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Hello and welcome to another episode of the Odd Blots podcast. I'm Tracy Alloway.
And I'm Joe Wisenthal.
Joe, the week's not over.
Yeah, we're recording this November sixth at ten point thirty three am. But one thing that is over is a lot of people expected that at this point there would be significant ambiguity about who had won the election, and actually that part is over. There's no ambiguity at all.
It's been called Yeah, that's right. So Trump has obviously won the election, and we've seen a pretty big market reaction. Equities obviously up, but also bond yields are going up, which means prices are going down. And there's been lots of talk about the return of volatility in the bond market and the way investors or traders were sort of approaching event risk from this election. I wrote about it
in the newsletter. There are other people who have been writing about it, and of course, as I said, the week isn't over yet. We still have that FED meeting on Thursday.
No, that's right.
You know you mentioned the event risk and the stock market rally and the bond move and I would say two things. I think there is probably just sort of generically probably a view among equity investors that Trump europolicies, probably less regulation, lower corporate taxes is good for stocks.
That seems like something. On the other hand, it's interesting because the VICS has absolutely collapsed, and so I think part of the reason perhaps for this at least some component of this stock market reaction is probably just the end of that election, certainty being gone, the unambiguous outcome,
and setting aside Trump versus Harris policies. Now, on the other hand, what's interesting is the move index, which may you know, like the great of the that's lower, but not dramatically lower, and it still remains at very high levels, at least relative to recent years, or at least over the last year. So there are sort of I would say, competing forces. You know, some aspects of uncertainty are gone.
That's good. But then there, as you say, this sort of march up and rates, which is a global story by the way, is still a big thing out there.
Yes, so we are going to be focusing on bonds today. We might record an equity specific episode later this week, but because of the upcoming FED meeting, and the election this week we felt, you know, let's look at bonds. Let's look at bonds, all right, and who better to look at bonds than Harley Bassman, managing partner at Simplify Asset Management and the creator of Convexity Maven, which is
an awesome publication. If you're not already reading it, Harley, thank you so much for coming back on all thoughts.
Thank you very much. Glad you're a wait today.
So I was also the creator of the Move index, which in addition, oh yeah, it right, in addition creator, in addition to being the Convexity Maven himself, should anyway keep going traces?
Well, okay, why don't we start with the Move index? Then, Harley explain or just give us a recap on what's been going on with the move, because there was one specific day where we saw a big move upwards ha ha ha. In the move.
The move is the Vicks for bonds. It's basically a one month window and so last month when we went from October four to October seven, the election popped into that window and that's what and so that's when you had the big jump in the move. And from that you could then calculate the market's expectation of volatility from that, and when we crossed over a month ago, I said eighteen basis points. When we walked into yesterday it was at seventeen basis points. So the market kind of got
it right. And as a Leco screen right now, tenure rates moved about eighteen so market kind of called this thing right on the move that was at one thirty ish, it's now one seventeen ish. It's going to drop again after the Fed on Thursday, because we still have the uncertainty of what they're going to go and do. We kind of think it's locked in, but not for sure. You'll see the move kind of dropped down after that. I guess the contrastor kind of zipping towards is that
the vics at you know, fifteen ish now. It never got that high. It got like twenty ish two days ago, which is barely above its long term average. Stock market has not moved that much for this entire time. All the volatility has been in rates, the uncertainty of what the Fed's going to go and do, and that still is not over. We still have to figure out what
is the terminal value. The terminal rate the Fed's that we get to, as well as where we're going to be this December, which is very interesting right now if you look at the market, we've had the market pricing in a lower rate than the dots, the Fed's prediction of policy going forward. That is now flipped over. We now have the market at forty basis points higher than the fed's most recent dot plot, and that's kind of new.
So the market's kind of changing sentiment here about where we're going to land a December from now and then two years from now.
Is that rare historically that here we have the vics really close to rock bottom levels and the move is still somewhat elevated if you go back historically. Is this common in period? Because intuitively, I would guess that if there's a high amount of uncertainty about what the FED is going to do over the medium term, I thought, you know, things like inflation and the FED mattered for stocks and therefore on some level that would translate to equity markets. How rare is that disconnect?
In general? From thirty thousand feet the move and the vics go hand in hand. You can't trade them, don't ever do that, Okay, But they don't want to go hand in hand. As far as I can tell, this is the longest period of where there's been a disconnect between the two of them, which is not really a shock when you think about it, because all the uncertainty has been in the bond market. We had, we had QI, we had QT, we had zup. The FED take and
makes some five hundred points in short order. The uncertainty has all been in the rates market and not in the stock market, and for reasons for that, the fiscal impulse of spending money has kept the stock market and the economy going well better than expected. So it's surprising, but when you look at the actual data, it's not that much of a shock. We still don't know where rates are going to settle, but we have a pretty good idea the stocks are going to be okay.
So one thing I've been wondering is you often hear from Republicans that they think economic growth will offset things that increase the deficit. So you know, we can have big tax cuts because the economy is going to boom and so the US will get more income and that will ultimately help offset the deficit. I'm always curious from a bond trader's perspective, How do you actually incorporate like economic growth specifically into your outlook for rates.
That's a challenge. I mean, you know, we have the numbers, but long and variable lags, as the expression goes, tends to dominate. Like I'm u Chicago, I'm a monitorist. I think you know, printing money cross inflation just takes time for it to happen. I mean, what you've seen recently is the FED basically printed created lots of money, and the last you know, four years, they set that pile
of money ablaze. And here we go. We have higher rates, we have inflation, and you have a stock market doing okay, and it seems like that's not going to change going forward. Becomes very interesting the markets move to where it's supposed to kind of go to. I think we're fair value right now. Now you can go well above fair value, but we've kind of gotten to where we're supposed to go if you kind of take the FED at its word of where they're faking inflation is going to be
and where the economy is gonna be. What we don't know right now is the push me, pull me effect between the fiscal impulse of theory that you know, Trump's kind of they advertise spending seven trillion dollars more versus immigration policy and tariffs which are negative. How is it going to work? That's unclear? I mean, which side is going to go and win? This is kind of why we have to go And really kind of the expression has been you take Trump seriously but not literally. I'll
go with that. We don't know what he's actually going to do. When at the end of the day, is he going to deport ten million people? Kind of doubt it. But could he go and to port a million? I guess so? And will that be impactful? Yeah? Yeah, I mean is he gonna raise terrorists? He's good? Triple tariffs? No, could you take about twenty thirty percent? Yeah? And what will that be through the system?
We don't know yet, right, and I think there's gonna there's just a tremendous amount of uncertainty on the specifics of this point, and obviously something we're going to be covering a lot really, I think in the years ahead, trying to understand how the economy evolves. Let's take it really short term for a second, because we do have that FED decision tomorrow. It seems like the market's basically locked. It's going to be a twenty five basis point cut.
Is there anything that you'll be watching? You know, there's no dots that are going to come out tomorrow, so it's I don't know, maybe, especially in the context of this week, one of the least anticipated FED decisions I can remember in sometime. But there's always some signal. Is there anything in particular that you'll be watching or listening for tomorrow when that decision comes out.
I've been saying for many many months now. I mean I have higher for longer. I will say that I was on the record thinking they would not cut last time. I thought they'd wait till after the election, you go and do it. But I still think we have to go and focus on what's really important here. The reason why we still agreed the Greek tragedies we still read Shakespeare is these guys captured, you know, the essence of mankind,
which is hubris ego. J. Powell does not want to go down as Arthur Burns, who cut rates as inflation came down in the seventies and then inflation came roaring on back and he became you know, the dog of inflation, whereas vulgar is our saint. I think Powell wants to go out as the hero. And therefore, with what's going on and the proposed policies by Trump, I kind of think he's pretty worried about, you know, a resurgence of
inflation and having his tombstone, say Arthur BYRNS reducts. So I kind of think he's going to want to go and sit back a little bit and kind of watch and see what Trump actually does. I just don't see if dropping rates as hard as everyone thinks. If he thinks he's going to go and reignite inflation and damage his legacy, I think his legacy probably matters more than anything else to him.
Yeah, one thing I wanted to ask you about, you know, you mentioned that idea of taking Trump seriously but not literally, and how that introduces a lot of uncertainty in the market. Some of that uncertainty, in addition to being captured in the move index, has been captured in the term premium, which has been going up. And term premium, I mean everyone has different definitions of it, but like a basic one is that it is the extra compensation or yield
that investors demand to hold longer term debt. And the thinking here is that the term premium might be going up because we're going to have all that uncertainty that comes with a Trump win. How are you thinking about the term premium from here on out?
I'm thinking about what is what it's called fair value, which is almost a meaningless number. But let's just what's fair value. Let's just say inflation comes in at two and a half those a two, which is not shock
pcees two to seven. The Fed slaps on thirty forty basis points of real rate, right, and then you go and put on the proper curve, and historically going back thirty five years, including all the stuff up and down, all the bear's panics and kiwis, basically you average one hundred and fifty basis points one hundred and forty seventy
precise between FED funds and the tenure. Well, if that fund is going to be two eighty eight, which is the long term dots we have right now, which is thirty eight basis points above inflation of two and a half, so or a real rate of almost a half point there, that just tens at four thirty five. You know we're four forty five. We're kind of there right now. What I see happening is the FED will take rates down
slower and expected the ten years. We're kind of in the in the kill zone right now, although something crazy happens and we have nominal GDP coming in like at five ish, Okay, I mean nominal GDP should kind of equal ten year rates in the grand scheme of the world. As a U Chicago person, and so I kind of think the term premium as we calculate it will expand as the front end comes down, and we'll all be right with the world, except for a few bumps and
bruises along the way. Once again, we really don't know what's going to happen between immigration and tariffs and immigration. I don't even hung about the politics of it, but I want to be very clear at the upper level, the econ me is people times, hours, test productivity, people hours productivity. I think what's happened in the last two years is we've had more people come in via immigration, legal or otherwise. That's supported the economy. Thus we have
numbers coming in better. And then if we start deporting people, you'll have less people. You'll bless GDP. Is that bad? Maybe not. I mean, if you if that's how you view the world, you want to have reduce immigration, if you're willing to go pay a higher interest rate for it, that's fine. I'm not going to debate the concept. I was going to say, what happens at the end of the road when you do that? And we're always willing to go in and make cost benefit payoffs when we
make decisions. Nothing's free in the world. So green policy, if you want to transfer from oil to solar and wind right now cost more money to do that. I'm not saying it's a bad policy, but we're willing to go pay it to go get that climate under control. That's okay. Just remember you're paying a price for it, and what's what price you're wanting to pay.
You mentioned Powell and the ghost of Arthur Burns, which of course is something that people have talked about at Fairmount and he doesn't want to go down as the person who really let inflation run wild again. And you know, earlier this year it seemed like okay, that had been cemented. They did the fifty bases point cut. Since then, the economy has been a little stronger than perhaps people had expected.
Then there's all the Trump uncertainty, et cetera. That being said, this gets to trick taking Trump seriously versus literally, and the uncertainty about what we don't know what he's gonna do. One thing we do know that he did last time was Browbie J. Powell on Twitter and other platforms about lowering rates. When you think about that time period specifically twenty eighteen twenty nineteen, I think it was more eighteen.
Did that have an effect? And should we think about the pressure that would probably likely emerge in twenty twenty five again if there's not significant rate cuts.
I suppose, But I think the much bigger event around that time was that when Powell's time came up for renomination, the government dragged their feet by like nine months on that because there was so much you know, I guess think does Biden wanted to put in a moreduvish person.
But in twenty eighteen specifically, that's when Paul was still hiking rates. We got the far away from neutral comment, which eventually had to get reversed. And that was when Trump was doing a lot of tweeting about rates, and so there was that pressure from the White House to the you know, nominally independent Federal Reserve or the independent
Federal Reserve. And what I'm curious is whether you think, as you were called back at that time, that that pressure had least at the margin, some effect on the policy setting.
I don't think it had that much. And I don't because now we've had another, you know, four or five eight years to look at this thing. It's unclear to me that what Trump was saying in Twitter was the same thing he was saying, you know, via Treasury Secretary. It seems to me that that there's a there's a dual level over here of what he actually wants to do versus what he says using the bully pulpit. So
it could be it could have been going. Let's say he's telling pell to keep going, to keep everything constant, but in public he's saying, take him down to go and you know, sound good root for the home team. It's unclear to me if that wasn't the case.
Joe had a great piece in our new daily newsletter last week, or maybe it was two weeks ago.
I think it was too lost track of time.
Yeah, time is a flat circle at this point, but it was about potential constraints on Trump that are introduced from the rate market. So, for instance, we know that mortgage rates broadly track US treasury yields, and so those have been going up recently, and most people don't like it when mortgage rates go up.
Are there any.
Political complexities that are introduced for Trump from the rate market? The sort of real world impact of the rate market.
I think the real world is going to have to be real money, which means the rates go up, and therefore the deficit goes up because our interest payments go up because we have so much of our debt is front loaded that keeps rolling over. So you know, it's not that we put out so much ten or thirty year paper where the rates locked in. We have most of the debt in the front end. So if rates go up by one hundred, that almost immediately goes into
deficit spending. I think those kinds of things where the real money hits the road, could be a bumper for how he operates. I don't think the actual rate moving itself will be the cause. I think we have to see see the whites of their eyes for it to happen.
I just have one more question I think, but you know, you mentioned the sort of multiple messages from the last Trump administration, and he may have on Twitter been browbeating Powell about lowering rates. But I think his Treasury secretary, Steve Manuchen, operated as what I would say is like a fairly normy treasury secretary, not a lot of populism,
policy adventurism, et cetera. Seemed to actually in retrospect at the time, but also in retrospect, have a fair degree of respect among people, I would say, on both sides of the aisle in the weeks ahead, like how much are you going to be keying onto personnel decisions when you're thinking about the medium term or longer term trajectory of this stuff that the new administration makes in terms of how that will feed through into things that would affect interest rates.
I think you have stumbled over the truth. I think I think who he picks for his cabinet and his senior leadership team is almost vastly more important than Trump himself. We saw who he picked last time, said, I want to say established with people, but seasoned people who knew the game. The extent he brings in less seasoned people that brings in uncertainty. It doesn't mean it's bad, It
just means it's uncertain market d uncertainty. So I think we're gonna still see a lot of volatility in the market until we see the slate of who's going to bring in for the key positions.
All right, Harley Bassman of Convexity Mave and the Convexity Maven, thank you so much for coming on All Thoughts at short notice to talk about the bond market.
Thanks, thank you.
Joe. Harley is great and I think he was truly the perfect guest for this particular conversation. One thing, I'm wondering, how many times do you think we said uncertainty in that podcast.
We'll have to go back to the transcript. And look, no, he was because look it's the Wednesday morning after the election, and there are so many questions in so much time in space for sort of big picture future of the country, future of the Democratic Party. Who all these thoughts and it's like, I'm not really into trying to figure that stuff out less than twelve hours after we got the result.
So Harley was great because then of course we have this FED decision and so nice, a nice stop a nice little snapshot of this moment in politics, economics, and rate market uncertainty.
I do think though, when it comes to rates, the move upwards that we've seen recently, there was discussion about whether or not they were moving in line with Trump's chances of winning or signs that the economy was still going relatively strong and that might imperil the FED cuts. But I think like maybe that argument is settled somewhat today with that reaction, because we pretty much know that
the Fed's going to cut tomorrow. Yeah, still rates start moving up, So at least that's that's one thing I think that's been kind of settled.
Yeah, Yeah, but there are Look I'm yeah, maybe I'm.
Clutching at straws at this point.
We're looking for something real, you know. I would just go back to two things, which is, it is interesting, as hardly confirmed, this disconnect between stock volatility and rates volatility, and it'll be interesting to see how long this gap persists. And then the other thing I would say is, you know, we talk a lot about bond market vigilantes, and I've never loved that term because I think it prescribes a certain level of agency to individual investors that I don't
think is necessarily warranted. But two things to your point, I still think people really don't like higher mortgage rates, and I think this is going to be a on some level political challenge for the Trump administration. And b even though we didn't really talk about equities very much, people like higher stock price higher sixty one percent of American households, according to Gallup, owned stock. Stock is how people fund college education. Stock is how people fund retirement.
And one thing that I'll be curious about is what I would call the stock market vigilantes and the degree to which equity markets act as a constraint on policy adventurers and particularly on things like tariffs, et cetera, that you could imagine a lot of companies in the US
really won't like for various reasons. I just think it like financial market vigilantes in general, I think it'll be really interesting to see what kind of limit they impose on a Trump administration that may be stocked with potentially different type of personnel than the first one.
Well, I guess the only certainty at this point is that we will have lots to talk about. Yeah, sure, shall we leave it there.
Let's leave it there.
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our guest Harley bass and he's at Convexity Maven. Follow our producers Carmen Rodriguez at Carmen armand dash Ol Bennett at Dashbot and kill Brooks at Kilbrooks. Thank you to our producer Moses Ondam. From our Oddlots content. Go to Bloomberg dot com slash Odlots, where we have transcripts, a blog, and a newsletter and you can chat about all of these topics twenty four to seven in our discord Discord dot gg slash od lots.
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