Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy hall Away. Tracy, I,
Speaker 1: I don't even don't really know where to begin right now,
Speaker 1: you know. I the thought that keeps coming to my
Speaker 1: head was that life, at least here in the US
Speaker 1: and the markets in general, are so different than they
Speaker 1: were exactly a week ago. At this time. The pace
Speaker 1: of change of what we're experiencing is almost is just
Speaker 1: completely bewildering and unprecedented. It feels like, so I know
Speaker 1: what you mean, but I am going to say, we're
Speaker 1: recording this on March sixte and a week ago. We
Speaker 1: were limited down on spatures, and we were limited down
Speaker 1: again this morning. So it's Monday. Therefore we must have
Speaker 1: hit the circuit breakers. I say that with sarcasm. This
Speaker 1: is not normal. We've hit limit down I think like
Speaker 1: three times in the past week, right and I think
Speaker 1: we've hit limit up at least once or maybe twice.
Speaker 1: The volatility that we're seeing is just relentless, and the
Speaker 1: pace of change in life. You know, last weekend, I
Speaker 1: was still out. I took my daughter to the park.
Speaker 1: I saw some friends at the park. I wasn't like
Speaker 1: going inside to bars or anything like that or restaurants.
Speaker 1: This weekend, I was alone. I walked through some of
Speaker 1: the same neighborhoods that I walked through last weekend. And
Speaker 1: to say that it was the vibe was different, it
Speaker 1: was truly is truly an understatement. So many of the
Speaker 1: places that I saw people where they were still lining up,
Speaker 1: just completely empty. And what we're what would normally be
Speaker 1: busy parts of New York on a sort of like
Speaker 1: nice pre spring day. All I'm gonna say is welcome
Speaker 1: to my world. And I think you were forewarned having
Speaker 1: listened to me complain about this for six weeks. But
Speaker 1: social distancing has been well into effect here in Hong Kong.
Speaker 1: We've had hoarding, we've had fights over a toilet paper,
Speaker 1: We've experienced it all. Um. So, yeah, it's kind of
Speaker 1: surreal to watch the rest of the world, especially Europe
Speaker 1: and the US, now go through what we saw in
Speaker 1: Hong Kong and China and some other parts of Asia
Speaker 1: just six weeks ago. Yeah, surreal to say the least.
Speaker 1: It's also, of course creating some very rapid changes in
Speaker 1: our own uh you know, micro podcasting schedule because even
Speaker 1: the guests that we're talking about and that have scheduled,
Speaker 1: we're actually having to change the topics on the fly
Speaker 1: because the original plan, the original discussion suddenly doesn't feel
Speaker 1: as relevant as it did even say, two weeks ago. Yeah,
Speaker 1: it's been challenging scheduling all thoughts episodes. And I think
Speaker 1: the sheer speed with which markets have sold off is
Speaker 1: absolutely astounding. So I saw one analysis from Bank of
Speaker 1: America Merrill Lynch where they were talking about how it's
Speaker 1: been the fastest bearer market on record because we've had
Speaker 1: just twenty one days from the trough until we felt
Speaker 1: from that. The next fastest one was back in nine.
Speaker 1: It's never that great to see twenty right up against
Speaker 1: nineteen twenty nine on a comparative markets chart. But I
Speaker 1: will say one thing that's remarkable about the current market
Speaker 1: sell off, and it really puts you in mind of
Speaker 1: of whether or not this is technically driven or at
Speaker 1: least being exacerbated by technical factors, or how much of
Speaker 1: it is driven by actual fears of the economy. And
Speaker 1: to me, it could go either way. Right if you
Speaker 1: assume that big parts of Europe and the US and
Speaker 1: maybe Asia again, as we get a second wave of
Speaker 1: infections are going to be shut down for the foreseeable future.
Speaker 1: Then clearly that is a serious economic problem. But on
Speaker 1: the other hand, some of the action that you've seen
Speaker 1: in markets, these weird moves like limit up one day
Speaker 1: and then limit down the next, these sort of self
Speaker 1: reflexive moves, do seem to indicate some sort of technical
Speaker 1: driver as well. Yeah. Absolutely, so, we were originally going
Speaker 1: to UH schedule today's guest. We scheduled a few weeks
Speaker 1: ago because he had an interesting thesis that UH congress
Speaker 1: or Senator Bernie Sanders, who's running for president, although he
Speaker 1: is a socialist, might not be as bad for pretext
Speaker 1: corporate profits as many people had expected. And we're like, okay,
Speaker 1: that's a it's a contrarian viewpoint, given the well known
Speaker 1: antipathy towards Sanders and his brand of socialism on Wall Street. Yeah,
Speaker 1: how about we get a fund manager to talk about that,
Speaker 1: and that will be a sort of classic odd Loxy
Speaker 1: Odd Lots episode to just sort of talk about something
Speaker 1: kind of weird like that. But us for a few
Speaker 1: weeks times have changed. For one thing, it uh appears
Speaker 1: now that Bernie Sanders is an extreme long shot to win,
Speaker 1: given the setback that he had in recent votes and
Speaker 1: so on, and just generally this sort of the big
Speaker 1: macro questions, whereas once a lot of focus about it's like, well,
Speaker 1: Trump is probably going to win the election, but what
Speaker 1: happens if Warren wins, or what happens if Sanders wins,
Speaker 1: or what happens in Biden wins. Some of these debates
Speaker 1: are certainly far from people's mind right now. That being said,
Speaker 1: it's it's never a bad time to talk to a
Speaker 1: very smart macro hedge fund manager, right and even though
Speaker 1: no one cares anymore about our original podcast episode idea,
Speaker 1: I think this kind of gets to the technical versus
Speaker 1: fundamental point, like, how would a macro manager actually be
Speaker 1: approaching the current market? You set yourself up to deal
Speaker 1: with moves of the size and the speed that we've seen.
Speaker 1: It'll be yeah, it'll be good. Let's get right to it. So,
Speaker 1: without further ado, I want to bring a novel Sonala.
Speaker 1: He is a strategist and portfolio manage manager at e
Speaker 1: I A All Weather Alpha Partners. Uh novel. Thank you
Speaker 1: very much for joining us, Thank you for having me.
Speaker 1: Appreciate it so I'm curious, you know. Start off, I
Speaker 1: think one of the things that has really been asking
Speaker 1: striking two people is historical comparisons, and nobody really has
Speaker 1: any sort of great UH analogies that they can reach for.
Speaker 1: But from your perspective, I'm curious when you look at
Speaker 1: the history of markets from a volatility standpoint, liquidity standpoint,
Speaker 1: price action standpoint, UH, difficulty of gauging the risk standpoint,
Speaker 1: this environment that we're in right now, what is it?
Speaker 1: Is there any historical analog in your view in terms
Speaker 1: of liquidity is similar to oh A like for example,
Speaker 1: there's this interbank funding spread between you know, Library and
Speaker 1: O I S and that is quite wide right now,
Speaker 1: and you know, the FED stepped in and you know
Speaker 1: they're they're, they're, they're they're going the kitchen sake at
Speaker 1: this in terms of both balance sheets as well as
Speaker 1: you know, we're back to the year rate and we're
Speaker 1: still seeing you know Library, I asked quite why. So
Speaker 1: there's that element which is interesting. But in terms of
Speaker 1: the real economy shock, this is kind of to me,
Speaker 1: it's kind of like a nine eleven if it were
Speaker 1: like over a very long period of time, and that
Speaker 1: you know, this is just shutting down services activity. Even
Speaker 1: in Oa, you know, you still have to go out
Speaker 1: and get a haircut, right, But in this, in this
Speaker 1: type of shock, it's I would say the closest analog
Speaker 1: I can come up with would be something like eleven
Speaker 1: over a longer period of time. So what does that
Speaker 1: mean exactly for the economic impact? Does that mean we
Speaker 1: have something more extreme but hopefully the economy recovers in
Speaker 1: a few months, or does it mean that we have
Speaker 1: a lasting impact. And I got to say, you know,
Speaker 1: having been in Hong Kong for well, for all of
Speaker 1: this and seeing how it plays out, even as the
Speaker 1: cases kind of ebb over here, consumer behavior is still
Speaker 1: very different to where it was at the beginning of
Speaker 1: the year. People just aren't going out as much and
Speaker 1: people aren't really working as normally. So is it going
Speaker 1: to be a short impact or lasting impact? Right? I
Speaker 1: think there's two elements of this. One is kind of
Speaker 1: the behavior all of it you talked about, and so
Speaker 1: we're we're tracking, um, We're very interested to see kind
Speaker 1: of like how the Chinese and Hong Kong you know,
Speaker 1: quote unquote reopenings work, you know, to what extents there's
Speaker 1: a bounce back in psychology, we would expect that, um,
Speaker 1: this would have a relatively lasting impact in terms of
Speaker 1: like behavioral dynamics. But then the other element is policy, right,
Speaker 1: so like how quickly do you open reopened the economy? Um,
Speaker 1: you know, that's the whole debate right between V shape
Speaker 1: you shape W shaps, L shaped recovery host reopening. But
Speaker 1: it's not just a matter of how quickly you reopen
Speaker 1: or how durable the social distancing procedures are. It's also
Speaker 1: a function of the policy that we've already kind of
Speaker 1: had in terms of how quick how quick were the
Speaker 1: policymakers in terms of identifying the problem and reacting to it,
Speaker 1: and at least in the case of for the U,
Speaker 1: s quite a very related response in terms of public health,
Speaker 1: and to this moment um nothing substantial fiscally, so um,
Speaker 1: we would expect this to be quite a lasting shock. Um.
Speaker 1: We expect some sort of policy in terms of fistical
Speaker 1: policy to be cobbled together over the next couple of weeks,
Speaker 1: hopefully something substantent, but for the time being, because of
Speaker 1: how related the response was in the US from the
Speaker 1: top down, Um, it's very difficult to like imagine a
Speaker 1: Sparrea where we kind of just read the engine right
Speaker 1: back up or able to have like a V shaped
Speaker 1: reopening of these economies which are really just starting now
Speaker 1: to shut down here in the US. So as noted,
Speaker 1: we're recording this Monday Merge sixteen futures are currently limited down.
Speaker 1: Last night it we got an emergency action from the
Speaker 1: Federal Reserve slashing rates all the way de facto to
Speaker 1: zero and also initiating a very substantial asset purchase more
Speaker 1: or less QUEI. I think we can call it to
Speaker 1: the tune of seven billion as far as I could tell,
Speaker 1: essentially hit zero market impact. I was thinking when I
Speaker 1: saw it, I was like, all right, this isn't gonna
Speaker 1: be enough, but it will do something for risk appetite.
Speaker 1: Maybe we get a brief bounce whatever. It's almost impossible
Speaker 1: to discern any positive that got out of it. How
Speaker 1: are you How surprised are you by how the swift
Speaker 1: reaction this with or this with lack of reaction, and
Speaker 1: then what that tells us at least personally I could
Speaker 1: speak for for like our fund, both the emergency fifty
Speaker 1: dipths cut as well as this cut to zero rates
Speaker 1: and expanding QUEI h we sold the news immediately. I've
Speaker 1: seen as the markets epen so um, I'm not surprised
Speaker 1: that we're seeing this type of odds. And in terms
Speaker 1: of in terms of portfolio managers, you know, given all
Speaker 1: the volatility balance sheets are is grossing down across the board,
Speaker 1: there's still like there's still an element of even dealer
Speaker 1: balance sheets appear to be constrained, um, and and they're
Speaker 1: not able to kind of pass along these lower rates
Speaker 1: to other sectors of the economy, which is why you
Speaker 1: see these inter bank credit spreads remain wide for this moment.
Speaker 1: So I think what the market saying is like, look,
Speaker 1: thanks FED for getting you know, getting down to zero out, expanding,
Speaker 1: you know, doing doing what you can for to like
Speaker 1: alleviate with cleary issues. But at the end of the day,
Speaker 1: this is going to require very very strong fiscal policy response,
Speaker 1: and so far, you know, we haven't really seen anything
Speaker 1: of real substance. And and I'm kind of I'm glad
Speaker 1: that the sect kind of got itself out of the
Speaker 1: way quickly because now the debate goes you know, there
Speaker 1: is no there's no Trump versus how will debate anywhere.
Speaker 1: You know, we're down to zero, and it's time for
Speaker 1: DC to get going. And so I think that's kind
Speaker 1: of the calculus, um and and so that's why I'm
Speaker 1: not too surprised that, you know, it has been quite
Speaker 1: enough for the market that kind of feel better. Just
Speaker 1: on the inter bank market point, we have seen a
Speaker 1: lot of weird sort of plumbing issues there. So um,
Speaker 1: as we're recording this, I just saw a headline float
Speaker 1: past about commercial paper sort of drying up, which for
Speaker 1: anyone who was watching the markets back in two thousand
Speaker 1: eight is going to stir some really uneasy memories. But
Speaker 1: we've also had some weirdness in US treasuries, lots of
Speaker 1: talk about liquidity there, um, some really geeky, weird stuff
Speaker 1: happening with the futures versus the cash market, something that
Speaker 1: was important enough and weird enough for FED Chairman Jerome
Speaker 1: Powell to actually mention on Sunday how much do those
Speaker 1: sort of liquidity inter bank issues worry you at the
Speaker 1: moment or how much do they factor into your sort
Speaker 1: of day to day investment pieces. As we were watching
Speaker 1: you know, bonds just not like you know usually if
Speaker 1: before the crisis, it was kind of funny because you
Speaker 1: would see like stocks would be like flat to like
Speaker 1: barely down, and bonds would just you know, surge and
Speaker 1: if stocks are ripping higher, bonds would be like flat.
Speaker 1: It's kind of opposite that, right, So, like when we're
Speaker 1: seeing big, like ten percent down days in the stock
Speaker 1: market and bonds are only down, that's very concerning because
Speaker 1: it reflects the fact that bonds and treasuries are not
Speaker 1: hedging risk assets on a day to day basis. And
Speaker 1: that was to me, that reflects just like a complete
Speaker 1: you know, price and sensitive balance sheet, uh like grossing
Speaker 1: down among the by side, just pure liquidations anything that
Speaker 1: likewid just get out of and the lack of capacity
Speaker 1: for dealers to absorb that on their balance sheet for
Speaker 1: variety of reasons. You know, there's this combination of Bontel
Speaker 1: three regulations as well as the U you know, the
Speaker 1: ex extra federal deficits under Trump's tax cuts and spending,
Speaker 1: and those kind of combined for this pretty perfect storm.
Speaker 1: So I think the liquidity is destinately playing a role here.
Speaker 1: You know, the FED stepping in on commercial paper would
Speaker 1: be good. I also think though, like you know, these
Speaker 1: these types of issues are a big deal. But even
Speaker 1: if you stem them, you still need that physical response,
Speaker 1: which is why I think that what would be what
Speaker 1: would make for a good cocktail policy would be a
Speaker 1: very very strong discor response with direct cash transfers and
Speaker 1: the FED stepping in to buy municipal bonds to to
Speaker 1: alleviate the burdens that state and local governments are going
Speaker 1: to have. You know, they're the ones who are operationally
Speaker 1: gonna have to try to alleviate a lot of what's
Speaker 1: going on, and their tax revenues are gonna be punging.
Speaker 1: So I think those those two things are are kind
Speaker 1: of important. You know, buying treasuries is good so far,
Speaker 1: it seems like treasuries are starting to have a little
Speaker 1: bit more of portfolio hedge value. But we're gonna we're
Speaker 1: probably gonna need a lot more than this, even if
Speaker 1: we alleviate liquidity issues. So let's talk about the fiscal response.
Speaker 1: And we're in this sort of interesting moment where I
Speaker 1: don't know about what's going on in d C, and
Speaker 1: I don't understand the brains of people who have been
Speaker 1: in d C too long. I think it sort of
Speaker 1: rots a lot of people's brains, but a lot of
Speaker 1: smart people who I respect, who have different preexisting ideologies,
Speaker 1: say a fiscal response, an aggressive fiscal response is necessary.
Speaker 1: Explain to us first why fiscal not just monetary policy
Speaker 1: is to you an important element of getting this right.
Speaker 1: And then in terms of fiscal response design, what is
Speaker 1: the best way to think about it? Well, so for
Speaker 1: your first question, you think, you think her rates and
Speaker 1: the price of money is long as far as he wants.
Speaker 1: But unless folks want to take risks, it's not really
Speaker 1: doing anything. Unique folks who are actually expanding balance sheet,
Speaker 1: who are taking risks in order to you know, access
Speaker 1: the lower funding costs that are available. So in the
Speaker 1: case of what's happening right now, you're seeing, He's like,
Speaker 1: restaurant traffic is down to the seventy percent already. And
Speaker 1: you know, right now I'm looking outside, um through my
Speaker 1: apartment window here in Dunlo, Brooklyn, I still see folks,
Speaker 1: you know, biking on the Manhattan Bridge and public t
Speaker 1: raeducation is still open, so like it could get much
Speaker 1: worse still, And so in this type of environment, what
Speaker 1: happens to folks who you know, work at places where
Speaker 1: there's no traffic. What happens to folks who um just
Speaker 1: just don't have the capacity to make anthony, whether it's
Speaker 1: you know, paying electrical bills or you know, your mortgage.
Speaker 1: The only way to alleviate that would be direct cash fanswers.
Speaker 1: And I think that's why, um, you know, there's this
Speaker 1: there's this big push now to recognize that. Look, you know,
Speaker 1: there's there's no real risk appetite either in the markets
Speaker 1: or in the real economy. No one's spending money. So
Speaker 1: you know, cutting racist is helpful in terms of doing
Speaker 1: all you can, but it's not going to really move
Speaker 1: the needle in an ideal world. And you know, Joe
Speaker 1: and I have talked about this a little bit on
Speaker 1: previous episodes, but you mentioned the FED possibly buying up
Speaker 1: UNI vons. But when it comes to the federal government,
Speaker 1: what would you ideally like to see in terms of
Speaker 1: fiscal policy? Right So, I mean there's there's a lot
Speaker 1: of proposals out there right now, and you know, everyone
Speaker 1: kind of has their own take, but I think the
Speaker 1: one thing that kind of unifies all of them is
Speaker 1: direct cash transfers, mail some checks or like you know,
Speaker 1: electronically credit them to accounts, because you're gonna need kind
Speaker 1: of like a federal government bridge loan to consumers and businesses,
Speaker 1: the kind of whether the financial shock while we are
Speaker 1: in this kind of social distancing environment. So there's a
Speaker 1: variety of way to do it, and there's a variety
Speaker 1: of way to target it. But that's the main issue is, yes,
Speaker 1: you can cut taxes and all this stuff, but primarily
Speaker 1: especially among the most vulnerable financial financially, most vulnerable parts
Speaker 1: of the population, we're gonna you know, either be furloughed,
Speaker 1: laid off, or don't have you know, savings to kind
Speaker 1: of draw down from. It has to be direct cash
Speaker 1: transwers to those hooks. Before we go any further. Actually,
Speaker 1: I'm curious, you know, I introduced you as a portfolio
Speaker 1: manager at e I a All Weather Elpha Partners. But actually,
Speaker 1: just give us a little bit more about your background.
Speaker 1: What's your what does your firm do? It's a hedge fund,
Speaker 1: but tell us a little bit more about that and
Speaker 1: how you generally go about your framework for thinking about
Speaker 1: markets in any environment. Right, So, yes, we're hedge fund.
Speaker 1: Um there's a macro element to it, and there's a
Speaker 1: launch short element to it, so march or equity. So
Speaker 1: my partner, he runs a launch short equity side of
Speaker 1: the portfolio, and UM, I do both UM discretionary macro
Speaker 1: as well as on top of that, UM you know,
Speaker 1: because we're all others fund a lot of the risk allocations,
Speaker 1: risk exposure allocations across different economic scenarios, across different athletic classes.
Speaker 1: So the way we kind of work is, um, you know,
Speaker 1: we start from the top and we think of what
Speaker 1: are the you know, key trends and themes in the
Speaker 1: macro economy, what are the best regions, asked the classes
Speaker 1: to be looking in, and we just drilled down from there.
Speaker 1: UM my partner will be doing a lot more single
Speaker 1: name stock picking and looking for you know, in industry
Speaker 1: have a trends. I'm more focused on broader macro pictures
Speaker 1: and so, um you know a lot of a lot
Speaker 1: of different frameworks that I utilized. A big part of it,
Speaker 1: again is just kind of understanding the interlinkages between balance sheets,
Speaker 1: so like which balance sheets and the global economy are
Speaker 1: able to expand which ones are contracting and what does
Speaker 1: that mean to different economic indicators and financial market edifications.
Speaker 1: So walk us through what a typical day looks like
Speaker 1: for you at the moment. You know, we've mentioned a
Speaker 1: couple of times. Now that we are a limit down
Speaker 1: this Monday, March sixteen, what do you do when you
Speaker 1: sort of come into the office and how do you
Speaker 1: position yourself or think about things? Well, Um, during this crisis,
Speaker 1: we were lucky enough to be kind of on top
Speaker 1: of it. So we we've you know, we've been quite
Speaker 1: short and the large short side the portfolio has been
Speaker 1: quite grossed down. So we've been we've been navigating this
Speaker 1: relatively well. But like in these types of environments, Um,
Speaker 1: you know, a lot of it is just um, you know, tactical,
Speaker 1: tactical trade. So the market plunges and we want to
Speaker 1: make sure that you know, okay, we made a little
Speaker 1: bit of money there are we able to kind of
Speaker 1: protect ourselves from the volatility of its just stepping right back,
Speaker 1: but at the same time not trying to just enter
Speaker 1: exit enter excellent. So just looking across like a lot
Speaker 1: of what I do is I look across assets to
Speaker 1: see which asset class in the moment provides the best
Speaker 1: asymmetry for upside and downside for risk exposures. But I mean,
Speaker 1: this is certainly not a typical type of environment. My
Speaker 1: day to day is certainly not as active as it
Speaker 1: is these days. Um usually you know, I'm just I'm
Speaker 1: tracking macroeconomic indicators. I'm chatting with folks I consider to
Speaker 1: be smart. You know. The number one thing I'm always
Speaker 1: looking at how the forward great curves across the world
Speaker 1: to see what's priced into interest rates and then how
Speaker 1: does that affect asset clashes across the board. But in
Speaker 1: this type of vironments, it's literally just the only way
Speaker 1: to trade. It is just technicals and watching the cross
Speaker 1: asset picture for signals, and it really it really requires
Speaker 1: kind of like a quick trigger finger and a reliance
Speaker 1: on a little bit of instincts and and gut dutt feeling.
Speaker 1: This isn't of the environments where you know, you're you're
Speaker 1: sitting on it cl mapping out you know, what's the
Speaker 1: right multiple for the stock market. This is a purely
Speaker 1: behavioral base case or scenario right now. So it's literally
Speaker 1: it's the cash trading in the market. Of course, futures
Speaker 1: have been going on night. Cash trading is about to start,
Speaker 1: so you gotta do some trades. Well, so let's see
Speaker 1: where this market opens. I'm thinking it might actually just
Speaker 1: hit the level two circuit breaker. Let's see if it doesn't,
Speaker 1: then um, perhaps there's there's a little bit of room
Speaker 1: before I can get there, but um yeah, mostly like
Speaker 1: what I'm in our in our tactical side of our
Speaker 1: micro portfolio, we're quite short right now. So if the
Speaker 1: market opens and there's a little bit of trading, I'm
Speaker 1: looking to just kind of lock in a little bit
Speaker 1: of profits and then trail my stop bosses a little
Speaker 1: bit to tighten up the risk sports we have. Because
Speaker 1: even if you're barished and you're doing wongless environments, the
Speaker 1: snap back roullies are just as longtile So we're we're
Speaker 1: trying to take advantage of like these limit down dates
Speaker 1: that slowly start to gross our our portfolio down a
Speaker 1: little bit and and raise our cash levels. So that
Speaker 1: you mean, when you say gross it down, just for
Speaker 1: people who don't know the terminology, what does that mean? Right? So,
Speaker 1: like in a portfolio, you can be long something, you
Speaker 1: can be short something, and so like you know, let's
Speaker 1: say you're long ten units of risk and short five
Speaker 1: units of risk, that would mean you're net long five
Speaker 1: in this In this environment, we're trying to reduce our
Speaker 1: exposures on both the long and short side, especially because
Speaker 1: we were able to capture the lion's share of the
Speaker 1: move since the middle late February. So at this point, um,
Speaker 1: given all the volatility and all the policy, all the
Speaker 1: potential policy coming coming about, we're trying to just reduce
Speaker 1: our exposure on boats on the long and short side
Speaker 1: of our macro portfolio. And I would imagine my my,
Speaker 1: my partner, he will be starting to kind of gross up,
Speaker 1: so finally starting to bargain hunts and start to buy
Speaker 1: a little bit um into these into these little peaks.
Speaker 1: But um, and this is especially important in terms of grossing,
Speaker 1: especially important because you know, there's rumors of market my
Speaker 1: clothes at some point this week, and I'm not really
Speaker 1: sure you know what's going to happen in the interim
Speaker 1: if markets close. So it looks like, you know, Marcus
Speaker 1: will be opening in about a minute. So let's see
Speaker 1: if if they're able to avoid a circuit breaker or not.
Speaker 1: This is really exciting. We just wanted to reiterate. I mean,
Speaker 1: we have no reporting that markets are about to close.
Speaker 1: Of course by the time this comes out, who knows.
Speaker 1: But it has happened at times of national emergency at
Speaker 1: in the past. We don't like spread any under rumors,
Speaker 1: but it is something that people are talking about right
Speaker 1: now as a concern, as a risk. Officials have denied
Speaker 1: that it's something uh imminent or various arguments for against.
Speaker 1: So I just want to put that out there, depending
Speaker 1: on when people are listening that as far as we
Speaker 1: know at this point at Monday nine, nine March sixteen,
Speaker 1: there is no actual evidence yet that a closure of
Speaker 1: this temporary closure of the stock market is something in
Speaker 1: the cards, but it is It is certainly trader chatter,
Speaker 1: to say the least, and it's getting discussed in some
Speaker 1: parts of the media. So here we go. It's almost
Speaker 1: nine thirty and we'll see how imminently. Um, yeah, we'll
Speaker 1: see if we imminently hit the circuit breakers. There we
Speaker 1: got I'm not in front of a Bloomberg terminal. You
Speaker 1: guys are gonna have to narrate this. Yeah, we're gonna
Speaker 1: have to narrate in front of are we not? For
Speaker 1: we at we got level one. So for people who
Speaker 1: don't know what that means, the circuit breakers and level one,
Speaker 1: what does that mean? Like? What does that? What does
Speaker 1: that tell us? Right? So, um, there's three levels, the
Speaker 1: circuit breakers one or seven percent down they on down
Speaker 1: day one percent down day. When a level one hits,
Speaker 1: then trading halts UM for fifty minutes. And then if
Speaker 1: if it reopens and it gets to the level two level,
Speaker 1: which is thirteen percent down, it's closed for another fifteen minutes,
Speaker 1: and then if it hits the final down level three trigger,
Speaker 1: then trading is halted for the rest of the day. Okay,
Speaker 1: So we hit level one, UM, we opened at DRED,
Speaker 1: which is about fifty five points lower there than where
Speaker 1: we close with the circuit breaker last night with the
Speaker 1: limit down last night, UM, and about two points from
Speaker 1: where we close on Friday. So markets are gonna be
Speaker 1: closed until and then they're gonna reopen, and if we
Speaker 1: get to that level, which is a thirteen per cent
Speaker 1: circuit breaker level two, then they'll close again till ten
Speaker 1: and then we'll see, um, are we able to avoid
Speaker 1: more or do we see some sort of short tweas,
Speaker 1: especially if we see some policy say r something. But
Speaker 1: but yeah, like there was there was nothing I could do. UM.
Speaker 1: Markets markets just open spin closed. So I'm just kind
Speaker 1: of I'm available talking to you guys. Okay, So just
Speaker 1: thinking about that level three circuit breaker, which would shut
Speaker 1: down the market for a whole day. We have seen
Speaker 1: some people start to talk and some people start to
Speaker 1: advocate as well for getting that market closure, like a
Speaker 1: temporary market closure, but one that would last for more
Speaker 1: than a day, just to help everyone sort of relax
Speaker 1: and maybe even help with some of that social distancing
Speaker 1: on Wall Street. What do you think about that idea?
Speaker 1: Do you think it would be helpful at this point
Speaker 1: to an extent? I think there might be something to it,
Speaker 1: especially if we're like having like a you know, down
Speaker 1: day in the market. Also, you know, after the FED
Speaker 1: cuts of the zero you know, it's possible that like
Speaker 1: at some point, what ends up happening if you could
Speaker 1: see the way economy is working is that there's multiple
Speaker 1: so like you could see a scenario where, you know,
Speaker 1: even if we have optimal policy and v shaped recovery
Speaker 1: and activity which people going even see, even then just
Speaker 1: a financial hit alone could create emergent feedback loops and
Speaker 1: to create kind of like a permanent damage, like irreversible damage.
Speaker 1: You know, there's there's a case be made to you know,
Speaker 1: shut down markets for a couple of days, for a
Speaker 1: few days a week or so, as long as in
Speaker 1: the interim, there's a very very powerful physcal policy being crafted,
Speaker 1: especially if it's a coordinated globally coordinated as the type
Speaker 1: of policy. If you're gonna shut down the markets and
Speaker 1: not do anything in the meantime, um, you know, you're
Speaker 1: just gonna have like a massive, massive list of cell
Speaker 1: orders that are just gonna hit immediately when the markets reopen.
Speaker 1: Pakistan in two thousand eight kind of they create they
Speaker 1: like implemented the floor to the to the Karake stocket change,
Speaker 1: which is effectively showing the Marcus when they reopened. It
Speaker 1: was so like you have to utilize the time in
Speaker 1: the interim, otherwise you're just gonna make the problem worse
Speaker 1: because you're just gonna have price and sensitive cell orders
Speaker 1: and like I like right now, for example, because the
Speaker 1: Marcuts are closed, the stock you know, the stock market supposts.
Speaker 1: You're seeing oil get hit for that is anything that's liquid,
Speaker 1: anything you can trade. Um, you know, that's how people
Speaker 1: are kind of shedding risk or hedging risk because they
Speaker 1: can't trade the stocks. So in the end, you could
Speaker 1: shut down one part of the market, but in an
Speaker 1: environment in which the demand is I need cash right now,
Speaker 1: they'll just find something that's trading and sell that as
Speaker 1: a proxy. Yeah. So, like you know, if you shut
Speaker 1: down the futures exchanges, it gets a little bit more
Speaker 1: difficult to you know, trade you know, crude oil futures
Speaker 1: or like gold or soilar features. But you know that
Speaker 1: you can always do it in physical you know, that's
Speaker 1: still there. I don't know, so I don't really know
Speaker 1: how you would do that right now, given the social distancing.
Speaker 1: But you know, they're like, at the at the very least,
Speaker 1: you have a scenario where you just have like a
Speaker 1: massive set of cell orders that would all hit at once,
Speaker 1: which is kind of what we're seeing with each of
Speaker 1: these circuit breakers. But speaking to your point about this
Speaker 1: raising cash, you know, like silver's down to day, gold
Speaker 1: is down four to day. These aren't necessarily super cyclical asset.
Speaker 1: It's just anything that you can get out of. They exist,
Speaker 1: they exist, and so the only safe haven is something
Speaker 1: that like all the liabilities are denominated, and in this
Speaker 1: case is just the occurrency. Yeah. So, now, as we
Speaker 1: originally said in our intro, the original topic we were
Speaker 1: going to have you to discuss back before the world
Speaker 1: went crazy, was your sort of kind of contrarian view
Speaker 1: that Bernie Sanders presidency could actually be good for U
Speaker 1: pretext corporate profits, contrary to what most people on Wall
Speaker 1: Street would assume. And I guess you know that specific
Speaker 1: angle has lost some timeliness. Nonetheless, it does sort of
Speaker 1: relate to something that you said a few minutes ago
Speaker 1: about how your sort of core macro framework that you
Speaker 1: used to think about markets in any in any condition,
Speaker 1: whether it's crisis or not, is about the balance sheet
Speaker 1: perspective and thinking about interlocking balance sheets between different sectors
Speaker 1: of the economy. Why do you talk about like what
Speaker 1: what is the balance sheet framework that you talk about?
Speaker 1: And then how does it apply to crisis economics? Right? So, um,
Speaker 1: you know, there's there's been some really really cool um
Speaker 1: conceptual frameworks that have been developed, a lot of them
Speaker 1: by post Kaneci economics like Hyman Minsky for example. The
Speaker 1: way it's kind of framed is that you kind of
Speaker 1: break down the global economy into different sectors. Like you
Speaker 1: have the public sector, like the federal governmance have households
Speaker 1: and consumers, you have businesses, you have you know the
Speaker 1: forum sector, right, so like the you know, the trade
Speaker 1: and so like if you if you're able to kind
Speaker 1: of algebraically take all of the different sectors of the economy.
Speaker 1: You're able to create kind of axiomatic models, so like
Speaker 1: you're able to say, no matter what happens, these these
Speaker 1: things are kind of accounting identities, and from there you
Speaker 1: can kind of navigate through to see, Okay, you know,
Speaker 1: as money flows from one sector any time and to
Speaker 1: the other, what does that mean? And then how do
Speaker 1: you kind of model out the full effect of that. So,
Speaker 1: for example, speaking to your contrarian view of like, um,
Speaker 1: you know, Bernie Sanders have a policy could be actually
Speaker 1: a good thing for pre tax corporate profit growth. Um,
Speaker 1: there's something called the collech Key leaving profit equation. I
Speaker 1: know you've had a string of bos servandantae on a
Speaker 1: couple of times. He's kind of likezing in my opinion,
Speaker 1: like expert on this. And the way it kind of
Speaker 1: works is that you can derive the profits in the economy,
Speaker 1: the corporate profits in the economy, by looking at all
Speaker 1: the other sectors of the economy. The things that help
Speaker 1: corporate profits are net investments dividends, and the things that
Speaker 1: curt profits are non business saving. So like if personal state,
Speaker 1: household savings rates go up, if foreign savings rates go up,
Speaker 1: which would mean uh, you know, in terms of the
Speaker 1: trade account, and if government saving can s go up,
Speaker 1: which would mean the deficit declines. Those things axiomatically would
Speaker 1: harm profits growth, while corporate investments dividends, those things actiomatically
Speaker 1: help profit growth. That's kind of how the flow of
Speaker 1: funds work. So the question becomes which of these you know,
Speaker 1: when you break it down into all these individual sectors,
Speaker 1: which ones would see expanding balance sheets in terms of
Speaker 1: expanding investments or expanding the federal budget, and which one
Speaker 1: would see contracting balance sheet. And then when you look
Speaker 1: through and net them all out, you're able to derive
Speaker 1: corporate profits. So I can kind of see how that
Speaker 1: would work in semi normal times, but I guess we're
Speaker 1: far from normal times now. So how would that framework
Speaker 1: apply to the current situation. Is it all about figuring
Speaker 1: out where federal government funds actually flow into or is
Speaker 1: there also a sort of movement of money between certain
Speaker 1: parts of the private sector? Right, and and and it's
Speaker 1: true that, like you know, where in the private sector
Speaker 1: money is flowing, it does matter, Like, for example, you know,
Speaker 1: wealthy folks, they say most of what they earned because
Speaker 1: you know, they have plenty of free cash flow and
Speaker 1: that that money it was in the stocks and bonds.
Speaker 1: Whereas folks who are further down in the income distribution,
Speaker 1: you know, they're like hands the mouth, you know, access
Speaker 1: cash in their in their income. Most of that gets
Speaker 1: respent right right back into the economy. So there's different
Speaker 1: multipliers as well within the private sector. But for example,
Speaker 1: let's let's talk about this framework right here, right now,
Speaker 1: right for for this current scenario, this current situation. Okay,
Speaker 1: so what's gonna happen to the corporate net investments? Well,
Speaker 1: why would you expand investments when demand is collapsive? Right,
Speaker 1: So that looks to be probably going to be taking
Speaker 1: a big hit. Household savings. Our household is gonna be
Speaker 1: spending or are they are savings race gonna rise? Most
Speaker 1: likely they're gonna be rising. Both of those things are
Speaker 1: bad for bad for core profits, growth, foreign saving. Right,
Speaker 1: are we gonna see the current account a deficit expand
Speaker 1: or contract and in this case it's again trade shutting
Speaker 1: down the same situation, and so what you're left with
Speaker 1: is government savings. You need the government to dramatically dis
Speaker 1: save two offset all of what I just mentioned beforehand.
Speaker 1: And so if the government has a very large expansion
Speaker 1: of a deficit and it's you know, and it's targeted properly,
Speaker 1: hopefully then you can start to see the offset the
Speaker 1: corporate profits start to occur. But without it, you can't
Speaker 1: rely on the private sector alone to do this. There's
Speaker 1: just there's no there's no ability for the private sector
Speaker 1: to do this myself. How confident are you that we
Speaker 1: are at some point going to see the public sector bazuka,
Speaker 1: the big guns come out that uh come that will
Speaker 1: have to be voted through by Congress, which is split,
Speaker 1: and have to be signed into law by President Trump.
Speaker 1: How confident are you that we will see that at
Speaker 1: some point? And how big do you think it needs
Speaker 1: to be to provide the necessary level of economic stabilization
Speaker 1: so that this is not turned into a great depression
Speaker 1: type scenario, right? I mean, those are both tough questions.
Speaker 1: We kind of have been relatively pessimistic about the response. Um,
Speaker 1: you know, there was such a belated response to the
Speaker 1: public health aspect of it that we didn't really anticipate, Um,
Speaker 1: the White House would be necessarily really on top of
Speaker 1: the wall. Um, in terms of the size and scope
Speaker 1: of of a fiscal simulas required. However, at this point
Speaker 1: there's gotta be some panic in d C and not
Speaker 1: just in the White House. I would think at some
Speaker 1: point we're going to see UM a quite strong response.
Speaker 1: You know. The way I've kind of been we've been
Speaker 1: to kind of think about it is like kind of
Speaker 1: like the trade deal, like phase one, Phase de phase three.
Speaker 1: So like the phase one, we kind of got, like
Speaker 1: you know, the blow seed bill, which you know, it's
Speaker 1: just not going to move the needle that much. Like
Speaker 1: you know, we're talking about only population is really going
Speaker 1: to get paid sickly, and it's just it's just not
Speaker 1: gonna be there's no like helicopter drops us that we
Speaker 1: probably get a phase two in response to the recent
Speaker 1: market facility, and hopefully there's some sort of global coordination
Speaker 1: with that. UM if it if it's if it surprises
Speaker 1: the markets en US perfect, we don't need a phase three,
Speaker 1: but I wouldn't be surprised if it kind of creates
Speaker 1: a squeeze higher the markets, and then the markets ultimately
Speaker 1: are still you know, there's still risk to be shed,
Speaker 1: and it goes a little lower, and then maybe we
Speaker 1: get a phase three where you know you'll all out Bazuka. Originally,
Speaker 1: you know, like back in back last month. Um, you know,
Speaker 1: we were saying, if we do implement social distancing quick enough,
Speaker 1: then you know, maybe something like two hundred billions could
Speaker 1: be sufficient. Because of just how related everything has been.
Speaker 1: I mean, even in New York today to this moment,
Speaker 1: there's really not that much testing being done. Um, I
Speaker 1: I know folks who are symptomatic and being turned away
Speaker 1: because of how late the response has been. We think
Speaker 1: by the day is growing. So like you know, the
Speaker 1: I m F just announced that or so just they're
Speaker 1: gonna do a trillion dollars of of a package. You know,
Speaker 1: maybe maybe we're talking you know, like two thousand eight
Speaker 1: hard type of numbers. You know, at this at this stage,
Speaker 1: it really is just past dependent. The way to do
Speaker 1: it is just aim big and go and like you know,
Speaker 1: don't worry about if it's too big. There's there's no
Speaker 1: inflation in the economy, which is the constraint of this stuff.
Speaker 1: And it's not like you can't take it back or
Speaker 1: retract some of this stuff in the future, but in
Speaker 1: the in the in the interim, you know, I would say, definitely,
Speaker 1: you know, multiple hud hundreds of billions and growing by
Speaker 1: this day. Um, you know, the first the first fiscal
Speaker 1: package that was suggested was eight points three billions, and
Speaker 1: I was on a podcast last month with with the
Speaker 1: colleague of yours, Mike Reagan, and I was saying, you know,
Speaker 1: out of zero to that minimum, right, if you look
Speaker 1: at nine eleven, you know, you look at you look
Speaker 1: at these types of shocks, you know, even Hurricane Katrine
Speaker 1: and Sandy. You know, we're fifty hundred billion bilk packages.
Speaker 1: We have a much much bigger shock and we're just
Speaker 1: not there yet. In term of the pistol response, the
Speaker 1: markets are perhaps scaring them into long We just reopened.
Speaker 1: We're now at twenty four and nineteen, so it looks
Speaker 1: like we are going to have a little bit of
Speaker 1: trading for a time being. Let's see if if we
Speaker 1: get to level two or not. We're down about ten
Speaker 1: percent right now. The impulse macroeconomically from China is very
Speaker 1: different than it was in eight and it's also very
Speaker 1: often than it was during stars. So the reopening of
Speaker 1: Chinese economy is can be really important to gauge you know,
Speaker 1: what's what's the long term impact and if be like,
Speaker 1: are their behavioral ships that occur and what's the duration
Speaker 1: of these social distiline procedures. Yeah, I gotta say we
Speaker 1: we did get some China Eco data out today that
Speaker 1: was much much worse than forecast. So industrial output down.
Speaker 1: I think it was thirteen and a half percent for
Speaker 1: January in February, and the forecast was for a three
Speaker 1: percent drop. Obviously that's backward looking. But yeah, all eyes
Speaker 1: on China for the foreseeable future, and make sure to
Speaker 1: wash your hands yet. Yeah, that's the that's the key thing.
Speaker 1: Good good last message. Absolutely, thanks so much for having me,
Speaker 1: Joe and Tracy. Yeah, that was fantastic. I really appreciate
Speaker 1: you joining us, and that was pretty fun watching, uh,
Speaker 1: watching one of the most historic market open in real
Speaker 1: time with someone trading at live. So I really appreciate
Speaker 1: you taking the time to do that with us. Absolutely.
Speaker 1: Thanks that was great U Joe, that was really fun.
Speaker 1: As you said, I'm kind of disappointed that we immediately
Speaker 1: hit the circuit breakers and we didn't actually get to
Speaker 1: trade anything, but I guess that's unfortunately becoming the norm
Speaker 1: now days. Yeah, no, it totally is. Um. I mean
Speaker 1: so much. It's just like I don't even know where
Speaker 1: to begin with talking about markets anymore, because the size
Speaker 1: and scope of the moves are so far outside of
Speaker 1: the bounds of anything that I'm is too, that I've
Speaker 1: covered the last ten years. I was hearing another fund
Speaker 1: manager talk trying to reach for analogies. He mentioned novels,
Speaker 1: the post and eleven analogy, but also shades of the
Speaker 1: Great Financial Crisis and the euro crisis and the long
Speaker 1: term capital management blow up and the flash crash that
Speaker 1: we had in two thousand eleven or whenever that was.
Speaker 1: So there's like it's almost like people can't find any
Speaker 1: analogies for what's going on in this market, and it's
Speaker 1: like the sum of all analogies, which explains in part
Speaker 1: why the speed of the decline, of the speed of
Speaker 1: this bear market is really just unlike anything we've ever
Speaker 1: seen before. Yeah. Absolutely, And I think that's where the
Speaker 1: technical versus fundamental stuff becomes really really important. And the
Speaker 1: thing that worries me at the moment is the fiscal
Speaker 1: factor that we've all been talking about. The notion that
Speaker 1: if the government can get its act together and announce
Speaker 1: the big bazooka, that the market seems to want it
Speaker 1: to announce that only works if people genuinely if markets
Speaker 1: are genuinely moving because people are concerned about the economy,
Speaker 1: and that's certainly part of it. But if markets are
Speaker 1: moving because we're getting a weird sort of liquidity driven
Speaker 1: dynamic or you know, a value at risk shock, I
Speaker 1: think it becomes a lot harder to stop those sort
Speaker 1: of self reflexive moves. That's what worries me. But on
Speaker 1: the other hand, markets aside, we know that just what
Speaker 1: we've seen so far already have been absolutely devastating two
Speaker 1: huge swaths of the economy, especially anyone who works in
Speaker 1: tourist industry, hospitality. I mean, those are real. The numbers are.
Speaker 1: I read in a Seattle Times this weekend, fifty restaurants
Speaker 1: already shut down. They called it the Great Recession on
Speaker 1: hyper drive. So no matter what's going on in the market,
Speaker 1: there are people already massively hurting for real who could
Speaker 1: use serious support right now, right Stopping the sell off
Speaker 1: markets is clearly not the first reason that or the
Speaker 1: primary reason that we should be implementing some sort of
Speaker 1: fiscal support at this moment in time. It's rough out there.
Speaker 1: But on the plus side, and you know, we're always
Speaker 1: trying to find the silver lining when we can. As
Speaker 1: an offa saying, we are starting to get a sort
Speaker 1: of return to normalcy in China and in Hong Kong.
Speaker 1: There's an open question about whether or not we're going
Speaker 1: to get a second wave of infections as the disease
Speaker 1: sorts of sort of heats up in Europe and the US.
Speaker 1: But if everything goes okay, we should have some idea
Speaker 1: of how and to what extent things start returning to
Speaker 1: normal after this type of disruption. Exactly right. One other
Speaker 1: point I wanted to make a novel mentioned. You know,
Speaker 1: we've had screen of us of the Jerome Levy Institute
Speaker 1: on a few times and his thoughts are helpful. I
Speaker 1: also been thinking about, like some of our conversations with
Speaker 1: the Sultan Postar and his point at it's like, you know,
Speaker 1: the sort of traditional economic models that mainstream economy is
Speaker 1: use DSG E model is that sort of assumes some
Speaker 1: sort of equilibrium. We know they fail massively all the time.
Speaker 1: And Sultan's perspective, it's like it's all about the balance sheet,
Speaker 1: It's all about who has money and who needs it?
Speaker 1: Uh is really what comes into view in times like this,
Speaker 1: because the only priority that most economic actors have, whether
Speaker 1: it's a company or a household, is who I want cash?
Speaker 1: Everyone wants it. Everyone wants to hold on to cash.
Speaker 1: Cash is gold. That's how you you know, it's like
Speaker 1: it's Sultan said one of our own episodes. He's like,
Speaker 1: cash or ripo is how you live to survive another day.
Speaker 1: Cash is how you survived another day. And when you
Speaker 1: see the liquidations in gold and the liquidations and oil
Speaker 1: and the liquidations and selling anything off, we're in this
Speaker 1: environment in which the name of the game for everyone
Speaker 1: is survive another day by getting their hands on cash. Right, So,
Speaker 1: even if there was a good investment thesis for gold
Speaker 1: at the moment, and you know, I'm not going to
Speaker 1: say whether there is or there isn't, but even if
Speaker 1: there was, I could still experience a massive move down
Speaker 1: because it's the only thing that's trading at the moment
Speaker 1: and the only thing that you can actually convert into cash.
Speaker 1: And again, that's how we get to this position where
Speaker 1: we are seeing all these weird and somewhat unexpected moves
Speaker 1: in the market. Absolutely, right, should we wrap it up there? Yes?
Speaker 1: On that happy note, of complete randomness and liquidity issues
Speaker 1: and meltdowns in markets. This has been another episode of
Speaker 1: the Odd Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway and I'm Joe Why
Speaker 1: Isn't Thal? You can follow me on Twitter at the Stalwart,
Speaker 1: and you should follow our guest on Twitter if he'll
Speaker 1: let you follow him. He's novel Sinala at Novel Sinala
Speaker 1: at e i A all Weather Macro Partners, and you
Speaker 1: should follow our producer on Twitter, Laura Carlson. She's at
Speaker 1: Laura M. Carlson. You should follow the Bloomberg head of podcast,
Speaker 1: Francesco Levy at Francesca Today, and check out all of
Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks
Speaker 1: for listening.