0:02

Vis is Master's in Business

0:04

with Barry rid Holts on Bloomberg

0:06

Radio. Hey, this week on the podcast,

0:08

I have an old friend as a guest. Jim

0:11

Bianco is one of the few people who

0:13

understood what the Federal Reserve was doing

0:16

post financial crisis in o eight

0:18

oh nine and made a very pressing

0:20

call as to the impact of KWI and

0:22

ZURP on equities. UH.

0:24

He is one of those rare bond analysts

0:27

that covers the stock market, and because

0:29

of that, he does so from a unique

0:31

perspective. I always find

0:33

his analysis and commentary

0:35

elucidating. He is one of the rare

0:37

people that makes you think about

0:39

things that you have not thought about before.

0:42

With no further ado. My conversation

0:45

with Jim Bianco VI

0:49

is Masters in Business with Barry

0:51

rid Holts on Bloomberg Radio. My

0:54

special guest this week is Jim Bianco.

0:56

He is president and macro strategist

0:59

at Unco Research, where he covers

1:02

such broad areas as monetary

1:04

policy, the intersection of markets

1:06

and politics, fund flows, and

1:08

market positioning. Jim was a

1:11

market strategist in both the equity and

1:13

the fixed income research group

1:15

at UBS Securities. UH. He was

1:18

equity technical analyst at First Boston

1:20

and Scherson Lehman Brothers. He is

1:22

both a CMT and a member of the

1:24

Market Technicians Association. James

1:27

Bianco, Welcome back to Masters

1:29

in Business on Bloomberg Radio. Thanks

1:32

for having me, very really appreciate it. So

1:34

I've been looking forward to having a conversation

1:37

with you about the present circumstances

1:40

for a while. For people who may not be

1:43

familiar with you, um, not

1:45

only do you have a background as a

1:47

technician, but you were also a

1:50

fixed income analyst for a long time.

1:53

And I find that bond

1:55

analysts look at equities very

1:57

different than stock guys do.

2:00

Is that is that a fair assessment? It's

2:02

more than a fair assessment. I think we're wired a little

2:04

bit different than stock guys. Vind

2:07

guys are always worried about the return of

2:09

their money, where stock guys are the return

2:11

on their money. So you start

2:14

off by thinking about things very differently

2:16

than you would from an equity investors standpoint.

2:19

And and let me just give you some props

2:22

about your analysis

2:24

post financial crisis. I

2:27

think you were the first person I recall

2:29

reading who were describing

2:32

quantitative easements and zero

2:34

interest rate policy as there

2:37

is no option. It's going to send stocks

2:39

appreciably higher. For

2:41

those of you who are pushing back on the FED

2:43

action, just lay

2:46

back and put your money to work and

2:48

let the FED make it go higher. Is

2:50

that a Is that a fair assessment? Yeah?

2:52

Early on, I did definitely think that, Like

2:54

you know, in the two thousand and ten to two thousand

2:57

and fifteen era, I was

2:59

definitely on that ball. Um.

3:02

To be honest, I've been a little bit surprised

3:05

at twelve years later it

3:07

seems to work as well as it did.

3:10

Uh, you know early on that the

3:12

market hasn't adjusted

3:14

at all to the idea that, um,

3:17

there's there's this fet put and it

3:19

will always work as veriently

3:21

as it did the first time. Every single

3:23

time has tried that, there's been no

3:26

um, you know, to use the word of the day,

3:28

there's been no immunity to it in the market.

3:31

That the FED is not as

3:33

effective as it used to be. Now they have to do larger

3:35

doses, but it does seem to still

3:37

work, and that's been very surprising. Hey,

3:40

every junkie requires a bigger and

3:42

bigger dose if they want the same high. Isn't

3:44

that a fair analogy? Oh? Yeah.

3:46

In fact, that was the uh. That

3:49

was the analogy that I was using early on,

3:51

was that you know, the markets are a junkie and the

3:53

FED is a pusher, and that seems

3:55

to have worked in it um as

3:58

it works like I said to this day. So

4:01

here's where the metaphor maybe goes off

4:03

the rails a little bit. Every

4:06

time I see a consensus of people

4:09

discussing the FED

4:11

put and why markets can never go down,

4:13

it usually means we're getting pretty close

4:16

to markets going way down. Think

4:18

back to the end of all

4:20

we heard is Hey, the Greenspan

4:22

put means that that you could be more aggressive

4:25

and take more risks, and that was fantastic

4:27

right up till that drop in

4:29

the tech sector. Yeah,

4:32

that's right, and I do think that that we

4:35

might be getting very close to that

4:37

period one more time that

4:40

the FED the FED put might

4:42

have run into some trouble here. Ultimately,

4:46

at the end of the day, I think there is one other

4:48

thing that people need to remember about

4:50

markets that there is a

4:53

fair value. There is um

4:57

uh, you know, a level that you

4:59

would look at to say that this is where

5:01

the market should trade if

5:04

the FED is successful in

5:06

keeping the market relatively near

5:08

those levels. I think that then

5:10

the ft point is successful. And that's largely

5:12

been the case over the last ten

5:14

or twelve years, that as the market

5:17

has gone up and as the FED is pushed

5:19

um, they were fairly close to what you

5:21

would consider fair value. But today now

5:24

the real question is what is

5:26

the true value of the market. Where should a

5:28

trade if the FED wasn't

5:30

in the market right now? And the

5:32

big debate is how much

5:35

of a long term effect is

5:37

this shelter in place pandemic

5:39

gonna have on the economy.

5:41

Do you believe that this

5:43

is a supply issue? What

5:46

I mean by that is all we really need

5:48

to do is have the governors just allow all

5:50

these businesses to unlock their doors and open

5:52

them up, and we will return to something

5:56

very very close to normal. That's all we need.

5:58

Or do you believe that there will be some longer lasting

6:01

demand issue. In other words, these

6:03

businesses unlocked their doors and open up. But

6:05

now we need to get people to be convinced

6:08

to resume two thousand nineteen

6:11

again that they're going to

6:13

voluntarily stay away, voluntarily

6:16

change their habits, voluntarily

6:18

take a more conservative approach

6:21

if you believe the latter that they are going to voluntarily

6:23

take a more conservative approach, and I'm in that camp.

6:26

Uh. Then I think the markets might be a little bit ahead of

6:28

themselves if you believe the former. No,

6:31

they just just let these businesses open up

6:33

and everybody will return. Memories

6:35

are short. Uh, then

6:38

I think that these markets are probably appropriately

6:40

valued. So to me, that's kind of the crux

6:42

of the question is how

6:45

much of this is being held back by

6:47

just the rules, or how much of it

6:49

is being held back by people's

6:51

attitudes that have now changed. Quite

6:54

interesting. I have so many different places

6:57

to go with you, the technical

6:59

sides, some of the other more interesting aspects,

7:02

but I have to stay with this supply

7:05

versus demand from a framework

7:07

perspective. Last week was

7:10

the beginning of May. A number of states

7:13

have begun to reopen,

7:15

either partially or or more aggressively,

7:18

and at the same time, on Sunday

7:21

we saw the highest level of new infections

7:23

that we've seen, um

7:25

since this whole thing started. You

7:28

seem to be raising the possibility

7:30

that we're gonna look back a

7:32

month or two from now and suddenly when

7:35

there's another surge of infections,

7:38

it's gonna frighten consumers into

7:41

staying home. Is that sort

7:43

of the scenario you're thinking about.

7:46

Yeah, I would even say it's even one step

7:48

before that. It's not that

7:50

you know, a wave of

7:52

infections is going to is going

7:54

to frighten consumers. It's the

7:57

fear of a wave that might

7:59

be enough to get them to change their behavior.

8:01

Let me let me put this in the context

8:04

for you. Um, the worst

8:06

recession in the post World War two

8:08

period was the last one two thousand

8:10

seven to two thousand nine. At

8:13

its worst point, real GDP,

8:16

real economic activity

8:18

was four percent down from its

8:20

high. Or we retained nine

8:24

of the activity that we had at the high at

8:27

the low. But yet a four percent

8:30

drop off was enough to produce

8:32

a fifty retracement in the stock market

8:34

at ten percent unemployment rate. Um,

8:37

you know the social unrest that led to Brexit

8:39

and Trump and the political polarization

8:41

that we had, and a lot of and bailout

8:43

schoolore effect. I think

8:45

you might wrote a book about the bail I

8:48

recall I recall a few jotting

8:50

down a few notes about the bailout spect and

8:52

all all of that was from

8:55

a four percent correction in real

8:58

GDP. By the way, the worst app or

9:00

was the Great Depression when we were corrected

9:02

seventy so another

9:05

at its worst point in ninety three,

9:07

we still had seventy five

9:09

percent of the economic activity

9:11

that we had in nine. So

9:14

the reason I bring that up is when people say,

9:16

okay, we're going back. The doors

9:18

are open. Hey, look at this. Three

9:20

people walked into a store. It's all okay,

9:23

Look, we got to get back of

9:27

where we were in two thousand nineteen.

9:30

Otherwise, if we make it back to

9:33

and that's the cover of this week's Economist

9:36

to Economy, and they've

9:39

picked up on the same thing I was talking about.

9:41

A n recovery is

9:43

a disaster. It's it's something

9:45

twice as bad. It's what two thousand seven

9:48

was, and it's something that is approaching

9:50

a mini depression. Now I'm not trying to be a

9:52

Cassandra here, but what I'm arguing

9:55

is we need to get almost

9:57

all the way back, if not all

10:00

the way back. Remember the way

10:02

we used to do analysis before

10:04

the virus, like three months ago. We

10:07

used to just talk about the change of the change

10:09

of the change, and if something was

10:11

it was was on the third

10:13

derivative moving a little bit that

10:15

that was somehow significant for markets.

10:18

But now we're talking about just basically

10:20

the change, not the first derivative, not the

10:22

third derivative. So this

10:25

is the challenge that we have in

10:27

the economy right now. It's not

10:29

a question of unlocked the doors

10:31

and activity will return. That will

10:33

happen, and the warmer weather of summer

10:36

will help activity return. Let's leave the

10:38

virus soft for a second. It's do

10:40

we get back to where

10:44

we were last year. If we do,

10:47

markets are okay if we make it back. To think

10:50

about it in these terms, if

10:53

you went through and added up every

10:55

governments, state and local government

10:57

said you just got a ten percent loss of revenue,

11:00

every business loss

11:02

of revenue, that will be devastating

11:05

for them. So this is the challenge

11:07

that we have. How far back are we going to go?

11:10

Huh? So before we wrap up this segment,

11:12

I have to ask a question not about

11:15

how far we will get

11:17

to in Q three a Q four. But

11:20

let's stay with the second quarter.

11:23

You know we got data on Q one. Really

11:25

it was only one month. It was March

11:27

that had such an impact. But my

11:30

back of the envelope calculations, you

11:33

know, you have thirty million people unemployed

11:35

out of a hundred and fifty five million in

11:37

the in the entire pool.

11:40

That's over. And then

11:42

you look at GDP for one

11:45

month. If that continues for the full quarter,

11:47

are we running it six

11:50

capacity? And we down thirty g

11:53

d P for Q two, which

11:55

we are now you know barely

11:58

uh a month and change too.

12:01

Yeah, it looks like that that's going to be the case.

12:03

And these will be the worst economic

12:06

numbers ever recorded for a quarter,

12:08

for a quarter, worse than the worst

12:10

point the Great Depression, worse than anything we

12:12

saw during the Civil War. Um.

12:15

Now, the the good news is

12:17

that that should not

12:19

be a sustained level that

12:22

that was all from the shelter in place.

12:24

Obviously, when we reopened, there is going

12:26

to be some uptick, a big uptick in activity.

12:29

Uh as we return to

12:32

something that approximates

12:34

normal, which is what we're talking about. What is that going to

12:36

be on the other side. But yes, we

12:38

are going to see some of the worst numbers

12:40

that we've ever seen. And I would also

12:43

add to you the thing that I've

12:45

been watching that I think is gonna be really

12:47

important is going to be that

12:50

unemployment number. And and if I was

12:52

to speak in statistical

12:54

terms, um, we're all now

12:56

familiar with initial claims. That

12:58

is, when somebody shows up at

13:01

the unemployment office to ask for unemployment

13:03

insurance. There's another number that they put

13:05

out called continuing claims

13:07

that means that you're still on unemployment

13:10

insurance week two, week three, week four. That

13:13

number would lacks a couple of weeks, but

13:15

it is now approaching twenty million.

13:18

It should probably approach to

13:20

thirty million in the coming weeks.

13:22

They'll be It'll come up a little bit short

13:25

of the total of initial claims because

13:27

a bunch of these companies are getting their paycheck

13:30

Protection Plan loans and they're rehiring

13:32

their workers. But that's only a few

13:34

million out of thirty million that that's happening

13:36

with. I think the real question then

13:39

becomes, Okay, these twenty

13:41

odd million people, how

13:43

fast they get off of unemployment? Because

13:45

if we're going to leave them on unemployment for

13:48

months or quarters on end, I

13:50

think that that's going to be an enormous stress

13:52

point for our economy. Uh And

13:54

so the faster we can get them off, the

13:57

faster we can return to normal. Now

14:00

now that I've said that, we haven't even we're

14:02

not even done adding them to the to the to

14:04

the unemployment roles right now, let

14:07

alone talking about getting them off. So

14:09

if there's one focus on that

14:11

worst numbers ever, I think it's

14:14

going to be that unemployment measure. My

14:16

special guest this week is Jim Bianco. He

14:18

is president and macro strategist

14:21

at Bianco Research, where he covers

14:23

all manners of markets and strategies.

14:26

Jim, you and I have been fishing

14:28

pals for I don't know about a decade,

14:30

maybe even longer, going up to

14:33

the Shadow Federal Reserve better

14:36

known as Camp Kotak up in Maine. It's

14:39

May, and I'm thinking about

14:41

August, and I'm having a hard

14:43

time imagining getting on

14:45

a plane and flying from

14:48

LaGuardia up to Banguora Main.

14:52

Any chance that we're going to have the

14:54

sort of um opening that

14:57

will allow that sort of behavior.

14:59

What what your plans for for August

15:01

this year? I would very

15:04

much like to go to um

15:06

Bangor and go to Camp Kotak this

15:08

year. Again. It's always been one

15:11

of the highlights of my summer. Uh,

15:13

not the least, which is to watch a bunch

15:15

of economists try and fish and beda

15:18

hook. And that's always worth the

15:20

price of admission right there as well. Um,

15:23

but I'm like you, I don't

15:25

know, uh, if that's

15:28

going to be doable. Um.

15:30

Sure, I mean technically there are planes

15:32

that are flying right now, and technically

15:35

you and I could get on a plane. But I'll

15:38

have to see what my comfort level is to get

15:40

on a plane in August, just like you,

15:42

And then we'll have to see how many people actually

15:45

want to make it up there as well too.

15:48

And this is gonna be a story

15:50

that we just said. I just said is gonna

15:52

be repeated in a lot

15:54

of industries and for a lot of people across

15:57

the economy for the next

15:59

several months. And it really impacts

16:02

more than anybody else, people

16:04

that have large gatherings. You know,

16:07

one of the things I've always been

16:10

saying to people because I'm in Chicago,

16:13

Um, I'll know the day that we've hit

16:15

a recovery

16:17

is when there's people in Wrigley

16:19

Field watching a baseball game. Now, will

16:22

that be this year, will that be next

16:24

year, five years? Never? When

16:27

will that event happen? When that event

16:29

happens, then I'll know we're all the way back. But right

16:32

now, you know, that's an open ended question,

16:34

is to when it's gonna happen. Maybe I usually

16:36

should say if well,

16:38

I assume we're gonna end up with some form

16:40

of treatment eventually and

16:43

some vaccine. The news this week from

16:46

Fiser and their partners

16:48

in Germany is that they're very

16:50

much on a fast track for a possible

16:52

vaccine. If if we have a vaccine

16:55

before the years over, do things

16:57

things go back to normal? Can we rise

17:00

zoom our previously scheduled

17:02

lives or has

17:04

this left a mark that's going to change us permanently.

17:07

Um, let's say we get a vaccine. I'll

17:10

answer the question by by posing

17:12

the metric. Let's say we get a vaccine.

17:15

Let's snap our fingers and say we've we've got

17:17

to max and it happens. Um,

17:20

I go back to the previous segment. We got twenty

17:22

million unemployed people on continuing

17:25

claims? How fast do we get that down

17:27

to three or four million? It was

17:29

one before this started, but let's

17:32

just try and get it from twenty down to three or four.

17:35

You know, if that thing can go down, that

17:37

measure can go down in a few months as

17:40

everybody gets massively hired

17:42

back. Uh, then everything's

17:44

cool and we've gone back to normal. But

17:46

if companies have gone out of

17:49

business, or even with a

17:51

vaccine, people said, yeah,

17:53

we dodged a bullet, but I got to rethink

17:55

the way that I do things. And

17:58

then that number stays elevated for

18:00

a long period of time, then

18:02

we've you know, if you would, the

18:05

behavior has already been changed, the damage

18:07

has already been done, and uh,

18:09

it's just not a vaccine

18:11

that can fix it. I don't know what the

18:13

answer to that is, but I do fear

18:16

that the longer we go the

18:19

more without a vaccine, the longer

18:21

we go with this fear of

18:24

health, the more people are

18:26

going to be willing to change their behavior,

18:28

and that even a vaccine may

18:31

not bring that back all

18:33

the way, and it will be a while before

18:36

we see it come back, Like you

18:38

know, in markets parlance, a whole

18:40

cycle that we'd have to run through before

18:42

we'd have to see it return, you

18:45

know. I think of it in terms of

18:47

almost a science fiction book, where

18:50

there are some people who have had the virus

18:52

and theoretically have the anybodies and

18:55

may or may not be immune, and then

18:57

there are people who live

18:59

with people or themselves, or people

19:01

who are either older or immuno

19:04

compromised or have comorbidity

19:06

ease that put them in a higher risk

19:08

category. Uh. And then there

19:10

are people that you know, let's

19:12

call it twenty to fifty otherwise healthy

19:14

who haven't had it. We may

19:17

end up with different groups of people with

19:19

different risk factors, and

19:21

the way things come back online is going to

19:23

be very dependent upon which

19:25

group you find yourself in, exactly.

19:28

And I think that that's what I mean by that. You

19:30

know that even

19:33

with a vaccine, and

19:35

assuming that one comes up, uh,

19:38

that you might you

19:40

might have already seen the behaviors,

19:42

especially among different groups, um,

19:45

change and change a lot. And that again,

19:47

I'll go back to what I said before. You

19:49

had of the activity

19:52

of the high at the worst point in the

19:54

Great Recession, and that produced all

19:56

that stress. And so it

19:58

would only take a little change at the margin

20:01

to get you, you know, five percent off

20:03

the high, three percent off the

20:05

high, and that's all we're talking about. And that

20:08

produces what we would ultimately know

20:10

as a recession or recessionary

20:12

type conditions. So we'll

20:15

have to see where everybody is

20:17

now. The last thing I mentioned, you know,

20:19

is about surveys, you know, and I'm always

20:22

been very skeptical of surveys too, because

20:24

every time a gallant organization or

20:26

somebody like that does a survey of people, are

20:28

you concerned, eighty percent of the country says

20:30

yes. Are you taking precautions

20:33

of the country says yes. Uh.

20:35

To me, that seems like that's the politically correct

20:37

thing to say. I mean, no one said say

20:40

no, I don't care about this, and I'm running around

20:42

and asking people to breathe on me on the subway,

20:45

um and so. But the question really

20:47

becomes this, when things open

20:50

up, do you still have that attitude? Um?

20:53

And that remains to be seen

20:55

at this point. I think most won't

20:58

have that attitude. They'll go try and go back to

21:00

some level of reality

21:02

or normalness. But enough

21:04

might that it could actually restrain

21:07

economic activity a little more than we think. Yeah,

21:10

the problem with those surveys are it's

21:12

always a function of how they phrase the

21:14

question. Change a word here,

21:17

change an emphasis there, you get a completely

21:19

uh different answer. You

21:21

know. A new term

21:24

just real quick on surveys is the shy

21:26

bias. Um. Even

21:28

the shy bias might be working here, And that is

21:31

how do you answer a question when a human being

21:33

asked you versus clicking on a

21:35

on a radio, button on a on a web page.

21:38

So when a human being ash you, you,

21:40

you know, how how concerned are you about

21:43

the virus? You're not. You're

21:45

more willing to tell a human being a poster,

21:48

yes I'm very concerned, as opposed to

21:50

answering a question and anonymously

21:52

saying not very concerned at all. So there could

21:54

be a shy bias in there too. And

21:57

we did see something very similar to that

21:59

in some of the political polling in when

22:03

supposedly people didn't want to say

22:05

they were a Trump supporter, uh,

22:08

and yet they were. That was

22:10

their plans for voting, and there was a

22:12

reasonable argument to be made that the

22:14

polls might have been undercounting

22:17

um now president Trump strength, I'm

22:20

curious if this is a similar phenomena. It

22:22

is, it is, and we also saw it in Brexit

22:25

too. Was the same thing that um

22:28

Brexit was really where the word shy bias

22:30

came from, because it has that uh, British

22:32

tone to it, is that people

22:34

did not want to tell human polsters that they

22:36

were in favor of Brexit, but in the online

22:39

polls it actually pulled a lot

22:41

better because when you didn't have to tell

22:43

a human being, you were more likely to say,

22:46

yes, I'm in favor of of Brexit

22:48

as well too, so that I fear

22:50

that there's something like that happening again,

22:52

because it's it's

22:54

almost sounds irresponsible

22:57

for me to say I'm not concerned

22:59

about the iris. And so therefore

23:01

when a human ask you, you your natural responses

23:04

yes, but in reality maybe you're

23:06

not. And so we'll have to find out

23:08

where people are once things open, and

23:10

how we how this all shakes out. If

23:13

you remember that video clip that one

23:15

viral of young college

23:17

dude on spring break on

23:20

the beaches in Florida who

23:22

basically saying exactly what you're

23:25

um articulating, Hey, man, I don't

23:27

really care about the virus. I'm young, I'm healthy

23:29

as spring break. I'm here for a party. Man,

23:32

that poor guy get xcorciated.

23:35

That is a perfect example of

23:37

not having the Shaw bias.

23:40

Yeah, exactly, you know, and you could you

23:42

could say, look, that's his opinion,

23:45

and he's welcome to his opinion and it's not illegal.

23:48

Um, you may want to argue a little bit on their

23:50

margins about the morality, and maybe his grandparents

23:52

wouldn't like to hear that or see him

23:54

soon. But boy did we jump

23:57

down his throat, and that that's what I mean

23:59

by that we've really pushed this behavior

24:02

on everybody, that that you need

24:04

to change because this is

24:06

a big deal, and that you

24:08

know, taking this full circle, why

24:11

I fear that even a vaccine,

24:14

while it will get a lot of people

24:17

to relax and try and return

24:19

back to normal, if it has

24:21

changed enough people's attitudes

24:24

that even vaccinated, I

24:26

still think that I want

24:28

to maintain this more conservative

24:31

attitude, go out less, spend

24:33

less money, and the like that

24:36

that could wind up pushing the

24:38

economy enough off of its

24:41

peak that it keeps it very,

24:43

very sluggish. As we move forward

24:45

from here, Let's stick with the

24:47

topic of sentiment, because

24:49

there's a question that keeps coming up, and

24:51

you're really the perfect person to

24:54

address it to. I keep

24:56

reading how many people can

24:59

seem to wrap their heads around a

25:01

market that's rallying so strongly

25:04

in the face of what looks like continual

25:07

bad news. How would you explain

25:09

the market's recovery to folks who are saying,

25:11

I don't get it. The death count is up to seventy

25:14

and higher, it's more than a million infected.

25:16

How on earth can the market? What

25:19

was April the one of the top twenty best

25:21

months for the SMP fire. Ever,

25:24

how is this possible? You

25:26

know, I think what people need to do is remember

25:28

what happened before. There's two

25:30

things. First of all, there's the obvious answer,

25:33

and that markets look forward, and

25:35

the death count and payrolls are backward looking.

25:38

You know, we're we're bracing ourselves

25:40

for in early May to get the April

25:43

payroll report. It's the April report, it's

25:45

last month's report, and we know

25:47

that it's going to show, if

25:49

Wall Streets right, more than twenty million

25:52

people have lost their jobs, far and away

25:54

the worst report ever seen

25:57

in The markets are looking forward, But let's

25:59

also remember what they did

26:01

in March. They went from an

26:04

all time high in late February to

26:06

down in

26:08

a little more than five weeks, far

26:11

and away the biggest all

26:13

time high to down thirty plus percent

26:16

correction. It's the fastest

26:18

ever recorded. That was

26:20

one of the worst collapses by

26:23

that measure ever seen. So

26:26

was the market overdone

26:29

in late March? Man? Probably? Was

26:32

the market maybe overdone um

26:34

now as it recovers or wherever

26:36

it's teak winds up being if it's at this level

26:39

here or slightly higher probably

26:42

as well too. But the market

26:44

always has that irregular

26:47

kind of move where it kind of goes

26:50

too far one way, too far, the other way,

26:52

too far back the other way one more time,

26:55

and you need to look at the larger trend. And

26:58

right now, the bigger question

27:00

is what is the larger trend. You know, it's

27:02

still fift off

27:05

of its all time high that was set three

27:07

months ago. That would suggest

27:09

the larger trend is still still

27:11

lower um at this point,

27:13

and it's percent off of its March low.

27:17

That would suggest that the larger trend might be

27:19

back up. So I still think

27:21

we're very much influx with the markets.

27:24

But um, you know, don't

27:27

get that nuanced with

27:29

the market. I hear a lot of

27:31

people get mad about the

27:33

market as well too. And what I mean by that is

27:36

they'll run these statistics like for

27:38

every death, market cap has increased

27:41

five hundred thousand, or for every

27:43

job you know, the market has increased fifty

27:46

dollars times the number of thirty million

27:49

jobs lost, or or some number like

27:51

that, And that's completely the wrong way to look at

27:53

it. Um it it's

27:55

it doesn't think of it in

27:57

those terms. It's where are we going

28:00

next? Is where it is? And right now

28:02

I'd say the larger trend is it's still very mixed.

28:05

You know, the market is still not telling you

28:08

it's all okay or it's all real bad.

28:10

It's still trying to figure it out. Right now,

28:13

you are the perfect person to have this

28:15

conversation with about

28:17

the policy response from both

28:20

the federal government and the

28:22

Federal Reserve. Let's let's start with

28:24

the FED. How does

28:26

monetary policy look? And what do

28:28

you think of what Jerome

28:30

pal has done so far? Um,

28:35

He's set all kind of records to FED

28:37

has set all kind of records in the most

28:39

extreme policies that we've ever

28:42

seen. UM. You know, it's

28:44

about that they threw the kitchen sink at

28:46

the market. They've thrown all the kitchen sinks

28:49

at the market as well too. And

28:51

it's probably if

28:54

UM I talked about watching financial

28:56

television, UM and

28:58

talking and watching professional

29:00

money managers, it's probably reason number

29:02

one why they think the market is up. Co invest

29:05

with the FED seems to be kind of

29:07

a working uh

29:09

thesis that you hear repeatedly

29:12

from a lot of people that the market is

29:14

going to go higher. But

29:17

if the question really becomes this, is

29:20

he doing the right thing? But

29:22

I think Warrenant Buffett this

29:24

past weekend summed

29:26

it up perfectly. Um

29:29

that the FED actions

29:33

has helped markets, and

29:35

in their view, they look at the

29:39

fixed income markets to corporate bond market is

29:41

opened, it's a lot a lot of companies to get

29:43

financing. It's allowed a lot of

29:45

companies to stay in business, it's

29:47

allowed a lot of people to

29:49

see their losses get reduced,

29:52

and that the FET is looking at that as being

29:54

a positive. And what Buffett said is it

29:57

is now. But the very big risk

29:59

is is that as we move

30:01

forward, that distortion

30:04

in markets that they're creating and

30:07

they think it's a distortion for the good, could

30:10

wind up being a real problem

30:12

down the road. And he said

30:15

I think the word he used was an extreme problem

30:17

down the road. But then he also

30:19

said doing nothing

30:22

and just allowing you know, this

30:26

UH market to sort itself out

30:28

with any support, could have meant

30:30

that that extreme outcome happened now

30:33

as opposed to later on. So

30:35

his suggestion was, which is why

30:38

I'm bringing it up because I'm in that

30:40

same camp, is that while

30:42

the FED has made things better now.

30:45

It's still a very open question

30:47

as if they've made things better for

30:49

good and if there are problems

30:53

a year or two now because of distorted

30:55

markets or malinvestment meaning

30:57

bad investment because the Fed old

31:00

everybody, Hey, it's all okay, go ahead

31:02

and paw your money into the market. And then some investments

31:04

go bad because we realized that

31:06

we were buying them at the wrong price or

31:09

at too high a value. And then you

31:11

would say a year for two from now, Yeah,

31:14

they've really created problems

31:16

for the economy that very

31:18

well may be true. If they had done

31:20

nothing, those problems would

31:22

have been occurring now. So

31:25

I think what he's suggesting is what

31:27

they might be doing is just shifting the

31:29

timelines as opposed

31:31

to repairing the economy

31:34

to the extent that they think they are. I

31:37

would I would phrase it slightly differently. This

31:40

is a hair of the dog that bit you. You

31:42

wake up with a hangover, You do a quick shot, the

31:44

hangar goes away, at least temporarily.

31:47

We're still dealing with the hangover from

31:49

O E O nine and uh

31:51

lo, and behold, hair

31:54

the dog is going to kick the can down the road

31:56

a little bit to mixed metaphors. Is

31:58

that what I'm hearing you say to some degree here,

32:01

Yes, I think so. I think that they they

32:03

have been able to, you know, to use that

32:05

last metaphor kick the can down the road. Right,

32:08

Um uh, since

32:10

we're since this is the metaphor segment, there's

32:13

no atheist in a foxhold, there's no capitalists

32:15

in a crisis, we had to

32:17

do something. If we didn't

32:19

do something, that worst

32:21

decline that we ever saw down thirty four

32:24

percent in five weeks might have

32:26

gotten even further worse in bad

32:28

English there, but in that it would have created

32:31

more and more problems. But by

32:34

kicking the can down the road, it

32:36

gives us some time to figure out what we're gonna

32:38

do. Now. What I'm

32:40

arguing here is that maybe at the end of the day,

32:44

we're still going to have those problems, but

32:46

we're just going to stretch them out over a longer period

32:48

of time, as opposed to

32:50

having those problems right now and

32:52

in In In other words, what I'm arguing is, I

32:55

don't think that the fat can really

32:59

taken economy that's sick

33:01

and make it better. Uh.

33:03

They can't create business, they

33:05

can't create revenue. If people don't

33:08

want to go to the stores. If people

33:10

don't want to buy, they can create

33:12

liquidity to make the markets behave

33:16

more in line with what you hope for

33:19

for a shorter period of time. But

33:21

that's all they can do, and you can hope that in

33:24

that period of time that gives

33:26

us time to find a vaccine, to change

33:28

your behavior, to figure out what we're gonna do

33:30

next, and hopefully mitigate those

33:33

problems. And that's really the big

33:35

question. So I'm not so sure

33:37

what what they've done short term has

33:39

been good because it's made

33:42

what looked like a catastrophe

33:44

at least stop for now. But I'm

33:47

not so sure that they've prevented it

33:49

forever. That remains to be seen. So

33:52

they can't keep the jumbo jet in the air,

33:54

but they could foam the runways, right,

33:58

all right, So you're listening with a

34:00

fun with metaphors on Bloomberg Radio.

34:02

So so let me put one of my

34:05

favorite powers to work I

34:08

hereby appoint you chairman of the Federal

34:10

Reserve. What would you

34:12

do under these circumstances? But

34:16

you mean I can't take the Gratio marks line

34:18

that any organization that would have me I would

34:20

immediately withdraw from that would

34:22

be well if I if I was,

34:25

if I was the head of the Federal Reserve, I think

34:27

I wouldn't be doing the things that are

34:30

vastly different than what they're doing

34:32

now. But I would be

34:34

asking a question, you

34:37

know, kind of behind the scenes. President

34:40

Trump says every

34:42

time he talks about this, we have

34:44

to get the economy back to

34:47

where it was. Okay,

34:49

I would ask, as the Federal Reserve chairman, can

34:51

we go back to two thousand nineteen, even

34:54

with the vaccine? Can we get

34:56

everybody to say, okay, that's over

34:58

with. Let's all let so I'll remember

35:00

what two thousand and nineteen was like and let's

35:02

go right back to that, or

35:06

what I think might be the case. Can

35:08

we help transition from

35:10

a pre virus um

35:12

mentality and economy to a post

35:15

virus mentality and economy and

35:17

that post virus economy

35:20

is going to be something different? And

35:22

what's that? Why? Why is that important? Because

35:26

our job then here is not to make

35:28

everybody try and

35:30

maintain where they were, but

35:33

help them manage to where we're supposed

35:35

to be going, which means I'm going

35:37

to give you some support for a while, then

35:40

not forever, and while I'm

35:42

giving you that support, you need to sit down

35:44

and figure out your business or figure out your finances,

35:47

or figure out your career and say,

35:49

Okay, it's going to be different

35:51

in twenty one. It's going to be different in twenty

35:53

two. How and what do I do

35:56

to get there? As opposed to Oh,

35:59

when are we going to get back two? That's

36:02

the big difference I think we need to be talking

36:04

about is what is economy

36:07

look like? And my fear is too

36:09

many people still feel

36:12

like, oh, it'll be two thousand nine all

36:14

over again, and it will be you

36:16

know, not but

36:18

a hundred percent or in the case

36:20

of Trump, hundred and five of

36:23

what it was in two thousand and nineteen.

36:26

And maybe it is. I mean, you know, this is unprecedented.

36:29

Nobody knows, but I'm going

36:31

to bet that it's going to be different. And

36:33

trying to preserve a status quo

36:35

that's unrealistic is where I think

36:38

the problems could come. Jim, let's

36:40

talk a little bit about what we

36:42

were discussing earlier with the Federal Reserve

36:45

and some of the new things that they're doing.

36:48

I don't ever recall them buying ets

36:50

that seems to be pretty new, and

36:52

then buying debt of some pretty

36:55

junkie companies that seems to

36:57

be pretty new. Also, what do you think of what's going

36:59

on? Yeah, they're not only

37:01

buying the e t F, but

37:04

bear in mind only e t F that

37:06

are tied to corporate bonds, so

37:08

no spiders, which is the sp

37:11

F. UM. They're buying

37:13

corporate bonds, are buying commercial paper, they're

37:15

buying asset back securities, they're buying

37:18

municipal bonds, UM.

37:21

You know, uh, They're they're buying paycheck

37:23

protection loan UM

37:25

loans and trying to package them into securities

37:27

as well too. This is part

37:31

of the effort to

37:33

try and support markets from

37:35

falling much more than they can.

37:38

This is them stepping in buying and trying

37:40

to put a floor on markets to try

37:43

and calm everything down to

37:45

hopefully get us to the other side. Now,

37:48

there is one thing that I

37:50

worry most about with all of these

37:52

programs UM.

37:54

Technically the fens not allowed to do this. So

37:57

how did they get away with this? UM?

38:00

As I pointed out, they're

38:03

actually not doing it. The Treasury

38:05

is doing it. They've put together all of these

38:07

special purpose vehicles or these

38:10

funds and then the treasury, the

38:12

taxpayer put some money into

38:14

these funds, the FED offer,

38:17

the FED finances it, and they go

38:19

out they buy these securities. In

38:21

other words, now monetary policy,

38:24

and Jerome Paul says this every time he speaks

38:26

about it, monetary policy

38:29

needs the permission of the Treasury

38:31

Department to do this stuff. So

38:33

the FED is given away a lot of its

38:35

independence to the administration,

38:38

not just this administration, but whoever

38:41

is the administration after twenty whether

38:43

it's the same or different, because this program

38:45

will most certainly continue well past

38:47

the election um as well

38:50

too, and that, I worry

38:52

could cause two problems.

38:54

One, it seems to be like a

38:57

nationalization of markets, because it is

38:59

the government that is ultimately

39:01

buying corporate bonds and e T

39:03

F and municipal securities. The federal

39:06

government in this case and to the

39:08

FED, is going to need

39:10

the permission of the Treasury

39:13

Department to change these programs

39:15

anyway they can, and so

39:18

far that's not been a problem. But later

39:20

on, you know, especially in an

39:22

election year, if the FEDE says, hey,

39:24

we want to maybe back off of

39:26

this program or not do this, the

39:29

administration could say I got an election

39:31

to win you're gonna keep buying this stuff

39:34

and keep going because now I now have

39:36

a say in your policy.

39:38

So this is gonna be really

39:40

an experiment that we haven't seen now. Last

39:43

thing about the people say, didn't do this

39:45

in a weight and the answer is yes, but

39:47

not to disdagree. But we also didn't

39:49

really understand it in a wad, and we had a different

39:51

administration that was willing to say to Ben Burnanky,

39:54

then you tell us what to do and

39:56

will agree with it. Twelve years

39:59

later, we've had twelve you study

40:01

this, we understand it. We have a very

40:03

different attitude about the Federal

40:05

Reserve than we did in two thousand

40:07

and eight. So I'm going to ask you two

40:09

questions about that, and one

40:12

is practical and one is theoretical. Answer

40:14

them however you like. The practical

40:17

question is what happens if the FED decides

40:20

they don't want to keep buying this and and

40:22

the government says, yes, you are, and the FED says,

40:24

okay, good luck, We're

40:27

We're done. So that's the practical

40:29

side of it. The theoretical side of it is, have

40:32

we just de facto created

40:35

a giant experiment in modern

40:38

monetary theory? Is isn't this MMT

40:40

rit large to take

40:42

the second one first? Yes, I refer

40:44

to it as MMT version one point. Oh

40:47

is what this seems to be right

40:49

now? Um, And the

40:52

better it goes, the more

40:54

I think we're going to continue to

40:56

see more of it. Uh. To

40:59

stick with that question, UM, real

41:01

quick, the

41:04

amount of stimulus or the amount

41:06

of support maybe that use that

41:09

phrase that we're giving the economy,

41:12

Uh, is between what

41:14

the Federal Reserve has done and expanding their balance

41:16

sheet with with the government is going to

41:18

borrow, and they announced this

41:20

week they're going to borrow three trillion

41:23

dollars just in the current

41:25

quarter, which is the number most bond

41:27

people are having a hard time understanding. It's so such

41:29

a big number right now, it's

41:32

the equivalent of four years

41:35

of income tax receipts. When all is said

41:37

and done, If the

41:39

federal government in the Federal Reserve

41:42

can either borrow or print four

41:45

years of tax returns and

41:47

not have a problem not produce

41:50

inflation. I've jokingly

41:52

said, can we get rid of the I R s? Can

41:54

they just print up our factors every year and

41:56

just send them to the Treasury at that point,

41:59

because if you can do this without

42:01

having any problems, then

42:04

why do we even pay taxes in the first place.

42:06

And isn't that been one of the arguments that

42:09

mm tears have been saying is that MMT believes

42:12

that the you don't adjust

42:14

monetary policy with interest

42:17

rates, you adjusted with taxes,

42:19

is that when there's no inflation, you print the money

42:22

and tax rates go down a lot. When

42:24

there's inflation and you want to remove

42:26

the money from the system, you raise taxes

42:29

as well too. So yes, I do think

42:32

this could be version one of mm

42:34

T. Now to your practical question. If

42:36

the FETE says, hey, we want to back off,

42:38

and the Treasury says no, and the FETE

42:40

says, good luck trying to do it without us

42:42

financing it, they run

42:45

a real political problem because

42:47

then they put the

42:50

treasury the taxpayer at

42:52

risk of loss, and then

42:54

they would have to Joan Paula, whoever decided

42:57

that policy, would have to stand there and say, you

43:00

know, you agreed with the Treasury

43:02

to buy hundreds of billions of dollars worth of

43:04

corporate bonds or municipal securities

43:06

or et F and the government and the

43:09

and the Treasury wanted you to do more, and you

43:11

said no, and you backed off,

43:13

and now the taxpayer is sitting on an

43:16

unrealized loss DROLL

43:18

and that's your fault. You're causing the

43:20

taxpayer to take tremendous

43:23

losses. Why are you doing that to

43:25

the taxpayer? That is a issue

43:28

that they never want to be involved with. They

43:30

don't ever want to go there, so

43:32

and we I don't think we'd ever know it. I think

43:34

that they'll always come to some form

43:37

of an agreement. And let me emphasize, there

43:39

will be no disagreement right now, you

43:42

know, because we're in the process of trying to

43:44

support a crisis economy.

43:47

The disagreement comes later down

43:49

the road, whether it's several years down the road

43:52

or several months, whenever

43:54

we decide that it is now

43:57

getting better enough that the set can

43:59

stop start reversing out

44:01

of these programs. The administration,

44:04

in theory has a veto over

44:06

that, and I'm just opening

44:08

the question that maybe they

44:11

will exercise it when that time

44:13

comes. But no one wants to exit

44:15

these programs right now, right now,

44:17

probably being in a minimum the year, so

44:20

that's not going to be an issue right away.

44:22

Hey, we we had ultra low rates

44:25

for a decade and the administration

44:27

screams when pal wanted

44:29

to thike rates, wanted to normalize

44:32

rates up from one and a half

44:34

percent to a more normal level. I

44:36

got to imagine that, no matter what the circumstances,

44:40

no president is going to want to see this

44:43

get normalized. Or am I now too

44:45

cynical in the era of

44:47

a White House Federal Reserve

44:50

jaw boning contest. No, I don't

44:52

think you're too cynical. I mean, if you

44:54

look at the history of the Federal Reserve and

44:57

the relationship that the Federal Reserve

44:59

has with the White House. Um,

45:02

the big difference between Trump and

45:04

previous president says Trump does it out in the

45:07

open on Twitter and that. But

45:09

we've known from books and biographies

45:13

going all the way back to Harry Truman.

45:16

UM, Harry Truman inviting

45:18

the entire think about this entire inviting

45:20

the entire f O m c UH

45:23

to the White House for lunch and

45:25

telling them that if they did not cut

45:27

rates, that they were doing the bidding of Joseph

45:30

Stalin to Lyndon

45:32

Johnson, UM, you know, throwing

45:34

the Federal Reserve chairman against the wall, literally

45:37

physically assaulting him and saying, boys

45:39

are dying in Vietnam and Bill

45:41

Martin, who was the Federal Reserve chairman at

45:43

the time, can't cut interest rates

45:46

to Ronald Reagan,

45:48

commanding Paul Vulker. Paul Looker

45:50

wrote that in his autobiography to Cut Rates

45:52

in which was an election

45:55

year, to George H. W. Bush,

45:57

blaming Ellen Greenspan for losing the

45:59

action. So this has going out

46:01

for seventy years that presidents

46:04

have been at odds with

46:06

the Federal Reserve. The

46:08

difference with Trump is he just does it in the

46:10

open, real time. The rest of them

46:12

did it behind closed doors. And

46:15

now that we have given the administration

46:18

a veto, it doesn't matter if

46:20

it's Trump or Biden or whoever. They're

46:23

gonna think twice when it comes back when

46:26

the FETE comes to them and says it's time

46:28

to leave, it's time to us to reverse

46:30

these policies, and they'll maybe

46:32

push back. That's a very open question. So

46:34

I don't think you're being too cynical. Huh.

46:37

Quite quite interesting. So I recall

46:39

back in two thousand and ten, two thousand

46:41

and eleven, remember the open letter to

46:44

Ben bernanke Hui

46:46

and Zurp are going to cause hyper inflation?

46:49

What are you doing. You're going to destroy the dollar.

46:51

We're gonna have crazy inflation. And

46:53

of course none of that came to pass.

46:56

The dollars was record ties.

46:58

For the next eight years, we saw

47:00

no inflation at all. If anything, deflation

47:04

is this similar to that

47:06

in that it's an unprecedented

47:09

set of circumstances, and the

47:11

natural reaction from inflation

47:13

hawks is oh no, the Fed's

47:15

action is going to send inflation much

47:18

higher. Uh. This

47:20

this is clearly different, if for no other reason

47:23

than gold has spiked dual

47:25

Compare and contrast between when

47:28

it comes to inflation. Yeah,

47:30

you know the letter.

47:32

I remember the letter to UH.

47:35

To be honest with you, I thought that that letter at

47:38

the time it was written, was a

47:40

reasonable fear that we had

47:42

that we looked at what the FED was doing.

47:45

If you believe the metric too much

47:47

money chasing too few goods, that

47:50

the FED was creating money,

47:53

you could argue that it didn't have the velocity

47:55

that it needed to turn over that it

47:57

needed in order to create inflation. But it was a

47:59

reasonable fear. And I would actually

48:01

argue to you that out of that experience

48:04

that they did, that episode without

48:06

inflation was the catalyst

48:08

for modern monetary theory to come along

48:11

and saying, hey, look what we just did in two thousands,

48:13

nine, ten, and eleven with all that money

48:15

printing and then reversed it out and we never had inflation.

48:18

Um, maybe we can start rethinking

48:21

how we could run monetary

48:23

theory as well. Today

48:26

it's just orders in orders of

48:28

magnitude larger. And

48:30

today the other thing

48:33

that's going on that's a little bit more different,

48:35

at least on its surface, is

48:38

a lot of these programs are trying to

48:40

be pushed down to non

48:43

Wall Street main street. We even call

48:45

them the main street programs.

48:47

We have p p p T PPT

48:49

Personal Protection Plan loans.

48:52

We're giving companies direct

48:55

loans. He has they're trying

48:57

to support markets, but we're

48:59

trying to of those companies loans. Now. The

49:02

fear here is that that lending

49:05

will lead to a higher turnover

49:07

of that money. Problem in two thousand

49:09

and ten was the FED printing up a lot of

49:11

money, pushed it into financial markets

49:13

to support financial markets, but it

49:16

never made it to the real economy

49:18

people. That money never filtered into your

49:20

pocket, or my pocket, or or

49:22

a neighbor's pocket, where we want up buying a new

49:24

car, or or buying a house, or

49:27

spending more on vacations or something

49:29

along those lines. This time

49:31

around, we are trying to get it

49:33

into your mind, in our neighbor's pockets

49:36

for that express purpose of go spend

49:38

it on a vacation, Go buy a new car with

49:41

that money as well too. So I think

49:43

that the risk that it does create inflation

49:46

is a real one and is a concern.

49:49

And it goes back to what I said before. If

49:51

they can do a trillion dollars worth of

49:53

borrowing and printing

49:56

and it doesn't produce inflation,

49:59

why do keep raising two trillion two

50:01

and a half trillion dollars a year in taxes?

50:04

Why don't they just print up two trillion

50:06

dollars a year and just send it to the Treasury and say everybody's

50:08

tax rate is now zero um at

50:11

that point. So, I think there's gonna

50:13

be leng lasting consequences to this.

50:15

Either it produces some kind

50:17

of a problem in the form of inflation, or

50:20

it doesn't, and not only

50:23

like we just talked about a second, either the

50:25

administration or somebody else says,

50:27

well, then if it didn't produce a problem, why do we stop?

50:29

Why don't we just keep printing, printing more of this

50:32

money, just keep going and going, And

50:34

why don't we Everybody gets free college education,

50:36

everybody gets free healthcare, everybody

50:38

gets uh um, a

50:40

much much lower tax rate. And you know, because

50:43

we've shown that we can print this money

50:45

without there being that consequence. So

50:47

one way or the other, I think we're gonna

50:49

have an issue to deal with. This

50:53

quite interesting, uh the pushback

50:55

against it, and I'm surprised

50:58

to learn that you were a Bernie bro This is

51:00

this is news to me. Um.

51:02

The pushback against the inflation

51:05

argument is, hey, this isn't money

51:07

that's going to people to buy houses or

51:09

cars or vacations or if

51:11

you remember, the

51:14

home equity mortgage with rural

51:16

money was being used to buy big screen TVs

51:19

and and do home renovations. These

51:21

are people who have been forced to shelter in place.

51:24

Many of them have lost their paycheck. This

51:26

is going to rent. We've seen thirty

51:29

of rent payments not being made. This

51:31

is going to food and medicine. This is really

51:33

basic survival. How

51:35

does that cause inflation, especially

51:39

if at best were an economy

51:41

and we can't get all the way back up to so

51:45

I think I I think, um, I needed

51:47

to give a little bit of a of a definition

51:49

when I talked about inflation. Um,

51:52

there is there will be no inflation

51:54

in and there probably

51:56

will be no inflation in the first

51:58

half of twenty one, and there is

52:01

a risk of deflation exactly

52:03

the way that you said. But

52:07

there will be this much I think

52:09

we can agree on. There will be

52:11

a restart to the economy. We are not

52:13

going to shelter in place for all of eternity.

52:16

There is going to either be a vaccine or

52:18

we're just going to get sick of this and say that we

52:20

have to kind of go back to some semblance

52:23

of normal. And there will be some

52:25

kind of a rebound in the economy. Whether it goes to

52:28

hundred remains to be seen, but there

52:30

will be a rebound. And it's on

52:32

the other side of that rebound.

52:36

Does all this stimulus money, which

52:38

is becomes mere survival money,

52:41

then some people go back to work.

52:43

Maybe you know, won't cool about how many

52:45

don't, but a fair number

52:47

of people will, uh, and

52:50

there will be more economic

52:52

activity plus all this other

52:54

money as well too. That's

52:57

where the fear that the inflation comes back and

52:59

it set and a half of one twenty

53:02

two in that respect, not

53:04

necessarily in two thousand and twenty.

53:06

In fact, not in two thousand and twenty. I

53:08

wouldn't say necessarily, wouldn't put that qualifier

53:10

on it, because I think with the with the

53:12

economic contraction that we're having, you're

53:15

not going to see it now. But the question is

53:17

what about on the other side. And

53:20

to me, you know, that's where I

53:22

think the message of the bond mark that has

53:24

been the tenure yield hit

53:26

a low of March on March nine thirty

53:29

basis points. Today as

53:31

we talk, it's around sixty sixty

53:33

six basis points. Now, he's a very little numbers,

53:36

but it hasn't gone anywhere for two months,

53:38

if you know, it's been trending sideways

53:42

in the face of all of this terrible

53:45

economic news and tremendous

53:47

amount of Federal Reserve purchases of

53:50

of traditional QUEUEI type

53:53

of treasury securities as well too.

53:56

They have purchased nearly and this is a hard

53:58

number to understand, they have purchased nearly

54:00

two trillion dollars worth of bonds.

54:03

This is mortgages and treasuries and agencies.

54:05

And I'm not talking about corporates and e T s. That's

54:07

a difference program in two trillion

54:10

dollars of those bonds in the last

54:12

seven weeks, and yet interest

54:14

rates are not falling and falling through

54:16

the floor we have seen in corporate

54:18

bond funds, and we have seen from

54:21

foreign central banks massive liquidations

54:24

of treasury securities. I

54:26

think the message to market might be telling

54:28

us is the bullmarket and bonds is over,

54:31

and that we are now looking at not

54:34

only not looking at negative interest

54:36

rates, which a lot of people are wondering in the US

54:38

we won't get that, but we're

54:40

looking at the fear of what comes

54:42

on the other side, and that fear

54:45

is crushing supply and inflation,

54:48

which is why I think that's a bond market has

54:50

been struggling as much as it has

54:52

for the last few months, that that's the signal it's

54:54

trying to send us. In the wake of all

54:56

that fed buying, it still cannot

54:59

rally any more, and that is

55:01

very concerning. So doesn't

55:04

a lot of that have to do with the fact that

55:06

when you're at the zero bounds,

55:09

when when rates are this low at

55:13

a certain point, I know it's a cliche,

55:15

but you're you're pushing on a string, there's

55:17

there's no impact, there's no stiffness.

55:20

Um, there's a technical term to that that I'm

55:22

during a blank on but you're not

55:24

seeing resonance from the

55:27

FED buying in prices.

55:29

Is that misstating it? Tell me what's

55:32

wrong with that thesis? The thesis

55:34

is the thesis is right, but it's

55:36

it's it's it's a measure about the real

55:38

economy. Is that lower

55:40

interest rate? And this gets to the negative interest

55:43

rate argument too, is that lower

55:45

interest rates? Um, if

55:48

you're not going to buy a house at

55:51

a two mortgage, Uh,

55:54

why does a one percent mortgage make

55:56

it more attractive for you to buy a

55:58

house? And the answer it doesn't

56:00

because the reason you're not willing

56:02

to buy a house at a two percent mortgage

56:05

doesn't have to do with interest rates. It maybe

56:07

has to do with either you've lost your job,

56:09

or your fear you've lost your job, or

56:11

you fear that your company

56:13

is going to run into trouble or something

56:16

along those lines. That's why

56:18

you wouldn't do it. That's the pushing on the string

56:20

argument, which is which is the big

56:22

pushback about negative rates. Well,

56:24

if if two percent interest rates won't get

56:26

me to buy a house, and one percent interest rates won't commuter

56:28

buy a house. Why would zero get me to

56:30

buy a house? Um? At this point,

56:33

my problem is not that I need another

56:35

hundred dollars or a hundred fifty dollars a month

56:37

off the rent page or off the mortgage payment

56:40

to get me into that house. I need concern

56:43

about or I need, um um,

56:46

to be less concerned about

56:48

the economy or my employment

56:50

situation to buy the house. So that's the pushing

56:53

on a string argument. And I think that that's

56:56

ultimately what the bond market has

56:58

been saying is that the problem

57:00

here is not that rates are too high, um

57:03

the you know, and that that the fix

57:06

isn't what nerion of cars collode.

57:08

And the former vice or former president of the Minneapolis

57:11

FET has been saying that we must go to negative

57:13

interest rates in the US like they have in

57:16

Europe and in Japan. The

57:18

problem, I think is with

57:20

a fear of the state of the economy.

57:23

That's what's holding us back. And

57:25

what the bond market says is, I lower

57:28

rates isn't going to help you anymore. It's no

57:30

point going lower, and at some point

57:32

when we get a rebound, all this

57:35

support money could produce

57:37

inflation, could produce inflation. Now

57:40

I want to emphasize that word could, because

57:42

we're only sixty five basis points

57:44

in the tenure note. Uh.

57:46

But like I said, the fetes bought to trillion

57:49

dollars to trillion with the T and

57:51

that is not pushing interest rates down.

57:54

That's a hard number for most bond people to understand

57:57

two trillion, and let alone non

57:59

bond people are understand that much.

58:01

Mind cannot get the BOMO rally to

58:03

continue um at this

58:05

point. And so I

58:08

think that what the market is fearing is that

58:10

there's going to be problems on the other side.

58:13

So yeah, that's how the pushing

58:15

on the string thing fits into it. And I

58:17

think it's a it's a right argument. I

58:20

want to get away from the FED, but

58:22

I can't help it because there's still

58:24

one or two things I have to ask

58:26

about. The arguments

58:29

against the purchases and

58:32

in favor of inflation seem

58:34

very similar to what

58:36

we heard made two

58:39

the central bank in Japan. If

58:41

you do this, you will cause inflation.

58:44

If you do this, you will cause problems.

58:46

So question one, can

58:48

we avoid inflation

58:50

in a similar manner to Japan?

58:53

And Question two. Does that

58:56

damn us to the same sort of

58:58

problems that Japan and has been suffering

59:01

ever since its market peaked in Yes

59:05

to the first question, we can't avoid the inflation,

59:07

and is that the the support

59:10

money just winds up not

59:12

getting You know, what you need to

59:14

have inflation is two things. You need to

59:16

have too much money.

59:19

And then the other argument, I'm using the classic

59:22

monetary line, chasing too

59:24

few goods. It needs to chase something

59:26

that's velocity, so you knew. You

59:29

know, it's one thing for me to send

59:31

you a check, but

59:33

then I need you to spend it as well

59:36

too. As you know, if it just sits in

59:38

your bank account going good, I've got a little

59:40

bit more money just in case things go bad.

59:42

I'm not going to do anything but let it sit there. It's

59:45

not going to produce inflation. But if you go out and you spend

59:47

it, then that will helpfully

59:50

get the inflation moving. And

59:53

that's always been the problem in Japan, the

59:55

high savings rate, the conservative

59:58

attitude that most of the Upan he's have about

1:00:01

spending money because they've been afraid about

1:00:04

their economy. Can we damn ourselves

1:00:06

in the other way as well? Too? Yes.

1:00:10

One of the things that we've learned about

1:00:13

negative interest rates, in very very

1:00:15

low interest rates is

1:00:17

it's very damaging to the financial

1:00:19

system. Because I like to joke, um

1:00:23

uh, if I was around, if you were around

1:00:25

in the Middle Ages or

1:00:28

in the Renaissance, and it's the fifteenth

1:00:30

century of uh uh,

1:00:33

and we're in Venice when we developed

1:00:35

fractional banking. Um.

1:00:38

It wasn't developed as an event, but it evolved

1:00:40

over time during that period. And you

1:00:42

said, look, here's what we do. We take in, We

1:00:44

take in a unit of account like a dollar, and

1:00:46

we put in eighty cents of it in

1:00:48

the reserve account. We lend out

1:00:51

the other twenty cents to make some money

1:00:53

or make some return on that money.

1:00:56

If you or I would have raised our hands in the fifteenth

1:00:58

century said hey, this is a good theory of how bank

1:01:00

you should work. But what happens when interest rates

1:01:02

go negative and you lend out the money and

1:01:04

then you have to also pay the the

1:01:06

interest payment on it too, They would have asked

1:01:08

us to leave the room. It doesn't work that way.

1:01:11

But you would make the loan. What's

1:01:13

that you wouldn't make the loan if

1:01:15

you if that case right, well, welcome

1:01:18

to you know, with with

1:01:21

negative interest rates. So negative

1:01:23

interest rates is very damaging

1:01:25

to the financial system. It

1:01:27

is crippled the financial system. I think in

1:01:30

Europe it is crippled the financial system.

1:01:33

In Japan, the Japanese stock

1:01:35

Japanese Bank Stock index is at a forty

1:01:37

year low, and the only reason it's at a forty

1:01:40

year low is because they started the index forty

1:01:42

years ago. All right, so let's jump to our

1:01:44

favorite questions are speed round and

1:01:47

what are you watching these days? What are you streaming

1:01:49

on Netflix or Amazon Prime

1:01:51

or podcasting? What are you what's keeping

1:01:53

you entertained? Um?

1:01:56

I am streaming a lot more than I have in

1:01:58

the past because I'm a big sports fan and

1:02:01

there are no sports to be a big fan of

1:02:04

except the Last Dance on ESPN.

1:02:06

Yes, that's been fantastic. UM.

1:02:09

I tend to like political thrillers, and

1:02:12

um there's one that I've been watching that's

1:02:14

on Netflix, which is an Israeli show called

1:02:16

Fauda, which is the Arab word

1:02:18

for chaos. Uh.

1:02:21

Interestingly, it's a political thriller

1:02:23

about terrorism, Palestinian

1:02:26

terrorism in Israel, and

1:02:28

supposedly it is one of the most

1:02:30

popular shows in the Arab world.

1:02:33

So it's an Israeli show about Palestinians

1:02:36

attacking Israel, and it was meant

1:02:39

for Israeli's to

1:02:41

watch, but yet the Arabs love

1:02:43

it just as much as they do. It's dubbed

1:02:45

show, so you know a lot of it is in Arabic

1:02:48

with subtitles. But it's a really good

1:02:50

show. Uh. That's been one that I've

1:02:52

liked. I've also been a big fan of Better Call Saul

1:02:55

and Homeland, um, and a

1:02:57

lot of those shows. The Last Dance

1:02:59

I've been j eating that up as

1:03:01

well too. Amazing. By the way,

1:03:03

Fouda is something you can't watch right

1:03:05

before bedtime because it's so thrilling

1:03:08

you just won't get to sleep for hours. It's that it's

1:03:10

that exciting. Um. What about

1:03:12

books? Are you reading anything, you're finding anything

1:03:15

you're catching your fancy these days? Yeah,

1:03:18

I've been trying to catch up a little

1:03:20

bit more on some of

1:03:22

my economic reading lately. Um

1:03:24

as well, So I've been reading,

1:03:27

um, you know The Economist Hour

1:03:29

by Apple Bomb, which

1:03:31

I've show could be a very good book. Uh

1:03:34

as well, I've been reading, uh,

1:03:37

the Jim Grant's book about Walter

1:03:39

Baggett, uh, learning a lot about

1:03:41

you know. UH. He was

1:03:44

the founder of the Economist magazine in the nineteenth

1:03:46

century and was a big

1:03:48

thinker as far as what

1:03:51

is the role of a central bank. He was the one who coined

1:03:53

the term that they are the lender of last resort,

1:03:56

uh and what that means

1:03:58

as well to uh. And then my

1:04:00

kids. I've got four kids, so

1:04:03

I've you know, I've I'd like to say that because

1:04:06

of my kids are all grown for

1:04:08

but for the last twenty years, what they've

1:04:10

done to me is they've reintroduced me to peanut

1:04:12

butter and jelly sandwiches, and I'm still a fan of

1:04:14

those and reading children's books. So

1:04:17

I've recently, within the last year

1:04:19

or so, I reread the Harry Potter series,

1:04:21

which I think is just tremendous. Isle

1:04:24

of the Blue Dolphins is another book that I've

1:04:26

read. These are children's children's

1:04:28

literature, which well done.

1:04:30

Children's literature is just fantastic

1:04:33

as well too. So you know, I eat

1:04:36

my peanut butter and jelly sandwiches and I read

1:04:38

these books and I think about that I'm doing a seventh

1:04:40

grade homework assignment all over again. Hey,

1:04:42

the hobbit was a children's book, and I

1:04:45

know people who read that and the rest of The

1:04:47

Lord of the Rings every year. Um.

1:04:49

So our final question, what do you know

1:04:51

about the world of investing today

1:04:54

that you wish you knew back in when

1:04:56

you first launched Bianco research that

1:05:01

you need to question every

1:05:04

assumption and be open

1:05:06

to the idea that things that are not supposed

1:05:08

to happen can happen. Negative interest

1:05:11

rates, negative crude oil prices,

1:05:14

the Federal reserved buying corporate bonds.

1:05:17

There was time not too long

1:05:19

ago, just to use those recent examples

1:05:23

where if you were to say that these things

1:05:25

were going to happen, people would have looked at you and

1:05:27

said, you know, you're off

1:05:29

your met because it's not the way that the world

1:05:31

works. And you need to be

1:05:33

open to these ideas. Now, that doesn't

1:05:36

mean that you need to run around

1:05:38

with a tinfoil hat on looking for

1:05:40

all of these things to happen, but

1:05:42

that you, as an investor

1:05:45

or, as somebody who watches markets,

1:05:47

to be open to the idea

1:05:50

that things that you never thought were

1:05:52

possible could wind up becoming

1:05:54

possible, especially in a period of stress. Quite

1:05:57

fascinating. We have been speaking with him.

1:06:00

Bianco He is the founder

1:06:02

and chief strategist at Bianco Research.

1:06:04

If you enjoy this conversation, well just look

1:06:07

up an incher down an inch on Apple iTunes

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or Google podcast, Spotify,

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wherever finding podcasts are sold, and

1:06:14

you could see any of the previous three hundred

1:06:16

plus conversations we've had over

1:06:18

the past six years. We love your

1:06:20

comments, feedback and suggestions right

1:06:23

to us at m IB podcast

1:06:25

at Bloomberg dot net. Give us a review

1:06:27

on Apple iTunes. You can check

1:06:29

out my weekly column on Bloomberg

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dot com slash Opinion, sign up

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for our daily reads at Rid Holtz dot com,

1:06:36

or follow me on Twitter at rid Halts. I

1:06:38

would be remiss if I did not thank the crack

1:06:40

staff that helps put these conversations together

1:06:42

each week. Charlie Bohmer is my audio

1:06:45

engineer. Michael Batnick is my head

1:06:47

of research. Michael Boyle is my producer,

1:06:49

slash booker. A Tikoval Bron

1:06:51

is our project manager. I'm

1:06:54

Barry Ridhults. You've been listening to

1:06:56

Masters in Business on Bloomberg Radio