Populism: As Popular as Ever

It's also that time of year, with less than six weeks togo until firms across Wall Street are starting to share their thoughts and ideas for the year ahead. And of course we'll close out the episode with our tradition the Craziest Thing I saw in Markets this week? And Sarah, before we get to, I gotta say I'm excited as usual on podcast A. I'm excited about about two things. One is, we got a pretty good call to the podcast hotline, to the What Goes Up Hotline this We'll

save that for the Craziest Thing. The other thing I'm excited about is I don't know if you've noticed, but my Delaware Blue Hens basketball team is undefeated six and oh the woebegone basketball team of the University of Delaware. I must say I hadn't noticed many people. Your Michigan team's also undefeated at three and oh though, so we are twice as undefeated as you. I'm just gonna throw that out there, probably not for long. We'll see how

we do it. But to honor the occasion, we actually have a guest from the great state of Delaware joining us here. Unfortunately, he did not go to the University of Delaware. He went to our conference rival, James Madison, so we won't we won't talk basketball with him about that, but we're happy to have him. His name is Luke Tilly. He's the chief economist at Wilmington's Trust in Wilmington, Delaware, and he's a former officer at the Philadelphia Federal Reserve. Luke,

welcome to the show. Thank you for having me. Okay, also joining us our very own Bonds and f X reporter and skilled a question I would say, Katie Greifeld, welcome to the show. Thank you. I'm so glad you brought that up right. How's the horse stone. His name is Batman and he's doing great. It's good. I used to think his name is Fatman, but I was mistaken. It is Batman is a much better, maybe more polite, accepting name than right. Right, I misunderstood my bed anyway, Luke,

let's start with you. I downloaded Welmington Trust has a very interesting capital markets forecast for twenty on the website. I uh. I advise everyone to download it's it's a pretty good read, and I like it because it gets into some of the sort of hot topics of the day, not just really financial but politics, populism, that sort of thing. I advise everyone print this out and bring it to Thanksgiving dinner so when it comes time to talk politics,

you're you're well armed. But I just I wanted to read a line from it that I think is really fascinating. I think this explains a lot of what we're seeing in the world today, whether it be Hong Kong or Chili. We're sort of the the US political endscape and it goes the rise, and populism isn't part of an outgrowth of the unintended consequences of productivity, which includes more gains for owners than workers and the secular disruption of the

labor force. For example, labor share of income remains low. The figure dropped from fifty six point five percent at the turn of the twentieth century to fifty point nine percent in two thousand and fourteen, and it will continue to drive populist sentiment. I find the stuff fascinating because I think this is a key theme of sort of global geopolitics. And like I said, this unrest we've seen in Hong Kong, in CHILEI a lot of Latin America. How does one take this and apply it to this

sort of the investment landscape. Yeah, sure, so it's a it's quite a mouthful. I don't know if you would try and do it Thanksgiving dinner. But of course we were packing quite a bit of information into that paragraph. But UH, simply put the rise of populism around the globe. If you just read headlines, you might think is coming from uh sort of random success of populist leaders or

particular movements that just happened to get more popular. But really, at its at its core, UH is this rise in productivity with firms, and firms have turned to robotics and artificial intelligence, UM, all kinds of technology that increases their productivity, and one of the UH, one of the outcomes of that is that less of income, less of GDP is

actually going to the worker. We had a fairly steady share of GDP going to workers if you look at US data for about four or five decades until the past of fifteen or twenty years when you see this uh steady decline in the amount that's going to workers. So in our view, on top of some of the

there admittedly there are some other things. You've got the outsourcing of jobs, You've got some of those other things, but both in the US and worldwide, you've got less and less income going to workers, and that tends to produce a pipe the sentiment. The connection makes sense. And looking at your research, I grouped it as a three piece you have productivity, populism, and then portfolio. But I can imagine some people coming to you and saying, what

do you mean productivity is on the rise? You look at some data points and it still shows that productivity is really low. Is the problem that there's still the conundrum of people just not potentially measuring productivity in the right way in this new era of technology and other industries. Yes, exactly. So this is something that we dug into quite a bit this year, and it's uh it's twofold. Really. One

is that it's very challenging to measure productivity uh. And then the second is that productivity tends to show up with a pretty significant lag. So on the first point, when the economy is changing very quickly as it is now we term this the fourth Industrial Revolution, with the development of all of these technologies. When the economy is changing very quickly, it's incredibly hard for our government statisticians down in d C to keep track of it. Uh.

In the late nineteen nineties this happened as well. There was this same conundrum that we had right now. How is it possible that we have all this growth and we have low unemployment, yet we don't have inflation going up? And the answer at that time was productivity. When you went several years later, when they had a better handle on what was going on, productivity was revised up about one and a half percent for a three or four year period. And our view is that that's exactly what's

going on right now. The government is not very good at keeping track of just how productive Amazon is, for example, or uber or some of these other companies. They'll get a better handle on it later, but right now we believe that that productivity is actually stronger than the statistics show, and that of course is what's helping keep inflation low right now and not not having those price pressures. Let's get right into those Thanksgiving political discussions with with your

drunk uncles. But you have to have the ammunition to counter those drunk uncles. I'm probably the drunk uncle in my in my scenario, but for everyone else, for you nephews and nieces out there. Um, and you start off this, uh, this report, this Capital Markets Outlook, you kind of give the sort of the risks if there's a Democrat elected or a Republican. Very interesting one looking at if there's a left leaning government. The wealth tax, this is a third rail issue for a lot of people. Uh, woman

can trust. According to this report, gives it a high chance of happening if a Democrat is elected, but a low impact on markets. Um, the walks through what the

thinking is with that, right. So this is a obviously a politically sensitive one and we should say that all of our research is just really not meant to be a judgment over whether these things are good, bad, or and different, but just looking at what the impact would be on markets, but clearly, clearly the wealth tax is something that has the attention of voters on the left right now, in supporters of the of the candidates in

the in the Democratic primaries. So a wealth tax would be incredibly challenging if it were implemented in terms of the execution of it and keeping track of wealth. We actually think it's more likely that will end up getting higher taxes in some other form, either the reversal of the taxes that were implemented in those tax cuts, or perhaps increases in taxes somewhere else. You know that that's on the personal side, that's also on the corporate side.

But clearly there's some support for the wealth tax right now, but there's a lot of sort of devil in the details on how you would go about implementing that. Right, It would be very tough to appraise someone's wealth on a hear to your basis if you yeah, and then you get the dynamic effects they try to get their wealth out. Several several of the proposals want to penalize that. It would be incredibly messy, But it's clearly going to be a topic of discussion throughout. People digging holes in

their backyard with filling it with golden and bitcoin. I guess that's what you do with bitcoin, Katie, right, is that that's what I hear? Yeah? Right. There was a really interesting story this week actually about high wealth individuals all of a sudden very interested in very normal type storage. Yeah, safety deposit box because who knows, who knows what's going

to happen with rates lately. Um With that said though, and bringing it kind of into Katie's world of f FX and rates, Luke, I first want to ask you because also in the notes that were sent over to us, uh, they said that the way you guys see it, tightening of monetary policy is a ways off, which I think the Fed has made very clear despite global central banks

taking a breather from incremental monetary easing. I want to get your take though, because a few people this week have said to me that now what it looks like the market is doing with yields moving lower once again to vnsives inequities, coming back to the fore, that maybe the market is actually pricing in the idea that the FED will have to cut again, and we're still stuck in this virtuous circle where the market prices in a cut and then the FED fields as though they have

to cut. Do you think it's possible we do get back to this that scenario, say within the next year. We do think it's possible, but we don't think it's the highest chance outcome if will. So a lot of what the FED was doing was basically fixing the yield curve. If you will, uh listeners out there, you can't see me putting the air quotes around the word fixing, but um, but that's essentially what they were doing. So Jerome pal never used this term, but essentially when the old curve inverts,

they get pretty nervous about that. Um. And even though they don't as as I said, they don't use that as well, we need to do that. That was clearly part of it. The the old curve back to where it is right now, as you said, flattening a little bit more this week. But the FED has gotten themselves in a spot where as they said, they want to wait and see how long it takes and what the

impacts of their rate cuts are. Clearly it is having having an impact so far, but really we don't think that they would end up cutting more rates unless the economy took a material turned downwards. What could cause that to happen that are it's not our view that the economy is going to take a material turned downwards unless we get more tariffs. If you get more tariffs on between US and China, more brinksmanship there, we think that that would end up leading them down that way. But

that's that's not our view right now. On the other side of whether they would be raising interest rates, uh, they don't have a history of reversing themselves in changing directions very quickly. UM. That would be obviously problematic to markets,

which are maybe looking for for more cuts. And you're there's really not enough time over the next six to nine months for inflation to do a U turn and really move material upwards for them to want to be hiking rates, and so then you know, if you can't have material inflation within the next six to nine months, you get out the twelve months and then you're right before the election. They're not going to really want to

uh cause problems just before that. So we think it's uh, we think it's pretty flat from from here unless you get that material downturn and that reversal in the year field curve is a lot more their open market operations to sort of fix the whole repo mess adding liquidity. I think the balance sheets expanded by close to three billion by now. I mean, um, is that that's just going to continue apace as long as that there's funding stress in the repo market, do you think? Yeah? So

this is where it gets really confusing. At Thanksgiving dinner if you want to, if you want to talk about FED policy and their monetary policy at the short end of the curve, and what they're doing with rates, and then also what they're doing with buying treasuries to expand their balance sheet, it's it can get a little bit convoluted. Um. Clearly, their balance sheet, as you suggested, is now expanding, it has as it has been since the beginning of September.

But that's not really on the rate cut side. That's providing the liquidity too markets and all those problems that happened uh in the repo market. So this is challenging for them to talk about. Really they have to keep doing that in order to provide liquidity, uh. And I think they're doing their best they can to convince people that it's not quantity of easing and it's not them

easing policy, Katie, come in here. You had a story that ran on Sunday called the bond Market's fate hangs in balance before trade war crunch time, and when you talked about the rise up that we've seen in bond yield um and what comes next. As Luke mentioned, trade is really a large trigger that we have to keep an eye on. But what our investors telling you this week, because we've seen the ten year fall roughly twenty basis

points are so or more? I mean, what's driving this and is the path for least resistance at this point lower? That's a great question. I mean it feels like the answer changes every day depending on the trade headlines we're getting as to where yields are headed next. And a stat I love that's in that article is that if you look at tenure treasure yields, they're extremely correlated to the Chinese you want right now, which I think just goes to show how much of sentiment in the bond

market relies on trade. So when I talked to investors, I talked to strategists in the bond market specifically, it's trade. It's all about trade, and we're really entering you know, a crucial few weeks before December and that tariff deadline. Meanwhile, the other market you cover, Katie EFFCS has really been

let's what's the word I'm looking for? I guess quite quite boring this year, right, Uh, you had you had another story out this week about the dollar being in the tightest range for a year, the dollar index, the the Ice Dollar index being in the tightest range for years since nineteen seventy six. Let's pretend I didn't edit that and you can just tell me what what the takeaway from that street. Yeah, it's really been feast and famly because the bond market has been going crazy, but

nothing has been happening in FX. And you mentioned the d X Y and X that's how you can find it on the terminal. But yeah, it's stuck in its tightest range in about over four decades. Four decades. Yeah, I was not close to alive, But um, that really has to do with it's especially crazy if you were born before and have to think about how it's almost

five decades go it's still got a four handle. But um, yeah, so that index is mostly made up of the euro dollar pair, which is this isn't even crazier status on track for its narrows yearly range on record, And I was talking to sock Jen about that, and Kit Jukes told me that's just because the market's almost been too accurate in pricing growth differentials in Europe in America or price for pretty good new was in America and bad

economic news out of Europe and Germany in particular. And that's really what we're getting right now, Luke, this very quiet volatility in the FX market. It's terrible news to our FFS traders listeners. I'm sure it's the worst worst possible outcome one could ever think of. But I go, I have to wonder for the economy as far as looking at financial conditions. I mean that it's a tight range, it is elevated compared to last year, But I would think that uh sort of diminished volatility in the FX

market is kind of good for financial conditions. Am I thinking about that right? Yeah? It hopes with financial conditions, especially with an increasingly integrated world where've got so many companies that are operating across borders and they basically have to deal with these FX rates on a on a daily, weekly and monthly basis, and those more um solid or less volatile ffex conditions just make it easier to operate,

and they just definitely encourage more trade. When you have all of the uncertainty that Katie mentioned coming from trade and all of the all of the uncertainty that's coming from that, and even some uncertainty about fiscal policy, to have one thing that is a little bit more stable is going to be supportive of growth. In our view, all year long, I've heard about how a strong dollar

is a headwind to corporate profits. Uh And finally, just a couple of months ago, people thought that, well, maybe that was about the change we saw the dollar started turning lower before it started picking up once again. But in your story, Katie, you talk about how corporates might be caught off guarded a different way. Can you walk us through that. Yeah. So usually when people think about f X effects, they think about, you know, how is

it eating into earnings? But what reporting this story out showed is that corporations have become or might be at risk of becoming a bit complacent when it comes to just hedging the currency risk. And we spoke to a few different firms and they said it's not you know,

they're huge multinational clients or the pension funds. It's these smaller companies, maybe you know, fifty to seventy employees, who have pretty bare bones treasury departments or accounting staff that are, uh, you know, after several years where nothing has happened in X, they're kind of stepping back their hedging activity because it's expensive and it hasn't paid off for several years. But obviously, you know, with record volatility at record lows um, you know,

the risk is that it shoots up really quickly. So there, I think we have a quote in there that this puts, you know, destroy profits at risk, you know, if you're

a small company hedging less. Look, any thoughts on what the dollar is going to do, Yeah, we don't really put out projections of that, but I would agree with Katie's sentiment that basically traders and FX traders are have been predicting the economies right because fundamentally what's going to end up driving currency and currency movements is how are the economies performing relative to one another and then what

are central banks doing. So, as Katie said, a lot of what is going on right now has been predicted. We predicted a or we the industry or whatever was priced in, was a slowdown in US growth this year right now, not expecting a huge re acceleration in trade and tariffs. Uh, some sort of reasonable answer to the whole brexit question. Uh, and that the European un the e c B s are the European Central Bank has got a new leader and she's not gonna make any

big changes right away. Right. So if all that's priced in, you still get those growth trajectories, Uh, then it should be fairly stable and we wouldn't expect any big movements in the dollar or any other currencies. You could imagine, uh, some sort of compilation and some sort of collection of of surprises such as trade and tariffs going bad, a hard brexit when it's not expected, or you know, any of any any of those things getting up ended, and

then you would expect to see some more volatility. So um. So it's it's inherently hard thing to predict. But basically we're just putting our judgments around those risks of those things happening at all times. Right. I think when you're in a low volatility phase, the hardest thing to do is try to predict what's going to snap it out if everyone wants to do it, but it's it's it's almost impossible, right, And and one thing is usually certain is that has been this low volatility for this long.

It's probably not gonna be same the next year. Right, Something's gonna happen. I wanted to get back to that look of from Wilmington's trust UM and especially talk about UM sort of the policies that have potentially bipartisan support. And I like the way you guys do this. You give these bubbles that say if it has a high chance or a low chance, and it's in big print, I can read it even without my reading glasses on.

So I appreciate, appreciate that from US UH, from US on the older end here antitrust UH medium chance, medium impact, UH, Drug price reform medium chance, medium impact. So we'll skip those. China trade obviously another Thanksgiving topic that's bound to come up. You guys give it a high chance and a high high impact, which obviously I think I agree with, especially

given that this is a bipartisan issue now. So I wonder, you know, so many people are trying to game theory out, you know, the Trump and President She negotiations, and who's got the upper hand, who's who's got the weaker hand, and what it means for when we'll actually see a deal, even a phase one deal. But what as you guys put out here, is that you know, a tougher stance

on trying to trade is a bipartisan issue. I mean, is it conceivable believable that, um, sort of the A lot of the thinking is that, well, China will just wait out President Trump. They they think there's a decent chance you won't get reelected. They can stall and just wait for the next president to negotiate with. Is that a Is that a bad way of thinking about it? Do you think there's so many, so many different ways to think about it? And as you said, trying to

game theory it out, it has entirely too many nodes. Um. But but I think you hit on it, and it's that it's such a bipartisan issue. I mean, just this week you had the Senate unanimously approved this bill that has to do with Hong Kong and retaining their independence. Elizabeth Warren and Ted Cruz were both co sponsors, not just voters, but co sponsors of this bill. When do you get often do you see that in the House voted. I think it was four seventeen to one to approve this.

So if you needed a clearer signal of it being um a bipartisan issue, I guess you need four in an eighteen to zero. But but it's clearly a bypart is an issue, which means that it's not going away. I don't know how that the Chinese will try to play it out, but where we've gotten ourselves as we've implemented these tariffs, We've got deadlines coming up, and it be sort of hard to back away from, and hard to back away from entirely because there are so many

human rights issues. Both parties have been upset about China in the way that they subsidize their state owned enterprises and the way that they steal intellectual property for so long that we view this, as said as a high chance of something happening, whether it's a series of deals or even if somebody else comes in, a new president gets elected, then there's clearly going to be some more

action taken after that. So so bottom line it for us, what kind of portfolio would you want to be in heading in the what sort of acid allocation would you be looking at? All? Right, So just recently after earlier this year when the trade talks broke down, we had gone to basically neutral against O our benchmarks and equities and on the fixed income side. Uh, just last month we went back overweight to equities because we've actually gotten

pretty optimistic. Um, we're not sure what a phase one deal is gonna look like, whether that pulls back any tariffs or anything like that, but we're fairly confident that we're not going to see more tariffs coming on. Basically, both economies are in such bad shape right now, especially relative to May, that we decided to move back into equities, and we think that it's a it's a good time to get to be taking on a little bit more risk and taking on a little bit more of that beta.

All right, so now we know what you guys are looking for heading into next year. But I think that brings us to the craziest thing all of us ever saw this week. That's right, let's start with the call to the hotline. I found this pretty interesting. So his name is John. He's a financial advisor out of the Dallas Fort Worth, Texas area, and he told us that

this is not just the craziest thing. He ever saw this week, Mike, but it's actually maybe the craziest thing he ever saw over the past decade to fifteen years. He's referring to a mutual fund. It's ticker p r w c X. It's the t row Price Capital Appreciation Fund, and he points out just its performance, how it's been doing so well over the past couple of years. Take a listen, This thing is absurd. It's outperformed it's category over the last five, ten, fifteen years. It's the number

one performing fund. And it's category. This is an aside cation fund, so it's US has anywhere from sixty bonds and regardless of that, still over that fifteen years time frame is outperforming the SMP while taking significantly less less risk. It's pretty good. And I'm gonna assume John is who he says he is, not a trow Price salesman on the phone there. We don't have a last name, John,

So that's on you. I believe I did fact check him on the numbers of the fund is out performing over the last fifteen years and twenty years, but over the last five years it's actually lagging the SMP by just a tad all right, Well, maybe we'll have to try to get the manager of that on here to talk about it. H that's pretty good, all right, Katie. Do you have a crazy thing you saw on markets this week? I'm gonna try my best. I love this story because I don't understand it. But it's about the

grain market and apparently we're seeing this weird trade. It's called the over Chicago trade, where corn is being sent from the west to the east and usually it just goes to the south. And my best understanding of why that's happening is because corn farmers in the East have been hoarding their corn supplies because there's been just this supply day, lou and they're they're hoarding it to wait on better prices, which I think would just exacerbate the problem.

But I don't know. It's a crazy story. It's on the terminal. I encourage you to read it because I probably did a terrible job. I like it. No, I like it. That's a good Thanksgiving themes story as well. Wow, I want to pretend that that's what I was thinking of the core market. Sarah, how about you? Can you can you top the crazy Chicago corn trade of whatever that was? Like? I have one that is pretty crazy, and there are a couple of stories that came out

about it this week. So pg n E the power company that has been under a lot of pressure after they did start some of those horrible, horrible wildfires out in California. They're filed for bankruptcy. Shares are down since mid Well, what's happening is because they have to compensate people out in California who say that their property was damage.

They're going through all these claims and all of a sudden, this one claim popped up with someone claiming that the fire destroyed a five hundred pound emerald with two hundred and eighty million dollars that they're having in their house. So of course p g n E is a little bit suspect about this, so they're trying to find out

more information. But Bloomberg's very own opinion Columnst. Matt Levin looked a little bit more into this, and it turns out that this emerald has likely been written about before. It actually has a name. The name is Blessa I believe that's how you pronounce it, and it also was

maybe cursed. So the way that yeah, clearly yes, um so the way Matt Levine finishes his column and he says, I'm going to stop the emerald speculation at this point, but I just wanted to flag for you the possibility that P. G N E might have caused a fire that destroyed a cursed emerald. Um so pretty crazy stuff. Does that end up being a good good? That's what I'm not sure now? That is this is the curse over now, I'm not sure. I thought you were going to tell me that the emerald's name was fat Man

bad it is five hundred pounds. But furthermore, emeralds are flammable, like that's what That's what I thought. I thought to emeralds burn right. Apparently apparently, at least if you can, you know, convince your insurance adjusters looke. Have they told you about our our gimmick here? I heard a little bit about it, so I did my best. But if you're asking for the craziest thing in markets, you bring in a macro economist, you're gonna get something about about

the economy. And that's actually I'm just gonna put some context around something that we've already discussed, and it's about the FED and about the balance sheet. Because you were right, might you already mentioned that they had started to add to their balance sheet again, and that started. The low point was the week of August twenty six, and when the FED released their balance sheet data this week, turns out they have grown in total their balance sheet by

two and eighty seven billion over twelve weeks. And just to put that in context, over twelve weeks, just that three month period, the two hundred and eighty seven billion is greater than the annual g d P of a hundred and forty five of the hundred and ninety five countries on this planet. That's crazy. It's pretty crazy. That's good, very good, very good. I appreciate the headline, but it's well done, well done. All right, I'll close with mine here. This is um a stock a company called art Go

in Hong Kong. It's a company that produces marble, and I think they were trying to expand in the real estate and whatever. None of that's important. What's important is this stock was up thirty eight hundred percent years a date, thirty percent. The stock was up a penny stock mainly because M s c I said that they would start including it in their indexes. Uh So, obviously people trying to front run that that passive money that will will

chase it. Later that m s C. I said, you know what, never mind, we're not going included in our indexes. We've gotten some complaints from you know, investors, uh uh quote. Their quote is further analysis and feedback from market participants on investability. In one the stock dropped percent wiped out five points seven billion dollars of market value with the one day percent drop. And that's the craziest thing I saw on markets. I think all four pretty crazy this week.

That's off, Yeah, that's off. And before we go, John from Dallas Fort Worth, Texas, I do want to let you know that Mike and I did hear your idea to explore indexed bond e t s even further and talk about the potential liquidity. So we'll absolutely talk about it. And anyone else who is interested in giving us a call, leaving us a tip, or giving us an idea for the craziest things you ever heard or saw in markets this week, give us a call. That number is six

four six three to four three four nine zero. But with that, Luke Tilly, Katie Griffelt, thanks so much for coming on the show. This week. Thank you very much for having me. Thank you What Goes Out? Will you 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 interview the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter.

Follow me at at Sarah Pontech, Mike is at reg Anonymous, and Katie Greifeld is at k Breifeld. You can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Tofur Foreheads. The head of Bloomberg podcast is Francesca Levie. Thanks for listening, See you next time.