A Market Wearing 'Rose-Colored Glasses'

I believe that's how it's pronounced. Maybe I'm wrong, but I'm pretty sure for all of us fans of the new Taylor Swift album, Mike had a good pairing for my coming back from my week off. But this week on the show, Mike, a pioneer of research on the yield curve, now has some words of wisdom to share about gold as the spot price of the precious metal

trades at rerec levels. Our guests wrote a paper on gold just this month, and he says massive passive ownership could possibly lead to a period of quote unquote irrational exuberance, and as always, will close out the episode with our tradition the craziest thing I saw in markets this week. So if you saw something crazy and want to give us a heads up, give us a call on the Bloomberg Podcast hotline at six four six three to four three four nine, oh, and leave us a voicemail. Maybe

we'll play it on the show. And as far as you mentioned, you're back from vacation. Uh, listeners don't realize this, but you're also back in New York City, back in your apartment. I think the last time we recorded a podcast with you in your apartment, your neighbors started playing some jazz upstairs. So I'm kind of I'm figures across. I'm kind of hoping that happens again. If we're lucky, maybe he'll play some Taylor Swift. Trust. That's that's right.

And I you know, I was watching some videos of our guests this week and I noticed he has which, uh, you know, there's this service or this thing on Twitter, and it's not a service. It's some guy on Twitter called room Raider Sarah where they go and they look at the rooms people are doing their zoom meetings from our guests this week has one of the coolest rooms

I've seen, very well appointed. But I think there's either a cello or a stand up base behind him, So maybe he'll get on and jam with the guy above you if if the jazz breaks out, that's what I'm hoping. Let's introduced our guests and see if his his room has been rated. I personally give it a high rating because I was watching his videos and I kept get getting distracted by his uh his cool room. Anyway. He is a finance professor at Duke University's Business School. He's

also a senior advisor at Research Affiliates. You may remember him from the show about a year ago. He was a guest, and we're gonna talk to him a little bit about some of the things he had to say back then because uh, they ended up being pretty prescient. Anyway, his name is Cam Harvey Kim. Welcome to the show. Great to be on the show. Okay, I wanted to

start enough. Sarah talked about this new paper you have out on the Gold and it's pretty fascinating to me because, as you point out in some of the discussions about this paper, Gold, we have a data set that goes back I don't know what thousands of years. Basically, you know, if you if you want to know the price of

gold in Roman times, we know what it was. And one of the really interesting things, as Sarah point out, I tend to latch onto the craziest things in reports like this, and one of the craziest and most interesting things you pointed out was that the price of gold paid as a wage two soldiers in ancient Rome, if you translate it to sort of the modern value of gold today, it's basically similar to the wage that an officer in the army would be making right now if

they were paid in gold, which to me kind of blows my mind, uh, since it sort of backs up one of the common theses for go old and that it's it's a good store of value. Um. Clearly it's hedged inflation on wages since Roman times, but as you also point out, it's a very unreliable inflation hedge. I guess if you're holding period is measured in centuries, it's perfect, but otherwise it's not as a reliable uh store value

inflation hedge as people might think. Walk us through basically the main points of that paper along those lines, because I really find it to be a really fascinating look on something that has been a cornerstone of financial assets

for forever pretty much. Sure, and essentially two papers, um and my paper of two thousand thirteen in the Financial Analyst Journal with Claude Herb we actually did this exercise that you described that the Romans kept great records and you could figure out exactly what a Roman centurion was paid, and we actually have the coins so you can figure out what the gold content or the silver content actually is, and we worked out that they were paid thirty eight

troy ounces of gold a year and and you're right that that's approximately the wage of a US Army captain. So that means that gold has held its value. Um, we've got another example of a loaf bread from the time of Nebuka desert, so it's even earlier, and that translates into about five dollars and fifty cents um in terms of the gold equivalent today, which is about what I pay at a boutique bakery for a high end a loaf of bread. So over the very long term,

gold is something that holds its value. So another way to think about this is that the inflation adjusted value of gold is approximately constant are three times, so it doesn't degrade. But the problem is that gold is volatile. So gold has the same volatility as the SNP five. So there can be large swims in value where it is a poor inflation hedge for decades or potentially centuries, and then all of a sudden it's a good inflation hedge for a decade or maybe a century. So it's

very unreliable in terms of hedge and inflation. So we've seen this pretty mad rush to gold in recent weeks. I mean your paper recently you looked at the inflation adjusted price of gold near the highs of nine eighties, right at the levels that we saw back inn. If gold currently is priced at such high levels relative to inflation, should investors rightly be believing that this will actually be

a good inflation hedge going forwards. So again, our analysis and our most recent paper which was just posted, actually it was the day of gold's all time high that we posted this paper. And so uh, and this is also with claud Urban and taught us Wisconta. And we do not then gold um gold in I guess uh, nineteen eighty in today's prices was about two thousand, two hundred and in two thousand eleven, in August it was about two thousand, one hundred, So we're very close to

the all time high in UH inflation adjusted terms. So we hit an a nominal high UH, not taking the inflation into a camp, but in nineteen eighty it was It was definitely bad news for investors. If you're buying in nineteen eighty, over the next five years, you lost fifty If you're a buyer in two thousand and eleven in August, over the next five years, you lost twenty eight percent. So what you see, and this is in

our paper, what do you see are these fluctuations. So we look at the average inflation adjusted price, and sometimes you're above and sometimes you're below, but there's a tendency to revert to the mean, and right now we're way above that average price. So think of that average price as the constant inflation adjusted price of gold. Sometimes you're above, sometimes you're below, and today you're way above. Okay. One

of the things you talk about is UH. You know, you sort of quote Warren Buffett and describe them as as bandwagon type of investors who pile into gold because it's had such a good run sort of. I guess you could consider them momentum investors to some degree. Um and you talk about how um the ETFs holding gold perhaps play uh, playing a large role in this this boom in the prices. Now to me, I would think, well, if ETFs are here to stay, that's kind of a

permanent new source of investors and speculators in gold. Would that suggest to sort of a permanent higher inflation adjusted price or would it suggest more of the violatility you're talking about? Would it perhaps accentuate the volatility when there is all this money in e t f s chasing gold.

So basically what we do in our paper is the show that there's a very strong correlation between the real price of gold, or the inflation adjusted press of gold, and the number of Troy ounces that the leading gold ETFs hold. So this time might be different, as you say, So we didn't have any gold e t s and retail investors the whole gold It was very difficult to do. You can buy coins, but they're very expense of relative

to the bullion price. You can buy bullion, but then you have to vault it and pay for that, and it's really difficult to buy and sell gold. So the e t s made it a lot easier for investors to actually hold gold and UM. And they do think that in the diversified portfolio, people should have some real assets and gold is one of those real assets, and other commodities, real estate, things like that makes sense. The

problem is the following. The problem is that this strong correlation between the price and the holdings of the gold ETFs is very suggestive of the following type of behavior. As the price goes up, investors buy more, and that the price goes up even more, investors continue to buy. And this is the opposite to what I teach. So what I teach is a good investments strategy is to buy low and sell high. It appears what's going on

here is that investors are buying high. And I do quote buffets of famous line and and that is um. He's referring to gold investors as bandwagon investors, and he says, as bandwagan investors join any party, they create their own truth for a while. And what that means is that you see the price going up, you jump on the bandwagon. You buy some of the gold DTF, and the gold TTF has to purchase gold and the price actually goes up,

and that is creating their own truth. Their investment thesis is validated as the price goes up, but the party just doesn't last forever. So I do worry about this. You mentioned, Uh, this is like a momentum effect and not quite um trend fall Followers are really careful on this, and that when the trend is really really strong, they d risk. So this is much different than a bandwagon effect where people just piling into this risky asset. And to be clear, this is just like a risk asset.

Look in March of the stock market tanked, gold plummeted, and the new gold bitcoin lost over its value. And then when we got to risk on, people got more comfortable that we're gonna get through the COVID nineteen. Uh, the stock market goes up and gold goes up. So this is just a speculative tool. And as for speculation, there will be some winners and there's going to be

some loosers. I was looking at total assets in g l D which is a really popular GOLDDTF just now well recently hitting a record high above eighty billion dollars. So it's pretty unbelievable. But Cam, I want to get your take because I feel like whenever we hear from investors lately who are now bullish on gold, pretty much every single time, they point to the level of real interest rates right now tenual real yield at negative one

percent or so, at record lows. How do you factor this in to any analysis on gold and what we might see as it pertains to volatility in real assets when you consider the fact that we do have real interest rates at levels pretty much never seen before. So we've addressed this and there it is true that since let's say two thousand and four, there is a strong negative correlation between the price of gold and the level of real or or nominal interest rates, so that correlation

is really clear. However, that correlation is unstable, so if you go back before two thousand and four, that correlation could be zero or it could be positive. So looking at the most recent data, you need to be really careful because that correlation could be what we call spurious. So I'd be very very careful on this. I'm much more faith in our analysis of the holdings of gold e t s. That kind of makes sense. They're holding more gold, they gotta buy more gold. And uh, the

price it is positively correlated with that. So yes, there is using the most recent data um this negative correlation between the rates and and gold prices. But I would just be pretty pretty careful on that. Okay, one more question on gold and then I think we want to

move on to the yield curve. And I know you know, a guy like you, you like to study the math, the statistical relationships, and the and the hard data, So this might be a question that is not answerable from that sort of approach, But I'm just curious if you have thoughts on it. And it's something that's I've never quite been able to wrap my head around when it comes to gold. Is what explains the appeal of gold

over literally centuries? Like you said, why why is it that Roman soldiers were willing to get paid in gold way back when and that value of that pay day is the same as it is today. I mean, does it all relate back just to the simple sort of physical demand for gold that it's it's a shiny, pretty metal, it's good for jewelry. Is it all? Does it all hinge around that? Do you think? Or is it just impossible to explain? It is true? That gold has been around for thousands of years, and I think part of

it is that it does have this usefulness. So gold seventy percent of gold is using jewelry. Um, it's used in some electronic parts also, so there is actually utility directly associated with gold. But I think part of the story is the safe haven to this, uh, this mystique that gold is the ultimate safe haven. So in in our research we actually um reject that hypothesis. And we've got this great example UM called the Hawksknew Horde and

it's from the countryside of England. Somebody's repairing offense and they dropped their hand. They look down and pick up the hammer, but they see a gold coin. They scrape the ground and they see more gold coins. Uh. This this's can only happen in England. But they immediately go to the university and seek out an archaeologist and they excavate and they find this treasure chest field with gold and they dated to the time that the Romans were

leaving England. So basically this was the safe haven. So some family, uh, they took their wealth, they buried it in the field, in the treasure chest. And the fact that we discovered it recently shows that it failed as a safe haven, that family never got access to it. So there is this mystique of a safe haven. There is this, uh, this myth the gold is a short term inflation hedge when it isn't. So I think that

gold is is very poorly understood. But you're correct that given that it's got such a long history and is part of our history, that uh, that it gets treated differently and people are willing to ignore the evidence. This okay, And we really can't have you on the show, as Mike alluded to, without discussing the yield curve. You are one of the pioneers of doing research on the subject. Your dissertation on the subject is also very very widely cited, and we had you on the show to discuss it

last mayor so. And of course, after the yield curve inverted last year, we did achieve or accession. Now, of course, this could all be seen as hoopla or whatever you might want to call it, considering the fact that no one could predict the coronavirus. However, is it safe to say that sure, I mean, the inversion of the yield curve did its job in predicting a recession. So yeah, you're correct that last year. Uh, it was code bread on the yield curve, So we had an aversion for

a full quarter. And my model um over the period since in nineteen sixties, every time the yield curve inverted, U of recession followed and there were no falls signals. So it was seven out of seven and it got the number eight signal, which suggested recession. And you're correct, we're obviously in a recession right now. Did deal curve predict the coronavirus? No, obviously not. I will never know

the counter factual. We do know that recession was largely expected, at least from the Duke's CFO survey where up to of the CFOs so a recession would start by the first quarter of So again we won't Actually no, we can never know the counter factual. UM. But I guess, uh, we didn't know there was going to be an oil embargo in nine three either. So the indicator is eight for eight. I'm counting it as a win. Cam I'm putting it in the wind column. Sometimes you get lucky

and sometimes unlucky. Uh, I'll take some of that, that's right. Well, I don't know how lucky it is to have a recession to be able to predict it. But I will I'll count it as win now cam obviously, now as we do start to take baby steps to to get the economy reopened and back on track, there's a lot of very uh you could call it uh exuberance in

the stock market, not just the gold market. You never seen this really rip wearing rally in stocks um recently, Lee, we have seen the long end of the curve sort of come off the floor a little bit and rise a little bit, a little bit of steepening in the curve, and that has everyone sort of turning their attention to the Federal Reserve will have the Jackson Hole Symposium at the end of the month, And I think I feel

like the bond market has really been speculating. I guess you can call it speculating, wishful thinking, hoping uh that the Fed will resort to some sort of yield curve control to keep that long end low in order to keep barring costs slow and keep this recovery going. As a yield curve student like yourself, does, what's your reaction to that, to the notion that the FED could potentially artificially bend the curve to to its wishes. Is that

is that a good thing or a bad thing. So traditionally, the FED has had control over the short term part of the yield curve UH, and they would engage in open market operations and UH deal with the FED funds rate. But we're in extraordinary times where this time around we've got unlimited quantitative using and that means the whole curve is being influenced by the Fed. Will this be morphing into yield curve control? I certainly hope not. These acts

are distortive. I don't think it's a great idea to have these really low or negative interest rates. It doesn't make any sense that in some countries you can get a mortgage where it's a negative rate, so you get you get paid every month to take out a mortgage. Does that or look at Japan? Yeah, look at Japan. That that's a great example of gild per control. Their bond markets gone, so Japanese government bonds are just bought by the Bank of Japan. Is that the model that

we actually want? So it is a very unusual situation. We're in a deep recession, yet the stock market has completely blown it off, and you're correct, you see some

green shoots in the bond market also, So I really worry. Um, it's I said, irrational exuperance in gold, but a minimum, it's uh, kind of a rose colored glasses effect where people are not looking at the structural damage that's been done to our economy, the potential cost of the QUEI, the potential cost of having to pay back all of the fiscal stimulus that's been completely ignored, and to me,

that's very worrisome when you've got markets like this. Well, we'll likely hear more about yield curve control next month at the FED meeting. Cam looking at the yield curve though right now, is there any signal that you can actually take away from it? And combining that with other signals that you look at. You mentioned the Duke CFO

survey any recent results from that as well. So the yelk curve is positively sloped, which means that it's signaling economic growth, and I believe that's what's going to happen. So the recovery is not going to be V shaped, but it will be a very strong recovery. And I think that that's consistent of with the Yelk curve signal. Remember, the slope of the yeel curve is telling us about expected future growth, so it's not just signaling recessions. It's

also signaling a growth. So we will see that growth. But I doubt given the slope that that growth is going to be robust. Uh. And yes, it might be that we get these really big numbers, but I think people need to understand the following. If you started a hundred and you dropped by if the next quarter you gain, you're not back to hundred, You're only at s. So so we need to carefully look at this. It'll be a while before we actually get back to where we started. Um.

But again, markets don't seem to factor that in. So these head evaluations in the equity market, UM, I think a lot of people believe they're just unsustainable in the long run. You're not in the camp of believing in some sort of permanent higher plateau invaluations. I take it. Uh, No, I'm not. And as you know, it's a very uh diverse uh situation. There's a lot of dispersion. So the behavior at the top ten stop sent SMP five hundred

much different than the other four hundred ninety. So what we're seeing is a sur urge in growth stocks and relative to value stocks, and that difference between the growth and the value stocks. Uh that that basically we haven't seen that ever before. So what's happening to growth stocks seems to me very similar to what's happening with gold Well. I think it's that time. It's that time, Mike stand clear of the craziest things we saw in markets this week?

All right, Sarah, you're back from vacation. You had two full weeks to come up with a crazy thing hit us. What's the craziest thing you've seen? All right? So maybe this is just a story of and it it hits well this year. It's kind of got a bit of humor to it, also a bit crazy. On Wednesday, um Penn National Gaming stock took a hit, But the reason it took a hit was after Dave Portnoy, who is the founder of Barstool Sports, posted a video of himself on Twitter saying that he was sick and that was

the reason why he hadn't been streaming recently. He said, do I have COVID? He wasn't sure, but he kind of assumed that he did. Anyway, just the idea that one person getting sick in the year of can hit a stock to the extent of two percent in a day like that's that's pretty crazy. Yeah, it's crazy enough one person, but with that particular person, the fact that that guy can move the share price is um I like you said, that's that's in a nutshell right there. Nutshell,

you can't escape it. Pretty good? How about you, Cam, Have you seen anything crazy and markets this year? I know it's been a very normal quiet year and markets. Uh, but what's popped out at you recently? That's crazy. The thing that's popped out that to me is very unexpected,

and that is Berkshire Hathaway being long Gold. So given the history of Warren Buffett and how negative he's been on Gold when it's above um or a very kind of rich value, it's very surprising that Berkshire took this position and indicates to me that there's at least a minimum and disagreement within their portfolio management team. I take it he's not a bystander in this case, or is he? Sounds like you might be. He's become what he wants mocked.

Perhaps that is interesting, though, I I can't remember wherever hearing Buffett long Gold, but he's been he's been sort of barrish about the whole the whole recession and economy this year anyway. But well, that's pretty good. Two good ones. Um, all right, I'll give you mine, Sarah. Mine actually was given to me courtesy of our chief Crazy Things correspondent, Vildonna Hirich. When you go on vacation, she has no choice but to but to cough them up to me.

She sends them to you instead it to me. It's pretty good. No help for me this week, though, you're on your own. This is from a website Action network dot com. It's written by Daryn Ravelli's he's a pretty

famous sports business journalist. Uh And it reports that an unopened case of nineteen eighties six nineteen eight seven Flair basketball cards, not even based baseball cards, money basketball cards recently sold at an auction for one million, seven hundred at Andy nine thousand, seven hundred and seventeen dollars, So almost one point eight million dollars for a big unopened box of basketball cards. Contained inside that big box there

were twelve boxes with thirty six packs each. So I forget how many comes in a pack, maybe twenty, so a lot of cards. But still for nineteen eight six eight seven basketball season, one point eight million dollars UH for those cards. Sarah, that's not the crazy part, though. Here's here's what I think is the craziest part. You ready, I'm ready. I think whoever paid that it was a steal.

They got a bargain, um. And here's why. Because that particular year, a certain basketball player from North Carolina who did not go to Duke was a rookie in the NBA, Michael Jordan's And based on these past openings of these boxes, UH, there's typically about thirty six Michael Jordan's rookie cards in this and since this documentary about Jordan's on on ESPN, they've been selling UH in their neighborhood of eighty thousand

to ninety seven thousand dollars each per card. So this this guy whoever, or this man or woman whoever paid one point eight million for these cards. If they get that many Jordan cards, theoretically they're looking at about a three million dollar UH asset right there with those thirty six cards. So the buyer knew what he or she was doing. Gotta steal. Well, we'll have to leave it there, Kim Harvey, thank you so much for joining the show today. Great to be back on the show What Goes Up.

We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter, follow me at Sara pant Sack, Mike is that Reaganonymous? And you can also follow Bloomberg Podcasts at Podcasts. Again. Thank you to Charlie Pellett of Bloomberg Radio and also the voice of the New York

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