Biggest Takeaways From The Fed Interest Rate Decision | Bob Elliot
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All right, welcome back. Joining me today is bob elliot, cio of unlimited funds. Bob, really great to have you.

We're just recording this about half an hour. So once the F. M. C.

Press conference ended, and I know about you, but that was one of the more entertaining f one sey press conference i've ever seen. There's there's a few hamers dropped there from power. I'm really excited to get into a .

video yeah for sure. Thanks about for eventually congrats uh on on taking this over and uh and I think given a new uh a new flavor uh uh of the pod and so i'm happy to be here uh for my first time and probably couldn't be A A A more consequences after more consequently couple of days than than the last few days yeah yeah there is no .

shortage of things to talk about that for sure. You're going to fill this up pretty quick here. Well let's let's start off with um from the top line from the F, C.

Start with F, C, C. We're going to action and impacts on that. So obviously we ve got the point of five bit, Scott, that was entirely expected by the markets. But just want to get your high level of view of some of the main take away, at least from the initial statement and the right change decision and then we can get in to some of the specifics .

on the press conference after yeah I think mostly the the statement and the and the twenty five basic point gut was largely in line. I think um you are in the statement this weeks here and there and you could maybe try and for like a little bit more hawkish iss from the statement then the the statement six weeks prior. But the big culture story is that IT was basically a confirmation of the fed continuing down the path that they laid out um in a particularly charm power laid out uh six weeks ago in terms of a shift in policy and and that was a continuation of what when he said the direction of travel for rates is clear. Uh Jackson hall and you know IT looks like a they're coming down that path, you know data or presence be damned yeah .

really seen that way. So IT feels like one of the main points of contentment right now on the state cutting path is whether you believe we are in restrictive territory or not. Um something imagine in the press conference was that he still felt like they were restricted by the the way we see perceives IT.

But I know yourself and and many others potentially see IT in different ways. And I feel like that has a lot of implications on how much into this right coming path that they get and also what are the impacts are met. So no sounds like as I said.

he really reiterated .

that he still and he still view as above neutral, ie restrictive um do you agree with that or do you disagree with that? And what does that say safe for the implications of you know say a december meeting and and you know as far as I really twenty twenty five terms of the overall return in neutral and where that actually .

is when you think about a neutral interest rate. Um I think there there's basically two different ways that you can approach that you can approach from a theoretical model based perspective, uh, which is mostly how the fed approaches this problem when they're thinking about what our star is and h or you can look at IT from an empirical perspective, which is I think basically the way that most uh macro uh investors look at this.

And um when you looking for an empirical al perspective, here's the basic picture, which is that we've had interest strates at roughly this level or higher for the course the last two plus years on both the short end, end end end, the long end. And we've seen real G, D P growth to be two to three percent during the entire time and omo GDP growth be five to six percent. Uh, pretty stable.

And so if you look at that and you consider that like the empirical evidence would suggest that the you know rates around five are are neutral because they are the level of rates that leads to a stable set of economic conditions, uh you know for an extended period of time um cherian palle doesn't see that that way. I'll remind you, the china poll said that, uh, interest rates above two percent were restrict to know in twenty twenty two, you know when he was when he was starting the process of hiking. And so I don't think there's a lot of credibility in terms of determining what the neutral rate is. Uh, and but none the less, it's guiding his policy and his policy is predominantly based upon the unfounded belief that you know interest rates are meaningful ly restrictive at current levels.

I feel like one of the big debates is looking at like whether you do believe to look at interest rates from a nominal real perspective. And so like a lot of the idea of restricting veness is hung g up on this idea that or if you look at like real fed funds, right, it's highly elevated from a psychotic perspective. Do you think that idea is flight of looking at in terms of like real side funds?

Yeah I think it's it's probably the worst way to think about this um in you know from a friends perspective, of course, do real interest strates matter just have in a general sense, of course, like the difference between you know ten percent interest rates with inflation, ten percent and ten percent industries inflations two percent. Those are obviously very different pass. But that's not what we're talking about here.

What we're talking about is the current level of interest rates um you know relative to inflation around two to three percent. And I think in a lot of ways, you don't really want to think about interest rates when you're thinking about how stimulative they are or restrictive. You really want to think about the relative CPI because the CPI isn't A A great indication of the ability to pay.

A much Better indication of an ability to pay is to think about interest strates relative to, for instance, income growth or revenue growth or profit growth. And if you think about IT in that context, um you know the current level of interest rates is IT looks much less h elevated in the context of, say, income growth. Household income growth running at five or six percent on an analyzed basis or revenue growth running at a five or six percent uh basis, you know at a five six percent growth rate basis um and so when you think about a that way, the idea of being very restrictive uh kind of falls away. And Frankly, those are those measures are more in line with the empirical evidence of how restrictive those rates have actually been. Then looking at sort of a real rate perspective without contacts.

obviously, you know there is of what they're do in december. I just quickly looked at the curve and IT maybe like seventy five percent odds of another kind december and then obviously is the of how many more rate cuts occur twenty twenty five on words um for me personally and I was is IT was in simple to see that there is no dissents.

This meeting as opposed the last meeting, band dissented so everybody was on board with the cut at this juncture but when he compared to their S C P from september where you know IT IT was pretty divided on whether we would see know today we've got to twenty fires, but then it's like IT wasn't certain whether they expected to see another twenty fight by. And within that context, and just like where the forward curve is, that do you see value there? Do you feel like a the Price? Do you feel like you'll get less cuts then? Is what's currently present to the four curve? What do you think there?

Yeah right now we're seeing you know roughly another seventy five fish basis points for the next six months for the rain or six months one hundred basis points including uh of total cuts and including today um and how fifty days in september you know seems about right like IT seems about right in the sense of seems like a plausible even money view on what the fed is likely to do over the course of the next uh six months. Um I don't see a lot of screaming value on one side or the other.

Um I when I look at that trade, you know certainly if I compared other times, like when there were seven cuts Priced in for twenty twenty four uh to begin the year, things like that, you this is this is much more A I I basically generaal confirmed you know roughly no matter what uh, the cuts are coming and you know they're not going to be aggressive, but they're also not going to be you know holding rates at current levels for extended period of time. And so you know you basically get roughly a cut. You know somewhere between every you know roughly every other meeting may be a little faster than that.

That seems about what i'd expect you in the reaction function that they're outlining now whether that is a print policy that's a whole different story, an important story from a person strating asset markets right ah you cutting into an economy that still as unemployment you know basically just off multiple cade laws. Um you know growth is still running a two to three percent. Inflation is above their Mandate, like all of those things would suggest residents to cut further. But the cutters are company.

I mean, this is a good slag way into some of the the key points that I saw in the press conference where, to your point, you're cutting until what feels like a pretty, pretty target economy. But you know when you hear what he's talking about, he is dual Mandate. First off, on inflation, you know he mentioned that he was looking at mostly like three months and six month annualized core PC e.

And he mentioned that like two point two percent is like, well, you know, we see that consumed to two percent. So we're not we're not worried about that. And then he mentioned a pretty off the cuff that he felt like the current labor market is is somewhat cooler than I wasn't twenty nineteen, which was interesting to me. So with that, you know framing in my own like what are some of the main takeaway you had from that press conference? And what is that and tell how they're thinking about the economy for what you're saying, which is that IT IT seems like I agree with that is that weren't a pretty good spot in terms of economic strength.

The press conference basically confirmed uh yeah my suspicion that um that charm endorses um a continuation of cuts um despite the fact that he even recognizes that the economies in pretty good shape and the reason why that is is because he believes that inflation is b and one of the most sort of torturous parts of that whole conversation was having to listen to him rationalized why inflation is absolutely no matter what definitely.

Two percent? And don't you ask any more questions about IT? Because I will I will torture every piece of information that is available to confirm, to confirm my bias that inflation is basically two percent and I won. Take any other information in that would raise a question about IT.

And so I think for me what that does that raises a question like literally like what information would term pal have to have in order for him to change his mind that uh that interest rates are uh very restrict tive at these levels and that inflation is beat um and you know I my senses uh like nothing would change his mind. And so any particular is interesting. He even acknowledge at the beginning of the of the pressure the first couple questions like yeah, growth is strong and stronger than we expected and inflation is elevated and higher than we expected, but cuts are coming anyway. The basis in line with the scp that we outlined in september. And that that's that right there is the perfect instantiation of what over easy monetary policy really is all about, which is know regardless of the data, regardless of the risks to inflation eeta you keep cutting and a and the p and .

placation of this is really interesting, because there are a few questions proposed at him about what's been going on in the long bone there and the surgeon yield. Ds, so you know obviously like if you just look at the the Price action since the first cut, um you know what the long bone deal has been doing in the last month is like it's absolutely absurd in terms of the iner, obviously notable. He tried to you know basically swap that away.

And he sort of like concern about that, you know, obviously to say that he tried to decompose. What were the actual at Price drivers of that move? Because, you know a few things happening at the same time there.

But what was your reaction that you know, just have not really caring, but what's going on with the long born there? And just in long born in general, like what has been the key driver for you, for you has a been fifty guard, has been know the economy just been Better, unexpected? Is that a saying what do you seeing there?

Why I think I in terms of the rise and bonuses, just the day after the the fed made their a policy announcement um in september, basically said, you know this this is over easy monetary basic, right? You're easing into a relatively strong economy and the fed is comfortable with easing into a little luong economy. And you know that sort of choice is it's a bit unusual. Typically central banks don't behave that way.

Typically, they only agrees, uh, ease aggressively in an environment of falling growth, you know easing into a uh reason strong economy is something that does come up now you see IT in a lot times in emerging economies um and uh sort of dynamics that you typically see during that are pretty clear, which is that stocks and gold outperform in that country's currency and that you know bonds are are assured by many investors and you you typically see yields rise and a curve sileni. And like you know pretty much that's what we got. Now I think that was I describe IT as that was sort of enhances by the fact that we had some positive gross surprises on top of the implementation of the monetary policy.

And you know a little bit probably uh from the election dynamics, you know though that as probably like modest relative to the other factors at play. Um and so you know I think from the friends perspective, the long rate rising is not it's IT has not sufficiently to raise concerns for them. I think he was pretty clear about that because and I think that that that part of it's actually a pretty reasonable take because like look grow stronger than expected in the current level of yields is about the four point four, which is basically where we've been for the last couple of years in terms of the level of the ten year board.

You know, we ve been in this range between three, seventy five and five. Four point four doesn't look particularly extreme. What that highlights is that bonuses could rise you know pretty meaningfully beyond where they are right now before the fed would start to get meaningfully concerned about the level of yields, you know having a negative effect on the economy.

The situation is an interest resting one because I don't know about you, but that's quite surprised to see like zero questions about quantive inning and that path there feels like that out, sort of a layup to ask at that situation because the smart folks I really know dig deep on on fed plumbing and felt like, you know roughly like you one to twenty twenty five years when we might see that end.

So felt like you, especially with the context of a surging long bonist, they might signal something about that ending. But there were zero questions about IT and zero comment from himself as well. That's surprising because I don't know. IT just feels like do you think it's like just being complacent about what's going on with the long bound fields? Or what do you think like is gone on there?

yeah. Well, I mean, I dream of the day when you know the fin twitters get a seat in the room, you know and then we can have like a rotating a rotation of which you one of us get to ask your question. I don't think that's going to happen anytime, anytime soon.

But but yeah, I was surprised you know there's basically no conversation about the baLance sheet. I think in part because from the fed's perspective um your chair power basic and the end sort of the fed orthodoxy is that um that baLance sheet roll off has no has no impact on monetary conditions. And when I say no impact, I mean like literally there are papers written by the fed that the quantity of tightening has no impact on the economy and that is crazy.

Um and the reason why that is, is because you know the selling of bonds or the reduction in the holding of duration by the federal reserve is is an asset sale ah and that and any asset sale has you should have a an expected impact on a on your asset Prices in general. So I think basically the fed has every intention to just sort of quietly you know reduced the baLance SHE lack you to run for a little bit. And you know the next couple of meetings probably though say that they've gotten the level of a of reserves and baLances eed size back to roughly where they wanted to be in the know stop.

The thing that's interesting about that is IT will likely compound the easing dynamic already at play because you know if you stop selling assets or effectively selling assets or they're lying off. But the the point is the same, which is if if the fed you was holding lustration, um you stops slowing the mont duration or steps, uh reducing the amount duration they're holding, that is on the margin stimulative. And so you you will probably be an additional point of stimulation, not huge, but you know just check IT on in as another indication of this over easy monetary policy. It's really interesting .

that feels like there is a lot of canon two of things going on. And I just think about the context of like a great report that our mutual friend handy consent put out about, just like breaking down what you know even talking about what is likely to occur that the fed is going to do. But I shit a little bit like what we think they actually should do.

Someone that just talk about about that is, you know, he wrote out that the this is that you to get control the long bomb they need to to come in more hawkish and that would allow that to settle down. Now obviously, we talk about what they're doing on on the fed funding in terms of lowing interest rates. We need look at the context of been gone on the long one, which is where most of the barring and learning of the economy occurs, is actually been a summer of A A tightening of financial should there. So perhaps we get into this world where, I don't know the fed is more hawkish, but that actually eases in a way. And these weird dynamics like that, i've just cares like how do you think about all of that and andy piece, in the context of what what do you think would be the right .

thing to do here? I think brtn uh, monetary policy in this circumstance, to be blunt, would be to do nothing um and if you look back through time, if I if I just blocked you in a Normal economy and I said growth has been roughly a potential for a couple years. Inflation was very high and is still a bit above what the Mandate is.

And you know unemployment rate is low and uh interest strates basically been at this level for a couple of years. What would you do? My answer would be you know uh neutral, maybe even tight the ted because a inflation above target um and yet you know the the fed has chosen an an a uh uni usual, but you know not unheard of path with the over easy path.

So um in some ways IT doesn't really matter that much as as an investor because you you trade the markets and the policies that are in front of you, not the markets and policies that should be pursued and and obviously that influences what you think probabilistic ally, what should be done or what is the orthodox approach often influences you in terms of what you guess the policies policy response will be. But i'd just emphasized in september or last month that rewrote reaction function. The reaction function is despite a stronger economy, cuts are coming ahead and that there is no inflation and that that's a reaction function that they have and are holding. And until I see indications that they choose to change their reaction function, i'll assume that you know that they'll continue to pursue IT that way. And today was further confirmation of that.

Would you take that reaction function as far as saying that they are basically given up on like a two percent target?

I would not say that. Um and the reason why I wouldn't say that is uh I think if you you know could craw into the recesses of chairman poll's mind I I believe that he believes that inflation is b um and his sluiced today about a all the reasons why inflation is actually two percent despite uh printing at two point seven percent on a year real basis I think is like an indication like a like I sight into his end of his you know of how is thinking about inflation here um and so the question is what will shake him of that uh belief uh, when you see things like this, you're a lot of confidence.

Let's say in a particular view, IT typically takes a lot of information to the contrary. Um you know we saw that during transworld. I mean, how much data did. Charm pol need before he finally gave up on the idea of the stuffers transitory. We're basically seeing the same um you know mental uh approach uh happening again.

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Celebrating ten years of innovation letter is making digital ownership more secure and accessible with their latest products, ledger stacks and ledger flex. These violence feature the world's first secure touch Greens, simplifying your digital transactions while ensuring uncompromising security through is ledger security chip and preparatory O S plus. With the ledger security key APP, you can say goodbye to traditional passwords and step up your dial protection.

Your entire trip to experience got a whole lot easier ready to protect your assets, choose the most trusted name in hardware wallets, leger, and take control of your digital security today at leger docker. All right, back to the show. I want I just quickly touch on the labor market side of things because that feels like something that he's really hanging his hat.

And you know, basically, the fed put is is seems to be struck and need the labor market and is really owning that. So you know you've been i've seen you posted like weekly thing of you, the labor mark is not is secularly tight. And then he eventually, a couple months ago, shifted to it's it's no longer type, but you know it's not i've seen cooler erly more like that. So I just curious to get like you're high little perspective on the labor market and whether this um this you know just aggressive fed put that struck on to meet the labor market is is IT like warranted at all. What are they missing that you feel like is is not warranted for that?

Well, first off, from a level perspective, you know i'm i'm old enough to remember when four percent and play in four percent on empyrean ate was considered a very strong labor market or where um you know uh prime age uh employment being at twenty five year highs means that your labor markets pretty strong um and so you I look at those numbers and I say, yeah have you ve gone from we were in twenty twenty two and only twenty twenty three where the labor market was like incredibly hot, like red hot to a labor market that is you know strong.

And to be clear, Cherry poll in the meeting said the labor market is strong, probably half thousand and times. So it's not like there's a disagreement about the fact that the labor market is strong. Um what he's saying is that he wants to maintain a very strong labor market, I think in part because he doesn't see and a risk up on the inflationary side of things or dementia risk on the inflationary side of things, even despite cuts. And so I think that general consensus, like from the level of labor market, I think mostly you know most people are are are aligned. Most reasonable people are aligned to accept you.

I think you think that is a real interesting question is, is the is a strong labor market supportive to inflationary pressures? And I think there there's a meaningful disagreement where what cheran paul's um uh thinking is to look at level indicators as they compared to level indicators in two and nineteen and and which was a time when you know labor marker was strong but wage growth and inflation was you know at target and say, hey, look worth the same sort of levels as we saw at that point in time are close to IT having on your measure. Therefore, there was no inflation pressure back then from labor market, so there must not be inflation pressure today from IT.

And the problem with that thinking is IT misses the fact the Prices have gone up thirty percent in the last four years. And so labor market conditions at the same level of tightening today have a totally different perspective in terms of what is appropriate omino wage growth to maintain you know real purchasing power. Totally different perspective that I wasn't 20 now why see why doesn't see the difference between you know wages today and and and Price on wage growth before I don't know， but today not a wage growth. Growth is five percent that is very high unless you have extremely high productivity growth um and most likely creates you know pressures structural inflationary pressures that will you know keep inflation above the the first ending OK.

So the last you know major bucket of the themes that I saw from the press conference was obviously recording this within the context of a major U. S. Election that just occurred. Trump highly likely is gonna a red sweep in congress. And so there is naturally a few questions asking basically about, uh, what what would be some hypotheticals of, say, if truth ash power to basically resigned before his terminals and also asking, you know, what would happen if trump tried to basically different feed governors advice chairs at sea and he was the most resolute I pretty much ever seen him, and just batting that down.

What we are thoughts about that and what are the implications? Because, you know, as I as that as I was occurring, I started to see like a long boss started to rally a little bit, to felt like, you know, the markets we're feeling a bit good about this, this just being resolute about fed independence. What did you .

think I think, uh, you generaal comes from, uh, sort of a long line of bad, uh, orthodox views of the fed. And that is that is an independent agency that is a non political.

And he's made a heck of an effort during a highly politicized environment to buy in large, make no comment on political matters at all and know his statements today, particularly in terms of like pencil a being reticent, I should say, to pencil out perspective policy implications of the new administration all line with this idea of you know affirming the fed is a non political energy know I think the the emphasis that the fed is independent and that once um once someone is confirmed, they are in the sea regardless of the desires of the executive is totally aligned with that uh perspective. Now what i'd say is you know it's the reality is probably more ambiguous than what german paul said in that press conference. And so you is important to recognize that you know just because he says that the executive can't um do certain things does not necessarily mean that that's either true or false.

Yeah, yeah, that's fair. I'm curious about what you think in terms of the the economy moving forward between the impact of monetary policy in the face of based on the unknown grade lock congress and and a highly um you know impact on policy like new policies from trump. So you know IT feels like the big debate.

Is you not like what can the fed really do in the face of that? You know so if if trump comes out and and you know with a fully fully red congress and the size montaria eeta um tax cuts, like how much power or like strength or strong hold does the that even have on impacting economy in the face of just maybe maybe fiscal dominance? Maybe not, but just curse .

your thoughts why I thought one of the more interesting uh conversations um is uh the beginning of the press conference was uh term power basically outlining and in making very, very clear that perspective, policies from a new administration has zero impact on the fed actions until those policies are approved and implemented and have influences on macroeconomic outcomes. right? So just think about that.

What that means is that and there's a lot of people, a lot of people on the panda class here in the micro panda class who will say because trumps coming in IT will have an influence on the fed. I just want to emphasize, IT will have zero influence on the fed until the policies are actually implemented and have a macroeconomic effect. What that means, I think it's very important, is we're in a time frame where most likely the tram administration will pursue a number of process wth policies essentially running more expansionary fiscal policy directly, indirectly into an ardi hot economy.

But the fed will not respond to them until they see IT, which means the fed is going to keep up their cutting cycle even though there's a bunch of you know canisters of gasoline sitting around by the fiscal authorities ready but on the economy and the fed is Operating blind in response to that. And so I think that creates one of the more interesting dynamics that we're likely to see, which is if you look over the next six months, we're going to get a bunch of monetary easing and then over the subsequent six to twelve months, we're going to get on to fiscal easing. And then only then are we likely to see all of that show up into the data, higher inflation, all of those things.

And only then will the fed respond. And so we can easily have basically a huge impulse of easing from a fiscal monetary perspective during this time frame before anyone fetches themselves. And only adding that is pulse illusion that inflation is absolutely be in two percent and will never go higher than that uh, out into the future. Yeah yeah that .

is that is a duty. So okay, um you know we does no point really debate in the semantics of how powerful that fiscal impossible be back. I don't know if we just say on a scale of of one to ten, you know if if you take trumps views and face value when we call that like a nine or a ten on the fiscal impact scale. So if we just got back to say like the impact four, five other time, something like that, if that a curs, do you think that the like the fed and monetary policy has the correct tools, the time inflation within the context of like continued fiscal impulse? Or do they get to a point where IT gets really hard to even like rangle .

that ah I mean, I think the fed is every tool imaginable, I mean has all the tools that they need to constrain um inflationary pressures. Uh if you know fiscal uh if fiscal policy is too expansion ary, the question is do they have the fortitude a to do IT like that? That's the only question.

Um I mean, as a simple example, you know the economy can if the economy is running hot, it's very easy to slow the economy, just raise interest rates to ten percent if that's not enough, raising the twenty percent you know like this is not an impossible task or you know got the baLance sheet and half in a year right? These these are not impossible things to accomplish. The question is um does the is the fed committed to executing on that and using those tools if they need to, in response to elevated inflation?

What I say is the indications, at least the the power fan, the indications are that there is a willingness to take steps, make an effort to combat inflation. I think we can you we might disagree on how aggressive they need to be and whether they're premature easing， but. You know we certainly have seen and if you know seen willingness to uh to tighten in response to those pressures if they were to emerge again.

yeah, I guess I just feel like that the measures are almost like half mature. You know like I think about, I think about quantive tights and approach that they took there about, just like letting IT be passive, all offers as active, selling IT feels like at every junk shirt. They never really have the true willingness to do what IT takes. They they try to talk like they do, but IT feels I can sort of opposite.

Yeah but that I think comes to the fact of proud two things one um overstating what the the impact fulness and restrict veness money of interest rates are. And so I think you know they didn't um there's a disagreement, i'd say, between you know certain people who have one view of the world in terms of the impact fulness of of interest strates of five and a half verses you know the fed muted as much more restrict tive um and then combined with the fact that some something effect got lucky in the sense of the unlucky that the supply chain issues cause inflation and then they got lucky that the resolution of this supply change created a lot of disinflation and so um plus oil Prices falling and so um you know they were never they were never chAllenged on the quantitative tightening front. They were never forced to make the additional tightening choice from their original moves um through this through this period because inflation started to come down. You know my guess is if they were faced with that choice um they would you know use more baLance sheet, more aggressive baLance sheet, uh, consolidation in order tighten policy. But you know we haven't IT hasn't been tested.

Yeah yeah, that's fair. I guess one of the big things people worried about right now is fiscal deficits. And you know they look at the two potential electoral outcomes of como lovers trumped, and they both would likely increase the deficit.

Trump, possibly more. We got the possibly more outcome as so now there's continued discussion of what is the impact of that on potential deficit. So know, just the first question on that regard is a simple one, which is, are you concerned about the fiscal deficits?

Why do know what you mean by concerned? I mean, deficits be larger? Yes, deficits will be larger. Will that lead to greater a financing needs from the government? For sure. IT also lead to stronger growth that on the surface should combine to put an upward pressure on long term interest rates.

Now I think the question is how bigger pressure will that be on long term interest rates? And in particular, will that pressure be large enough to create a monetary tightening that offsets the fiscal the positive fiscal impulse as well as the the monetary easing that we're seeing on the front end? And there know my guess is that the beta to those increased deficits initials is probably going to be lower than many sort of a many folks who uh, do about you know the long term U S.

Bond market will suggest。 And the reason why that is A A couple of one, just remember the U. S.

Economy is the strongest economy in the world, in the developed world and has the highest interest rates on the long end, and actually getting a lot of demand from elsewhere in the developed world for higher yielding U. S. dead. And if usdt rise, that will likely insane vize. More demand and not less demand. That's number one or two, is if we get into a situation where yields are rising to the point when they start drawing on the stock market is important to remember the treasury has the authority and the flexibility to cultural supply.

And while uh members of the trump administration uh or members of, say, trump uphills ates have been quite negative about the efforts that jane elen did to constraint duration supply um over the course the last couple of years, you know once you're sitting in office and you see those rates rise and starting to hit the stock market, uh, you know that that a that moral outrage that we're seeing as the expressed as they set on the outside may become you know uh a policy norm uh particularly I mean like look at a politicized c in a highly political administration. And so my guess is if industry rise, they'll just cut the duration supply and then the only real constraint is whether the dollar you know starts to fall. Um and you know that in the context of you know the go the U S being uh the outperformer, it's just probably not a big rise um in certainly in the medium term, maybe eventually to be arrest, but not in the medium term .

yeah and is a good answer I want by asking like do you worry about IT because you know the hypothetical worry is okay. Do definitely keep playing out to the point that you know buyers stopped showing up for long term dead and we see something a failed option. Obviously, there's mechanics behind that, that pretty easily solve those, but that's like the doom scenario, like what if we get a the failed auction at the treasure, you know? But obvious ly, there's a lot of lot tool.

And we should also remember that if we had a circumstance where the yellow curve steepened in a way that was inconsistent with underlying macroeconomic conditions, the fed has the ability to buy an unlimited number of treasuries, right? And so you could have a you the if if foreign buying wasn't enough to fund higher deficits and uh and higher domestic buying as yellow rise wasn't enough and the treasury cutting a situation supply, I wasn't enough, you know, when the chips are down, you can buy the fetches by the debt as a monetary policy tool.

And they can essentially buy an unlimited amount of that, again, only constrained by the currency. And even then there's a question about how constrain they are. I am just look at japan, they are basically bought all of they bought fifty percent of the outstanding government debt.

No, that is multiples of GDP. And like what's the problem? Like yeah the ends down, you know which is a good, nice, nice for macro trading. But like is someone is standing in tokyo really like feeling a terrible outcome as a function of that .

yeah if you also like a story, just that maybe that the political will is, you know, like you're talking about basically kv, which is become a dirty word at this junction. But you know, I think a bit about, you know what the bank of england did with the guilt crisis really came in with like a localize facility that they that was somewhat temporary and sort of orthogonal to that monetary post, like they're about to start cut that the week after was was their current intentions and they actually did. But you know, they had this temporary program and then they all wanted later on. So do you feel like that something that the fed would be you know okay with doing, say, I know at some random time were even the other hawkish from a policy perspective. They come on with a localized facility like .

that yeah they certain ly, they certainly could provide targeted liquidity if there was a specific uh a specific concern. You know I kind of look at that there are just all different flavors of Q E, depends on exactly the mechanics and stuff like that. Um but you know the short story is it's just an example. The guilt crisis, so to speak, is just a good example of the fact that when there's this a material acute problem, the central bank has unlimited ability to constrain the rise. Ebony les, and so this idea that we're going to go to fifteen percent on fields, you know, let's say when the economy you when nominal growth is five percent like I can happen because the red just not gonna that.

Um my last question on just the fiscal situation and potential electoral outcomes um from this juncture is obviously there's a lot to talk about trying to decrease government spending, decrease deficits um basically increasing efficiencies, bringing in you know you know master just cut below. Basically when I look at the actual you know government spending, it's so much of IT as I defense, social security interest payments.

Like do you see any of that like efficiency that you know they're talking about cutting? Like two trillion dollars. Do you see that is like giving possible?

I mean, could they cut two trillion dollars? Like just for in terms of orders of attitude discretionary spending, one point seven trillion and half of that is military spending. So like, could they cut two trillion dollars? Like no like not not you.

That's a um I put that in the totally implausible camp. You could see A A circumstances. There's efforts made increase efficiency and you know the existing bureaucracy, certain there's bloody of bloody of things that could be done to increase the efficiency there.

But like the impact the macro impact of those things is like, you know orders of magnet de less than the campaign, right? That sounds great. I we're going to got two trillion dollars the deficit, you know and it's like, okay, so when are you stopping the social security checks? The answer is like, it's not going to happen. So you know, and that's just the reality .

yeah agreed to. okay. So within the context, everything you talk about what to get into acid allocation based on those perspectives, maybe starting with just actually bonds and gold with less love your hello p of perspectives on your outlook on those three asset classes, how they entertain within another within abroad based month portfolio and just see how you brought out look there.

Well, I mean, I think basically what we've seen the question outstanding and fifteen days ago was um from a pool from a fiscal policy perspective and a monetary policy perspective, were we going to have an affirmation of over easy monetary fiscal policy or we were going to have some indication that, that was likely to be dial back, you know given the electoral realities and maybe chairman power uh, expressing some hesitation uh, about the existing, the expected and the answers, we basically just get total affirm on both accounts, which is we're onna run over easy fiscal policy and and we're going to run over easy monitary policy ahead.

And those are the circumstances. You know, while it's kind of unusual, it's not unheard of and it's pretty straight forward how this works, which is, uh, stocks and gold typically will do well in that sort of environment and bonds will not do well in that sort of environment on a relative basis. And one of the benefits of building stocks and golders, you don't actually know whether the overly easy policy will um will one essentially to non productive heart assets or whether they'll stimulate nominal growth, you are not really sure ah it's hard to know. And so holding that package of stocks and gold together is a often a Better package to be holding in these environments than just holding, for instance, stocks alone or or 钩子 王。

When you talk with a bonds being, you know just put a lightly a bit of a mess these days, IT feels like, you know, mostly that's the duration side of this. Obviously, the credit side. Is there any space for and I like just like corporate credit, either like a yellow investment grade, Derek was you know when I look at credit spread ad there, obviously there like just incredibly tight. Um is there any is there any spot for that on that side? Um you know if you can just like the donation had IT or .

something like that. Yeah I mean credit spreads, we ended the circumstance where uh, continuing to run over easy monetary policy is supportive to know keeping the rate of default low um and but at the same time, you're not getting compensated much for them. So um you know what what I see is that mostly what's happening is that credit thread investors are uh leveraging up a lot in order to basically make up for the fact that spreads are low.

And that's that's like a fine trade as long as there is no issue with the financial system in the economy. And and i'm not seeing a lot of indications, so that's likely to happen. But but that's a dangerous place to take you from someone who lived through you know two thousand and six, seven and eight like levering up to the girls on credits, red risk at secular tights. You know, IT may not screw you today. I may screw you tomorrow, but there will be a day when things reverse and you you're probably going to be caught without pants on when the when the water goes.

sounds like you can have the same morning for anybody that's levering up on an .

effect Carry trade or right now too yeah I mean F X Carry trades um you know offer the same risks let's say um of and and I was so many people learn some of the chAllenges of that in August, and you are looking their wounds as a result.

I'm obviously, we've had a pretty domestic prospect of the most less conversation in terms of the U. S. But is there anything that you're seeing in terms of emerging markets opportunities there? Thoughts there um from a road base there .

you remember the U S. Is in fact the best economy in the world and so we should just talk about the U. S. Because it's the most important well .

have been point to a canadian yes.

that's right. That's right. As a member of the first first day, I hope you appreciate how important.

Yes, I do. I, I do not pay attention to the canadian economy.

I I uh alternatively having grown up detroit IT and been uh and and only as a kid allowed to watch uh P B S and C B C I have a uh an unusual familiarity with the canadian economy and experience so very good that um that I still enjoy. But I I think if you just take taking that back around the world, I think we're basically seeing the same sorts of overly easy policy dynamics pretty much everywhere like today is a good example.

Actually, the bank of england comes out and says we're going to push off the time frame for which we think till we think inflation is going to meet our Mandate. Don't worry, we're cutting, right? It's like the same thing, right? You know they easily could have been in a circumstance where they saw that set of conditions and said, let's just slow this down and not ease, but they continue to ease to spite the inflation problem, uh, persisting.

And and then really, if you look elsewhere, you mean everyone's cutting and everyone's causing pretty aggressively like china know is doing basically whatever IT takes on the monetary side to support their economy. Still have a lot of a lot of effort on the fiscal side um uh that's needed in or actually a deal with the uh deal leveraging that they're happening. That's happening, but they're easing the bank of japan.

There was all the speculation they were gona tight aggressively I mean wit i'm going to be dead by the time the bank of japan I agressively more than twenty years and and still no aggressive fighting from the bank of japan um and no reason for them to canada you know uh easing aggressively, probably more appropriate um given their underlying economic circumstances but so easy aggressively. The E C B is so easy aggressively despite the fact that you know unemployment rate is at multi decade laws and services inflation is elevated and wage and inflation is elevated. So they're del and easing and you add IT all up and actually pretty tty amazing, like the amount the number of central banks that are cutting interest rates today and the amount of cuts that are happening today.

The last time this happened, other than the very cute march of twenty twenty period, was the middle of the financial crisis, october two thousand and eight. And like having lived through the financial crisis in two thousand, I can tell you that like IT a close, like we are nowhere near what have felt like in two thousand and eight. And yet the e, the level of aggression in terms of easing is roughly the same. And so you look at that, you say, does that make sense? No, that's a global over easy approach that we're seeing pretty much .

every yeah well said um but last question here, you always have some hot takes that you put on twitter and I always appreciate them. I just want to ask you for what is what is your final hot take or sage advice for those that trader look at mro as a stance today.

i'd say fuck valuations.

So okay caught up in .

PS or what look like trust I I grew up in, you dive in discount models, cash flows um you know PS mattering valuation um uh your careful study of the of the internet bubble and how unreasonable IT was and none the less when you have a set of monitoring fiscal momentum, pushing the markets in a certain direction. You like you can't you can't get symptom ious about valuations in that sort of environment.

Um if you look back through time and I ve spent more time studying more bubbles, and I recommend anyone doing their entire life bubbles processed until there is a meaningful tightening of financial conditions, typically by the central bank. And um you might think that U. S.

Stocks are in a bubble. You might think a eyes a bubble. You might think p is are two elevated all of that um and IT doesn't really matter because as long as easy money persists, the bubble or the elevated valuations will persist some day that will change. But um um but not not in the not in the near chairman. So um if I see another chart of showing that socks are overvalued, like you know just delete that, it's actually harming you to look at that chart.

You're freed. Require somebody that that attempted added to be a value investor a long time ago, then saw the line and decided to never fight the that again. Ah you preach to the quire .

that's you know you've to you ve got to learn right learn through .

pain exactly. Well, about thousand a ton of fun really enjoyed that is going to have you on working for school if they wanted. Hear more about .

you yeah for sure if you want more of my regular flow of hot takes, usually with slightly less profanity uh check out uh my twitter feed at bob unlimited also have a youtube where I have a variety of clipsed that I am from my my various media appearance that a bb on limited um and new uh just this uh just in last few weeks i've started a tiktok channel where I do a morning run downs.

What i'm seeing in the markets no dancing yet but it'll get there. Uh and that is also at bob unlimited. Ah so uh if you're into tiktok or have a ency friends, family member, colleague, uh, you would .

go had to recommend that.

Thanks so much.