Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily
Speaker 1: we bring you insight from the best in economics, finance, investment,
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Speaker 1: John and I went mental on this and that for
Speaker 1: the next nine hours, there's going to be a complete
Speaker 1: mythology of these gazillionaires, these technology giants, and these politicians.
Speaker 1: As a spar in Washington, what we wanted to do
Speaker 1: is have a sane conversation with a doer, someone like Cook,
Speaker 1: someone like Bezos and the rest of him. Jim McKelvey
Speaker 1: is the McKelvey School of Engineering at the Washington University
Speaker 1: of St. Louis. He stumbled on a thing with a
Speaker 1: guy named Dorsey called Square and made a pile of money.
Speaker 1: But that came out of his curiosity and his innovation
Speaker 1: and everything from glassblowing to just simple engineering and Pascal
Speaker 1: language from another time and place. We're thrilled Jim mcklby
Speaker 1: can talk today about these four people who are going
Speaker 1: to stand in front of our Congress. Jim thrilled to
Speaker 1: have you with us. As well. You are like bezos,
Speaker 1: you were like cook, You're like the rest of them.
Speaker 1: You guys aren't normal. What's your message to these congressmen?
Speaker 1: What come on? What's your message to these congressmen about
Speaker 1: the innovation you guys had when you were fifteen or
Speaker 1: twenty or so. I mean, it's exactly the opposite of
Speaker 1: what you just said. Um. And the reason I wrote
Speaker 1: the book The Innovation Stack is because, in fact, I
Speaker 1: want to skewer this hero myth that somehow people who
Speaker 1: end up in these positions of fantastic power are somehow
Speaker 1: different than the rest of us. Um. I mean it's
Speaker 1: it's literally the opposite of you you said. I'm a very
Speaker 1: normal guy. I live in St. Louis. Um, I'm not
Speaker 1: a genius. I'm not even that hard working. I'm no
Speaker 1: good at running companies. So um. What I wanted to
Speaker 1: do was figure out what can take a normal person
Speaker 1: and put them in a position where someday they do
Speaker 1: run a company so powerful they get hauled in front
Speaker 1: of Congress. Will Washington block that innovation? Is that a
Speaker 1: risk that's out there? Look, there's always a risk from regulation,
Speaker 1: and when regulation comes, it usually doesn't come in sort
Speaker 1: of precise surgical implements. But I don't think Washington going
Speaker 1: to do that much. Um. But then again, I'm not
Speaker 1: a legislator. I'm not even somebody who runs a company,
Speaker 1: so I'm not really qualified to speak on that at best.
Speaker 1: I'm somebody who spent a lot of time studying the
Speaker 1: dynamics of these companies. And I would say this as
Speaker 1: somebody who is very regulated. I believe in regulation, but
Speaker 1: you want regulation to be consistent so that the companies
Speaker 1: and the people who work for them can adjust and uh,
Speaker 1: you know, not have to lurch back and forth. Jim,
Speaker 1: I want to take Tom's question and turn it on
Speaker 1: its head. The idea that perhaps Washington ten squadsh innovation
Speaker 1: are big tech companies squadshing innovation. This is one of
Speaker 1: the big questions. Is perhaps the idea of Amazon taking
Speaker 1: out and eliminating some of the platforms for competitors or
Speaker 1: sort of pushing them down on the search function in
Speaker 1: order to basically push forward their own products first, Is
Speaker 1: that stifling innovation? Well, look, I don't know exactly what
Speaker 1: Amazon is doing, but I will tell you this. I mean,
Speaker 1: the reason I wrote the book was because Amazon, in
Speaker 1: its early days attack Square, and they copied our product,
Speaker 1: they undercut our price, and everyone expected Square to die um,
Speaker 1: and we didn't. Um. And uh you know, a year later,
Speaker 1: Amazon gave up processing credit cards and um and honestly
Speaker 1: competing with them, they were really gracious. The competition that
Speaker 1: you got from Amazon. Do you think that might Square better? Um?
Speaker 1: Actually it was almost irrelevant. The funny thing about what
Speaker 1: happened was with Amazon was that because we had an
Speaker 1: innovation stack, which is this weird thing that I've been
Speaker 1: studying for three years, the competition really didn't happen in
Speaker 1: a way that was traditional. So if you've got normal businesses,
Speaker 1: which are basically sort of very close copies of each other,
Speaker 1: then competition, uh is can be deadly. And when Amazon
Speaker 1: does this to normal companies, it wipes them out. Um.
Speaker 1: But in the case of the Square and some other
Speaker 1: companies that have these things called innovation stacks, you're actually
Speaker 1: almost competition proof, at least as long as you played
Speaker 1: by a certain set of rules that you know, I
Speaker 1: spent three years studying, so I think, Um, you know,
Speaker 1: everyone expected it to be this giant battle. Um. But
Speaker 1: at Square, we really didn't do anything different. And by
Speaker 1: the way, That pattern repeats and dozens of companies that
Speaker 1: I have studied, including one, you know, Bank of America.
Speaker 1: The founding of Bank of America. UM, it was done
Speaker 1: by a kid who dropped out of school at fifteen
Speaker 1: years old. UM, no formal education. He was a protein
Speaker 1: But Jim, Jim, I don't mean to interrupt, but we're
Speaker 1: gonna run out of time. Jim, this is critical. Is
Speaker 1: Washington gonna get in the way of that innovation stack. No,
Speaker 1: Washington is not going to do it because they can't.
Speaker 1: Um that companies with innovation stacks adapt very very quickly.
Speaker 1: What Washington needs to do is just lay out the rules.
Speaker 1: They need to talk about what's important. UM. If there
Speaker 1: if there needs to be some protection, they put in
Speaker 1: some protection. But what we need as innovators is to
Speaker 1: just know the rules that we're playing in. Hi, Jim
Speaker 1: write to catch out with you five minutes does not
Speaker 1: do this justice. You've gotta get you back, Jim mccaby
Speaker 1: that Square Cove found out and Deputy chair the send
Speaker 1: Louis Fete. Jill carry Hall works within the competitive milieu
Speaker 1: of economics and equity at Bank of America. What she's
Speaker 1: known for is a blistering single sentence in a three
Speaker 1: page report. Jill, you have a sentence which is stunning,
Speaker 1: which is small caps will see a nine year over
Speaker 1: year collapse of earnings versus large caps with only a
Speaker 1: collapse of earnings. How does small cap get to the
Speaker 1: end of the bridge? Yeah, I mean, the fundamental backdrop
Speaker 1: for small cops is one of the reasons we've been cautious.
Speaker 1: I think. Obviously, the coronavirus and the current crisis has
Speaker 1: been one that's been more detrimental to small businesses. But
Speaker 1: even going into this, small caps were worse positioned than
Speaker 1: they usually are. Ahead of recessions. You had about a
Speaker 1: third of the Russell two thousand that had no earnings,
Speaker 1: you had record debt levels UM. And now this this
Speaker 1: earning season, as you mentioned, you're seeing much much bigger
Speaker 1: your re earnings collapses for smaller companies and and they're
Speaker 1: still seeing weaker revision trends even though we're starting to
Speaker 1: see a bottoming out there. So so we're still cautious
Speaker 1: for smaller companies. But but as you if you move
Speaker 1: into a more sustainable recovery UM, you know, while it
Speaker 1: may take a bit longer than than usual given where
Speaker 1: they were. That that typically tends to be a more
Speaker 1: favorable backdrop for smaller caps. But but for now, we
Speaker 1: remain more relatively cautious that Joe, just walk me through
Speaker 1: the earnings profile relative to the price at the story
Speaker 1: large caps versus small caps now sure, so, I mean
Speaker 1: right now, on a valuation basis, all three size segments
Speaker 1: are treading it at pretty extended levels versus history, So
Speaker 1: so relative to earnings, the market certainly doesn't look look
Speaker 1: cheap no matter what size segment you're looking at um.
Speaker 1: But but for from a relative basis, if you're a
Speaker 1: long term investor, that's sort of the long term goal
Speaker 1: case for small caps is relative to large their trading
Speaker 1: it at multidecade lows. Evaluation doesn't really tend to be
Speaker 1: very predictive. If you have a short time horizon, you know,
Speaker 1: what the pe multiple of the market is today doesn't
Speaker 1: really necessarily tell you much about what returns are going
Speaker 1: to get over the next year. But if you have,
Speaker 1: you know, a ten year long term horizon, then that
Speaker 1: does tend to be more predictive. So so for a
Speaker 1: long term investor, it could be a good entry point
Speaker 1: for small caps. But but for the near near term.
Speaker 1: We still remain conscious, you know, when you're thinking about
Speaker 1: these numbers and considering the price of the story, just
Speaker 1: how much is it distorted by the big four, these
Speaker 1: big tech names that will be reporting to Capitol Hill today. Yeah,
Speaker 1: for the SMP five overall, we've definitely seen a lot
Speaker 1: of the returns this year driven by by mega caps
Speaker 1: and fame stocks mid all of the unprecedented liquidity that
Speaker 1: we've seen. We're equal weight the tech sector right now.
Speaker 1: We we have seen pretty strong earnings trends. It's been
Speaker 1: one of the sectors that this earning season so far
Speaker 1: has continued to surprise to the upside, along with healthcare
Speaker 1: UM it has some of the cleanest balance sheets and
Speaker 1: the SMP so fundamentally the sector still looks strong. But
Speaker 1: you know, you have seen valuations get more and more extended.
Speaker 1: And one of the reasons that we're equal weight tech
Speaker 1: within the SMP five is potential for for higher regulation,
Speaker 1: whether some of these companies wind up self regulating or
Speaker 1: whether it's forced upon them. I think that's something that
Speaker 1: you know as we move into election, and regardless, it's
Speaker 1: something that both sides, the i'le have have talked about
Speaker 1: so obviously we saw that happened with financials and regulation
Speaker 1: and lower multiples. So that's one one potential concern around
Speaker 1: tech talks. Jill, high regulation is one issue, but that
Speaker 1: can't erase the fact that we've seen an acceleration in
Speaker 1: the trend toward tech, toward working from home, towards the cloud.
Speaker 1: And I'm wondering how much this affects the small caps
Speaker 1: and the fat and the fact that perhaps some of
Speaker 1: these companies are more leveraged to the old economy, the
Speaker 1: one that didn't depend on tech as much, and perhaps
Speaker 1: that's one of the reasons why those shares are down
Speaker 1: eleven percent versus almost seventeen percent gain on the NASDAC.
Speaker 1: How much is this a structural challenge for small cap
Speaker 1: stalks going forward? Right? I think that's exactly right, that
Speaker 1: that's one of the issues. When we've looked at the
Speaker 1: earnings exposure of small caps, they actually have about double
Speaker 1: the earnings exposure to some of what we would consider
Speaker 1: more secularly challenged industries, like some of those old econmosh
Speaker 1: old economy industries you mentioned, like rates um, you know, machinery,
Speaker 1: parts of old brick and mortar, retail relative to large caps.
Speaker 1: So and the areas of small caps that that are
Speaker 1: more tech exposed, you know, small caps software. Some of
Speaker 1: these areas are where you have seen those those valuation
Speaker 1: multiples go more stratospheric. So you know, overall with within
Speaker 1: small caps, investing in in growth stocks does tend to
Speaker 1: be a more consistent longer term strategy than for large
Speaker 1: But but yes, more more exposure told maybe micro caps
Speaker 1: small caps who's keeping count? And the old days when
Speaker 1: revenue was this damage and particularly unit growth was this damage,
Speaker 1: you did a roll up, everybody merged, etcetera. Is the
Speaker 1: apparatus out there right now the catalyst the incentives to
Speaker 1: get one big M and A of the small camp space.
Speaker 1: I mean, I think certainly you know M and A
Speaker 1: it tends to be cyclical. So you know, while certainly
Speaker 1: you're you're you can still see some some occurred during
Speaker 1: during downturns, and that tends to pick up cyclically. Um.
Speaker 1: You know that when we when you look for companies
Speaker 1: that could be acquisition targets, that that tends to be
Speaker 1: one eventual strategy and small caps um. But but I
Speaker 1: think overall, right now we're seeing a broader picture of
Speaker 1: you know, uncertainty, over cast, appointment from corporates. That's the
Speaker 1: theme we're seeing this earning season where even though you know,
Speaker 1: a lot of companies have have stopped, uh, you know,
Speaker 1: a lot of the buyback and dividend suspensions may may
Speaker 1: largely be behind us to the overall market. But I
Speaker 1: but you'll, I'm I'm baffled by this in the small
Speaker 1: cap space. If I'm at four times, ebata seven times,
Speaker 1: but maybe even seven eight times. But uh, somebody at
Speaker 1: Bank of America, one of your competitors, gets on the
Speaker 1: phone and says, you can't grow yourself out of this merge.
Speaker 1: Is that mechanism broken? I don't think it's broken. I think,
Speaker 1: as you say, for for a lot of small caps,
Speaker 1: there there are attractive acquisition targets. And this has been
Speaker 1: a very good market for not only for stock picking,
Speaker 1: but for just very differentiated uh, you know, valuations within
Speaker 1: the market. So I think you know what one of
Speaker 1: the things to to look at is is for small caps,
Speaker 1: you know a lot of companies that that have you know,
Speaker 1: attractive free cash flowd the ability to grow. Um. We
Speaker 1: we've seen companies that are are very over levered within
Speaker 1: small caps overall. So you know, I think kind of
Speaker 1: separating out some of these metrics, and you know, just
Speaker 1: as an investor looking at the small cap sized segment,
Speaker 1: even if it's even if this is a point whereas
Speaker 1: we expect value could continue to start to work, um,
Speaker 1: you know, differentiating within small caps, what's more quality value
Speaker 1: from you know, levered risk within small caps um and
Speaker 1: companies that still do have that potential to grow. Jill,
Speaker 1: since you're having a pretty cautious tone and a lot
Speaker 1: of people come on this program and they say that
Speaker 1: they're actually going more into small caps is a way
Speaker 1: to capture some of the upside on this recovery. What
Speaker 1: do you say against the argument that these companies will
Speaker 1: benefit more from a week or dollar more from a
Speaker 1: bigger resurgence internationally as a result of that. Yeah, I mean,
Speaker 1: I think when we've you know, when small caps overall
Speaker 1: have grown more internationally exposed over time, so the gap
Speaker 1: between small and a large caps for and exposure has
Speaker 1: has narrowed, they are still more domestically exposed. When we've
Speaker 1: looked at the dollar versus relative performance over time, it
Speaker 1: actually hasn't been very predictive. And that you know, you've
Speaker 1: seen some periods of of secular dollar strength for small
Speaker 1: caps of underperforms somewhere they've outperformed. So really, what we
Speaker 1: found is that the overall economic backdrop and what's going
Speaker 1: on UM tends to be more predictive than just the
Speaker 1: level of the dollar itself. Still, what do you say
Speaker 1: to people who have left off the idea of bankruptcy
Speaker 1: or some sort of contagion among smaller companies saying the
Speaker 1: FED has their back fiscal stimulus will also help support them.
Speaker 1: Do you think that this optimistic view is perhaps overplayed
Speaker 1: at this point? Well, I think, you know, certainly where
Speaker 1: we expect to remain in a lower for longer rates backdrop,
Speaker 1: we expect the FED to remain a comminative, but you know,
Speaker 1: in terms of the unprecedented fiscal and monetary stimulus we've seen,
Speaker 1: you know, one of the reasons that we're we're cautious
Speaker 1: on the market and the spa hundred overall UM in
Speaker 1: terms of not really expecting more more upside through year
Speaker 1: end is that we expect there could be payback risk
Speaker 1: from all the stimulus we've seen, and that a lot
Speaker 1: of the biggest stimulus has largely been behind us and
Speaker 1: certainly there's potential for more to to help the economy,
Speaker 1: but um, you know, we we've seen diminishing returns from
Speaker 1: stimulus in terms of the boosts we've seen to lower
Speaker 1: quality stocks. As we've seen each consecutive instance, those get
Speaker 1: less and less of a boost. So um, I think
Speaker 1: it will remain in accommodative backdrop. But but a lot
Speaker 1: of the biggest boost we've seen has been in the past.
Speaker 1: We're seeing fighting collective will as well Joe Gright to
Speaker 1: catch out with the Joe carry hole there of Bank America,
Speaker 1: some k let's bringing prey, shall we see the Securities
Speaker 1: Global head of Right Strategy joins us right now, Preya,
Speaker 1: I think you agree with me that this is more
Speaker 1: important than people are letting gone later today. What are
Speaker 1: you looking for in the news conference with Chad jack
Speaker 1: pal right, It's all going to be about the news
Speaker 1: conference because I don't expect any changes in the statement.
Speaker 1: We don't get the dot plot, we don't get projections,
Speaker 1: So it's all about how does he set the stage
Speaker 1: for forward guidance and how does he frame the que
Speaker 1: You know, is QUEI all about market functioning? Because if
Speaker 1: that's the case, and they should continue to buy across
Speaker 1: the curve, but market functioning has largely returned to normal.
Speaker 1: So are we going to see a reduction in quee.
Speaker 1: I've actually been you know, reading between the lines. A
Speaker 1: lot of the FED officials have been talking about more accommodation.
Speaker 1: But one way they can provide more accommodation is to
Speaker 1: change the narrative of que itself from being something about
Speaker 1: market functioning, which it did a great job, but it's
Speaker 1: it's sort of done. I think, to now provide accommodation
Speaker 1: to keep long term rates low. I think if we
Speaker 1: get that shift in narrative, the markets, uh, you know,
Speaker 1: going to understand that the FED is going to move
Speaker 1: further out the curve. That's going to help real rates
Speaker 1: decline somewhere. I think we've started to price this in.
Speaker 1: If you look across assets, the dollar, gold, real rates,
Speaker 1: break evens all telling you that the markets setting up
Speaker 1: for sort of hate saying normal but effectively normal queue,
Speaker 1: which is that the the intent of QUEUEI is to
Speaker 1: keep long term rate slow. I think we really need
Speaker 1: to hear that from chap Out because we've been setting
Speaker 1: up for that for the last couple of weeks. Pray
Speaker 1: when you hear Governor brand and say things like we
Speaker 1: need to shift away from stabilization to accommodation. Do you
Speaker 1: hear yield curve control? I think she has been a
Speaker 1: proponent of yield curve control, and we were thinking that
Speaker 1: that's likely to happen this year, but from recent FED communication,
Speaker 1: not everybody is on board. It's a completely new policy tool.
Speaker 1: How do you get out of veek of control? So
Speaker 1: I still think it's going to be in the policy
Speaker 1: tool kit. But something they can do, you know, from
Speaker 1: the existing tools is certainly link forward guidance to inflation,
Speaker 1: effectively suggesting a much more dubbish reaction function. If they
Speaker 1: have this reaction function in twenty they wouldn't have hyped
Speaker 1: because core PC was significantly below too. So I think
Speaker 1: they can do that with existing outcome based forward guidance.
Speaker 1: They can also just shift that you need so effectively
Speaker 1: provide accommodation, you know, giving them time until they actually
Speaker 1: analyze eeek of control. I do think they may have
Speaker 1: to do that next year. Have the idea that you
Speaker 1: talked about this is huge, the idea that the FED
Speaker 1: could come out and say we are going to actively
Speaker 1: try to suppress longer term borrowing costs for the United States,
Speaker 1: basically monetizing the United States dead. That would have a
Speaker 1: torpedo effect on the dollar, wouldn't it. I think that
Speaker 1: the part of the weakness and the dollar in the
Speaker 1: last couple of weeks, I think is the market sort
Speaker 1: of listening to the Fed and saying that's probably the
Speaker 1: next step. So I but absolutely, I think if they're
Speaker 1: very clear that they're going to keep long term rates low,
Speaker 1: that should weaken the dollar. Now a lot with the dollar,
Speaker 1: A lot does depend on, you know, what's happened happening globally.
Speaker 1: If global growth is going to research, then that can
Speaker 1: certainly take the dollar much weaker. I'm a little more pessimistic,
Speaker 1: I think, you know, I'm not sure that global growth
Speaker 1: necessarily picks up, so I think that ultimately will put
Speaker 1: a floor on the dollar. Plus we have an election
Speaker 1: coming up, so there's a lot of other things going
Speaker 1: on with the dollar. To prey it's away from your remit,
Speaker 1: but tell me about the labor economy. I mean, I'm sorry,
Speaker 1: it's part of their mandate. It's not good. How do
Speaker 1: you take the prism of the labor economy and folded
Speaker 1: over in the lower for longer. So I think you
Speaker 1: know clearly it's it's part of their mandate. When we
Speaker 1: look at the labor market, I think we've seen the
Speaker 1: improvement from reopening, also from stimulus, which is why this
Speaker 1: whole stimulus discussion is important. Our fear is that the
Speaker 1: labor economy is going to start to stall as we
Speaker 1: realize that the were reopening to a new normal. There
Speaker 1: will be parts of the labor economy that cannot get
Speaker 1: back to normal because it's the social distancing, et cetera. Okay,
Speaker 1: but three, this is important. I'm gonna make some news here.
Speaker 1: Are you in the glide path of Steve Major at
Speaker 1: HSBC or what we see out of some of the
Speaker 1: people at JP Morgan of a lower ten ure yield
Speaker 1: and even a ten ure yield that could threaten the
Speaker 1: zero bound. Yes, I think for the zero bound it's
Speaker 1: a little bit hard because the fact can just let
Speaker 1: up on the amount that they're buying. But we actually
Speaker 1: do see low a ten ye years in the near term.
Speaker 1: I think August seasonals are typically positive. We're seeing the
Speaker 1: recovery stall and you have a devilish fed that's going
Speaker 1: to start buying out the curve. I think that's going
Speaker 1: to actually uh tense, could absolutely touch bottom in the
Speaker 1: very near term. Apprey, This is so so difficult for
Speaker 1: a right strategist right now, for anyone in this bomb market.
Speaker 1: We touched on this in the last hour. How do
Speaker 1: you have some kind of call on the yield curve
Speaker 1: when you can have a fat step in with yield
Speaker 1: curve control? Even if you think inflation expectations going to
Speaker 1: pick up because they'll tolerate higher inflation, haven't You just
Speaker 1: got to follow the FED just the idea that whatever
Speaker 1: the fat does is whether the yield curve is going
Speaker 1: to go right? Well, I think there's a reaction function component.
Speaker 1: Then there's the actual economic data, and I think what
Speaker 1: we're all struggling with is we can't extrapolate from any
Speaker 1: of the economic data we've been seen, right because the
Speaker 1: weakness was all about the lockdown. Now the improvement seems
Speaker 1: to be all about reopening. So we're looking at these
Speaker 1: high frequency measures to try and estimate is the recovery stalling.
Speaker 1: We're all becoming epidemiologists. We're looking at the virus rate,
Speaker 1: death rate and for depressing topics. But you know, once
Speaker 1: you have that If the FED clarifies the reaction function,
Speaker 1: the market can then start to look at the data
Speaker 1: and then start to price in what happens to rates.
Speaker 1: But you know, we're also looking at supply demand. If
Speaker 1: we're going to get another one and a half trillion
Speaker 1: more of supply, then I think this thread buying becomes
Speaker 1: extremely critical to pick what you know, how well, where
Speaker 1: exactly is the tenure? What does that heal curve look like?
Speaker 1: You're right, more variables to look at now where we're
Speaker 1: all coming up at the biologists because this is a
Speaker 1: health problem, it's not a financial system problem. And I
Speaker 1: have to wonder if the FED comes out and provides
Speaker 1: even more accommodation, what does that do at this point
Speaker 1: with your record low borrowing costs across the board? I
Speaker 1: think it buys time. Does it prevent something like a
Speaker 1: taper tantrum? Let's say we get a vaccine soon, and
Speaker 1: I hope that we do. We get a vaccine, but
Speaker 1: it's going to take a while for that to you know,
Speaker 1: be effective, for for consumer confidence, business confidence to come back.
Speaker 1: I think where the FED can absolutely help keep things
Speaker 1: accommodative until we can get the public health response, until
Speaker 1: we realize that actually we're going back to normal, then
Speaker 1: they can take it back. I think that's the key,
Speaker 1: just to prevent some sort of big tightening in conditions
Speaker 1: because suddenly there's optimism about a vaccine. I think so,
Speaker 1: so they can be more preemptive. It can just at
Speaker 1: least ashore the market, takers premium out and help risk asses.
Speaker 1: And they've done a great job so far. But I
Speaker 1: think they may have to do more on treasuries, even
Speaker 1: how much supply is going to come down the pike.
Speaker 1: You know, I love catching up with you. We love
Speaker 1: catching up with the prayer mess, with that of tad securities.
Speaker 1: You have gotten a pologust like something. This is Dennis
Speaker 1: Curbon out of retirement, off the golf course and John
Speaker 1: this is without question the most important conversation in gold
Speaker 1: in the week, the month, and indeed the quarter. This
Speaker 1: is equivalent to Gary shilling on low interest rates, a
Speaker 1: major shout out to the bulls in the equity market.
Speaker 1: Someone like Ben Laidler at Tower Hudson Garmin nailed gold.
Speaker 1: He went't even further and said not only owned gold,
Speaker 1: but own it yen in euro And we get an
Speaker 1: update this morning from Mr Gartman, Dennis, I believe off
Speaker 1: your reports you are out of gold. How could Gartman
Speaker 1: be out of gold? Well, let's I'm practicing social distancing
Speaker 1: in the gold market. That it has become a little
Speaker 1: too crowded, and is uh? I think it is Jogi Berra,
Speaker 1: Who's who was talking about a restaurant one time in
Speaker 1: New York who said, nobody goes there anymore. It's too crowded.
Speaker 1: It's become awfully crowded. The boat has become very crowded,
Speaker 1: too many people involved. I couldn't get people interested in
Speaker 1: gold of consequence two and three years ago, and now
Speaker 1: it's front page too. Is now it's the front page
Speaker 1: of every report that you see, It's the front page
Speaker 1: of magazines, it's the lead article on and and the
Speaker 1: radio and television. And I think it's just become a
Speaker 1: bit too crowded, that's all. How much of a pullback
Speaker 1: do you need to see to become enthusiastic again? Well,
Speaker 1: first of all, there let's say that I always told
Speaker 1: people who in a bull market there are three positions.
Speaker 1: One can have really long, modestly longer neutral, And this
Speaker 1: point on gold, I'm neutral. How far down do I
Speaker 1: think I need to see it go. Well, we're trading
Speaker 1: close to fifty five I think just a few seconds ago. Uh,
Speaker 1: if we traded back to seventeen seventy five, eighteen and
Speaker 1: a quarter, I'd be a buyer. Noah sends or bus
Speaker 1: about it. And do I think that we'll get that
Speaker 1: kind of correction? Yes, I think we will do I
Speaker 1: can I tell where if it gets to seventeen seventy five,
Speaker 1: is that reasonable? I'll just simply say a hundred dollars
Speaker 1: from from any interim high, and I'm a buyer. Again.
Speaker 1: What's the catalyst for us el off? Just the fact
Speaker 1: that the market is way too crowded, too many people involved.
Speaker 1: Nothing more than that. Sometimes that's all one needs. You
Speaker 1: might see if had become less accommodative, discussing perhaps a
Speaker 1: a a less expansionary policy towards its balance sheet, some
Speaker 1: sort of comment from a Federati official might do it.
Speaker 1: A turnaround in the dollar to a stronger dollar, which
Speaker 1: I don't think is going to happen, that might do it.
Speaker 1: Weakness in the stock market that might do it. There's
Speaker 1: a number of things, but let's just simply say too
Speaker 1: many people are all of a sudden all involved in
Speaker 1: the in the gold market, that there's only one position
Speaker 1: that everybody has that's long and I think that's just
Speaker 1: people have to be taken out of that trade. Dennis,
Speaker 1: weakness in the stock market causing a sell off in gold,
Speaker 1: does this mean that the correlation between gold and a
Speaker 1: risk off feeling markets is broken? Well, it's interesting. Sometimes
Speaker 1: golden stocks go up together, sometimes golden stocks going contravention
Speaker 1: one to another. For the past several months, they've been
Speaker 1: moving in convention one with the other. As gold has
Speaker 1: gone up, so has stocks. And stocks has gone up
Speaker 1: have gone up, so has gold. But I do think
Speaker 1: that there's a great probability that that conventional movement, that
Speaker 1: that consistency between the two shall shall continue for a
Speaker 1: while longer. So if if the stock market, and I
Speaker 1: think stocks are extremely expensive, if stocks start to tumble,
Speaker 1: you'll get a correlative sell off in the gold market.
Speaker 1: What people don't understand, folks, is a Dennis Garment newsletter
Speaker 1: was ten twelve, fourteen pages long each day. In the
Speaker 1: back three or four pages were on the political philosophy
Speaker 1: of this nation. Dennis, I know there's gonna be four
Speaker 1: hipsters in front of Congress today rumor has that you're
Speaker 1: going to be the fifth horseman, and you're not there.
Speaker 1: But what is Congress doing going after the value add
Speaker 1: capitalism that we've seen out of silicon technology. It's ill advised,
Speaker 1: it's a bad decision, but they're going to do it
Speaker 1: anyway because that's the left wing phenomenon, that the left
Speaker 1: wing philosophy that seems to dominate the news media at
Speaker 1: this point. So it's going to be I think it'll
Speaker 1: it'll be terribly ugly, ugly, almost as ugly as what
Speaker 1: we watched yesterday with the attacks upon Mr Barr. So this,
Speaker 1: I don't think it's going to be a very pretty
Speaker 1: day for the to be a social they handle it howl,
Speaker 1: you mean you and I remember the Bloomberg headline with
Speaker 1: the Justice Department walked away from the Microsoft litigation of
Speaker 1: years ago, A T and T, et cetera. What's your
Speaker 1: advice to these guys over lobbied over expert about how
Speaker 1: to patiently get through this. That's exactly what they should do.
Speaker 1: Patiently get to it. Try not to smirk, try not
Speaker 1: to laugh, try not to get up and walk out,
Speaker 1: answer the questions with yes and no answers, and be
Speaker 1: as genteel and as southern as you possibly can be.
Speaker 1: It will be very difficult. Gentele and southern. Will you
Speaker 1: own that? Dennis? Dennis, I want to go back to
Speaker 1: the equity markets where Lisa was before. You say they're
Speaker 1: over priced, but they have a bid. I have to
Speaker 1: participate in a four oh one K. I'm not trading
Speaker 1: like Doug cass or you were, you know, the day traders.
Speaker 1: I know you're on the couch Mrs Garbins, on the
Speaker 1: couch doing the robin Hood thing. If I'm in a
Speaker 1: four oh one K, I have to participate. How do
Speaker 1: I do that? Well? I think you should still be.
Speaker 1: It is still a bowl market, and it's still a
Speaker 1: long term bed on the benefits and the attributes of
Speaker 1: the American system over long periods of time. It will
Speaker 1: still be five years from now stocks will be from
Speaker 1: the lower left to the upper right from where they
Speaker 1: are now, Shall they be from the lower left to
Speaker 1: the up right in the next six months? I have
Speaker 1: my doubts. And if you're long, if you're overly exposed,
Speaker 1: I think being somewhat less exposed. After a thirty seven
Speaker 1: or thirty eight percent rally in the NASDAC in the
Speaker 1: court the last three months. Probably makes sense to take
Speaker 1: some of that off the table. Raise a little cash
Speaker 1: can't hurt you at all. Dennis Lisa emails in from
Speaker 1: surveillance and says, when you get a chance, Dennis, tell
Speaker 1: us when to go along gold again. Mr Gartman just
Speaker 1: brilliant on the moonshot that we've seen on gold in
Speaker 1: Yen and in euro as well. Francine Lakwan, London, I'm
Speaker 1: Tom Keane in New York. He is the Richmond Fed.
Speaker 1: There was a gentleman named Mr Black, and then there
Speaker 1: was Al brought us, and then onto Jeffrey Lacker. But
Speaker 1: the character and true fabric of the Richmond Fed is
Speaker 1: always in will be Al brought us where thrilled he
Speaker 1: could join us today. Hell, you've never seen a deficit
Speaker 1: like this. How does the deficit growth, the deficit sustainability,
Speaker 1: the deficit reality that we have, how does it change
Speaker 1: the dialogue at the eCos building? Well, you know, I
Speaker 1: think UH Anonymous are comfortable with these deficits, That's that's
Speaker 1: for sure. But I think it's well recognized that this
Speaker 1: is just a really unusual situation and I don't need
Speaker 1: to Maybe we've people talk about this uh endlessly on
Speaker 1: your program and elsewhere. Uh, and you got you got
Speaker 1: to deal with it with policy in a really wholesale way.
Speaker 1: And they've done that, and I think I think so
Speaker 1: far the progress has been has been cool. Uh. So
Speaker 1: I think the general thinking around that table probably is
Speaker 1: we don't we're not comfortable with these deficits. Uh, but
Speaker 1: we're gonna have to live with them for a while
Speaker 1: and hopefully, uh, you know, we'll we'll deal with bringing
Speaker 1: them down when the economic situation and the driver, which
Speaker 1: is pandemic gets uh, gets to a point where we
Speaker 1: we have the opportunity to do that. For now, I
Speaker 1: think it's just steady as she goes. The academics of
Speaker 1: the Richmond FED has been so varied and interesting. But
Speaker 1: if your color and combined together Richmond, Atlanta, maybe Bob
Speaker 1: McTeer and the Georgia School to Dallas FED as well.
Speaker 1: There's a huge body the American public that's grievously concerned
Speaker 1: about deficit build up. Can you support trillions of dollars
Speaker 1: of additional stimulus to overlay over what Chairman Powell is doing?
Speaker 1: I think we have I think at this point we
Speaker 1: really don't have a lot of choice. UH. And I
Speaker 1: think many of the most recent statements by reserve back
Speaker 1: presidents now on the committee have been calling for uh
Speaker 1: continued fiscal stimulus. I think there's gonna be some concern
Speaker 1: it to fed about the difficulty of getting this current uh,
Speaker 1: the division between the House and the Senate UH corrected,
Speaker 1: and and and and done. Uh, but that's gonna answer
Speaker 1: the deficit. And I just have to go back to
Speaker 1: what I said a minute ago. UH. We're not used
Speaker 1: to it, we don't like it. UH, but we've got
Speaker 1: to live with that, UH until we get a good
Speaker 1: solid floor under the economy. Hopefully the path of the
Speaker 1: pandemic will make it possible to do this with less
Speaker 1: future further build up as we moved through the second
Speaker 1: half of the year and into UH. But UH, you know,
Speaker 1: if if things do go south with that, we have
Speaker 1: to be prepared for that. And I think what's happening
Speaker 1: now is we're trying to prevent that from getting any worse.
Speaker 1: And that's full the job one UH and bringing the look.
Speaker 1: I don't like deficits. I think you know that. I
Speaker 1: don't like the inflict the potential inflation of longer term
Speaker 1: inflationary implications of high DEFICUS and the fact that the
Speaker 1: FED is essentially monetizing a lot of this. But you know,
Speaker 1: you've got to prioritize. We've got to get the weakness
Speaker 1: in the economy undergird it so that we can look
Speaker 1: forward to the day when we'll get we'll see more
Speaker 1: growth of the economy and that just we'll just naturally
Speaker 1: begin to go down. Mr Brods, When will we see
Speaker 1: a much stronger U S economy? A good question that
Speaker 1: a lot is going to depend. There's several possibilities to
Speaker 1: start to start and oversure UH. And again, I think
Speaker 1: it comes back to the path of the pandemic and
Speaker 1: how we deal with that. I think maybe it was
Speaker 1: Robert Kaplan, the Dallas FED president. I'm not sure that
Speaker 1: one of the UH current reserved back president said that
Speaker 1: the Really maybe it was Eric in Boston made the
Speaker 1: point that the best economic tool now is the things
Speaker 1: we're trying to do to get the pandemic under control
Speaker 1: of bend the curve down. UH. So hopefully we'll have
Speaker 1: some success. We have had a tough time for the
Speaker 1: last couple of months with that not much success UH.
Speaker 1: And you begin to see I think it's some of
Speaker 1: the most recent data. I'm no expert on this, but
Speaker 1: some of the most recent data I was looking at
Speaker 1: listening about yesterday, maybe a little bit of progress in
Speaker 1: the Southern States towards easing the caseload increase. If that
Speaker 1: were to turn into something like a trend, that would
Speaker 1: make a huge difference and make our job a lot
Speaker 1: easier and make the day when we begin to grow
Speaker 1: again come sooner rather than the later. You mentioned that
Speaker 1: you're worried about inflation. You're worried about these deficits. When
Speaker 1: do investors start worrying about that? Well, you know, I
Speaker 1: think some investors are already worrying about it. I think
Speaker 1: some of the run up in the price of go
Speaker 1: will probably reflects concern on the potusan some investors. I
Speaker 1: don't want to suggest here that I think inflation is
Speaker 1: a clear at present current danger. I don't expect to see. Actually,
Speaker 1: what we would like to see as an increase with
Speaker 1: the PI. Would really like to see is an increase
Speaker 1: in the underlying trend rate of inflation back up close
Speaker 1: to the two percent target. I think that would make
Speaker 1: conducting monetary policy a lot easier. But you know, if
Speaker 1: that we begin to see a movement in that direction
Speaker 1: at some point, probably more than a year further down
Speaker 1: the road, and then you could begin to see some
Speaker 1: upside risk on the inflation up front. But that's for
Speaker 1: the future. Have to look forward to it, have to
Speaker 1: be aware of it. But that's does something that the
Speaker 1: FEBLE have to deal with in the future. Right now
Speaker 1: that I think the key thing is to get the
Speaker 1: inflation rate up and bring it closer to the two
Speaker 1: percent target. The FED give you a long answer, but
Speaker 1: the Fed UH at this meeting, it's going to be discussing,
Speaker 1: I think the kind of strategy it wants to follow
Speaker 1: to ensure that something like that happens. We have an
Speaker 1: inflation target at two percent, but I think it's going
Speaker 1: to be discussion about the possibility to going to something
Speaker 1: call it average inflation targeting, which would allow the inflation
Speaker 1: rate for a period of time to move above two
Speaker 1: percent UH in order to get us a bet our
Speaker 1: inflation tracts. Al brought us. Thank you so much for
Speaker 1: joining us today. He's the former Richmond to the FED President.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg
Speaker 1: Radio