WEBVTT - Surveillance: Tech Testimony With Square's McKelvey 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily 0:00:13.960 --> 0:00:17.560 we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.640 --> 0:00:27.640 Bloomberg dot Com, and of course on the Bloomberg folks. 0:00:27.720 --> 0:00:29.840 John and I went mental on this and that for 0:00:29.960 --> 0:00:32.120 the next nine hours, there's going to be a complete 0:00:32.120 --> 0:00:37.800 mythology of these gazillionaires, these technology giants, and these politicians. 0:00:37.880 --> 0:00:41.200 As a spar in Washington, what we wanted to do 0:00:41.440 --> 0:00:46.120 is have a sane conversation with a doer, someone like Cook, 0:00:46.560 --> 0:00:50.440 someone like Bezos and the rest of him. Jim McKelvey 0:00:50.760 --> 0:00:54.640 is the McKelvey School of Engineering at the Washington University 0:00:54.680 --> 0:00:57.400 of St. Louis. He stumbled on a thing with a 0:00:57.440 --> 0:01:01.640 guy named Dorsey called Square and made a pile of money. 0:01:01.640 --> 0:01:05.840 But that came out of his curiosity and his innovation 0:01:06.080 --> 0:01:10.520 and everything from glassblowing to just simple engineering and Pascal 0:01:10.640 --> 0:01:14.840 language from another time and place. We're thrilled Jim mcklby 0:01:14.840 --> 0:01:18.200 can talk today about these four people who are going 0:01:18.240 --> 0:01:21.399 to stand in front of our Congress. Jim thrilled to 0:01:21.480 --> 0:01:25.600 have you with us. As well. You are like bezos, 0:01:25.680 --> 0:01:28.440 you were like cook, You're like the rest of them. 0:01:28.560 --> 0:01:33.560 You guys aren't normal. What's your message to these congressmen? 0:01:34.160 --> 0:01:38.319 What come on? What's your message to these congressmen about 0:01:38.360 --> 0:01:42.319 the innovation you guys had when you were fifteen or 0:01:42.319 --> 0:01:46.399 twenty or so. I mean, it's exactly the opposite of 0:01:46.400 --> 0:01:48.600 what you just said. Um. And the reason I wrote 0:01:48.600 --> 0:01:51.360 the book The Innovation Stack is because, in fact, I 0:01:51.440 --> 0:01:54.480 want to skewer this hero myth that somehow people who 0:01:54.640 --> 0:01:57.920 end up in these positions of fantastic power are somehow 0:01:57.960 --> 0:02:00.560 different than the rest of us. Um. I mean it's 0:02:00.680 --> 0:02:02.560 it's literally the opposite of you you said. I'm a very 0:02:02.600 --> 0:02:05.880 normal guy. I live in St. Louis. Um, I'm not 0:02:06.080 --> 0:02:08.320 a genius. I'm not even that hard working. I'm no 0:02:08.360 --> 0:02:11.880 good at running companies. So um. What I wanted to 0:02:11.919 --> 0:02:16.280 do was figure out what can take a normal person 0:02:16.840 --> 0:02:19.560 and put them in a position where someday they do 0:02:19.800 --> 0:02:21.679 run a company so powerful they get hauled in front 0:02:21.720 --> 0:02:26.760 of Congress. Will Washington block that innovation? Is that a 0:02:26.880 --> 0:02:31.160 risk that's out there? Look, there's always a risk from regulation, 0:02:31.480 --> 0:02:34.440 and when regulation comes, it usually doesn't come in sort 0:02:34.440 --> 0:02:39.840 of precise surgical implements. But I don't think Washington going 0:02:39.880 --> 0:02:43.200 to do that much. Um. But then again, I'm not 0:02:43.240 --> 0:02:45.440 a legislator. I'm not even somebody who runs a company, 0:02:45.440 --> 0:02:48.359 so I'm not really qualified to speak on that at best. 0:02:48.400 --> 0:02:50.359 I'm somebody who spent a lot of time studying the 0:02:50.440 --> 0:02:54.520 dynamics of these companies. And I would say this as 0:02:54.560 --> 0:02:58.880 somebody who is very regulated. I believe in regulation, but 0:02:59.000 --> 0:03:01.800 you want regulation to be consistent so that the companies 0:03:01.880 --> 0:03:04.760 and the people who work for them can adjust and uh, 0:03:04.840 --> 0:03:07.040 you know, not have to lurch back and forth. Jim, 0:03:07.080 --> 0:03:08.880 I want to take Tom's question and turn it on 0:03:08.919 --> 0:03:13.160 its head. The idea that perhaps Washington ten squadsh innovation 0:03:13.440 --> 0:03:16.320 are big tech companies squadshing innovation. This is one of 0:03:16.320 --> 0:03:19.799 the big questions. Is perhaps the idea of Amazon taking 0:03:19.800 --> 0:03:23.320 out and eliminating some of the platforms for competitors or 0:03:23.400 --> 0:03:26.360 sort of pushing them down on the search function in 0:03:26.440 --> 0:03:30.920 order to basically push forward their own products first, Is 0:03:30.919 --> 0:03:34.560 that stifling innovation? Well, look, I don't know exactly what 0:03:34.600 --> 0:03:37.200 Amazon is doing, but I will tell you this. I mean, 0:03:37.280 --> 0:03:41.200 the reason I wrote the book was because Amazon, in 0:03:41.240 --> 0:03:44.200 its early days attack Square, and they copied our product, 0:03:44.240 --> 0:03:47.960 they undercut our price, and everyone expected Square to die um, 0:03:48.000 --> 0:03:51.640 and we didn't. Um. And uh you know, a year later, 0:03:51.800 --> 0:03:56.560 Amazon gave up processing credit cards and um and honestly 0:03:56.600 --> 0:04:01.400 competing with them, they were really gracious. The competition that 0:04:01.440 --> 0:04:06.680 you got from Amazon. Do you think that might Square better? Um? 0:04:06.720 --> 0:04:09.920 Actually it was almost irrelevant. The funny thing about what 0:04:10.040 --> 0:04:13.960 happened was with Amazon was that because we had an 0:04:13.960 --> 0:04:16.280 innovation stack, which is this weird thing that I've been 0:04:16.279 --> 0:04:19.839 studying for three years, the competition really didn't happen in 0:04:19.880 --> 0:04:22.840 a way that was traditional. So if you've got normal businesses, 0:04:22.880 --> 0:04:26.320 which are basically sort of very close copies of each other, 0:04:26.560 --> 0:04:29.880 then competition, uh is can be deadly. And when Amazon 0:04:29.960 --> 0:04:33.160 does this to normal companies, it wipes them out. Um. 0:04:33.200 --> 0:04:35.039 But in the case of the Square and some other 0:04:35.040 --> 0:04:37.920 companies that have these things called innovation stacks, you're actually 0:04:38.160 --> 0:04:40.840 almost competition proof, at least as long as you played 0:04:40.839 --> 0:04:42.400 by a certain set of rules that you know, I 0:04:42.440 --> 0:04:45.840 spent three years studying, so I think, Um, you know, 0:04:46.000 --> 0:04:48.760 everyone expected it to be this giant battle. Um. But 0:04:48.839 --> 0:04:51.080 at Square, we really didn't do anything different. And by 0:04:51.120 --> 0:04:53.960 the way, That pattern repeats and dozens of companies that 0:04:54.000 --> 0:04:56.920 I have studied, including one, you know, Bank of America. 0:04:56.960 --> 0:04:59.640 The founding of Bank of America. UM, it was done 0:04:59.640 --> 0:05:01.719 by a kid who dropped out of school at fifteen 0:05:01.800 --> 0:05:05.279 years old. UM, no formal education. He was a protein 0:05:05.520 --> 0:05:07.360 But Jim, Jim, I don't mean to interrupt, but we're 0:05:07.400 --> 0:05:09.960 gonna run out of time. Jim, this is critical. Is 0:05:10.040 --> 0:05:13.720 Washington gonna get in the way of that innovation stack. No, 0:05:14.080 --> 0:05:16.239 Washington is not going to do it because they can't. 0:05:16.440 --> 0:05:20.039 Um that companies with innovation stacks adapt very very quickly. 0:05:20.080 --> 0:05:23.000 What Washington needs to do is just lay out the rules. 0:05:23.040 --> 0:05:25.680 They need to talk about what's important. UM. If there 0:05:25.720 --> 0:05:27.600 if there needs to be some protection, they put in 0:05:27.640 --> 0:05:30.919 some protection. But what we need as innovators is to 0:05:31.000 --> 0:05:33.240 just know the rules that we're playing in. Hi, Jim 0:05:33.360 --> 0:05:35.400 write to catch out with you five minutes does not 0:05:35.440 --> 0:05:37.440 do this justice. You've gotta get you back, Jim mccaby 0:05:37.440 --> 0:05:39.720 that Square Cove found out and Deputy chair the send 0:05:39.800 --> 0:05:46.720 Louis Fete. Jill carry Hall works within the competitive milieu 0:05:46.800 --> 0:05:50.560 of economics and equity at Bank of America. What she's 0:05:50.600 --> 0:05:53.880 known for is a blistering single sentence in a three 0:05:53.920 --> 0:05:57.760 page report. Jill, you have a sentence which is stunning, 0:05:58.240 --> 0:06:02.080 which is small caps will see a nine year over 0:06:02.240 --> 0:06:08.279 year collapse of earnings versus large caps with only a 0:06:08.320 --> 0:06:11.960 collapse of earnings. How does small cap get to the 0:06:12.080 --> 0:06:16.440 end of the bridge? Yeah, I mean, the fundamental backdrop 0:06:16.480 --> 0:06:18.919 for small cops is one of the reasons we've been cautious. 0:06:19.000 --> 0:06:23.280 I think. Obviously, the coronavirus and the current crisis has 0:06:23.720 --> 0:06:26.640 been one that's been more detrimental to small businesses. But 0:06:26.720 --> 0:06:30.440 even going into this, small caps were worse positioned than 0:06:30.480 --> 0:06:32.920 they usually are. Ahead of recessions. You had about a 0:06:32.960 --> 0:06:35.800 third of the Russell two thousand that had no earnings, 0:06:35.839 --> 0:06:38.680 you had record debt levels UM. And now this this 0:06:38.760 --> 0:06:41.640 earning season, as you mentioned, you're seeing much much bigger 0:06:42.160 --> 0:06:45.520 your re earnings collapses for smaller companies and and they're 0:06:45.560 --> 0:06:48.560 still seeing weaker revision trends even though we're starting to 0:06:48.560 --> 0:06:51.359 see a bottoming out there. So so we're still cautious 0:06:51.400 --> 0:06:53.680 for smaller companies. But but as you if you move 0:06:53.680 --> 0:06:57.200 into a more sustainable recovery UM, you know, while it 0:06:57.240 --> 0:06:59.800 may take a bit longer than than usual given where 0:06:59.800 --> 0:07:02.240 they were. That that typically tends to be a more 0:07:02.240 --> 0:07:05.480 favorable backdrop for smaller caps. But but for now, we 0:07:05.520 --> 0:07:08.040 remain more relatively cautious that Joe, just walk me through 0:07:08.040 --> 0:07:10.360 the earnings profile relative to the price at the story 0:07:10.440 --> 0:07:14.840 large caps versus small caps now sure, so, I mean 0:07:14.920 --> 0:07:17.880 right now, on a valuation basis, all three size segments 0:07:17.880 --> 0:07:21.200 are treading it at pretty extended levels versus history, So 0:07:21.600 --> 0:07:24.960 so relative to earnings, the market certainly doesn't look look 0:07:25.040 --> 0:07:27.720 cheap no matter what size segment you're looking at um. 0:07:27.880 --> 0:07:30.600 But but for from a relative basis, if you're a 0:07:30.640 --> 0:07:33.320 long term investor, that's sort of the long term goal 0:07:33.360 --> 0:07:36.520 case for small caps is relative to large their trading 0:07:36.520 --> 0:07:40.000 it at multidecade lows. Evaluation doesn't really tend to be 0:07:40.160 --> 0:07:43.000 very predictive. If you have a short time horizon, you know, 0:07:43.040 --> 0:07:45.560 what the pe multiple of the market is today doesn't 0:07:45.600 --> 0:07:48.200 really necessarily tell you much about what returns are going 0:07:48.240 --> 0:07:49.920 to get over the next year. But if you have, 0:07:50.400 --> 0:07:53.120 you know, a ten year long term horizon, then that 0:07:53.240 --> 0:07:55.640 does tend to be more predictive. So so for a 0:07:55.680 --> 0:07:57.960 long term investor, it could be a good entry point 0:07:57.960 --> 0:08:00.520 for small caps. But but for the near near term. 0:08:00.520 --> 0:08:02.280 We still remain conscious, you know, when you're thinking about 0:08:02.280 --> 0:08:04.240 these numbers and considering the price of the story, just 0:08:04.320 --> 0:08:07.680 how much is it distorted by the big four, these 0:08:07.720 --> 0:08:12.000 big tech names that will be reporting to Capitol Hill today. Yeah, 0:08:12.000 --> 0:08:14.720 for the SMP five overall, we've definitely seen a lot 0:08:14.760 --> 0:08:18.280 of the returns this year driven by by mega caps 0:08:18.280 --> 0:08:23.000 and fame stocks mid all of the unprecedented liquidity that 0:08:23.080 --> 0:08:26.440 we've seen. We're equal weight the tech sector right now. 0:08:26.560 --> 0:08:29.680 We we have seen pretty strong earnings trends. It's been 0:08:29.720 --> 0:08:32.000 one of the sectors that this earning season so far 0:08:32.559 --> 0:08:35.600 has continued to surprise to the upside, along with healthcare 0:08:36.080 --> 0:08:38.040 UM it has some of the cleanest balance sheets and 0:08:38.080 --> 0:08:40.719 the SMP so fundamentally the sector still looks strong. But 0:08:41.080 --> 0:08:43.640 you know, you have seen valuations get more and more extended. 0:08:43.679 --> 0:08:46.000 And one of the reasons that we're equal weight tech 0:08:46.080 --> 0:08:49.760 within the SMP five is potential for for higher regulation, 0:08:50.559 --> 0:08:53.880 whether some of these companies wind up self regulating or 0:08:53.880 --> 0:08:57.000 whether it's forced upon them. I think that's something that 0:08:57.360 --> 0:09:00.240 you know as we move into election, and regardless, it's 0:09:00.240 --> 0:09:02.600 something that both sides, the i'le have have talked about 0:09:02.679 --> 0:09:06.440 so obviously we saw that happened with financials and regulation 0:09:06.559 --> 0:09:09.680 and lower multiples. So that's one one potential concern around 0:09:09.720 --> 0:09:12.840 tech talks. Jill, high regulation is one issue, but that 0:09:12.920 --> 0:09:15.280 can't erase the fact that we've seen an acceleration in 0:09:15.320 --> 0:09:18.760 the trend toward tech, toward working from home, towards the cloud. 0:09:19.080 --> 0:09:21.760 And I'm wondering how much this affects the small caps 0:09:21.760 --> 0:09:23.760 and the fat and the fact that perhaps some of 0:09:23.760 --> 0:09:26.480 these companies are more leveraged to the old economy, the 0:09:26.600 --> 0:09:29.240 one that didn't depend on tech as much, and perhaps 0:09:29.240 --> 0:09:30.959 that's one of the reasons why those shares are down 0:09:30.960 --> 0:09:34.360 eleven percent versus almost seventeen percent gain on the NASDAC. 0:09:34.440 --> 0:09:37.320 How much is this a structural challenge for small cap 0:09:37.360 --> 0:09:40.679 stalks going forward? Right? I think that's exactly right, that 0:09:40.679 --> 0:09:42.439 that's one of the issues. When we've looked at the 0:09:42.840 --> 0:09:45.959 earnings exposure of small caps, they actually have about double 0:09:46.120 --> 0:09:48.640 the earnings exposure to some of what we would consider 0:09:48.720 --> 0:09:52.720 more secularly challenged industries, like some of those old econmosh 0:09:53.200 --> 0:09:57.960 old economy industries you mentioned, like rates um, you know, machinery, 0:09:58.160 --> 0:10:02.760 parts of old brick and mortar, retail relative to large caps. 0:10:02.800 --> 0:10:05.600 So and the areas of small caps that that are 0:10:05.679 --> 0:10:08.400 more tech exposed, you know, small caps software. Some of 0:10:08.440 --> 0:10:11.320 these areas are where you have seen those those valuation 0:10:11.400 --> 0:10:15.000 multiples go more stratospheric. So you know, overall with within 0:10:15.080 --> 0:10:18.040 small caps, investing in in growth stocks does tend to 0:10:18.040 --> 0:10:22.080 be a more consistent longer term strategy than for large 0:10:22.120 --> 0:10:25.640 But but yes, more more exposure told maybe micro caps 0:10:25.679 --> 0:10:28.960 small caps who's keeping count? And the old days when 0:10:29.000 --> 0:10:32.480 revenue was this damage and particularly unit growth was this damage, 0:10:32.840 --> 0:10:36.160 you did a roll up, everybody merged, etcetera. Is the 0:10:36.320 --> 0:10:40.760 apparatus out there right now the catalyst the incentives to 0:10:40.880 --> 0:10:44.079 get one big M and A of the small camp space. 0:10:45.640 --> 0:10:47.640 I mean, I think certainly you know M and A 0:10:48.080 --> 0:10:51.080 it tends to be cyclical. So you know, while certainly 0:10:51.120 --> 0:10:53.840 you're you're you can still see some some occurred during 0:10:53.960 --> 0:10:57.439 during downturns, and that tends to pick up cyclically. Um. 0:10:57.480 --> 0:10:59.840 You know that when we when you look for companies 0:10:59.880 --> 0:11:02.360 that could be acquisition targets, that that tends to be 0:11:02.400 --> 0:11:05.640 one eventual strategy and small caps um. But but I 0:11:05.640 --> 0:11:08.480 think overall, right now we're seeing a broader picture of 0:11:08.880 --> 0:11:12.040 you know, uncertainty, over cast, appointment from corporates. That's the 0:11:12.040 --> 0:11:14.960 theme we're seeing this earning season where even though you know, 0:11:15.040 --> 0:11:18.520 a lot of companies have have stopped, uh, you know, 0:11:18.679 --> 0:11:21.480 a lot of the buyback and dividend suspensions may may 0:11:21.520 --> 0:11:25.000 largely be behind us to the overall market. But I 0:11:25.960 --> 0:11:29.160 but you'll, I'm I'm baffled by this in the small 0:11:29.280 --> 0:11:33.160 cap space. If I'm at four times, ebata seven times, 0:11:33.320 --> 0:11:36.720 but maybe even seven eight times. But uh, somebody at 0:11:36.760 --> 0:11:39.240 Bank of America, one of your competitors, gets on the 0:11:39.280 --> 0:11:43.400 phone and says, you can't grow yourself out of this merge. 0:11:44.120 --> 0:11:48.600 Is that mechanism broken? I don't think it's broken. I think, 0:11:49.080 --> 0:11:51.080 as you say, for for a lot of small caps, 0:11:51.160 --> 0:11:53.880 there there are attractive acquisition targets. And this has been 0:11:53.880 --> 0:11:56.920 a very good market for not only for stock picking, 0:11:56.960 --> 0:12:00.240 but for just very differentiated uh, you know, valuations within 0:12:00.280 --> 0:12:02.600 the market. So I think you know what one of 0:12:02.640 --> 0:12:05.439 the things to to look at is is for small caps, 0:12:05.480 --> 0:12:07.920 you know a lot of companies that that have you know, 0:12:08.240 --> 0:12:11.360 attractive free cash flowd the ability to grow. Um. We 0:12:11.559 --> 0:12:15.040 we've seen companies that are are very over levered within 0:12:15.120 --> 0:12:17.600 small caps overall. So you know, I think kind of 0:12:17.600 --> 0:12:20.520 separating out some of these metrics, and you know, just 0:12:20.559 --> 0:12:23.120 as an investor looking at the small cap sized segment, 0:12:23.160 --> 0:12:25.920 even if it's even if this is a point whereas 0:12:25.960 --> 0:12:29.720 we expect value could continue to start to work, um, 0:12:29.760 --> 0:12:33.240 you know, differentiating within small caps, what's more quality value 0:12:33.400 --> 0:12:36.880 from you know, levered risk within small caps um and 0:12:36.960 --> 0:12:39.520 companies that still do have that potential to grow. Jill, 0:12:39.559 --> 0:12:41.880 since you're having a pretty cautious tone and a lot 0:12:41.920 --> 0:12:43.520 of people come on this program and they say that 0:12:43.520 --> 0:12:45.719 they're actually going more into small caps is a way 0:12:45.760 --> 0:12:48.480 to capture some of the upside on this recovery. What 0:12:48.520 --> 0:12:50.920 do you say against the argument that these companies will 0:12:50.920 --> 0:12:53.320 benefit more from a week or dollar more from a 0:12:53.360 --> 0:12:58.920 bigger resurgence internationally as a result of that. Yeah, I mean, 0:12:58.960 --> 0:13:01.440 I think when we've you know, when small caps overall 0:13:01.480 --> 0:13:05.360 have grown more internationally exposed over time, so the gap 0:13:05.440 --> 0:13:08.000 between small and a large caps for and exposure has 0:13:08.160 --> 0:13:11.480 has narrowed, they are still more domestically exposed. When we've 0:13:11.480 --> 0:13:14.800 looked at the dollar versus relative performance over time, it 0:13:14.840 --> 0:13:18.720 actually hasn't been very predictive. And that you know, you've 0:13:18.760 --> 0:13:21.480 seen some periods of of secular dollar strength for small 0:13:21.520 --> 0:13:24.360 caps of underperforms somewhere they've outperformed. So really, what we 0:13:24.440 --> 0:13:27.880 found is that the overall economic backdrop and what's going 0:13:27.920 --> 0:13:30.600 on UM tends to be more predictive than just the 0:13:30.679 --> 0:13:33.000 level of the dollar itself. Still, what do you say 0:13:33.000 --> 0:13:35.640 to people who have left off the idea of bankruptcy 0:13:35.720 --> 0:13:38.720 or some sort of contagion among smaller companies saying the 0:13:38.760 --> 0:13:42.280 FED has their back fiscal stimulus will also help support them. 0:13:42.280 --> 0:13:45.000 Do you think that this optimistic view is perhaps overplayed 0:13:45.040 --> 0:13:48.520 at this point? Well, I think, you know, certainly where 0:13:48.600 --> 0:13:51.520 we expect to remain in a lower for longer rates backdrop, 0:13:51.600 --> 0:13:54.280 we expect the FED to remain a comminative, but you know, 0:13:54.559 --> 0:13:59.040 in terms of the unprecedented fiscal and monetary stimulus we've seen, 0:13:59.400 --> 0:14:01.720 you know, one of the reasons that we're we're cautious 0:14:01.720 --> 0:14:04.960 on the market and the spa hundred overall UM in 0:14:05.080 --> 0:14:08.319 terms of not really expecting more more upside through year 0:14:08.440 --> 0:14:11.160 end is that we expect there could be payback risk 0:14:11.240 --> 0:14:13.240 from all the stimulus we've seen, and that a lot 0:14:13.280 --> 0:14:16.960 of the biggest stimulus has largely been behind us and 0:14:17.040 --> 0:14:20.040 certainly there's potential for more to to help the economy, 0:14:20.120 --> 0:14:23.680 but um, you know, we we've seen diminishing returns from 0:14:23.720 --> 0:14:26.440 stimulus in terms of the boosts we've seen to lower 0:14:26.520 --> 0:14:29.760 quality stocks. As we've seen each consecutive instance, those get 0:14:29.840 --> 0:14:32.400 less and less of a boost. So um, I think 0:14:32.480 --> 0:14:35.080 it will remain in accommodative backdrop. But but a lot 0:14:35.120 --> 0:14:38.160 of the biggest boost we've seen has been in the past. 0:14:38.280 --> 0:14:41.080 We're seeing fighting collective will as well Joe Gright to 0:14:41.120 --> 0:14:44.960 catch out with the Joe carry hole there of Bank America, 0:14:46.480 --> 0:14:49.160 some k let's bringing prey, shall we see the Securities 0:14:49.160 --> 0:14:52.160 Global head of Right Strategy joins us right now, Preya, 0:14:52.520 --> 0:14:54.360 I think you agree with me that this is more 0:14:54.400 --> 0:14:56.800 important than people are letting gone later today. What are 0:14:56.840 --> 0:14:58.960 you looking for in the news conference with Chad jack 0:14:59.000 --> 0:15:01.680 pal right, It's all going to be about the news 0:15:01.680 --> 0:15:04.360 conference because I don't expect any changes in the statement. 0:15:04.440 --> 0:15:06.640 We don't get the dot plot, we don't get projections, 0:15:06.920 --> 0:15:09.240 So it's all about how does he set the stage 0:15:09.320 --> 0:15:12.920 for forward guidance and how does he frame the que 0:15:13.560 --> 0:15:16.200 You know, is QUEI all about market functioning? Because if 0:15:16.240 --> 0:15:18.320 that's the case, and they should continue to buy across 0:15:18.360 --> 0:15:21.800 the curve, but market functioning has largely returned to normal. 0:15:22.040 --> 0:15:24.320 So are we going to see a reduction in quee. 0:15:24.800 --> 0:15:27.200 I've actually been you know, reading between the lines. A 0:15:27.240 --> 0:15:29.800 lot of the FED officials have been talking about more accommodation. 0:15:30.040 --> 0:15:32.640 But one way they can provide more accommodation is to 0:15:32.760 --> 0:15:36.120 change the narrative of que itself from being something about 0:15:36.120 --> 0:15:38.960 market functioning, which it did a great job, but it's 0:15:39.200 --> 0:15:41.760 it's sort of done. I think, to now provide accommodation 0:15:41.800 --> 0:15:43.960 to keep long term rates low. I think if we 0:15:44.080 --> 0:15:46.720 get that shift in narrative, the markets, uh, you know, 0:15:46.800 --> 0:15:48.840 going to understand that the FED is going to move 0:15:49.080 --> 0:15:51.520 further out the curve. That's going to help real rates 0:15:51.520 --> 0:15:54.000 decline somewhere. I think we've started to price this in. 0:15:54.160 --> 0:15:58.520 If you look across assets, the dollar, gold, real rates, 0:15:58.560 --> 0:16:01.600 break evens all telling you that the markets setting up 0:16:01.640 --> 0:16:04.760 for sort of hate saying normal but effectively normal queue, 0:16:05.240 --> 0:16:08.320 which is that the the intent of QUEUEI is to 0:16:08.440 --> 0:16:10.640 keep long term rate slow. I think we really need 0:16:10.680 --> 0:16:13.120 to hear that from chap Out because we've been setting 0:16:13.200 --> 0:16:15.000 up for that for the last couple of weeks. Pray 0:16:15.080 --> 0:16:16.880 when you hear Governor brand and say things like we 0:16:16.880 --> 0:16:20.320 need to shift away from stabilization to accommodation. Do you 0:16:20.360 --> 0:16:24.400 hear yield curve control? I think she has been a 0:16:24.400 --> 0:16:27.200 proponent of yield curve control, and we were thinking that 0:16:27.200 --> 0:16:30.840 that's likely to happen this year, but from recent FED communication, 0:16:30.880 --> 0:16:34.200 not everybody is on board. It's a completely new policy tool. 0:16:34.640 --> 0:16:36.720 How do you get out of veek of control? So 0:16:36.760 --> 0:16:38.560 I still think it's going to be in the policy 0:16:38.600 --> 0:16:41.560 tool kit. But something they can do, you know, from 0:16:41.560 --> 0:16:45.320 the existing tools is certainly link forward guidance to inflation, 0:16:45.680 --> 0:16:49.520 effectively suggesting a much more dubbish reaction function. If they 0:16:49.560 --> 0:16:52.360 have this reaction function in twenty they wouldn't have hyped 0:16:52.480 --> 0:16:55.320 because core PC was significantly below too. So I think 0:16:55.320 --> 0:16:58.280 they can do that with existing outcome based forward guidance. 0:16:58.560 --> 0:17:01.560 They can also just shift that you need so effectively 0:17:01.600 --> 0:17:05.000 provide accommodation, you know, giving them time until they actually 0:17:05.000 --> 0:17:07.399 analyze eeek of control. I do think they may have 0:17:07.480 --> 0:17:09.480 to do that next year. Have the idea that you 0:17:09.600 --> 0:17:11.760 talked about this is huge, the idea that the FED 0:17:11.800 --> 0:17:13.960 could come out and say we are going to actively 0:17:14.000 --> 0:17:17.200 try to suppress longer term borrowing costs for the United States, 0:17:17.200 --> 0:17:19.960 basically monetizing the United States dead. That would have a 0:17:20.000 --> 0:17:23.359 torpedo effect on the dollar, wouldn't it. I think that 0:17:23.480 --> 0:17:25.720 the part of the weakness and the dollar in the 0:17:25.800 --> 0:17:27.840 last couple of weeks, I think is the market sort 0:17:27.880 --> 0:17:30.280 of listening to the Fed and saying that's probably the 0:17:30.359 --> 0:17:33.359 next step. So I but absolutely, I think if they're 0:17:33.440 --> 0:17:35.680 very clear that they're going to keep long term rates low, 0:17:36.119 --> 0:17:38.879 that should weaken the dollar. Now a lot with the dollar, 0:17:39.160 --> 0:17:42.720 A lot does depend on, you know, what's happened happening globally. 0:17:42.760 --> 0:17:45.600 If global growth is going to research, then that can 0:17:45.640 --> 0:17:48.720 certainly take the dollar much weaker. I'm a little more pessimistic, 0:17:48.760 --> 0:17:51.119 I think, you know, I'm not sure that global growth 0:17:51.119 --> 0:17:53.800 necessarily picks up, so I think that ultimately will put 0:17:53.800 --> 0:17:55.840 a floor on the dollar. Plus we have an election 0:17:55.920 --> 0:17:57.840 coming up, so there's a lot of other things going 0:17:57.880 --> 0:18:00.560 on with the dollar. To prey it's away from your remit, 0:18:00.640 --> 0:18:03.440 but tell me about the labor economy. I mean, I'm sorry, 0:18:03.480 --> 0:18:06.720 it's part of their mandate. It's not good. How do 0:18:06.800 --> 0:18:10.440 you take the prism of the labor economy and folded 0:18:10.440 --> 0:18:14.639 over in the lower for longer. So I think you 0:18:14.680 --> 0:18:17.119 know clearly it's it's part of their mandate. When we 0:18:17.119 --> 0:18:19.159 look at the labor market, I think we've seen the 0:18:19.200 --> 0:18:22.639 improvement from reopening, also from stimulus, which is why this 0:18:22.680 --> 0:18:25.919 whole stimulus discussion is important. Our fear is that the 0:18:25.960 --> 0:18:28.240 labor economy is going to start to stall as we 0:18:28.359 --> 0:18:31.800 realize that the were reopening to a new normal. There 0:18:31.800 --> 0:18:34.840 will be parts of the labor economy that cannot get 0:18:34.840 --> 0:18:38.960 back to normal because it's the social distancing, et cetera. Okay, 0:18:38.960 --> 0:18:41.280 but three, this is important. I'm gonna make some news here. 0:18:41.280 --> 0:18:43.679 Are you in the glide path of Steve Major at 0:18:43.800 --> 0:18:46.359 HSBC or what we see out of some of the 0:18:46.400 --> 0:18:49.080 people at JP Morgan of a lower ten ure yield 0:18:49.240 --> 0:18:51.080 and even a ten ure yield that could threaten the 0:18:51.160 --> 0:18:55.160 zero bound. Yes, I think for the zero bound it's 0:18:55.160 --> 0:18:57.000 a little bit hard because the fact can just let 0:18:57.080 --> 0:18:59.360 up on the amount that they're buying. But we actually 0:18:59.359 --> 0:19:01.440 do see low a ten ye years in the near term. 0:19:01.680 --> 0:19:04.399 I think August seasonals are typically positive. We're seeing the 0:19:04.440 --> 0:19:07.320 recovery stall and you have a devilish fed that's going 0:19:07.359 --> 0:19:09.919 to start buying out the curve. I think that's going 0:19:09.960 --> 0:19:13.119 to actually uh tense, could absolutely touch bottom in the 0:19:13.200 --> 0:19:15.679 very near term. Apprey, This is so so difficult for 0:19:15.680 --> 0:19:18.160 a right strategist right now, for anyone in this bomb market. 0:19:18.200 --> 0:19:20.479 We touched on this in the last hour. How do 0:19:20.520 --> 0:19:23.119 you have some kind of call on the yield curve 0:19:23.480 --> 0:19:25.240 when you can have a fat step in with yield 0:19:25.280 --> 0:19:28.080 curve control? Even if you think inflation expectations going to 0:19:28.160 --> 0:19:31.000 pick up because they'll tolerate higher inflation, haven't You just 0:19:31.000 --> 0:19:33.399 got to follow the FED just the idea that whatever 0:19:33.400 --> 0:19:34.879 the fat does is whether the yield curve is going 0:19:34.920 --> 0:19:38.800 to go right? Well, I think there's a reaction function component. 0:19:38.880 --> 0:19:40.879 Then there's the actual economic data, and I think what 0:19:40.920 --> 0:19:43.920 we're all struggling with is we can't extrapolate from any 0:19:43.960 --> 0:19:46.159 of the economic data we've been seen, right because the 0:19:46.240 --> 0:19:49.560 weakness was all about the lockdown. Now the improvement seems 0:19:49.600 --> 0:19:51.800 to be all about reopening. So we're looking at these 0:19:51.840 --> 0:19:55.480 high frequency measures to try and estimate is the recovery stalling. 0:19:55.480 --> 0:19:58.680 We're all becoming epidemiologists. We're looking at the virus rate, 0:19:59.040 --> 0:20:02.480 death rate and for depressing topics. But you know, once 0:20:02.520 --> 0:20:05.320 you have that If the FED clarifies the reaction function, 0:20:05.600 --> 0:20:07.840 the market can then start to look at the data 0:20:08.280 --> 0:20:10.480 and then start to price in what happens to rates. 0:20:10.760 --> 0:20:13.119 But you know, we're also looking at supply demand. If 0:20:13.119 --> 0:20:14.920 we're going to get another one and a half trillion 0:20:14.960 --> 0:20:17.760 more of supply, then I think this thread buying becomes 0:20:17.800 --> 0:20:20.960 extremely critical to pick what you know, how well, where 0:20:20.960 --> 0:20:23.159 exactly is the tenure? What does that heal curve look like? 0:20:23.520 --> 0:20:26.920 You're right, more variables to look at now where we're 0:20:26.920 --> 0:20:28.639 all coming up at the biologists because this is a 0:20:28.680 --> 0:20:31.560 health problem, it's not a financial system problem. And I 0:20:31.640 --> 0:20:33.959 have to wonder if the FED comes out and provides 0:20:33.960 --> 0:20:37.119 even more accommodation, what does that do at this point 0:20:37.119 --> 0:20:40.720 with your record low borrowing costs across the board? I 0:20:40.760 --> 0:20:43.359 think it buys time. Does it prevent something like a 0:20:43.359 --> 0:20:45.800 taper tantrum? Let's say we get a vaccine soon, and 0:20:45.840 --> 0:20:48.399 I hope that we do. We get a vaccine, but 0:20:48.440 --> 0:20:51.000 it's going to take a while for that to you know, 0:20:51.040 --> 0:20:55.160 be effective, for for consumer confidence, business confidence to come back. 0:20:55.400 --> 0:20:58.280