global macro podcast series | featuring jim bianco...what i love about your work is that you are...

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GlobalMacroPodcastSeries|featuringJimBianco

There’sonegrouplargerthantheFedandthatiswhatEdYardenicoinedfortyyearsago-TheBondMarketVigilantes.ThecollectivewisdomofthebondmarketislargerthantheFed.

Theproblemisthatthebondmarket,rightnow,isnotofacollectivewisdom.Itisnotofonethought.Therearepeoplethereallovertheplaceinthebondmarket.Somearebullish,bearish,up,down,left,right,forward,backward.

Butifyougetinflationandtheneverybodyisoftheperceptionthatinflationishereerodingthevalueoffixed-incomeinvestments,thentheybecomeofonemindandthatonemindistosell.Interestratesgoupandthen,atthatpoint,theFedcan’tstopinterestratesfromgoingupuntilthemarketdemandsthattheyjuststopwiththeprofligatepolicies.

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Introduction

Forme,thebestpartofmypodcastingjourneyhasbeenachancetorefinemyowninvestmentframeworkthroughaseriesofconversationswithextraordinaryinvestorsineverycorneroftheworld.Inthisseries,Ialongwithmyco-hosts,RobertCarverandMoritzSeibert,wanttocontinueoureducationbydiggingdeeperintothemindsofsomeofthethoughtleaderswhenitcomestohowtheworldeconomyandglobalmarketsreallyworktotryandlearnhowtheythink.

Wewanttounderstandtheexperiencesthathaveshapedthem,theprocessestheyfollow,andthehistoricaleventsthathaveinfluencedthem.Wealsowanttoaskquestionsoutsideournormalrules-basedplayground.We'renotlookingfortradeideasorrandomguessesaboutanunknownfuturebutratherknowledgeaccumulatedoverthecourseofdecadesinthemarketstotrytomakeusbetter-informedinvestorsandwewanttosharethoseconversationswithyou.

OurGuesttodayisatruemasterwhenitcomestoprovidingobjective,data-drivenresearchwithauniqueperspective.So,I’mconvincedyouwillenjoyourconversationwithJimBiancoofBiancoResearch.

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Niels:Jim,thankssomuchforjoiningustodayforaconversationaspartofourminiseriesintotheworldofGlobalMacrowherewerelaxourusualsystematic,orrules-basedframework,toprovideyou,withabroadercontextastowhereweareinaglobalandhistoricalframeworkand,perhaps,discoversomeofthetrendsthatmayoccurintheglobalmarketsinthenextfewmonthsorevenyearsand,ultimately,howthiswillimpactusasinvestorsandhowweshouldbestprepareforthisfuture.

So,we'resuperexcitedtodiveintomanydifferenttopicsinthenexthourorso,notleastbecauseyouareoneofthemostprolificresearchersthatIhavecomeacross.WhatIloveaboutyourworkisthatyouareverygenerouswhenitcomestosharingitonTwitterandotherplatforms.So,welcomeandletmejustkickitoffwithakindof30,000-footquestion,ifyoudon’tmind.We’vehadanumberofguestsonthisseriesandIaskallofthemwheretheythinkweareinaglobalmacropicture.

Tome,atleast,itfeelslikeit’skindofablendofthingswe’veexperiencedbefore.Therearealotofanalogiesbackto1929,the1930s.TherearepeopletalkingabouttheJapaneseBubbleinthelate‘80s;ofcourse,wereferbacktotheTechBubble;theGreatFinancialCrisis,then,ontopofallofthiswehavethisglobalpandemicthathascomeintoourworldwhichmakesitaprettyuniquetimetobealiveandtobeaninvestor.So,letmejustkickitoff,Jim,andgetyourbigpicturerightnow.

Jim:Yeah,thanksforhavingme.Ihavetostartwiththatthisisunlikeanythingthatwehaveseenbefore.Firstofall,you’reright;we’vegotaglobalpandemicgoingon.Thisisnotthefirsttimeinhistorywehaveeverhadapandemic.Interestingly,thisonecameattheheightofaverylongexpansionandatall-timehighsinfinancialmarkets.Mostoftheotherones,whetheritbe2009withSARS,1968,theHongKongFlu’57,or1918,justtonameoffafew,usuallydon’tcomenearall-timehighs.It’smoreacoincidencethananythingelse.

Ontopofthat,whatwedidthistimethat’suniquetoalltheotheronesisthatweeffectivelydidaglobaleconomicshutdown.That’sneverbeendonebefore.Noonereallyknowswhatthatmeansandwe’restillalltryingtofeelaroundinthedarkastowhatitsimplicationsare.

Soyeah,weusealotofanalogiesthatit’slikethe‘30shere,andit’slike2008here,it’slike1918here,butwe’realljustguessingbecausethereisnoroadmapforsomethinglikethisthatwe’relookingatrightnow.

Niels:Yeah,absolutely.I’mgoingtojuststickwithyouforalittlewhileandaskacoupleofbiggerquestionsandthenRobandMoritzwilljoinin.Ididnoticethatyouhaveawebcastoutrecently,maybeeventhisweek,whereyoutalkaboutafewbigtopicswhichIthinkwe’llspendalittlebitoftimeontoday,withoutadoubt.

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We’lltalkaboutratesandwhereweareonthat.Obviously,we’veseenamassivechangeinretailinvestorbehavior,andthen,ofcourse,theworldistryingtomanagereopeningtheeconomies.Youmentionedabouttheshutdownwhichisdefinitelyunique,andnowwehavethisequallyuniquesituationofhowdowerestartthisthing?

So,let’sjustjumpin,maybe,atthefirstpointandthat’sinterestrates;andalsoIthinksomeinvestorswillsitbackandlookatwhathashappenedintheequitymarketsinthelastfewmonthswherewehad,certainly,quitealotofvolatility.Ithinkthefirsttimeeverwehadayearlyoutsidereversalwherewehitbothnewhighsandnewlowscomparedtolastyear.Yet,inthelastcoupleofmonths,interestrateshavenotmoveddramatically.So,tellusalittlebitmoreaboutwhatyou’reseeinginthatspace.

Jim:Interestrateshaveprobablybeen,inmymind,themoreinterestingofthecasesbecausewhatishappeningthereisaquestionaboutwhetherornotthereisstillamarketsignalleftininterestrates.That’sbecauseoftheheavyinvolvementby,let’ssay,theprice-insensitivebuyeroftheFederalReserve.They,literally,createthemoneythatthey’reusingtopurchasesecurities.So,I’moftheopinionthattheyhavegreatlyreducedthesignalthere.

NotonlyistheFederalReservebuyingbonds,butlet’sbemorespecific,they’rebuyingmortgagebonds,they’rebuyingTreasurybonds,they’rebuyingcorporatebondsincludingjunkbonds(anythingthathasbeendowngradedsinceMarch22ndotherwiseknownasafallenangel),they’rebuyingETFs,they’realsolookingatbuyingloans(whetherornotthey’reMainStreetloansorpaycheckprotectionplanloans),andthey’realsolookingintothepossibilityofbuyingmunicipalbondsaswelltoo.They’redoingitinanaggressiveway;inawaythatwehaven’tseenthemdoitbefore.

So,itbegsthequestionthatthereasonthatwehavemarketsandthereasonwehavepeoplelikemethatlookatmarketsiswetrytolookatthesignalsthatmarketsaretellingustogiveusanideaofwheretheeconomyisgoingtogo.Idon’tthinkIcantrustanyofthesignalsinthebondmarket,rightnow,withthisbigofabuyer.That’swhyIhavealwaysmarveledatpeoplethatwillgointogreatdetailabout,“Well,theyieldcurvewashereanditwentthereandnowit’sgoingoverhere.”Idon’tknowifittellsusanythingaslongasthey’renotfreelytradedmarkets.

Withinthat,takingastepback,whathasalsohappened,ifyoulookattheinvestorflows,isthatsinceMarch,investorshavebeenbailingoutofthebondmarketinabigway.Theyweresellingcorporate;theyweresellingTreasuries;theyweremovingthemselvesintomoneymarketfunds.ForeigncentralbanksevensoldoveronehundredandfiftybilliondollarsworthofTreasuriesaswell,too.

Atthesametimethattheyweredoingthat,theFederalReservesteppedinandwas,atonepoint,buyingoveronehundredbilliondollarsadayofbonds.Now,they’redowntoaboutfive

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toeightbilliondollarsaday,today,currently.Butitlookslikewhatthey’vebeeneffectivelydoingisthewordsyouhearallthetime,“yieldcurvecontrol.”Allthatmeansisprice-fixing;thatthey’vebeentryingtofixthepriceofinterestrates.

Ithinkthatwe’vealreadyhaditandthat’swhythebondmarkethasexhibitedverylittlevolatilityanditsyieldshavenotmovedmuch.That’swhy,likeIsaid,ifthat’sindeedthecase,youhaveeffectiveyieldcurvecontrolfromtheFed,andtheyhavebeenoff-settingwhateversellingthattheprivatesectordidandthenbackedoffwhentheprivatesectorstoppedselling.Idon’tknowifyou’vegotanysignalsoutofthebondmarketatall.

So,it’sgoingtobeverytoughtouseitassomekindofamechanismtotellushowtheeconomyisgoing,whatthestateofinflationis,andeverythingelse.So,it’sanunusualperiodbecausewehavenotseenanythinglikethis.Abouttheclosestexamplethatwehave,inmoderntimes,mightbeJapanandthesamethingappliestheretoo.Thissignalingthatyou’regettingoutoftheJGBmarketaboutthestateofinflationandtheeconomyintheJapanesemarketisverylooseifnonexistent.WhateverJGBisdoingdoesn’ttellyouawholelotaboutwhatisgoingonwiththeJapaneseeconomy.

Niels:That’sinterestinginthatyoutalkaboutsignalingfromtheyieldcurve,becauseaspartofourglobalmacroserieswe’vehadCamHarveyonwhoisobviouslytheinventoroftheyieldcurveindicator,so,ofcourse,hebelievesthat,atleastbackinJunelastyear,therewasasignalandhecalledit,Ithinkit’seightforeightnowintermsofsignalingarecession.Doyouputanyweight,orhaveyou,historically,putweightonhiswayoflookingattheyieldcurvetopredictrecessions?

Jim:Yes,IknowCam,andIthinkhisworkhasbeentrulyfantasticandIwaswithhim,lastyear,exactlysayingthat,thattheinvertedyieldcurvewasasignalthatinterestratesweretoohigh.That,tome,iswhataninvertedyieldcurvemeans,ifyouwanttoputitsimplyit'swhenlong-termratesarelowerthanshort-termrates.They’rejustsayingthatshort-termratesaretoohighandit’srestrictive,anditcanproducearecession.Iwastherewithhimonthat.

Wedidgetarecessionbut,“Oh,itwasapandemic.”Theyieldcurvecouldn’thavepredictedthepandemic,true,butwewillneverknowwhatwouldhavehappenedwithoutit.Maybewewouldhavehadarecessionanywaywithoutit.Itendtothinkthatwayaswell.

But,sinceMarch(I’mtalkingaboutsinceMarchnotforever),whentheFederalReservesteppedin,inamajorwaylikewe’veneverseenbefore,IthinkthatI’mstartingtoquestionsignalsthatI’mgetting.Again,it’snotafreelytradedmarket.Itisnottheintersectionofbuyersandsellersmakingconsciousdecisionsonwhattheywanttodo.Thereisabigplayerintherethatisinventingmoneyoutofthinairandisusingthattomanipulatemarketstoa

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particularend.So,that’swhyIhavebeenverysuspect,sinceMarch,aboutwhatisgoingonintheeconomyasImeasuretheinterestratemarket.

Niels:Sure,Rob,what’sonyourmind?

Rob:Let’sjustdoalittlebitmoreofthislookingbackandcomparingwherewearenowversuswhatmighthavehappenedbefore.Iguess,thecommonalitybetweenthiscrisisandthelastone,inthepost-2009,isthefactofthismassiveinterventionbycentralbanks.Howwouldyoucomparethekindofquantityofthatinterventionthenversusnow?

Inotherwords,thelasttimetherewereconcernsthattheintervention,basically,endeduppushingupthepriceofbonds,whichisobviouslywhatwewanted,butthatthendidnotleadtobankslendingmoremoney,thepriceofcreditcomingdownandanincreaseinconsumptionontheotherend.Thatdidn’treallyseemtohavemuchofaneffectontherealeconomy.Istheremorelikelytobeabetteroutcomenow,doyouthink?Havewelearnedourlessons,orisittimeforanotherapproach?Orisitaquestionofthatthey’rejustnotdoingenough?

Jim:Youknow,that’sagoodquestionandI’llanswerthequestionthisway.Rememberthatin2008and’09,whentheydidtheirextraordinaryinterventions,itdidproducearecovery…Arecoverycameinthewakeofthoseinterventions(sayitthatway).Thatrecoverylastedforelevenyearsandthatwas,atleast,intheU.S.,thelongestexpansioninhistory.

Whatisnotoftentalkedabout,whatthatexpansionis,ifyoulookatthetotalgainofGDPoverthoseelevenyears,itwassomethinglike35%.Itmovedup,inaggregate,35%higherthanitwasin2009.Thatactuallyranksasbelowaverage.So,youhadaverylongrecovery,butintotalitwasaverybelowaveragerecovery.Ihaveattributedthattothatinterventionremovesordampenstheanimalspirit,dampensthecreativedestruction(whichevermetaphoryouwanttouse)forcapitalism.Whiletheyareabletosuppressthecyclesothatitlastslonger,theconsequenceofthatisacyclethatisalotshallower.

So,that’swhyIthinkwesawthepoliticalpolarizationandwesawalotoftheangstliketheTeaPartymovementsandeverythingelseaboutthestateoftheeconomy.Somuchsothatwehadabitofarebellion;notonlyarebellionintheUnitedStates,butaroundtheworldwithBrexitandwithTrump-thattheywereabitofarebellionagainstthestatusquo,notbecausepeoplewereunhappy(atthattimewewereenteringtheseventhyearofanexpansion),butthatitwasaverypoorexpansion.

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So,nowweseemtohavetakenthewronglesson,from2008and’09,andwe’regoingalotharderabouttryingtousealotofinterventiontofixtheeconomy.I’llcutitdownforyoureallyquickly.Itcomesdowntoonesimplefact:whomeasureswhat.

Nowyouguysandme,wemightallthink,correctly,thattheideaoffinancialmarketsisthatthey’resupposedtoreflecttherealeconomy.So,whatevertherealeconomyisdoing,itgetsreflectedinthemarkets(thelevelofthestockmarket,thelevelofinterestrates)notpreciselyeverymoment(theycandivergealittlebit),butovertimetheycomebackandforthtoeachother.

ThatcertainlyiswhatWarrenBuffethasbeenarguingandwhatalotofhighprofilehedgefundmanagers,whetherit’saDavidTepperorBillAckmanorStanDruckenmillerwhentheyhaveexpressedcautiousnessintheeconomy.That’spartofthisdisconnectargumentyouhearthatthefinancialmarketshavedisconnectedfromtherealeconomy;thattheyhaverunwayaheadoftheeconomy.

But,IthinkattheFederalReserveandatalotofotherplaces,andcertainlytheTwitterfeedofthePresidentoftheUnitedStates,theybelieveit’stheotherwayaround.Theybelievethattheeconomyreflectsthestockmarket.

So,whenTrumpkeepschortling,“Oh,newhighinthestockmarket,jobs,jobs,jobs.”Hethinksthatifyouramthestockmarkethigher(justrandomlyramithigher)itwillcreateconfidence,itwillcreatejobs,itwillcreateGDP.Theeconomywillthenreflectthestockmarket.IthinktheFederalReservethinksthat.IthinkthattheTreasurySecretarythinksthat,andIthinkthereareanumberofotherpeoplethatthinkthataswelltoo.

Thatusedtogobytheoldnamecalled“TheWealthAffect”.So,Ithinkthat’sgoingtoreallybethequestionoftheday:whichreflectswhat?RightnowIthinkthedrivingpartofthepolicyisifweboostmarketsandifJ.Powellcomesoutinhispressconferenceandsays,“Well,themarketswereilliquidandcompaniesweregoingtogooutofbusiness,butthenwesteppedinandwesavedthemandtheygotfinancing.”Thentheythinkthatthey’vedoneagoodjobbecausetheythinkthattheyhavethenincreasedtheability…

J.Powellsaysthis,“Thefreemarketwasgoingtoletthesecompaniesgooutofbusinessbutwepreventeditandwesavedthosejobs.”Maybethefreemarkethadagoodreasontosendthosecompaniesoutofbusiness.We’llneverknowbecauseyousteppedinandyoucircumventedtheeffect.Really,whichmeasureswhat?

Weallmaythinkthathere’stheeconomyandthat’swhyweemployeconomiststotellmewhattheeconomyisdoingandthenI’llbackintowhatthefinancialmarketshouldbe.Butin2020it’smorelike,“Putthefinancialmarketsatsomearbitrarylevelandthenwatchtheeconomyadjusttothatlevel.”ThatwascertainlythecaseinMarch.Theywereafraidof...Whenallthefinancialmarketsarbitrarilytookout35%oftheirvalue,wentdown,thefearwasthattheeconomywasgoingtoadjusttothat.So,thenweforceditbackupsothatthe

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economycouldadjustbackhigher.That’stheprecipiceoftheargument:whichdriveswhat?Thisisreallyhowwehavetothinkaboutit.

Moritz:IthinkwhatwealsoseeisthatpeoplestarttorealizemoreandmorethatwhatyoudescribeasTheWealthEffecttendstoworkbetterforthosepeoplethathaveassets,whicharelongstocksbecausetheycanimmediatelyenjoyit.Thosepeoplewhodon'thaveassets,sonotasmanyassets,andaren'tlongstocks,they'rekindofleftonthesidelines.Itleadstomorecentralbankinterventionextraordinaire.We'vehadquiteafew.

It'snotjustthatwe'vehadtheGlobalFinancialCrisis2008,2009,andacoupleofinterventionsthere,andnowwehaveacoupleofinterventionsrightnow.We'vehadquiteafewin-between,which,I'mnotsureifpeoplewanttoforgetaboutthem,butthere'sbeenOperationTwistQuantitativeEasingOneandQuantitativeEasingTwo...Andit'skindofthatlikeeveryyear,everysecondyear,therehasbeensomethinggoingon.

Itseemstomethatmaybethemarketsarelikeadrugaddictwhereassoonastherearewithdrawalsymptoms,theFedhastodosomethingnew-pullanewtrickoutofthehat.So,whatdoyouthink,Jim,arewegettingtoapointwheremaybetheFedandothercentralbankshavedoneenoughoristhisjustthatwe'repausingalittlebit,butrestassured,thenextcentralbankintervention,thenexttrick,whateverthecasemaybe,explicityieldcurvecontrol,younameit(therearemanyoptionsavailable),thenexttrickisprobablyacoupleofmonthsaway.

Jim:Oh,Iagreethatthenexttrickisjustacoupleofmonthsaway;thatthey'renotgoingtostopdoingthis.Idon'tthinkthattheywilleverreallywanttostopdoingthisaswelltoo.Tothefirstpartofyourquestionaboutinequality(whichiswhatyouwereaskingabout),yes,thisdoescreateabiginequality.

Forty,forty-fivepercentoftheAmericanpublicownsequities.TheyarebenefitingfromtheFedusingfinancialmarketsasamonetarypolicytool.We'regoingtopushupfinancialmarketsandwearethengoingto,hopefully,createtheconfidenceinjobsthatItalkedabout.

Theotherforty,forty-fivepercentofthepublicthatownsnostocksdoesn'tbenefitfromthat.Butthey'vebeensatisfiedbecausethey'regettinganextrasixhundreddollarsaweekinunemployment;therehavebeenstimuluschecksthathavebeenmailedoutaswelltoo.

TheproblemthatIseewiththisisyouarefosteringthatinequalityanditshowsupinthemostobviousways.IntheU.S.rightnowwearetalkingalotaboutwhetherornotthereisaretailmaniagoingoninthestockmarket.Ibelievethatthere(handsdown)is.Ihappentothinkit'slargerthanthe2000retail,or1999retailstockmarketmania,although,admittedly,it'showtomeasureit.So,there'salittlebitofguessworkinthere.But,nevertheless,itisverylarge.

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What'sdrivingthat?Stocksalwaysgoup.TheFederalReservehasbeenbuyingstocks.ThePresidentoftheUnitedStatesTweetsout,"Wecan'tlettheairlinesfail.Wecan'tlettheenergycompaniesfail."Thepublic(especiallysmallretail),thatdoesn'townstocks,"Oh,Igetit.Igetit.Thisisarisk-freeinvestment.Thatthey'vegotanunlimitedprintingpressandthePresidentistellingyou,noneofthesecompanieswillfail."

Idon'tknowwhatWarrenBuffetwasthinkingwhenhesoldallhisairlinesinthemiddleofMay,butthegovernmenttoldyoutheywon'tletthemfail,sogetinandgetininabigway.That'swhyyouhavehadthisrushofretailandallthistalkaboutretailinvestinginthemarket.Thisisthenaturalconsequenceofthesepoliciesaswelltoo.

So,itisgoingtocontinue,Ithink,tofosterthatinequalitybecausetherearesomepeoplethatdon'thaveenoughmoneytoinvestinassetsornotenoughassetstoreallymatteratthemargin.Youknow,ChairmanPowellknowsthis,Ithink.Ithasbeenverycuriousthathe'sbeenaskedalotoftimes,"Doyourpoliciesfosterinequality?"Andit'sabouttheonlytimeheevershowsanyemotion,"Absolutelynot!NONEofourpolicieshaveANYTHINGtodowithinequality.It'sallthevirus'sfault.It'sallCongress'fault.It'sNOTtheFed'sfault."

WellJ.,itactuallyis.You'retheonethat'spushingupfinancialassets.Financialassetsareheldbyricherpeople.They'rebenefitingfromthat.You'retryingtotellmeandyou'vesaidthis,"Well,ifImakeallthebondholdersrichbyholdinguptheirbondprices,thenthecompaniescanissuemoredebt,andthentheycanexpandandhiremorepeople.

So,you'vealreadygivenmethedefinitionofTheWealthEffect,ortheinequalitythatyou'retryingtofosteraswell.So,thisisgoingtobealegacyofit.

Thefinalthoughtforyou,theFederalReservekeepstellingusaboutthesepolicies,"Oh,well,we'regoingtodothisforawhileandthenthemarketswillrecoverandthenwe'llgetoutandwe'llstop."Iheardthattwelveyearsago.Twelveyearsagotheysaid,"We'regoingtodothis‘unconventional’policyofquantitativeeasingandthenoncethemarketsstabilize,we'llstopdoingit.Theytried;theyendedQE1,asyoumentioned;andthenthemarketswobbledin2010,andthentheydidQE2;thentheyendedQE2andthemarketswobbled,andthentheydidOperationTwist;thentheytriedtodotheTaperTantrumandthemarketswobbled,andtheycamebackintothemarket;thentheytriedtogetoutagaininthe4thquarterof2018,andthemarketswobbled(fell20%bytheS&P500),andthentheturnedaroundandtheygotbackinagain.They'renevergettingoutofthispolicy.

They'renevergettingout.Justlike,twelveyearslater,theynevergotoutofQE,Idon'tthinkthey'regoingtogetoutofanyofthesepolicies.They'lltry;marketswillthrowafit;andthenthey'llcomerightbackaswell.So,thisisgoingtobe,tosomeextent,untilthemarketsrejectthem,thisisgoingtobethestatusquowiththewaythattheytrade.

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Moritz:So,theyarelikeadrugaddict.It'slikewe'redoingthosemeasuresinperpetuitybutwhat'stheendgameofthat?It'sdifficultformetobelievethatyoucanjustsay,"Yeah,let'sdothatforthenextten,twentyyears.Whateverthecasemaybe,there'salittlebitofafire,we'llthrowliquidityatit,we'llextinguishthefire.Thisisalwaysgoingtowork."Ithinkatsomepointtherewillprobablybeanaturalbreakingpointwheretheywilllosethetrustofthemarketandthenthethingfallsapart.

Jim:Yeah,Iagree.I'llofferyouanideaofwherethatbreakingpointisandthat'sinflation.Now,that'ssomethingwehaven'thad,toanygreatdegree,atleastbythemeasurednumbersorbythemarket'sperception.I'mclearaboutthosewords,"themeasurenumberandthemarket'sperception."

WhenIsay,“Inflation,”peoplesay,"Oh,Idon'tcarewhattheCPIsays,lookatthepriceofthis,orthepriceofthat.Iseeinflationeveryday."OK,youmay,that'scostofliving,that'salittlebitdifferentthantheconsumerpriceindex.Butmoretothepoint,themarketdoesn'tseethat.Butifthemarketperceivesthatthereisinflationandthatinflationstartsup,thenyou'llseearejectionbybondinvestors.

There’sonegrouplargerthantheFedandthatiswhatEdYardenicoinedfortyyearsago-TheBondMarketVigilantes.ThecollectivewisdomofthebondmarketislargerthantheFed.

Theproblemisthatthebondmarket,rightnow,isnotofacollectivewisdom.Itisnotofonethought.Therearepeoplethereallovertheplaceinthebondmarket.Somearebullish,bearish,up,down,left,right,forward,backward.

Butifyougetinflationandtheneverybodyisoftheperceptionthatinflationishereerodingthevalueoffixed-incomeinvestments,thentheybecomeofonemindandthatonemindistosell.Interestratesgoupandthen,atthatpoint,theFedcan’tstopinterestratesfromgoingupuntilthemarketdemandsthattheyjuststopwiththeprofligatepolicies.

Now,we'renottherenow,andIdon'tthinkwe'regoingtobeatinflationin2020.Idoworrythatyoumightstarttoseethebeginningsofinflationin2021or2022aswell.Thenthatmightbecometheproblem.WhydoIthinkwe'regoingtogetinflationafterthiscycle,in'21or'22?You'vegotalotofstimulatingofdemand.Wekeephandingpeoplemoney.Here'ssixhundredbucksaweek.Here'satwelvehundreddollarcheck,gospendthatmoney.

We'vegota13%unemploymentratewhich3%hasbeenmisclassifiedso,ineffect,16%unemploymentrate.Simplyput,thatjustmeansthat,inaggregate,we'reproducinglessstuff.Notasmanypeopleareworkingastheyusedto.Afallofaggregatesupplystimulatingaggregatedemandshouldproducehigherpricesoncewegetoutofthiscycle.ThenyoumightseearejectionofthesepoliciesbytheFed.

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IfI'mwrongonthat(wedon'tgetthatinflation),andthepolicieswork(liketheywouldsaythattheyworkedtenyearsago);thattheFedsteppedinandtheFedbecameaggressiveandtookoverthebondmarketandstartedsettingprices;maybe[theFed]evengoesallthewaytoformalyieldcurvecontrol(price-fixing),andalltheywouldarguetomeis"goodthingshappened”(Marketswentup,peoplegotjobs,GDPwascreated,everybodygothappy),thenwhystop?

Whywouldyoueverstopthatprogram?That'swhathappenedtwelveyearsagowithQE.Theyneverstoppedit.Ithinkthatthisiswhatwillhappenthistimearound.Again,theonlythingthatwillstopitiswhenthemarketdemandsthattheystopitandIthinkthat'sinflation,andIthinkthatcouldbeastoryfornextyearandmaybetheyearafter.

Niels:Iagreewithyourpointaboutinflation.Ithink,actually,it'saveryinterestingpoint.Also,youhavementionedaboutoncethebondmarketstartstothinklikeoneinsteadofmany,asitisatthemoment.

I'mstillreallycuriousaboutthemotivationoftheFedwhich,obviously,hasreceivedalotofstick,oratleastPowellhas,fromtheWhiteHouse.ThenIcameacrossthisdocumentaryafewmonthsago,ThePrincesoftheYen,andRichardWerner'sworkfromtheinsideoftheJapanesemoneysystembackinthe'80sor'90s.Atleast,basedonhiswork,hefeltthattheBOJwaskindofengineeringthebubblewithagoalofgettingmoreindependence.Oncethebubblebursteveryonewasunhappy,itwouldleadtomoreindependencefortheBOJ.CouldtherebeanysimilaritiestowhytheFedisdoingwhatit'sdoing?Couldtheywantmoreindependence?Clearly,it'snotreallyindependent.It'sclearlybeinginfluencedbyotherparties.

Jim:Yeah,iftheywantmoreindependencethey'regoingaboutitthewrongwaybecausethey'vegotlessindependencerightnow.Letmebackuptothebeginningofyourquestion.TheWhiteHousehasbeencriticizingtheFed,butifyoulistencloselytowhatTrump'scriticismshavebeen,theyhavesimplybeen,"You'renotprofligateenough,you'renotpushingthestockmarketup.”

RightbeforethepandemichitPresidentTrumpspokeattheEconomicsClubofNewYorkandhesaid,"Iguaranteeyou,ifJ.Powelldidtherightthing,theDowJonesIndustrialAveragewouldbe10,000pointshigher."Oh,Iknowwhatyouwanthere,youwantthemtoforcethestockmarketupandyouwillthenjustifyitbecauseitwillcreateconfidenceinjobs.That'swhatthebigcomplaintwasabouttheFed.

Now,theproblemisthatwhenthepandemichitandtheeconomywastanking,Igetit,theFedcan'tjustsitthereandjuststartcitingobtuseeconomictheory,theyhadtodosomething.

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So,theysteppedinandtheydidwhattheycouldinthattheystartedtomassivelycutrates,andexpand,andstartbuyingbonds,andstartedalloftheseprograms.

But,theFeddoesn'thavetheauthoritytobuycorporatebondsorETFs,maybedon'thavetheauthoritytobuymunicipalsecuritiesandalotoftheseloansthatthey'rebuying.ThewaythattheyskirtedtheruleswastheTreasuryistechnicallybuyingthis.TheycreatedaspecialpurposevehicleandtheTreasury(theU.S.taxpayer)fundsthatspecialpurposevehicle.TheFedactsastheirfinancierandjustgivesthemtheextramoney.ThentheFedwentoutandhiredBlackrock,onbehalfoftheTreasury,inordertodoallofthetradesandalotoftheseprogramsaswelltoo.

So,whattheFedactuallydid(iftheywantedmoreindependence)isthattheyactuallybecameadivisionoftheUnitedStatesTreasuryDepartment.They’vegottheleastindependence,maybeofourlifetime,rightnow.

Thisisgoingtobeinterestingbecause(let’sassumeTrumpstaysasPresident)iftheFeddidwanttoexittheseprogramstheydon’townthesesecurities,theTreasuryDepartmentownsthese.TheTreasurySecretaryservesatthepleasureofthePresidentoftheUnitedStates.It’sunclear,doestheFedneedthepermissionoftheTreasurytostopdoingthis?Orcantheyjustsay,“That’sit,we’redone,nomore.”

So,theyareofonemind.Infact,ifyoulookatJ.Powell’scalendar(they’vereleasedhiscalendar,now,forApril,andhiscalendarfromMaywillbereleasednextweek),buteverysingledayinthemonthofAprilJ.PowellhadatleastoneconversationwithSteveMnuchin,everysingleday.IsuspectsomethingsimilarlikethatwillhavehappenedinMayaswelltoo.

So,theyaretheleastindependentthanthey’veeverbeenrightnowbecausethey’resotiedupwiththeTreasury.So,it’sreallybeen…Iknowalotofpeoplethinkthat-thattheFedwantstobemoreindependent.Theyactuallywenttheotherwaywiththis.

It’sbeenaworkinprocess.Idon’tknowwhereit’sgoingtogonext.Idon’tknowhowthey’regoingtoextricatethemselvesfromthislackofindependenceorwhatitwillmeaninthefuturebutitwillbeinterestingtowatch.

Rob:AlotofpeopleareinpreparednessforMMT.So,thecentralbankshouldbedoingMMT.Istruggletoseehowthat’sdifferentorbetterthangovernmentthemselvessteppinginandsaying,“Right,we’renotgoingtobeabletodothisthingofpumpingupassetpricesandthereforeimprovingtheworldeconomy.That’sjustnotthewaythingswork.Weneedtointervenedirectlyintherealeconomyandactuallyspendmoneyonthefiscalside.”

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Jim:Iagree.Letmegiveyouastatistic.IftheTreasury’sprojectionsandtheFed’sprojectionsarecorrect,betweenMarchandAugusttheyaregoingto,ineitheracombinationofeitherprintorborrowtheequivalentoffouryearsoftaxreceiptsinfivemonths.So,theywillhavecreatedfouryearsoftaxreceiptsinfivemonthstogotowardstryingtobattlethecontractionintheeconomyandthepandemic.

Let’sjustforargument’ssakesaythatitworks.Wegetnothingbutgoodthingsthathappen:jobs,GDP,highermarkets,noinflation.Therehasbeenanargumentthathasbeenmade,thatImadeittoo:OK,ifyoucouldpullthatoffwithouttherebeinganydownside(justtostarklygetmypointacross),whydoweneedtaxesanymore?WhydoweneedanIRS?Whydon’tyoujustprintupwhatwewanteveryyear?CongresscandecidewhattheywanttospendmoneyonandthenjustphoneovertoJ.Powellandhecanprintupthemoneyandawaywego.Becauseifyou’redoingitnow,andyou’regoingtodofouryearsworthofitnow,andyou’renotgoingtohaveanybadthings,whywouldyoustop?Whywouldyoueverstopdoingthatatthatpoint?

So,IdothinkthatwhattheFedisdoing,whatthegovernmentsaredoing,worldwide,withtheirmassiveinterventionisgoingtohaveaprofoundimpactonewayortheother.Eitherit’sgoingtoproducesomekindofmalinvestmentorsomeinflation(andthat’sthecampIwouldeventuallybein),orifitworksspectacularlythenwehavetorethinkthiswholecapitalismthingalloveragainandask,“Whydon’twehaveourcentralbanksandourgovernmentstohaveapermanenthandinmarkets,allthetime?”Ifeverytimetheystepinandputthathandintherethenonlygoodthingshappen,thenwhywouldweeverwantthemtotakeitout?

Andinvestors?They’lljustbeshortsighted:upisgood,downisbad.Idon’tcarewhatthepolicyisbutifmystockpricesarehighertomorrowthantheyweretoday,it’sagoodpolicy.Ifmystockpricesarelowertomorrowthantoday,itwasabadpolicy.That’skindoftheonlywaytheylookatit.That’swhytheFeddoesn’tgetmuchcriticism.

IhadaSenatoroncetellme…IaskedaSenatoronce(whowasontheSenateBankingCommittee),“Whydoesn’tanybodyeverpresstheFedinanyoftheirquestions?”Hesaid,“I’lltellyouwhy(hewastalkingtome),supposeIwrotedownabunchofhardquestionsfortheChairmantoanswer.SupposeIreadallthosequestionsandsupposeItrippeduptheChairman;theDowfallsathousandpoints;I’mintrouble;I’mintroubleforaskingthequestion,nottheChairmanforbotchingtheanswer,orthepolicy,I’mintroubleforputtinghiminthatuncomfortableposition.”

So,aslongastheydostuff,theFed,eventhoughIthinksomeoftheseprogramsthatwe’redoingwithcorporatebondsandstuff,mightnottechnicallybelegal.That’smyopinionandIcouldbewrongonit.Butnooneisevengoingtoriskaskingthequestionbecausetheyallliketheoutcome.Themarketisgoingup,everythingisgood.

So,that’swhatIsaid,givenallthat,IthinkthattheFedthinkingthat,“Oh,we’regoingtocreatepleasureforeverybodyandthenwe’regoingtoleave.”Youain'tleaving,youain't

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goingtoleave.That’sgoingtobethe…Or,you’regoingtowindupgoingtoofarandcreatingmalinvestmentandproblemsandthenthemarketwilldemandthatyouleavebecauseyou’retheproblemnotthesolution.ThosearethetwopossibleoutcomesIseeinthis.

Niels:Moritz,whatareyourthoughtsatthispoint?

Moritz:Well,thanksforallofthat,Jim.I’dliketo,ifyouguysareOKwiththat,I’dliketoshiftgearsjustalittlebitonyou,Jim,becauseIrememberoneoftheconversationsthatyouhadwithourcommonfriend,ErikTownsend,acoupleofweeksback,thatrelatedtotheoilmarketandtheoilmarkets.Atthepointwhen(Ithink)youhadthediscussion,[theoilmarket]wasabouttostartitsmassiverecovery.Thisrecoveryhassincecontinued(probablytothesurpriseofmany,myselfincluded).[It’ssurprising]howstrongthatrecoverywasandhowsubstantiallythecontangothatusedtobepricedinthemarketshasbeentakenaway.Becausethisisaglobalmacromarket,what’syourviewonwherewe’regoingfromhereasfarasoilisconcernedandasfarassupplyanddemandandthemarketbeingbalancedandthetermstructureofthatmarketisconcerned?

Jim:Yeah,what’shappenedintheoilmarkethasbeenjustextraordinaryinwhatwe’veseeninthelastfewmonths.TheleastbitbeingthenegativepricesthatwehadintheMaycontractacoupleofmonthsago.Alotofthatwasafunctionoffinancialengineering.Itwasafunctionofalotofthesefundsthatbuythefrontendcontractandthencontinuetoroll.Ithinktheywereattheprecipiceofcreatinganoversupplyinthesupercontangothatwe’veseeninthemarket.

Now,sincethatdebacleinMay,whathashappenedwiththeoilmarketisalotofthefundsthatinvestinoilhavebeenlargelycarriedoutofthemarket.ThefamousoneisUnitedStatesOilCompanytheETF,itwasbarredfromcreatingorredeemingnewsharesandtheyjustgotapprovaltodoit,again,justlikeaweekago,andtheyreallyhaven’tstarteddoingitinanymajorwayjustyet.AlotofotherfundsliketheChinaOilFundblewupaswelltoo.

So,whatyouhadhappenwas,inoil,Ithinkwasthatyouhadwaytoomuchfinancialengineeringandthat’swhatyousawinthewildmovementsinAprilandMay.Nowthatyou’vewrungoffsomeofthatfinancialengineering,thecontangohasreturnedtonormal;thepricehassettleddownataround$35to$40orso(maybeit’salittlebitabovethatrightnow,orthereabouts).

Makenomistake,oilguys,theycanrankrightuptherewithBiotechexecutivesinbasicallymakingupcrapaboutwhatthey’redoing.Fortydollarsisgoingtobeareallytoughproblemfortheoilindustrytocontinuetomakemoney.WhatImeanbythatisthattheseguyswilltell

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me,“Oh,aslongasthepricedoesn’tgounderfiftywe’regoingtobefine.”That’swhattheysaidatthebeginningoftheyear,orat$65,thenitgoesto$48,“Oh,wejustchangedeverything,nowaslongasthepricestaysabove$35…”Wait,howdidyoufixthatinfiveminutes?Theanswerisyoudidn’t.

So,Ithink$40isgoingtobeaverytoughproblemfortheoilindustrytomaintainandyou’reprobablygoingtoseemorecutbacksinproduction,maybesomebankruptcies.It’sprobablygoingtoputaflooronthismarketrightnow,assumingthatthedemandsituationissomewhatstabilizedandthatwedon’thaveanotherviolentdownturnintheeconomyonemoretime.

Ithinkwhatyousawhappen,inMarchandAprilandMayinoilwaswehadover-financializedtheoilmarket.Whenthepandemichitandwehadthatsharpfallinoilpricesandoildemand,oilpriceshadahardtimeadjustingbecauseofallthefinancializationandthenithadtogothroughallofthosewildmovementswithnegativepricesandeverythingelse,basicallypushingalloftheplayersupandnowitseemstobesomewhatmoreclosertonormal.

Niels:Yeah,Iwasjustcurious(maybealsojumpingalittlebitaround),Ithinkwecanallagreethatit’sunusualtimesandit’scertainlysomekindofexperimentthatweareseeinginfrontofoureyesanditmaylastforabitlonger.Atsomepoint,youwouldthinkthatsomethingisgoingtohappen.WesawwhattheCoronaViruscoulddotomarketsandmaybesomethingelsewillhappenandatsomepoint(itcouldbeinflation,asyoumentionedearlier,Jim),itcomestoabreakingpointandI’mjustcurious,inyourview,whenitdoes(wedon’tknowexactlyhowlongthatwillbe),what’sgoingtobethebestsafe-havenassetsdoyouthink?

Jim:Yeah,that’sagoodquestion.Theotherthingthatseemstobehappeninginmarketsis(tothefirsthalfofyourquestion),somethingwillcomealongand,Iwouldactuallyargue,aswe’retalkingrightnow,inlateJune,somethingiscomingalongandthatisthat,bymostmetricsyoulookat,theCoronaViruscasecountisasbadasithaseverbeen.

It’sjustnotbadinLondon,NewYork,andParis,so,therefore,it’sOK.ButifyoutakeoutthoselargeurbanareasthatwerehavingabigprobleminMarch,it’sbad.It’sbadintheUnitedStates.TheUnitedStatesisshowingsomenumbersthatwehaven’tseensinceearlyMayorlateAprilintermsofthenumberofcases.

ThecityofHoustonannounced,onthedaythatwe’rerecording,thattheyareelevendaysawayfromrunningoutofICUbeds–thatithasgottenthatbad.NowthereasonIsaythatisthestockmarketisalsocontinuingtorecover.ThedaythatHoustonsaysthatwe’reelevendaysfromrunningoutofICUbeds,whichNewYorkCity,atitsworstpointnevergotthatbad.

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Houston,whichisthefourthlargestcityinthecountryhasalreadyeclipsedthatintermsoftheyareinaworsepositionthanNewYorkCity’sworstposition.

Thestockmarketisrecovering.It’supanother1%.So,whatseemstobeinterestingis,thevirusdoesn’tmatteranymore.Ithinkthereasonthatthevirusdoesn’tmatteristhatthere’sthiscollectiveopinioninthemarket(I’mtryingtointerpretthemarket),thatreallywhattheproblemwaswasn’tthevirus.Theproblemwasthelockdowns.[Themarketsarethinking],“Nowthatwe’vegottenridofthelockdowns,Idon’tcarehowmanypeoplegetsick,Idon’tcarehowmanyhospitalsystemsgetoverrun,aslongaswedon’tlockdownagain,we’refine.”

So,thevirusmaycomeback.Itmaycomebackinastorythatweareoftheopinion,especiallyHouston,HoustonisthemiddleofTexas,thefreespiritTexans,thelastthingthey’lleverdoislockdownHouston.Well,ifitcomestothatIdon’tknowifitwill,thatcouldactuallywindupbecominganotherrealproblemforthemarkets.

Also,thereisamyopathyinmarkets.NewYorkCityopenedyesterdayandthey’reallowingoutdoorCafés.So,that’s80%oftheworld.NewYorkCityrestaurantsare80%oftheworld.So,asfarasthem,that’sgood.Everythingisgettingbetter.What’shappeninginHouston,what’shappeninginArizona,what’shappeninginIndia,what’shappeninginAfrica,ormaybeSouthAmerica?Ugh,yeah,that’sdifferentstuff.Well,actuallyit’sallbadinallofthosecountriesiswhatyou’reseeingintermsoftheviruscount.

So,thefirstthingI’dmentionisyeah,therewillalwaysbesomethingthatcomesalong.Inflationcouldbeoneofthem.Theotheronecouldbethatthelastwordonthevirusmaynotbework.Whetherit’safirstwaveorsecondwave,it’sasemanticalargument.Youhearpeoplesay,“Whathappensifwegetasecondwave,whichtheymeananincreaseofcases,inthefall?”No,it’shappeningrightnow,inthelatepartofJune,andwehavejustcollectivelydecidedthatitdoesn’tmatterrightnow.Itstillmay,ifitcomestothattherehastobesomekindofchangeorforcedchangelikealockdown.That’swhateverybodyisassuming,thatnothingwillcomeofthis.

Niels:It’sinteresting,right?Firstofall,Iwouldsaythatit’sinterestingthatthemarketdoesn’tpricein,rightnow,thepossibilityofanotherlockdown,ornotinalargedegreebecauseweallknowthatassoonaspoliticiansandauthoritiesfindanewtoolthattheycanuseeffectively,theytendtouseitveryquicklyinthefuture.So,myviewis,certainlynowthatwehaveinventedthelockdown,Idon’tthinkit’sthelasttimethatwe’regoingtoseethat.That’sonething.

Theotherthingis,ofcourse,whatabouttheunderlyingeconomy?Areweseeingmoretravelers?Areweseeingpeopledriving?Isfuelconsumptionactuallyshowinganysignsofastrongrecovery?Publictransportation,arethetrainsfull?Idon’tseeit.

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Rightnow,aswespeakinlateJune,asyousay,I’mseeingheadlineswhereoneofEurope’s,maybeoneoftheworld’slargestairlinesisonthebrinkofbankruptcyiftheycan’tgetthisrestructuringdeal.I’mtalkingaboutLufthansa,inthiscase,inmyneckofthewoods.So,thereisreallyadisconnect,inmanyways,butofcourse,that’swhatwenormallyseewhenthesethingshappen.

It’slikethiscartoonwhereyouseepeoplepushingupatrainandwhenthelastpersonjumpsintothetrain,ofcourse,thereisnoonelefttopushitanyfurtherandthat’swhenyouhavethebig…So,weneedmorepeopletobegoingfromthecampoftheBeartothecampoftheBull,sotospeak,justbeforethingscanunravelpossibly.

Jim:Youknow,you’reright.Now,asfaraswheretheeconomyisgoing,thisweekisbetterthanlastweek,nextweekwillbebetterthanthisweekandworldwideeconomiesarerecovering.I’llevengoyouoneotherthingtosaythat,itispossiblethatthewaythatwemeasuretheeconomy,itispossiblethatwehavealreadyseentheendoftherecessioninMay.But,thatdoesn’tmeanthattherecoveryisgoingtobeinstantaneous.Thatcouldbealongperiodofrecovery.

I’vebeenmakingthepoint,forsometimenow,thatifyoulookatoutput,GDPoutput,usingtheUnitedStatesforexample,in2008,atitsworstpoint,theeconomy’soutputwas96%ofwhatitwasinthe2007peak.RealGDPdeclinedallof4%.Thatproduceda56%correctioninthestockmarket,10%unemployment,alotofangstandanxiety,theTeaPartymovement,OccupyWallStreet,andeverythingelse.

In1929,theworstrecessioninhistory,wewentto78%oftheoutputin1932thatwewerein1929.Itwas78%.So,IthinkthatwhatpeopleneedtounderstandisthatI’veheardalotofpeoplesay,“Oh,theeconomyisrecoveringnicelyanditwillbebackto90%ofwhereitwasbytheendoftheyear.”90%,that’smorethantwiceasbadas2008.That’saneardepression.

Youhavetogetbackto96%justtorepeathowbad2008was.You’vegottogetbackto98%inordertogetbacktoagardenvarietyrecession.Soyeah,weareseeingthenumbersrecover,weareseeingthatsubwaytrafficinNewYorkCityisnowupto25%ofwhatitwaspre-pandemic,25%.Upfromlike4%.We’reseeingairlinetrafficintheUnitedStatesisaround21%ofwhatitwaspre-virus.Weneedtogetitto98%inordertosaythatwe’vereallyrecovered.

Ifwecomeup60%,70%,andthenstall,whichwouldbeanotherdoublingifnottriplingfromwherewearerightnow,thatisabadrecession.So,Ithinkalotofpeoplearenotappreciativeofhowbadthiscanbefortheeconomy.Thethingthatthey’refocusedonnowistherateofchange–thisweekisbetterthanlastweek;andnextweekwillbebetterthanthisweek.

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So,thehopewillcontinuetosay,“It’sgettingbetter.”Itisgettingbetterbut,ifwe’vegot16%effectiveunemploymentyoucan’tgetbackto10%unemploymentandjustsay,“Hey,that’sit,it’salldone,it’sallfixed.I’msorryyou19millionpeoplethatlostyourjobs,toobadforyou.Mystockportfolioisatanewall-timehigh,andtheeconomyisdoingwell,yeahforme.”

Thatisaprescriptionfordisasterifthat’sthementalitythatwe’regoingtotake.Weneedtosay,“Whenistheunemploymentrate,whichiseffectivelyat16%,goingtogetbackunder5%?”Mostpeoplethinkit’sgoingtotakeseveralyears.Ok,whatarewegoingtodointhemeantime?Arewegoingtocontinuetosubsidizeeverybodyforseveralyearswithextramoney?Arewegoingtocontinuetoblowthesebudgetdeficitsoutwithextramoney?Orarewejustgoingtosay,“Sorry,youlose,youdon’townstocks,Ido.”So,it’sgoingtobeaverydifficultthingforustotryandhandle.

Soyeah,theeconomyisgettingbetter.There’snodoubtaboutit,andtheworst,thebottommightalreadybein.Buttogetallthewaybacktothatoldhighwon’ttakeaperiodofacoupleofmonthslikeoldrecessionsusedto,oraquarterortwo.Itmighttakeseveralyearsandthatisgoingtobeproblematicasweworkthroughthis.

Rob:Yeah,it’sinteresting,isn’tit,becausewe’rekindofturningthingsaround,likeyousaidearlier,thebondmarket’snotreallygivingapricesignalanymore.Theequitymarketisn’treallyworkingefficientlyandgivingussignals.It’sreallyinterestingtolookattheU.S.wheretherearedefinitelysignsofasecondwavewiththeincreaseincasessinceJune.Whereas,inEuropeand,sayGermany,caseshavecrackedalittlebitfromonanextremelylowbaseandyettheEurostocksarestillsignificantlydownfromthepeak.Whereas,theS&PandtheNasdaqprettymuchrecoveredorhaveevengonethroughthepreviouspeak.

But,isthereaproblem?I’mabigfan,don’tgetmewrong,ofusingthis(somepeoplecallit)alternativedata,thismorehigh-frequencydatathatyoucaneffectivelyusetosortof‘nowcast’themacroeconomy,butisn’ttheproblemwithusingthatinasimplewayofsaying,“Well,weneedtogetbacktothepreviouspeak.”There’sadangerherethatthere’sgoingtobestructuralshiftsinconsumptionanditmightbethatthelong-termnormalfor,say,traffic,isactually80%ofwherewewerebeforeratherthan100%.Ordoyoureallythinkthatwearegoingtoeventuallymovebacktowherewewere,intermsoflookingatthosenumbers?

Jim:No,Idothinkthatthatisgoingtobetheprobleminthatyou’refocusedontrafficalot.Thatmaybethenewpeakisgoingtobe80%.Well,there’sasimplereasonwhy.Ithinkoverhalfofallgasolineisconsumedbypeopledrivingtoandfromwork.Ifthisworkathometrendcontinues,andIthinkitwillbecauseoneofthethingsthatI’vearguedaboutwhat’shappeningwiththepandemicis,whatevertrendisinplace,workathome(foroneexample).Youcanputthemintotwobuckets.Wasitanexistingtrendthat’sbeingacceleratedbecause

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ofthepandemic?AndIthinkworkathomeisonethatwasinplaceandisbeingaccelerated.Or,wasitonethatwascreatedbecauseofthepandemic?Well,ifit’sbeingaccelerated,it’sgoingtobeveryhardtoreverseit.Ithinkalotofpeopledon’twanttosayitoutloud,butIthinkthey’reverycomfortableworkingathome.Ithinktheylikeitthiswayandtheywouldliketocontinuetohaveitthisway.

Well,ifwe’regoingtodriveless,andwearegoingtoneedlessofficespacebecauseIthinkalotofcompaniesaregoingtobeveryhappywiththat.Look,wewerealwaysafraidoftheworkathomethingbecausewealwaysthought,eh,peoplewon’treallywork.They’llscrewaround,buttheywon’twork.Well,wefoundoutthattheydo.Theydoworkenough.

Now,IlookatmyITexpensesatmycompanyandIgo,“Allmyemployeesarepayingfortheinternetconnections.I’mnotpayingforit.TheyallhavetotakeitonthemselvestodoalloftheirownselfITbecausethere’snoITguyintheirhome.Ifthey’renotgoingtocometotheoffice,Icanditchhalfmyofficespaceandsavealotofmoney.

So,youcanseethatbecomingthetrend,thatthelargerandurbanareasstarttoshrinkbecausewedon’twanttospendthetimecommutingtogotoanoffice.Of,ifwedo,it’soneortwoorthreedaysaweek,notfivedaysaweek.Thatwillbecomeachangefortheeconomy.Therewillbealotofstructuralunemployment,therewillbealotoflostGDPthatwehavebuiltintotheeconomynowbecauseweassumethatdrivers(touseanumber)intheUnitedStatesconsume10.5millionbarrelsadayofoil,indriving,whichiswhattheyweredoingpre-pandemic,not8.5,whichiswhatthey’redoingrightnow.

Well,thatextratwomillionbarrelsadayisgoingtobealotofjobsandalotofGDPlost.Alotofthoseofficespacesaregoingtoseetheirleasesholdcomeupandthere’sgoingtobealotofgivebackofofficeandthey’regoingtohavealotofglutofofficespace.There’sgoingtobealotofpeoplethat,maybe,ifIcanworkathome,andhomecanbeanywhereIwantittobe,thenwhydon’tIbecomelikeNiallFerguson(theeconomistattheHooverInstituion),whohasmovedtohishouse.Hefamouslysaid,“Look,I’vemovedtomyhouseinMontana.Ihaven’twanderedmorethanfivemilesfrommyhousesinceMarchandI’mfinewiththat.Icouldjuststaythiswayforever,asfarasI’mconcerned.”

So,ifI’mgoingtoworkathomelet’sgobig,andlet’ssellourhouseinsuburbanNewYork,orManhattan,andlet’smovetothebackwoodsofVermontorMontana,orwhereeveryouwanttomove.So,youcouldseeamassivechangeintheeconomy.Thatwilltakeyears;thatwillcreatedisruption;thatwillcreateproblemsintheeconomythatwillbemuchlongerterm.Alotofpeoplewillfeelleftoutanditwon’tbethatsimple.

Soyeah,whenIhearthePresidentorLarryKudlowsay,“Well,theeconomyisgoingtoboomrightbacktowhereitwasinearly2020or2019.”Idon’tknowifwe’reevergoingtogoback.I’mnotsayingit’sgoingtobebad,I’mjustsayingit’sgoingtobedifferent.Ijustdon’tthinkyoujustgobackandcloseyoureyesandimaginewhatthingswerelikelastsummerandsay,“We’regoingtogorightbacktoexactlythatspot.”EvenJ.Powellsomewhatseemstohope

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forthattoo,“We’regoingtogorightbacktowherewewerelastsummer.”GPDoutputmaygetthereoveraperiodoftimebutthat’sonlyafterwe’verestructuredtothisnewkindofthinkingthatwascatalyzedbythepandemic.

Niels:JustbeforeMoritz,maybeyouhave,I’msure,aquestion.Ijustwanttoaddonethingtothisparticularpointandthatis,tome(andIwanttohearyourthoughtsaboutthisaswell,Jim,becauseyouknowmuchmoreaboutthesethingsthanIdo),italmostseemstomethatthiscouldbeoneofthoseparadigmshiftsthatwe’reenteringinto.I’mnotsayingthatit’stheCoronaVirusthat’sthefault,butwhatwe’vegenerallyseen,inabiggerpicture,isyou’reseeingpeopleworkingforcarmanufacturers,people,asyousay,workinginthefossilfuelproduction.Wehavetransportationwheretechnologyisdisruptingthatwithdriverlessthis,thatandtheother.

Itseemstomeit’salmostlikewhathappenedtothefarmersahundredyearsago,whereitwentfrombeing25%or30%ofallpeoplewereemployedinthatsectorandsuddenlytherewasn’tmuchuseforthemwithtechnologyandotherchanges.Nowwe’redownto2%or3%ofthat.Asyousay,ithasmassiveconsequences.Actually,rightnow,Iwouldn’tknowwherethesepeoplewouldgotofindanotherjobbecausethat’swhattechnologydoes.Italso,actually,limitstheamountofpeoplethatyouneedtoproducemorestuff.

Jim:Yeah,there’saprofessoratNorthwesternUniversitysuburbanChicago,BobGordon,andhe’sdonealotofworkonproductivityinjobsandhisconclusion,whichIlargelyagreewith,hasbeenthatjobs,technology,isanetcreatorofjob.Tousethefamousexamplethathe’sbeenusing,VisiCalcinventedthespreadsheetin1979.Well,thatmeantthedeathoftheaccountingclerkjob.Hundredsofthousandsofaccountingclerkjobswereeliminated.Butitcreatedawholenewclassofjobscalledthefinancialmanager.Wecreatedmorepeopleusingspreadsheetstoanalyzedatathanweeliminatedpeoplewhosejobwastojusttypedataintoacomputer.

So,itisanetcreatorofjobs.Idobelievethat,overtime.Buthere’stheproblem,whensomethinglikeautonomousdrivingcomesin,it’sreallysimpleandit’sreallyeasytoseewholoses.Thedriverloses.Weworrythattheytendtobelower-skilled,whatarewegoingtodowiththem?Thenwegetcallstowringbackandnothavethattechnologicaladvance,slowitdown.Butitwillcreatewholenewindustriesandwholenewjobs.Idon’tknowwhatthosejobsare.Maybeyoudon’t,nobodydoes.

I’vesaidthatwhenSteveJobs,in2006,heldupthefirstApple1iPhone,howmanypeoplelookedatthatphoneandsaid,“Wow,that’stheendofthetaxibusinessbecauseitwillcreateUber.Oh,wow,that’stheendofthehotelbusinessbecausewe’llcreateAirBnB,”becauseof

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thewholethingwiththeAppStoreandthesenewphones.Nobodysawthatcoming.Itkindoforganicallyhappened.Yougivepeopletheseopportunitiesandtheycreatethem.

So,wewillcreatenewjobs.Wejustdon’tknowwhattheyare.Theoldjobswillgofirst,thenewjobswillcomelater,theoldjobsweknowwhatthey’regoingtobethataregoingtobelost–thedriverjob.Wedon’tknowwhatthenewindustriesornewjobsaregoingtobecreatedbecauseofdriverlesscars.So,I’mnotafraidofthefuturehappeninginthatrespect,butIunderstandtheanxietyandthestressthatit’sgoingtocausetogetthere.Itmightevencausearetardingoftheeconomybecausetheoldjobsgofirst.Wewon’tcreateanythingexceptthatwe’lljustgetridofdriversandletcarsdrivethemselves.Then,whenwestartrealizingthecostoftransportationhasgonedownsomuch,wholenewideasonwhatyoucanusetransportationforwillbecreatedandtheywillcreatenewjobsgoingon.

Theinternetwiththeinventionofblogsilluminatedalotofnewspaperjobs,oralotofreporterjobs,mediajobs.Butthewholebloggingindustrycreatedalotmoreopportunitythanthejobsthatwerelost.But,thatwilltaketimetogofromonetotheother.It’snotseamless.It’salittlebitchaoticandalittlebitmessy.ButIdothinkthatwillbewhatcomesofit.So,itwillbeadifficulttransitionbutwe’regoingtohavetomakethattransition.Ijustdon’tseehowwe’regoingtogoback.

Thepandemic?You’reright,itmaynothavecreatedanyofthis,butwhatitdiddo,Ithink,isacceleratedsomeofthesetrendsandwe’regoingtoseeabiggeraccelerationofsomeofthesetrends,Maybeadeurbanization;maybeaworkathometypeofthing,thosekindsofideasIthinkwe’regoingtoseemoreofthataswemoveforward.

Moritz:GreatJim.Wewanttobeconsciousofyourtime.We’rejustaboutaboveanhour,butIguessthemillion-dollarquestionthatIwantedtobringup,andwedidn’tevenspeakaboutgoldyet,butgivenallthatwe’vejustdiscussed,howwouldyouthinkoneshouldallocateorstructuretheirportfolioinordertobebestpreparedforwhat’stocome?

Jim:Well,that’sagoodquestion.Short-term,Ithinkriskassetsaregoingtodobetter,intheshort-term,becauseIthinkthatthepullofcentralbanksandgovernmentstryingtoreflatemarketsisgoingtostaystrongandit’sgoingtobetoughtofightthat.So,it’sgoingtogoup.

Longer-term,you’vegotanothersixmonths,maybeayear,maybethree[months]–threemonthstoayearofdecentmarkets,wouldbemyguess.Longer-termIfearthatthisisgoingtocreateamalinvestmentandinflationthat’sgoingtohavefinancialmarketsstrugglingthereafter.Theinflation,whenyouask,so,Ithinkthatriskmarketswillthenstruggle.

Asfarasinterestratesgo,they’regoingtostayrangeboundandthey’regoingtostaykindoftighttowheretheyarerightnowwithaslightupwardpullbecauseIthinkthatinflationinthe

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futuremightbeaslightupwardpullbutnotabigupwardpull.So,there’snotgoingtobeawholelottodointhebondmarket.Andifyouuseitasariskreducer,likeina60/40portfolio,Idon’tthinkit’sgoingtoworkaseffectivelyasitusedtointhepast.

Gold,youaskedaboutgold.I’vealwaysarguedthatgoldandcryptoskindofgointhesamecamp.Howdoyougetyourmoneyoutofthefinancialsystem?Well,there’sreallynogoodwaytodoit.Theclosestwaywehaveisgoldormaybecryptos.Buthere’stheproblemwithgold.It’sstillsotiedtothefinancialsystembecausepeoplesay,“DoIbuygold?”AndIsay,“Yes.”Andtheysay,“Good,I’llgobuysomeGLD.”Well,waitaminute,thereasonyouwanttobuygoldisthatyouthinkthere’sgoingtobeinflation,orthere’sgoingtobesomekindofaproblemandthatyouwanttohavegoldasahedge.Butifyou’regoingtorunrightintoGLDthengobuyTeslabecauseit’sthesamething.You’vestillgotyourmoneyinthefinancialsystem.Gobuysomecoinsandburytheminyourbackyard.Nobodyknowshowtodothatsotheydon’tdothat.

So,IthinkI’mmildlybullishongold.Ithinkgoldshouldbegoingalothigher.ButwesofinancializeditbetweenETFs,andfutures,andderivativesthatit’ssotiedwiththefinancialsystem.LookatwhatitdidinMarch.Wheneverythinggotreallyugly,whichisthetimeyou’resupposedtoowngold,itsoldoff,becauseitalsohasanelementofbeingafinancialinstrumenttooanditsoldoffwitheverythingelse.So,I’mmildlybullishongold.IftherewasawaytoreallyseparategoldfromthefinancialsystemI’dbealotmorebullishonitthannow.So,short-termriskmarketsgoup,longer-termIfeelthatthey’regoingtohitaceilingandrunintotroubleafterthreemonthstoayear.Ithinkinterestratesaregoingtomeandersideways.Ithinkforthoseina60/40portfoliothatthinkthatthat’stheiredge,they’regoingtobedisappointedbyit.Ilikegold,butI’mkindofmildlybullishongold,I’mnotwildlybullishongoldrightnow.

Niels:Well,Jim,onthatnotelet’swrapupourconversationbeingmindfulofyourtime.Thankssomuchforspendingagoodhourwithus.WereallyappreciateitandI’msureallofourlistenersdoaswell.Bytheway,toallofyoulisteningtoday,makesureyoufollowJim’sworkonTwitterandatBiancoResearch,ofcourse.FromRob,Moritz,andmethankssomuchforlisteningandwelookforwardtobeingbackwithyouaswecontinueourGlobalMacroMiniseries.Inthemeantimebewell.

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