Surveillance: Rep. Hill on Robinhood

French Hill, French Hill, it's your fault. Arkansas has the snowiest uh February like ever, like back to when the Hill family came over the border in eighteen twelve or whatever it was. What's the snow like in Arkansas? And what are you gonna do about it? To fix it? Well, bye, Gollway. It's all the responsibility of the politicians in Washington caused the snow fifteen to seventeen inches here in central Arkansas, and our highways are clear, but our neighborhoods are still

piled up East Coast style snow. But I've been shoveling and doing the best I can yeah, I know it's Republicans shovel Democrats calling the snow plow. Okay, let's move on from their French hill. We saw yesterday the game stop hearings. I noticed the Washington Post this morning gives

it essentially zero play. What happens next after that testimony, Well, first, I think Mr Tinev, the CEO and Robin Hood Market certainly apologized for the fact that they had inadequate collateral and deposit with their clearing firms and DTCC the depository Trust, which then put their customers in a bad position in the midst of a bubble that was a key element in terms of the equity market plumbing. I thought the

earring demonstrated that it worked as we expected to. But I think Maxine Waters, our chairman of House Financial Services, going to have additional capital to markets hearings, and from the discussion yesterday Tom, I think she'll focus on payment for order flow, also reassess short selling. What have been

the changes since the two thousand thousand ten changes. Congressmen, how concerned are you about the environment, the broader environment that's led to this type of speculation about the fact that people have money as well as the apparent lack of risk prompted by the Federal Reserve. Well, let's start with that, which is zero interest rates in the Federal Reserve, accommodative policy, and household savings at the highest rate it's

been in decades. This prompts people to reach out and take risk, just as you've been discussing the last a few minutes. But the key thing for I think robin Hood investors are we all know that investing is caveat inmptour, but does robin hood have the support for the those new entrance to the investing market. Are they have the

skills and communication on their platform to educate customers. I've been in this business for four decades and the paternalistic aspect of coaching and monitoring accounts on margin, on the use of options on small dollar stocks are all fundamental to retail investment brokerage. Is that really being adequately handled on an app based platform like robin Hood. That was a key thing we talked about. Brilliantly said from the

gentleman from the Delta Bank and Trust company, Lisa. What I think is so important here is this strange phrase due diligence in the old days there was a respect for it, and then to be honest, technology took over. How do you do due diligence given modern technology? Well, and that's exactly what Congressman was talking. Congressman Hill is talking about this paternalistic attitude, which is actually part of what the robin Hood crowd is rebelling against. And so

that balance. How do you ensure earth that you give people access to this dynamism, to this explosion and asset prices that has been fueled by the environment that you're talking about, while giving them the correct due diligence. That's complicated. Well, I think he should enhance his website, asked him yesterday. Does he have a call center? And the average robin Hood an investor does not have someone to call during the business day. It's all done by email to their account,

and that's inadequate in tough times. The call centers that robin Hood apparently are only granted to those with some extreme option approval by the firm. And I believe the CEO committed yesterday to much better consumer communication, and he made a comment about his consumer education on his platform. But look, we all know that granting someone margin, granting someone option authority is a tough job just to do by algorithm based on the boxes checked by a customer

complishment before we let you go can scathellical question. It's not actually aimed at you personally, who obviously understands the financial industry inside out these hearings, how can we make them better? Do you think they would be better if they were closed door? And I'm here's a journalist talking

about less transparency. But it just seems to me that sometimes these hearings become theater and lawmakers, your colleagues, turn around and make it that they might have some pre existing bias, some songa dance, They want to clip the video and send it out to constituents. How do we make this better, more useful? Well, that tone is said at the top by the committee chairman, Maxine Waters in this case loves click bait, and she also loves Jonathan

to use the full committee. Here's the way to do this, in my view, if you use the Subcommittee on Capitol Markets, which is believe chaired by Brad Sherman, you have a smaller number of people. You can spend the same amount of time, but you can multiple rounds of questions and it's a way to have a much more constructive dialogue on Capitol Hill, but our chair has elected not to do that in some of these high profile matters. And John,

that's brilliant. That's like the subcommittee we have here where you and Lisa tell me to shut up. If you if you look at the UK and I'll bring it. The House Financial Services Committee is one thing. In the UK we have the Treasury Select Committee and it is a smaller room, it's a smaller setting, and it seems to be a little bit more direct, and I think that's what the congressman is alluding to. Congressman is great to catch up, come back soon, always great to catch

up this Republican from Arkansas. Right now, Ellen Santner joins us with Morgan Stanley, their chief US economists, out with a bombshell report and adjustment. I believe it was yesterday looking for as John mentioned, six and a half percent and even seven percent GDP depending on where you measurement. But what's so important here is what Stephen Roach invented

it Morgan Stanley, which is everybody feeds off everybody else's research. Ellen, your secret weapon on the pandemic is Matthew Harrison, he's definitive in biotech. And matt Harrison is telling you he's seeing better vaccination numbers. Yeah, better vaccination numbers. We're getting shots and arms at a greater rate. Hospitalization rates coming down, death counts are coming down. That's what households really care about.

And that's what gives them the confidence, uh to show in the surveys that we send out of households, UH that they want to get out there, they want to return to you know, put the word normal in quotes. Whatever that means to each person is different, but they want to get out there right. And maybe it's just coming out of this bad winter. But we've got the ingredients there to make that happen. And for those of

you on radio and TV, this is really important. We discover these economists before they're a chief economist, a fancy title like Ellen has and Ellen Sander was discovered with a cute consumer analysis years ago. Ellen, does this devolve this six and seven percent g DP? Does it devolve into a consumption boom? Uh? Yeah, so that's what So when you think about the forecast for the U. S economy, right has to be about the consumer because that's the

lion's share of the economy. Um. But you don't just have the consumer this time, right, You've got fiscal stimulus behind it, so you've got a lot of buying power out there, UM with pent up demand that continues to build. And so the biggest delta for the economy this year is what the consumer does as we're able to move more freely around the economy. Now, that also points to the greatest risk is that you know, confidence is rising there telling us in our surveys they want to get

out and do things. And you know, historically and you know this, Tom, sometimes we can say we feel one way, we do something else. You know that that is a risk. And if that's the case, then you see the savings right in the US just remain really really elevated this year. And you don't see that calm down as people start to been ellen. When did the unemployment numbers start to matter again? So the unemployment numbers, uh, you know, we're looking at two different ones right now. And I know

we've discussed this in the past. So you've got um, you know, the six plus percent on the uh, you know, unemployment rate that's the most widely reported that's the traditional measure that we use, UM, but you're closer to around ten and a half percent for that underlying unemploy unemployment

rate that you take into account all the measurement issues. Um, we do get impro improvement in the unemployment rate this year, but if we think about them that broader measure, the underemployment measure, the ten and a half percent comes down to six and a quarter by the end of the year on our estimates. So it's it's a four percentage points is a huge amount of improvement. That's still a

really high unemployment rate by the end of the year. UM. So you've got a lot of that pent up demand coming through at a time when we still got supply constraints, especially on the labor side. And that's what plays into some of the inflation forecast for inflation to rise. And can you imagine the news conference at the Federal Reserve as they see six and a half percent GDP growth this year and start to look at five next year, what does that look like? Yeah, so I think it's

it's a it's an evolution, right. So even at the March So at the March of Onese meeting, they're gonna have to revise upward their forecast. And some of that is just because growth is going to be tracking so much higher already in the first quarter because of the stimulus checks that came through uh in that bill that was passed in December. But they may not pull in forecast fully for what might be coming right around that

time of this next fiscal stimulus package. So most likely then at the June meeting they would have to revise upward their forecasts again UH. And then most likely only by September, when their forecasts continue to track behind the economy, and this is what we normally see each year, they play catch up by revising higher um. But here's the thing,

it's the unemployment rate that matter for them. UH. And even though we have inflation rising and reaching above two percent by the end of the year, UH, that's not good enough, and especially not in the context of a six plus percent underlying unemployment rate. Well, Tom, this is the story the forecast for the Fed right now and the degree they need to raise those forecasts four point two percent real GDP year on year twenty two three

two percent. Compare and contrast the Fed with Morgan Stanley. Right now, the gap is this one gap? Is this white? And John? As you mentioned, there's speeches next week. I'm sorry, there's going to be a sentence here, a sentence there. So how do we navigate that FED speak Helen? When you start to get those cracks not from the governors, not from the core of the FED pal Clarida, who we hear from next week, but from the FED presidents who start to look around and see what you see,

which is better growth. Yees. So I think we'll see more of them speaking out and and speaking their mind, but they'll they'll temper it right. So it's gonna be very obvious that they're seeing better growth, but it's still going to be obvious to them. They're still uncertainly around how the vaccine will out, will progress, will they be hiccups there? So we're still you know, the cloud of COVID will be thinning as we get into the middle of the year, um, but we're still going to be

under it. Uh. And so they'll acknowledge better, they acknowledge the better growth, but that we're just not there on the labor market. So, I mean, they've they've got a lot of cover here, um to explain that we're still not anywhere near that significant improvement um that they say that they're looking for now. That applies to grate heights, um for some of them, that does apply to tapering

the balance sheet as well. But we do think um that by the middle of the year, with again with the cloud of COVID really thinking then um, that more of them will be talking about balance sheet tapering could be on the horizon because at some point you don't need the titan policy, but you at least need to take your foot off the gas pedal, um. And that will start when they decided to start tapering, and we think that tapering begins in the beginning of next year. Ellen.

We also are going to be hearing next week from Jenny Ellen on Monday, And there is a big question, she said yesterday and in interview, the price of doing too little is much larger than the price of doing something big. How concerned are you about the price of higher inflation that perhaps is much beyond what people are expecting right now. So I think the risk there, of course, is that it rises more so than what the Fed

can stomach. I mean, we have the highest inflation forecasts on the street, and it's still not enough to trigger rate hikes in our view before the third quarter of three. Um, of course we can get that wrong. Could be that there's more supply constraints that last longer. There's a lot of flow through from the dollar that we're seeing pushing import prices higher, and those tend to be their flow and lasting movements. But the FED is there. They'd rather

fight that battle. Uh and Janet Yellen knows good and well what the Fed can do. They'd rather fact fight that battle of pushing down inflation if they need to, rather than continuing this multi decade battle trying to pision inflation. Ell, when you're channeling your inner Mario Draggy, I mean you're going out to twenty three. And as you know, when the facts change, the news changes, and the actions of people change. What do you perceive to be the verbal

path for institutional officers that demand market stability? Is they stagger to year two thousand, twenty three. They're gonna be walking on glass. They will be walking on glass. And that is the big one of the biggest debates out there. They are hell bent on fighting any financial stability with macailpredentcial tools. Sometimes I think about macro predential tools. As you know, isn't a financial um stability like a frog in boiling water. All right, so everything feels fine, everything

feels fine, everything goes fine. Then oh my god, nothing's fine. And so can Michael podentcial tools really exactly well, so well, they recognize it fast enough, and so that's the biggest day. They are certain that they can battle it fast enough and that they've got the tools necessary to battle it. Um But you've got to step in with things like rate hikes even if to get into the cracks. If right, you've got a labor market that's tight. You see, you're

running a high pressure economy. If those inflationary pressures are coming through, you must be a maximum employment and so you would be raising rates in that environment, and the market would be asking you to raise rates in that environment. The problem is if it comes way sooner than expected and the market that markets expect, and you get a very very violent and volatile move in rates. And that's the conversation right now. And I'm fantastic to catch up.

And is that up the chief economist right now? Robert Miller joint just Bob Miller from black Rock head of America's fundamental fixed income. That's an important position on the speed of change. Bob Miller, I love your note where you say events are moving rapidly and the FED isn't. When does the FED blink? Great question, Tom, Um. The conversation you guys are having preceding the most recent break would suggest that we're reading off each other's notes. Um,

I think it's coming. I don't think it's coming immediately. Um, it's certainly not next week at the testimony in front of Congress, but we think that at the March MC, the SEP that has delivered the state of the economic projections that are delivered, where are going Our our expectation, as you three, for unemployment for twenty one is going to be marked down at four point eight, so approaching the four point one longer run rate, and four PC is going to be marked up to one point nine,

approaching the two percent target. So our our simple conclusion from this that the FED is going to find it more and more difficult as Mark in April pass to continue to differ the discussion of recalibration of policy. So, as you guys have said, there's massive pistol in the system now likely more coming relatively soon with the one point nine package from the Biden administration UH potentially followed

by infrastructure later this year. But the dual policy impulse is just epic at the moment, at a time when vaccine rollout is proceeding at a very good pace. We're now running, on average about fifty million a month, and that could easily become sixty million a month. So think about what that implies for just two months forward. And secondly,

the weather is about to turn warm. I know it sounds um mundane, but it matters right, and we're four weeks away from warmer weather that will allow people to get outside. So I think you're going to see this just a monumental amount of pensive demand unleashed in the next couple of months. And it's gonna make it hard for the PAD to say that substantial further progress their phrase for what's necessary to consider recalibrating quantitative easing, the

substantial further progress has not occurred. I think it's coming. It's probably gonna take a month or two. We need a clinic on duration risk, and I'd like you to offer that to us right now. Talk to us about duration risk, what it is and how you're thinking about it at the moment. But you know, Jonathan, I think one one way to see to us this is the fet IS really not your friend if you're a bond investor, after after forty years of kind of being your friend.

And we've been talking about this since the adoption of the average Inflation Targeting Framework last summer. UM that was that was revealed at the August um uh Jackson Hole. But um, you know, the fet IS is explicitly telling you they're going to target inflation at two percent and they're going to be willing to allow it to run above UM. That's a very different regime than we've been

in for the prior board decade. So I think you have to you know, when you're looking at long duration nominal bonds, UM, you've got to be pretty careful that you're being adequately compensated for both UM inflation risks from the normal ciplical economy, which which frankly aren't haven't been particularly um uh you know, robust in the last couple of decades. But nonetheless, the central Bank is telling you

that they're now going to target higher inflation. So I think it I think it really matters and and it calls into question the willing you know that the comfort in holding longer and phenomenal bombs and relatively well yield Bob, the FED is not your friend. And yet don't fight

the Fed. I mean, these are the sort of contradictory messages that we're hearing at a time when yes, the FED would like to see inflation run hot, but the Fed's balance sheet rose to a new record high in the week ended yesterday, to seven point five six trillion dollars. I mean, how much will they say involved to suppress borrowing costs, to allow this fiscal impulse to gain control and to be a friend frankly to bond markets regardless

of inflation. Well least I think that the FED is your friend depends upon the asset class you're talking about. I think I think don't fight the Fed is still a rule number one in terms of risk assets UM and and and certainly supportive for the cyclical outlook. UM. That said, they have adjusted their reaction function in a way that makes them less quote unquote friendly for long duration and you know bond manager so, but I think they have to differentiate between what what asset classes you're

talking about? That messages no longer. It's simply blunt as as it used to be. You know, the size of the balance. She is going to continue to grow. Um it's it's gonna it's gonna start to grow at a slower pace sometimes in the next few months. You know. Think about this, that the the bonds twenty billion bonds a month that they're currently buying, between treasuries and mortgages, UM is in order to scale that down over time, they want to go really slowly. They certainly want to

avoid the two thousand and thirteen experience. So our expectation has been they'll dial up back like ten billion a month right over the core in the year. Well, if you're going to dial back over the course of the year and in the middle of two you so we expect the output gap in the US economy to close this summer, and as new Secretary of Treasure Yelling said recently with the with the upcoming Crystal Package, she expects that we could achieve full employment in two thousand two.

If you close those two gaps, you still want to be buying a lot of bonds. So to our our point is we need to slow the rate of purchase relatively soon, so that they can do it over a long time rise and not be buying bonds when we've achieved full employment. Um Interest rates are a totally different story, right, that's the tide to the inplacment outlook and that the average inplace framework. So they've they've driven a wedge between

rates and to E. I think appropriately so. But the guidance around to E needs to change sometime in the next couple of months. But this conversation is too important. Can you do me a favor? Just hold the line. We'll bring you back in just a couple of minutes. Time. Prob Miler that Black Rock head of America's Fund of until fixed income and bias there to go to the

gentleman from Columbia University. I'm gonna really listen to the vice chairman John for that one single sentence of nuance of how they adapt to a five or six percent run rate real g d P A nominal rate of what six seven eight percent gdpis treasure yield to the breaking out to Let's bring in roberts patim chief investment strategist. Rob. I've got one question to kick things off. When does roberts Hip become a buyer at the long game now

tens on thirties, one, etcetera. Yeah, well, this is a great environment, and I like answering that question when we've crossed above fair value in terms of yield, and I think in terms of the long term outlook, I can't tell you that's today, if it's tomorrow, or if it's gonna be the fourth quarter, but I think we've clearly topped the value in terms of treasury yields. What's going on here? It kind of looks like a behavioral financista where people are looking at these rapid rates of growth.

They're looking at a few of the high prints and CPI and pc that we saw back in the spring summer, and they're extrapolating that into the future, and they're pricing in a string of fed rate heights that is unlikely to be a sensible central scenario. And uh So, I don't know whether we're going to get up to one fifty or even maybe higher, you know, if you get

another infrastructure bill coming through. But I think we've already topped our value, and that means that looking out, you know, five years, in terms of return, bonds are going to be likely to end about performing cash. So what have you been doing in the first couple of months this year? Is all this craziness has been gone on around you? Yeah, we have to try to stay with what makes sense,

what's easy, what's doable. And there's a good balance in the market between the economy doing well and spreads coming in.

Picking up yield in spread product across a range of sectors while steering clear of any of the names of the sectors that are gonna be having problems, and that area of activity in bond portfolio management, the sector allocation security selection is a higher information ratio, higher hit ratio, a better area to focus anyhow um, but the rate side is going to drive returns on over the long term.

And I think what you've had, frankly in the crash of the COVID nine team a good offset between interest rate and spread risk, where to the extent that people were losing on the spread side in bonds, they were making money on the interest rate side. In the recovery that we've had, Yeah, you've had some increase in yields, but you've had a massive compression and spread what's the

bottom line. Bonds have done well and looking forward. You know, the next two to four years, you're not going to get that much spread compression, but you will get income

from spread product, and so that will help. But I think what you're gonna get now looking to to four years ahead is a realization that we're not going to do six percent GDP for the next five years, that after this money flows through the system, there's going to be a slowing down and the government markets are going to have to mark to market that these fed rate hikes are not going to happen at anything near the pace it's priced in, and that's gonna be in positive returns.

So I'm just trying to pass through. There's a lot there, and I want to unpack it. With respect to the treasure yield, I'm just curious. You're saying that we are beyond fair value, but it didn't seem like you're necessarily going all in. You're talking long term, short term, how high can we go and how much could it potentially challenge the flight into risky credit that we've seen year to date. Right So so I can't tell you that obviously, and but I can take a stab at it please.

And but what we've seen right from from that period exactly a year ago February, the hundred basis points springs swinging rates from thirty to one thirty. That spect out the whole future from the worst scenario to the best scenario. That was likely at that time. But since that time, we've had Washington d Cgo Democrat. We've seen that they're able to spend money. We've seen vaccines developed, uh much

to a greater extent than anyone would have guessed. I would imagine in a time frame not not imaginable, but more important than any of that, we have seen people take the money that they get from the government and their income and spend it like mad. So we're a few percentage points elevated and unemployment, but we're at record retail sales, so the market has to price in that psyche,

and I think, you know, we're in the zone. I would think that unless we get some other breakout and the economic activity, you're not going to top one fifty on the tenure. It will be very difficult to see if we do top one fifty, to see that sustained. So I think we're basically in that last twenty five basis points. Roeber tip, I'm gonna go back to dive into the business at first Boston. And what I find fascinating is all the MATHA Berkeley doesn't matter. It's what

corporations do when yields back up like this? What does supply do? What does CFO do? CFOs chief financial officers? What do they do when yields back up? Well, CFOs, fortunately for the market, already did it. You know, raise money, right, That's what they do is when they're nervous, they raise money to make sure they survive. Then when things are looking better and rates are low, they raise some more money in case they need it for a strategic acquisition.

And a lot of that's happened, and we've had some drop off and issuance. Uh So I think the supply is going to be manageable. On the corporate side, I think there are signs of accesses in the market. There's a lot of liquidity slashing around uh And the problems that the Fed UM and these central banks are gonna have is not going to be that they're going to create systemic inflation, because inflation underlying measures, I think are already showing a tendency after bursts of activity, to come

right back down. And the same as trou on the retail sales side. But I think while these central banks are shooting for these unreasonably high inflation targets and creating very buoyant markets, that that's gonna be the problem. The game stops and all of these phenomena that pop up that make them nervous. They're creating systemic risk. Robby sound like a treasury bobby and not a tries to rebuyd

I'm just trying to reconcile it. Or in the last time, everything I said is I want to buy treasuries and it's just something holding you back. Yeah. I mean if you told me I had to do one trade right now for the next two years, it would be long duration, right, it would be long fixed in conversus cash on a diversified basis. Uh. If you said, well, you know, do

you want to go to a maximum position here? You want to wait to they see raids crest or something like that, I think you'd have to go with that because the economy has a lot of momentum. Even just this retail sales number we saw this week was spectacular, right, So you don't want to underestimate reality. But at the same time, what's going on in the markets. As you can see, it's extrapolating this pace of growth too far

in the future. And we saw this exact phenomena play out where the Trump victory people priced in a new reality of high growth a three ten your note. By the end of twenty nineteen, that was all over. Uh so may or maye out of made uh make America great again, But it made bonds great again. And right now this rise and yields to one a quarter or whether it's one fifty, is built back bonds better. Right we're in a zone where they're attractive. And two years from now it's going to be like a lot of

this optimism I think never happened. You're gonna be back at the secular fundamentals of Asian demographics and PERNICI justly more inflation. At least it is looking forward time. In that conversation with you, Robert, tis great to cash up. We hold up, Robert Tip, patm Chief investment Strategist. Thank you, Seth.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg.