WEBVTT - Ark Funds Are Taking In As Much Flows As BlackRock: BI's Balchunas 0:00:00.800 --> 0:00:04.040 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 0:00:04.040 --> 0:00:06.920 my co host Matt Miller. Every business day we bring 0:00:06.960 --> 0:00:11.520 you interviews from CEOs, market pros, and Bloomberg experts, along 0:00:11.560 --> 0:00:15.560 with essential market moving news. Find the Bloomberg Markets podcast 0:00:15.560 --> 0:00:18.479 called Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:24.240 at Bloomberg dot com slash podcast. So Cathy would founder 0:00:24.280 --> 0:00:27.120 and CEO and CEE. I oh, and I'm sure she 0:00:27.160 --> 0:00:28.960 has a ton of other titles that will bring to 0:00:29.000 --> 0:00:31.840 you later. At Ark invest has gotten a lot of 0:00:31.880 --> 0:00:35.920 attention lately. Her stellar fund performance has been marred after 0:00:36.000 --> 0:00:38.680 a sell off in Gulf some of their biggest bets. 0:00:38.960 --> 0:00:42.920 Would spoke with Bloomberg's Carol Master and Tim Stenovac on 0:00:42.920 --> 0:00:46.760 Bloomberg Business Week. Here's what she had to say. Well, 0:00:46.880 --> 0:00:50.920 I do believe we we love a wall of worry, 0:00:51.040 --> 0:00:53.920 and we were seeing the wall of worry starts to build. 0:00:54.440 --> 0:00:57.720 I saw it on social media, a lot of chatter, 0:00:58.440 --> 0:01:03.800 some just waiting for our funds in particular to take 0:01:03.840 --> 0:01:08.039 a tumble. Uh. Some maybe to buy, and some happy 0:01:08.080 --> 0:01:10.959 to sell and short and all of that. We love 0:01:11.040 --> 0:01:14.560 the liquidity that this provides us. We think it's very 0:01:14.560 --> 0:01:20.080 healthy and very healthy shakeout. So that's uh. I guess 0:01:20.120 --> 0:01:23.600 she needs no introduction, Carol Masser is what I'm talking about. 0:01:23.760 --> 0:01:29.920 Talking to Cathy wood Um really interesting because she kind 0:01:29.959 --> 0:01:32.880 of marked the bottom there. She bought the dip, and 0:01:32.920 --> 0:01:35.440 so did a number of others. Let's bring it, Eric 0:01:35.440 --> 0:01:37.960 Balcunas to talk about it, senior E t F analyst 0:01:38.040 --> 0:01:42.360 for Bloomberg Intelligence. Is this the most popular um of 0:01:42.400 --> 0:01:45.039 the new E t F s? Eric? I mean, of 0:01:45.080 --> 0:01:47.880 course g l D and j n K and some 0:01:47.960 --> 0:01:49.920 of the sort of plain vanilla ones, But is this 0:01:49.960 --> 0:01:53.960 the most popular special et F? Oh? Yeah, I mean 0:01:54.240 --> 0:01:57.200 this is the fastest growing asset manager in the country, 0:01:57.200 --> 0:02:00.120 if not the world, in terms of percentage growth. And 0:02:00.160 --> 0:02:02.680 it's not growth from like one million to ten million UM. 0:02:02.720 --> 0:02:05.880 It's basically from like four billion to forty fifty billion, 0:02:05.960 --> 0:02:09.360 so it's tenfold over a year. You rarely see that 0:02:09.400 --> 0:02:11.760 kind of growth, and you rarely see it from a 0:02:11.880 --> 0:02:14.720 stock picker. Those have been out of favor and in 0:02:14.800 --> 0:02:17.120 the issuer. There's not much distribution. She didn't have a 0:02:17.120 --> 0:02:20.600 lot of distribution network when she started, and also high cost. 0:02:20.720 --> 0:02:23.080 I mean her funds are seventy five basis points. Any 0:02:23.160 --> 0:02:25.679 one of those three things makes life very difficult in 0:02:25.760 --> 0:02:28.440 the et F industry. She's all three and is now 0:02:28.520 --> 0:02:31.040 basically taking in as much flows as black Rock, and 0:02:31.120 --> 0:02:34.080 it's the story is tremendous. Can't take my ass off 0:02:34.120 --> 0:02:36.600 of it. And obviously the performance is what is driving this. 0:02:36.919 --> 0:02:39.520 You look at her performance and you know, maybe half 0:02:39.560 --> 0:02:44.480 of it is a growth tech the cues, but the 0:02:44.520 --> 0:02:46.880 other half is really a hot hand and that's why 0:02:47.000 --> 0:02:49.240 she's getting the money. And you know, other people who 0:02:49.240 --> 0:02:52.880 are doing well but not that well, are not Eric. 0:02:53.040 --> 0:02:56.600 You know, some criticism of Cathy and of Arc is 0:02:56.639 --> 0:02:59.639 that it's just a derivative play on Tesla's at derivative 0:02:59.639 --> 0:03:02.560 play on maybe Bitcoin and maybe some of the hot 0:03:02.680 --> 0:03:05.840 names Apple, Amazon or whatever. It's really just reflective of 0:03:05.880 --> 0:03:09.560 what's going on in the nastack. What do you make 0:03:09.600 --> 0:03:13.000 of that? I mean, there's this a little truth of that. 0:03:13.080 --> 0:03:15.320 The testa call was major, but then that's about a 0:03:15.400 --> 0:03:18.240 fifth of a r k k's return though, so a 0:03:18.320 --> 0:03:20.880 fifth is major, but it's not it's not nearly it's 0:03:20.880 --> 0:03:27.200 not even close to half. You look, she's got internet stocks, also, biotech, software, 0:03:27.880 --> 0:03:31.200 commercial services, it's pretty it's across the board, and that's 0:03:31.400 --> 0:03:34.079 part of what I think she really tapped into. Back 0:03:34.080 --> 0:03:36.560 in the day, there was a lot of sector ets 0:03:36.720 --> 0:03:39.120 and some industry ets, but she said, you know, I 0:03:39.120 --> 0:03:41.960 don't be locked into a gig sector or an industry here, 0:03:42.160 --> 0:03:44.480 and also don't be locked into rules. So she said, 0:03:44.480 --> 0:03:47.440 we're gonna go after innovation, and she I think really 0:03:47.480 --> 0:03:49.960 tapped into this nature of how stocks are hard to 0:03:49.960 --> 0:03:53.840 classify these days, namely Tesla and Amazon UM. But if 0:03:53.840 --> 0:03:55.560 you look at her performance, so I think it's interesting 0:03:55.560 --> 0:03:58.560 about it is she only has a one percent overlap 0:03:58.640 --> 0:04:01.240 with the S and P five hundred, so is wells 0:04:01.280 --> 0:04:03.920 the SMP has done. She's figured out returns that aren't 0:04:03.960 --> 0:04:07.240 even in those benchmarks, which has also helped her in 0:04:07.360 --> 0:04:10.119 terms of marketing because she can say, look, you own 0:04:10.120 --> 0:04:13.000 the SMP, you don't need this active manager that has 0:04:13.080 --> 0:04:15.880 basically most of the SMP plus a couple of bets. 0:04:16.040 --> 0:04:18.159 You should go with me. I'm completely different and I 0:04:18.200 --> 0:04:21.039 can head you from the value stock stocks that you 0:04:21.080 --> 0:04:23.719 have in your SMP. And that's a pretty powerful pitch 0:04:23.760 --> 0:04:25.800 in my opinion, that goes even beyond just coming in 0:04:25.839 --> 0:04:28.760 and saying, hey, my return rules. By the way, a 0:04:28.800 --> 0:04:30.920 fifth isn't even half of a half. I wanted to 0:04:30.960 --> 0:04:35.400 point out that's how far away it is. Not the mathematician. Um, 0:04:36.880 --> 0:04:39.880 you know. It's It's funny because when Cathy would when 0:04:39.920 --> 0:04:45.520 the inflows were like supercharged, um, all the critics were like, oh, 0:04:45.560 --> 0:04:47.840 this is bad, she's got too much money. She she 0:04:47.880 --> 0:04:51.760 can't work with such what's such a high amount of inflows? Um. 0:04:51.839 --> 0:04:54.160 So I thought it was interesting that she did say 0:04:54.200 --> 0:04:58.320 this is healthy yesterday. I mean, Um, it's difficult to 0:04:58.440 --> 0:05:03.240 be to have so much firepower, isn't it. Yeah. So, 0:05:03.400 --> 0:05:05.839 on one hand, there's some stocks where she's over a 0:05:05.880 --> 0:05:09.479 ten percent owner, maybe about a dozen or so. That's 0:05:09.520 --> 0:05:11.480 tough because when you see inflows, you're gonna have to 0:05:11.480 --> 0:05:13.520 buy those stocks. People have impact costs, and there's been 0:05:13.520 --> 0:05:15.680 a front running. People know what she holds every day. 0:05:16.360 --> 0:05:19.080 We are in kind of a new world here because 0:05:19.080 --> 0:05:20.880 she's transparent. Back in the day, when you had to 0:05:20.920 --> 0:05:23.440 Peter Lynch or a hot manager, you didn't know really 0:05:23.480 --> 0:05:26.880 what they held. Um. In addition, she shows the holdings 0:05:26.880 --> 0:05:28.400 every day in the trades, and so you can go 0:05:28.400 --> 0:05:31.360 ahead and front run her or at least invest with her, 0:05:32.160 --> 0:05:34.040 But the flows, I think that you know, this is 0:05:34.160 --> 0:05:36.200 part of the issue, which it can create a little 0:05:36.200 --> 0:05:38.400 bit of upward spiral. The flows come in, you buy 0:05:38.400 --> 0:05:40.680 the stocks, stocks go up, you get more flows, and 0:05:40.720 --> 0:05:42.480 it could go a little bit on the downward. However, 0:05:42.520 --> 0:05:44.880 I know she's taken a couple there's a couple of 0:05:44.880 --> 0:05:47.200 things you can do with some megacap names to help 0:05:47.200 --> 0:05:49.600 with cash management. She can do cash and lou there's 0:05:49.600 --> 0:05:52.560 a few tricks there. Her argument as well, I'm investing 0:05:52.560 --> 0:05:54.680 in stocks. They're going to grow a lot anyway. And 0:05:54.720 --> 0:05:57.159 I also think that spacks and I p o s 0:05:57.440 --> 0:06:00.600 are going to replenish the market. So um. I've heard 0:06:00.640 --> 0:06:02.520 some people pushed back on both of those, but that's 0:06:02.560 --> 0:06:05.679 her argument. But largely she said they were built for scale. 0:06:05.720 --> 0:06:07.200 I will say, though, if you look at her small 0:06:07.240 --> 0:06:10.240 cap holdings, they had dwindle down to nothing. Um. They 0:06:10.320 --> 0:06:13.359 used to be about and they are gone. So she 0:06:13.520 --> 0:06:15.640 is going to be forced into large caps a little. 0:06:15.680 --> 0:06:18.760 I think that's the reality of the situation, but it 0:06:18.880 --> 0:06:22.000 certainly hasn't done too much the performance yet. Hey, Eric, 0:06:22.320 --> 0:06:24.520 thanks so much for joining us. Eric. We really appreciate 0:06:24.560 --> 0:06:28.280 that update. Just a fascinating story on Kathy Wooden arc 0:06:28.320 --> 0:06:30.760 and you've been on top of it. From a research perspective. 0:06:30.880 --> 0:06:34.960 Eric valcunis senior E t F analysts for Bloomberg Intelligence. 0:06:34.960 --> 0:06:36.880 I'll tell you, within the whole Bloomberg complex, I don't 0:06:36.920 --> 0:06:41.120 think there's anybody who is smarter uh and more on 0:06:41.200 --> 0:06:44.400 top of this whole ETS funds and the funds flows 0:06:44.440 --> 0:06:46.360 there have just been extraordinary and Eric has been all 0:06:46.400 --> 0:06:52.279 over it, so we appreciate his lots. Daniel DiMartino Boots. 0:06:52.279 --> 0:06:56.960 She's the CEO of Quill Intelligence UH and the former 0:06:57.200 --> 0:07:01.240 FED advisor UM. So we are going to bring her 0:07:01.320 --> 0:07:06.000 in in order to get more on what we heard 0:07:06.040 --> 0:07:11.280 from Powell yesterday and what we expect from FED chair 0:07:11.440 --> 0:07:15.960 Pale today. Danielle Um, what do you think of the chairman? 0:07:16.000 --> 0:07:20.120 I thought yesterday was like Goldilocks Powell. He was basically saying, No, 0:07:20.280 --> 0:07:23.040 rates aren't rising because of inflation, it's because of optimism 0:07:23.080 --> 0:07:27.840 for the economy. And that's exactly right, except for what 0:07:27.920 --> 0:07:31.520 Bloomberg Sebastian boyd Uh said a few hours ago that 0:07:31.560 --> 0:07:33.840 I tweeted out. You know, it's all good at rates 0:07:33.840 --> 0:07:37.880 are rising to reflect a reflating happy economy and you 0:07:37.960 --> 0:07:40.480 hear the birdies chirpid in the background, except for that 0:07:40.560 --> 0:07:44.680 fact that the stock market is the economy, and futures 0:07:44.680 --> 0:07:47.840 were down, and so this is this is the ultimate 0:07:47.840 --> 0:07:54.320 trade off and the sensitivity that we're seeing in housing, 0:07:54.720 --> 0:07:59.240 but also what we're seeing in investment grade bonds. You know, 0:07:59.280 --> 0:08:00.880 if you look at the are just E t F 0:08:01.200 --> 0:08:04.000 H y G, it's flat as a pancake. You're to date. 0:08:04.920 --> 0:08:07.520 If you look at l q D, which the Fed 0:08:07.920 --> 0:08:12.240 intervened directly in the largest investment grade E t F 0:08:12.640 --> 0:08:14.960 with its facilities that were shut down at year end, 0:08:15.400 --> 0:08:19.600 it's down more than four percent. So the market is 0:08:19.720 --> 0:08:23.960 telling you where your pressure points are in no uncertain terms. 0:08:24.560 --> 0:08:27.680 And in press conferences in the past, Powell has been 0:08:27.760 --> 0:08:32.600 very articulate about interest rate sensitive sectors. You've you've got 0:08:32.640 --> 0:08:36.120 your Barkley's Commercial Mortgage backed Securities index about to turn 0:08:36.360 --> 0:08:41.480 negative for the years interest rate sensitive sectors. So you 0:08:41.559 --> 0:08:44.400 can have all the reflating you want, you can have 0:08:44.480 --> 0:08:49.680 the vaccine narrative pulled off perfectly, flawlessly, but we still 0:08:49.720 --> 0:08:54.520 have a massively over indebted economy that is acutely sensitive 0:08:54.600 --> 0:08:56.920 to even I won't I won't even say the smallest 0:08:57.200 --> 0:08:59.240 since August the fourth, we've had the yield on the 0:08:59.320 --> 0:09:02.360 tenure trip bowl, and people forget that even though rates 0:09:02.360 --> 0:09:05.439 are very low on an absolute basis, that the delta, 0:09:05.559 --> 0:09:08.520 the starting point matters and to be triple off your 0:09:08.559 --> 0:09:11.559 lows in a matter of months, that that can be 0:09:11.679 --> 0:09:16.240 dramatical markets. So Daniel again, Chairman Pale's message, certainly from 0:09:16.320 --> 0:09:18.920 yesterday is consistent, which is lower for longer as it 0:09:19.320 --> 0:09:21.719 as it relates to interest rates. But is there a 0:09:21.800 --> 0:09:23.800 risk that the markets are just going to pass him 0:09:23.840 --> 0:09:29.680 by and uh it just kind of move on without him. Well, 0:09:29.720 --> 0:09:32.040 that is indeed the risk. And if you go back 0:09:32.200 --> 0:09:36.000 and read what laal brainer It has said about what 0:09:36.120 --> 0:09:39.920 yield curve control would look like. She's talking about the 0:09:39.960 --> 0:09:43.360 short end of the curve. She's speaking about two year paper, 0:09:43.440 --> 0:09:48.120 three year paper, the market has this ingrained thinking that 0:09:48.200 --> 0:09:51.040 the that the fet is referring to the tenure or 0:09:51.040 --> 0:09:55.240 the long bond, that's not what the original narrative, that's 0:09:55.280 --> 0:09:58.520 not what the original game plan was to be. It 0:09:58.640 --> 0:10:02.840 yield curve control was to be implemented. And that's why 0:10:02.880 --> 0:10:05.319 a lot of market participants were paying closer attention are 0:10:05.360 --> 0:10:08.800 saying further out on the maturity spectrum, further out on 0:10:08.840 --> 0:10:11.679 the maturity spectrum for the FED to target long term rate, 0:10:12.040 --> 0:10:15.080 which is why the wheels are falling off. He's not 0:10:15.120 --> 0:10:18.360 concerned about inflation, even though you know, if I look 0:10:18.360 --> 0:10:20.760 at a chart of the five year break evens it 0:10:20.760 --> 0:10:25.080 it almost goes vertical. And the government's about to spend 0:10:25.120 --> 0:10:27.880 another two trillion in stimulus. After that, they're gonna want 0:10:27.920 --> 0:10:30.560 to talk about the next two three four trillion dollar 0:10:30.640 --> 0:10:34.760 stimulus plan. Not I'm not exaggerating with those numbers. Um, 0:10:34.880 --> 0:10:39.280 are you worried about it? So? You know, I mean 0:10:39.400 --> 0:10:43.000 part of this is going to be withdrawing cash from 0:10:43.040 --> 0:10:47.040 the Treasury General account that the government's checking account that's 0:10:47.040 --> 0:10:49.800 housed at the FED stands at one point seven trillion 0:10:49.920 --> 0:10:54.520 right now, exactly, So part of this is already part 0:10:54.559 --> 0:10:56.680 of this check has already been written, if you will. 0:10:57.480 --> 0:11:01.040 But that being said, this massive thing just happened where 0:11:01.040 --> 0:11:03.880 I am in Texas. So you are going to have 0:11:04.360 --> 0:11:07.920 a fundamental source of support for all of the things 0:11:07.920 --> 0:11:10.480 we've been talking about are driving inflation because of the 0:11:10.520 --> 0:11:15.200 supply chain disruption copper, steel, lumber, things that have been 0:11:15.679 --> 0:11:19.040 doing things that are already out of control, expensive that 0:11:19.160 --> 0:11:22.920 the Fed is anticipating as being transitory in nature, are 0:11:22.960 --> 0:11:25.920 going to have a longer impact. To say nothing, a 0:11:26.000 --> 0:11:29.880 freight costs which we anticipate staying very high. And it 0:11:29.920 --> 0:11:31.880 was interesting Bloomberg did a great story a few weeks 0:11:31.880 --> 0:11:33.920 ago about the fact that we talked about all these 0:11:33.920 --> 0:11:37.280 deadhead freighters headed from the West coast ports back to 0:11:37.360 --> 0:11:41.440 Shanghai empty. This is causing a huge disruption in the 0:11:41.440 --> 0:11:44.439 global food chain. You've got sugar that can't get out 0:11:44.440 --> 0:11:46.760 of India, You've got coffee they can't get out of 0:11:46.880 --> 0:11:50.880 Vietnam because there's not there's not enofreighter's out there. So 0:11:51.800 --> 0:11:56.120 my concern for Powell is that that the persistence of 0:11:56.160 --> 0:11:59.160 inflation is going to be look and feel in the 0:11:59.280 --> 0:12:02.480 data be on summer as more than a transitory moment. 0:12:03.720 --> 0:12:06.080 He's also talking about just citing some of the commentary 0:12:06.120 --> 0:12:09.079 from yesterday, you know, talking about the vaccines as a 0:12:09.200 --> 0:12:13.520 single best policy. Expects economic activity to bounce back strongly, 0:12:13.520 --> 0:12:15.720 expect especially in the second half of the year GDP 0:12:16.160 --> 0:12:20.240 may grow six. Is that sound reasonable to you or 0:12:20.280 --> 0:12:24.520 is he perhaps a little optimistic? You know, that's the 0:12:24.559 --> 0:12:27.040 remains to be seen. If you do pure math and 0:12:27.120 --> 0:12:29.680 say this amount of money is going to get put 0:12:29.720 --> 0:12:31.800 into the economy, then then you get that at the 0:12:31.840 --> 0:12:34.000 other end. But we have to bear in mind the 0:12:34.040 --> 0:12:37.839 houses have been purchased. Home people even even put out 0:12:38.000 --> 0:12:41.959 a slight morning yesterday that said people might not redo 0:12:42.040 --> 0:12:45.280 their decks again. They just did them. And you know, 0:12:45.320 --> 0:12:47.480 people who were forced to stay at home, they're not 0:12:47.480 --> 0:12:51.800 gonna be pouring as much good spending into the economy, 0:12:51.960 --> 0:12:54.040 and they can't make up for the vacations that they 0:12:54.360 --> 0:12:56.199 that they didn't take, and they can't make up for 0:12:56.280 --> 0:12:59.400 the restaurant meals that they didn't have. So you'll see 0:12:59.440 --> 0:13:03.320 that big bold in service spending, but you'll also see 0:13:03.320 --> 0:13:06.000 an offset as people leave their homes because they're no 0:13:06.040 --> 0:13:08.959 longer going to be you know, basically inside of their 0:13:08.960 --> 0:13:11.640 homes and trapped and saying, God, I've got to redo 0:13:11.720 --> 0:13:15.480 this bathroom. It really is awful. So that that level 0:13:15.480 --> 0:13:19.120 of spending on goods just because there's a vaccine is 0:13:19.280 --> 0:13:22.800 going to take a hit. All right, Daniel, what's the 0:13:22.800 --> 0:13:26.120 biggest concern for you as we think about this reopening 0:13:26.280 --> 0:13:28.959 trade here in the economy. It seems like again We're 0:13:28.960 --> 0:13:32.640 getting some really good numbers the metrics on the pandemic. 0:13:32.679 --> 0:13:36.000 We're getting some really good UH data on the new 0:13:36.080 --> 0:13:38.760 vaccines Johnson and Johnson today, what's some of the what 0:13:38.840 --> 0:13:40.800 are some of the big concerns that you think maybe 0:13:40.840 --> 0:13:44.320 the market's overlooking. So again, I am following credit like 0:13:44.360 --> 0:13:48.440 a hawk. And we've also had the third test failed 0:13:49.160 --> 0:13:52.600 of if you if you add up pandemic and employment 0:13:52.600 --> 0:13:56.679 assistance to non seasonally adjusted state claims, you you may 0:13:56.679 --> 0:14:00.400 recall the Department of Labor change the methodology midway through panic. 0:14:00.679 --> 0:14:04.480 So I add up those two initials every week, and 0:14:04.520 --> 0:14:07.800 we've crossed through one point four million three times in 0:14:07.840 --> 0:14:10.920 a row when we shouldn't be. We should be in 0:14:10.960 --> 0:14:14.920 the process of a slow decline and steady decline in 0:14:15.400 --> 0:14:18.280 jobless claims, and yet we're not seeing that. So I'm 0:14:18.320 --> 0:14:22.400 looking for that to show sustained improvement and get below 0:14:22.480 --> 0:14:26.320 that line and continue to improve. By the way, um 0:14:26.440 --> 0:14:30.760 John Farah was interviewing Brian Deese the other day and 0:14:31.880 --> 0:14:34.160 trying to get trying to get a picture of whether 0:14:34.360 --> 0:14:37.560 or not um Biden has met with Powell. He couldn't 0:14:37.560 --> 0:14:40.520 get an answer out of dees, do you think this 0:14:40.640 --> 0:14:43.800 relationship is going to be a lot different than Powell Trump. 0:14:46.520 --> 0:14:48.680 I don't think that there's anything to suggest that the 0:14:48.720 --> 0:14:51.400 relationship will be in any way, shape or form contentious. 0:14:51.920 --> 0:14:54.680 And we know that Powell has a great working relationship 0:14:54.680 --> 0:14:57.920 with Yellen. So the line of communication is technically wide 0:14:57.920 --> 0:15:00.880 open to the White House. Um, what I would say 0:15:01.080 --> 0:15:05.200 is I am not personally sure that a man of 0:15:05.280 --> 0:15:08.880 his means necessarily wants to sign up for four more years. 0:15:09.680 --> 0:15:13.160 Come next to February, by the way, the birthday, so 0:15:13.720 --> 0:15:19.680 February Powell's birthday, So that may be something that is 0:15:19.800 --> 0:15:22.680 making it to where there is not justification to build 0:15:22.680 --> 0:15:26.160 this wonderful working relationship. Powell himself is not positive he 0:15:26.200 --> 0:15:28.200 wants to sign on for four more years, But again, 0:15:28.760 --> 0:15:30.920 Powell and Yellen have a very close working relationship. I 0:15:30.920 --> 0:15:33.320 wouldn't read too much into it. Hey, Danielle, thank you 0:15:33.360 --> 0:15:35.560 so much once again for joining us. Danielle di Martino 0:15:35.560 --> 0:15:39.000 bout cio and director of Intelligence at QUILL, former advisor 0:15:39.040 --> 0:15:42.520 also at the Dallas Federal Reserve. Right now we go 0:15:42.600 --> 0:15:45.560 to FED Chair Jerome pal testifying before the House Financial 0:15:45.560 --> 0:15:48.560 Services Committee with Chairwoman Maxine Waters kicking off the Q 0:15:48.680 --> 0:15:54.400 and a story. Certainly that's been over the last couple 0:15:54.400 --> 0:15:57.520 of days. FED Chairman poun As testimony in front of Congress, 0:15:57.520 --> 0:16:00.680 and I think the takeaway is lower for longer, but 0:16:00.800 --> 0:16:03.480 the bond market says otherwise. We've had a nice move 0:16:03.600 --> 0:16:06.040 up in yields here the ten years up about five 0:16:06.080 --> 0:16:09.560 basis points just today one point three nine percent. Will 0:16:09.560 --> 0:16:11.680 call it the thirty year up six basis points two 0:16:11.680 --> 0:16:15.080 point to four to help us get some perspective. We 0:16:15.200 --> 0:16:18.320 love chatting with Ted Ravel. He's the chief Tad Ravel, 0:16:18.440 --> 0:16:21.960 chief investment officer for fixed income at t c W. Boy, 0:16:21.960 --> 0:16:23.680 when I went out to l A on my marketing trips, 0:16:23.720 --> 0:16:26.600 t c W was the first meeting you had to 0:16:26.600 --> 0:16:28.880 get on your calendar. Tad, thanks so much for joining 0:16:28.960 --> 0:16:32.880 us here. What do you make of FED Chairman Pal's comments. 0:16:33.360 --> 0:16:35.000 I guess more of the same. Would you say, are 0:16:35.040 --> 0:16:38.480 you reading anything else into it? It was totally more 0:16:38.560 --> 0:16:41.840 of the same. I mean, I think a fair disaggregation 0:16:42.120 --> 0:16:45.200 of where the where the Fed's heads at is that 0:16:45.280 --> 0:16:48.480 they have pretty well committed to KIWI at the current 0:16:48.560 --> 0:16:51.840 pace well through two thousand and say call it this 0:16:51.920 --> 0:16:54.760 year twenty one. It takes at least twelve months to 0:16:54.800 --> 0:16:56.800 tape or if in fact you were going to do it, 0:16:56.880 --> 0:16:59.360 So that takes you through two thousand and twenty two, 0:17:00.120 --> 0:17:02.040 and then um, if there were going to be any 0:17:02.120 --> 0:17:05.119 rate rises, we're looking out into the next year beyond 0:17:05.160 --> 0:17:08.160 that two thousand and twenty three. Obviously, as you sort 0:17:08.160 --> 0:17:11.000 of alluded to, the market may have its own ideas 0:17:11.119 --> 0:17:15.280 about the advisability of a course of action of a 0:17:15.359 --> 0:17:18.960 zero percent policy, a one d and twenty billion per 0:17:19.000 --> 0:17:23.320 month QUEI policy in the face of a fiscal stimulus 0:17:23.359 --> 0:17:27.239 package that is just shy of two trillion dollars, and 0:17:27.320 --> 0:17:30.359 given that the forecasts from the Atlanta Fed and so 0:17:30.520 --> 0:17:36.119 forth have projected actually relatively elevated GDP in two thousand 0:17:36.160 --> 0:17:38.720 and twenty one, and that's probably why you're seeing the 0:17:39.440 --> 0:17:42.400 bond market react the way it is, which is to say, 0:17:42.520 --> 0:17:44.800 the tens and the thirties selling off as hard as 0:17:44.960 --> 0:17:48.160 as they have in the last two to three months. So, 0:17:48.359 --> 0:17:50.560 I mean, one of the things I noticed that Powell 0:17:50.600 --> 0:17:55.280 said yesterday was that it's not inflation driving rates higher, 0:17:55.359 --> 0:17:59.480 it's optimism for the economic recovery. But at the same 0:17:59.520 --> 0:18:02.560 time I look at break evens, it seems like the 0:18:02.600 --> 0:18:07.600 market does anticipate inflation to come back, And I can't 0:18:07.600 --> 0:18:10.919 imagine it's transient either, because you're not going to stop 0:18:10.960 --> 0:18:14.480 needing to buy copper or lumber in the face of 0:18:14.560 --> 0:18:18.879 rebuilding better. Um, what do you think, Dad, Well, I 0:18:19.240 --> 0:18:23.880 think that the discussion about inflation is um is always 0:18:24.320 --> 0:18:26.159 a bit squishy. And this is what I mean by 0:18:26.240 --> 0:18:29.800 it that it can be defined narrowly the way the 0:18:29.840 --> 0:18:32.200 Fed prefers to define it, which is to say that 0:18:32.520 --> 0:18:36.720 inflation is a form of currency debasement with respect to 0:18:37.200 --> 0:18:39.920 goods and services. But it can be defined a little 0:18:39.920 --> 0:18:41.800 bit more broadly. I don't know why it cannot be 0:18:42.359 --> 0:18:46.000 to include asset price and UH inflation. I think that 0:18:46.040 --> 0:18:48.119 if you ask the man on the street, what what 0:18:48.160 --> 0:18:50.679 does inflation mean to me? It means that I have 0:18:50.800 --> 0:18:53.399 to work longer and harder in order to get the 0:18:53.440 --> 0:18:56.800 things that I want. Now. If the if the reality 0:18:56.960 --> 0:18:59.720 is that, uh, the home that you want to live 0:18:59.720 --> 0:19:02.040 in has doubled in price, and you have to come 0:19:02.119 --> 0:19:05.840 up with twice the down payment, depending upon what your 0:19:05.880 --> 0:19:08.120 income and your savings and so forth, it could take 0:19:08.200 --> 0:19:11.800 quite a long number of years. That represents a deterioration 0:19:11.840 --> 0:19:15.760 in your lifestyle. So to ignore asset price inflation and 0:19:15.840 --> 0:19:18.880 to substitute it with the owner's equivalent rent. This sort 0:19:18.880 --> 0:19:22.159 of this wonky construct that looks at the carry costs 0:19:22.160 --> 0:19:25.320 of a house, but not really the primary issue that 0:19:25.359 --> 0:19:28.960 I think confronts particularly first time home buyers, which is 0:19:29.080 --> 0:19:31.560 they can make the payment all right, if someone would 0:19:31.560 --> 0:19:35.440 give them the down. So if we're thinking about currency 0:19:35.480 --> 0:19:38.879 debasement in a larger context, maybe we've already had, you know, 0:19:38.960 --> 0:19:43.400 some measure of inflation. And I also think that FED pronouncements, 0:19:43.440 --> 0:19:47.280 not just FED but central banking pronouncements about inflation are 0:19:47.560 --> 0:19:51.159 are inherently suspect because, first of all, they want they 0:19:51.200 --> 0:19:55.200 are committed to a zero rate policy, and they because 0:19:55.240 --> 0:19:59.000 they have, in the case of the US, a statutory 0:19:59.280 --> 0:20:03.359 um constraint to uh TO to not allow quote unquote 0:20:03.359 --> 0:20:06.240 inflation get out of hand um. Naturally they're going to 0:20:06.320 --> 0:20:09.040 forecast low rates of inflation. But look at their history. 0:20:09.440 --> 0:20:13.000 The history of central banks forecasting inflation is abysmal. It 0:20:13.119 --> 0:20:15.600 is really, it is really bad when you look at 0:20:15.840 --> 0:20:19.440 at the numbers that they have projected versus what's been realized. 0:20:19.840 --> 0:20:21.760 And then if you want to take a slightly academic 0:20:21.960 --> 0:20:25.080 and a longer you, let's say a fifty perspective on it. 0:20:25.320 --> 0:20:28.080 Let's look at it this way. In the sixties, the 0:20:28.160 --> 0:20:32.080 FED and their colleagues said, we know inflation. We got this, 0:20:32.160 --> 0:20:35.439 it's Phillips curves. When unemployment gets too low. Whoops. In 0:20:35.480 --> 0:20:37.640 the seventies you throw that in the trash. So then 0:20:37.680 --> 0:20:40.520 you say, okay, well, it's about monetary aggregates and the 0:20:40.560 --> 0:20:43.440 growth there there too. Well that kind of went out 0:20:43.560 --> 0:20:46.040 at the windows as well. And by the way, M 0:20:46.080 --> 0:20:51.760 two broad monetary aggregates have grown about over the last year. Interestingly, 0:20:52.160 --> 0:20:54.960 now the FED says it's kind of psychological, it's your 0:20:55.000 --> 0:20:58.000 expectations and so forth. I guess my point is is 0:20:58.000 --> 0:21:00.400 that when you have a feat currency, they are all 0:21:00.520 --> 0:21:03.640 kinds of ways that inflation can probably rear. It's it's 0:21:03.760 --> 0:21:07.080 very ugly head, simply because it really just comes down 0:21:07.119 --> 0:21:10.360 to the extent to which people trust the currency and 0:21:10.560 --> 0:21:13.000 trust in its long term stability. If you're going to 0:21:13.040 --> 0:21:16.159 buy an apartment building in dollars today and you have 0:21:16.200 --> 0:21:19.080 a ten year horizon associated with it or lend against it, 0:21:19.400 --> 0:21:22.639 you have to have some faith that, uh, that that 0:21:22.760 --> 0:21:25.240 dollars that you're going to receive or pay ten years 0:21:25.240 --> 0:21:28.000 from now is going to be within spitting distance of 0:21:28.200 --> 0:21:33.439 what you contemplate in today's contract. Yeah yeah, yeah, yeah, 0:21:33.520 --> 0:21:35.720 yeah right, just exactly like bitcoin, which is why you 0:21:35.720 --> 0:21:37.879 can't make a long term contract in bitcoin, because you 0:21:37.920 --> 0:21:41.680 have no idea whether you're gonna um be really unhappy 0:21:41.760 --> 0:21:44.360 or whether your counterparty is going to be really unhappy 0:21:44.359 --> 0:21:46.840 about it. So so anyway, my point is is that 0:21:47.000 --> 0:21:48.920 the FED is going to say what it needs to say, 0:21:49.000 --> 0:21:51.879 which is inflation is well controlled. Even though they don't 0:21:51.920 --> 0:21:55.040 really know what inflation is. They define it narrowly, and 0:21:55.080 --> 0:21:59.280 they have had a terrible history of forecasting it. All right, 0:21:59.480 --> 0:22:03.480 So had the Fed is doing its job, it is, 0:22:03.520 --> 0:22:07.679 you know, keeping rates, keeping liquidity into the marketplace. What 0:22:07.760 --> 0:22:09.679 do you expect or what do you need to see here? 0:22:09.720 --> 0:22:11.480