalization
Speaker 4: and is going to have I think, you know, epic
Speaker 4: impact on markets. And finally, you joked one of the
Speaker 4: podcasts earlier this year, you just need to sound smart
Speaker 4: by stroking your chin and quoting geopolitical risks. But I'm
Speaker 4: going to quote geopolitical risks. I think we're at the
Speaker 4: end of the end of history era. US won the
Speaker 4: Cold War, liberal democracy was triumphant. Liberal democracy had a
Speaker 4: test during the Global War on Terror. But I don't
Speaker 4: remember anyone really wanted to sign up with Osama bin
Speaker 4: Land to go live in a cave. It was the
Speaker 4: case that we were able to win the global war
Speaker 4: on terror. Liberal democracy was triumphant, but now it's not.
Speaker 4: It face is a genuine challenge with what's going on
Speaker 4: in these wars. And you might think the wars are
Speaker 4: just individual points, but they add up to something that wears.
Speaker 4: The whole is much greater in the sum of its parts.
Speaker 4: The unbounded relationship between Shishiping and Putin is important. The
Speaker 4: Biden administration may not have learned this so well, but
Speaker 4: certainly the bb administration has learned that deterrence doesn't work.
Speaker 4: Our efforts to deter our adversaries, and certainly Israel's efforts
Speaker 4: to deter Hamas if we found out it doesn't work.
Speaker 4: And so now we face a genuine dialectic fight of
Speaker 4: liberal democracy against the forces the challenge it And you
Speaker 4: might think, well, you could say that at any time.
Speaker 4: This sounds like a political science podcast, but it has
Speaker 4: direct impact on financial markets because there's one empirical regularity
Speaker 4: about wars. They cause inflation because they're expensive to finance.
Speaker 2: Joe, I feel like our international relations degrees become more
Speaker 2: useless by the day. You would think it would be
Speaker 2: the opposite, with all this geopolitical risk, But I remember, like, well,
Speaker 2: I think you would have done it around the same time.
Speaker 2: It was all like neoliberal end of globalization. It was
Speaker 2: all Fukuyama and people like that. And yeah, it doesn't
Speaker 2: seem to have happened, doesn't well.
Speaker 1: To be honest, I don't remember anything in college. And
Speaker 1: it was not because I was like partying like crazy.
Speaker 1: I just it's been a long time. There's a lot there.
Speaker 1: Let's talk a little bit more China for a second.
Speaker 1: In fact, just today this morning, we got some new
Speaker 1: data out of China. Not great. Population continuing to shrink.
Speaker 1: There's this question about like, when are they going to
Speaker 1: stimulate the economy, When is that big spending coming up?
Speaker 1: When are they going to have something more resembling a
Speaker 1: welfare state, common bread sets or theme that allows the
Speaker 1: Chinese consumer to add more buying power. What is going
Speaker 1: on in China even sitting this maybe some of these
Speaker 1: sort of national security or national defense ambitions, et cetera.
Speaker 1: What is you know, when you say economic nationalism, what
Speaker 1: is Hijinping trying to do? Right? Now in your view
Speaker 1: to the Chinese economy.
Speaker 4: So investors, whether it's in the West or with regards
Speaker 4: to China, are continually hoping for the FED put the
Speaker 4: China put around the corner, and I think it just
Speaker 4: misunderstands what's going on with China, and I describe clearly
Speaker 4: as making an effort to develop the economy through state
Speaker 4: run enterprises. Common prosperity is their version of income redistribution
Speaker 4: and directing things to national defense clearly as its own goals.
Speaker 4: I think one of the things you learned from history,
Speaker 4: so shifting from the ir degree to the history degree,
Speaker 4: is these leaders, as communist leaders, whether it's Stalin or
Speaker 4: Shishin Ping or Mao, they believe behind closed doors what
Speaker 4: they say to you in public, whether you're looking at
Speaker 4: Stephen Cottinggan's work about Stalin or Frank Decotter's work about Mao.
Speaker 4: Whenever they've gone to the archives, they've found out what
Speaker 4: they sing in the poll Up Bureau that they never
Speaker 4: thought would be released was exactly what they were saying
Speaker 4: in public. And Shijingping is telling you what he believes in.
Speaker 4: And therefore a lot of the templates that people use
Speaker 4: in order to try and understand China. Now, I think
Speaker 4: are you know, they have some resonance, but I think
Speaker 4: they're just missing the major point, which is you'll have
Speaker 4: some people say, oh, it's a balance sheet recession, or
Speaker 4: China's on the edge of its Lehman moment, because Chinese
Speaker 4: real estate genuinely is the world's largest asset class. Those things,
Speaker 4: in some sense are both true. But I don't think
Speaker 4: he helps you understand what's going on in China. I
Speaker 4: go back to and bear with me, because this may
Speaker 4: seem at first like a goofy comparison. Shishingping's notion of
Speaker 4: common prosperity reminded me I forget when the penny dropped
Speaker 4: of FDR's efforts in the immediate aftermath of his effort
Speaker 4: to stimulate the economy out of the Great Depression. What
Speaker 4: happened in the Great Depression in the United States is
Speaker 4: that we expanded state control of the economy. Fiscal and
Speaker 4: monetary policy were pretty inert, and you demonized any private success.
Speaker 4: I asked this was a good example of using chat GPT.
Speaker 4: I asked chat GPT to compare FDR's second inaugural address
Speaker 4: in nineteen thirty seven with Shishingping's key speeches about common prosperity.
Speaker 4: This was everything you need to know about chat GPT,
Speaker 4: because first it begged me not to do it. It said,
Speaker 4: you shouldn't be doing this, You absolutely should not compare
Speaker 4: FDR and shishing Ping. So it spit that out like
Speaker 4: a ferbal. But then when I forced it to answer,
Speaker 4: if you go and compare a common prosperity speech to
Speaker 4: that second inaugural, they have the same elements. And let
Speaker 4: me tie this into answering your question Joe about why
Speaker 4: this is helpful for understanding Chinese macro now. The essence
Speaker 4: of the NRA and the Great Depression, the Wagner Act,
Speaker 4: it was all to suppress competition. There was a perception
Speaker 4: the competition was a bad thing. And what that did
Speaker 4: was it set wages above the market clearing level. And
Speaker 4: what is the result when you have wages set above
Speaker 4: the market clearing level? Unemployment? Why do you have unemployment
Speaker 4: in China?
Speaker 3: Now?
Speaker 4: Is it because it's not a particularly dynamic economy. It's
Speaker 4: still an amazingly productive and growth oriented set of businesses.
Speaker 4: It's experiencing unemployment because the overall price level of that
Speaker 4: economy is inappropriate and then in response, you end up
Speaker 4: with status leaders doing the same thing that FDR did,
Speaker 4: which is you might have noticed some of the news
Speaker 4: stories about Shi Shinping sending people down into the provinces.
Speaker 4: It's the same thing we did in the new deal
Speaker 4: with the CCC, the WPA. I even got a chuckle
Speaker 4: in December when they said they were going to do
Speaker 4: fiscal stimulus by flood abatement, which reminded me of the TVA.
Speaker 4: So for me, I go back to the government meddling
Speaker 4: in the economy like we did in the Great Depression,
Speaker 4: as being a useful template for what's going on in China.
Speaker 4: The unemployment rate never went below fourteen percent after nineteen
Speaker 4: thirty three until we had World War Two. So let's
Speaker 4: hope World War two is in his solution to his
Speaker 4: unemployment problem.
Speaker 2: You know, the mistake you made asking chat GPT when
Speaker 2: you should have asked You know, there's like a study
Speaker 2: Shei shin Ping.
Speaker 1: GPT version yeah, the Chinese.
Speaker 2: Yeah, there's like a nationalistic version of Chat GPT in China.
Speaker 2: And it's funny because I played around with it. You
Speaker 2: actually you can't ask any questions in English. It refuses
Speaker 2: to engage in English, because it will tell you Chinese
Speaker 2: is a beautiful language and you should be interacting with
Speaker 2: it in Chinese. So you need to ask that same
Speaker 2: question to the shehin Ping thought.
Speaker 1: That would be that would be a fun experiment talk
Speaker 1: to us about the end of the end of history
Speaker 1: a little bit more incidentally, and it was not planned
Speaker 1: at all. I'm like halfway through the Fukuyama book right now.
Speaker 1: I started reading it about two weeks ago. Setting aside
Speaker 1: whether it's right or wrong, it's a very interesting book.
Speaker 1: But what do you sort of talk about what that
Speaker 1: means the end of history to you, and what it
Speaker 1: means for that thesis or that idea to be coming
Speaker 1: to an end.
Speaker 4: So I think this cohort of policymakers and the mainstream,
Speaker 4: certainly of US policymakers, believes that the Postcold War architecture
Speaker 4: either doesn't really demand the US to do that much
Speaker 4: or deterrence is enough. But it's evident that deterrence didn't
Speaker 4: work for Putin invading Ukraine, it's evident that deterrence didn't
Speaker 4: work for Hamas. And then perhaps what's going on with
Speaker 4: Hesbelah against Israel. Big question mark whether deterrence is enough
Speaker 4: for maintaining the status quo with Taiwan. These are all
Speaker 4: questions that you have to ask yourself. The end of
Speaker 4: the end of history for me, means do we have
Speaker 4: to have a completely different security architecture In the immediate
Speaker 4: aftermath of the In the Cold War period, the post
Speaker 4: World War Two period, we had NSC sixty eight, which
Speaker 4: said we need to develop the H bomb, we need
Speaker 4: to be able to fight two and a half wars,
Speaker 4: and we ended up not doing deterrence. We ended up
Speaker 4: fighting multiple wars in order to enforce the liberal democratic order.
Speaker 4: I worry that we're moving back into an era where
Speaker 4: the end of the end of history means that we
Speaker 4: can't just, as my friend Neil Ferguson says, talk softly
Speaker 4: and carry a big stick, that we'll have to actually
Speaker 4: the who's the stick?
Speaker 1: But you know, you made the point when you're sort
Speaker 1: of giving the big picture, like after nine to eleven,
Speaker 1: that there was a major military effort and there was
Speaker 1: war in Afghanistan, there was a warre in Rock, but
Speaker 1: there was not some big sudden impulse. It felt like
Speaker 1: to sort of like take the side of al Qaeda
Speaker 1: regardless of the war itself, and you know, obviously Fukiyama
Speaker 1: is telling you know, sort of liberal democracy is like
Speaker 1: the logical endpoint for society. That's the ultimate sort of
Speaker 1: the expression of society with the least internal contradictions. And
Speaker 1: so you're saying now is like, actually there is there
Speaker 1: is competition, there are people, and there are countries, et cetera.
Speaker 1: I think maybe there is a different way.
Speaker 4: Listen surveys of the global South, and if you don't
Speaker 4: trust the surveys, just look at what the leadership does,
Speaker 4: whether it's whether it's Brazil or India. They're not taking sides.
Speaker 4: They're seeing the dialectic between liberal democracy and illiberal tendencies,
Speaker 4: and they are not so sure about signing up with
Speaker 4: the post Cold War liberal order just by revealed preference.
Speaker 4: So you're seeing this play out in real time in
Speaker 4: a very important way, even with allies who we've hugged
Speaker 4: closer in certain spheres like India. So I think this
Speaker 4: is a real you're seeing the manifestation of it right
Speaker 4: in front of your right, in front of our eyes.
Speaker 2: How do you express these ideas in actual trades? So
Speaker 2: all these big picture thoughts, end of secular stagnation, a
Speaker 2: major change in China's economic and potentially political trajectory, the
Speaker 2: end of the end of history. How do these actually
Speaker 2: translate into positioning?
Speaker 4: So let me give you a Let me give you
Speaker 4: a case study, because you might think these are all
Speaker 4: pretty airy fairy ideas, difficult to figure out exactly how
Speaker 4: to put on a trade, because ultimately you got to
Speaker 4: go to your Bloomberg and pick out a ticker whether
Speaker 4: you want to be long or short. Let's take the
Speaker 4: term premium move last year, So the term premium in
Speaker 4: the US treasury market, which is the extra compensation that
Speaker 4: you get for owning an asset with longer duration, by
Speaker 4: about one hundred basis points from July to October. Did
Speaker 4: that just rise exogenously? No, that was really importantly influenced
Speaker 4: by some of the forces that I'm talking about. You
Speaker 4: don't have the same economic non economic actors going out
Speaker 4: and buying treasuries hand over fists. We're experiencing QT and
Speaker 4: the Chinese being more reluctant to buy treasuries. We also
Speaker 4: saw that banks, for regulatory reasons and maybe reasons related
Speaker 4: to the cycle, we're buying fewer treasuries. So that was
Speaker 4: a very real manifestation losing these non economic actors buying
Speaker 4: treasuries as a buffer to that big increase in the
Speaker 4: term premium. Similarly, if you buy into our argument that
Speaker 4: we're at the end of the new normal or the
Speaker 4: global savings glot, there now is a surf feet of
Speaker 4: safe assets, not a dearth of them. You should expect
Speaker 4: the term premium to go up over time, and you
Speaker 4: can construct very specific trades for that, what sort of
Speaker 4: short duration outright, a curve steepener because you want to
Speaker 4: pair it with a bet that the Fed is cutting rate.
Speaker 4: So these have very tangible implications for us. And then
Speaker 4: kind of the art of it and also the science
Speaker 4: of figuring out the timing will depend upon the data
Speaker 4: and what the policymakers are doing. But having this broad framing,
Speaker 4: you can see how it can translate into something that
Speaker 4: is a very real opportunity seen last year.
Speaker 1: Jason Cummins, thank you so much for coming on odd Locks.
Speaker 1: Fascinating the conversation.
Speaker 4: Thank you both.
Speaker 1: Tracy. Can I just say real quickly, all guests should
Speaker 1: come prepared to cite as many past episodes as Jason did.
Speaker 1: Really that's how you know. So I really appreciate that.
Speaker 2: He's done his prep, that's for sure.
Speaker 1: But I did find that a sobering conversation. Yeah, at
Speaker 1: a very minimum.
Speaker 2: Yes, it reminded me a little bit about the conversation
Speaker 2: we had with Anna Wong towards the end of last
Speaker 2: year about why a recession didn't materialize in twenty twenty three,
Speaker 2: but per her argument it could in twenty twenty four.
Speaker 1: There's a lot there, I mean to start, I do
Speaker 1: think his points about the labor market need to be
Speaker 1: taken seriously. Yeah, and this idea that yes, like unemployment,
Speaker 1: we have not triggered a some rule. Headline on employment
Speaker 1: has remained depressed. But there were those red flags unambiguously
Speaker 1: in that last report. We did talk We have talked
Speaker 1: about them. We even even brought them up with Lalel Brainerd.
Speaker 1: There are some signs of a weakening labor market and
Speaker 1: it can go from weak to bad, or it could
Speaker 1: go from tight to moderately tight to loose fast. And
Speaker 1: I think that is something to pay attention to.
Speaker 2: Yeah, I keep thinking back to Oh again, this was
Speaker 2: a point that Anna brought up, but the two thousand
Speaker 2: and one recession, and Jason brought it up as well.
Speaker 2: But the idea of how quickly things kind of shifted
Speaker 2: in there, and to some extent, people didn't really realize
Speaker 2: it was happening until much later because you didn't see
Speaker 2: you know, it took a while for the unemployment to
Speaker 2: kind of start to spike. But the other thing that
Speaker 2: I was thinking about, like, it seems to Jason's point,
Speaker 2: it seems like the wild card here is sort of
Speaker 2: what happens to corporate profit margins and what dial companies
Speaker 2: have to start turning in order to maintain those, you know,
Speaker 2: is it pricing power? Can they still eke out more
Speaker 2: revenue from the consumer, or do they have to resort
Speaker 2: to cost cutting measures?
Speaker 1: Well, I thought that was really interesting, his point about
Speaker 1: you can have periods in which the trajectory of economic
Speaker 1: activity and financial conditions go in different directions. So, as
Speaker 1: he pointed out, in the immediate wake I guess of
Speaker 1: bear Stearns, we did see that rally in financial assets,
Speaker 1: even as already the economy is really starting to shed
Speaker 1: private sector jobs at least to a meaningful degree.
Speaker 3: Now.
Speaker 1: Granted, like again, the headline labor market indicators look fine,
Speaker 1: but there have been those reports of layoffs lately, and
Speaker 1: people are starting to wonder what that means, and so
Speaker 1: maybe it's just about margin padding, et cetera. But there
Speaker 1: isn't enough to watch even if like markets seem fine
Speaker 1: or seguine about it.
Speaker 2: Yeah, to some extent, it feels like markets or investors
Speaker 2: kind of sometimes it takes a while to internalize the
Speaker 2: shifts that are happening. But that said, I think there's
Speaker 2: also there's a human tendency to call like big regime
Speaker 2: changes constantly. And we kind of saw it, going back
Speaker 2: to the intro of this conversation, we saw it in
Speaker 2: twenty twenty three. You know, lots of people were arguing, Oh,
Speaker 2: things are going to be different this year, We're going
Speaker 2: to have a recession that didn't materialize. That doesn't necessarily
Speaker 2: mean that it can't this year. And again to Jason's point,
Speaker 2: like the trick here is sort of determining how long
Speaker 2: and variable those flags actually are.
Speaker 1: I really liked also his description of like what them
Speaker 1: what he does or yes, And it was interesting to
Speaker 1: hear that. And this is something that does not come
Speaker 1: up very much, which is the connection between the big
Speaker 1: picture ideas that he you know, is three big ends,
Speaker 1: the end of the new normal or the end of
Speaker 1: secular stagnation, the end of China's growth at any cost
Speaker 1: fail is in favor of this sort of more domestic
Speaker 1: focused in nationalism, and the end of the end of history,
Speaker 1: the sort of geopolitical call. But it was interesting to
Speaker 1: hear those three big ideas within the framework of a
Speaker 1: company that needs to make short term trades to make money.
Speaker 1: And how do you sort of connect the long term
Speaker 1: macro with the short term macro. I really enjoyed hearing
Speaker 1: him talk about that.
Speaker 2: Yeah, absolutely, I kind of I always thought of macro
Speaker 2: hedge funds as like making these big bets on regime shifts.
Speaker 2: But his point about like, well, there is that aspect
Speaker 2: of it, but also a lot of it is more
Speaker 2: tactical than strategic long term investments also makes sense because
Speaker 2: of course, where does the hedge in hedge fund come from?
Speaker 2: You have to, you know, be long and sure and
Speaker 2: you're trying to preserve capital, So that makes some sense.
Speaker 2: Shall we leave it there for now?
Speaker 1: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm Jeo Wisenthal. You can follow me at The
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