Surveillance: Reddit Revolution With Mishkin

I think it's super interesting and I think it plays into the bigger narrative. It's in place that we have a social revolution going on between the halfs and the half not in the words of the people who played the stock market, the Wall Street suits and and and the retailers. We have the fact a fat that continues to play a game where they ignore facts. I guess Paul's next statement, we're be that the world is flat or that gravity is something that was invented in terms

of fake news. And finally, I think most most importantly, we have the fact that you know, fat needs to stand out one day soon together with the treachery secretary that's incoming and realized that the financial repression that goes on today creates a market which is in its nature is a one size bet with the market at old times. So you have created by virtue of this extended policy, and look into the future of even more extension of the same policy tool. With the financial repression, you create

a betting market, a betting market. And just to fill in people who did not hear jr. Own Power yesterday, you are throwing shaded his comment where he said, if you look at what's really been driving asset prices really in the last couple of months, it isn't monetary policy. The connection between low interest rates and asset values is

probably something that's not as tight as people think. Steve, given that we are in this betting market, do you think that this populist shift, this ang her that you're talking about that seems to be a hallmark, whether in actuality in terms of who's doing the trading, or at least in the sentiment on these chat rooms, how else will be expressed in markets? In other words, is this going to be a pervasive feature that does affect where prices end up going? It does, and I'd already done it.

Of course you're all aware of a few hedgephones that's been in trouble. And if you look at the whole construction in the inside the fund management business of long short portfolios, if you have and and attacked the list of the most fifty most shortest stocks, you're also attagging the nominal names that everyone has in the short portfolio

of the big hedge fund. So we will see, and we saw yesterday and particularly in the green transformation space, the energy space, that a lot of names came down inside today simply because the collateral value of the shorts blew up, or the lag of value in the shorts blew up, and they need to sell collateral against meaning

that they had to sell the profity position. And I think at Lisa is very important to note that we had in percentage term, the single biggest move in VIC yesterday we've ever seen, not in nominal terms, but in in in in percentage terms, which is a clean indication.

And for the record, if you look at the curve in the VIC futures, the indication of what is to come, we have seen that the front end contract is now of course, a gradually being priced relatively Steve part of your charm is unlike a lot of c I O s. You have massive trading experience of enjoying the bid, walking away the challenges a bid, and you can't find an

ask out there. Right now, I want you to talk about what we're seeing hedge funds, short retail, the guys on the couch, and I think they're way more sophisticated than people think. But I want you to talk about the cost to short. The big guys clear their short everybody else's reshorting game stop right now, and the so called borrow too short is immense. What is that signal

to you? It signals that you know, if there's one component of the market which and I agree with you, Tom, we have to give credit to these people in the

retail spills. Not only are they going after the short names where the vulnerability is because you have to deliver these stocks back to the owners and they can get call on that, so they have, you know, a counterparty risk, but they also using the optionality, the convexity of options, which translated into plain English means that they're getting a massive leverage of just buying the nearby calls. And don't forget this is a generation of people, young people who

primarily probably came from the betting industry. In the betting industry, the probability on a bed is at best fifty minus the house. Now they're they're aggurgating their voices, their money in a game against the short interest as you allude to, with a game that says, you know, we're playing this like a lottery ticket. We can buy the calls forever and we will lose, as we always start in the begging in the betting, you know, once in a while, but as long as the gains out with that. So

we have changed the dynamics. And I think for us, all suits, as they call us, we need to realize that the game has changed and and and that and I have to go back to fit because sorry, Jonathan, just we have to go back to fit. It is a repression market. We have the repression of the markets. We have no price discovery. Of course we get to

a betting situation. Well, let's add to that for Chairman Powell once it really get on his radar, staing, because in the last twenty four hours in that news conference, that was just the strug of the shoulders. We've got bigger things to worry about, and they do, and absolutely and I think probably also we should get credit to Powell to then connecting it to the full employment mandate

that he's trying to operate. He put it in the context that despite the fact we run a very low interest rate and we have you know, on hold for at least into twenty four in terms of changes to that interst rate, we still have six million people who are unemployed. So the market disagree with Paul on the fact that you can go back to a a model where you have full employment. And for the record, you know, if you ask any future is to anyone who wants to look into the future, they all expect that by

we'll have people maybe not unemployed, but deployed. Alternatively, So to creating a model now that drives towards full employment, full capacity under the headlines of the technology and and and and on the cult demographic is going the other way, I think just makes off a huge policy mistakes incoming Stein.

I love what you said. They're about the conflation year of quantitative finance, and literally at Thorpe like betting over the people trying to play a game, as we heard from Villier, the hunted the hunter being hunted as well. I want you to conflate Paul Wilmon of Imperial College, the great Nacien Talab and also what we heard from the legend or dairy ed Thorpe, which is it's okay to take a loss. I know I'm going to take a loss, but I've got the upper hand right now.

Explain that. Yeah. So, so it's really optionality. I mean crypto. The crypto space is another example. So let's use crypto as an optionality. And it's thoughts and these comments. If you play the game of crypto, you don't even need

to understand crypto. You don't need to understand stocks. If you're betting every time five percent of your wage, five of your total amount, and you have an optionality that says, yet once in a while you get a fifty two hundred payback on that exactly bet, then you will always be ahead because you can control the destruction of your capital relative to your earning. So you have a very

very high optionality game in the market. And that optionality, of course is being not only supported but being extended in terms of guarantees the length the death by by the Federal Reserve, who of course has a different agenda, but one of the unattended consequences being that the support that very optionality itself. Steve always great to catch up, Sir Stean Jacipson, Saxa Bank see io Steve, Thank very much.

Shan across rights blisteringly straightforward tech reports. They're wonderfully clear. I love when it's seven pages, it's actually seven pages and not filled with a lot of fillers. She's across at Research and joins us now Shannon off of Microsoft and off of Apple. Let's just start with the big, big tech. What have you learned? Well, I mean, I think what we've learned is that certainly the consumer has been extremely resilient. UM. You know, iPhones were up seventy year.

PC sales were very strong at at Microsoft, UM, you know. And I think we've also learned that the cloud is a big focus UM services within Apple on which we're up, we're driven partially by the cloud services they have. You know, obviously Azure was up fifty so UM. I think both of those trends are are strong. Enterprise a little weaker, UM, not a little weaker, but it remains remains a little

bit shaky. Year I would say, in the game of extrapolation, what is your conviction out two years or five years on these names. They're getting a pandemic pop. How do you recalibrate your conviction out to to five years? You know, I actually I've remained really positive on both of these companies. I think you know, Apple is is. I mean, they're they have a billion iPhones out there, um and they're installed. They say at one point six billion devices that people

are utilizing. Their services continue to grow. UM. They're spending you know, aggressively in R and D, which is continuing to support their product pipeline. You know, they came out with the their AirPod maxes. They're continuing to be sold out some of the Again, some of these products don't necessarily move the needle a lot, but in agg aggregate they do. UM. For Microsoft, you know, I think they're Azure is is quickly becoming, you know, one of the

obviously the top choices from a cloud perspective. UM companies continue to shift to cloud services like Office three, six five. And you know the interesting thing about PCs is that where I don't know, a few years ago, everybody said they were dead and everybody was going to go to a tablet. Now the PC companies are all talking about one PC per person, that one PC per household. So there's still a long ways to go in terms of PC adoption and penetration. So then can we just take

a step back. The shares are lower today because they didn't provide a forecast, and yet they had a revenue for the quarter of more than a hundred billion dollars, surpassing revenues for full years as recently as two thousand and eleven. And people are selling the shares because they don't have visibility in the near term that they're going to absolutely crush it the same way that they have. There is a question of what they have to do with their money with all of that cash in order

to keep crushing it. At a time when Facebook views Apple is potentially it's biggest competitor, in Volkswagen views Apples its biggest competitor with Eye Message and the Apple Car, respectively. Is Apple investing its cash in enterprises that will lead it to that dominance in those particular industries in a different way than it is now. Well, I look, I think Apples running the playbook they've been running for several years,

and it's clearly worked very well. So I don't think they need to go and buy something, um, you know, and be aggressive from an acquisition standpoint. You know, you look at their their R and D spend. It's it's significant. You know, we hear chatter about autos. You know, they're they're obviously investing heavily in healthcare. UM. I'm not sure that they need to really change what they're doing. I mean, you know, if you look at the trajectory of the revenue.

You know, last year they did two billion, and this year we have them doing three two billion. UM. The numbers are staggering. I still remember when they gave us a model that said, you know, we're going to do eight to twelve billion over the next few years annually. So it's working. Um. And you know, I think that they will come out with They've always said they will come out with products when they're ready to release them,

and they're the best product out there. They weren't the first product on PCs, they weren't the first product on iPods, they weren't the first products on tablets, and yet they have come out and and iPhones. I would say you can make the argument there they were at first with with the product they had, but you know, they have continued to take significant share and become dominant leaders in the categories, and I think we will see that again in some of these other products, but it will take

some time. Shannon, we gotta go. There's an aline go into space. Shannon Cross Cross race an analyst. The gains and losses are not fifty fifty. You can have a you can have or eight percent or seven percent of the people capture the game and leasa to your point. Everybody else loses money on the way out. Ander Sheets studied this at Brown University. You're gonna get right to in futures of negative thirteen the vics thirty three, Ander Sheets, Let's open up, and I don't want to get you

in trouble with Mr Gorman. You're really good at this mathematics. Your thoughts on this moment is the hedge funds get clovered? Well, I think it's important to to separate that there are you overlapping storylines in this market. There's a storyline around the strength of the recovery and will there be issues or delays with the rollout of vaccine, And then I think there's a separate discussion now around the concentration of positioning which I think has been a discussion now for

some time. I think we've this has been a very unequal market for for years really, with very uneven valuations across sectors, across styles, and very uneven positioning among active investors to try and take advantage of that, and so I think it's important to separate those things out, and ultimately,

in my view, the macroeconomic picture still looks good. We at Morgan Stanley are still very constructive on the growth backdrop, and that makes makes us think that this is a more modest adjustment rather than some larger um challenge for the market. Bear with me here, Andrew, I want to think this out with you. Live on at just one of the conversations that you and I have been having for the best part of the decade need to change. We see market moves, we talk about the stories that

are driving those moves. We often draw a line back to the fundamentals, the outlook, the story, so to speak. And I just wanted sometimes at the moment, particularly I think back to late August early September, that maybe it's just this explosion in short dated call options, and it's the tailwack in the dog, and we'll sit around trying to come up with these fundamental reasons for any given moving in markets, because that's what we've done for decades.

But I wonder Andrew, whether we just need to change our approach and the way we actually consider what's happening around us and the way we talk about the price action. Yeah. Look, I think that's a very good point, and I think this is a case where we're more than one thing

can be true. I think it can be true that you're seeing an unusually large amount of retail industrial activity of call options activity that you're seeing, you know, on an unusually amount of large amount of liquidity that that's going into the market. And yet you know, viewed, I think from from other lenses, market is behaving and has been behaving for some time, I think in a very rational,

fundamental way. My favorite example is if you look over the last decade, you know, the market that's performed the best by far has been the SMP five hundred, which has had the best earnings growth by far of the international markets. And so it's not the case that you know, the SMP is only up because rates are low or the set is doing que the the SMP has had significantly superior earnings growth to those other major markets. So I think it's a case of kind of both things

can can be true. You can have shifts and market behavior, you can have um uh, you know, changing patterns of behavior. But I do think overall, those those broader fundamental trends remain intact and remain important. Andrew, I love that you started by talking about the different narratives going at the same time. It is a very difficult market to sum

up in one word. One of the narratives is the concentration of markets, and we're seeing this both on a specific stock basis as well on as a consensus view perspective as well. For example, coming into the year, the weaker dollar call was very much consensus. The higher rate call was very much consensus. Both of those have been turned on their heads in the first few weeks. One how important is it to look at the concentration of positioning and move against that in order to avoid such

violent repositioning going forward. Yeah, I think this is a really important point. And again I think a theme that that interestingly varies across markets. I think we find there are some views where I think we're in the consensus. We like a lot of people think interest rates in the US go higher. There's some areas where I think we're we're out of the consensus, or think some what differently,

We're not in that week dollar camp. Um we we think that the equally weighted SMP five hundred while outperform the SMP five hundred. I e. You'll see a broadening of the market and and underperformance of some of those larger um those larger weighted stocks, as as often happens coming coming out of a recession. And again I think if you look at some of the recent price action, you know, again I think this is, you know, an interesting thing to uh to, an interesting or an important

way to die diagnosed. What's going on is what's leading the market the most widely held stocks or is it the more economically sensitive ones? And there were all students of the mop up books on all these crisis I think of Stanley Fisher's classic book on inder sheets in the derivative space, whether notional or the small amount of actually derivatives issued traded, however you want to phrase it. What are the shadows out there for a guy like you?

What are the unknowns? Are the mysteries of the derivative space right now. So I think this is this is quite fascinating actually because even you know, a week ago or two weeks ago and things seemed much calmer, the equity options market was still expecting quite a bit of volatility at the overall index level and was quite worried about a larger draw down. Right that that skew was was historically very steep, and so I don't think this is a case where you could say the market was

completely blindsided. There was, you know, an elevated amount of uncertainty expected by the options market, and then what we saw yesterday was an even larger adjustment of that. You had a much larger move in the vix um than

you did versus credit or other asset classes. So and I think that also speaks to the positioning nature of it that this has I think the hallmarks of a var shock or a kind of positioning shock, more so than a than a real economic shift in view, Well put Andrew interesting ty Andrew shas that of moments down Andrew right to catch up, Sir, I was in one of my fancy breakfasts that I have where I hold court yesterday with the entourage and I got a phone call.

It's from Pharaoh, so I had to take it, of course, and he's screaming at me, Tom, forget about all these pundits. Get us a rocket scientist. So we came close. We've had a wonderful set of conversations. Mr Gartman on the history of the moment. Steve Jacobson, I thought was lights out at Saxel Bank. And now James Angel he is at Georgetown, Jim Angel. And what's so important here is he is a rocket scientist, is engineering out of cal Tech,

his brilliance and mathematics at Berkeley, among others. And we're thrilled that the finance professor could join us this morning. I've got to go, Jim right away to you with a Bloomberg down the hallway at Georgetown about whether you're participating in this, if you enjoyed being long or short game stuff. Well, I was long until yesterday, but when the stock went crazy, I decided to go short just

a little bit. Although I see that it is doubled overnight, so I've proven to myself once again I am a lousy trader. Now we need a booker here on surveillance, so if they throw you out the door Georgetown. You've got a job up here, Jim Angel. If that's the If that's the reality, are you worried that the people on the couches are dumb or are they as sophisticated as you are? Um, I'm sure they're more sophisticated than me, that's for sure. But I mean, what we have here

is a confluence of events. Yeah, we have the mother of all short squeezes going on, you know, at the same time we have a retail herd. But I'm also hearing that hedge funds are jumping on board. As one hedge he told me, he said, Hey, when the herd moves through the gate, get on a cow. So I think what we're seeing is this move is being amplified

by other hedge funds that are jumping on board. They smell the blood in the water, they can see that some that shorts are overexposed, and they're playing a game of musical chairs to ride it until it turns well.

But Professor Angel, this goes to a broader issue here, which is the question of democratizing the market, allowing smaller traders to participate in a rally that has been unprecedented and phenomenal in equities fueled by policies versus protecting the individual and muster from institutional investors who are manipulating the herds to do their bidding right. And that's sort of the question. How do you distinguish one from the other.

It's very hard, there's no easy way. Personally, I think investors should have the right to invest in anything they want, So I'm very literally about people who want to protect people from themselves. Your litera of people protecting people from their themselves. In other words, you think that there is nothing wrong with what's currently going on, and you disagree with Senator Warren in saying that the SEC regulators do your job, get involved because there is nothing for them

to do. This is just markets the way that they ought to be a running Is that correct? Not completely? There are things that regulators should be doing. You know, they should be investigating what's going on because we see a stock price that is clearly disconnected reality and who's driving it now is a test of a new consolidated out a trail. It's not fully up in thing, but it's partially running. Let's see if it's giving us good data. Also,

what's causing the short squeeze. This is not the first time we've seen these kind of spikes in prices, and let's face it, an overpriced stock is nobody's friend. When the market or a single stock is overpriced, all you're doing is locking in future losses for investors when that stock comes back to its proper level. So we don't know. Super high prices are not good for anybody. Now, the SEC should also be looking at imperfections in the market

that are driving the short squeeze. I think we need improvements in the customer Protection Rule fifteen three Dash three. I think we also need to upgrade Rule two oh four on regulation SHO. These are things that I think can be done to improve customer protection and smooth out some of the wrinkles that are leading to these kind of price spikes. James terrifically smart and we appreciate your time,

so please come back soon. Professor James Angel that of George Town came out of New York City, studied under stand Fisher at m I T and went on to a sterling academics side at Columbia University. I'm out has passed as a governor of the Federal Reserve System and we are thrilled on our new policy that Rick Michigan could join us this morning. Rick, I've got a two hour interview ahead of me with you, and I don't

have a time for it as well. Do you see the construction of possible policy in Washington or is it going to be gridlock as we've known. I think they're gonna get something's done, but I think that, uh, there's gonna be issues on sub parts of what the Biden administration wants. So I think what they definitely will do, uh, and I think do it quickly is to get funding for uh more vaccinations, better testing and so forth. Uh. I agree with J. Powell on this, which is what's

happening to kind of. It's really all about the COVID. That's the deal that that if we get COVID under control quickly, the economy will come back and actually can come back fairly strongly because of all the pent up saving and uh uh you know me and many others. The day that I can start traveling, man, I'm I'm out there. I want to spend some money. I'd like

to go out to restaurants. Uh that uh right now, I'm living the dream and uh I want to live a much better dream in terms of after COVID gets more under control, and I think that's really the key. So I think that we are going to get a quick progress on that. Where we'll become more complicated will be on some other elements of this bill. I do

think we're gonna have some uh expansive fiscal policy. Some checks will get set out, but there are other elements of that legislation that may not get past, particularly minimum wage and so forth, So we'll have to see. I think that's one of the key issues for the federal Reserve and for the economy, which is uh, is the partnership in Washington going to be a problem or not? Remarkably, it wasn't when the never first occurred. What was extraordinary.

Within two weeks of the pandemic being declared, we had a two trillion dollar bill from Congress and it wasn't any less petit partisan then it is than it is now. So I actually optimistic that that that they'll do reasonable things on this regard. But I think the real key issue is gonna be how quickly do we get the vaccine out? The Boden administration says by the end of the summer, we may have everybody vaccine. That would be good news if it happens. Uh, then there's this issue

the variance. How effective with the vaccine be against the variants? Will we have to have new shots in order to deal with some of these variants. So I think all of this is basically, uh, the key to what's going to happen to the economy. It's it dominates everything else. And I think that that's why the FED is basically

in a holding pattern. They're not going to tighten and they're not gonna depart from their expansionary policy regime that they've set in place until there's really good information that COVID starts to get under control, and we don't have that yet. So that's why I think they're taking the position they're in and why we're all waiting for a hopefully better times but we don't know. Recollare me to jump in just quickly. You mentioned the speed, the pace

of the snap back, the recovery. What is it about the nature of this specific shock that dictates the snap

back the speed at which we recover. Okay, so it's what's actually really unique about this, uh, this recession, the COVID recession UH is UH not that we have a sharp down turn in in UH in the economy, but that this is actually a case of where what we call a supply shock, the fact that that basically UH, there's problems in terms of production and production of certain types of goods, particularly things like that are service type industry which involved one to one contact. The supply shock

is driving demand. So indeed, the dom thing is that people aren't spending. But it's not because of of of of typing, monetary policy or something else. It's because of the fact that the COVID actually causes people not to be able to spend. So once you release that, once you get people back able to spend again, they've been doing a lot of savings, they're gonna they're gonna start spending and probably spending very strongly, which will be the

economy back fairly quickly. The problem is until people feel comfortable with going and traveling, getting on an airplane, they feel comfortable with going inside a restaurant, UH, and so forth. This is gonna actually be key to what happens. So I've just been vaccinated, so once the back I get the second dose, I'm going to be much more willing to go out and uh and travel for example. When that happens to everybody, that's gonna be a big fan

thing to affect their demands. So it's it's unique because what's happening on the book, we call the supply side is actually driving demand, which is a very unusual situation, almost unique to this recession, because we really never had a pandemic recession before, at least in the modern era. Well, congratulations on getting vaccinated. Oh yeah, absolutely, I'm free, free at last. I know that's I look forward to that day.

There is a question though, in the mean time, when people are sitting at home looking for something to do, their trading stocks, and we've been talking about that all morning. Uh, And it's not just individuals, it's also institutions who are playing around with all of this money that has washed in. J. Powell yesterday said, if you look at what's really been driving asset prices really in the last couple of months,

it isn't monetary policy. The connection between low interest rates and asset values is probably something that's not as hight as people think. Is that true. I think in general, when you look at the data of a long period of time, that's basically true. Uh, there is an issue that there could be an interaction in terms of UH expential policy and UH what people call irrational exuberance. Uh, and so there was always a concern about that. I actually think that people overdo their focus on the stock

market as as UH is driving things. In fact, bobos in the stock market per se are and when they burst are not really the problement for the economy. They can be dealt with. It's when it involves the credit credit credit markets uh and UH, and that's what what the the thing that caused the problem in terms of the last global financial crisis was not the stock market knot not the the fact that there were changing in

asset prices per se. It was the fact that when that happened, it really affected the credit markets to cause them to seize up. That's not where we are right now. So I think that people focus on on the market. Uh. People can lose money, they can do stupid things. We can have bubbles, their crazy things, that's having a game

stop and so forth. But that's actually very rarely past a major effect in economy unless it interacted the credit markets, which I don't think is what we're seeing right now ricks And I don't want to go all Sandy Grosser and Joe Stiglasonia, but let's go. It's a Columbia moment here, and I want to talk about the informations out there. Do we have too much information visible now? Or are we still drowning out in the equity markets in and all our long short and all the silliness or is

it still information we can't see? Are we drowning invisible information from all this trading volume. I don't think we're drowning it invisible information. But there is an issue that that you know the nature of markets, this is sometime times people go a little bit crazy. I mean, that's just uh, the history of financial markets. It was Charlie Kinderberg was one of my professors. Lifeful professor by the way, uh quite a character. Uh in this book pat uh

many patents, medeas and crashes. This is just what what what happens. People sometimes get a little nutsy. That's one of the reasons why you actually want central banks to be there to make sure that if there's a uh people get nutsy, that central banks can actually come into basically stabilize the situation of bad things. Happen. And and actually this is what has been able to do various successfully,

particularly extremely successful in this COVID crisis. Uh. That one of the things that people that realize how lucky we are that COVID didn't occur fifteen years ago before the last financial crisis, right because it took eighteen months for the FED to figure out what to do. Uh, in this case, it didn't. They did in two weeks. Is actually extremely important in terms of the economy doing much better than otherwise. What Ricky Michigan just because the time

this is so so so important. And I want to move from Kindleburger over to Hyman Minsky, who darkened the door Columbia, I believe as well. Would you suggest that the distortions and derivatives and calls inputs in a long short hedge fund battle could be something our central bank we'll have to focus on down the road. Again, I think that the issue isn't what Hyman Minsky was talking about was these credit cycles. That's really what we have to worry about, is these these big booms in credit

that crash. That's where we get into real trouble. Other bubbles, UH typically are not really as important if they converned the combodies market, they do create some lost is. But but think about the following that during the UH, the precursor to the global financial crisis, that basically we're lost about five billion in the subprime market. That basically triggered the whole thing. So that was a credit market distortion

which spread. If the stock market moves one percent or just a couple of percents, that's way more than the five billion dollars. So stock market moves all the time, and yet it doesn't create these kind of problems. It's really when it's the credit markets that get it get from. It's bubbles in the credit markets that we have to worry about, not bubbles in asset markets per se, although sometimes they do occur at the same time, and that's

when you get into real trouble. And that's it where I think that that we're I have less concerned now UH that I did for example, during the Global Financial Crisis, where the bubbles really spread very much into the credit markets, and that's where we were in deep trouble. Rick would have to continue this conversation on the credit market another time. Rick Fontanasa to catch up. Rick Michigan of columb University. Thank you. Thanks for listening to the Bloomberg Surveillance podcast.

Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio