Notes From Underground: More FRA Podcast

On Wednesday,  I had the great pleasure of talking with David Rosenberg, one of the most prominent financial analysts of the last 30 years. As moderator Richard Bonugli sets the tone, the conversation covered many of the topics discussed in Notes From Underground throughout the past year. The power of podcasts can provide so much information in a condensed format, which would take 100 posts to reproduce. Enjoy the discussion and recognize that this was recorded three hours before the release of the FOMC statement.

Post-FED, the market focused on the symmetric nature of the inflation target. I’m not sure what the excitement was all about as I always believed that this newfound symmetry was always assumed within the Fed’s stochastic models. But I will advise that the FED is failing the symmetry test for it raises rates in 25 basis point increments but when it wants to cut rates there is no restrictions on how much to cut. The FED will always err on the side of deflationary fears, thus the asymmetric nature of the Fed and why GOLD is a play on deflation and the failure of central bank policy. Enjoy the Rosenberg/Harris conversation.

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15 Responses to “Notes From Underground: More FRA Podcast”

  1. Philippa Dunne Says:

    Can’t wait to read this when I am finished working. Rosie is one of my favorite people. Not the reason, but he’s called our work cutting edge.



    • yraharris Says:

      Philippa—great to hear from you.He is one of my favorites and I say at the end something which as a music lover will make you laugh.I told him this would come across as two jews blues as it got to be a dismal discussion–the new Mike Bloomfield and Barry Goldberg.But I think you will enjoy it.

  2. Rob Syp Says:

    Your sense of humor in all this Yra is like Old Jews telling jokes…
    As you have written over the years it’s really just a riddle that we all wake up and try to beat the market…

    Thank you for the insight I am more knowledgeable today cause of you.

  3. Pierre Chapuis Says:

    Question, If we’ve had deflationary pressures over the last 8 ish years (I understand certain asset classes have been going up in price) while interest were going down or being kept low. Wouldn’t the reciprocal be true? Now that interest rates are rising aren’t to expect inflation.

    • yraharris Says:

      Pierre–not necessarily because the asymmetric nature of central banks .They are in a hurry to get to “normal” ,neutral or natural rate because they need to in order to be able to cut when the next slowdown comes.The balance sheet recession as analyzed by Richard Koo falls into place in the sense of the first 8 years.But as I continue to caution—the rise in all debt is an overhang to the entire global system.How long can Italy borrow short term funding at less then zero—sorry Pierre this question is very complex and is not simple to answer

  4. Arthur Says:

    DAVID TEPPER (VIDEO): “The economy is really good right now despite different things…From a policy standpoint, some of the regulation stuff was probably really good for the economy….and the tax policies and I don’t think they were all good, but I think there were some things that needed to be done. The corporate reform was probably good because we were becoming a high tax country…the tariffs and attacking individual companies like Amazon is just nuts….I think tariffs in general are not a good thing for the economy. The economy seems pretty good as long as they don’t take these tariffs too far.” YouTube – April 27, 2018 (Part 2, Part 3)

  5. Michael A Temple Says:

    An enjoyable podcast with you and David. Several points

    1. You both highlighted that global growth outside the US is rather punk, and that the US final demand figure for Q1 (after various adjustments) was a mere 1.6% (David’s figure).

    Accordingly, other CBs are NOT matching the US interest rate cycle. Yes, Powell is the head of the US Fed….But, we all know the Fed is still the “go to” CB of the world. If the worsening liquidity profile emanating from the Fed continues because Powell is more willing than his predecessors to “stay the course” and not actively reassure investors that the market put is nearby, I think the “troubles” might begin in overseas markets, rather than first here in US.

    2. To that point, an EM friend of mine has pointed out that in SE Asia, virtually all of the current account economies have seen y-t-d net investment outflows. Not a good sign.

    3. Was somewhat surprised to hear that Rosenberg seemed rather sanguine, in stark contrast to his Grant’s recent gloomy view.

    4. Yield Curve As was mentioned, I don’t think we need to see US yield curve inversion to trigger troubles. With our debt having exploded from $30 Trillion to $47 in just one decade, there is a tremendous amount of tinder that could upset the apple cart.

    5. Your comment about the assymetry of the Fed’s dot plots is spot on….If/when market VOL explodes and flash crash or worse occurs, the spigots will always be opened far larger and faster than the measured 25 bp tightenings we have seen. Seems to argue for an increased exposure to gold as the first indication that Fed tightening is over and the possibility of a return to QE is possible (after all, as you pointed out, who in the world is going to buy over $1 trillion of new UST issuance if stagflation is truly here.

    6. This would also argue that the yield curve could very dramatically blow out AFTER any such “risk off” sell off.

    7. Soros’ theory of reflexivity. With USD suddenly King Dollar, the momentum seems set in place. Of course, the stronger USD becomes a de facto tightening, as well. Yes, the USD is rallying due to the very favorable interest rate differentials….But, at some point, the actual strength of the USD becomes a tightening effect. As you both pointed out, Trump does not truly want a strong dollar, as it undercuts his theme of competitive devaluation. Ergo, will Mnuchin/Ross make a speech at some Economic Club in the coming months deriding the strong USD?

    8. Back to Gold…..Again, am surprised neither David nor you expressed any more enthusiasm for it, especially when you consider how bullish David seems to be on the oil sector. Brent is knocking on the doorsteps of $80, and WTI is soon to hit $70s. Is gold really not going to get dragged along higher if oil has further upside?

    As always, a terrific podcast. Keep up the good work.


  6. Chicken Says:

    That does it, I’m cracking open that bottle of Sailor Jerry…

  7. Michael A Temple Says:

    A wise man recently wrote, “Cash is an ascendant asset”.

    Of course, that was you.

    Take a look at Dan Loeb’s comments below (CEO/Founder of Third Point)

    Loeb’s take on this “market shift” also explains why despite the best earnings season in decades, the S&P has been unable to turn green for the year: in a nutshell the recent surge in volatility has “increased uncertainty around appropriate multiples” mostly as a result of confusion over what the new benchmark interest rate is and because “there is finally an alternative to equities in the form of relatively riskless two-year money.” According to Loeb, this “riskless” 2-Year money which manifests itself in the form of a 2.5% Yield on the 2Y Treasury, has been observed in “money market flows where $400 billion has flooded in so far this year versus a total $80 billion of inflows in 2017.”

    Seems as though Mr. Loeb has embraced your “ascendant asset”.

    Of particular note, look at the $400 BN inflow into money markets in just the first four months of 2018 vs a TOTAL of $80 BN for all of 2017….If this pace continues, we could see $1.2 Trillion flow into this ASCENDANT ASSET, providing real competition to equity and bond inflows, as Loeb highlights elsewhere in his note, and is one of the reasons why he is turning cautious/bearish.

    Like you, Yra, he is not calling for an imminent collapse. But, he says he thinks he can hear the dog whistles that it is time to reduce risk.

    On a further bearish note, consider the “quiet” rally in oil.

    At $69 for WTI, oil has jumped 133% since its Q1 2016 lows of $28/29. Clearly, this represents a drag on the consumer at the pump and in supply chains.

    Now, consider that short-term interest rates are also up a cool 200ish bp in the same time frame, as measured by Libor. As you and David Rosenberg noted in your podcast, US total debt is now at $47 Trillion (versus $30 Trillion on the eve of Lehman).

    I confess I don’t have the statistics in front of me, but let’s assume that 25% of that total figure is floating rate debt, or $12 Trillion.

    At 200 bp, that is an additional debt burden of $250 BN/yr!! Yes, I know the money gets re-circulated. But, the key point is that consumers and corporations who have floating debt are now paying much higher interest costs than just two years ago, and even one year ago given the rapid rise in the front end in just the past six months.

    Conclusion……I think you/David may be right that the yield curve does not necessarily have to invert to cause pain/tip us towards slowing or a recession because these higher short term rates are a new phenomenon as QE has stopped and overall debt is 50%!!!! higher than a mere decade ago, when it was overindebtedness, which was largely held by the banking and shadow banking players, that caused the Great Recession.

    In short, the ASCENDANCY of CASH as an ASSET is a BAD thing for a market that has been hooked on the opium/hopium of QE. And imagine, I haven’t even touched upon the shrinking liquidity in EM markets as King Dollar is causing more immediate strains in those systems. So, while the S&P parties on like it’s 1999, EM countries who have capital deficits are seeing net investment outflows. In an interconnected financial world, even the S&P is ultimately affected by the “sickness” of overseas markets, especially if a shock occurs.

    Speaking of shocks, but Argentina and Turkey are both suffering liquidity trials by fire, although admittedly their circumstances are not so much tied to dollar funding issues as larger issues.

    Nevertheless, when smart guys like Dan Loeb begin to trim their sails (heeding your clarion call of ASCENDANT cash), how long before other lemming-like hedge fund managers pull in their horns, not wanting to be the last one out the door.

    Again, recipe for a disaster? No…But, definitely time to be cautious.

    Rising oil prices and rising cost of money are party poopers at any Liquidity Ball.

    Just sayin’

    Yra, keep up the good and provocative work.



  8. yraharris Says:

    Mike—there is a great deal hereThe ascendancy of cash is gaining steam .Buffet has enormous cash piles waiting for better opportunities.Last weeks FT and WSJ noted the big M&A deals as the discussion is back to Chuck Prince’s music playing gotta dance.This is preposterous but if you live off the fees from deal making it makes perfect sense.But from my perspective if a deal cannot stand on its own merits and economics it is certainly no deal.The emerging markets are coming to a possible inflection point but as always it will come down to each nation’s debt and ability to finance said debt–whether in dollars or another currency .But if funding can be done in domestic currency the country will have much greater chance of avoiding crisis.But each nation has its own politics to confront so the assessment is never as easy as wall street wishes to believe—-happy cinco de mayo

  9. Michael A Temple Says:

    I focus on the annualized figure of inflows into money market funds highlighted by Loeb. Approximately $1.2 Trillion vs total 2017 inflows of just $70 BN….That is over one order of magnitude.

    That is saying something.

    The “troubles” will first manifest themselves in EM markets, as we are already seeing strains….Simple as that, in my view….I could be wrong and perhaps it is S&P that buckles first. But, a key part of the global plumbing is being compromised by the relentless rise in USD and US interest rates…QT just magnifies the problems….And, as stated, now the SMART money is pulling back from stocks/”risk” and is finding value and comfort in 2-year UST.

    Who knows….2-yr UST could, perhaps, be one of the best assets to own this year in the US investment landscape.

    We shall see.



  10. arthur Says:

    Yra, your blog/thoughts are much, much better than my years at the University.

    Commodities and geopolitics, The 800-pound-gorilla effect.

    • yraharris Says:

      Arthur–thanks so much.I try to take my accumulated knowledge from years of school–the study of multinational corporations in the mid 70’s coupled with great professors teaching political economy from many different perspectives and putting it all together with thory and practice–Praxis.Being knowledgeable about foreign currency flows immediately post -Bretton Woods helped provide the foundation for trying to understand global flows.I also had great mentors in the banking world as well as the floor trading world.Paul K,and many Swiss traders taught me the machinations of the cash currency markets.Thanks for making the blog worthwhile.

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