Surveillance: Silver Spikes as Reddit Frenzy Spreads

Global Investors US investment strategist. I'll just ask you, what can you possibly say about what happened last week so I keep you out of trouble. Yeah, it's a great question on a Monday morning. Look, it was fascinating to watch about thirty billion dollars of market cap in a fifty trillion dollar US stock market has created really a lot of media and attention, and I think in fact

for some good reason. You know, we are living through history here and if you uestions that come to mind as we process all of all of these news around stocks like game Stop, AMC, etcetera. UM one, you know what really drives, uh, the value of an asset is it it's fundamental value based on some sort of discount of cash flow model or p multiple or is it really what an asset owner is willing to pay for it? And we see that in places like artwork or collectibles, etcetera.

Is this really any different? And and really over time how does this end? Does game stop or NAMEC come back down to its fundamental value, which if you look at average price targets by analysts game stop at thirteen fifty, a m C at two fifty, or you know, do we get some sort of regulation in the introm our market? Force is going to dominate? And then finally, you know, there's something we've been thinking about as an industry and

as a financial services firm. M Are we going to need a new set of analysts that just kind of go through and combe through message boards? Social media? Uh? Do we need AI and bots to help us with this to kind of figure out where to invest next? And so all fascinating questions. I mean, it's really important we go through Pharaoh's Twitter feed just to see where he is. You know, that's the only way, Yeah, because

I know you do as well. Uh No, what have you changed anything at Alian's I mean, you know it's sort of a February first readjust off what was written December fifteen for two thousand twenty one. Is it renuance

in the tone? You know, it's interesting, I mean generally speaking beyond what's happening in the retail space, and certainly retail investors have become a bigger part of our equation of both those clients, but really as drivers of the market, and we saw that not only this year, but really

in Forest last year. I think in you could argue the smart money was the retail money who really got in post that March low and wrote the market up the sp plus on the nastack, and so that was fascinating to watch the retail versus the institutional clients that we had um But broadly speaking, our outlook for is driven by three factors, and that's re accelerating growth and we're watching, you know, whether or not that does come to question in the second half of this year, a

FED that continues to remain on the sideline, and we would argue that that will remain the case through one at least, and then of course what happens with the bind administration, stimulus and and physical spending. And I think interesting to see this week at one point nine trillion met with a six billion package by the Republicans. Perhaps the magic numbers in the middle there at one point two to one point three trillion at some point, I

think they both are starting point. So, uh, as long as those factors are in place and we don't get any exogenous shocks, we do think that this is an economy and really in a market that is pretty well supported. Have we already passed mona the time where we can say that Reddit traders will not necessarily be the exogenous

shock that causes a deeper sell off. You know, thus far, we haven't seen signals that that, uh, these trades will will spark any systemic risk UM, as we noted earlier as a percent of total market cap very diminimous, probably less than maybe even point one percent of overall market cap UM. And so we think while they could cause ripples in how the financial services industry operates broadly, we don't think that it will cause um any major shocks that would would really put a dent in the overall

financial services system. And so that to us is important. I do think we're watching for shocks that are beyond just you know, the reddit type traders, which include things, as you mentioned earlier, variants of the virus, whether or not we can win this race between vaccines versus variants. How the rollouts going, and we're encouraged on that front in particular, not only here in the US, but quite globally. If the pandemic copy got a looking last week, did

it great a catch up? It's fantastic to catch up. Sty Well, this is not that David Axelrod of Obama administration claim. It's a David axel Rod of Ballard Spark law. What you need to know is we know on surveillance the length of the resume, the length of the bio is in for inversely proportional to the skill. Except axel Rod is a wild, wild exception to that. His cases are extraordinary, both in private practice and his work with the Securities and Exchange Commission. And we're thrilled to bring

you this voice on surveillance this morning. David, thank you so much, really honored that you could be with us, uh this morning. You did an insider trader thing at the at the Williams Court there in Washington years and years ago. If you were speaking to a body of attorneys today about what is to come in this uproar, what would you say to them. You know, listen, I'd say that you know, in the in the in the wake of this, everyone's looking for a boogeyman. But I

think we're gonna find out that nothing really has changed. Um, not really much was done wrong here. The rules are gonna work. Fine, may see other examples of this going forward. But I think the market's going to shake out. I mean, the small retail traders saw and saw an inefficiency here, saw a window to do something, um, and and they and they did, and they made some money. But you know, all that the stock is gonna go back down probably and I think it's probably all gonna shake out. How

do you is a lawyer? You've you've been You've been with sec against Cooperman, You've had men, you've been on both sides of the fence practicing the law. How do you treat the silicon val tone that we get from Robin Hood and others? How do you candle the behavioral and cultural millennial tone that we observe. Well, listen, there are very smart people at the hedge funds, at an institutional investors. They've been scraping social media for years already,

that this is nothing new to them. It may be new to us in the general public scene this, but you know, it's it's they're gonna have to build into it. They're gonna build it into their models. They're gonna end up probably taking advantage of it, and of ways that I wish I could contemplate because I'd be not working in the law. Um, but you know, they're gonna deal with it, and it's gonna all be built into how

they operate. What illegal issues here, David, You know, I'm not sure there are you know, as I said, a lot of people are looking for something wrong here, but this isn't the case where you see deception on Reddit. It's not people aren't mining about what they're gonna do. They're saying, I'm going to buy this stock because I wanted to go up. People have been doing this for years,

So I don't see anything wrong there. You know, for robin Hood, you know, you need to look at the terms of contracts they have with their with their actual customers. But I haven't seen anything that indicates there's a problem for robin Hood either. There's a larger question here, David, especially as social media takes on an increasing presence in markets. What's the line which it crosses into market manipulation. Yeah, I mean, that's that's gonna be the difficult thing, right.

I mean, usually in situations like this, you see people crossing the line, and the line is line, the line is deception, the line is the pump is part of the pump and dump. Um. So once you see people kind of exaggerating, fabricating what's going to happen, you'll see the SEC get very active, very quickly. But if that line hasn't been crossed, if you just have Dave x Rod sitting in front of his computer trading stock, it's

the line is not there. I don't think hedge funds need me to protect them David, But I will ask this, does intent matter? Does the objective matter? If I go on a forum and say this is what I like, this is why I like it, and the objective is just to make money. What if the objective is to hurt or cause someone else paines, does that matter? I mean no, uh, in our system and our you know, hedge funds has been doing this year for years. I mean, the intent is to make money. They don't care whether

a business gets put out of business. I mean, which is the very possibility of the of the put options in this case. So no, you know, if retail investors want to hurt hedge funds, that's the way. Our system doesn't doesn't capture intent. Our system is as long as you're honest, as long as you're not deceiving someone, you can your intent really is irrelevant. What did you think? What was your response when you saw trading shut down on Thursday or Friday? Do you just assume that somebody

got out front of those announcements? Yeah, I I always assume that if there's going to be a big shift in the way that the markets operating, that someone with information and balance is taking advantage. How do you how do you discover that? How how does the prosecution discover that malfeasance? Really simply, I mean, if it happened, I suspect that the SEC and perhaps the Department of Justice

will send subpoenas for testimony for emails for Bloomberg. I am chats uh exactly had to throw that pitching for you, But I mean it's it's always in the records. So I mean, if some hedge fund knew that bloom that Robin Hood was going to take action and knew that would harm the stock. Um that information is probably going to be there, and the SEC or the d O J as I said, because this could be a criminal event, we'll find that David as a formal former SEC official.

Given the politicization of this issue, the fact that ao See and Senator Ted Cruz came out and sided on the on the side of the robin Hood traders, this became a populist versus the system kind of debate. What are the long term consequences for the supposedly a political regulatory agencies like the SEC. You know, from a policy perspective, I don't know. I could go millions of different ways.

I mean from from AOC's perspective, UM, I mean, they could attack what hedge funds were doing in the first place. They could attack large put options that you know, some people argue have no economic benefit in the beginning, Um, others they could attack robin Hood and make sure that market access is in place for everyone. But really it's hard to talk and the politics of this are really weird. As anytime you have AOC and Ted Cruz lining up on the same side of an issue, you know one

should expect UM. So I don't know it. It can go a million different different ways. That's certainly a good way of putting it. David, great to catch. Yeah, thank you. David actually wrote the film sec Supervise Street Trial Council Now without a SPA law help Corta droutsa bank for years writing most read twelve page papers that always had not one, not two, but three charts where you would stop and actually have to read the report and read the captions under the charts. That's how good he is.

He was snagged by Apollo Management as their chief economists or thrilled it. Mr Slock could join us uh this morning, Torston. I want to cut to the chase, which is the idea of long term inflation expectations. No one cares commodities lift and it's real simple on the Central Bank watch.

Should Mr Powell pay attention to Dr Copper? I mean, this is a very important issue in races, markets and therefore and everything fixed income I mean placed expectations in the long ends or tenia break evens have gone up almost on a linear trend since much I've been a few mos here and there, but this is certainly something that's very important for the fit. Then, of course the question becomes, well, why is it that the market suddenly expects inflation in ten years high to be higher? And

there's a number of different explanations. The first one, as you mentioned TOWM, is that commodity prices are almost mechanically correlated with long term inflationing incputations, so commodity prices going up it is a very important driver. But another very important driver is to fit changed the framework from just normal inflation targeting to and reflectible inflation targeting, and therefore the fit saying will allow OLMOS shooting has been pushing

long term inflation infectations. Stuff that's good here and now, but it's certainly a very critical thing to monitor if we do get that strong growth in the second half this year that you guys have covered so well. Do you think that markets right now towards in our underpricing or overpricing inflation so they I mean, if I look at Bloomberg screen today, there is really no inflation in TRIM means, in code PC, in co CPI. No matter what fit measure or be a measure that you look

at for inflation, there's just no actual inflation. So all of this has to do with what expectations, of course, both in the next few quarters, but also what expectations if you look several years out. So for now, I think the market is a little bit get ahead of itself in the sense that we will not get that much inflation. We will get some base effects of course in the next few months, as we all know, but going into two thousand twenty two, still we have a

lot of slag in the economy. We therefore, as as you also just spoke about the lago, market is not great on Friday with the numbers that we get for January. So at this point it is a little bit it's still too premature to worry about inflation, not to get philosophical about this torson. But as we see higher commodity prices, and as the prices of goods goes up as a result of supply chain disruptions and other COVID related issues, how much could we see some sort of not disinflation

but stagnation. This idea that people's wages are saying the same or going down, the employment picture is weak, and they are forced to pay more for the goods that

they need. That's right, and that's that's that's that's the environment we have today, I mean commodity prices going up, and at the same time we have also had very little employment growth, and unfortunately we still have as you know that the employment situation that we have ten million people less working today relative to a Fipruary two thousands winning. So the label argut is indeed still very weak while

commodity prices are going up. If you look further out, then of course it becomes more almost a philosophical issue, whether you think that it is the level of capacity utilization that matters. In other words, in the Philip scripture were about the level of the outpro gap or the

change in the outpro gap. That's a sophisticated way of saying that should we worry about at growth spurit potentially giving some inflation in the second half of this year, or should we say, oh, that's not a problem because

the unemployer is still so high. So there's a lot of thinking around this issue, and I'm sure that FED is looking very carefully this potential risk that we could have that the growth bursts we get in the second half this year does lift in particular services pricing, and tossed and talked to me about financial stability risks, and we've gone through the labor market. There are very clear reasons why this fat wants to keep right slow for

a long long time. Do you see them doing that at the sacrifice of really making sure that financial stability

risk don't build. That's really important, Jonathan. There is a very critical paper, reasonably by there on sim Sect that try to look at exactly why is it that stock prices are so seemingly disconnected from fundamentals, And what they are arguing, which makes a lot of sense, is that it is actually the optimal strategy for the fit to say, if we know that this shock is of limited nature, in other words, it will be all at some point,

then we should be easing financial conditions as much as possible. We should be creating a disconnect between stock prices and credit spreads and the real economy because that does accelerate the expansion later on. So in that sense, I think the Fate looks at this it says, yeah, we do know that stock prices might seem reads if you're high. We know that credit spreads are very tight depressive to fundamentals.

But this is the best strategy for us in terms of getting the economy as quickly back as possible, and that's the objective. They've been successful, Toulson. I can pick example after example where they've managed to divorce financial conditions from economic fundamentals. Do you think we can have a reconcund that. Yes, So now the question of course becomes, well, what once we then get to the pandemic being over,

what is the well then going to look like? And in particularly if this is associated with rates going up, and this is where you get a little bit worried about what sexes and this most vulnerable to higher rates. And that's of course those sexts that I'm all along

duration and that's of course in particular tech. So if we do have a move higher in rates in the second half this year, both in the front end with FED expectations and also in the long end, then those parts of the fun that a most sensitive to high at discount rate and in this case in particularly the

tech sector would also become more vulnerable. So you're right, Jonathan, that if we do have much high level of valuations once the pandemic it is over, then we do begin to in particular, as I says, become more vulnerable to rates moving up within the system. Torsten Slark of Apollo Management, do you see effervescence? Is it an effervescence? I don't mean bubble in an amateur sense like that, but do you just see a ferment there from all this gross accommodation.

So I think that the FIT and d C be NDS would be to say we have done what we can do with the tools we have. And that's why the debate, as you also have talking about earlier today, is that now we're switching from monetary policy having done whatever they can, and that results in high as surprises. But that's why the fiscal discussion is now so aftertely critical that it's small the issue that we haven't really

spoken about yet. And stuff course that the number of cases is coming down quite quickly from the US, also in Europe, also in the UK. And I mean think about a few weeks ago in the US to have about three hundred thousand new cases every day. Now we have about a hundred fifty thousand. If you put admittedly very simple you rule it down and ask the question, if I type c V I D on my Bloomberg screen, when will we actually get that the number of new

cases will be close to zero. You get and I know this is a been extreme thinking both about the strings from Latin America and South Africa and set up. But you can that we get to sero new cases sometimes yet potentially already in much so that's why the speedless which the number of cases is coming down. That's something that we should not under is the mate that we could potentially have the growth, but not only the

second half this year. You could potentially already come in the second quarter of this year, and that of course will be an upside surprise to market, the upside surprise. So would you suggest that this bull market valuing out six months, valuing out a year is fairly priced, so that that's why that comes to whene we will begin

to see inflation and therefore the fit dovishness. Will that be sticking or will the fit the having to turn around quite quickly as you know, the fate is at the moment saying we will not high rates on to two twenty three. This is almost the premise for the hunt for yield. People buying first the duration and treasuries,

then i G then high yield and in equities. If we do begin to see that growth comes faster and quicker, and the catch up effect, if you will, is much more speedy than what we all expect at the moment. Then the f it would certainly have to pedal back and and to talk about rate packs coming to know. But the question therefore is is the FED going to state dovish Clarita has said that we will do que meaning by a d building and treasuries forty building in

mortgages throughout the end of this year. If we have three very strong quarters of growth here in the next nine, then we could have that defect could be potential being to the table already sometime in the second half of this year, Towarsten, one thing that you did so well when you were at Deutsche Bank was put out these charts showing the divide in the labor markets, showing the

divide in the economy between halves and have nots. From your seat now at Apollo, there is a question when does this divide and have and have not affect markets which have been relatively divorced from it and moving on very different factors, in part because they're dominated largely by the bigger, more resilient companies. When does it become a real problem that you have a two track economy with

a two track labor market. I know the's and as it is a case shaped recovery, and as you have covered so well, this is creating all kinds of issues. In particular will leverage in companies that have very little learnings, not only because of COVID, but have not had earnings for three years in a row, the so called sumpie companies. And what this is also opening up is of course that there's a number of, if you will, unintended consequence of the very very quick reaction that the FED had

during this rise. It's normally a recession cleans out balance sheets. In two thousand six, it was cleaning out energies in the housing sector. It was cleaning out benergies the banking sector, cleaning up penergies in the household sector, meaning consumers. This time around, the FED and the fiscal policy makers came to the rescue so quickly. So therefore normally we then say, okay, we had a recession, we can now have another cycle.

In the last ten years. The issue is that this recession really didn't clean up much, and therefore many of the problems that we had pre COVID, most importantly leverage in the lower rated companies and a lot of companies that are much more at risk. That problem is still here. So that says many of the vulnerabilities that you normally clean out with the recession, those vulnerabilities are still here.

That's why going into this new cycle that we're literally entering here as we speak, it does raise some questions about well, but this cycle starts out on a very vulnerable footing, and that is a problem when you think about how long this cycle actually can end up being serious issues. I have to say that, Tusten, I just love the Apollo. Just allow just a little bit of stubble, just a little bit. It's COVID. I mean now, it's that you talked about the Deutsche Bank Apollo transition. I'm

just taking it seriously to the next level. You've got a little stubble, Yeah, I'm not. It's allowed here too. That's why, thanks Slock of Apollo Management. I'm looking at this shark Tom and the peak of sober back on the Bloomberg was back like two thousand elevens. Let's let's get some perspective here. We can do that with Mike mcgloane. He covers all that commodity stuff for Bloomberg Intelligence. Mike, what do you make of what's going on with silver

here this morning? Up ten percent, pushing up the thirty dollars. Hello, Tom, imply I was thinking of you this weekend and two time when I was trying to ice skate in my neighbor's pond, but the ice wasn't think enough yet. But we're getting to that pon hockey let weather just too much snow now, but that's very cool. Yeah, the keeping

about silver, it's a fundamentally bullish mark. In fact, before this issues with Robin Hood and stuff is it's the most likely commodity I view that was really going to get to the old time highs or even double in value this year, which is around fifty. It's in a perfect spot as far as electrification macro economic it's being

half industrial, half pressures. But what's happening now with you know the Reddit stuff is this is a really deep market institutions in terms of future is already very much long. I think it's you manage money net positions, I e. Hedghunes,

there of open interest net long ready. So this is just adding a little fuel to the bullish narrative and silver the way I see it, so it's kind of a do you view this is kind of a short term trading I guess, you know, just a short term blip here, Mike, Or is this something that the bulls can build upon going forward more than the latter? It's short term and this is a good way for traders to lose money. I I look at the best way to look at silver and precious medals and bitcoin, it's

just buy and forget about it. And the best way to lose money is to try to trade it. So silver is known as the Devil's medal for a reason because it's rip your it will make will make the valil is amazing, I'll make you lose your hair, as you've seen. I used to have here. But and it's but it's at these levels, I think it just adds to there. But that's the big difference with things like game stock. It's a fundamentally bare stock when I had

too many shorts. This is fundamentally bullish, a really deep market that silberty long and it has a lot of reasons to just do what gold did. Gold made a new high last year. Silver the gold ratio right now is below the twenty year average, which is quite rare. So to me, the whole space is just moving higher. Just silver has the has the attention at the moment, Mike A Man. The statistic from us GS, a government agency.

If you walk a hundred and eighty feet, folks, which is like what Tom Brady will pass on the first down on the Super Bowl. If you walk a hundred and eighty feet and you make a cube of that size, that's all the silver in the world. Mike. I think all of us have an intuitive understanding of gold. Is silver constrained? Is it rare? Is it is it something where they're not mining it anymore? It's been constrained for

a while. COVID reduced production, and you know prices have been down since that peak in two thousand and eleven, so obviously you expect to pull back in all the all but the most productive minds. But the big difference is twenty years ago, maybe eighty or six, it was really used for precious purposes and for jewelry and thing. Now it's fift is industrial solar panels and things and electrification, and the other fifty percent is for coinage. And jewelry

and things. So to me, that's why it's so unique in this space, and it's just not as rare as gold. The thing is, if prices get high enough, you can bring on silver supply quite rapidly. Gold it's much Where where do you get silver? Where do you mind silver? Like South America, Mexico, Peru, Chili, it's almost all South America. Would just think of the conquistadors and that's just say the fourth flor Tiffany. But there, Michael, Bitcoin, let's get

your thirty seconds on bitcoin. Tom. Tom just lives for this. Well. It's the thing about bitcoin is just the fact is the old school precious metal holders of centuries now no, they have to have some bitcoin in their portfolos, and they might be missing out. Now that's not only anecdotal, it's a fact in terms of funds. And it makes sense from what you're seeing from the narrative is you probably need to add maybe a portion of what I was going to put in gold, or what I did

put in gold into bitcoin. So now I analyzed the two together, and if you lead a bitcoin of gold together combine, the act has been lower than the stock market on as you know we could get the forty five people Paul we've had on against mcgloan. It could be mcglowan against the first one. He was the first one to tell me about bitcoin being a store of value, so that that hey, hey moon shot, Um Mike, I learned. I hate what he's on because I have to take notes.

I learned so much. Michael mcgloan, Thank you so much, Bloomberg Intelligence. 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.