Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.
And I'm Joe. Why isn't thal Joe?
Did you see the jolts number that just came out?
We are recording this May thirty first, twenty twenty three. I did job openings back up. You know. That's the thing, like they keep thinking, oh, the labor market's going to cool, it's going to cool, But here we are over ten million job openings again.
Right, so job openings far exceeded I think any analyst estimate ten million openings for the last month. And I guess the question is the market seems to be of two minds here, right, you have a lot of people who seem to be talking about the inevitability of recession, and yet you have the data that's still coming in
stronger than a lot of people are expecting. And of course, you know those two things are related, because if data keeps coming in stronger than expected, then maybe inflation doesn't start to go down in the FED has to hike even more and it pushes the economy into recession. But it does feel like not only is there a lot of doubt at the moment, but we're sort of heading in two possible polar opposite directions.
Well, the thing that I keep coming back to is striking is if you told someone, you know, at the beginning of, you know, January twenty twenty two, you know, when right towards zero, that by spring twenty twenty three, we'd be at five and a quarter on the FED Fund, right, Everyone's like, oh, you know, the market would have crashed, we'd be in recession, et cetera. And yet here we are with ten million, more than ten million job openings.
And something that we've talked a lot about is like, you know, the entire twenty tens with sluggish growth, and everyone's like, oh, this is the pickup, this is when inflation is going to come back, and it doesn't. And so far this decade it feels like, Okay, this is finally when inflation is going to roll over, this is when the recession is going to happen, et cetera. And these expectations keep get kicked forward.
Absolutely, And I'm glad you mentioned interest rates just then. And I mean the implication is kind of we've had years of people warning about what that's going to happen when interest rates rise is it going to lead to an explosion in interest rate costs and things like that? And you know, we have seen some bankruptcies, but we're still sort of at this inflection point, it feels like. So I'm very pleased to say that we have the
perfect guest for this episode. We are going to be speaking with the man, the myth, the legend, Jim Grant, the founder and editor of Grant's Interest Rate Observer and a long time commenter of financial markets. I've been a fan of his work for many years, so I'm so glad we can finally have him on the show. Jim, thank you for coming.
It is lovely to be here. And yes, interest rates are a thing. I began to doubt the efficacy of my business model.
People are observing, people want interest rates observe.
It is a good time for observation.
Well maybe that's a good starting place. But how would you characterize the current period in markets versus you know, the trajectory of history. You've been through and written about many interest rates cycles at this point.
Well, first place, I would call it good copy journalistic. This is all we like.
It doesn't matter up and down.
Just give us some good cop Yeah, we don't want peace and quiet. Well, there are so many singular features, and dogmatism has been I think, I hope has been expunged from the conversation. It's hard to dogmatize after twenty twenty, twenty one and twenty et cetera. What is new and different is, for example, interest rates have gone from nothing to five plus in the short end of the yield curve.
And wouldn't you suppose that the homebuilders would have taken a big but instead the home builders are right behind the video as the stocks and what you would think that they produced computer chips, grath and two by fours, But the homebuilders made new highs recently. And that you know why, because rates have kind of put interest rate handcuffs on people who are in possession of one of these sweet mortgages. Beginning with the numbers two or three
or four. I think most of the homeowners now have loans have something less than five. So people aren't moving and there's no supply. Oh, I exaggerate slightly, but there's a little supply, and the home builders are hot footing it into that gap and they are coining money with huge margins and great perplexity all around.
So you're speaking our language, like on multiple levels. You mentioned semiconductors with Nvidia two by four's, we've talked lumber, we've talked home building. So what is they say then about our efforts to fight inflation? You know, we think of housing as like the ultimate rate sensitive sector, and yet here we have home builders close to all time highs despite the surge. What does that say about I don't know, perhaps the fed's toolkit in fighting this kind of inflation.
Well, the FED, only about two weeks ago was propagating it.
All the central banks of the world for years and years were bemoaning the fact they could not hit their two percent arbitrary mind you, and the arbitrary two percent inflation target, and the FED as recently as the jackson Hole speech of what two thousand and twenty, that remote jackson Hole conference chairman Palla said, you know, we are going to search for a flexible inflation target, and if it's too low, we will we will overshoot and thereby bring the average over the cycles up to more than
two percent. Now that was it seems to me that was kicking sand in the face of the fates. And so there's there's a bureaucratic dogmatism in the FED. They've got these algebraic models, like goodness, how formidable they look on a blackboard, but they don't actually function very well so far as the future is concerned. And the FED was in fact dogmatic through two thousand and twenty one into twenty twenty two, buying mortgages recently, I think as
March twenty two. So you asked about their inflation fighting tools, they're rusty, Say.
Well, just on that note, I mean walk us through. Why haven't the interest rate increases fed into the real economy? More like, why are you not seeing house prices go down? Why are you not seeing the much anticipated wave of bankruptcies that people were warning about for you know, many many years after the two thousand and eight financial crisis, Well.
House prices have in fact gone down. Is this phrase existing house prices, that is, the ones that are not imaginary, So existing house prices or down new house prices are down from their peaks, you know, eight ten percent of memory serves. But the point is well taken, Tracy, that you know the phrase I think something will break right, And I was of the view, am of the view that try as J Powell might emulate Paul Volker. Mister Powell is not working with Paul Volker's economy. It's much
more dead therefore much more fragility. You know, people are head over heels over private credit. They can tend that this is is a not quite Navidia quality breakthrough in the history of finance, but it's up there. But you know, the private credit is a manifestation of the seeming imperative to build leverage, whether it's on the federal level or the corporate level, not quite so much recent years on
the individual level. So there's a lot of leverage. And I would say Tracy that with respect to the paradox of nothing breaking much yet, just be patient. I expected that much.
It's coming. Where do you see vulnerabilities? You mentioned fragilities?
Private equity is one. I think private credit will be shown to be rather oversold as a breakthrough. I don't think it's any such thing.
How do you actually how do people think about Why do people think that there's something special about private credit?
Well, I think the story goes that the vendors of private the lenders of private credit, are more flexible. They have commitments by their limited partners who supply funds. They are not constrained by banking regulations. They are kind of a new breed, so the story goes. But you know, they are lending, to an important extent, to software companies, which famously lack gap profitability. They are lending to the very same people that the public credit markets are lending to,
but they're doing it at a somewhat cheaper rate. They're not doing it on a rated basis. So Moody's is not getting a ratings business it did. I don't know. The whole private credit business sounds to me as if it were the same wine in slightly more presentable bottles.
Just on this topic, there's a line that you wrote many years ago now and it kind of lives for free in my head, and it's slightly random, but it's basically Invaliant of financialized age has produced a financialized pharma company. And I used to think about that quite a lot. In the context of Valiant. Of course, you know, they borrowed a lot from market cheaply. They bought a lot
of companies. They used interesting accounting techniques such as adbacks to boost their valuation so that they could keep borrowing. And I wonder how much that type of financialization, in your opinion, is reflected across the market and across the economy, not just a valiant specific type thing.
Well, I would say that it is rather endemic. I guess we ought to define it. What I mean by tracy is the finance for the sake of finance, not for the sake of making a better product, but finance for the sake of making money through structure, through fees and the like. That's financialization. And you see it again in private equity. There's this thing called adas. Ad Backs
are a form of sly manipulation of cost structure. So you do a deal by a company and you say we will lever it, meaning we will encumber it with debt to the extent of six and a half times ebit DA. That's a kind of non gap measure of earnings. And the reason it's six point five and not nine point five is because we project savings through the great managerial improvements that private equity invariably introduces.
To it, synergyes sergies everywhere.
To its portfolio companies. And don't you know that S and P does an annual ad back study. That's that's the age in which we live. There is an ad back study from that you can look wait for every year, and it shows that most of these promised savings Tracy don't be shocked at, don't materialize, but the fees surrounding them are paid. So that's an example, one micro example of financializations. And I think it's all over the place.
Since you mentioned in Nvidia twice already, I feel like the Nvidia chart would make very a lot of sense to me in the year twenty twenty one or maybe twenty eight, twenty nineteen, you know, during the sort of like zerp heyday when we associated low interest rates with booming tech stocks. But here we have the chart. It's not Zerp anymore. We're at five and a quarter percent, and yet that hasn't extinguished this sort of like animal spirits of the market to pile into some like really
hot area because you know, AI is really exciting. What does that say about, you know, some of our assumptions about the relationships between investment and animal spirits and speculation and rates. When we see this sort of activity at a time of five and the quarter interest rates.
You know, the wonderful thing about financial markets is that we keep on stepping on the same rake there's in science, you know, progress is kulative, stantles shoulders a giants, but financial history is invariably cyclical and recurrent, which helps a lot if you can recognize patterns. Scott McNeely, who's the CEO of Sun Microsystems, that gave the terrific little speech, I guess on Twitter. Maybe it was an exasperated and
rueful expression. It was kind of a post mortem of the of the dot com bubble, which now is so deep in the historical miss But the Sun was trading that at ten times earnings, and mister McNeely said, what do you have to do right? Sorry revenue? Of course.
Understand that's the laugh line.
Or so what you would what he would have to do? What you have to break even with at ten times revenue? Well, of course ten years I would have to send you every single so no more R and D, no more salaries for the employees, no taxes, oops, no taxes, etcetera. So so he went through this exercise and he said, and at the end he said, why did you pay ten times revenues? Okay, the video is like thirty five times revenue, so it's thirty five years of.
That, no cause, no employ I read no capax, no R and D. I read text.
I read somewhere that Navidio is introduced AI, which is tan about in fact equal to yeah, equal to tanaa, the invention of fire.
It's a new fire, tam On. That's got to be huge.
That's always the warning sign, right, tam when people start talking about total addressable market size. I have a slightly personal question, but I've always wondered this, do you consider yourself more of a journalist or more of a financial analyst?
Journalist journalist?
And how does that influence Evan Lorenez.
He's the great financial and.
He's great, he's very good. But how does that inform your your own work?
Evan? Well, I started not quite a one man It was never exactly a one man band. This is our fortieth year, but for many a year there was no Evan. There was often someone to lend a hand. Yeah, there were a lot of help. I have gravitated to journalism, I think more than the really deep diving financial analysis. I'm interested in history as well. Have read a lot, written some.
And wrote a book on Badget right, Yes.
Yeah, Welder Badget is the kind of the muse of contemporary central banking. They invoke his dictum about in a crisis, they will say the contemporary central bankers will lend freely to everybody, which is a very much a paraphrase of Badget's lend at a high rate against against suitable banking collateral to solved institutions, et cetera.
I just want to say, I thought you must be have been exaggerating when you said the thirty five times revenue. But you're like, I was like, that cannot be right. It can't be thirty ex revenue. But no, fiscally, your twenty twenty four for in video revenues forty billion. It's a trillion dollar company. And so yeah, we're basically.
It looks like a typo. Yeah we publish published last night, and I say, no, let's please, let's even.
Like, look at fiscally your twenty twenty seven currently on the Bloomberg. I found this seventy seven billion. So even like you go out to twenty seven, you're still like a fifteen twenty twenty seven or fourteen next twenty twenty seven.
Revs Lumberg, which can get anyone on the phone auto call up Scott McNeely and say, what.
Now, let's do that. Let's do that. That's a that's a really good idea. Scott's really those earnings calls back and that they were really fun. Can I ask a question? You know, you mentioned dogma, You mentioned the FEDS rusty inflation fighting tools, which you know, maybe understandably because for the previous decade or really even longer, maybe the the impulse was reflation, and why are we missing on the downside,
et cetera. What did that period teach you as a historian of financial market as a student and someone who's like, what did the period of like two thousand and nine through twenty twenty in which we had large deficits, we had this exploding size of the FED to balance sheet, and yet this sort of inability to generate inflation? Like what was your sort of like looking back on that decade?
It end well, it was very humbling for me. What I took away from it is that the inevitable is always certain, but not always punctual. I look back in some of my work there, I was rather impatient for the inevitable difficulties and crises attending upon on you know, this credit creation jag I thought, certainly it was going
to happen like Tuesday or so. But so it's like the elapsed time between the first signs of a house price is going way above trend on the one hand, and the onset of the housing related credit difficulties of two thousand and seven, eight and nine, that period of six years was approximately twenty years in journalistic time. If you were a little bit too insistent upon Yeah.
Well, just on this point, let me ask a sort of devil's advocate question, because I had, you know, a similar trajectory sort of I wouldn't compare myself to you, obviously, but you know, post two thousand and eight, I wrote a lot about excesses in the corporate bond market, and it seemed very clear to me that eventually this would blow up. It didn't really, and you know, we could argue that maybe the time is coming for some of
those excesses to get flushed out of the market. But it does feel like the solution to a lot of financialization is more financialization, or at least it has been so far. So for instance, with corporate bonds, when there was stress in the market, the central bank comes in props up the corporate bond market through the bond buying program? Why can't that continue forever? And like, what is the tipping point at which financial solutions to financial problems is no longer viable?
A tipping point was six years ago my impatient clock. It was a long time ago, but it did not tip. So why can't it go on for a r I know they're always these excesses do crop up, they are met with additional stimulus, intervention, manipulation, and still we go on. Who was it who said there is a deal of ruin in a country? Because it was Adam Smith, And there's a great deal of ruin so to speak, in
finance and manipulated finance. And one are the singularities of the present time is the is the American position in international finance? You know this is countries emits the reserve currency, which means that we consume much more than we produce.
We finance the difference with dollar bills that only we can lawfully print at a most reasonable price of like nothing, and we remit the dollars to our creditors, mainly in Asia SA and those dollars don't leave the country because they come back in the shape of treasuries and moreages purchased for the portfolio interests of our crowders. So if that is kind of a new thing in the long historical it's not. It's not so new in terms of years, but in terms of phenomena, it's it's the reserve currency
country being a chronic big debtor. It's kind of a different thing, reserve currency country living on the highness of strangers, so to speak. That's that's not exactly writ So the more one learns, the less dogmatic one becomes about timing.
Certainly, well, well that actually leads to the exact next question, which is, you know, obviously, currently today in twenty twenty three, there's yet another round of most the dollar going to
lose some its global status. But we've been hearing that forever, right, Like we you know, we heard that certainly after the Great Financial Crisis, I think, you know, pre Greade financial crisis, there was a lot to talk about the euro and we've talked about the show and like, you know, who is the model that flashed euros on the This is not a new thing. So when you think about like okay, like timing is really tough with this stuff, Like does
it feel new? Does this moment feel different than past times when people had dollars datus anxiety?
Well, some of the rhetorics the same, you know that. I guess by definition, the excesses are greater. The US International Financial Position, which is a piece of data that comes out every year at this time, ever, shows a deepening deficit between what we own of other countries' securities and businesses versus what they own of our securities and businesses and other security and public security. So the deficits deepen.
But you know, so, what's the competition? Turkey is mad at US and wants a different currency Iran, Ditto, China and the Russia the same. But I don't see those as strong competitors for an alternative currency. I see gold as a perennial option. Unfortunately, too few people share my enthusias for that.
I wish perhaps everyone else who's wrong.
Perhaps bloomber could help along those lines as well.
Well, just on this note, I mean, we were talking about Nvidia. When you see markets react like that, what do you think is happening there? What is the thought process of an investor who says I'm going to buy in VideA when it's up forty percent in three weeks.
Well, I think a couple of things. First of all, again under the heading of you never know, which I have come to embrace as a sound journalistic and life principle, There is a possibility at this time it is the invention of fire apart two, so one holds mind share for that. I think more likely is that this is part of the muscle memory of a generation of zero percent interest rates and all you can eat credit. The great all you can eat credit buffet table was open
for business for ten years. Interest rates fell from nineteen eighty one until a couple of actually a couple of weeks ago. It's called forty years. So that's a lot of muscle memory. Central banks have intervened predictably until fairly recently when markets shuttered. Look what happened in twenty nineteen, or the repull market. This obscure recondite thing caught a head cold in September and the Fed resumes QWED didn't
called QW it's a qwi. Yeah, it was QWI. So naturally people assume that the upside is the side to be on. It takes a true contrarian, most bloody minded contrarian this to butt one's head against that, But it's a living So why do people do it? Because A because cyclical memories are short and cycles are recurrent, and b because it has worked. Quote that phrase out to be in quoted.
It's funny, you know you talk about like the memory of ZIRP or the memory of forty years of declining interest rates. Right before you walked in, Tracy and I were talking about, like, you know, the real estate market and I've sort of been looking at maybe buying a place, and the one thing you always hear from people is like, oh, well, like rates are high now, but maybe you'll be able
to refinance lower in a few years. And when every time I hear that, I'm like, I mean that would be nice, but like there's no guarantee of mean reversion. And you know what were they like eighteen percent in the nineteen eighties, Like could we go back there? Could I see teens fed rates in my life?
Yes? You could. There's a property about interest rates that
I find intriguing. My interest is not widely shared, but here is my reading of the question, the great question whether rates are a mean reverting So what was what characterizes interest rate movements is their generation length phasing, not necessarily cycles where there are the interest rates fell for the last quarter of the nineteenth century, rose to the first twenty years of the twentieth, fell from nineteen twenty forty six rows from forty six to eighty one, fell
from eighty one to call it twenty twenty one. So at each juncture there was some mark of excess on, some mark of speculative excess blow off, Like certainly nineteen eighty one, you know, a twenty percent plus funds rate seemed excessive. A fourteen percent yield in nineteen eighty four long bond when the CPI was printing it four or five that seemed excess. If ten percentage points are really yield, that seemed a lot. So I would I speculate that we are embarked on a long cycle of rising rates.
And I say that, first of all, for reasons of pattern recognition. There is no theory behind it. But I observed that in not twenty and twenty and twenty one, some unimaginably large number of debt securities were priced to yield less than nothing. Bloomberg keeps this particular figure, and I bet still perhaps you could check me. I bet still there's like one hundred billion dollars of bonds price to yield, less than nothing worldwide. But they were eighteen trillion.
I think at the peak the most extraordinary expression of unqualified bullishness on an asset class because it had the name of bonds which had been falling in yield, rising and price. So no, it would not surprise me at all if we were embarked on something resembling a generation length bear market and bonds meaning rising yields and falling prices, that would fit the form.
Could you get you mentioned the idea of a embarking on a long cycle of higher rates. Could that happen even with a recession in the States, because this seems to be the bet that everyone's making right that inflation isn't coming down, and so the Fed's going to have to hike and inevitably that will lead to recession.
Well starting yeah, cuts, yeah. Starting in nineteen fifty eight, something strange happened and people at the time remarked on it, which is that in a recession, prices did not fall or subside, and that marked the what proved to be the beginning of the age of inflation, so fast forward
to the seventies seventies. It's kind of a trite historical marker, you know, it's never going to repeat exactly, but for what it's worth, in the seventies, interest rates did fall and rise as the business cycle changed, but inflation came and rose and subsided in three different phases. It wasn't a straight line. So yeah, we could have a we could have recession and rates pulled back and then they resumed the rise. So the cycle long.
Term path would be upwards in terms of interest rates, but not linearly.
Yeah. For example, from nineteen forty six to fifty six, the movement up in the long data treasury was one hundred basis points one percent. That it went from three and a half basically from sorry, two and a half to three and a half over ten years. So this is this is this is rather glacial. This is kind of geologic. Yeah, so that's why one can forecast these long cycles with especially if one of seventy six and a half years old, without any anxiety about being after that less.
But to your point, I mean it makes sense. I mean, look, as you mentioned that forty year cycle basically through I don't know, two dozen whatever. It's not like it was only down. I mean we had up cycles in the eighties and the nineties. Oh yes, It's just that the long term trend was lower highs easies time, and so potentially the idea here is okay, I mean, we do get a cutting cycle on a year, but it's lower less.
Yeah, so what happed? So the rates peaked in nineteen eighty one and nineteen eighty four, there was what the technicians called a retest of those highs and yields, and everyone on Wall Street who was anyone was on the side of saying that rach will go back up again. And the long bond did go to fourteen percent in nineteen eighty four when inflation was less than I think
less five percent. So it's I think. I think one of the least appreciated forces in markets are factors they would say is simple condition, behavior or muscle memory.
So just on that note, I was thinking back. I used to have a grandparent who lived through the Great Depression and had food hoarding problems because of this, because she hadn't had a lot of food when she was growing up, and so in her later years when she had access to food she would buy a lot of it and store it our markets. I'm assuming markets are ill equipped to deal with this kind of generational shift.
You have people Joe and I certainly you know, for forty years have been striving for any sort of return, any sort of field. We've only recently started earning like significant bank interest on our savings accounts.
This pleasant, it's so nice.
It's lovely being a wrench money for nothing.
Make a lot of it. You can make some money if we like plug which online banking, But don't do it. We got to get I'm not going to until they pay us. We're not going to say right, hold out for that exactly right.
And I'm aware that you know the real return is still negative, but it's still nice. But how would you expect markets to adapt to this shift?
Well, if it's slow enough, they could adapt easily. The great shift of higher races I mentioned it took ten years to get started. I remember my first job on Wall Street. I just got of the Navy and I was a foe, went to college. I was a clerk on a Wall Street trading disc and I came home and the New York telephone long dated sixties, the sexy
sixes of they call it. And I told my father this, What everyone says, Dad, is that these six percent yields, this is something special, and you have to avail yourself. So I'm not sure where the New York telephones were in the year nineteen eighty one, but they were not at six percent. So you have to pace yourself. But there's often plenty of time to adapt. But you know, there's opportunities in the non adaptation. In a great bond
bear market, all sorts of strange things happen. For example, call protection goes for free because no one expects race to go back up again, so you can buy call protection without any premium.
Right when you look at these long shifts, these multi decade moves, how much is it about maybe politics or just shifting ideas? And so you know, I'm thinking, like, part of the reason I think many people would say we had such a powerful and aggressive physcical response to the COVID shock was the memory of the weak recovery coming out of two thousand and eight, two thousand and nine,
and this sort of like years of slow growth. So it's like, Okay, we're not going to like make this mistake again, make another one we'll make, we'll go we're going to overshoot in the different direction. And so how much of like these like when you look at sort of like long shifts and obviously like that vulgar era and some of those ideas, some of the supply side
ideas from the early eighties, like those are ancient. Those are old memories, like people forgot it and now that people have different ideas and now people talk about like state capitalism and public investment. How much do these like long cycles sort of correspond with like essentially ideas that are in vogue.
You have to wonder whether the direction of causeation. Richard Russell, who was a marvelous technician and thinker about Marcus who was no longer with us, it was the author of the of the epigram, markets make opinions, and there's I think there's something to the idea that that phases of economic life, whether it be markets or nine to five world of actually producing things as it were, that the
background music of enterprise kind of conjures ideas. I'm not sure if ideas, cause maybe might these ideas are recurrent. I mean, I'm told that the generation what's comes after z.
A whatever my daughter. I don't know. I got to find out what that is.
They're socialists apparently, so we invent that one again. I've given you a very poor answer to an excellent question, Joe.
Well, just on the notion of these long term cycles maybe starting to shift. It does feel like, you know, previous decades were about the sort of lower interest rates, and during those previous decades, we basically built the financial system around the assumption that government bonds are the safest thing out there. Yeah, bonds, you know, the yields don't
move around that much. And yet in the previous year we have seen big question marks around the safety of government bonds and the stability of yields, which have resulted in a few things. Breaking to your earlier point, you know, we saw troubles at the bank, the FED reporting and accounting loss on its own balance sheet. What does it mean for the financial system as we move into potentially a higher rate environment or a higher vall environment for rates.
I think one of the ideas that has sustained markets over the past, call it generation, is the idea of federal reserve competence, the notion that people have fed and know what they're doing and can make things happened there. They are weather makers in finance, and they're responsible for the great moderation. They're responsible earlier for Paul Volker responsible. So it started with Paul Volker and his mastery of
the inflation problem. And so I think that the FED will be revealed as a bunch of well intended people who are involved in a kind of pseudoscience. And people will wake up one day and say, I've noticed that my weather app is accurate for a day or two, but at ten days, I wouldn't chuch. I wouldn't bet my dog's life on it. And yet we listened patiently, even reverentially, to the economists at the FED, to talk about what's going to happen next month or next year.
They know nothing. I mean, the future is a closed book. The screenwriter named Goldman. Butch Cassidy and the Sundance Kid, Now they're such great And you said apropos of Hollywood's forecasting ability. Nobody knows anything, said William Goldman, correct. Correct
as to the fashion of future. The difference is that the FED thinks it knows something, and thought it knew something in twenty twenty when it was going to try a little harder to produce more inflation, and thought it knew something in twenty twenty one by insisting that the problem in front of its eyes was transitory, et cetera. I don't mean to ask too much of them, but I would ask of them the confession that they really
don't know. So we will, I think, have that fact, that simple, humble fact, presented to us in a way we can't deny. Not so long ago, I remember it vividly, nineteen eighty eighty one, when you should have been interested in owning these There's something called lions and tigers. These are trade names for a zero coupon treasury securities priced to yield twelve thirteen, fourteen, fifteen percent internal compounding, no
reinvestment risk for thirty years. Seemed like a good investment. However, such was the burden of accumulated loss and the loathing that people felt towards this unrepaying, brutally punit of asset class. It was Certificates of confiscation was the phrase that bonds acquired. That was the people hurling anathemas at the bond market and at the Fed. And now did I tell you mentioned the Fed's broke. Now it is a hypothetical theoretical insolvency, but to me it is a symbolic It is a
symbolic fact of not a little importance. You know. The only thing that looks more like the Silicon Valley balance sheet and Silicon Valley is the Fed's balance sheet. And they earn at two and they pay at five these days and every week they lose a little bit more of their capital in the form of a promise to
the Treasury to one day make it up. People gloss over this, say, oh, it's a FED can print money but can't print net worth, right, So that's not going to go out of business because it is insolvent, unlike some of its charges the banks. But the fact that shouldn't the FED be maybe shouldn't it be held to the same accounting and regulatory standards as the private banks? Wouldn't that have forced all the excesses of ZERP.
And can it can set its own stress test?
Right? Perhaps Jamie Diamond could write a stress test for the FED.
The ultimate recipe I.
Heard I heard myself going off on rather a sermon.
I will still no, not at all. I want to Actually, you mentioned how like if you had bought in, like you know, at some point in the late seventies or early eighties, some of these long dated zero coupon bonds, they would have done fantastically well over some length of time, like some of the greatest investments evers. But you had to deal with those first few years, and maybe you took some serious sustained losses. And I was thinking about your point about like contrarianism. This is I mean, this
been devils everyone in the financial industry. The challenge of like, well, how do you maintain some sort of out of consensus position in a period, especially if you're at well there's two there's multiple things, but A there's the psychological battle of like, well am I wrong? Is the market wrong? See? Like be like you want to make money, and see you might if you're managing someone else's money, you might
not have a very long leach to lose money. What is sort of like you're thinking about like that process of like okay, like this might be you don't know the exact timing of when it's going to work, and like reconciling these challenges.
Well, I have some experience in this mine is it is a you know, journalists don't get margin calls. Friends of mine who do this for a living. That is to say this meaning, identify something that is not in favor or in phase, research it, gain conviction, and hold it in spite of the scorn and the vitriol of those positions. Otherwise, that's the kind of the game. Journalistically, all you have to do is have a hard shell.
If you're doing it in real time with real money, you either have to have a very very loyal base of limited partners or investors or be managing your own money. It's hard. I mean, it's wearing. It is not life enhancing, but when it's right, it's really sweet.
Yeah, you got to do the victory laps well, Jim. On that happy note, We're going to have to leave it there, but thank you so much for coming on.
All thoughts really sure are entirely welcome. Tracy both, thank you.
That's incredible. That's such a true I really appreciate you coming back on delight.
Thank you.
We'll have you back on in twenty years. Let's see read the interest rate cycle, Let's see what fed funds and the teams.
Yeah, I hope I'll be here LifeWise.
Joe that conversation was really fun.
That was a lot of fun. I mean we've both read gym stuff for years. It's always educational, always historically fulfilling. It is great getting to talk in person.
Also, I love that he can just throw out anecdotes like, oh, yeah, this one set of bonds from.
Yeah, well there's the thing. We could talk for like three or four hours, you know about like what was it like, you know, buying corporate bonds for like you know, AT and T bonds or New York telephone bonds. It's six percent and to that, you know, like there's so many stories. It would be fun to go down with.
Absolutely, but the point that stood out to me was that muscle memory idea. And I do think I think what's happened is it's not just it's not just buy the dip because the Fed's going to do something and save everyone. It's also that I think a lot of people have figured out that momentum is a thing, and even though something looks like a bubble, if you can get out early enough, you can still make money. So instead of running away from bubbles, people kind of run towards them.
Now.
Absolutely, I also just think that, like I mean, I definitely feel this these days, where it's like the memes tuck the zerp era of the fang ero so recently that it's like, oh, yeah, that's normal. That little dip that we had in twenty twenty two and people shunned tech that was the aberration. But yeah, you see in
video and AI you gotta go back to that. And then I think this gets back to like the rates thing, which is that like five percent or like a six percent mortgage feels really high to people after fifteen years of or whatever, but it's not right, Like it's not high at all, like six percent, and they were much higher throughout much the entirety of the nineties, and they
were much much higher throughout entirely the eighties. But you know, for a lot in the entire generation, their entire lives of like potentially home buying lives is like basically the zerp era.
I do wonder if the novelty of earning interest on bank savings is ever going to wear off for me. You know, it's been almost forty years of not earning anything and now it's just amazing to get a few percentage points.
I'm so like poisoned by the last decade. I can't be bothered to like click the buttons to move over for how much?
Yeah, you can have my money money for nothing and negative real return. That's great.
All right.
Shall we leave it there?
Let's leave it there.
Okay.
This has been another episode of the Audlots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.
And I'm Jill Wisenthal. You can follow me on Twitter at the Stalwart, follow our producers at Carmen Rodriguez at Carmen Arman and dash Oll Bennett at dashbot. And check out all of the Bloomberg podcasts under the handle at podcasts, and for more odd Loots content, go to Bloomberg dot com slash odd Lots, where we have transcripts, a blog, and a newsletter. And check out the discord Discord dot
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