Central Banks taking over financial markets? | Jim Bianco and Tavi Costa
Moon. - bangs tom was our vevo my zoom alive Aquino. Canal Jaya, Tessa Ferrer in, tmr's esta Malaya special, hvala. Apenas. In Portuguese estas phrases per, second alone since Kevin O'Connell since Olivia Chow Cheney and Thomas cartel agree yeah, party Lycoris Wranglers, as the agendas agree on the poison, transmits el pasillo, mention, fragile, George or ammonia as legendas, English alright, so this is all that I'm gonna say in Portuguese, this, is a. Conversation. That. I. First. Of all I want to thank Savi for making the introduction, and the, contact, so Tov Acosta from Chris cats capital, how are you I'm. Great thanks for having me look forward to this conversation I'm. Grateful that Jim. Was able to join us and look forward to this and. Jim. Bianco from, Bianco, research president. And father of Bianco, research we're. Gonna talk about central, bank's interventions, financial, markets, and Jim. Thank you very much for accepting the invitation yeah, thank you guys it would forward to the conversation. All. Right so we, have so much to talk about about, all. That is happening financial, markets especially. With. Regards, to central, bank's interventions. And, the. One question that I want to start off, for. You Jim so we can kick, off this conversation is, the following so, the, crisis, triggered, by the corona virus do, you think it exposed, our financial, system fragilities, or it, caused them. Well. That's a good question and, I'd have to probably go with expose, them. We. Were running a financial. System on a certain set of assumptions, that. Did. Not anticipate. Some. Kind of a pandemic. Type, global. Shutdown and once. We got that it did, show the you, know exposed, it even. If you were to narrow that down a little bit I think there's been an argument to be made that, it's, a losed a lot of business practices too like the. Incessant buybacks. In the leveraging of companies, that. They never were holding. Amount of money, that they needed to as a rainy day fund if, they were to ever running the trouble and now, there's a need to have to bail out those companies so I'd, probably lean, towards. More exposed, it although, you. Know, you, could make a good case that it caused it as well too it's, a tough question to answer to be honest with. If, you wanna. Feel. Free I'm having issues you're barely security. Is you. Let you guys continue there really yeah, I don't know what's going on SEC but, okay, great so one. Thing that was I've, been paying attention for a long time, regarding. The feds actions. And policies is, that, since, September. Last year so 2019. When. The first liquidity, crisis. Happened. In the financial system in the US the. Fed started intervening, heavily. Reducing. Rates. Incrementing. The. Overnight. Repos, and. That. To me suggested, that something was not right or. Some. Fragilities. Or baby was, the business cycle coming, finally, to an end after 10 years of, expansion. And the. Coronavirus, was as you said the sudden stop of economics, sudden. Stopped economics, that caused that that made. It made it the whole thing even worse. But. If you, weren't for the coronavirus. Do, you think we, could, end up even. Without the coronavirus, we could have a recession, even, without that, yeah. I do think that there was a real possibility, that that could have happened what. I'm what. You're talking about happened, in September let, me put. Some some, color on that sure. In. The post crisis, during the crisis, of 2008, we. Correctly, identified, that the banking system. Over. Levered itself, over. Leveraging itself means that the banks had a certain, amount of equity. And then they could give. Out loans and buy securities, above, that in multiples. Above that in the. Case of Lehman, Brothers they, went from one dollar of equity to $40.00 worth of securities, that, we decided was too much so. We've put together myriad. Of rules over the last 12 years to. Pull back the banks, and. Those rules are not just Federal Reserve rules, those, are Bank of International Settlements, or, Basel, 3, those. Are FDIC. Rules those. Are. The European banking, rules ECB, rules all the way up and down the line so, we limited, what banks could do in terms of leverage you. Get to September, of 2019. And. The markets had been growing and growing and growing Bank. Assets, had not been keeping up they, hit their limit as to what they could do and that's. When you started seeing problems in the repo market the. Fed came in with a patchwork and, that. Patchwork was, to, hand, the bank's extra, reserves, to try and keep that market going and. It worked for a while and then, the coronavirus, said it but I do think, your. Larger point is right where. Were we before the coronavirus, we, were in year 12 of an expansion, we. Were showing serious signs of, strain, in that expansion. And that's, one of the reasons why I pushed.
Back On these arguments, but well, let's look at what happened to the financial, markets during the. Spanish. Flu or during the Hong Kong flu in the 60s, or doing SARS or MERS or the bird flu or the. Swine flu a lot. Of those came in very, different environments, the, Spanish flu came, literally. At the end of World War one completely. Different financial financial, system, environment, SARS. Two. Days after, the Iraq, war started. In 2003, was once ours was declared a pandemic, markets. Were down risk. Once was, high, people. Were very defensive. Then, you declared a pandemic you got a completely, different response out. Of markets then what, you had here the, 12th year of the longest recovery, ever, raging. Markets, going. Of strain, that you would see at a peak and then you. Got the coronavirus so that's why I think that this is giving a much different response than those, did in the pin up in the past. Guys. Oh sorry, about that that was a security, guy was just. Telling us that some. Giving just giving us some information about the building but I have, you. When are they no, no no one is in the building that's what's funny I'm, probably, the only one here so but. I would like to share a chart. With you first - -. Then perhaps. Perhaps. You, can you can comment on those charts let's. See here so just, share my screening. One. Minute all, right so. Can. You see it yes, all. Right, so. My. First question to you is is, regarding, you know the this environment, that we're in and in terms of the macro economic setup. In general. What. Are the industries. That you see the this actors, or assets. It can be even an asset class that can benefit, from this sort, of QE to infinity, lunacy. That we're hearing, recently more. Recently, as you see in this chart, S&P. 500, of you remember, when everyone was saying that it was supposed to be high the court are positive, correlated, to to, the Fed balance sheet and then we saw this correlation completely. Break this, chart should be updated because there is a relief, balance more recently but, also there there is a massive. Increase in the balance sheet even from there, one. One, industry, that I've been focusing on and I would like you to comment on that if you if you have any views on it that perhaps could, benefit from this is the, only industry I know that, is so trading below the 1980s. Levels. And at the same time it is likely to probably. Benefit. From this whole environment, so maybe, perhaps, you could you, could give us your view on on on what you think about about those those two charts and maybe something you're seeing on that sure. And if I could I'll comment. On those charts if you could show my screen I want, to show a couple of charts that are along, those. You, showed the Fed balance, sheet let. Me just, get there and here's. The Fed's balance sheet updated. And I can draw on this screen here, and. You can see that it's really taken off to new all-time highs it's. What's happened with the Fed balance, sheet as a, percent. Of GDP, the. Fed's balance sheet right now is at twenty four percent almost a quarter it should take out its all-time high set, in 2014. As well. But I also wanted to point, out let's not just look at the Fed let's. Look at world central bank so if we include all of them the Fed the ECB, the Bank of England the Bank of Japan and the Swiss National Bank their. Balance, sheets are up a trillion, and a half dollars in, just, the last month or so taking. Out their old high from, 2018. And way. To express, that is here. Is this aggregate. Size of the bond market, right here here's, the aggregate size of all those balance sheets they, now own 31 percent of the bond market, up from, 27. Percent just a month ago and there. Are all-time highs of 33, percent should probably fall in the, next couple of months the, amount of stimulus. That, central, banks are putting into this system is. Unprecedented. Deutsche. Bank says it's 30 trillion, annualized. Is what they've committed to that's larger, than the. Capitalization. Of the stock market, we. Passed a two trillion dollar stimulus bill, on Friday. Two. Hours, ago Donald. Trump was saying he. Thinks it's time they start another two trillion dollar infrastructure. Stimulus, bill I think. That what you're going to see in. Terms of assets is we're. Going to have a V bottom, and that. V is going to be the second or third quarter, where we have all the, layoffs in the contraction of the economy the, virus will go away will, rebound, I don't think we're going to go all the way back to the high that's your L and, on.
That Back side of that we're. Going to have inflation or, as, I've even joked about if we, don't have inflation if the, Fed could run their balance sheet which is five and a quarter now the, estimates, are it will be ten within. A year if the, central bank world center to run there's to 25 or 30 trillion dollars, and we. Could get those balance, sheets up at new records, and we don't have inflation then, we could delete the word from the dictionary because. If this doesn't produce inflation, nothing. Will produce inflation, so I think that the play here, is for. Now, you're. Going through a contraction. Nominal, GDP is going to contract stock. Market's going to struggle, I still think, but, when, we start seeing the peak in viruses. And coming out of it stimulus. Is going to be the order of the day and that, should produce inflation. And I, think that all the inflation, beneficiaries, will go if it doesn't initially. Don't. Just keep doing two trillion dollars a year a two trillion dollars two trillion dollars until it does as. Well to, your question about gold that. Has been one of the more confounding, things, that I think has been gold in. Theory, gold should be going, ballistic it's. Not, going ballistic, one. Of the reasons I think it's not going ballistic is, to. But the purpose, of gold is to get your money out of the financial system but. Too much of it is being purchased within, the financial system it's GLD it's futures, contracts, its derivatives, as on gold fine you buy gold because you think there's going to be stress until you find out that your counterparty. Has, failed, and you don't get your money and then, you might as well have just owned Tesla stock then, at that point the, way you need to own it is physical. Gold the. Premium, that the physical, gold is getting, over. The. Comex price is near a record and they're shortages, galore, so. I do think, that eventually gold, will make a run but. I think that the structural, problems, is it's, not GLD, it's not, future's it's go buy gold. Coins and put them in your basement and a lot of people don't want to do that or don't know how to do that and even if they have the motivation to do that you call up a going coin dealer they don't have any so, that's going to take time it'll, eventually come with gold but, I do think that that, mentality. Has, to change I. Just. Want to go back to Jim's, points about central, banks balance sheets. Skyrocketing. Across, the globe and, with. All these stimuli. Stimulus. Packages. Not. Only monetary, but also fiscal. The. We. Might not have price. Inflation, in, the sense of goods and services like the CPI or the PCE, but. If, all, this money, creation, by the Federal, Reserve keeps.
Going. Directly. To financial. Markets it, might only inflate, again, financial. Assets. Unless. This, two trillion, Fiscal. Bureau stimulus. Bill actually, gets. The, money to, the people so if the people start spending, I think, we can sensation. Even faster, than people realize. Can. I just jump in on there real quick course not. Only. Lasts. Over. The weekend. Donald. Trump made a comment, that, the. Way that they're trying to do this stimulus, is. The. Way they're trying to do this stimulus, is that, they're they're trying. To get it out in the market in a matter of days and, if. They don't get it out in days he said Congress is going to come back and they're going to change the rules so, that they're gonna get it out in dates the way they're doing it now is they're saying to, all the thousands, of banks in the world, you. Hand. Out the loans and we'll, reimburse the banks but if you don't get their money out in days we'll. Just have the government do it so I think they're damn well intent, on making, sure this money gets out there and making, sure that this money gets spent and it, gets spent as quickly, as possible. As well so I hundred, percent agree with you that one. Of the things that may happen is is that this money may never make it into the economy but. Boy they're going to move heaven, and earth to try and make it get, this money into the economy to, make sure that it does go. Just. Before. Switching. To suit IV just one one. Additional. Point there is. If. If. The feds or if the the Congress if. Course doesn't make, it doesn't. Cannot. Make the money get to in streets. What. Happens, in. The case of the. Federal Reserve printing. The, money and, getting, in getting the bank's making all the loans there if I just, let me rephrase, it the. Way I see, it is that, right. Now we have because. Of the corner virus we have a huge, supply, shock we, also have a huge, demand, shock, so. We could say those, two, effects, they. Offset, each other and that's why we're not seeing price, increases, but. On, the other hand even, if the Fed gets, the money to, the Main Street if Congress makes makes. The, money gets to the people get to the people we. Might even have, a higher. Demand, for money so people are saying Oh everything, that is happening and say well I might, as well just increase my liquidity, needs and hoard, this cash and not spend, it so. We might be in a situation, that even, with the money again into the street people will not spend it do you think that's possible oh I.
Definitely Think that that's possible, that they they they they wants but we don't know how, they're going to react with this money. But. We do know that the, amount the scale, of the money that they're committed. To which. Is six trillion, dollars, which is twenty five percent of the economy which. We've never seen before is. Unprecedented. The amount of money that we're going to see at least at, least committed, but you're right. Ultimately. You want people to use this money and buy cars. And buy houses and. Do, things, other, than buy. Groceries. And cleaning, supplies and that's. Gonna be tough to get, somebody in this environment I don't know how somebody can buy a house in this environment most people want you to let you in their house because, of the fear of the virus to actually look at it to actually buy it I don't know anybody, who's gonna want to go, to a car dealership to, buy a $30,000. Car I don't even know if the car dealerships, open, and again, I don't know if they even go let me test drive it without, me you haven't be sitting in a hazmat suit so, you're right that money's, gonna be there and great, I'll go buy some groceries with it now go buy some disinfectant. Wipes, but, you know am I gonna buy serious. Things with it to really get the economy moving that's, gonna take some time but. I do think that's what I said on the backside when. The buyer speaks and it starts going down and we start returning, back that's. When I think we could really start to see the burst of the money so, I don't think you're going to see inflation, in March. Or April or. May, but. In the fall is when, you could definitely start seeing it in the, fall when we start going back to work assuming, that you, know that we start having some return to normalcy, we've. Stuffed everybody, with money. Vacations. Cars, other, things, that they could spend their money on, along. Those lines then, you could start seeing it and then maybe we'll start seeing that inflation. Tavia. You can jump in yeah. Let me make a comment so first. Of all one thing I've been, looking, at for some time and I think be, interesting people know that too, but it's it's one, major reason why I think we haven't seen inflation, yet is because of the commodities. Market when you look at the commodities, market since the weight, or so most. Commodities are either down significantly or flat, you, know II can, nation meny you know oil net, gas agricultural. Commodities, the, list goes on and on and I think that I had you, know it's it's very it's it's a little bit difficult to see inflation, in such. A low. Commodity. Prices environment. And the number, one maybe, you can comment on that too but also in, terms of innervation, especially. On the side of the. Government. One, of the biggest questions, that I've been trying, to ask myself here is is who is going to to, bail out whom you. Know we're, seeing now no earnings essentially. In corporations. Right now corporate. Earnings are probably going to be plunging, we, have no consumption, as much as we had in the last few week or, so, so in terms of tax revenues, you, know it's going to be very challenging and. Then you have the government spending, side that is surging, as, you know and and, at the same time you have economic. Activity, that is falling to pieces. And. You. Know I think that that's it's it's, probably somewhat. Obvious if you looked at relative to GDP deficits.
Relative To GDP are probably, likely to rise significantly, here. Well. You know do, you have any estimates, first, of all for. Deficits. Relative to GDP in. Your firm and your opinion. Also, order what are the impacts, of that in a short term. Yeah, if you look at deficits, to GDP. Right. Now the deficit, in one trilled. Deficit, at one trillion, dollars, is, estimated. To be somewhere. Around four percent of GDP. The. Estimates, I've seen here now that it was 18 percent is where we're going so, that's putting, it in around four or five trillion dollars, the deficit, as we move forward and then. Trump today said let's to another two trillion on top of that that. Deficit, would be the highest in American, history, except, for. 1944. When we were financing the from. Financing World War two these, numbers are going to be out of sight I like I said we're, gonna look back at a trillion dollar deficit, in a year or two we're gonna think that's a balanced budget is where, we're gonna go with, with with these deficits, they're going to be, huge. In terms of. Where. We're going from here so. Much so let. Me let me um let, me turn, tact here if you can throw my screen back up here a second. I want, to point out something here the. Chart you're looking at here is the. Fed's QE purchases. This. Is the amount of money, that the what, the way the Fed works is that, they they say we're gonna buy some bonds here's, a list of bonds we're gonna buy Street. Please submit us bids okay, they get about a hundred billion dollars worth of bids how, many bonds do they buy then it's the Green Line they're, mine seventy, billion dollars of bonds a day a day, is what, they're buying they used to do QE infinity, that was 85 a month they're. Also doing 30, over so billion a day in, mortgages. In. Other words what I'm leading up to here, is that, if you, look at this yield this is the 10-year yield here's, where it is today here's, where it was a month ago it, really hasn't gone anywhere the. Fed is buying half, a trillion, dollars, of bonds a week.
Yields. The 10-year yield should be zero in this market, if there was any normalcy. To it the, reason, I think it's going. Sideways right now is. That. We. Are worried, about a inflation. In be giant, deficits, I like, to say I started, in the bond market in 1987. 33 years ago for. 33. Years I've heard people say to me well, we're gonna have these big budget deficits we're gonna crowd out the bum permits gonna have to borrow so much money that we're, going to see interest rates go up they're gonna crowd. Out everybody else and for, 33, years I said that's not a thing it doesn't work that way but, coming, out of this virus and coming. At the numbers, that were looking at that, actually might be a thing so, really, what you could wind up having is the fear of inflation after. Everything, is behind us there'll, be a contraction first, the. Amount of stimulus. That we're seeing right now I'm now, leading to gigantic, budget deficits and huge supply you. Could see interest rates soar, on the back end of this not, in the middle of the crisis, not in the second quarter a third quarter don't, maintain their safe. Harbor. Status but, coming out of this you could see much higher interest rates you know you back up to the early part of your question about commodity, prices not moving, a, lot. Of that's China, China. Is the is the factory, of the world copper. Iron or you know aluminum. Crude, oil all that stuff goes into China, out comes finished goods China. Is trying to restart, their economy, we could debate where. They are but they're not all the way back and now, China's, customer, the rest of the world is in, lockdown so. A lot of the commodity, depression, you're seeing right now is largely. Because China. Can't, get restarted, to the degree they want and even if they did and they start making, iPhones. All the, Apple stores are closed no one's buying, them right now now, maybe later this year they'll start buying them but that's later this year and then they'll have an inventory to work off so, I think that's why you're seeing the depression in. Commodities. As well but eventually. As, we, get going if, we start to see the inflation, come you'll. Start seeing more, traditional, inflation, measures like some of those commodities like gold and silver start, moving higher. It. I just. Want to ask what. Row. This, oil play, into, all this because, I I've. Heard the thesis, that. We might have not, only negative. Interest, rates but also negative, oil prices. It's. Unbelievable. Well for now though can I actually since, your question. I would like to share a few, charts, on that and have Jim comment. On oil I think, this. Is our charts that I'm looking at of the bar but probably can, you see a now my screen. All. Right so. These. Are probably charts that I'll be, tweeting maybe, today, and. What's. Interesting here is when, you look at this you know one, thing that is being crazy is it contango right now and in the future curve, you can see they're in the second panel on this chart largest. Contango ever for, the six months al, contracts. And you can see that how, previous. Times when we had this distortion, it also. Marked. Some major turns, in oil prices I see, this as well sort of a double bottom oil relative, to the S&P 500 or overall equities. Also. Doing a double, bottom here as well and you can see that previous. Times like the tech bubble this was actually in 1998. And oil, was up massively. After, after, we reached that level you, have the credit spread zine in red here for energy, reaching. Extreme levels. While oil prices, have been declining well, make sense but this divergence, is kind of extreme, now you. Got oil prices, versus, a 200-day, moving average. Also at an extreme, looks, like we're in the death of the the global financial crisis. And, you tweeted this that. Fernando. Was just referring to which is you, know a rainbow will pay you to take oil and. Analysts, are saying that it's possible they would see negative oil prices, at, what point so. I'll go back to my screen at what point you. Know do, we see a turn in oil and and what, is your view on oil in general. Well. I think what's happening with oil right now is that the Saudis are using this crisis, to try and achieve.
Oil, Dominance. They. Are glut, in the market with, oil to a degree that we haven't seen before, their, hope is to break the Russians, to break the Iranians, who they hate to, break the frackers in the US and they, could become then the dominant, player in this so, there's a secondary. Story, in addition, to everything else so they're, the. Supply, we're. Getting a supply shock. And. A demand shock in oil that's a little bit different than the man checklist we're not using it as much because the global economy slowing and they're, flooding the market with oil if you could share my screen, um. By. The way your contango chart, that's huge, it's, betting, that in six. Months, demand. Comes, back and the, Saudi stopped, pumping like crazy that's. What you're seeing that they're trying to see this now as far as negative, oil goes this. Chart here I tweeted this out yesterday, but it's got a bunch of a bunch of different sub. Grades. In in North America, now, remember, that oil trades, in. That you know you buy oil and, it will trade different, grades are better grades than other grades, so. This implied, bitumen, spot that's, trading, at $1 there is actually an oil crate that's trading at $1 it, comes out of Western Canada because. 30% of it is what's called condensate, when you buy a barrel of oil 30%, of its not oil so, that's why it trades it's such a discount, to, everything else and it requires extra processes. When, you get it to the refinery, to do something with it and then, it also has to trade net, of its. Transportation. Costs. And its, storage costs, so, if transportation, costs are expensive because it goes by rail not by pipe and if. Storage. Is running out because we've got such a glut and storage, becomes higher if the transportation. And storage costs on some, of these lower grade oils like, the $1 bitumen, spot or the back in Guernsey that's in North, Dakota or if, in the Western Canada select which is at $4 that's, the oil sands, if those. Transportation, stuff, goes above, $4. These will all trade at negative, prices we've seen this with. Natural, gas the. Scream, you will hear in the distance will, be Calgary, and Edmonton because.
They. Are the oil parts, of Canada, that have been doing very well and if, they're going to have to continue to sell oil at $4, to $1 a barrel and, it's, going to go lower there's. Gonna be widespread bankruptcies, all over the province, of Alberta it's going to be ugly it's. Gonna be ugly there right now but keep in mind there's. A secondary, story here the, Saudis, are pumping, like mad because. The Saudis want to break everybody, and go back to being the dominant player they're, tired of having to fight with the shale, producers in the United States with the Russians with the Iranians, as, to who sets the price in the dominance of oil MBS. Mohammad Solomon he wants, to be the man in oil and he's using this opportunity, so, that, end that how, do we get a resolution, to this and. You know I know Trump, is talking, to all these sides I don't, know how he finds a way, that everybody could declare victory and then, stop pumping around like crazy so, I think this is going to stick around for a while what's, happening, with the with the price of oil. Interesting. Yeah. Go ahead to have to go ahead no, I think that's a that's an interesting view and. But. It no, related, to you. Know obviously. You know the real question is how much of that is priced in or not. But. In. Terms of what's happening with equity markets, an economy, that you're aiding overall. You, know how much do we need to see of a deterioration, until, we see some large. Institutions. In general to to, start fail. You. Know we've had a few issues with the ETF's. Outflows. Recently, which is that whole past investment, bubble, that, is you know my view at some point will be it will cause issues you have those you know large. Amounts, of risk, parity strategies, all over, the world with. People long equities. And long bonds. And if you your equity part of the book is losing, money in a significant, way while. Your phone is underperforming, now you're under facing. Challenging, moments. For redemptions. So. You. Know what, what is your view in terms of those those. Of the. Markets today and and, do you think that how, much do we need to go down here more into, not, just in markets, but also the economy before, we see you know you. Know Boeing or or some hotel some. Some. Airline industries, starting. To really have issues and, just. In addition to Tavis Costa the type of question, is, despite. All the, liquidity being injected by the Fed the ECB, and other central banks the. LIBOR, OAS. Spread, it keeps rising, so, I mean that, that, says something is not yet, right. Yeah. I agree there is there is a lot of that let me take these one at a time if you put my screen up. Here's. A chart of. Viruses. In the United States you know and I did this chart. Yesterday. And, I, want to point out the reason I did this is I want to remind everybody today's, the last day of the month the. Last day of the month of. February. 29th there were 70, cases 70. In the United States there. Was one death on the. 29th, we were at a hundred forty two thousand, and twenty four hundred today. We're at a hundred and seventy, thousand, and. We're. At thirty four hundred deaths. Where. Are we gonna be one, month from today if, we've, gone from 70, to 170. Thousand, and one to 3400. This, month and everybody. Says is that next, month in terms of viruses could actually wind up being worse. But. Where do we wind up going, you. Tell me how bad this gets I'll tell, you, how.
Much Damage, long-term. Damage we, do to the economy because. We all want to talk about how many people are gonna lose their jobs in April how many people can lose their jobs in May then, the virus a peak and everybody will go back to work but. Not everybody's, gonna go back there's, going to be some, long term changes, Steven, major HSBC. His argued, the, handshake is gone we will never do handshakes, again it, makes sense and if, we have that kind of cultural, change we're. Going to have a lot of changes, going on, in in. Our economy so how much better how much worse is it going to be so, the next chart I'm going to throw up here at you. Let. Me find my I, know, it is all right right, there but, this is my drawdown. Chart so, what it shows here is it shows a bunch of indices so, it starts here on January first at zero the. SP, is 20%. Off, of its high, that's the SP right there at the top all. Of these other ones right here are financials. They're all these financials. JPMorgan. Is down 28% the. Bank's stock index is down 38%, in, other. Words the financials, have done far, worse than, the, overall market, I argued. Last, week, at the love's when. The financials, were down 50%. And Citibank. Was down 56%. Right here at these loads, we. Were not in a financial crisis, but, damn close to one at that point and that the, market was signaling, to us that. There is a real, possibility that, we could be seeing a financial, crisis, here's, your LIBOR. Treasury. Spread the old Ted spread it, has blown out to at least a 10-year high this. Is saying that there is a tremendous amount of stress in the financial, system I, agree. That what, Bernanke, said we're. Not going to see a major failure. Because. We were at the limit, the, Fed threw everything. At the market, I've, argued they've nationalized. The markets in the way that they've done this they. Lifted, us off the lows for, now for. Now but. If we sink, back to those lows over the next several weeks or, make, a lower low, we. Could be seeing some kind of a. Stress. Point that can lead to, some kind of failure or some, other type of problem so, my message here is financial. Failure now no but, we are close and there is definitely signs. That, the market is being bent, real. Hard will. It break it. Doesn't, have a lot more left to bend on it right now for, now we're not bending, it anymore because, we've lifted off, of those levels but, we are at a real risk point here. But. If. Banks, failure, if the. Financial, stress gets, worse. What. Else is left for the Fed to do besides. Nationalizing. A bank. Well. That's exactly what they would do they would do they would take out the old 2008, playbook, and they'd. Call up JPMorgan, and say buy Bear Stearns or buy WaMu or they'd call up some other they would or, they would turn to Bank of America and say you, are now merging, with Merrill, Lynch and that's, what they essentially did they forced, all, of those mergers, they, forced all those mergers together as well you would see more of that happen. Along the way as, well I think though what they would probably do, and an. Interim. Step is they'd say what. Is causing, the. Problem here. And that is falling, markets, well, the Fed probably, must go back to my screen here again. The, Fed is put together all, of these facilities.
That. Primarily. A credit facility, commercial paper funding facility you can read the list yourself. How. Is this work because. The feds not allowed, to do any, of this and the. Answer is the. Fed is not buying, corporate, bonds the, Fed although, they committed, to buying ETS, fixed. Income ETS, that own investment, grade bonds they're. Not doing it the, Treasury, is doing it they. Are putting for each one of these facilities they. Are putting together a. Fund. Called, the special purpose vehicle, the. Treasury. Will. Commit, money to that fund, and be, at it what they call a first loss position now, that's a bunch of high finance talk for something very simple the, Treasury, will own the fund not, the Fed the, Fed will provide the financing and then, they hired Blackrock. To do the trades, so. The Fed is going, to just finance the Treasury the government. Is buying corporate, bonds the government. Is buying ETFs. The government, is buying commercial paper, the, government, is backstopping. Providing, loans against prover shal paper the, Fed is just giving the financing, if, these, markets, sink down lower they'll. Buy all of it they'll just ratchet. Up the purchases that, they'll just try. And single-handedly. Support. Those markets, at higher levels, to prevent that financial, crisis, so, instead of waiting for the firm's to fail they'll, say the, assets, that the firm's own that are falling we're. Gonna stop them from going down now. My. Fear, of this is that. Long term this. Is a problem. Of, nationalizing. Markets, you, reduce the market signal, look, capital. Markets work because, we watch markets, they give us signals, they give us ideas, on where we're supposed to allocate, our money if, you remove that hey, you're, going long-term. If you remove that you wind, up with distorted. Signals. Malinvestment. Which is bad investment, and private. Sector, players. Funds. And, and, the like they, can't compete against, somebody that's got unlimited money that can write a number on a cheque and it doesn't matter to them they leave and they, make the problem worse so, in. Theory, what the Fed is done. Now. Okay. You're trying to stop the liquidity problem, now but. If you stay there long term it's, a real problem, last, thought for you on this thing did, we did this in 2008, not all of this not to this degree but. We did a version of this in 2008, and then. We, didn't understand, it and, we said Ben Bernanke, you're. - I came. Up with this you, run this and Bernanke said okay we're gonna do this for a little while we're gonna get out we did 12. Years later we. Understand, these programs, we, understand, it's the government, buying not the Fed the feds the financier, we, have a president, who blames. The Fed that the Dow is not 10,000, points higher who wants, negative interest rates who wants, the Fed to go hog-wild. With others with, all of their financial engineering, we.
Just Gave him the tools. To the feds printing, press to, do exactly, that we have merged, the Fed in the Treasury, as one, and, the. Treasury, can now dictate, to the Fed what to do Donald. Trump can dictate to the Fed what, he wants, the. Question, you have to ask yourself, is will, he show some restraint in, an election year when he's trying to get elected I think I just answered the question right, there it's, an election year you've, given him a printing press to try and ramp markets, higher to get reelected, I think, we know where we're gonna go with this unless. Somebody. Else a, minutia, Nepal. Really. Stand at the doorway and say absolutely, not. Even if you want to fire me not. Gonna let you do it so, we'll see where this goes but it's a dangerous, game that we're playing by. Nationalizing. These markets, through, the government, with the Fed beating the financier. Well. I mean I know. I'm. A Johnny rain cloud here don't, look back there it sits but. I mean this the. One the one point you. Hit. The nail on the head because. We're talking about price, discovery. And the, prices, they do provide the signal, especially. In the financial markets, especially in interest, rates and if, the Fed is, suppressing. This I mean we, can really have long-term damage, in. A way I think this is what what already happened, because of the 2008. And 2009. And QE, one two and three we, already had had, have, had some of that we. Might we might have even worse, in the upcoming, years so that's and how, do we unwind. This how, do we go, about really. Reducing, the Fed's balance sheet really. Increasing, normalizing. Rates it seems impossible we. Try to do this in December, in. In 2017. And 2018, I'm gonna share my screen now, hold on here, this. Is the net. Unrealized. Gains. Or losses of, the large large, chart, commercial. Banks in the US so, these are the, securities. Held, for sale available, for sale so. This shows us how. The banks, could. Not take higher, interest. Rates. Back in December 2018.
These, Were huge, potential. Losses in, the financial system now, given that we are already. Back to zero interest rates and the, Fed is intervening way, more it's. Going to become ever, more impossible, to unwind this so where, does this lead us. Well. That's a good question I think you. Know, I'm looking at some of the, the. Comments, here stop the bailouts, let them fail. Careful. About that that's not a walk in the park you know what to let all these firms blow up I mean you might you, might like that from a an. Emotional, standpoint yeah screw those bankers, but you might not like the consequences of that I think what the for the Fed is right now where the Treasury is right now is, everything. We're doing will. Pose a challenge, post. Virus, we. Got to get post virus, that's. Where they want to be they want to be post virus, for starters, and then. We can then start dealing with this but. Make. No mistake, post. Virus, won't be a walk in the park I think, it'll be inflation, is what this is what they're going to wind up having us, deal, with as well and we'll, have to see what. Other problems, we have but, it's not going to be in, one. Of the reasons that the market went down as much as it did as I, like to say I don't. Think the markets panicked, in the last six weeks I don't, think that they're what, I think happened was they. Came to a realization that, there was January. 2020. And there, was a set of circles we, used in other world worked then. We saw the virus, and we said send. All those assumptions to the history department, the world doesn't work that way anymore there's, a new reality, in the world we have to reap rice to it markets. Don't complain they don't explain they just say it used, to be a hundred and not, 75 and, we're, not gonna argue with you about whether it should be 98, or 97 is just 100 to 75 is what, we will basic. What we've been doing and we've, been yelling stop, don't do that and the feds been yelling stop don't do that in trying to prevent it and I, think that ultimately they, can't over, a long period of time they can for a little while, stop it but, that's what we're doing is we're pricing. And, part of that repricing, is the, post for the post virus world is going, to have problems, too now, maybe what they're saying is Jim, you're right we're gonna go for 100 to 75, but. If we've done nothing we'd go from 100 to 40 and that, would make it much worse I you. Know I could go either way on that argument but, I do think that what we're doing is we're, going to a new era we're, going to something different I think, all those people say gotta buy the dip, you know that then we're gonna come back we're gonna be stronger than ever that's. Mean reversion, mentality. That nothing. Has changed, and, that we're gonna go right back to where we were before that's. Possible, I just don't think it's likely I think we're gonna have a different, world and in, that different world it's gonna be lower valuations. Is where, we're gonna be last, offering on that in. 1980s. We had an emerging, market crisis, but he didn't hit the developed world so, the developed world could sit there and say hey, you guys in emerging, markets don't overreact, in, 2008.
We Had in a market we had in a crisis that hit the major countries, of the world but. The emerging markets could say hey, you guys in developed world don't, overreact. 20:22. Everybody. There's no one's immune from this right now so if. We. Decide, that there's a new era and we. Have a different valuation, new, Europeans, aren't going to say you're wrong on that they got his bed is us the Asians are going to say you're wrong on that they, got hit as bad as us so, everybody's. In the same boat, as well and that's what's different I don't think that what we ever encountered. Or ever considered. Was all. The crisis we've had before hit. The emerging markets hit the developed, markets at some of the developed markets hit sectors, but. We never had something to hit everybody and. This is something that hit everybody and that's, why I think you're seeing such enormous. Efforts. Put by the central, banks to try, and stop this don't, be problems, on the back end but, what they think they're trying to do is you. Know stop, it from being much worse right, now. I. Still, have many questions here, I want, to be sensitive to your time Jim if we can stir, ball for a few more minutes yeah we could go on for a few more minutes I just hope going inside. Here you know, you. Know let me just say a quick positive, look. We. Have it weren't genius people were creative, people we, will adapt, to the new environment, that's. Not a problem, but. If we're gonna sit around you. Know you know sheltered, at home going, when. Can we when is the SP gonna go back to 30. 401. Can I just start screaming there, is no alternatives, get back in the stocks all the time for, a hundred percent it's. A different era that era is over we're. Gonna go to a different era it's not going to be the end of the world but. It is going to require us to be flexible. In our thinking and in our changing I think, the thing that's going to happen coming out of this is we're. Not going to go back to work and said, great now that I'm back at work what. Company can't close now and move their operations, to China no, it's gonna be what can I close in China and move back to the United States what, kind of close in China and move to Europe or to move to Brazil we're gonna go that way so, that's gonna be a different way to think so, whenever I see on financial television all these people talking about the virtues, of. Globalization. That. Ever. Ended, about about, two months ago and now we're in a different era there won't be no globalization. There's. Just going to be a different, type and, we, can't cop trying, to force, January. 2020, on us we have to go to the new era it won't, be the end of the world it's just it needs, to be different. Oh, coming. And a few things you said if you don't mind well, sounds like while the nationalizing. Situation, sounds like China to me China's. Being in that path for. A long time so is Brazil and a few in, a few parts too and. It said I hope I personally. I hope we don't see that, but. You know kind of trying to put together will you all, the stuff you said and one of the things you said no, this this race to the bottom when oil prices in, general and, then you, know the situation with the virus outbreak, which, probably, is linked to the idea of. Worse. Eat macro indicators, for the next month or so labor, markets, becoming, you know another, issue as well more and more and. Then at the same time you comment on on, Donald, Trump becoming the new leader of the Federal, Reserve and. Which. Was, probably the case before but now more than ever and. With the, special, s. Peavey's that you were coming on is. Do, you think it's possible my number one question do you think it's possible that they.
Can Reduce. Volatility. To, more, of normal. Levels understand. You set low multiple I'm talking about more volatility, until. Elections, do. You think that obviously, that's the goal from. The Trump's perspective, are seems to be the goal do. You think it's even possible in, other words will this liquidity be, enough to. To. Offset you know this this turmoil in the markets, and, in. Terms of the globalization a, comment. You made it's, it's, very interesting that you know I've been, thinking, about that as well a largest companies in the world are from the US and. If you're thinking about you know the logistics of coming back to the US as well you, would think that there will be no less globalization, would cause less exports. Among, countries, in general and. And that is a major source of dollars, you know so that, will be a lack of dollars, outside of the US another, reason why we're seeing repo. Markets now becoming, an inner. International. Not just in the US so, will. That become an issue as we, get into a world where where. It's, more D globalizing, terms of the dollar now so, two separate, questions one on Trump and if. He is able to reduce, the volatility to normal and the second one on the dollar and, the. First question no. We can't reduce the volatility what, will reduce the volatility, is. Right. Now you. Need to get the markets, to the point where. They believe, that, we. Have now priced, in this new era that we're, close to what we perceive, is fair value, when. That happens. Private. Sector buyers. Will emerge, funds, will emerge they will buy and hold right. Now the, only people that have merged in the last week are, people that think I could, buy spiders. Right now they'll rally 15 percent the next four days and I could sell it at a profit there's. Not people saying this. Is the new reality should, be priced here. And I, want to own it for five years starting right now when. We get to that point, volatility. We'll find some kind of equilibrium though. The volatility. We see now is a signal, we're, not at equilibrium, that's. Why if you, are if you jump, to my screen here again I'll show you something real quick about volatility. Um, let. Me just find the right chart here real quick. This. Chart here what. This shows you is I, know, this is a little hard to read for some of you but I'll explain it these. Are the 20 biggest days in the, stock market's history, since, 1926. The S&P 500, the 20 biggest days this. Shows you what it's done the, next hundred days by. The way a couple of these days are this month we've had a few of these days this month on this list, on. Average a hundred days later the stock market is 18%. Lower. Seventy. Percent of the time the. Market is lower, what. This chart here shows you on the bottom is we had a bunch of these days up here in 2008, that was here, by, February, by March of 2009. We. Were as it says here 40 percent lower. Whenever. You see this kind of wild, volatility. It means, a market, is not an equilibrium, and that, it most likely needs, to go lower to find that equilibrium. And what. It does then, the volatility, goes away Trump, doesn't want to hear that he, wants to hear volatility. Goes away, with, the stock market back at 3,400. Not, volatility, goes away with, the stock market at 2100. As. Well, - but, the, only way we go back to 3400. Is if, you think this. Is all going to be forgotten and we're, just going to go right back to where we were in January. It's possible like I said but I don't I don't buy it so I don't think that the volatility. We see they, can't some think it's oppressive for a little while but, not longer-term, only. A read-only. Markets. Reaching, what the collective, wisdom thinks, it's fair value, real. Buyers start saying I'll now, own it at these prices, because. I think it represents the. New realities. Fair value, that, that could definitely get, us there but we're not we're.
Accepted, Dollars. Done but. I just, said that it might be 30 years before we find it might be two years but, right now like I said if I could wave a wand and we all said okay the, dollars no longer the reserve currency fine what, is well. There's no good option then we're back to what's the worst what's the worst of all the what's, the least bad option it's, the dollar and that's, kind of where we're at with it right now but I think what the administration's. Asked, or what the American public has the answer is you're. Not the reserve currency because, you're. Good, it's, because everybody else is worse and as, soon as somebody else comes in that's better you're, gone as the reserve currency and like, I said that will probably, be some. Crypto, that is not created, yet that's. Coming, soon, in the next couple of years then, we don't even know what the name of it is if I had to guess but we're not there yet so the dollar sticks around for a while and it's, kind of the top dog I. Have. Two final questions I, mean I could, go on for another hour here but. We can't but. I have two final questions first. One if inflation. Really, picks up how, will the Fed deal, with it well we just will, it just change the narrative maybe, oh now I can tolerate 4%. Inflation or 6%, this is good for business and the. Other question is, was. There any other. Option. To deal with the crisis, even in 2012. 2008. To, 2009 and now, 2020. Besides. This, massive intervention and, the unprecedented, amounts. Of money creation was, there another, option and if, you were there and I other stands, you, were interviewed, for the job at, the Federal Reserve Board how, would you have dealt with the crisis, yeah. On. That last part first if that's that, is public information that, I did go to the White House last year and I did interview, to be a Federal Reserve governor, and. Then they picked Chris, Waller and Judy Shelton I know both of them fantastic. Picks I was honored to be able to be considered I I, got. A chance to go to the west wing of the White House on business, not many people can say that and it, was it, was a great experience. As well too so I'm, happy, that the. That. They that they did that as far as your question goes, about. Inflation. Yeah. They'll tolerate more inflation they. Will tolerate more, inflation, and. They. Will just say you know the two percent targets now a three percent target if interest. Rates go up too much they'll try and QE them, back down and they'll, constantly. Manipulate. The markets around the, edge as. Well but, I think they'll consider, that a victory I think. What they'll say is if later, this year 2021. The economy. Is recovering and there is inflation, interest. Rates are going up markets. Are a little wobbly be, fine because interest, rates are going up remember higher rates lower. Multiples, you know your p/e ratios should come down they'll. Say that's. A win it's, a win over everybody. Sitting at home, fearing. That they're gonna get sick and die so, that's it that's a thought they'll think of it in those, terms as. Well the. Question about what I would do well. I tell. You what I do they throw me out of the room is you. Know I'll, save the two dirty words that, you'll never hear at central bankers say trust. Capitalism. And I'll. Give you an example. Tomorrow. 81. Let. Me back up a second the the, the ground, zero the fixed income markets, are not in a good place right now. The, ground zero of where they're not in a good place is the. Commercial, mortgage market in. 2008. It was residential. Mortgages that blew up today its commercial, mortgages why because, I own a hotel, and, no one's in it and I have to pay my mortgage on March, first I have to pay my mortgage I made first I have to pay my mortgage on June first I own, a business and, I own my rent and the, government, closed, me and I, owe my rent I own a mall, or an office, building and people. Have to pay me their, leases, but they're gonna fail because they're, not in there doing business so, I'm gonna come up short to. Give you an example there's, a cheesecake. Factory as, a, restaurant, chain in the United States, Cheesecake. Factory last, weekend I save hundreds of restaurants they, flat out announced, we're, not gonna pay our mortgage April first why, our stores are closed there's nobody in um we're not generating any money we're, not gonna pay our stores. 81. Billion, dollars, of mortgage. Payments commercial. Mortgage payments, are due April 1st, 81. Billion, dollars is due, May. 1st I was, at the Fed they say this is a crisis, and, I'd say no one is it well. What do we do about it nothing you. Tell all of those commercial, mortgage owners and you, tell all of those in, those restauranteurs, you, guys got to get in a room and work something out you, got to work something out between you two guys it's, not for us to just bury you with money Cheesecake.
Factory You, got a problem commercial, mortgage owners then own the mortgages, on Cheesecake Factory restaurants. Do you want to take the restaurants, and run them no you don't you don't know how to run restaurants, so talk to them and work, something out trust. Capitalism. I tell. You I was in a debate many years ago with. A former, member of the monetary, policy committee at the Bank of England and I, said that they said what would you have done in 2008, I said a version of trust capitalism, and he, pointed at me and he said they, will never do, that they will never do that and I said I know them don't do that that's, the problem. We constantly. Manipulate. These markets, you, know there's, some smart guys with mortgages, and there's some more smart people at Cheesecake, Factory let, them alone they'll. Figure it out but. We won't we'll try and get in the middle and we'll turn on the printing press and we'll throw money at them and we'll say ok we made March better than it would normally have been we made April, better than it normally would have been and, what costs longer-term and that's, the, problem that we face, right now it's a mindset, problem, that, we have more than anything else. Somebody. Said they're a bunch of socialists, everybody's. A socialist, right now that's, the problem. We're. Just arguing, two different degrees I'd argue to you you, gotta be cranked up here you've, got mmt version, 1.0, unfolding. Right now that's what this is is it's, a version of modern monetary theory print money and fix everything and if, you don't produce inflation, we're. Gonna print more money and fix, more things and we're gonna print more money and make more stuff free until. We go too far is what, we do so I kind of hope we get inflation sooner, rather than later to fail this experiment, sooner because, we're gonna keep going down this road oh let's make College, free let's make healthcare free, let's make cellphones free, let's make rent free let's make everything, free.
At. That point you know just call Jay tell them to turn the printing presses on faster, as well, that's, the problem that we're gonna, face and what. Stops that is you, get inflation. You get markets, that reject. It the, sooner they reject it the better we'll. See like, I said they're not going to reject it on the down they're not going to reject it over the next several months because we're going lower but. When we come back on the upside we'll see what kind of response we get out of that. Jim. Fascinating. Discussion, thank, you very much for your time thank you very much for your, candid. And honest, answers, I mean this is what we need and I think it's it's. One. Of the questions of our time because, this is going to impact everybody. Not. Just the u.s. it's. The whole world whatever it's being done there it's, even being replicated by, other central, bank's by other governments. And I think it's say an, experiment. Destined. To fail it has failed in the past people, has people. Have forgotten how it was we, had then monetary. Modern. Monetary theory Brazil many times in the eighties in the nineties I've, experienced. The hyperinflation in, my lifetime I know how it is just, to spend to print and spend money so it doesn't work so, I hope, with this and rather, sooner, than, later, savvy just your final, words and then I'll live to Jim to say goodbye, yeah. Well, first off it's it's crazy. To think about of inflationary. Landscape, which I'm totally on board if, it would truly, change, the the. Macro scenario in terms of you just think about the companies, that would not, be able to survive in such an. Environment it's. Like the 1970s, environment. With much. More debt on the corporate and government, level and. That would be very difficult to to. A lot of businesses, so I think that that you know that would truly change the whole landscape but. On. My less common I just want to say well thank you Jim. For for. Putting the time with us we're, you know I'm big. Fan of your work I think you were one, of the few. Guys in industry that really put the work in terms of being, an independent thinker a lot of people like to say that and I think you truly are so. Congrats for that and I you, know I I look through your stuff all the time so thanks for sharing your views and and being, with us and Fernando, thanks. As well for for, having me on as well I'm, just. Asking questions today, and it was fun it was my first time interviewing, someone so, thanks. Again well, thank you guys I appreciate the kind words and, I thank, you all very much and I'll just leave you with the. Optimistic, tone I would leave you with is it's going to be different not, necessarily. Bad, we, got a not, wine, I want January, 2020, back again, it. Just it's going to be new and it's going to be a different, type of environment, and, we. Can go, from A to B if, we want. To without it being painful. And. The. Part of the part of the problem with the bailouts and everything else is there, seems to be an implicit demand, I want, it to be back to the way it was pre virus and I want it to stay that way forever but it can't and as soon as we recognize that it will be different, not, necessarily, bad we, go about getting there it won't be nearly as painful. As it has to be and I hope that we come to that recognition and, we, move along those lines as quickly as possible but thank you very much I really enjoyed the conversation. Thank. You very much Jim thanks. Taavi all the best goodbye. Thank. You.