The MMT Experiment is Underway

frequent listener. I've got big shoes to fill, right, and the only role is you have to laugh at my jokes, or at least pretend to laugh. Alright, I do. That's a little week, but we'll we'll, we'll work on it anyway this week on the show. Obviously, government and central bank policies have once again became the main drivers of financial markets. Our guest this week will help us make sense of all of it. He has served in important

economic position is under five different US presidents. He's an expert on how policy and diplomacy and investments interact and Kenny, he will hopefully help us sort out these crazy times in markets, and as always, will close out this episode with our tradition, which is the craziest thing I saw

in markets this week? And remember, if you see something crazy and markets, give us a call on the Bloomberg Podcast hotline at six four six three two four three four nine zero and leave us a voicemail and maybe we'll play it on the next episode. Kay, Yes, we were talking about this before. I think this week's guest has one of the most fascinating resumes I've ever read. Um I was reading. I was very impressed reading his Wikipedia page. Firstly because he's got a Wikipedia page that's

that's sort of impressive in and of itself. But he's been in government a long time. He was had roles such as Deputy US Trade Representative with the rank of ambassad He was a senior economic advisor to Henry Kissinger. He most recently served in the Obama into administration as Under Secretary of State for Economic Growth, Energy and the Environment and UH. To top it all off, he was vice chairman of Goldman Sachs International for quite a long time.

U Currently he is a managing director at the wealth management firm of Taman Advisers, and his name is Robert Hormaz. Rob welcome to the show. Thanks very much, Mike. Great to be with you, and great to be with you, Katie Bob. I was reading a recent piece you had, oh, and Katie Bob also with all that going on, he manages to get more bylines in the financial press than I do. I think somehow very impressive. But Bobby had a recent piece in Baron's talking about obviously the federal

deficit is just ballooning. UH. It's gonna get bigger and bigger for the foreseeable future as the government sort of counteracts the economic damage from the pandemic mc um and you write about sort of, you know that the risks of sort of political extremism on both sides that could come as a result of, you know, the nation just kind of trying to wrap its head around how we

can possibly solve this deficit issue. But one thing I want to ask in regards to that is what are those sort of fringe economic ideas that I feel like is going more and more mainstream uh these days? Is

the idea of uh modern monetary theory. Uh. Stephaniekelton, who is a columnist for Bloomberg, has a book out that's that's really hot, called the Deficit Myth, you know, and you know, for listeners who are unfamiliar, there's it's kind of a complex thing to discuss mm T. But the the gist of it, as that book title suggests, is perhaps we've been too afraid of of deficit spending, and that when you're a sovereign country like the US that issues its own currency, it's not as big of a

deal as deficit hawks would uh claim it is. Um If you issue your own currency, theoretically you can never default on your debt. I'm just curious, given your vast experience in the government and and thinking about the depth sit thinking about the global economies, what is your take on modern monetary theory these days as we are faced with this unprecedented depthsit situation. Well, now we have a particularly unusual set of circumstances whereby we're in the midst

of forced or involuntary utilization of modern monetary theory. That is to say, the federal government is issuing and will continue to issue trillions of dollars worth of bonds, and the market is by and large buying them up at a very low interest rate. And the Fed if the market is not going to do it. The FED has demonstrated its desire and its willingness to buy the assets

up and keep interest rates extremely low. This is not unheard of, and then as states, this was done during World War Two where the FED guaranteed the Treasury that it would buy Treasury bonds at a very low rate to keep interest rates low, to keep the death service

and costs of the of the government low. So theoretically this can last a very long time as long as the Treasury is making these big bond issues a regular occurrence, as it appears to be, although now it's not decided what the next step is, but there will be some additional spending, large additional spending. It's necessary, and the Fed. J. Powell has said he is going to in effect continue to keep rates low. But he said also something we should be aware of. The Fed can't do at all,

the fan FED cannot do this indefinitely. But what is definitely mean? How long can this occur? What are the end results of this? At some point if trees don't go to the sky, what could disrupt the markets and what could cause either the Treasury to run into trouble with its issues or the FAT to feel uncomfortable and underwriting those issues for the indefinite future. We don't know

that this is all terra incongnito. Well, I do want to jump in and ask, even though you just said we don't know, but what do you think is the breaking point? You know, as the US just continues to sell more and more debt, the budget deficit is just ballooning. At what point does that become a problem and might cause that disruption you touch on, Well, I think one thing we have to bear in mind is that foreigners

are major players in the debt market here. The FED is a bigger player, and obviously American financial institutions are bigger players. But feigners are still buying debt issued by the Treasury in part because they see other parts of the world less stable than the US. With all of our problems that we have here, we're probably the most reliable creditor, well, certainly the most reliable creditor in the

world by by all traditional standards. The problem would occur if there are doubts about the FED and the particularly doubts about the Treasury repaying the debt of the United States. For instance, there is some discussion in the United States UH Congress and and in Washington in general about maybe the US will decide it doesn't want to pay interest on some of the deck that it owes China. No one has actually threatened this, but it's sort of part

of the Washington rumor mill. That would be the kind of thing that would be highly disruptive and could really undermine this scenario, because the key to the American credit market all the way back to Alexander Hamilton, is the full faith and credit of the United States is behind the bonds issued by the United States, and that is

critically important. The second is that if rates stay low and inflation starts going up, then people who are holding dollar assets low yielding dollar assets find that they're losing more and more in real terms every year, and that

could be a problem. And third, the question of the dollar itself, and that is if if the dollar, which has been relatively strong, the dollar weakens further, then other countries like the Europeans will be in a better position to if, depending on what their own rates are, to attract some of the money that's now currently going into the dollar. But we have seen some weakening in the

dollar this year. I mean, nothing too dramatic yet, but last time I checked the some of the broad indexes were down near the lowest in in a couple of years.

Is that the beginning of that? Do you think? And is that you know, for an investor to sort of wrap their heads around all these issues, is that sort of the main where the main focus should be is what role the dollar plays in the global economy in sort of this new world we have of of a little bit of political isolationism, um and these massive deficits. I mean, if you're an investor, you mainly just focused

on the risks to the dollar at this point. I think you're focused to a degree on the risk of the dollar. Probably that's not the main thing you're focused on. You're focused on essentially interest rates. You're focused on the credibility of the federal government's commitment to repay its debt.

But I do think the dollar, if you're abroad, and even if you're an American, is important in part if you're abroad and you're buying dollar denominated assets and you're seeing that all our weakening, you're you're losing money, and particularly if you're buying fixed income assets where you're getting no interests, practically you're really losing money. You're certainly losing

it in real terms. That's a factor. The second thing we have to bear in mind is that low interest rates are not free in the sense that there are a lot of Americans, particularly retirees, older Americans, who don't like to buy equities because they consider them risky. They want secure assets, they want to secure flow of income.

And you know that is a problem for them because if they're holding a lot of treasuries, they're holding secure assets for sure, but they're losing year after year after year. If Treasury is paying twenty basis points or thirty basis points and the inflation rate is two work two and a half percent or whatever will turn out to be. So it's really a huge burden on savers who want

secure flows of income but want to avoid risk. But one of the more fascinating parts of your career was sort of helping to negotiate diplomacy with China way back in the Nixon administration. I'm curious just your sort of overall thoughts of the U. S. China relationship right now.

Obviously it's seen better days, it's deteriorating. Is this friction between these two countries here to stay regardless of who the next president and is, And how do you sort of see it all shaping up in terms of, you know, geopolitics from one thing, but also just what the economic and market implications will be saying the next decade between

the US and China. Relations between US and China are more fraught, more tense, more acrimonious then I have seen in all the time I've been working on China, and I started, as you mentioned, in the early nineteen seventies with Henry Kissinger, and there have been a lot of issues between the United States and China, but the relationship really is deteriorating, and deteriorating badly. It was beginning to

deteriorate even before COVID. It was the beginning to deteriorate because of differences over trade, differences over intellectual property, differences over who would be the dominant player in global technology. All these things were important in the relationship. And China now is a country that sees the US preoccupied with very difficult domestic issues and believes that this is an

opportunity for it to expand its role internationally. Which it is doing, not just through the Belton Road initiative, but trying to write some of the rules or a lot of the rules for global trade, for global technology, et cetera. The problem for China though, is that it has a lot of domestic issues, and there's issues relating to joblessness. That's a problem. There are a lot of people who are big borrowers in China. Now they're unable to pay

their debts. So China is not immune to economic difficulties. That the death situation there is quite substantial, and it now has to rely more and more, and President Chijin pain has made this point, rely more and more on its own economy. It can't rely as much on the United States, so it has to bolster its own economy domestically, and it has to develop relationships with other markets Southeast

Days and Europe and other markets as well. So it's becoming more and more I wouldn't say detached from the United States, but it's coming to rely less and less on the American market. And also it's worried that the United States, at some point, for political or other reasons, will cut off Chinese access to certain important technologies that Chinese companies need China realize very heavily, for instance, on

American semiconductors. And there's also this concern that the United States will interfere with the capital market relationship, with the financial relationship between the United States and China. So China is beginning to realize that it is vulnerable to what the United States has been doing and what the United States is threatening or implying that it might do, which could be a disruptive to the Chinese economy. I wanted

to talk about that a little bit. You know, we mentioned earlier in the pod that there's been some talk about, you know, perhaps Chinese companies wouldn't be able to list on US exchanges. I mean, when you sort of think about that happening, in the implications of that, do you view that as a real threat, something that could happen that we could see in the next you know, a couple of months or years, or do you think still a lot of the back and forth between the US

and China is posturing? Well, I think so far it's posturing. I I do think there are people who in the financial markets who don't like the idea of the listing Chinese assets and American equities markets. So the issue is what kind of reporting requirements the US is going to impose on China. Will China comply with those, because partly it's about that as well, not just about the political threat,

but about it and regulatory issues. But these have existed in the past and the US government has sort of overlooked them. Now that's becoming a more serious issue. I do think it would be a problem in part for China because it does get the broad benefits of being able to list in New York, but it also has other markets where it can list. If it can list in Hong Kong, for instance, it can list in Shanghai,

can list in Beijing, can list in London. So the Chinese would regard this as a disruptive act by the United States, but they could find alternatives if if they had to be considered a very bad political signal threatening the repayment of debt owed to China, that is a wholly different issue, and that would be very disruptive to the Chinese who expect to get paid when they invest in American assets. But other countries, well then say well, if US does this to China, maybe it will do

it to US. For other political reasons or exert leverage. So I think you'd see a highly disruptive reaction in the US financial markets and certainly in the dollar. So Bob, if the next president, whoever it is, we're able to lure you back into the Beltway to to give them some advice on this issue. What's your advice on how to handle China going forward? I think there are various issues where the United States should take a tough negotiating position.

I've negotiated with the Chinese on a number of technology and related issues, and uh, it's possible to take tough positions visa of each China without being confrontational towards China. So you have to find the right balance. Um, and one can say, well, we haven't gotten as much as we would like to in terms of the kind of changes that we've been asking the Chinese or negotiating for.

But we also have to come to the understanding in in our policy framework the way we set up our relations with China, that we're gonna need China for a variety of reasons. For instance, if there is a major global financial crisis as a result of this pandemic, as a result of all the debt that has been accumulated by a great many countries, not just the US and China, but many emerging economies. China was critical in two thousand

and eight resolving the financial problems of that period of time. Second, we also have to bear in mind that Chinese and American scientists are working very closely and companies are working very closely on trying to find various kinds of immunization technologies, therapies, drugs to deal with COVID, and we do not want to sever those relationships with American and Chinese scientists. We can learn from them and they can learn from us.

They have some very very good scientists working on back scenes. They have a wholly different testing regime from the United States. We have a we have a different more rigorous testing regime or trials than the Chinese do, or at least it's different. They need to be seeing in Washington is part of dealing with the COVID issue through various vaccines and various therapies, and to deal with the post COVID financial issues that were clearly going to face. So Bob

I actually wanted to go back to the dollar. It's one of my favorite things to talk about and within that, one of my favorite things to talk about is the reserve status of the dollar, and hearing you talk about you know how much debt were issuing the importance of foreigners in buying that debt. You know, how important is the reserve stas of the dollar to the US. Do you think and do you think there's any risk that the dollar could lose some of that reserve status going

forward from here? At the mom meant, I think the dollar is still pretty secure as a reserve currency as the major global transaction currency, is the major global store of value. Most global trade, even trade between China and other countries, is denominated in dollars. Oil trades denominated in dollars. So for the moment, I think the role of the dollar is quite secure. On the other hand, it's not a god given right for the United States to have

the world's reserve currency. And what you're going to get over a period of time are countries that will be exploring digital currencies, that will be exploring other kinds of assets, reserve assets, that will be using their own currencies like the EU and the Euro. The Chinese want the RMB currency. If you want to play a greater reserve role, and the US has to recognize that everyone does trust the US dollar as the major reserve currency in the world.

But what we don't want to do is overdo the dollar as a way of imposing sanctions on other countries, which we often do. We don't want to cause anyone the doubt the ability and the United States to meet its obligations. We want to make sure that we behave responsibly when it comes to the management of the dollar.

The flip side of the coin, Bob so to speak of a week dollar is obviously uh, somewhat of a tailwind for the US equity market uh, and for gold obviously has been been roaring this year, especially with equities UM now SMP flirting with another record high territory this week. How much are equity markets, in your opinion, in pricing in sort of the best possible outcome to the virus, you know, is it seems like there's a lot of optimism about a vaccine coming perhaps in the fall or

by the end of the year. UM. How much risk you do you see equities at this type of loft evaluation given UM, you know there is some potential risk with how well the vaccine plays out in the near future, what the economy looks like in the fall as we go back to school in the US and and the virus potentially could flare up again. How do you see

it all playing out for the rest of the year. Well, I do think for the rest of the year, the markets are more and more going to be focused on the virus and on the treatments for the virus or a vaccine. We have a lot of experience in developing vaccines, and the one thing we know about vaccines is they

take a long time to develop. Now, it's certainly true that a lot of big companies are putting all the ammunition, all the brainpower, all the capacity they can in the developing vaccines, but you have to test them, you have to go through trials. You have the trials are quite have to be quite extensive because you're actually giving the vaccine to well people, so you don't want to make them sick by giving them the vaccine. It's very optimistic to think that we're going to get a vaccine as

quickly as a lot of people think. Now. There are a lot of announcements about candidate vaccines. There's something like twenty six candidate vaccines. Of those, just as a matter of interest, China is engaged in nine of them, so show see that China is playing a role. There are

other countries Britain, Oxford University, Israel, Germany, even Russia. The role of science, the role of medicine in dealing with COVID has actually led to a lot of progress and a lot of lives have been saved and we're some of our very best people. We looked at science and scientists after World War Two as heroes of the war and developing new weapons and heroes of the space age.

We took people from all over the world and they helped us to build up our capability in the military area after World War Two, you know the rocket program, nuclear program, etcetera. We have to look now at our security and say we can't just do this on our own. We have to get the best and the brightest here, but also open up to the best and the brightest from the rest of the world. The scientists who come

from or work with people all over the world. That that that new definition security is that it's military, but it's military plus health and military plus the environment. And we're gonna need to work with our own best and brightest and give more of respect to scientists and others, but also interact with those from other countries who have a lot to offer. Also, I hear you, Bob. I'm all for working with the best and the brightest. But now, Bob, it's time to work with the craziest things I think

we've seen in markets. This is our our gimmick to close the show every week. A lot of people love it. It's the craziest thing we've seen in markets. Stand clear of the craziest things we saw in markets this week, Katie, I want to start with you, what's the craziest thing you saw in markets this week? So it's not in markets, but it's about markets, so I think it counts. Um I found on Twitter of screenshot from the subreddit data

is Beautiful. It's a subreddit on reddit dot com and uh user l L moon Jay makes art out of stock charts, and this week he made this beautiful chart of Ford stock price going back the past year. He took that chart. Obviously it dipped in March and then it's rebounded a little bit, but it kind of looks like a clip. And he made this beautiful mountain scene and actually has a little FOURD truck in it as well,

and I'm just in awe of it. I can't stop like switching between the picture and then the actual chart. So I would head to that subrette and look at it because it is beautiful. All right. Well, hopefully he had paid paid the appropriate data license for that, for that data for that. How about you, Bob? Have you seen anything crazy recently in markets? Originally, when the when gold started shooting up, I thought that was crazy. We're not going to have any inflation anytime soon. I don't think, um,

why was gold shooting up? But now I don't think that's so crazy anymore because it's really, in a in a way a bet against the dollar. And it goes back to what we were saying earlier. If you don't want to hold another foreign currency, but you don't want to hold the dollar because the dollar is depreciating, than gold is a good asset. It's a good hedge against a week or dollar. So what I thought was crazy.

I'm not a gold bug, but it was crazy a little while ago, and the gold shooting up as much as it did, I now regard, and um, I think others do as well. Regard gold as a single a signal of concern about the dollar continuing to depreciate, and it's a signal that we as a country and we in Washington have to bear in mind. Absolutely absolutely amazing running gold this year. And as you said, I guess not too surprising given the circumstances, but still pretty spectacular. Yeah, Okatty,

I will, I'll give you mine now. And Katy, you and I as reporters and journalists in financial markets, we spend a lot of time writing about the way people like Bob and professional investors sort of come up with their investment ideas, all the heavy duty analysis and number crunching involved. But the New York Post this week's brings us another way to go about it. And you know what it is. You just hire a psychic. Hire a

psychic who will read tarot cards. And apparently there is a woman named Hey June who she used to work at JP Morgan as a data analyst, a couple other roles, strategists and on the side, she was given tarot card readings to colleagues and friends. Uh and and she decided, you know what, there's so much demand for this, I'm just gonna do this full time, and apparently, according to The New York Post, she has clients in in the hedge fund world, in the big tech world, and she

gives literally gives tarot card readings in the boardroom. I'll give you one quote from her. She said, I've had many instances where I've told traders be more open minded today because I pulled a Capricorn card, which means big business, or a Chariot card, which means getting lucky. Then they put in a trade that they normally wouldn't do and they make bank. So I don't know, Bob, I don't know. Are you gonna be replaced by a tarot card reader? Do you think is there a risk of that? I

think it's unlikely. I mean. The one thing, the one thing uh I can say as we conclude here, is that we at Tedaman have a great team of people who make judgments on the basis of of facts, make judgments on the basis of thoughtful analysis, make judgments on the knowledge of what's going on in our own country, in the world and various markets, and and do very thoughtful research. The one thing we don't use is tarot cards. That's problem guessing. That's probably a good thing. I think

that's it for the this week's episode, Bob. We can't thank you enough, very illuminating an educational discussion, and I hope someday we can have you back to talk more. I would love to. I want to thank you for inviting me to participate. Mike and Katie, you have been great, great questions. Um. I hope I do have a chance to see you both again soon. What Goes Up will 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 podcast so more listeners can find us. And you can follow us on Twitter, follow me at Rea Anonymous, follow Sarah at Sarah Ponzac, and follow Katie Greifeld at k Greifeld. You can also follow Bloomberg Podcasts at Podcasts and thank you to Charlie Pellett of Bloomberg Radio and the voice of the New York City Subway System. What Goes Up is produced by Jordan's Gas Poora. The head of Bloomberg

Podcasts is Francesco Leavy. Thanks for listening. See you next time,