Harley Bassman on Trump, the Fed, and the Bond Market
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We're in the middle of a truly wild presidential race, pitting a democrat who wasn't on the ballot until this summer against the republican who is convicted on thirty four felling accounts. But the wild dest thing might be this guy.

if you already believe in the constitution, you're just signing something already believe, and you can want a million dollars.

awesome. I'm make chaffin. And this is citizen iron three part series from ironic. Or we investigate iron mosques on precedent support for Donald trump for you onic on apple podcast or wherever you like to listen.

Bloomberg audio studios, podcasts, radio news.

Hello and welcome to another episode of the all bots podcast. I'm Tracy .

elway and i'm jw joe.

The weeks not over.

Yeah um we're recording this november six at ten thirty three A M. But one thing that is over is a lot of people expected that at this point, there would be significant ambiguity about who had won the election. And actually that part is over. There's no ambiguity of called yeah.

that's right. So trump has obviously won the election and we've seen a pretty big market reaction. Equities obviously up, but also bonds are going up, which means Prices are going down.

And there's been lots of talk about the return of volatility in the bond market in the way investors or traders were sort of approaching event risk from this election. Yeah, I heard about IT in the news letter. There are other people who have been writing about IT. And of course, as I said, the week isn't over yet.

We still have that fed meeting on thursday that the event risk ck market rally in the bond move. And I had to say two things. I think there is probably just sort of generally probably a view among equity investors that trump euro policies provide less regulation, lower corporate taxes is good for stocks.

That seems like something. On the other hand, it's interesting because the vick has absolutely collapsed. And so I think part of the reason perhaps for this, at least some component of this stock market reaction is probably just the end of that election certainty being gone. The unambiguous is out and setting aside trump versus terrorist policies. Now on the other hand, what's interesting is the move index, which meet you .

like the that's lower .

but not dramatically lower. And IT still remains at very high levels, at least relative to recent years or at least over the last year. So there are sort of, I would say, competing forces. You know, some aspects of uncertainty are gone, is good. But then there, as you say, this sort of march shop and rates, which is a global story, by the way, is still a big thing out there.

yes. So we are going to be focusing on bonds today. We might record an equity specific episode later this week because of the upcoming fed meeting and the election week felt let look, all right. And who Better to look at bonds than hardly bassman managing partner at simplify asset management and the creator of convexity navin, which is an awesome public if you're not already reading IT, hardly. Thank you so much for coming back on oppos.

Thank you very much away today.

So he's also the creator. The move index for in addition, in addition created in addition to being the conviction mavor himself should anyway keep going traces well.

okay, why don't you start with the move and excelled? Hardly explain or just give us a recap on what's been going on with the move because there is one specific day where we saw a big move upwards haha, ha, in the move.

The move is is the vx for bonds is based a one month window. And so last month when we went from a tober four to october seven, the election popped into that window. And that's what.

And so that's when you had a big jump, any move. And from that, you can then calculate the markets expectation of volatility from that. And when I crossed over a months ago, I said eighteen basis points.

When we walked into, uh, yesterday, I was seventeen business points on the america. Got right. And as a little screen right now, ten rates moved about eighteen.

So make a call. This right on the movie was at one third sh. It's now one seventeen eh.

It's could drop again after the fed on thursday because we certainly they are gonna to do we of think is locked in. Not for sure you see the move. I dropped down after that. I guess the contrast to kind of zipper towards is that the vix, I know, fifteen years now, IT never got that high, got like twenty years two days ago, which is barely above his long term average stock market, has not moved that much for entire time.

All the battle has been in rates, the uncertainty of what the what the thing is going to go and do and and that still duck over, uh, we still have to figure out what is the terminal value, the terminal rate that they get to as well as where we're going to be this december, which is very interesting right now. You look at the market, we've had the market pricing in a lower rate than the dots, the feds prediction, uh, uh, a policy going forward that is now flipped over. We now have the market and forty basis points fire than that, that most recent dog plot and and and that's kind of news. So the markets changing sentiment here about um where we're gonna a december from now and then two years from now.

is that rare historically that here we have the vicks really close to rock bottom levels and the move is still somewhat elevated if you go back historically.

Is this common in period? Because intuitively, I would guess that if there is a high amount of uncertainty about what the fed is going to do over the medium term, I thought, you know, things like inflation in the fed mattered for stocks and therefore, on some level that would translate to active markets. How where is that disconnect .

in general, from thirty thousand feet, the move and the vicks go hand in hand. You can't trade them. Don't never do that, okay? But they let me go hand in hand.

As far as like to tell, this is the lowest period of whether has been a disconnect between two of them, which is not really a shock when you think about IT because all the uncertain ty has been in the bond market, we had, we had QE, we had Q T, we had serb, that that take a, make some five other no points in a short order. The uncertainty all been in the rates market and not in the e stock market. And for reasons for that, I we the fiscal impulse of spending money has kept the stop work and the economy going well.

They are than expected. So it's surprising. But when you look at the actual data, it's not that much of a shocked we still don't know where rick is settle, great idea to be OK.

So one thing i've .

been wondering is you often hear from republicans that they think economic growth will offset things that increase the deficit. So you know, we can have big tax cuts because the economy is going to boom. And so the U.

S. Will get more income and that will ultimately help of the deficit. I'm always curious from a bond traders perspective, how do you actually incorporate like economic growth specifically into your outlook for rates?

That's a chAllenge. I mean, you know, we have the numbers, but long and variable legs, as expression goes, tends to dominate. I am u chicago.

I'm a monitor. I think, you know, printing money process inflation just takes cypher to happen. I mean, what you seen recently is the pad basically printed, created lots of money.

And the last, you know, four years, they said that palamon a blaze. And here we go. We have higher rate, we have inflation and you have a stock market doing OK and IT.

Seems like that's not going to change going forward. Becomes very interesting. The markets move toward is supposed to to go to, I feel, fair value right now. Now you can go well about fair value, but we've kind of gotten the world was supposed to go if you kind of take the fed and its word of where their relations could be and where the economy is could be.

What we don't know right now is the the push me, pull me effect between the fiscal impulse of they are reason trumps kind of they advertise spending seven trillion dollars more versus immigration policy, and we try negative how are you going to work? That's unclear which sides going to go win. This is kind of way we have to go.

And really kind of the expression has been to take trump seriously, but not literally i'll go with that. We don't know is actually going to do when that were at the end of the day is you get to port ten million people kind of do that. But could you go to port a million? I I guess so and will that be impact for? Yeah, yeah I mean, you could raise terrors, good.

Triple terrors? no. Could take up twenty thirty percent. yeah. And and what will that be through the system.

we don't know yet, right? And I think there's there's just a tremendous amount of uncertainty on the specifics of this point. And obviously, something we're going to be covering a lot really, I think, in the years ahead, trying to understand how the economy evolves, let's take a really short term for a second because we do have that fed decision tomorrow.

IT seems like the markets basically a locked. It's going to be a twenty five basis point cut. Is there anything that you'll be watch? You know, there's no doubt that you're gonna come out tomorrow. So I don't know, maybe especially in the context of this week, one of the least anticipated fed decisions I can remember in some time, but there's always some signal. Is there anything in particular that you'll be watching or listening for tomorrow when the decision comes out?

I ve been saying for many, many months now, I mean, I am higher for longer. I will say that I was on the record that they would not cut glass time. I thought they were all actually actually go and do IT, but I still think we have to go and focus on.

What's really important here is where we still grade greek tragedies. We still read shakespeare is these guys captured, you know, the essence of mankind, which is hubris, ego. Jpl does not want to go down as Arthur ns, who cut rates as inflation came down to seventies.

And then the fish came rolling on back and he became, you know, the dog of inflation was, worker is our saint. I think powel wants to go out as the hero. And therefore, with what's going on and the proposed policies by trump, I kind of think is pretty worried about, you know a resurge of inflation and having his tombstones say, are the birds reduced?

Um so I kind of think he's gonna want to go and sit back a little bit and kind of watch and see what trump actually does. I just don't see him dropping rates as hard as everyone thinks. If he think this is going to go and read that inflation and damaged his legacy, I think his legacy probably matters more than anything else to him.

Yeah one thing I wants to ask you about, you know, you mention that idea of taking trump seriously, but not literally, and how that introduces a lot of uncertainty in the market. Some of that uncertainty, in addition to being captured in the move index, has been captured in the term premium, which has been going up. And term premium, I mean, everyone has different definitions of IT, but like.

A basic one is that IT is the extra compensation are yield that investors demand to hold longer term debt. And the thinking here is that the term premium might be going up because we're gonna all that uncertainty that, that comes with a trump in. How are you thinking about the term premium from here on out?

I'm figured about what is is called fair value, which is almost the mean this number. But this is what's fair value. Let's the same. Inflation comes in two and half those two, which I shock. P, C, two, the that slats on thirty, forty, fifty points of real rate, right? And then you go and and and put on the proper curve.

And historically, going back thirty five years, including all the stuff up and down, all the birds panics and cues, basically you average one hundred and fifty basis points hundred forty seven people size between fed funds and a ten. Well, that bun is going to be two eighty eight, which is the long term dots we have right now, which is thirty eight places, points above inflation of two and half, or real rate of almost. I have point there that is tens of four thirty five.

You know, we're four forty five. What kind of there right now when I see happening is the fed will take rates down slower than expected. And the ten years were kind of in the in in the killzone right now, what something crazy happens and we have Normal GDP coming in like a Vivian, okay, that I mean, Normal GDP should kind of equal ten year rates in the grand scheme of the world as a chicago person.

And so I kind of think the term premium, as we calculate, will expand as the front end comes down and will all be right with the world, except a few bumps and bruises along the way. I once again, we really don't know what's going to happen between immigration and terrorists and immigration. I don't hung about the politics of IT, but I want me very clear at at at the upper level economy is people touch our times, productivity, people, our productivity.

I think what's happened in the last two years as we had more people come in, the immigration, legal, rather wise, that supported, but the the economy does we have numbers coming in Better. And then if we start deporting people you have us, people you have us. G, D, P.

Is that bad? Maybe not. I mean, if you, if that's how you view the world you want to have, uh, reduce immigration. If you're wanna go pay a higher interest state for work, that's fine.

I'm not going to debate that the concept don't can say the what happens at the end of the road when you do that. And and we're always going to go and and may cost benefit. Fs, when when we make decisions, nothing is free in the world.

So I Green policy, if you are transfer from oil to a solar wind right now more or need to do that, I think it's a bad policy. But we will go pay IT to go get that uh, climate, uh, under control. That's okay. Just remember you're paying a Price ford and what's what Price you want to pay.

Bones are back, and so is all the credit P G M fixed incomes monthly podcast series. From the latest trends to long term perspectives, you'll get timely fixed income insights from leading economists, research journalists and investment professionals, whether your new to bones or a season investor tune into all the credit, whether you get your podcasts, this podcast is intended solely for professior investor use. Past performance is not a guarantee of future results.

We're in the middle of a truly wild presidential race pitting a democrat who wasn't on the ballot until this summer against the republican who is convicted on thirty four felony counts. But the wildest thing might be this guy, if you already .

believe in the constitution, you're just signing something already believe, and you can rent a million dollars.

So I max chaffin. And this is citizen iran, three part series from ironic, where we investigate iron mosques, unprecedented support for Donald trump. While you on ink, on apple podcast, or whatever you like to listen.

you mentioned power and the ghost of earth ur burns, which of course is something that people have talked about a fair amount. He doesn't want to go down as the person who really let inflation run wild again. And you know, earlier this year seemed like, okay, that had been cemented.

They did the fifty basis point cut. Since then, the economy has been a little stronger than perhaps people expected. Then there's all the trump on certain day. That being said, this gets to track taking trump seriously verse literally and the uncertainty about what one thing we do know that he did last time was Brownie j power on twitter and other platforms about lwr ing rate. When you think about that time period, specifically twenty eight, twenty nine, I think there was more eighteen. Did that have an effect? And should we think about the pressure that would probably likely emerge in twenty twenty five again if there is not significant rate cut.

I suppose. But I think the much bigger event around that time was that when pales time came up for innominata, a government drag their feet by like nine months on that because there was so much you know um I think by and want to put in a more David person but in two.

eight team specifically, that's when paul was still hiding rates. We get the far away from neutral comment, which eventually had to get reversed and that was when trump was doing a lot of tweet about rates. And so there was that pressure from the White house to the innominata independent feal reserve of the independent federal reserve. And what i'm curious as whether you think as you were called back at that time, the dead pressure had at least at the margin sum effect on the policy setting.

I don't think I had that much, and I don't because now they've had another four, five, eight years. Look at this thing. It's uncleanly me that what prompt was saying in twitter was the same thing he was saying, you know, via treasury secretary IT seems to me that that is a dual level over here of what he actually wants to verses what he says, uh, using the bully popt. So IT could be IT could have been said he's telling people keep going and to keep everything but in public is saying, take him down to go and you know, sounds good room of the home teen is unclear to me if if if that was in .

the joe had a great piece in our new daily newsletter last week or maybe he was two weeks ago, I think was, yeah, time is a flat circle at this point up. But I was about potential constraints on trump that are introduced from the rate market. So for instance, we know that mortgage rates broadly track U S.

Three yellow. And so those have been going up recently and most people don't like IT when mortgage rates go up. Are there any political complexities that are introduced up for a trump from the rate market, the sort of real world impact of the rate market?

I think the real world gonna have to be uh real money at which means the rates go up and therefore the deficit goes up because our interest payments go out because we have so much of our debt is front loaded that keeps rolling over. So you know selling we put out so much ten or thirty year paper where the rate flocked in, we have most of dead, the front end, so very good by a hundred that almost immediate goes into deficit spending.

I think those kinds of things where the real money hit the road could be A A A, uh, a bumper for how we Operates. I don't think that great movie itself will be the cause. Think you have to see, see, the one of their eyes were to happen.

I just have one more question, I think. But you know, you mentioned the sort of multiple messages from the last trump administration and he may have on twitter, been browbeating power about lowering rates. But I think his treasury secretary, Steve nuon, Operated as, what I would say, like a fairly treasury secretary, not a lot of populism, policy adventurism. Etta seemed to actually, in retrospect at the time, but also in retrospect, have a fair degree of respect among people outside on both sides of the isle in the weeks ahead. Like how much are you going to be king on to personal decisions when you're thinking about the medium term or longer term trajectory of the stuff that the new administration makes in terms of how that will feed through into things that would affect interest?

Ate I think you have stumbled over the truth. Um I think I think who he picks for his cabinet and his senior leadership team is almost vac more important than trump himself. We saw who he picked last time very season, I will say, establish people but season people who know the game this time he brings in less season to people that brings uncertainty, doesn't as bad IT just means is uncertain market market uncertainty. So like I think we're going to still see a lot of volunteer in the market until we see the slate of who is going to bring in with the key positions.

right? hardly. Baseman of convex ity maven d convexity mavor.

Thank you so much for coming on all bots at short notice to talk about the bond market. thanks. Thank you.

Joe hardly is great, and I think he was truly the perfect guest for this particular conversation. One thing i'm wondering, how many times do you think we said uncertainty in that podcast?

They'll have to go back to the transcript. And no, he was because look at the wednesday morning after the election and there are so many questions in so much time in space for sort of big picture future of the country, future of the democratic party, who all these thoughts. And it's like i'm not really into trying to figure that stuff out less than you know twelve hours after we got the result.

So hardly was great because then, of course, we have the fed decision. And so nice, a nice stop, a nice snapshot of this moment in politics, economics and rate market uncertainty. I do think .

that when IT comes to rates, the move upwards that we've seen recently there, there was discussion about whether or not they were moving line with trumps chances of winning or signs that the economy was still going relatively strong and that might imperil the fed cuts. But I think like maybe that argument is settled some what today with that reaction because we pretty much know that the feds gonna cut tomorrow and still rates are moving up. So at least that's that's one thing. I think that's been .

kind of settled. Yeah, there aren't look, yeah, maybe clutching at straws.

We're looking for something real know.

I would just go back to two things, which is IT is interesting as hardly confirmed this disconnect between stock volatility and rates volatility and be interesting to see how long this gap persists.

And then the other thing I would say is, you know, we talk a lot about bond market vigilantes, and i've never loved that term because I think that prescribe bes a certain level of agency to individual investors that I don't think is necessarily warranted. But two things, to your point, I still think people really don't like higher merger traits. And I think this is going to be a on some level, political chAllenge for the trump administration in b, even though we didn't really talk about equalities very much.

People like higher stock Prices, higher. Sixty one percent of american a households, according to gala, on stock. Stock has help people find college education stock and help people fund retirement.

And one thing that i'll be curious about is what I would call the stock market vigilant is and the degree to which equity markets act is a constraint on policy adventures and particularly on things like terror, is seta that you could imagine a lot of companies in the U. S. Really wont like for various reasons. I just think it's like financial market vigilantes in general. I think IT would be really interesting to see what kind of limit they impose on a triumph administration that may be stocked with potentially different type of personnel in the first one.

Well, I guess the only is certainty, ty, at this point is that we will have lots to talk about, should leave. This has been another episode of the all bots podcast. I am Tracy alloway. You can follow me at Tracy .

alway I wasn't. You can follow me at the store. Follow harley investment. He's at convexity maven. Follow our producers, common rud rigs at common armon dash bennet, a dash butt and kill Brooks. Add, kill Brooks.

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