Global Macro Podcast #008 | feat. Jim Bianco

[Music] there's one group larger than the fed and that is what ed yard danny coined 40 years ago the bond market vigilantes the collective wisdom of the bond market is larger than the fed the problem is the bond market right now is not of a collective wisdom it is not of one thought there's people that all over the place in the bond market some are bullish bearish up down left right forward backward but if you get inflation and then everybody is of the perception that inflation is here eroding the value of fixed income investments then they become of one mind and their one mind is to sell and interest rates go up and then at that point the fed can't stop interest rates from going up until the market demands that they just stop with the profit policies [Music] for me the best part of my podcasting journey has been a chance to refine my own investment framework through a series of conversations with extraordinary investors in every corner of the world in this series i along with my co-host robert carver and at sea but want to continue our education by digging deeper into the minds of some of the thought leaders when it comes to how the world economy and global markets really work to try and learn how they think we want to understand the experiences that have shaped them the processes they follow and the historical events that have influenced them we also want to ask questions outside our normal rules-based playground we're not looking for trade ideas or random guesses about an unknown future but rather knowledge accumulated over the course of decades in the markets to try and make us better informed investors and we want to share those conversations with you [Music] our guest today is a true master when it comes to providing objective data-driven research with a unique perspective so i'm convinced you will enjoy our conversation with jim bianco of bianco research jim thanks so much for joining us today for a conversation as part of our mini-series into the world of global macro where we relax our usual systematic or rules-based framework to provide you with a broader context as to where we are in a global and historical framework and perhaps discover some of the trends that may occur in the global markets in the next few months or even years and ultimately how this will impact us as investors and how we should best prepare for this future so we're super excited to dive into many different topics in the next hour so not least because you are one of the most prolific researchers that i've come across and what i love about your work is that you are very generous when it comes to sharing it on twitter and other platforms so welcome and let me kick it off with just kind of a 30 000 feet question if you don't mind we've had a number of guests on this series and i kind of asked all of them where they think we are in in a global macro picture because to me at least it feels like it's kind of a blend of things we've experienced before there's a lot of analogies back to the 1929 1930s there are people talking about the japanese bubble in the late 80s of course we refer back to the tech bubble the great financial crisis and then on top of all of this we have this global pandemic that has come into our world which makes it a pretty unique time to be alive and to be an investor so let me just kick it off jim and kind of get your big picture right now yeah thanks for having me i have to start with this is unlike anything that we've seen before first of all you're right we've got a global pandemic going on uh this is not the first time in history we've ever had a global pandemic but interestingly this one is coming or came i should say at the height of a very long expansion and at all time highs in financial markets most of the other ones whether it be 2009 with sars 1968 to hong kong flu 57 or 1918 just to name off a few usually don't come near all-time highs that's more coincidence than anything else on top of that what we did this time that's unique to all the other ones is we effectively did a global economic shutdown that's never been done before no one really knows what that means and we're still all trying to feel around in the dark as to what its implications are so yeah we use a lot of analogies that it's like the 30s here and it's it's like 2008 here it's like 1918 here but we're all just guessing because there is no road map for something like this that we're looking at right now yeah no absolutely i mean i'm gonna just stick with you for a little while and and ask a couple of bigger questions and that rob and moritz will will join in but i did notice that you have a um a webcast out recently maybe even this week where you kind of talk about a few big topics which i think we'll spend a little bit of time on today without a doubt i mean it's kind of the you know rates where we are on that obviously we've seen a massive change in in kind of retail investor behavior and then of course the world is trying to manage reopening the economies you you mentioned about the shutdown which is definitely unique and now we have this equally unique situation is you know how do we restart this thing so let's just jump in maybe with the first point and that's just sort of interest rates and also i think some investors will sit back and look at what's happened in the equity markets in the last few months where we had certainly quite a lot of volatility i think the first time ever we had like a yearly i think it's called an outside reversal where we hit both new highs and new lows compared to last year yet the last couple of months interest rates have not moved dramatically so tell us a little bit more about what you're seeing in in that space interest rates have probably been in my mind the more interesting of the cases because what's happening there is a question about whether or not there is still a market signal left in interest rates that's because of the heavy involvement by let's say the price insensitive buyer of the federal reserve they literally create the money that they're using to purchase securities and so i'm of the opinion that they've greatly reduced the signal there and not only is the federal reserve buying bonds but let's be more specific they're buying mortgage bonds they're buying treasury bonds they're buying corporate bonds including junk bonds anything that has been downgraded since march 22 otherwise known as a fallen angel they're buying etfs they're also looking at buying loans whether or not they're main street loans or uh paycheck protection plan loans and they're also looking into the possibility of buying municipal bonds as well too and they're doing it in an aggressive way in a way that we haven't seen them do it before so it begs the question that the reason that we have markets and the reason we have people like me that look at markets is we try to look at the signals that markets are telling us give us an idea of where the economy is going to go i don't think i could trust any of the signals in the bond market right now with this big a buyer that's why i've always marveled at people that will you know go into great detail about well the yield curve was here and it went there and now it's going over here i don't know if it tells us anything as long as they're not freely traded markets within that taking a step back what's also happened if you look at the investor flows is since march investors have been bailing out of the bond market in a big way they were selling corporates they were selling treasuries they were moving themselves into money market funds foreign central banks even sold over 150 billion dollars worth of treasuries as well too but at the same time that they were doing that the federal reserve stepped in and was at one point buying over a hundred billion dollars a day of bonds now they're down to about five to eight billion dollars a day today currently but it looks like what they've been effectively doing is the words you hear all the time yield curve control all that means is price fixing that they've been trying to fix the price of interest rates and i think that we've already had it and that's why the bond market has exhibited very little volatility and its yields have not moved much and that's why like i said if that's indeed the case that you have effective yield curve control from the fed and they've been offsetting whatever selling that the private sector did and then backed off when the private sector stopped selling i don't know if you've got any signals out of the bond market at all and so it's going to be very tough to use it as some kind of a mechanism to tell us how's the economy going what's the state of inflation and everything else so it's an unusual period because we have not seen anything like this about the closest example we have modern times might be japan and the same thing applies there too the signaling that you're getting on the jgb market about the state of inflation and the economy in the japanese market is very loose if not non-existent it really whatever jgbs do doesn't tell you a whole lot about what's going on with the japanese economy yeah it's interesting you talk about signaling from the yield curve because as part of our global macro series we've had cam harvey on who's obviously the inventor of the yield curve indicator so of course he believes that at least back in june last year there was a signal and he called it i think it's eight for eight now in terms of signaling recession have you ever i mean do you do you put any weight or have you historically put weight on on his way of looking at the yield curve to predict recessions yes i know cam and i think his work has been truly fantastic and i was with him last year exactly saying that that the inverted yield curve was a signal that interest rates were too high that to me is what an inverted yield curve means if you want to put it simply once long-term rates are lower than short-term rates they're just saying that short-term rates are too high and it's restrictive and it can produce a recession and i was there with him on that and we did get a recession oh but it was a pandemic the yield curve couldn't have predicted the pandemic true but we will never know what would have happened without it maybe we would have had a recession anyway without it i tend to think that way as well but since march i'm talking about since march not forever when the federal reserve stepped in in a major way like we've never seen before i think that i'm starting to question signals i'm getting because again it's not a freely traded market it is not the intersection of buyers and sellers making conscious decisions on what they want to do there's a big player in there that is inventing money out of thin air and is using that to manipulate markets to a particular end so that's why i've been very suspect since march about what's going on in the economy as i measure the interest rate market sure rob what's on your mind let's just do a little bit more of this looking back and comparing where we are now versus what might happen before i guess the commonality between this crisis and the last one in the post 2008 is the fact this massive intervention by central banks how would you compare the kind of constitution of that intervention you know then versus now in other words last time there were concerns that the intervention basically ended up pushing up the price of bonds which is obviously what we wanted but that then did not lead to you know banks lending more money price of credit coming down and an increase in consumption of the other end that didn't really seem to have a much of an effect on the real economy is there more like like to be a better outcome now do you think have we have we learned our lessons or is it is it time for another approach or is it a question that they're just not doing enough you know that's a good question and i'm i'll answer the question this way remember that in 2008 and 9 when they did their extraordinary interventions it did produce a recover a recovery came in the wake of those recite interventions to say it that way that recovery lasted for 11 years and that was at least in the us the longest expansion in history but what is not often talked about with that expansion is if you look at the total gain of gdp over those 11 years something like 35 percent it moved up in aggregate 35 higher than it was in 2009 that actually ranks as below average so you had a very long recovery but in total it was a very below average recovery and i've attributed that to the intervention removes or dampens the animal spirits dampens the creative destruction whichever metaphor you want to use for capitalism and while they are able to suppress the cycle so that it lasts longer they the the consequence of that is a cycle that's a lot shallower and so that's why i think we saw the political polarization and we saw a lot of the angst like the tea party movements and everything else about the state of the economy so much so that we had a bit of not only a rebellion in the united states but around the world with brexit and with trump that they were a bit of a rebellion against the status quo not because people weren't happy that we at that time we were entering a seventh year of an expansion but then it was a very poor expansion and so now we seem to have taken the wrong lesson from 2008 and nine and we're going a lot harder about trying to use a lot of intervention to fix the economy and i'll cut it down for you real quickly it comes down to one simple fact measures what now you guys and me we might all think correctly that the idea of financial markets is they're supposed to reflect the real economy so whatever the real economy's doing it gets reflected in the markets the level of the stock market the level of interest rates not precisely every moment they can diverge a little bit but over time they kind of come back and forth to each other that's certainly what a warren buffett has been arguing and what a lot of high profile hedgehog managers whether it's a david tepter or bill ackman or stan drunken miller uh when they've expressed cautiousness in the economy that's part of this disconnect argument you hear that the financial markets have disconnected from the real economy that they've run way ahead of the economy but i think at the federal reserve and in a lot of other places and certainly the twitter feed of the president of the united states they believe it's the other way around they believe that the economy reflects the stock market so when trump keeps cro charling oh new high in the stock market jobs job shops he thinks that if you ram the stock market higher just randomly ram it higher it will create confidence it will create jobs it will create gdp the economy will then reflect the stock market i think the federal reserve thinks that i think that the treasury secretary thinks that i think there's a number of other people that think that as well too that is what and that used to go by the old name called the wealth effect and so i think that that's really going to be the question of the day which reflects what right now i think the driving point of the policy is if we boost markets and if jay paul comes out as press conferences and says well the markets were illiquid and companies were going to go out of business but then we stepped in and we saved them and they got financing then they think that they've done a good job because they think that they have then increased the ability and jay j-pal says this these companies were gonna the free market was gonna let these companies go out of business but we prevented it and we saved those jobs maybe the free market had a good reason to send those companies out of business we'll never know because you stepped in and you circumvented the effect so really which measures what we all may think that here's the economy and that's why we employ economists tell me what the economy is doing and then i'll back into what the financial markets should be but in 2020 it's more like put the financial markets at some arbitrary level and then watch the economy adjust to that level that was certainly the case in march they were afraid of was though the financial markets arbitrarily took out 35 percent of their value went down the fear was that the the economy was going to adjust to that so then we forced it back up so that the economy could just back higher that's kind of the argument the precipice of the argument what is it which drives what is really where we have to kind of think about it i think what we also see is that people start to realize more and more that what you describe as the wealth effect tends to work better for those people that have assets which are long stocks right because they can immediately enjoy it and those people who don't have assets so not as much assets and aren't long stocks they're kind of like left on the sidelines and it leads to more central bank intervention extraordinaire and we've had quite a few it's not just that we've had the global financial crisis 2008 2009 and a couple of interventions there and now we have a couple of interventions right now we've had quite a few in between which i'm not sure if people want to forget about them but you know there's been operation twist and quantitative easing one and quantitative easing two and it's kind of like you know every year every second here there's been something going on and it seems to me that maybe we're like the markets are like a drug addict where as soon as there are withdrawal symptoms the fat has to do something new put a new trick out of the head so what do you think jim is are we getting to a point where maybe the fed and other central banks have done enough or is this just we're pausing a little bit but rest assured the next central bank intervention the next trick whatever the case may be explicit yield curve control you name it there's many options available the next trick is just you know probably a couple of months away oh i agree that the next trick is just a couple of months away that they're not going to stop doing this and i don't think that they will ever really want to stop doing this as well too to the first part of your question about inequality which is what you were asking about yes this does create a big inequality 40 45 of the american public owns equities and they are benefiting from the fed using financial markets as a monetary policy tool we're going to push up financial markets and we are then going to hopefully create the confidence and jobs that i talked about the other 40 45 percent of the public that owns no stocks doesn't benefit from that but they've been satisfied because they're getting an extra 600 a week in unemployment there there's been stimulus checks that have been mailed out as well too the problem i see with this is you are fostering that inequality and it shows up in the most obvious ways in the us right now we are talking a lot about whether or not there is a retail mania going on in the stock market i believe that their hands down is i happen to think it's larger than the 2000 retail or the retail stock market media although admittedly it's hard to measure it so there's a little bit of guesswork in there but nevertheless it is very large and what's driving that stocks always go up the federal reserve has been buying stocks the president of the united states tweets out we can't let the airlines fail we can't let the energy companies fail the public especially small retail that doesn't own stocks oh i get it i get it this is a risk-free investment that they've got an unlimited printing press and the president is telling you none of these companies will fail i don't know what warren buffett was thinking when he sold all his airlines in the middle of may but the government told you they won't let them fail so get in and get in in a big way and that's why you've had this rush of retail and all this talk about retail investing in the market this is the natural consequence of these policies as well too so it is going to continue i think to foster that inequality because there are some people that don't have enough money to invest in assets or not enough assets to really matter at the margin you know chairman powell knows this i think it's it's been very curious that he's been asked a lot of times you know uh do your policies foster inequality and it's about the only time he ever shows any emotion absolutely not we have none of our policies have anything to do with inequality it's all the viruses fault it's all congress's fault it's not the fed's fault well jay it actually is you're the one that's pushing up assets financial assets financial assets are held by richer people they're benefiting from that you're trying to tell me and you've said this well if i make all the bondholders rich by holding up their bond prices then the companies can issue more debt and then they can expand and hire more people so you've already given me the definition of the wealth effect or the inequality that you're trying to to uh foster as well so this is going to be a legacy of it and the final thought for you federal reserve keeps telling us about these policies oh well we're going to do this for a while and then the markets will recover and then we'll get out and we'll stop i heard that 12 years ago 12 years ago they said we're going to do this unconventional policy of quantitative easing and then once the markets stabilize we'll stop doing it and they tried they ended qe1 as you mentioned and then the markets wobbled in 2010 and then they did qe2 and then they ended qe2 and the markets wobbled and then they did operation twist and then they they tried to do the taper tantrum and the markets wobbled and they came back into the market then they tried to get out again in the fourth quarter of 2018 and the markets wobbled fell 20 by the s p 500 and then they turned around and they got back in again they're never getting out of this policy they're never getting out just like they did never 12 years later they never got out of qe i don't think they're going to get out of any of these policies they'll try markets will throw fit and then they'll come right back as well so this is going to be to some extent until the markets reject them this is going to be the status quo with the way that they trade so they are like a drug addict it's like you know we're doing we're doing those measures in perpetuity but what's the end game of that it's difficult for me to believe that you can just say yeah let's do that for the next 10 20 years you know whatever the case may be there's a little bit of a fire will throw liquidity at it will extinguish the fire you know this is always going to work i think at some point there will probably a natural breaking point where they will lose the trust of the market and then the thing falls apart yeah i agree i'll offer you an idea of where that breaking point is and that's inflation now that's something we haven't had to any great degree at least by the measured numbers or by the market's perception and i'm clear about those words the measured number of the market's perception when i say inflation people say oh i don't care what the cpi says look at the price of this or the price of that i see inflation every day okay you may that's cost of living that's a little bit different than consumer price index but more to the point the market doesn't see that but if the market perceives that there is inflation and that inflation starts up then you'll see a rejection by bond investors there's one group larger than the fed and that is what ed yard danny coined 40 years ago the bond market vigilantes the collective wisdom of the bond market is larger than the fed the problem is the bond market right now is not of a collective wisdom it is not of one thought there's people that all over the place in the bond market some are bullish bearish up down left right forward backward but if you get inflation and then everybody is of the perception that inflation is here eroding the value of fixed income investments then they become of one mind and their one mind is to sell and interest rates go up and then at that point the fed can't stop interest rates from going up until the market demands that they just stop with the profligate policies now we're not there now and i don't think we're going to be at inflation in 2020. i do worry that you might start to see the beginnings of inflation in 2021 or in 2022 as well and that then that might become the problem why do i think we're going to get inflation after this cycle in 21 or 22 you've got a lot of stimulating of demand we keep handing people money here's 600 bucks a week here's a 1200 check go spend that money we've got a 13 unemployment rate which three percent has been misclassified so an effective 16 unemployment rate simply put that just means that in aggregate we're producing less stuff not as many people are working as they used to an aggregate fall out of aggregate demand stimulate on fall of aggregate supply excuse me stimulating aggregate demand that should produce higher prices once we get out of this cycle and then you might see a rejection of these policies by the fed but if i'm wrong on that we don't get that inflation and the policies work like they would say that they worked 10 years ago that the fed stepped in and the fed became aggressive and took over the bond market and started setting prices and maybe even goes all the way to formal yield curve control price fixing and if all they would argue to me is good things happened markets went up people got jobs gdp was created everybody got happy then why stop why would you ever stop that program that's what happened 12 years ago with qe they never stopped it and i think that this is what will happen this time around and again the only thing that will stop it is when the market demands that they stop it and i think that's inflation and i think that could be a story for next year and maybe the year after i agree with your point about inflation i think actually it's a very interesting point also you mentioned about you know once the bond market starts to think like one instead of many at the you know as it is at the moment i'm still really curious about the motivations of the fed which is obviously has received a lot of stick or at least powell has for from from the white house and and then i came across this documentary uh a few months ago the princess of the yen and richard werner's work from the inside of the japanese money system back in the 80s or 90s and at least based on his work he felt that the boj was kind of engineering the bubble and with the goal of getting more independence because once the bubble burst everyone was unhappy it would lead to more independence for the boj could there be any similarities to why the fed is doing what it's doing could it want more independence because clearly it's not really independent i mean it's clearly being influenced by by other parties yeah if they want more independence they're going about it the wrong way because they've got less independence right now let me back up to the beginning of your question the white house has been criticizing the fed but if you listen closely to what trump's criticisms have been they've simply been you're not profligate enough you're not pushing the stock market up right before the pandemic hit president trump spoke at the economics club of new york and he said i guarantee you if jay pal did the right thing the dow jones industrial average be 10 000 points higher oh i get i know what you want here you want them to force the stock market up and you will then justify it because it will create confidence in jobs and that's what the big complaint was about the fed now the problem is when the pandemic hit and the economy was tanking i get it the fed can't just sit there and just start citing obtuse economic theory they had to do something and so they stepped in and they did what they could and that they started to massively cut rates and expand and start buying bonds and started all of these programs but the fed doesn't have the authority to buy corporate bonds or etfs maybe don't have the authority to buy municipal securities and a lot of these loans that they're buying the way that they skirted the rules was the treasury is technically buying this they created a special purpose vehicle and the treasury the u.s taxpayer funds that special terpis vehicle the fed acts as their financier and just gives them the extra money and then the fed went out and hired blackrock on behalf of the treasury in order to um do all of the trades in a lot of these programs as well too so what the fed actually did if they wanted more independence is they actually became a division of the united states treasury department and that they've got the least independence maybe of our lifetime right now and this is going to be interesting because let's assume trump stays as president if the fed did want to exit these programs that doesn't own these securities the treasury department owns these the treasury secretary serves at the pleasure of the president of the united states it's unclear does the fed need the permission of the treasury to stop doing this or can they just say that's it we're done no more and so they are of one mind in fact if you look at jay pal's calendar they've released his calendar now for um april and uh this calendar for mail be released last week but every single day in the month of april jay paul had at least one conversation with steve mnuchin every single day and i suspect something similar like that will have happened in may as well too and so they are the least independent that they've ever been right now because they're so tied up with the treasury so it's really been if they i know a lot of people think that that the fed wants to be more independent they actually went the other way with this and it's been a work in process i don't know where it's going to go next i don't know how they're going to excruciate themselves from this lack of independence or what it will mean in the future but it'll be interesting to watch a lot of people who proponents of mmt say you know the central bank should be doing mmt i struggle to see how that's different or better than government themselves stepping in and saying right we're not going to be able to do this thing of pumping up asset prices and therefore improving the real economy that's not just the way things work we need to intervene directly in the real economy and actually you know spend money on the fiscal side no i agree let me give you a statistic if but the treasury projections and the fed's projections are correct between march and august they are going to in a combination of either print or borrow the equivalent of four years of tax receipts in five months so they will have created four years of tax receipts in five months to go towards trying to battle the um the contraction in the economy in the pandemic and let's just for argument's sake say that it works get nothing but good things that happened jobs gdp higher markets no inflation there's been an argument that's been made i've made it too okay if you could pull that off without there being any downside and just to kind of get it you know starkly or to get my point across why do we need taxes anymore why do we need an irs why don't you just print out what we want every year congress can decide what they want to spend money on and then just phone over to jay paul and he can print up the money and away we go because if you're doing it now and you're going to do four years worth of it now and you're not going to have any bad things why would you stop why would you ever stop doing that then at that at that point so i do think that what the fed is doing what the governments are doing worldwide with their massive intervention is going to have a profound impact one way or the other either it's going to produce some kind of malinvestment or some inflation and that's the camp i would eventually be in or if it works spectacularly then we have to rethink this whole capitalism thing all over again and ask why don't we have our central banks and our governments to have a permanent hand in markets all the time if every time they step in and put that hand in there then only good things happen then why would we ever want them to take it out as well and investors they'll just be short-sighted up is good down as bad i don't care what the policy is but if my stock prices are higher tomorrow than they were today it's a good policy if my stock prices are lower tomorrow then today it was a bad policy and that's kind of the only way they look at it that's why the fed doesn't get much criticism i had a congressman once tell me i asked a congressman once who's on the senate um on the senate banking committee actually senator and i asked him why doesn't anybody ever press the fed in any of their questions and he said i'll tell you why he says suppose you he was talking to me suppose i wrote down a bunch of hard questions for the chairman to answer you know suppose i read all those questions and suppose i tripped up the chairman the dow falls a thousand points i'm in trouble i'm in trouble for asking the question not the chairman for botching the answer or the policy i'm in trouble for for putting him in that uncomfortable position so as long as they do stuff the fed even though i think that some of these programs they're doing with corporate bonds and stuff might not technically be legal that's my opinion and i could be wrong on it but no one's even going to risk asking the question because they all like the outcome market's going up everything is good so that's why i said given all that i think that the fed thinking that oh we're going to we're going to create pleasure for everybody and then we're going to leave you ain't leaving you ain't going to leave and that's going to be the big or you're going to wind up going too far and creating male investment and problems and then the market will demand that you leave because you're the problem not the solution those are the two possible outcomes i see of this [Music] maurice what are your thoughts at this point well thanks for all of that jim i'd like to if you guys are okay with that like to shift gears just a little bit on your gym because i remember one of the conversations that you had with with our common friend eric townsend a couple of weeks back and that related to the oil market and the oil markets at that point i think when he had the discussion was about to uh start its uh massive recovery which has since continued probably to the surprise of many myself included how strong that recovery was and how substantially the contango that was used to be priced in the markets has uh been taken away i just like because you know this is a global macro market what's your view on where we're going from here as far as oil is concerned and as far as supply and demand and the market being balanced and you know the term structure of that market is concerned yeah what's happened in the oil market's been just extraordinary in what we've seen in the last few months you know the least bit being the negative prices that we had in the may contract a couple of months ago a lot of that it was a function of financial engineering it was a function of a lot of these funds that buy the front-end contract and then continue to roll i think that they were at the precipice of creating an oversupply in the super contango that we've seen in the market now since that debacle in may what's happened with the oil market is a lot of the funds that invest in oil have been largely carried out of the market the famous one united states oil company the etf it was barred from creating a redeeming new shares and they just got approval to do it again just like a week ago and they really haven't started doing it in any major way just yet a lot of other funds like the china oil fund blew up as well too so what you had happened was in oil i think was you had way too much financial engineering and that's what you saw in the wild movements in april and may now that you've rained out run out some of that financial engineering the containers returned to normal the price has settled down at around 35 to 40 dollars or so maybe it's a little bit above that right now thereabouts but make mo the mistake oil guys you know they can rank right up there with biotech executives and basically making up crap about what they're doing 40 is going to be a real tough problem for the oil industry to continue to make money i know that what i mean by that is that you know these guys would tell me oh as long as the price doesn't go under 50 we're going to be fine that's when they said at the beginning of the year when we're at 65 then it goes to 48. oh oh we just changed everything now as long as the price stays above 35 wait how did you fix that in five minutes the answer is you didn't so i think 40 is going to be a very tough problem for the oil industry to maintain and you're probably going to see more cutbacks in production maybe some bankruptcies and it's probably going to put a floor on this market right now assuming that the demand situation is somewhat stabilized and that we don't have another violent downturn in the economy one more time but i think what you saw happen in march in april and may in oil was we had over financialized the oil market and when the pandemic hit and we had that sharp fall in oil prices and oil demand oil prices had a hard time adjusting because of all the financialization and then had to go through all of that wild movements with negative prices and everything else basically pushing all of those players out and now it seems to be somewhat more closer to normal yeah i was just curious maybe also jumping a little bit around and that is i mean i think we can all agree that it's unusual times and and it's certainly some kind of experiment that we're seeing in front of our eyes and then it may last for a bit longer but at some point you would think that something is going to happen we saw what the coronavirus could do to markets and maybe something else will happen and at some point could be inflation as you mentioned earlier jim at some point it comes to a breaking point and i'm just curious in your view when it does we don't know exactly how long that will be but when it does what's going to be the best safe haven assets do you think yeah that's a good question you know the other thing that seems to be happening in markets to the first half of your question is something will come along and i would actually argue as we're talking right now in late june something is coming along and that is is that by most metrics you look at the coronavirus case count is as bad as it's ever been it's just not bad in london new york and paris so therefore it's okay but if you take out those large urban areas that we're having a big problem in march it's bad and it's bad in the united states the united states is showing some numbers that we haven't seen since early may or late april in terms of the number of cases the city of houston announced on the day that we're recording they are 11 days away from running out of icu beds that it's gotten that bad now the reason i say that is the stock market is also continuing to recover the day that houston says we're 11 days from running out of icu beds which is which new york city its worst point never got that bad and houston which is the fourth largest city in the country has already eclipsed that in terms of they're in a worse position than new york city's worst position stock market's recovering it's up another one percent so what seems to be interesting is the virus doesn't matter anymore and i think the reason the virus doesn't matter is there's this collective opinion in the market i'm kind of trying to interpret the market that really what the problem was wasn't the virus the problem was the lockdowns and now that we've gotten rid of the lockdowns i don't care how many people get sick i don't care how many hospital systems get overrun the market's thinking as long as we don't lock down again we're fine so the virus may come back and may come back in a in a story that we are not we are of the opinion especially houston houston's the middle of texas the free spirit texans the last thing they'll ever do is lock down houston well if they if it comes to that i don't know if it will that could actually wind up becoming another real problem for the markets also there is a myopathy in markets right new york city opened yesterday and they're allowing outdoor cafes so you know that's 80 of the world new york city restaurants are 80 of the world so as far as them that's good everything's getting better what's happening in houston what's happening in arizona uh what's happening in india what's happening in africa or maybe south america well you know that's rounding your stuff well actually it's all bad in all of those countries is what you're seeing in terms of the virus count so the first thing i'd mention is yeah there will always be something that comes along inflation could be one of them the other one could be that the last word on the virus may not be word whether it's a first wave or second wave is a semantical argument but there was you know you hear people say what happens if we get a second wave which they mean an increase of cases in the fall no it's happening right now in the late part of june and we're just we have just collectively decided it doesn't matter right now and it still may if it comes to that there has to be some kind of change or force change like a lockdown because that's what everybody's assuming that nothing will come of this that's kind of interesting right first of all i would say it's interesting that the market doesn't price in right now the possibility of another lockdown or not to some you know not in a in a large degree because we all know that as soon as politicians and authorities find a new tool that they can use effectively they tend to use it very quickly in the future right so my point my view is that certainly now that we have they've invented the lockdown i don't think it's the last time we're gonna see that that's one thing the other thing is of course what about the underlying economy right are we seeing more travelers are we seeing people driving i mean is fuel consumption actually showing any signs of a strong recovery public transportation are the trains full i don't see it right now as we speak in late june as you say i'm seeing headlines where one of europe's maybe one of the world's largest airlines is on the brink of bankruptcy if they can't get this restructuring deal and i'm talking about lufthansa in this case my neck of the woods so there's really a disconnect in many ways but of course that's what we normally see when these things happen all right i mean it's like these cartoons where you see people pushing up a train and when the last person jump into the train of course there is no one left to push it any further and that's when you have the big girl so we need more people to be going from the camp of the bear to to the camp of the bull uh so to speak just before things can unravel possibly yeah no you're right now you know as far as where the economy is going this week is better than last week next week will be better than this week and worldwide economies are recovering i'll even give you one other thing to say that it is possible that the way that we measure the economy it is possible that we've already seen the end of the recession in may but that doesn't mean that the recovery is going to be instantaneous that could be a long period of recovery i've been making the point for some time now that if you look at output gdp output use the united states for an example in 2008 at its worst point the economy's output was 96 of what it was in the 2007 peak we had fallen real gdp declined all of four percent four percent that produced a 56 correction in the stock market 10 unemployment a lot of angst and anxiety the tea party movement occupy wall street everything else in 1929 the worst recession in history and we were at 78 of the output in 1929 that we were i'm sorry in 1932 that we were in 1929. it was 78 so i think that what people need to understand is i've heard a lot of people say oh the economy is recovering nicely and it will be back to 90 percent of where it was by the end of the year 90 that's more than twice as bad as 2008 that's a near depression you got to get back to 96 percent just to repeat how bad 2008 was you could get back to 98 in order to get back to a garden variety recession so yeah we are seeing the numbers recover we are seeing that subway traffic in new york city is now up to twenty five percent of what it was for pre pandemic 25 up from like four percent we're seeing airline traffic in the united states is around 21 of what it was pre-virus we need to get it to 98 in order to say that we've really recovered if we come up 60 70 and then stall which would be another doubling if not tripling from where we are right now that is a bad recession so i think a lot of people are not appreciative of how bad this can be for the economy the thing that they're focused on now is the rate of change this week is better than last week and next week will be better than this week and so the hope will continue to say it's getting better it is getting better but if we got 16 effective unemployment you can't get back to 10 unemployment and just say hey that's it it's all done it's all fixed i'm sorry you 19 million people that lost your jobs too bad for you my stock portfolio is at a new all-time high and the economy is doing well yay for me that is a prescription for a disaster if that's the mentality that we're going to take we need to say what is the unemployment rate which is effectively 16 percent gonna get back under five and most people think it's going to take several years okay what are we going to do in the meantime then are we going to continue to subsidize everybody for several years with extra money are we going to continue to blow these budget deficits out for the extra money or we're just going to say sorry you lose you don't own stocks well i do and so it's going to be a very difficult thing for us to try and handle so yeah the economy is getting better there's no doubt about it and there is the worst the bottom might already be in but to get all the way back to that old high won't take a period of a couple of months like old recession just or a quarter or two might take several years and that is going to be problematic as we work through this yeah it's interesting isn't it because we're kind of turning things around like you said earlier the bond market's not really giving a price signal anymore the equity market isn't really kind of working efficiently and giving us signals and it it's really interesting look at the us where there's definitely signs of a second wave with the increase in cases since june whereas in europe and in say germany cases have cracked out a little bit from an extreme but from an extremely low base and yet the euro stocks is still significantly down from the peak whereas the s p and the nasdaq pretty much recovered or even gone through the previous peak but is there a problem i am i'm a big fan don't get me wrong of using this some people got alternative data this more high frequency data that you can effectively use to sort of now cast the macro economy but isn't the problem with with using that in the simple way of saying what we need to get back to the previous peak there's a danger here that there's going to be structural shifts in consumption and it might be that the the long-term normal for say i don't know traffic is actually 80 percent of where we were before rather than 100 or do you really think that we are going to eventually move back to where we were in terms of looking at those numbers no i do think that that's going to be the problem and that you're focused on traffic a lot that maybe the new peak is going to be 80 well there's a there's a simple reason why i think over half of all gasoline is consumed by people driving to and from work if this work at home trend continues and i think it will because one of the things i've argued about what's happening with the pandemic is whatever trend is in place work at home for one example you could put them into two buckets was it an existing trend that's being accelerated because of the pandemic and i think work at home is one that was in place and is being accelerated or was it one that was created because of the pandemic well if it's being accelerated it's going to be very hard to reverse it i think a lot of people don't want to say it out loud but i think they're very comfortable working at home and i think they'd like it this way and they would like to continue to have it this way well if we're going to drive less and we are going to need less office space because i think a lot of companies are going to be very happy with that look we were always afraid of the work at home thing because we always thought ah people won't really work they'll screw around but they won't work well we found out they do they they do work enough now i look at my it's expenses at my company and i go all my employees are paying for the internet connections i'm not paying for it they all have to take it on themselves to do all their own self id because there's no it guy in their home and if they're not going to come to the office i could ditch half my office space and save a lot of money so you could see that becoming the trend that the larger urban areas start to shrink because we don't want to spend the time commuting to go to an office or if we do it's one or two or three days a week not five days a week that will become a change for the economy there will be a lot of structural unemployment there will be a lot of lost gdp that we that we have built into the economy now because we assume that drivers to use the number drivers will in the united states consume 10 and a half million barrels a day of oil in driving which is what they were doing pre-pandemic not eight and a half which is what they're doing right now well that extra 2 million barrels a day is going to be a lot of jobs a lot of gdp lost a lot of those office spaces are going to see their leases hold come up and there's going to be a lot of give back of office and they're going to have a lot of blood of office space there's going to be a lot of people that maybe if i could work at home and home can be anywhere i want it to be then why don't i become like neil ferguson who's moved to his house in my the economist at the heritage institute who famously said look i've moved to my house in montana i haven't wandered more than five miles from my house since march and i'm fine with that i could just stay this way forever as as as far as i'm concerned so why don't i if i'm going to work at home let's go big and let's sell our house in suburban new york or in manhattan and let's move to the backwoods of vermont or montana or wherever we want to move and so you could see a massive change in the economy that will have to that will take years that will create disruption that will create problems in the economy that will be much longer term and a lot of people will feel left out and it won't be that simple so yeah when i hear you know the president or larry kudlow say with the economy's going to boom right back to where it was in early 2020 or 2019 i don't know if we're ever gonna go back i'm not saying it's gonna be bad i'm just saying it's gonna be different i just don't think you just go back and close your eyes and imagine what things were like last summer and say we're going to go right back to exactly that spot that's what a lot of people even jay powell somewhat thinks seems to hope for that too we're going to go right back to where we were last summer gdp output may get there over a period of time but that's only after we've restructured to this new kind of thinking that was catalyzed by the pandemic just before moritz maybe you i know you have i'm sure a question i just want to add one thing to this particular point and that is to me and and i want to hear your thoughts about this as well jim because you know much more about these things than i do but i mean it almost seems to me that this could be one of those paradigm shifts that we're entering into i'm not saying it's the coronavirus that's the fault but what we're generally seeing in a bigger picture is i mean you're seeing people working for car manufacturers people as you say working in the fossil fuel production we have transportation where technology is disrupting that with driverless this that and the other seems to me it's almost like what happened to the farmers 100 years ago where it went from being 25 or 30 percent of all people were employed in in that sector and suddenly there weren't much use for them with technology and and all those changes and now we're down to what two or three percent of that and as you say it's it has massive consequences and actually right now i i wouldn't know where these people would go to find another job because that's what technology does it also actually limits the amount of people you need to produce more stuff there's a professor at northwestern university suburban chicago bob gordon and he's done a lot of work on productivity and jobs and his conclusion which i largely agree with has been that jobs technology is a as a net creator of jobs to use the famous example that he's been using visicalc invented the spreadsheet in 1979. well that meant the death of the accounting clerk job and hundreds of thousands of accounting clerk jobs were eliminated but it created a whole new class of job called the financial manager and we created more people using spreadsheets to analyze data then we eliminated people that whose job was to just type data into a computer so it is a net creator of jobs i do believe that over time but here's the problem when something like autonomous driving comes in it's really simple and it's really easy to see who loses the driver loses we worry that they tend to be lower skilled what are we going to do with them and then we get calls to reign back and not have that technological advance slow it down but it will create whole new industries and whole new jobs i don't know what those jobs are maybe you don't nobody does you know famously as i i've said when steve jobs in 2006 held up the first apple one iphone how many people looked at that phone and said wow that's the end of the taxi business because it will create airbnb or wow that's the i'm sorry we'll create uber or wow that's the end of the hotel business because we'll create airbnb because of the whole thing with the app store and these new phones nobody saw that coming it kind of organically happened you give people these opportunities and they create them so we will create new jobs we just don't know what they are and the old jobs will go first the new jobs will come later the old jobs we know what they're going to be that are going to be lost the driver job we don't know what the new industries or new jobs are going to be created because of driverless cars so i'm not afraid of the future happening in that respect but i understand the anxiety and the stress that it's going to cause to get there and it might even cause a retarding of the economy because the old jobs go first because we won't create anything except we'll just get rid of drivers and let cars drive themselves and then when we start realizing the cost of transportation has gone down so much whole new ideas on what you can use transportation for will be created and they will create new jobs going on you know the internet with the invention of blogs eliminated a lot of newspaper jobs or a lot of reporter jobs media jobs but the whole blogging industry created a lot more opportunity than the jobs for the lost but that will take time to kind of go from one to the other it's not seamless it's a little bit chaotic and a little bit messy but i do think that that will be what comes of it so it will be a difficult transition but we're going to have to make that transition i just don't see how we're going to go back and the pandemic you're right it may not have created any of this but what it did do i think is accelerated some of these trends and we're going to see a bigger acceleration of some of these trends maybe a de-urbanization maybe a work-at-home type of thing those kind of ideas i think we're going to see more of that as we move forward great jim we want to be conscious of your time we're just about above an hour but i guess the million-dollar question that i wanted to bring up but we didn't even speak about gold yet but given all that we've just discussed how would you think one should allocate or structure their portfolio in order to be best prepared for what's to come that's a good question short term i think risk assets are going to do better in the short term because i think that the poll of central banks and governments trying to reflate markets is going to stay strong and it's going to be tough to fight that so it's going to go it's going to go up longer term you got another six months maybe a year maybe three three to three months to a year of decent markets would be my guess longer term i fear that this is going to create a male investment in inflation that's going to have in financial markets struggling thereafter the inflation when you ask so i think that you know risk markets will then will then struggle as far as interest rates go they're going to stay range bound and they're going to stay kind of tight to where they are right now with a slight upward pull because i think that that inflation in the future might be a slight upward pull but not a big upward pull so there's not going to be a whole lot to do in the bond market and if you use it as a risk reducer like in a 60 40 portfolio i don't think it's going to work as effectively as it used to in the past gold you asked about gold i've always argued that gold and kryptos kind of go into the same camp how do you get your money out of the financial system well there's really no good way to do it the closest way we have is gold or maybe kryptos but here's the problem with gold it's still so tied to the financial system because people say do i buy gold and i say yes and go good i'll go buy some gld well wait a minute the reason you want to buy gold is you think that there's going to be inflation or there there's going to be some kind of a problem and that you want to have gold as a hedge but if you're going to run right in the gld then go by tesla because it's the same thing you've still got your money in the financial system go buy some coins and bury them in your backyard that nobody knows how to do that so they don't do that so i think i'm mildly bullish on gold i think gold should be going a lot higher but we've so financialized it between etfs and futures and derivatives that it's so tied with the financial system look at what it did in march when everything got really ugly which is the time you're supposed to own gold it sold off because it would because it also has an element of being a financial instrument too and it sold off with everything else so i am mildly bullish on gold if there was a way to really separate gold from the financial system i'd be a lot more bullish on it then now so short term risk markets go up longer term i feel that they're gonna they're gonna hit a ceiling and run into trouble after three months to a year i think interest rates are going to meander sideways i think for those in a 60 40 portfolio that think that that that's their hedge they're going to be disappointed by it and i like gold but i'm kind of mildly bullish on gold i'm not wildly bullish on gold right now well jim on that note let's wrap up our conversation being mindful of your time thanks so much for spending a good hour with us we really appreciate it and i'm sure all our listeners do as well and by the way to all of you listening today make sure you follow jim's work on twitter and at bianco research of course from rob morton me thanks so much for listening and we look forward to being back with you as we continue our global macro mini series in the meantime be well thanks for listening to top traders unplugged if you feel you learned something of value from today's episode the best way to stay updated is 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Channel: Top Traders Unplugged

Views: 1,624

Rating: 4.9130435 out of 5

Keywords: niels kaastrup larsen, moritz seibert, rob carver, global macro, macro investing, macro trading, top traders, covid, covid-19, coronavirus, pandemic, Federal Reserve, free market, finacial crisis, 2020, bond market, retail stock, oil price, investing future, risk

Id: HSeBs4oQdic

Length: 66min 14sec (3974 seconds)

Published: Wed Sep 16 2020