June 23, 2023 • 46 mins
While in some places life has mostly gotten back to normal following the Covid-19 pandemic, there are aspects of economies and markets that may have been altered permanently. Jared Gross, the head of institutional portfolio strategy at J.P. Morgan Asset Management, joined the What Goes Up podcast to discuss his team’s research into the post-pandemic landscape.
According to Gross, some of the most-important legacies of the global health crisis will be disruptions to trade practices and the reaction of central banks to volatility in markets. Some highlights of the conversation:
“It’s a rewiring of trade. The big pipe between China and the developed markets is being split apart. There’s a lot of reshoring, onshoring, friendshoring, nearshoring—all of that stuff is going on, and it’s a real thing, and it’s going to change the way trade happens,” Gross said.
Another big change is that investors can’t expect the US Federal Reserve to come to the rescue when markets wobble, he says. “The central bank put, which everyone used to talk about, has probably been replaced with a fiscal put. If you’re looking for a backstop for market volatility, you probably can’t depend on the monetary authorities as much as you used to, because they now have to be very careful given the amount of fiscal stimulus in the economy. They can’t just cut rates because stocks go down. They can’t just cut rates because a bank is wobbling.”
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Episode Transcript
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Speaker 1 (00:15):
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Regan. I'm a senior editor at Bloomberg.
Speaker 2 (00:21):
I'm Katie Greifeld. I'm a cross asset reporter filling in
for Bill Dona Hirich.
Speaker 1 (00:25):
And this week on the show, if you're anything like me,
you probably talk about the last decade or so as
three distinct periods. First, there was the pre COVID times,
that period of low inflation, low growth, and low interest
rates after the global financial crisis that's often referred to
as the new normal. Then there was the stay at
home COVID era when absolutely nothing was normal. And then
(00:48):
there's now and in the here and now, COVID isn't
the threat it once was, but things are still quite
a bit different than they were before COVID. And that's
especially true when it comes to the economy and financial markets.
So what changes can we expect to be permanent? And
importantly for the show, what will it mean for your investments.
We'll get into it with a strategist in the asset
(01:09):
management unit of a major bank who recently helped offer
a seventy page research report on the post COVID world.
But First, Katie, thanks for phoning for Veldana this week.
Speaker 3 (01:20):
I am thrilled for the opportunity.
Speaker 1 (01:22):
Yeahl Dona's feeling a little under the weather this week.
And as you know, she's very excellent podcast co hosts. Yes,
sometimes she goes a little overboard. I'll say, like when
I make a dad joke, she laughs a little too hot.
Sometimes she's always talking about how cool and young seeming.
I am, oh, yeah, yeah, a little overboard. So okay,
(01:43):
so try to keep that toned down. I'll dial that,
keep it in check.
Speaker 3 (01:46):
Got it.
Speaker 1 (01:46):
But speaking of another cool hip young guy we have
here returning to the show. He is the head of
Institutional Portfolio Strategy at JP Morgan Asset Management. Jared Gross,
welcome back to the show.
Speaker 4 (01:59):
Thank you so much, Mike, And as a father of three,
if you need any backup on the dad jokes, someone
home your guy, someone will get me. The joke there,
of course is I don't think bol Donna's once left
at any.
Speaker 1 (02:09):
Any joke that's good, that was authentically I have but
char talk to us about. This is a fascinating report.
You guys have seventy pages. I'll confess I haven't read
every page. I've read most of it, though, But you know,
if you had a quick elevator conversation with a client,
how would you sum up what you find to be
the biggest takeaways from this report?
Speaker 4 (02:31):
So I think I'll start, if you'll indulge me, with
just a little bit of a snapshot of what happened before,
because I think it sets up the conversation, and I
think you touched on this a little bit. What you
had before COVID was a very globalized economy with long
supply chains. You had a lot of migration that took
the pressure off of develop market economies when it came
to a declining labor force. You had low inflation, which
(02:51):
led to a very deeply ingrained accommodative monetary policy QII,
low interest rates across the board. And then because we
had low injury, we had rising asset prices, and we
had a lot of leverage. And so COVID comes along
and shocks that system. And I think that equilibrium that
existed pre COVID was somewhat fragile. That doesn't mean it
was necessarily doomed to unwind, but COVID came along and
(03:14):
sort of did that for us. And so in that
shock you had. The phase one was the health crisis
and a lot of government spending and the shutdowns, and
we all kind of lived through that. And then maybe
less well understood was the kind of the fiscal impulse
that came on. And that's important because prior to COVID,
the monetary policy authorities were the only game in town.
(03:35):
If anything, they were pushing back against austerity or very
low levels of fiscal spending, and that did a complete
one point eighty When COVID hit, the fiscal authorities woke up,
they started spending money, and the monetary authorities actually financed it.
If you look at the amount of debt that was
issued during COVID, almost to the dollar, it was paid
for by central bank balance sheets, and so that shifted
(03:59):
the entire sort of economic dynamics. So now you know
what we did in this report is we're looking for
things that are more permanent. As you said, we don't
want to tell the story of peloton that went up
and came right back down, or cruise line that went
down and came right back up, or crypto or crypto
if we want to go there. But you know, there
are some interesting things. I mean, we look at supply chains,
(04:20):
and there's a lot of narrative in the market now
about deglobalization. I think it's actually much more subtle. It's
a rewiring of trade. It's the big pipe between China
and the developed markets is being split apart. There's a
lot of reshoring, on shoring, friend shoring, near shoring. All
of that stuff is going on, and it's a real thing,
and it's going to change the way trade happens. We've
(04:41):
got a lot of demographic challenges in the developed world that,
while they remain profound, we have seen some daylight now
in the form of technology. The fact that we were
all able to go home and work for two years.
We're back from that. But when we look at a
declining labor force and we say, how do we get
talent back into that labor force, we can do that
(05:03):
remotely now, and that's a huge advantage that developed economies
are going to have. The fiscal and monetary sort of
flip flop I described a little bit. The way we
put it in the paper is that the central bank put,
which everyone used to talk about, has probably been replaced
with a fiscal put. If you're looking for a backstop
for market volatility. You probably can't depend on the monetary
authorities as much as you used to because they now
(05:25):
have to be very careful given the amount of fiscal
stimulus in the economy. They can't just cut rates because
stocks go down, or they can't just cut rates because
a bank is wabbling, and we've seen that. You think
about what happened with Silicon Valley Bank. That was basically
a FED operation that the FED sort of went along with,
but that was not the FED cutting rates to ease
the market's mind. It was a profound change.
Speaker 1 (05:45):
You consider that more on the fiscal side, I guess,
since it wasn't a result of lowering rates.
Speaker 4 (05:50):
Yeah, I'd say the traditional tools of monetary policy, which
were if there's something's going wrong, you cut rates first
to take the pressure off. That seems to be off
the table right now, and that is I think a
little bit by design. The FED wants to restore its credibility,
and one of the aspects of restoring credibility is you
have to demonstrate some indifference to market volatility. If you're
cutting rates at the first sign of someone losing money,
(06:12):
you know you're not going to have a lot of
credibility and I think the FED sort of they've been
looking for a way out of that trap for a while,
and this seems to have given it to them.
Speaker 2 (06:20):
I definitely want to talk about the credibility topic, because
that has definitely become a conversation in markets. But I
want to make sure I'm understanding the metaphor that sort
of the central bank put has been replaced by the
fiscal policy put. It sounds like what you're saying is
not that fiscal authorities will come out and throw a
lot of money at the economy of market volatility increases.
Speaker 3 (06:40):
It sounds like what you're saying.
Speaker 2 (06:41):
Is rather that because of all of that stimulus from
the fiscal side, that sort of limits the central bank's
ability to step in every time there's a hiccup.
Speaker 4 (06:51):
I mean, there are some problems that the fiscal authorities
may be better suited to solve. Financial market volatility probably
isn't one of them. But if you think about certain
areas of growth, you look at what happened in COVID.
The ability to pump money into employers and employees' pockets
to support aggregate demand during COVID, short term interest rates
would have helped at the margin and we did see
(07:12):
short term interest rates fall, so you can't necessarily sort
of prove the counterfactual. But I think a lot of
the lesson learned was that fiscal policy can play a
very real role in responding to crises. And so, you know,
I think, as you said, like the fiscal authorities feel
a little bit unbound by what's happened, and they then
they feel more active, and as a result, the monetary
authorities have to hang back and take a more sort
(07:35):
of defensive posture. Yeah, I wanted to rewind a little
bit and talk about that reaction to Silicon Valley Bank
and some of the other regional banks that were sort
of wobbling there. It was a pretty impressive reaction from
the FED and the Treasury Department, how quickly they were
able to seemingly put that fire out. But I wonder
(07:55):
if the fire is really out. Interest rates aren't going
any lower any time soon. That pressure on deposits, the
funding cost at smaller banks hasn't really gone away. Have
we heard the end of this story when it comes
to the banking sector, where you is it possible we'll
be dealing with another one down the road sometime. I
(08:16):
think they've taken what could have been a very short,
sharp and sort of painful reckoning for a lot of
these banks and extended it. And the issue I think
was we're probably all familiar with was you had the
assets on the bank's balance sheets had gone down in
value a lot as interest rates had risen, and when
depositors were pulling money, that forced a sort of mark
(08:37):
to market of those assets and wiped out the capital.
And so that forced the FDIC to essentially step in
and put these banks into receivership. And that's a simplified
version of the story, but that's basically what happened. Now.
Because they're able to essentially fund their liabilities at the
original purchase price, they've taken that marked to market change
off the table. But they in order to retain their deposits,
(08:59):
they have to pay them market rate. You know, the
demand from depositors to get the highest possible rate is
very real. They can go to a money market fund,
they can go to the next bank down the road.
And I think they've realized that the deposit insurance limit
is a real thing. We get reminded of that every
ten years or so, that you know there is a limit,
on what deposit insurance is worth. And so yeah, I
(09:21):
think to answer your question, this is going to be
a lingering problem for the banks because if they are
essentially unprofitable because they can't earn a net interest margin
over their deposits by virtue of having to offer such
high rates, then their capital will sort of gradually diminish
over time, or at least it prevents them from building
up capital and becoming more resilient. The story's not fully written,
to be sure.
Speaker 3 (09:41):
So what does that mean for monetary policy?
Speaker 2 (09:45):
Because if we think back, the FED had a meeting
in March which was amazing, and I remember the thought
exercise on Wall Street at the time was how much
of a tightening impulse is all of this stress that
you're seeing among the banks worth? And it feels like
we kind of settle on fifty basis points.
Speaker 3 (10:01):
I don't know.
Speaker 2 (10:01):
I think Powell himself acknowledged that maybe it was worth
twenty five basis points.
Speaker 3 (10:05):
And then you think about what we heard from the FED.
Speaker 2 (10:08):
At June's meeting, and it feels like definitely some of
those worst case scenarios when it comes to the banking
system have been taken off the boil when you think
about that long term story that you're talking about, that
this is going to continue to be a problem for
some of these lenders. The fact that you have a
lot of competition coming from money market funds, how does
(10:29):
that translate into credit tightening.
Speaker 4 (10:33):
The banks who are under pressure from having to pay
higher deposit rates, they will presumably be less willing to
extend credit. They will be more focused on preserving the
equity capital that they have and earning their way out
of the hole to the point where they have enough
excess capital that they can resume lending. You know that
may or may not be a huge part of the economy. Obviously,
(10:54):
borrowers have many places they can go to get credit.
Banks are one. The private credit industry, which is blossomed
in the last ten years, is certainly there to offer credit,
and larger banks, who may not suffer from the same problem,
have the ability to offer credit as well. So I
don't know at the economic level, sort of the macro level,
how severe this is going to be, And it doesn't
(11:14):
appear yet. There's a lot of evidence that it's leading
to a downturn. We do see signs of it in
the loan officer's survey, and some of the data points
that bank credit is becoming less available, and you know,
it may be that this is another sort of long
and variable lag. We talk about monetary policy operating with
a lag, bank credit may offer the same feature. So
(11:38):
I think it's a little too early to tell how
big a problem it's going to be. I think from
the market standpoint, and as it relates to the FED,
the question is will the Fed essentially cave or pause
earlier than they would or cut rates sooner than they
would because of this? And I think it's not really
clear that that's the case. I mean, the market has
been trying to call the fed's bluff now for a
(11:58):
couple of years. I think the FED has generally spoken
pretty clearly about what their intent is, which is to
raise rates until you get to a positive real rate,
hold it there for some period of time until inflation
is coming down, and then gradually return rates back towards
the long term sort of nominal target two percent or thereabouts.
Speaker 3 (12:19):
And I guess that.
Speaker 2 (12:19):
Comes back to the sort of credibility issue that we
were talking about a few minutes ago, the fact that
the market keeps fighting the Fed. I was looking at
it a little bit earlier. I mean, PAL has been
pretty clear that maybe two more rate hikes are kind
of likely. From here, it just feels like there's this
persistent golf between what's priced in and what PAL is
(12:43):
actually saying.
Speaker 3 (12:44):
How do you narrow that goal?
Speaker 4 (12:47):
Well, I think the market has learned it's less than
multiple times now. I think at some point they will
be right in the sense that they will be pricing
in the actual pivot from the Fed as the economy
turns down, as inflation comes down. Thus far, they have
not predicted that very accurately, and it's not you know,
I mean you can sort of point the finger at
the market broadly. Professional forecasters have not done a particularly
(13:07):
good job of forecasting inflation. The five year, five year
forward rate has not done a particularly good job of
forecasting inflation. Consumer expectations have not done a particularly good job.
So inflation is where it is, and I think the
Fed is responding to real data about inflation. The core
rate is still north of five. So does the Fed
feel an imperative to cut at this point? Clearly not.
(13:27):
If anything, They're going to go the other way. I mean,
obviously they're going to be somewhat data dependent, but you
see a lot of volatility in the two year, which
is where I think that risk is concentrated. You don't
see as much volatility at the long end of the curve,
which is interesting because I think that tells you that
despite all of this uncertainty and the volatility we've been through,
long term inflation expectations are reasonably well anchored, and that
(13:48):
the ten year and certainly the thirty year have not
moved around as much on a relative basis as we've
seen the front end of the curve.
Speaker 1 (14:02):
Jared, you touched on this a little bit, but I
just want to read one of the bullet points from
that report we discussed and unpack it a little bit.
Says developed economies have been facing a seemingly intractable problem
of aging populations, declining labor force participation, and insufficient immigration.
COVID may have led to a potential solution the power
(14:23):
of workplace technology to match labor and capital at a distance,
and presumably that's describing zoom and teleconferencing and that sort
of thing. But then this year we had a new
sort of wildcard thrown into the mix in the form
of artificial intelligence, and presumably I think all of the
(14:43):
hype and all of the stock market euphoria over it
is somewhat related to what you're talking about here, in
that we don't have this quickly growing labor force, but
we do have this technology that's going to allow for
more efficiency, more productivity, that sort of thing. But I'm
curious how you're thinking about how the stock market has
(15:08):
reacted to this hype round AI, because, for one thing,
there are fundamentals attached to it pretty quickly. In Vidia's forecast,
how much they raise their forecast. All the cloud companies
are raising their forecasts, if not all many of them.
Does the hype around AI justify what we've seen in
this stock market this year thirty percent up on the
(15:29):
Nasdaq one hundred and how do you sort of separate
that hype from the true sort of fundamental potential from AI.
Speaker 4 (15:37):
It's obviously early in the game, so we have to
be a little careful about how strong a prediction we
make here. I think in some cases you have specific
firms that were remarkably well positioned for the growth in
the sort of large language model, data driven AI that
the market just didn't appreciate, and their chip technology and
I think this specifically refers to Nvidia, although I will
say I'm not an expert in this space. Particularly, they
(16:00):
had the technology that was necessary for this, but no
one sort of realized it until chat GPT came along
and showed the world what their particular chipsets were capable
of relative to their peers. And I think that seems
to be a well earned advantage. Now, I mean, whether
the market is correctly valuing it, I think is hard
to know.
Speaker 1 (16:17):
Is it a potential macro force, you know, as far
as unemployment rates inflation? Do you think this is something
we're gonna be seeing moving the numbers on sort of
the macro numbers that we all look at.
Speaker 4 (16:29):
So that's a topic we get at in the paper,
and we don't spend as much time on AI specifically,
although we do speak a little bit about the cloud
and sort of how that's rolling through the economy. But
when you think about it, right, the challenge that a
lot of developed economies have had is a declining working
age population and declining labor force participation. That's naturally an
inflationary sort of impulse in the economy. Trying to get
(16:50):
workers into that space is why we think that a
lot of the technology gains from Zoom and other sort
of remote work will be helpful. And it's not just
allowing people to work where they want to work and
not have to commute. It's worker populations that historically dropped out,
whether it's older workers, women, people with children, those people
who may have a handicap, might be unable to work
(17:11):
in an office situation. You bring them back in and
that supports the labor force to some extent. And you
actually see a little bit of the data, and this
is one of the more interesting charts in the paper.
If you look at the long term demographic trend of
the labor force participation post COVID, we actually were seeing
higher levels of participation than that trend would have indicated.
And I think that's clearly the result of technology bringing
(17:31):
people back into the labor force. The other thing that's
a little more speculative but could be very interesting over
the longer horizon is cross border so allowing workers in
the develop world where there is a surplus of labor
to get around the immigration barrier, which is a challenge
and work remotely. And so you know, we're sort of
optimistic that technology broadly speaking, will bring workers in and
(17:55):
ultimately be sort of a disinflationary force. Now, the point
you're making about AI is it reduces the denominator, I
guess is to in the mathematical way, you just need
less workers because the computers will do the jobs that
were being done by human beings. I think that's inevitable
to some extent. I mean, we were already seeing that
pre COVID. You walk into a burger king, you tap
on a kiosk, you don't talk to a person, don't
(18:17):
you walk into you know, but you know, like that's
that stuff's already changing. And then you think about sort
of automation and industrial automation and the like care giving
to elderly in Japan where they have robots doing. I mean,
there's a whole host of ways in which technology is
stepping into the shoes of humans and that. But that's
a very long term trend.
Speaker 1 (18:35):
More of a Wendy's guy.
Speaker 2 (18:36):
Oh yeah, no, I love Wendy's. Actually, I'm so glad
you said that. I do like burger king fries. I
will just add, could an AI do a podcast?
Speaker 3 (18:44):
I don't think so.
Speaker 1 (18:45):
Oh, they certainly have written some scripts that I've early
on point I don't know.
Speaker 3 (18:49):
I don't know I would fact check those.
Speaker 2 (18:51):
But okay, So aside from this sort of long term
disinflationary impulse that we're getting from tech that we could
be getting from AI, if we bring that conversation to
a slightly shorter but still longer term timeframe, I want
to talk about the inflation that we're experiencing right now.
I think we finally put the term transitory to bed.
We've disabused that notion. But is the inflation that we're
(19:14):
looking at now? And of course inflation has been coming
down if you measure by a CPI, if you look
at PCE, But is this structural inflation it's two percent
still a realistic target or do you think inflation has
structurally moved higher.
Speaker 4 (19:31):
I think the Fed has the tools to get inflation
back to two percent if they choose to, and at
this moment, they're not going to back off of that
as their stated target, because again it gets back to
the credibility question. Is there a scenario where the economy
starts to go south and inflation has not yet come
down enough that they have to make a really difficult
(19:52):
choice between their sort of dual mandate. Potentially but we're
a long.
Speaker 1 (19:56):
Way from there.
Speaker 4 (19:57):
With employment at the current high levels and inflation at
the current high levels. Clearly the thumb is on the
scale with respect to the Fed's sort of objective function,
that fighting inflation is number one. So I think that's
sort of where their heads are at right now. I
think you know, the question as to how structural it is.
I think initially you know inflation was supply driven when
(20:18):
you get into sort of the early stages of COVID,
it was reasonable for them to look at that situation
and say that supply driven inflation tends to be self correcting,
and so the phrase transitory, which I think has come
to be regarded as an unfortunate turn of phrase by Powell,
there was some basis for that, but over time, I
think what they missed was that the labor market sort
of downturn was really short lived and was really almost
(20:40):
like an accounting blip at the end of the day,
because so many people got money from the government and
stayed spending. The job market came back pretty strongly, pretty quickly,
and the FED was behind the curve very quickly, and
it took them, particularly in the spring into the fall
of twenty twenty one, when inflation was surging and they
were still working out of their prior forward average targeting
(21:02):
and forward guidance, and they were living in this very
slow paced world of monetary policy reaction, and so they
wound up behind the curve, and that allowed some of
this inflation to become more structural. We did have a
bit of a wage price spiral, so you know, I
mean classic, you know, when I learned economics, the basic
message was you ignore headline because it's very volatile in
(21:23):
both directions. A lot of the factors that go into
headline inflation are their sort of elastic demand. They're substitutable,
So if it's high this month, it could be low
next month, so you don't really worry about that. And
core had been low for so long, and I think
people stopped worrying about it, and now it's high, and
you know, and I think we don't yet have a
good handle on how long it takes to come down.
(21:43):
You know. I think it's an interesting moment to consider
the difference in the choices made by say Paul Vulker
back in the eighties versus Powell today. Vulkar's policy path
was to hike very rapidly to extremely high levels, generate
a very strong positive real rate, effectively crush the economy
huge unemployment, but then rapidly cut so that there's a hit.
(22:06):
Was very painful, but it was very quick and very clear.
Powell's chosen a more sort of finest approach, which is
to hike to a positive but fairly low real rate
and then stay there. And so we're right in that
bumpy phase where inflation is the core is right around five,
the rates are right around five. You can arm wrestle
over whether there's a positive real rate at various points
on the curve, but it's not clear that he's done
(22:28):
enough to really tip inflation over yet. And so I think,
you know, they're they're taking some comfort in the idea
that there is a long lag. And you have, also,
I think, you know, an economy that built up a
lot of leverage prior to COVID, and that cost is
now coming due in the form of higher interest expense,
not just for banks but for anyone who borrows money.
(22:49):
You know, I think they're probably right to pause and
watch the data a bit, but it's you know, they
have definitely not moved as aggressively as past FEDS have,
so we have to be thoughtful about that.
Speaker 1 (23:00):
Shared one thing that came up over and over again,
especially in the news. Maybe I'm to blame. I think
I edited probably half of these stories questioning whether sixty
forty was dead in the even in the pre pandemic era.
But then when rates got really ridiculously low during COVID,
you know, every day there was a new obituary for
(23:20):
the sixty forty strategy. Sixty percent of your portfolio in stocks,
forty percent in bonds. I feel like everything's changed now.
So I'm wondering what the conversations are with institutional clients
of yours these days. You've got this fomo that seems
to be erupting in the stock market. Yet at the
same time, it's very easy to get a risk free
(23:43):
real return even in cash money markets, almost at five
percent in some cases. What are the conversations, like, what
should an institution, in your opinion, be doing with their
money right now? Yeah, there were a lot of obituaries
written for sixty forty. I probably wrote a few myself,
you know.
Speaker 4 (24:00):
And look, I think twenty twenty two was the worst
possible outcome if you are a classic kind of correlation
based investor, where you get your risk management from the
assumption that stocks and bonds will move into opposite directions
at the same time. Obviously, twenty twenty two was the
one year and twenty year thirty where that goes the
wrong way on you, and it led to severe losses.
(24:21):
So you know, at the same time, even going into
twenty twenty two, you could look at market valuations at
the end of twenty one and say equity valuations were high,
bond yields were low. It was very hard to see
how a sixty forty portfolio was going to do much
for you, even if you didn't anticipate the sort of
catastrophe that twenty twenty two turned into. And I think
the recipe then, which still makes a lot of sense,
(24:42):
is diversify not just in terms of sort of correlation
of betas, but across genuinely diverse asset classes, particularly using
alternatives that have unique return streams. Focus on managing liquidity
and illiquidity. So for whatever asset portion of your assets
you put into to long lock private equity and private
(25:02):
credit strategies, you're going to generate a higher level of
return almost certainly with those types of approaches, but they
lock up your liquidity, and that's a problem for two reasons.
One is if you need your liquidity, if you're a
pension fund or an endowment who has to pay out,
you have to have cash ready to go. It's also
there's an opportunity cost when you get a volatile market
and the stock market goes down twenty percent and you'd
(25:23):
like to be a buyer, where do you get to
dry powder from? And so you know. I think the
twenty twenty two episode has sort of forced people to
rethink a lot of these issues. I think the more
diverse strategies going forward make a lot of sense. I
think the alternatives world has evolved and diversified to the
point where in the old days investors tended to think
of it as very liquid. You're talking about draw down
(25:46):
structures in private equity and private credit that lock up
your money for five, seven, ten years or more. And
because that money was locked away, you would only bother
to choose those private vehicles that had the highest possible returns.
I think what we've seen today is much greater willingness
to look across the spectrum of alternatives, which has some
much more liquid, some moderate liquid, some very illiquid, and
(26:09):
that if you use that entire spectrum, you can allocate
a lot more of your capital in that space. I
think we're going to still see a lot of stocks
in a lot of bonds right now. Cash is really
interesting because you're getting paid to be defensive, which feels good,
but you know there is a trap there too. I mean,
if interest rates do start to fall, if the FED
is successful, the returns on your cash will come down
(26:29):
pretty quickly. I think we're at a point now where
fixed income investors should start to move back to their
natural habitats. You know, if you're a core bond investor
who's just looking for diversity versus stocks, that's a good
place to be. If you're a long duration investor who's
hedging liabilities, you can start to move back out there.
The curve seems to be in a pretty good.
Speaker 2 (26:48):
Place, and I get that the argument that can be
made about cash maybe turning into a little bit of
a trap. But until that point where the FED starts
cutting and I forget exactly what language Pal used at
the June presser, but I think you said something.
Speaker 3 (27:03):
Like raycuts are a couple of years away.
Speaker 2 (27:05):
Like it feels like it doesn't really become a very
scary trap until that point one hundred percent.
Speaker 4 (27:11):
I mean, you are you're trying to anticipate when the
FED will pivot and when the rates will start to
come down. Obviously, the FED is going to be reacting
to real data. There are a lot of people who
have very well founded views that a recession will be hitting,
probably less likely in the very end of twenty twenty three,
but certainly in twenty twenty four. And there's a lot
of reasons to think that may be happening. That's probably
(27:34):
beyond the scope of our call today. But you know,
when and if that happens, the FED will react. Now,
I think the question is how quickly they react. Where
in that sort of progression do you put the first cut?
And as you said, it's sitting cash is pretty safe,
you're getting paid.
Speaker 2 (27:49):
That is interesting, just piecing together what you said that
when the recession comes, the FED will cut and people
will exit cash. I feel like that's one of the
one of the many ways that sort of the perception
of cash has changed. Like in the past few months,
cash has become not necessarily a defensive strategy. It's going
on the offense collecting the yield in cash. And when
(28:11):
you think about what the trigger for getting people out
of cash would be, it might actually be the recession.
I'm thinking all out here, because usually you think of
cash as like.
Speaker 4 (28:22):
Yeah, preservation, that's right. I mean, the key difference today
is with the inverted curve. Everything else in bondland is
a negative carry trade. For the most part. You're getting
paid more money at the front of the curve in
the most defensive asset relative to just about everything else.
And you can take on credit risk, and I think
credit risk is reasonably priced. It certainly isn't cheap by
historical standards. But yeah, to your point, you normally think
(28:46):
of cash as having almost a penalty rate for the
protection it provides, and that's just not the case right now,
and I think a lot of investors are sort of
appreciating that. And it's not pure cash. I mean, you
have a variety of sort of money market strategies, short
duration bond strategies. There's lots of things you can do
to capture those fields.
Speaker 1 (29:18):
You know, you mentioned how it seems like the recession
calls keep getting pushed further out into the future now
into twenty twenty four, but they're still there. The equity
market really seems to be behaving like a soft landing.
Is a done deal, a given? But I wonder, you know,
if there is a recession in the cards for twenty
twenty four, does it make sense that the stock market
(29:40):
really saw the bottom in October of last year? Where
do we have to have that sort of cathartic drop
in the market that we typically see during or right
before recession. At least, I.
Speaker 4 (29:54):
Think what would be concerning is that with inflation where
it is, the traditional sort of safety valve of that
central bank put is no longer there, and so you
have to be concerned that if there is an earning's recession,
if stocks are selling off, that sort of habit that
we've gotten used to of the central bank coming to
the rescue just won't happen. I do think the fundamentals,
(30:16):
I mean, this is why are the recession expectations getting
pushed out Because the economy is doing okay. The employment
numbers are still pretty strong, wages are still doing reasonably well,
consumer spending is pretty healthy, the real estate market is
pretty sound. Obviously, there's some exceptions and sort of office
space and things like that, but a lot of the
things that would normally underpin a severe sell off aren't
(30:37):
really there. And I think to the point you made earlier,
like a big part of the equity run up is
a very concentrated exposure to the top seven to ten
names that are largely tech focused. So could those names
snap back and have a real sell off, Sure, but
I think the rest of the market has not followed
anywhere close to the same degree in terms of the
(30:57):
valuation increases, and so I don't know that there's much
of an air pocket underneath the entire market. There may
be under some of the tech names, though.
Speaker 1 (31:04):
Which you know, if you're talking about a quarter of
the weighting of the S and P with a handful
of names on an equal weighted basis, might not be
too bad, but it could get ugly.
Speaker 4 (31:14):
Yeah. I mean again, I don't have a particularly clear
sense of sort of the valuation for those firms, But yeah,
just given what they've done, even a partial retlacement from
a percentage standpoint could be pretty severe.
Speaker 2 (31:25):
And just on the topic of recessions and the yield curve,
at what point can we say the yield curve was wrong?
At what point do the recession calls, does the actual
recession get pushed out enough that it's not any longer
in that magical twelve to eighteen month timeframe from the
time that the curve inverted. How are you thinking about
the yield curve and its potency as a recession indicator.
Speaker 4 (31:48):
Well, you know, there's the old joke that the yield
curve has predicted ten of the last five recessions. So
you have to take it with a grain of salt.
And I think one of the ways, and this sort
of paraphrases a little bit of what's in our paper,
you have to understand that COVID really was a very
profound reset of the financial and economic system in a
way that past business cycles were not. It's almost like
(32:10):
when your computer's not working and the last resort is
you just turn it off and you turn it back
on and yeah, you know, and you wait for the
screen to come back on, and you're like, please, please God,
let my document be up there when it turns on.
And COVID was a little bit like that, And so
a lot of the sort of habits and patterns that
we got used to looking at don't necessarily apply here.
(32:31):
I mean, the last time. I mean, you really have
to go back to the eighties to see a spike
in inflation like what we saw and a FED reaction
function like what we saw. And even there, the degree
of leverage that had built up because of a very
long period of low interest rates is unique. The asset
class relationships that were used to because you know, were
(32:53):
heavily biased by the fact that we lived through a
forty year disinflationary bull market. There's so many ways in
which you'd really can't rely on the rules of thumb
that have been passed down from the last thirty forty years.
You really have to look at the fundamentals. And so
to your question about the yield curve. Right now, the
FED is anchoring the front of the curve at or
(33:14):
slightly above the prevailing rate of inflation, and they intended
to keep it there for some period of time. History
suggests that positive real rates of a reasonable magnitude will
slow the economy and will bring inflation down. And aside
from that, you also have quantitative tightening and other things
that are reducing the money supply, and all of those
things together are pretty powerful, and so we do think
(33:37):
growth will slow. Whether you get a soft landing or
a recession, and people can sort of arm wrestle over
how you define those things. That's probably a little bit TBD,
but we think it's going to work. Eventually, the direction
will be down for inflation, will be down for rates.
That's essentially what the curve is pricing. I think a
lot of the volatility in the curve over the last
year and a half has been again the market implicitly
(33:59):
thinking the thing did not have the sort of gumption
to hold fast to interest rate hikes, and that the
market was essentially predicting that at the first bad data
point or the first sign of market volatility, they would
just cave. And they have. And I think you have
to give Powell some credit for that, which is they've
i think spoken very clearly about what their intentions are
and they followed through.
Speaker 1 (34:19):
Jared, I'm going to give you some credit too, because
we were joking before we started taping that the last
time you were on it was like this. We must
have talked for a good hour about all the important
cross asset and macro things in the world, and then
we spent about a minute on bitcoin and crypto, and
of course I made that the headline of the piece
on the podcast as as you're right, so I'm gonna
(34:41):
do that again, I think now I'm just kidding. But Katie,
I want you to chime in on this too, because
it is a fascinating development in the last week or
two with black Rock applying for a bitcoin etf, Wisdom
Tree coming out applying for one, and we've seen bitcoin
ETFs before going nowhere. But I feel like when Blackrock
(35:02):
does it, it's something's changed, something different. Yeah, Jared, let's
start with you. Does this move you know? I think
the headline last time was J P. Burgen's Jared Gross
says institutional investors have no interest in crypto or something
like that. Does this change the game at all? Do
you think now that, if it should, Blackrock successfully launch
a spot bitcoin etf.
Speaker 4 (35:24):
So there's a lot of layers to that sort of process.
One thing I think has become increasingly well established understood
is that bitcoin itself as an asset is not a security.
It is essentially a commodity, and there are past instances
of ETFs based on commodities. So if you accept that
sort of logic, I don't know that there's a regulatory
(35:47):
barrier to this sort of preceding my assumption as Blackrock
thought all this through and is not going to be
right investing all the time and effort to do something
that's just going to get knocked off the ledge by
Gary Gensler. So they got some clarity from the actions
against coinbab and that's when I say there's distinctions. I
think you really have to draw a very bright line
between Bitcoin. Again, my understanding is this sort of ether
(36:07):
falls under that same kind of rubric and the broader
kind of tokenization of the crypto world, which I think
is full of poorly regulated and sort of assets masquerading
as securities that aren't regulated like security. And this is
the place where the SEC and the CFTC are battling.
And so you know, I don't have a particular view
on where those lines get drawn, but it certainly seems
(36:30):
like the SEC has now thrown a marker down saying
if you are trading these things often exchange that they
are securities at least according to the SEC's definition, and
that'll get litigated. I think Coinbase is suing them and
they're going to go to court and figure out where
the lines are drawn.
Speaker 2 (36:47):
But gray Scale is also suing the SEC because they
had their spot bitcoin eto. It was an application, but
it was trying to convert their trust into an ETF
that was rejected last June, almost exactly year ago, and
they're now suing the SEC. But kind of make a
comment to what Jared was saying, to the idea that
theoretically Blackrock has thought all of this through. You mentioned
(37:10):
that we saw something from Wisdom Try. You've also seen
in Vasco revive their spot bitcoin ETF application and bit
Wise as well.
Speaker 1 (37:19):
Why now, Katie, Is it because they finally got that
clarity or feel like they've gotten the clarity in terms
of Blackrock.
Speaker 2 (37:25):
Yeah, I'm not sure what spurred the Blackrock filing. I've
spoken to a lot of analysts and investors about what
they could possibly be thinking, and the answer I get
is in hush tones, Oh it's Blackrock.
Speaker 3 (37:38):
They must know something.
Speaker 2 (37:40):
And theoretically, you look at this long line of issuers
who are lining up right behind them, and that seems
to be the thinking among the industry right now. It's
going to be really fascinating to see how this plays out.
Speaker 1 (37:52):
It would be shocking to see Blackrock get an ETF
application rejected.
Speaker 2 (37:57):
That's what I was thinking, I want to go back
and check. So Blackrock the world's largest asset manager, they're
also the world's largest etf issuer, which kind of goes.
Speaker 3 (38:05):
Hand in hand.
Speaker 2 (38:06):
I would love to go back through history and see
how many times they've filed for an ETF and had
it not launch.
Speaker 4 (38:14):
And I think with bitcoin specifically, you also have to
go back. And this, I think was the subject we
discussed last time I was here, is what's the purpose
of it? If you're an investor, why do you want
to own bitcoin? And I think there's really two perspectives.
There's a more of a retail perspective, which this is
sort of a fun, interesting asset class. There's a lot
of volatility. People love to day trade things with a
lot of volatility, and you can make them a lot
(38:35):
of money, you can lose a lot of money. Most
the institutional investors that I deal with, they don't think
in those terms. They want to understand is there a
long term positive rate of return attached to this asset
and does it have correlation advantages that diversify your portfolio?
And I think with bitcoin, the first one is hard
to see. The second one you can probably wrap your
mind around. That it is starting to become a little
(38:57):
more like gold in the sense that it's this sort
of uncorrelated thing. But still it's very hard to postulate
that there's an intrinsic rate of return attached to just
being long bitcoin, and it obviously has a lot of volatility,
which from an investor standpoint is a risk that most
institutions simply don't want to take. If it becomes increasingly
normalized and liquid and easy to trade, then I think,
(39:20):
like a lot of commodities, it'll become at least potentially
part of people's portfolios. So that's a you know, as
I said, I try to draw a very clear line
around bitcoin versus the rest of crypto, which I think
is replete with dangerous places that you do not want
to get. I'm interpreting that as there's no lottery ticket
allocation in institutional portfolio. Jared Gross, head of institutional portfolio
(39:43):
Strategy at JP Morgan Asset Management, Thanks so much for
coming back. Can't let you go just yet, though we
do have attrition on the show, where hopefully you came
prepared with the craziest thing you've seen in markets. I
don't know anything the one that struck me when I
was asked this is There was a story I think
it was in the New York Times the other day
about Argentina and how the dining scene in Buenos Aires
(40:05):
is ultra hot, not because of all star chefs or
low beef prices, but because inflation has gotten so out
of hand that the Argentines would rather spend their money
instantly once they take it from the bank in a
restaurant than watch it lose value sitting in their pocket.
And so this has become the favored pastime of the
(40:26):
residents of Buenos Aires, which is to dine out as
a hedge against inflation.
Speaker 1 (40:31):
I'd be some pretty good food there too.
Speaker 2 (40:33):
Yeah.
Speaker 4 (40:34):
I've certainly spent a lot of money in restaurants without
having it serve as a hedge against inflation.
Speaker 3 (40:37):
So I don't I'm going to I'm going to use
that one.
Speaker 4 (40:39):
Yeah, my husband, maybe I'll sleep a little better at
night when you get my credit card building. And I
was hedging Argentine inflation.
Speaker 1 (40:45):
I had no idea my teenaged daughters were.
Speaker 3 (40:47):
Hedging in They're deeply worried about inflation.
Speaker 2 (40:53):
Already talked about I was going to talk about the
filing rush to see a lot of is where is
follow in black rocks lead? I don't know, that's all
I got. I mean you could talk about the price
a bitcoin. It got close to or above thirty thousand.
I think it rallied.
Speaker 3 (41:09):
Something like seventeen percent in the days since we're back. Baby,
it's crazy you're back. Yeah, the smallest scrap of news
and here we are.
Speaker 1 (41:18):
It is crazy. I'll grant you that. Why now, I
think it is the crazy part, but it'll I mean,
it all makes sense when you unpack it. All right,
I'll give you my crazy thing. And this relates to
how hot the labor market is. There is a billionaire
family in the UK, a US family, billionaire family. This
is the New York Post, so they don't tell you
the family. It's a blind item. I think they refer
(41:40):
to it. And this billionaire family is seeking a dog nanny,
so someone to come in full time and watch.
Speaker 3 (41:49):
The salary on that.
Speaker 1 (41:50):
That is where we play. Oh god, the Prices Precise
game show. Jared, I got to inform you you're now
contestant on the Prices Precise to make Katie go first, Katie,
if you're a billionaire US family in London. I assume no,
not actually London. Wah, Knightsbridge district, that's London.
Speaker 4 (42:12):
Okay, are we going annual salary? Is this an hourly way?
Annual salaries per dog? And you're we doing? Yeah?
Speaker 1 (42:19):
How might one whole in the story is they don't
tell you what kind of dogs that would influence, but
multiple two dogs?
Speaker 3 (42:26):
Two dogs? And is this in dollars.
Speaker 1 (42:29):
You can I'll accept British pounds.
Speaker 3 (42:31):
I'm going to go in dollars dollars.
Speaker 1 (42:33):
Don't make me do the bitcoin conversion.
Speaker 3 (42:35):
I'm just thinking about the New York City rats.
Speaker 2 (42:36):
Are I think the annual salary there is like one
hundred and fifty thousand.
Speaker 3 (42:40):
I'm going to say one hundred and fifty thousand US dollars.
Speaker 1 (42:42):
One hundred and fifty thousand US dollars. I'll give you
a little more information, Jared. Since you're the guest, you
do get six weeks off.
Speaker 3 (42:49):
Oh wow.
Speaker 1 (42:50):
But the recruiter says, but when you're dealing with this
sort of clients, if they want to go to Monaco tomorrow,
you'd be on a private jet flying with those dogs.
Speaker 4 (43:01):
So remote work is not an option.
Speaker 1 (43:02):
For remote work, you really need to drop everything and
be there when they call and leave your private life
on the back burner for these two billionaire dogs.
Speaker 3 (43:13):
So Katie, I'm still gonna stick with one hundred.
Speaker 1 (43:16):
And fifty thousand. That's about one hundred and twenty.
Speaker 3 (43:19):
You have functions for this on terminal, So.
Speaker 4 (43:22):
You went dollars, Yeah, dollars, I'll accept that. I'll stay
in dollars.
Speaker 1 (43:25):
For I remember the prices right, rules are in effect, so.
Speaker 4 (43:28):
You got to be under, you can't be over. Is
that how this works?
Speaker 1 (43:30):
We'll call it closest to the pin?
Speaker 4 (43:33):
Okay, yeah, I'm going to say two dogs in London
working for billionaires on call twenty four to seven is
a ninety nine thousand dollars a year job.
Speaker 1 (43:42):
Holy cow, what a gosh dollar? Wait, dollars, dollars, but
if pounds is closer, I'll take that. Man, all right,
I'm gonna have to get the calculator out. One hundred
thousand British pounds to take care of two dogs. What
is in London? One hundred and twenty eight thousand US
dollars the difference in the middle. Yeah, yeah, I think
(44:05):
we got a draw.
Speaker 4 (44:05):
I think so I'll take it.
Speaker 1 (44:07):
You have a draw, that's pretty good, and uh, it's
time for me to announce I'll be leaving Bloomberg for uh,
for my retirement career as a dog nanny in London.
Speaker 2 (44:17):
Why did I immediately take you seriously?
Speaker 3 (44:22):
I need to go.
Speaker 1 (44:22):
Oh believe me. When I leave, they'll be dragging me
out of here in a handcuffs, not in handcuffs, but
kicking and screaming.
Speaker 3 (44:29):
Why doesn't Full dawna laugh? You are pretty funny.
Speaker 4 (44:34):
That is what we call a backhanded compliment here in
the podcasting world.
Speaker 1 (44:39):
I'll take any compliment backhand, forehand, side hand, whatever it takes.
Jared Gross, head of Institutional Portfolio Strategy at JP Morgan
Asset Management. Really always a pleasure to hear your thoughts
and express so simply and eloquently, really appreciate it, and
hope I'll get you back in for a third time
and get another bitcoin headline.
Speaker 4 (44:59):
No bitcoin headline, Yeah, you already got one. It's all
got Yeah, nothing, that's time. Thanks Jared, take care, Bye, bye,
what goes up?
Speaker 5 (45:13):
We'll be back next week. Until then, you can find
us on the Bloomberg Terminal, website and app or wherever
you get your podcasts.
Speaker 3 (45:22):
We'd love it.
Speaker 5 (45:22):
If you took the time to rate and review the
show so more listeners can find us. You can find
us on Twitter, follow me at Goldana Hirich. Mike Reagan
is at Reaganonymous. You can also follow Bloomber Podcasts at podcasts.
What Goes Up is produced by Stacy Wong and our
head of podcasts is Sage Pauman. Thanks for listening and
(45:44):
we'll see you next week.
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Regan. I'm a senior editor at Bloomberg.
Speaker 2 (00:21):
I'm Katie Greifeld. I'm a cross asset reporter filling in
for Bill Dona Hirich.
Speaker 1 (00:25):
And this week on the show, if you're anything like me,
you probably talk about the last decade or so as
three distinct periods. First, there was the pre COVID times,
that period of low inflation, low growth, and low interest
rates after the global financial crisis that's often referred to
as the new normal. Then there was the stay at
home COVID era when absolutely nothing was normal. And then
(00:48):
there's now and in the here and now, COVID isn't
the threat it once was, but things are still quite
a bit different than they were before COVID. And that's
especially true when it comes to the economy and financial markets.
So what changes can we expect to be permanent? And
importantly for the show, what will it mean for your investments.
We'll get into it with a strategist in the asset
(01:09):
management unit of a major bank who recently helped offer
a seventy page research report on the post COVID world.
But First, Katie, thanks for phoning for Veldana this week.
Speaker 3 (01:20):
I am thrilled for the opportunity.
Speaker 1 (01:22):
Yeahl Dona's feeling a little under the weather this week.
And as you know, she's very excellent podcast co hosts. Yes,
sometimes she goes a little overboard. I'll say, like when
I make a dad joke, she laughs a little too hot.
Sometimes she's always talking about how cool and young seeming.
I am, oh, yeah, yeah, a little overboard. So okay,
(01:43):
so try to keep that toned down. I'll dial that,
keep it in check.
Speaker 3 (01:46):
Got it.
Speaker 1 (01:46):
But speaking of another cool hip young guy we have
here returning to the show. He is the head of
Institutional Portfolio Strategy at JP Morgan Asset Management. Jared Gross,
welcome back to the show.
Speaker 4 (01:59):
Thank you so much, Mike, And as a father of three,
if you need any backup on the dad jokes, someone
home your guy, someone will get me. The joke there,
of course is I don't think bol Donna's once left
at any.
Speaker 1 (02:09):
Any joke that's good, that was authentically I have but
char talk to us about. This is a fascinating report.
You guys have seventy pages. I'll confess I haven't read
every page. I've read most of it, though, But you know,
if you had a quick elevator conversation with a client,
how would you sum up what you find to be
the biggest takeaways from this report?
Speaker 4 (02:31):
So I think I'll start, if you'll indulge me, with
just a little bit of a snapshot of what happened before,
because I think it sets up the conversation, and I
think you touched on this a little bit. What you
had before COVID was a very globalized economy with long
supply chains. You had a lot of migration that took
the pressure off of develop market economies when it came
to a declining labor force. You had low inflation, which
(02:51):
led to a very deeply ingrained accommodative monetary policy QII,
low interest rates across the board. And then because we
had low injury, we had rising asset prices, and we
had a lot of leverage. And so COVID comes along
and shocks that system. And I think that equilibrium that
existed pre COVID was somewhat fragile. That doesn't mean it
was necessarily doomed to unwind, but COVID came along and
(03:14):
sort of did that for us. And so in that
shock you had. The phase one was the health crisis
and a lot of government spending and the shutdowns, and
we all kind of lived through that. And then maybe
less well understood was the kind of the fiscal impulse
that came on. And that's important because prior to COVID,
the monetary policy authorities were the only game in town.
(03:35):
If anything, they were pushing back against austerity or very
low levels of fiscal spending, and that did a complete
one point eighty When COVID hit, the fiscal authorities woke up,
they started spending money, and the monetary authorities actually financed it.
If you look at the amount of debt that was
issued during COVID, almost to the dollar, it was paid
for by central bank balance sheets, and so that shifted
(03:59):
the entire sort of economic dynamics. So now you know
what we did in this report is we're looking for
things that are more permanent. As you said, we don't
want to tell the story of peloton that went up
and came right back down, or cruise line that went
down and came right back up, or crypto or crypto
if we want to go there. But you know, there
are some interesting things. I mean, we look at supply chains,
(04:20):
and there's a lot of narrative in the market now
about deglobalization. I think it's actually much more subtle. It's
a rewiring of trade. It's the big pipe between China
and the developed markets is being split apart. There's a
lot of reshoring, on shoring, friend shoring, near shoring. All
of that stuff is going on, and it's a real thing,
and it's going to change the way trade happens. We've
(04:41):
got a lot of demographic challenges in the developed world that,
while they remain profound, we have seen some daylight now
in the form of technology. The fact that we were
all able to go home and work for two years.
We're back from that. But when we look at a
declining labor force and we say, how do we get
talent back into that labor force, we can do that
(05:03):
remotely now, and that's a huge advantage that developed economies
are going to have. The fiscal and monetary sort of
flip flop I described a little bit. The way we
put it in the paper is that the central bank put,
which everyone used to talk about, has probably been replaced
with a fiscal put. If you're looking for a backstop
for market volatility. You probably can't depend on the monetary
authorities as much as you used to because they now
(05:25):
have to be very careful given the amount of fiscal
stimulus in the economy. They can't just cut rates because
stocks go down, or they can't just cut rates because
a bank is wabbling, and we've seen that. You think
about what happened with Silicon Valley Bank. That was basically
a FED operation that the FED sort of went along with,
but that was not the FED cutting rates to ease
the market's mind. It was a profound change.
Speaker 1 (05:45):
You consider that more on the fiscal side, I guess,
since it wasn't a result of lowering rates.
Speaker 4 (05:50):
Yeah, I'd say the traditional tools of monetary policy, which
were if there's something's going wrong, you cut rates first
to take the pressure off. That seems to be off
the table right now, and that is I think a
little bit by design. The FED wants to restore its credibility,
and one of the aspects of restoring credibility is you
have to demonstrate some indifference to market volatility. If you're
cutting rates at the first sign of someone losing money,
(06:12):
you know you're not going to have a lot of
credibility and I think the FED sort of they've been
looking for a way out of that trap for a while,
and this seems to have given it to them.
Speaker 2 (06:20):
I definitely want to talk about the credibility topic, because
that has definitely become a conversation in markets. But I
want to make sure I'm understanding the metaphor that sort
of the central bank put has been replaced by the
fiscal policy put. It sounds like what you're saying is
not that fiscal authorities will come out and throw a
lot of money at the economy of market volatility increases.
Speaker 3 (06:40):
It sounds like what you're saying.
Speaker 2 (06:41):
Is rather that because of all of that stimulus from
the fiscal side, that sort of limits the central bank's
ability to step in every time there's a hiccup.
Speaker 4 (06:51):
I mean, there are some problems that the fiscal authorities
may be better suited to solve. Financial market volatility probably
isn't one of them. But if you think about certain
areas of growth, you look at what happened in COVID.
The ability to pump money into employers and employees' pockets
to support aggregate demand during COVID, short term interest rates
would have helped at the margin and we did see
(07:12):
short term interest rates fall, so you can't necessarily sort
of prove the counterfactual. But I think a lot of
the lesson learned was that fiscal policy can play a
very real role in responding to crises. And so, you know,
I think, as you said, like the fiscal authorities feel
a little bit unbound by what's happened, and they then
they feel more active, and as a result, the monetary
authorities have to hang back and take a more sort
(07:35):
of defensive posture. Yeah, I wanted to rewind a little
bit and talk about that reaction to Silicon Valley Bank
and some of the other regional banks that were sort
of wobbling there. It was a pretty impressive reaction from
the FED and the Treasury Department, how quickly they were
able to seemingly put that fire out. But I wonder
(07:55):
if the fire is really out. Interest rates aren't going
any lower any time soon. That pressure on deposits, the
funding cost at smaller banks hasn't really gone away. Have
we heard the end of this story when it comes
to the banking sector, where you is it possible we'll
be dealing with another one down the road sometime. I
(08:16):
think they've taken what could have been a very short,
sharp and sort of painful reckoning for a lot of
these banks and extended it. And the issue I think
was we're probably all familiar with was you had the
assets on the bank's balance sheets had gone down in
value a lot as interest rates had risen, and when
depositors were pulling money, that forced a sort of mark
(08:37):
to market of those assets and wiped out the capital.
And so that forced the FDIC to essentially step in
and put these banks into receivership. And that's a simplified
version of the story, but that's basically what happened. Now.
Because they're able to essentially fund their liabilities at the
original purchase price, they've taken that marked to market change
off the table. But they in order to retain their deposits,
(08:59):
they have to pay them market rate. You know, the
demand from depositors to get the highest possible rate is
very real. They can go to a money market fund,
they can go to the next bank down the road.
And I think they've realized that the deposit insurance limit
is a real thing. We get reminded of that every
ten years or so, that you know there is a limit,
on what deposit insurance is worth. And so yeah, I
(09:21):
think to answer your question, this is going to be
a lingering problem for the banks because if they are
essentially unprofitable because they can't earn a net interest margin
over their deposits by virtue of having to offer such
high rates, then their capital will sort of gradually diminish
over time, or at least it prevents them from building
up capital and becoming more resilient. The story's not fully written,
to be sure.
Speaker 3 (09:41):
So what does that mean for monetary policy?
Speaker 2 (09:45):
Because if we think back, the FED had a meeting
in March which was amazing, and I remember the thought
exercise on Wall Street at the time was how much
of a tightening impulse is all of this stress that
you're seeing among the banks worth? And it feels like
we kind of settle on fifty basis points.
Speaker 3 (10:01):
I don't know.
Speaker 2 (10:01):
I think Powell himself acknowledged that maybe it was worth
twenty five basis points.
Speaker 3 (10:05):
And then you think about what we heard from the FED.
Speaker 2 (10:08):
At June's meeting, and it feels like definitely some of
those worst case scenarios when it comes to the banking
system have been taken off the boil when you think
about that long term story that you're talking about, that
this is going to continue to be a problem for
some of these lenders. The fact that you have a
lot of competition coming from money market funds, how does
(10:29):
that translate into credit tightening.
Speaker 4 (10:33):
The banks who are under pressure from having to pay
higher deposit rates, they will presumably be less willing to
extend credit. They will be more focused on preserving the
equity capital that they have and earning their way out
of the hole to the point where they have enough
excess capital that they can resume lending. You know that
may or may not be a huge part of the economy. Obviously,
(10:54):
borrowers have many places they can go to get credit.
Banks are one. The private credit industry, which is blossomed
in the last ten years, is certainly there to offer credit,
and larger banks, who may not suffer from the same problem,
have the ability to offer credit as well. So I
don't know at the economic level, sort of the macro level,
how severe this is going to be, And it doesn't
(11:14):
appear yet. There's a lot of evidence that it's leading
to a downturn. We do see signs of it in
the loan officer's survey, and some of the data points
that bank credit is becoming less available, and you know,
it may be that this is another sort of long
and variable lag. We talk about monetary policy operating with
a lag, bank credit may offer the same feature. So
(11:38):
I think it's a little too early to tell how
big a problem it's going to be. I think from
the market standpoint, and as it relates to the FED,
the question is will the Fed essentially cave or pause
earlier than they would or cut rates sooner than they
would because of this? And I think it's not really
clear that that's the case. I mean, the market has
been trying to call the fed's bluff now for a
(11:58):
couple of years. I think the FED has generally spoken
pretty clearly about what their intent is, which is to
raise rates until you get to a positive real rate,
hold it there for some period of time until inflation
is coming down, and then gradually return rates back towards
the long term sort of nominal target two percent or thereabouts.
Speaker 3 (12:19):
And I guess that.
Speaker 2 (12:19):
Comes back to the sort of credibility issue that we
were talking about a few minutes ago, the fact that
the market keeps fighting the Fed. I was looking at
it a little bit earlier. I mean, PAL has been
pretty clear that maybe two more rate hikes are kind
of likely. From here, it just feels like there's this
persistent golf between what's priced in and what PAL is
(12:43):
actually saying.
Speaker 3 (12:44):
How do you narrow that goal?
Speaker 4 (12:47):
Well, I think the market has learned it's less than
multiple times now. I think at some point they will
be right in the sense that they will be pricing
in the actual pivot from the Fed as the economy
turns down, as inflation comes down. Thus far, they have
not predicted that very accurately, and it's not you know,
I mean you can sort of point the finger at
the market broadly. Professional forecasters have not done a particularly
(13:07):
good job of forecasting inflation. The five year, five year
forward rate has not done a particularly good job of
forecasting inflation. Consumer expectations have not done a particularly good job.
So inflation is where it is, and I think the
Fed is responding to real data about inflation. The core
rate is still north of five. So does the Fed
feel an imperative to cut at this point? Clearly not.
(13:27):
If anything, They're going to go the other way. I mean,
obviously they're going to be somewhat data dependent, but you
see a lot of volatility in the two year, which
is where I think that risk is concentrated. You don't
see as much volatility at the long end of the curve,
which is interesting because I think that tells you that
despite all of this uncertainty and the volatility we've been through,
long term inflation expectations are reasonably well anchored, and that
(13:48):
the ten year and certainly the thirty year have not
moved around as much on a relative basis as we've
seen the front end of the curve.
Speaker 1 (14:02):
Jared, you touched on this a little bit, but I
just want to read one of the bullet points from
that report we discussed and unpack it a little bit.
Says developed economies have been facing a seemingly intractable problem
of aging populations, declining labor force participation, and insufficient immigration.
COVID may have led to a potential solution the power
(14:23):
of workplace technology to match labor and capital at a distance,
and presumably that's describing zoom and teleconferencing and that sort
of thing. But then this year we had a new
sort of wildcard thrown into the mix in the form
of artificial intelligence, and presumably I think all of the
(14:43):
hype and all of the stock market euphoria over it
is somewhat related to what you're talking about here, in
that we don't have this quickly growing labor force, but
we do have this technology that's going to allow for
more efficiency, more productivity, that sort of thing. But I'm
curious how you're thinking about how the stock market has
(15:08):
reacted to this hype round AI, because, for one thing,
there are fundamentals attached to it pretty quickly. In Vidia's forecast,
how much they raise their forecast. All the cloud companies
are raising their forecasts, if not all many of them.
Does the hype around AI justify what we've seen in
this stock market this year thirty percent up on the
(15:29):
Nasdaq one hundred and how do you sort of separate
that hype from the true sort of fundamental potential from AI.
Speaker 4 (15:37):
It's obviously early in the game, so we have to
be a little careful about how strong a prediction we
make here. I think in some cases you have specific
firms that were remarkably well positioned for the growth in
the sort of large language model, data driven AI that
the market just didn't appreciate, and their chip technology and
I think this specifically refers to Nvidia, although I will
say I'm not an expert in this space. Particularly, they
(16:00):
had the technology that was necessary for this, but no
one sort of realized it until chat GPT came along
and showed the world what their particular chipsets were capable
of relative to their peers. And I think that seems
to be a well earned advantage. Now, I mean, whether
the market is correctly valuing it, I think is hard
to know.
Speaker 1 (16:17):
Is it a potential macro force, you know, as far
as unemployment rates inflation? Do you think this is something
we're gonna be seeing moving the numbers on sort of
the macro numbers that we all look at.
Speaker 4 (16:29):
So that's a topic we get at in the paper,
and we don't spend as much time on AI specifically,
although we do speak a little bit about the cloud
and sort of how that's rolling through the economy. But
when you think about it, right, the challenge that a
lot of developed economies have had is a declining working
age population and declining labor force participation. That's naturally an
inflationary sort of impulse in the economy. Trying to get
(16:50):
workers into that space is why we think that a
lot of the technology gains from Zoom and other sort
of remote work will be helpful. And it's not just
allowing people to work where they want to work and
not have to commute. It's worker populations that historically dropped out,
whether it's older workers, women, people with children, those people
who may have a handicap, might be unable to work
(17:11):
in an office situation. You bring them back in and
that supports the labor force to some extent. And you
actually see a little bit of the data, and this
is one of the more interesting charts in the paper.
If you look at the long term demographic trend of
the labor force participation post COVID, we actually were seeing
higher levels of participation than that trend would have indicated.
And I think that's clearly the result of technology bringing
(17:31):
people back into the labor force. The other thing that's
a little more speculative but could be very interesting over
the longer horizon is cross border so allowing workers in
the develop world where there is a surplus of labor
to get around the immigration barrier, which is a challenge
and work remotely. And so you know, we're sort of
optimistic that technology broadly speaking, will bring workers in and
(17:55):
ultimately be sort of a disinflationary force. Now, the point
you're making about AI is it reduces the denominator, I
guess is to in the mathematical way, you just need
less workers because the computers will do the jobs that
were being done by human beings. I think that's inevitable
to some extent. I mean, we were already seeing that
pre COVID. You walk into a burger king, you tap
on a kiosk, you don't talk to a person, don't
(18:17):
you walk into you know, but you know, like that's
that stuff's already changing. And then you think about sort
of automation and industrial automation and the like care giving
to elderly in Japan where they have robots doing. I mean,
there's a whole host of ways in which technology is
stepping into the shoes of humans and that. But that's
a very long term trend.
Speaker 1 (18:35):
More of a Wendy's guy.
Speaker 2 (18:36):
Oh yeah, no, I love Wendy's. Actually, I'm so glad
you said that. I do like burger king fries. I
will just add, could an AI do a podcast?
Speaker 3 (18:44):
I don't think so.
Speaker 1 (18:45):
Oh, they certainly have written some scripts that I've early
on point I don't know.
Speaker 3 (18:49):
I don't know I would fact check those.
Speaker 2 (18:51):
But okay, So aside from this sort of long term
disinflationary impulse that we're getting from tech that we could
be getting from AI, if we bring that conversation to
a slightly shorter but still longer term timeframe, I want
to talk about the inflation that we're experiencing right now.
I think we finally put the term transitory to bed.
We've disabused that notion. But is the inflation that we're
(19:14):
looking at now? And of course inflation has been coming
down if you measure by a CPI, if you look
at PCE, But is this structural inflation it's two percent
still a realistic target or do you think inflation has
structurally moved higher.
Speaker 4 (19:31):
I think the Fed has the tools to get inflation
back to two percent if they choose to, and at
this moment, they're not going to back off of that
as their stated target, because again it gets back to
the credibility question. Is there a scenario where the economy
starts to go south and inflation has not yet come
down enough that they have to make a really difficult
(19:52):
choice between their sort of dual mandate. Potentially but we're
a long.
Speaker 1 (19:56):
Way from there.
Speaker 4 (19:57):
With employment at the current high levels and inflation at
the current high levels. Clearly the thumb is on the
scale with respect to the Fed's sort of objective function,
that fighting inflation is number one. So I think that's
sort of where their heads are at right now. I
think you know, the question as to how structural it is.
I think initially you know inflation was supply driven when
(20:18):
you get into sort of the early stages of COVID,
it was reasonable for them to look at that situation
and say that supply driven inflation tends to be self correcting,
and so the phrase transitory, which I think has come
to be regarded as an unfortunate turn of phrase by Powell,
there was some basis for that, but over time, I
think what they missed was that the labor market sort
of downturn was really short lived and was really almost
(20:40):
like an accounting blip at the end of the day,
because so many people got money from the government and
stayed spending. The job market came back pretty strongly, pretty quickly,
and the FED was behind the curve very quickly, and
it took them, particularly in the spring into the fall
of twenty twenty one, when inflation was surging and they
were still working out of their prior forward average targeting
(21:02):
and forward guidance, and they were living in this very
slow paced world of monetary policy reaction, and so they
wound up behind the curve, and that allowed some of
this inflation to become more structural. We did have a
bit of a wage price spiral, so you know, I
mean classic, you know, when I learned economics, the basic
message was you ignore headline because it's very volatile in
(21:23):
both directions. A lot of the factors that go into
headline inflation are their sort of elastic demand. They're substitutable,
So if it's high this month, it could be low
next month, so you don't really worry about that. And
core had been low for so long, and I think
people stopped worrying about it, and now it's high, and
you know, and I think we don't yet have a
good handle on how long it takes to come down.
(21:43):
You know. I think it's an interesting moment to consider
the difference in the choices made by say Paul Vulker
back in the eighties versus Powell today. Vulkar's policy path
was to hike very rapidly to extremely high levels, generate
a very strong positive real rate, effectively crush the economy
huge unemployment, but then rapidly cut so that there's a hit.
(22:06):
Was very painful, but it was very quick and very clear.
Powell's chosen a more sort of finest approach, which is
to hike to a positive but fairly low real rate
and then stay there. And so we're right in that
bumpy phase where inflation is the core is right around five,
the rates are right around five. You can arm wrestle
over whether there's a positive real rate at various points
on the curve, but it's not clear that he's done
(22:28):
enough to really tip inflation over yet. And so I think,
you know, they're they're taking some comfort in the idea
that there is a long lag. And you have, also,
I think, you know, an economy that built up a
lot of leverage prior to COVID, and that cost is
now coming due in the form of higher interest expense,
not just for banks but for anyone who borrows money.
(22:49):
You know, I think they're probably right to pause and
watch the data a bit, but it's you know, they
have definitely not moved as aggressively as past FEDS have,
so we have to be thoughtful about that.
Speaker 1 (23:00):
Shared one thing that came up over and over again,
especially in the news. Maybe I'm to blame. I think
I edited probably half of these stories questioning whether sixty
forty was dead in the even in the pre pandemic era.
But then when rates got really ridiculously low during COVID,
you know, every day there was a new obituary for
(23:20):
the sixty forty strategy. Sixty percent of your portfolio in stocks,
forty percent in bonds. I feel like everything's changed now.
So I'm wondering what the conversations are with institutional clients
of yours these days. You've got this fomo that seems
to be erupting in the stock market. Yet at the
same time, it's very easy to get a risk free
(23:43):
real return even in cash money markets, almost at five
percent in some cases. What are the conversations, like, what
should an institution, in your opinion, be doing with their
money right now? Yeah, there were a lot of obituaries
written for sixty forty. I probably wrote a few myself,
you know.
Speaker 4 (24:00):
And look, I think twenty twenty two was the worst
possible outcome if you are a classic kind of correlation
based investor, where you get your risk management from the
assumption that stocks and bonds will move into opposite directions
at the same time. Obviously, twenty twenty two was the
one year and twenty year thirty where that goes the
wrong way on you, and it led to severe losses.
(24:21):
So you know, at the same time, even going into
twenty twenty two, you could look at market valuations at
the end of twenty one and say equity valuations were high,
bond yields were low. It was very hard to see
how a sixty forty portfolio was going to do much
for you, even if you didn't anticipate the sort of
catastrophe that twenty twenty two turned into. And I think
the recipe then, which still makes a lot of sense,
(24:42):
is diversify not just in terms of sort of correlation
of betas, but across genuinely diverse asset classes, particularly using
alternatives that have unique return streams. Focus on managing liquidity
and illiquidity. So for whatever asset portion of your assets
you put into to long lock private equity and private
(25:02):
credit strategies, you're going to generate a higher level of
return almost certainly with those types of approaches, but they
lock up your liquidity, and that's a problem for two reasons.
One is if you need your liquidity, if you're a
pension fund or an endowment who has to pay out,
you have to have cash ready to go. It's also
there's an opportunity cost when you get a volatile market
and the stock market goes down twenty percent and you'd
(25:23):
like to be a buyer, where do you get to
dry powder from? And so you know. I think the
twenty twenty two episode has sort of forced people to
rethink a lot of these issues. I think the more
diverse strategies going forward make a lot of sense. I
think the alternatives world has evolved and diversified to the
point where in the old days investors tended to think
of it as very liquid. You're talking about draw down
(25:46):
structures in private equity and private credit that lock up
your money for five, seven, ten years or more. And
because that money was locked away, you would only bother
to choose those private vehicles that had the highest possible returns.
I think what we've seen today is much greater willingness
to look across the spectrum of alternatives, which has some
much more liquid, some moderate liquid, some very illiquid, and
(26:09):
that if you use that entire spectrum, you can allocate
a lot more of your capital in that space. I
think we're going to still see a lot of stocks
in a lot of bonds right now. Cash is really
interesting because you're getting paid to be defensive, which feels good,
but you know there is a trap there too. I mean,
if interest rates do start to fall, if the FED
is successful, the returns on your cash will come down
(26:29):
pretty quickly. I think we're at a point now where
fixed income investors should start to move back to their
natural habitats. You know, if you're a core bond investor
who's just looking for diversity versus stocks, that's a good
place to be. If you're a long duration investor who's
hedging liabilities, you can start to move back out there.
The curve seems to be in a pretty good.
Speaker 2 (26:48):
Place, and I get that the argument that can be
made about cash maybe turning into a little bit of
a trap. But until that point where the FED starts
cutting and I forget exactly what language Pal used at
the June presser, but I think you said something.
Speaker 3 (27:03):
Like raycuts are a couple of years away.
Speaker 2 (27:05):
Like it feels like it doesn't really become a very
scary trap until that point one hundred percent.
Speaker 4 (27:11):
I mean, you are you're trying to anticipate when the
FED will pivot and when the rates will start to
come down. Obviously, the FED is going to be reacting
to real data. There are a lot of people who
have very well founded views that a recession will be hitting,
probably less likely in the very end of twenty twenty three,
but certainly in twenty twenty four. And there's a lot
of reasons to think that may be happening. That's probably
(27:34):
beyond the scope of our call today. But you know,
when and if that happens, the FED will react. Now,
I think the question is how quickly they react. Where
in that sort of progression do you put the first cut?
And as you said, it's sitting cash is pretty safe,
you're getting paid.
Speaker 2 (27:49):
That is interesting, just piecing together what you said that
when the recession comes, the FED will cut and people
will exit cash. I feel like that's one of the
one of the many ways that sort of the perception
of cash has changed. Like in the past few months,
cash has become not necessarily a defensive strategy. It's going
on the offense collecting the yield in cash. And when
(28:11):
you think about what the trigger for getting people out
of cash would be, it might actually be the recession.
I'm thinking all out here, because usually you think of
cash as like.
Speaker 4 (28:22):
Yeah, preservation, that's right. I mean, the key difference today
is with the inverted curve. Everything else in bondland is
a negative carry trade. For the most part. You're getting
paid more money at the front of the curve in
the most defensive asset relative to just about everything else.
And you can take on credit risk, and I think
credit risk is reasonably priced. It certainly isn't cheap by
historical standards. But yeah, to your point, you normally think
(28:46):
of cash as having almost a penalty rate for the
protection it provides, and that's just not the case right now,
and I think a lot of investors are sort of
appreciating that. And it's not pure cash. I mean, you
have a variety of sort of money market strategies, short
duration bond strategies. There's lots of things you can do
to capture those fields.
Speaker 1 (29:18):
You know, you mentioned how it seems like the recession
calls keep getting pushed further out into the future now
into twenty twenty four, but they're still there. The equity
market really seems to be behaving like a soft landing.
Is a done deal, a given? But I wonder, you know,
if there is a recession in the cards for twenty
twenty four, does it make sense that the stock market
(29:40):
really saw the bottom in October of last year? Where
do we have to have that sort of cathartic drop
in the market that we typically see during or right
before recession. At least, I.
Speaker 4 (29:54):
Think what would be concerning is that with inflation where
it is, the traditional sort of safety valve of that
central bank put is no longer there, and so you
have to be concerned that if there is an earning's recession,
if stocks are selling off, that sort of habit that
we've gotten used to of the central bank coming to
the rescue just won't happen. I do think the fundamentals,
(30:16):
I mean, this is why are the recession expectations getting
pushed out Because the economy is doing okay. The employment
numbers are still pretty strong, wages are still doing reasonably well,
consumer spending is pretty healthy, the real estate market is
pretty sound. Obviously, there's some exceptions and sort of office
space and things like that, but a lot of the
things that would normally underpin a severe sell off aren't
(30:37):
really there. And I think to the point you made earlier,
like a big part of the equity run up is
a very concentrated exposure to the top seven to ten
names that are largely tech focused. So could those names
snap back and have a real sell off, Sure, but
I think the rest of the market has not followed
anywhere close to the same degree in terms of the
(30:57):
valuation increases, and so I don't know that there's much
of an air pocket underneath the entire market. There may
be under some of the tech names, though.
Speaker 1 (31:04):
Which you know, if you're talking about a quarter of
the weighting of the S and P with a handful
of names on an equal weighted basis, might not be
too bad, but it could get ugly.
Speaker 4 (31:14):
Yeah. I mean again, I don't have a particularly clear
sense of sort of the valuation for those firms, But yeah,
just given what they've done, even a partial retlacement from
a percentage standpoint could be pretty severe.
Speaker 2 (31:25):
And just on the topic of recessions and the yield curve,
at what point can we say the yield curve was wrong?
At what point do the recession calls, does the actual
recession get pushed out enough that it's not any longer
in that magical twelve to eighteen month timeframe from the
time that the curve inverted. How are you thinking about
the yield curve and its potency as a recession indicator.
Speaker 4 (31:48):
Well, you know, there's the old joke that the yield
curve has predicted ten of the last five recessions. So
you have to take it with a grain of salt.
And I think one of the ways, and this sort
of paraphrases a little bit of what's in our paper,
you have to understand that COVID really was a very
profound reset of the financial and economic system in a
way that past business cycles were not. It's almost like
(32:10):
when your computer's not working and the last resort is
you just turn it off and you turn it back
on and yeah, you know, and you wait for the
screen to come back on, and you're like, please, please God,
let my document be up there when it turns on.
And COVID was a little bit like that, And so
a lot of the sort of habits and patterns that
we got used to looking at don't necessarily apply here.
(32:31):
I mean, the last time. I mean, you really have
to go back to the eighties to see a spike
in inflation like what we saw and a FED reaction
function like what we saw. And even there, the degree
of leverage that had built up because of a very
long period of low interest rates is unique. The asset
class relationships that were used to because you know, were
(32:53):
heavily biased by the fact that we lived through a
forty year disinflationary bull market. There's so many ways in
which you'd really can't rely on the rules of thumb
that have been passed down from the last thirty forty years.
You really have to look at the fundamentals. And so
to your question about the yield curve. Right now, the
FED is anchoring the front of the curve at or
(33:14):
slightly above the prevailing rate of inflation, and they intended
to keep it there for some period of time. History
suggests that positive real rates of a reasonable magnitude will
slow the economy and will bring inflation down. And aside
from that, you also have quantitative tightening and other things
that are reducing the money supply, and all of those
things together are pretty powerful, and so we do think
(33:37):
growth will slow. Whether you get a soft landing or
a recession, and people can sort of arm wrestle over
how you define those things. That's probably a little bit TBD,
but we think it's going to work. Eventually, the direction
will be down for inflation, will be down for rates.
That's essentially what the curve is pricing. I think a
lot of the volatility in the curve over the last
year and a half has been again the market implicitly
(33:59):
thinking the thing did not have the sort of gumption
to hold fast to interest rate hikes, and that the
market was essentially predicting that at the first bad data
point or the first sign of market volatility, they would
just cave. And they have. And I think you have
to give Powell some credit for that, which is they've
i think spoken very clearly about what their intentions are
and they followed through.
Speaker 1 (34:19):
Jared, I'm going to give you some credit too, because
we were joking before we started taping that the last
time you were on it was like this. We must
have talked for a good hour about all the important
cross asset and macro things in the world, and then
we spent about a minute on bitcoin and crypto, and
of course I made that the headline of the piece
on the podcast as as you're right, so I'm gonna
(34:41):
do that again, I think now I'm just kidding. But Katie,
I want you to chime in on this too, because
it is a fascinating development in the last week or
two with black Rock applying for a bitcoin etf, Wisdom
Tree coming out applying for one, and we've seen bitcoin
ETFs before going nowhere. But I feel like when Blackrock
(35:02):
does it, it's something's changed, something different. Yeah, Jared, let's
start with you. Does this move you know? I think
the headline last time was J P. Burgen's Jared Gross
says institutional investors have no interest in crypto or something
like that. Does this change the game at all? Do
you think now that, if it should, Blackrock successfully launch
a spot bitcoin etf.
Speaker 4 (35:24):
So there's a lot of layers to that sort of process.
One thing I think has become increasingly well established understood
is that bitcoin itself as an asset is not a security.
It is essentially a commodity, and there are past instances
of ETFs based on commodities. So if you accept that
sort of logic, I don't know that there's a regulatory
(35:47):
barrier to this sort of preceding my assumption as Blackrock
thought all this through and is not going to be
right investing all the time and effort to do something
that's just going to get knocked off the ledge by
Gary Gensler. So they got some clarity from the actions
against coinbab and that's when I say there's distinctions. I
think you really have to draw a very bright line
between Bitcoin. Again, my understanding is this sort of ether
(36:07):
falls under that same kind of rubric and the broader
kind of tokenization of the crypto world, which I think
is full of poorly regulated and sort of assets masquerading
as securities that aren't regulated like security. And this is
the place where the SEC and the CFTC are battling.
And so you know, I don't have a particular view
on where those lines get drawn, but it certainly seems
(36:30):
like the SEC has now thrown a marker down saying
if you are trading these things often exchange that they
are securities at least according to the SEC's definition, and
that'll get litigated. I think Coinbase is suing them and
they're going to go to court and figure out where
the lines are drawn.
Speaker 2 (36:47):
But gray Scale is also suing the SEC because they
had their spot bitcoin eto. It was an application, but
it was trying to convert their trust into an ETF
that was rejected last June, almost exactly year ago, and
they're now suing the SEC. But kind of make a
comment to what Jared was saying, to the idea that
theoretically Blackrock has thought all of this through. You mentioned
(37:10):
that we saw something from Wisdom Try. You've also seen
in Vasco revive their spot bitcoin ETF application and bit
Wise as well.
Speaker 1 (37:19):
Why now, Katie, Is it because they finally got that
clarity or feel like they've gotten the clarity in terms
of Blackrock.
Speaker 2 (37:25):
Yeah, I'm not sure what spurred the Blackrock filing. I've
spoken to a lot of analysts and investors about what
they could possibly be thinking, and the answer I get
is in hush tones, Oh it's Blackrock.
Speaker 3 (37:38):
They must know something.
Speaker 2 (37:40):
And theoretically, you look at this long line of issuers
who are lining up right behind them, and that seems
to be the thinking among the industry right now. It's
going to be really fascinating to see how this plays out.
Speaker 1 (37:52):
It would be shocking to see Blackrock get an ETF
application rejected.
Speaker 2 (37:57):
That's what I was thinking, I want to go back
and check. So Blackrock the world's largest asset manager, they're
also the world's largest etf issuer, which kind of goes.
Speaker 3 (38:05):
Hand in hand.
Speaker 2 (38:06):
I would love to go back through history and see
how many times they've filed for an ETF and had
it not launch.
Speaker 4 (38:14):
And I think with bitcoin specifically, you also have to
go back. And this, I think was the subject we
discussed last time I was here, is what's the purpose
of it? If you're an investor, why do you want
to own bitcoin? And I think there's really two perspectives.
There's a more of a retail perspective, which this is
sort of a fun, interesting asset class. There's a lot
of volatility. People love to day trade things with a
lot of volatility, and you can make them a lot
(38:35):
of money, you can lose a lot of money. Most
the institutional investors that I deal with, they don't think
in those terms. They want to understand is there a
long term positive rate of return attached to this asset
and does it have correlation advantages that diversify your portfolio?
And I think with bitcoin, the first one is hard
to see. The second one you can probably wrap your
mind around. That it is starting to become a little
(38:57):
more like gold in the sense that it's this sort
of uncorrelated thing. But still it's very hard to postulate
that there's an intrinsic rate of return attached to just
being long bitcoin, and it obviously has a lot of volatility,
which from an investor standpoint is a risk that most
institutions simply don't want to take. If it becomes increasingly
normalized and liquid and easy to trade, then I think,
(39:20):
like a lot of commodities, it'll become at least potentially
part of people's portfolios. So that's a you know, as
I said, I try to draw a very clear line
around bitcoin versus the rest of crypto, which I think
is replete with dangerous places that you do not want
to get. I'm interpreting that as there's no lottery ticket
allocation in institutional portfolio. Jared Gross, head of institutional portfolio
(39:43):
Strategy at JP Morgan Asset Management, Thanks so much for
coming back. Can't let you go just yet, though we
do have attrition on the show, where hopefully you came
prepared with the craziest thing you've seen in markets. I
don't know anything the one that struck me when I
was asked this is There was a story I think
it was in the New York Times the other day
about Argentina and how the dining scene in Buenos Aires
(40:05):
is ultra hot, not because of all star chefs or
low beef prices, but because inflation has gotten so out
of hand that the Argentines would rather spend their money
instantly once they take it from the bank in a
restaurant than watch it lose value sitting in their pocket.
And so this has become the favored pastime of the
(40:26):
residents of Buenos Aires, which is to dine out as
a hedge against inflation.
Speaker 1 (40:31):
I'd be some pretty good food there too.
Speaker 2 (40:33):
Yeah.
Speaker 4 (40:34):
I've certainly spent a lot of money in restaurants without
having it serve as a hedge against inflation.
Speaker 3 (40:37):
So I don't I'm going to I'm going to use
that one.
Speaker 4 (40:39):
Yeah, my husband, maybe I'll sleep a little better at
night when you get my credit card building. And I
was hedging Argentine inflation.
Speaker 1 (40:45):
I had no idea my teenaged daughters were.
Speaker 3 (40:47):
Hedging in They're deeply worried about inflation.
Speaker 2 (40:53):
Already talked about I was going to talk about the
filing rush to see a lot of is where is
follow in black rocks lead? I don't know, that's all
I got. I mean you could talk about the price
a bitcoin. It got close to or above thirty thousand.
I think it rallied.
Speaker 3 (41:09):
Something like seventeen percent in the days since we're back. Baby,
it's crazy you're back. Yeah, the smallest scrap of news
and here we are.
Speaker 1 (41:18):
It is crazy. I'll grant you that. Why now, I
think it is the crazy part, but it'll I mean,
it all makes sense when you unpack it. All right,
I'll give you my crazy thing. And this relates to
how hot the labor market is. There is a billionaire
family in the UK, a US family, billionaire family. This
is the New York Post, so they don't tell you
the family. It's a blind item. I think they refer
(41:40):
to it. And this billionaire family is seeking a dog nanny,
so someone to come in full time and watch.
Speaker 3 (41:49):
The salary on that.
Speaker 1 (41:50):
That is where we play. Oh god, the Prices Precise
game show. Jared, I got to inform you you're now
contestant on the Prices Precise to make Katie go first, Katie,
if you're a billionaire US family in London. I assume no,
not actually London. Wah, Knightsbridge district, that's London.
Speaker 4 (42:12):
Okay, are we going annual salary? Is this an hourly way?
Annual salaries per dog? And you're we doing? Yeah?
Speaker 1 (42:19):
How might one whole in the story is they don't
tell you what kind of dogs that would influence, but
multiple two dogs?
Speaker 3 (42:26):
Two dogs? And is this in dollars.
Speaker 1 (42:29):
You can I'll accept British pounds.
Speaker 3 (42:31):
I'm going to go in dollars dollars.
Speaker 1 (42:33):
Don't make me do the bitcoin conversion.
Speaker 3 (42:35):
I'm just thinking about the New York City rats.
Speaker 2 (42:36):
Are I think the annual salary there is like one
hundred and fifty thousand.
Speaker 3 (42:40):
I'm going to say one hundred and fifty thousand US dollars.
Speaker 1 (42:42):
One hundred and fifty thousand US dollars. I'll give you
a little more information, Jared. Since you're the guest, you
do get six weeks off.
Speaker 3 (42:49):
Oh wow.
Speaker 1 (42:50):
But the recruiter says, but when you're dealing with this
sort of clients, if they want to go to Monaco tomorrow,
you'd be on a private jet flying with those dogs.
Speaker 4 (43:01):
So remote work is not an option.
Speaker 1 (43:02):
For remote work, you really need to drop everything and
be there when they call and leave your private life
on the back burner for these two billionaire dogs.
Speaker 3 (43:13):
So Katie, I'm still gonna stick with one hundred.
Speaker 1 (43:16):
And fifty thousand. That's about one hundred and twenty.
Speaker 3 (43:19):
You have functions for this on terminal, So.
Speaker 4 (43:22):
You went dollars, Yeah, dollars, I'll accept that. I'll stay
in dollars.
Speaker 1 (43:25):
For I remember the prices right, rules are in effect, so.
Speaker 4 (43:28):
You got to be under, you can't be over. Is
that how this works?
Speaker 1 (43:30):
We'll call it closest to the pin?
Speaker 4 (43:33):
Okay, yeah, I'm going to say two dogs in London
working for billionaires on call twenty four to seven is
a ninety nine thousand dollars a year job.
Speaker 1 (43:42):
Holy cow, what a gosh dollar? Wait, dollars, dollars, but
if pounds is closer, I'll take that. Man, all right,
I'm gonna have to get the calculator out. One hundred
thousand British pounds to take care of two dogs. What
is in London? One hundred and twenty eight thousand US
dollars the difference in the middle. Yeah, yeah, I think
(44:05):
we got a draw.
Speaker 4 (44:05):
I think so I'll take it.
Speaker 1 (44:07):
You have a draw, that's pretty good, and uh, it's
time for me to announce I'll be leaving Bloomberg for uh,
for my retirement career as a dog nanny in London.
Speaker 2 (44:17):
Why did I immediately take you seriously?
Speaker 3 (44:22):
I need to go.
Speaker 1 (44:22):
Oh believe me. When I leave, they'll be dragging me
out of here in a handcuffs, not in handcuffs, but
kicking and screaming.
Speaker 3 (44:29):
Why doesn't Full dawna laugh? You are pretty funny.
Speaker 4 (44:34):
That is what we call a backhanded compliment here in
the podcasting world.
Speaker 1 (44:39):
I'll take any compliment backhand, forehand, side hand, whatever it takes.
Jared Gross, head of Institutional Portfolio Strategy at JP Morgan
Asset Management. Really always a pleasure to hear your thoughts
and express so simply and eloquently, really appreciate it, and
hope I'll get you back in for a third time
and get another bitcoin headline.
Speaker 4 (44:59):
No bitcoin headline, Yeah, you already got one. It's all
got Yeah, nothing, that's time. Thanks Jared, take care, Bye, bye,
what goes up?
Speaker 5 (45:13):
We'll be back next week. Until then, you can find
us on the Bloomberg Terminal, website and app or wherever
you get your podcasts.
Speaker 3 (45:22):
We'd love it.
Speaker 5 (45:22):
If you took the time to rate and review the
show so more listeners can find us. You can find
us on Twitter, follow me at Goldana Hirich. Mike Reagan
is at Reaganonymous. You can also follow Bloomber Podcasts at podcasts.
What Goes Up is produced by Stacy Wong and our
head of podcasts is Sage Pauman. Thanks for listening and
(45:44):
we'll see you next week.
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