Volatility From Voting

than ten percent at the time. We were all still in the office together and he said, in essence, belows aren't in until DC starts to panic, will stricter social isolation measures then took cold, stocks tumbled, and trillions and economic stimulus came from Washington and the Fed. Now the sp F DRED has risen more than fifty percent since, and we'll discuss what's next for markets, fiscal and monetary policy, and as always, will close out the episode with our tradition,

the craziest thing I saw in markets this week? Now, Sarah, I was chatting with our chief Crazy Things correspondent, Vildonna Hirick before this show, and she's back to giving you exclusively all the craziest things she sees. I thought you were going to say that she gave you one. I'm going to say that she doubled up then and vil Donna just needs her own show that because she's just coming up with multiple a week. It's it's honestly pretty impressive.

And she's very proud of this when she said she might be her best ever, So you guys should be proud. I'm want to say that I think she knows where her loyalty lives. Yeah, I'm just gonna break the news to you early though that mine's better. So all right, you proud as you want. But as you said, uh, Sarah, this guest this week was last on the show in March, and you know what I was thinking about recently. Do you remember your last handshake with someone before the virus lockdown?

I really don't. Was our guest to your last hand show? I think he was. I think he was, and I remember when I met him and we both it's like a reflex, you both shake hands, and then I think we both were like, wait, maybe we shouldn't be shaking hands, but that was that was it. He might go down as my last hand shake ever. I'm not sure I'll ever be comfortable enough to shake it. I don't know if I even remember how to shake some I do like a right kind of like a little sleep. But anyway,

very happy I'm back on the show. As you said, he made some great calls I think in the last time he was on in March. His name is novel Son Noula and he is the chief macro strategist at the hedge Fund e i A All Weather Alpha Partners NFL. Welcome back to the show. Thank you so much for having me again, Mike. And you know, it's always a pleasure that chat was the last person that you shok it. That's absolutely right. The other fun thing, yeah, it is.

It's a very it's a very special bond. We also bonded over that episode by making fun of Luke Lukawa pretty vigorously in that I don't think we can do that again. He's not here to defend himself, so I don't know I would feel bad making fun of Luke next time. We'll try to get them back on here. But uh, but now let's start with the big news of the week. It was obviously Jerome Pal's speech at

the Virtual Jackson Hole summit of the Federal Reserve. Any Basically, the headlines were that the Fed appears to be willing to let both inflation run a little hotter than two percent and also for the to allow the job market to sort of get a little bit hotter. They're not worried about the Phillips curve and sort of the the strength of the job market, how that will affect inflation

as much as they once were. What are your sort of main takeaways, uh from the Chairman pal speech and sort of how it's, if at all it will influence

the way you're looking at markets going forward. Now, you know what, if you don't mind, I'll start by taking us back to our last podcast actually and when you know, the view I kind of presented was social distancing is going to be a big deal to well economic momentum, and it's gonna require massive fiscal and monetary coordination in order to reflate assets to kind of provide the the

income replacement and the market backstops um. So for for the for the global markets to weather the storm, however long it takes. We definitely got exactly that. You know, we got trillions of dollars of fiscal spending, and we had a FED that you know, was already along its path of its strategic policy review. That motivation behind that in the first place was to rethink, to rethink, are

we short circuiting recoveries without necessarily needing to? And I think that the market had already been starting to condition towards that. COVID, like I did with a lot of other trends, really accelerated it and kind of pulled it all forward, and we got to a point where, you know, curves are very flat, very little yield left, and you know, the market basically saying, you know, the Fed's not gonna get gonna get in front of this or get ahead

of this. They're gonna let it run. I consider that kind of chopping off the left tail of the distribution of both inflation and just generally growth. However, the question becomes, can be FED also open up the right tail. We've chopped off the left hail and distribution, we've limited deflation risk, we've we've prevented market crashes, and we've provided an income replacement from the substitution. But can it actually ignite at the right tail? Can it open up the right tail?

I think that this seat by a chair. Powell at Jackson Hole was kind of just more so the codification of what the trend that's been kind of being priced in over the course of the last several months, if not even longer than that. And so now I think that this is kind of an event where a lot of folks like me are saying, Okay, I can kind of book my fed trades, I can kind of you know, that trade is kind of over, and now my my narrative shifts towards what can open up the kit. So

then what can possibly open the right tail? And I think just the fact that we are talking about right tail risk right now at the point of where we are and what we've seen happen in markets over the

last couple of months is just pretty amazing. Yeah, you know, it's funny because I've had of you for a long time that a lot of our economic outcomes are ultimately follows the choices because the things that typically would constrain massive discial spending, massive redistribution, massive subsidies, all these types

of things typically what constrains as inflation. So if you're in a structurally disinflation disinflationary regime, as we have been in for decades, perhaps like the lion share of my life, how you fat it really is up being a policy choice, Like you can decide if you want, if you want freepers unemployment, there's a policy cocktail I can get you there three four seven employment. So the idea is that the in order to open up the right tail, you

continue to do what we've been doing. Everyone's kind of surprised, um that the combination of the Cares Act plus the FED promising it wouldn't use the CARES as a reason to short circuit the recovery of the Cares Act, the fact that we have monetary christal coordination and fiscal dominance, it's not surprising to me that it was able to reflate the economy, and a surpris us so well, Um, there's a lot of places where it could have done much better, and there's a lot of big issues that remain,

and you know, the whole k shaped recovery idea I think as alien, but generally speaking, I think it succeeded. And if that type of fiscal impulse would return into something that was a little bit more durable, something that was a little a little bit more not necessarily contingent upon crisis, and the FED continued to establish it's an implemented promise to not short circuit uh those impulses. And then I don't see why we couldn't open up the

right tail. I don't anticipate us being able to open up inflationary risk to the point where its spires on itself. In my opinion, getting to you know, three or four percent inflation uh seven eight percent nominal girth to me um is likely to be just basically a politic choice. And and and that's why I think that these markets are so politically driven, They're so connected to politics that

they used to be, because policy is driving everything. And we may have kind of crossed the rubicon um in Nicona. You know, it seems like we have seen a little bit of steepening in the treasury yield curve even before the Jackson whole speech, picking up somewhat after that. Is it a no brainer to think that steepening trend is gonna continue, or you know, will the FED to have something to say about that down the road at some point? I mean, is I guess is the notion of potential

yield curve control from the Fed? Is that idea dead right now? Do you think or do you think it could be a topic we're talking about again in the future. So everyone I talked you think I'm crazy with my answer to this, But the idea is, especially on the show, I've been talking about yield for control type of policy sinceeding, before the boj Ample bent to the I always kind of brought it back to the World War Two for the fifties analog in the United States, and I think

it's still remains salient. Um. The way I would frame my answer to your question would be to say that I think it's likely that if this type of dawn market action were to continue and persist, I wouldn't be surprised if the FED in September Epilepsy decided to do something along the lines of saying, either we're gonna upsize QUI or we're going to shift the composition of QUI toward long end purchases. You know, what's the point of

buying the two years? What's the point of a point of buying the five year when you know those are you know, the Defense Promising Unit, they're basically just trading as funds, right, So UM, I would be surprised to see them come in with some sort of balance sheet policy to signal to the market that nope, you know,

we're even even the little bit that we've stepen. No, we're not going to allow it to I think in order to get a yield care control type of policy, or yield caps or anything along those lines, I think the impetus for that, and then the backdrop required for that would be a structural shift that the market used as a as a reason to challenge the Fed. Stands.

For example, if we were to get a very big fiscal package with signs that it would be quite durable and not just you know, a one time thing turning into a two time thing, but like this is the new normal, you know, the first thing traders would do is they would sell the long in the market, you know, of the bond market and um. If they were to do that enough, then the Fed likely step in and say, actually, we're going to make sure that all this spending is

finance at a specific level. The other potential scenario along these lines would be if we got some sort of um surprise on the vaccine front. There's a lot of political impulses occurring on both sides right now, so you know, there's probably higher than usual risk of UM kind of like a politically finessed vaccine headline to hit prel action, so you know, a big fiscal package or a vaccine, both of those things could be the impetus for folks in the market to just sell the long end and if, if,

if it were to feed on itself. That's the window and that's the preconditions I think required for the FED to step in with something like yielder control, because that's the moment where it's most needed, that's the moment where it's the most effective, and that's the moment where the FED is establishing the most credibility with that policy without taking the risk of you know, we're preempting it and by the time we need it, we have to do it again, and we have to kind of establish some

sort of novel credibility and you know that, you know, mon tery policy is a weird gain. It's similar, you know, it's similar to just like how money works for generally, it really depends on credibility and signaling. I disagree with the way some folks frame you know, credibility and inflation fighting or whatever. If you have structurally distiflationary regimes, the

credibility needs to be on the other side. But if we see a backup and yields, that's that's significant, and it's driven by some sort of regime ship, whether it's fiscal quality or a vaccine, that would be the type of window where I think that we could see yield curtetical. I do think that the FED would ultimately signal a willingness to go down that route if we were to see the bond market back up that part. So you mentioned fiscal but clearly, at least of now, we don't

have a fiscal four package yet. The FED has made it very very clear that they're on the market side lower for longer, they'll let both inflation in the labor market run hot. How much pressure then does that put on the fiscal side of the equation, And how do you think about those risks or the risk that maybe we don't get another trillion dollar fiscal package, or is that outcome just so far fetched that people just won't

even believe that that won't happen. The way the FED has realigned and recalibrated its policy has essentially been a move a move away from being kind of a shock absorber or counter say focal to being procyclical, by which I mean this usually if stocks go down, real yields will fall because folks are expecting the fat. You know, ease,

if socks go up, real yelds go up. So sorry about my dog left, because you know, folks are expecting Okay, this reflects possibility for the FAT to start tightening policy because we are in like a clause I tagged environment

and nominally yields. It becomes the case that the FED policy becomes procyclical because as markets rise and as growth increases break even as an inflation rise, which means real yields fall, which means that effectively, as things are good in the economy and markets, financial conditions become even looser. And they actually they further feed that welcome for the first time. In the show novels Dog he got a new puppy, everyone, classic quarantine purchase. I'm gonna get my

dog down here to bark back at them. Sorry about that, guys, but yeah, So you know, as markets and as upside outcomes occur in markets and the economy, financial conditions actually become a looser. And the same thing works in rehearse where if there are downside risks to the markets or the economy, break even small and it really yields tightened,

they go up, which tightens financial conditions. So really the FED is in a position where it's become more of a post cyclical driver, and it becomes very important for fiscal policy to utilize that space, because if we have fiscal cliffs and such, and you know, people start selling break even and start betting on lower equation, then real borrowing costs actually rise, which exacerbates the issue. And to the question of what's going to happen and how do

the markets that do it? I think the way the market have been thinking through it is you know, look, you know personally at COVID, which really moved the odds for the presidential election odds um and pull ing, and then we have these protests and some interesting actions by certain police departments, which then coincided with the odds for

the Senate shifting as well. And you know, now everyone that talks about blue wave right like because of that, I think that the markets basically saying, even if they want to play games on fiscal polity right now, we'll basically get the hero's Act in February much so, you know, it's just like a window of uncertainty. But like, because there's something on the other side to look at, I'm gonna be buying in depth, which means that deep of a depth to buy when I think can change that.

There's a few things I can change that. And I think the closer we get to the election without without a deal, I think the bigger the risk becomes along these lines. But yeah, you know, if if fiscal policy doesn't follow through, then you know, a lot of what the FED is doing isn't really gonna be able to be effective. A lot of the Fed's effectiveness comes from accommodating fiscal policy. It is necessarily igniting effectiveness of it zone.

So without that fiscal polity, the potency and efficacy of the FEDS decisions is much lower. And actually the strategic shift could actually work a reverse because of this protocolcality element I'm talking about. Do we get that, I don't know.

I've always kind of been like, internally, we've been have of the view that it's likely to be the case that President Trump would prefer to have a big fiscal package that's much better time for the election Um, you know, and I think that how Speaker Felosi recognized that and that was part of the cocktail reasons why she passed the Heroes Act in the House in May, and you know, very early on, aiming for a late summer deal that

gets through the Center as well. And then we had these you know, the Executive Action and like all this fiscal drama and games and back and forth. But ultimately, I do think, you know, everyone has an incentive to get something done. Um, and well we probably will see something get done. Is it the case that, so, Sarah, you asked me, does what Jeff Powell is saying does defense approach? Do all these things pressure Congress into acting fiscally? Maybe?

I think that probably what pressures Congress a lot more than that would be the markets on the electoral cycle. So you know, if if we if the market decides, you know, my friend marked out one of his favorite phrases that he uses, which I think is very salient and insightful, is the market is very prone to quote belated overreactions. So if we get a belated overreaction to these kind of rolling fiscal cliffs, the market can go probe for a fiscal foot strike. I'm sure it will

find it and then we'll get the deal. Otherwise it becomes a game of electoral politics. And so you know, I wouldn't be surprised if you know, I don't know where we see a random pre election vaccine pump at the same time as around my stimulus package, you know, like and like just like a very well juiced pump

into the election. Fascinating what you said, because I think a lot of people and myself included, as we got into August, you know, it became sort of vacation season in Washington, d C. And then we had the political conventions where you knew nothing was going to get done. I had really expected sort of a tantrum in markets over the fact that there wasn't a physical package ready

to be signed. So you're you're thinking, is that the markets sort of looking through that into a blue sweep, a blue wave, and that we will get that Heroes Act, which is what it's like three times the size of what the latest GOP fiscal package was. That three you know,

three trillion verses one trillion. That's fascinating to me. I wonder though, you know, it's a long time between November and inauguration time in January, and I wonder what could go wrong in that period, you know, is is it safe to assume some political theater that could possibly create

some volatility? Do you think? Just similar to you, I was sitting there in July and August being like, really, the market just don't care about this, you know, I certainly I was certainly positioned for them to care about it, and you know, we have to make um some adjustments, and thankfully, you know, we were disciplined to our process and it worked out um quite well. But yeah, like

I was also very surprised about that. And and by the way, because of that, I run the risk inherently of of ex post front to rationalize the market move. But I do think that there's something to the notion of why do I care if I know that we're going to get a massive package coming in February and if that goes well, then like what's to stop them from continuing this? And that's an utter regime ship, you know. So I think I probably played at least a little

bit of a role to your matter question. You know, how quickly we normalized post pandemic and how quickly and how long and how durably we're able to maintain this new fiscal regime. Whether President Trump is re elected or not, whoever on the losing side will, in different ways and in different magnitudes have some sort of feeling of contesting

the election. And if it does end up being a lane duck period, I think it's an even bigger political risk because you know, there's a lot of things that can be done, especially on the geopolitical front, that might not be you know, the typical normal handover period during a late duct period between election inauguration, the distribution of probabilities changes so much, you know, especially if we get a fiscal package or a vaccine before the election, irrespective

of how effective it is, or irrespective of it if it won't through the right regulatory channels. You know, if Maderna wants to get a vaccine now and says they got to phase three and President Trump's administration wants to do an emergency use authorization, I mean, I don't know if that's like koshert but like they'll probably try, and that will probably matter to the markets, to the rather discourse.

And then the reason I bring that up, it's because if we get this well timed fiscal package were a well timed vaccine headline, then I'm sure folks will start re calibrating the the electoral odds of President Trump as well as the GOP the Senate. And you know, if that were to occur, then suddenly a lot of things start changing. Do we get a President Trump and a Democratic Senate? Do we get a blue sweep? Do we

get a red sweep? The point being there that the distribution of probabilistic outcomes, why it is, we have more outcomes that are that are within the range of probably plausible, and in that scenario that's like definitionally higher volatility. There's

there's more scenarios that need gonna be considered. Um So I absolutely believe that, Like you know, again, it's the sequencing is kind of like get to the point where the where the FED is understood and priced in, then you shift to the regime of fiscal and MACS, and then you shift to the regime and narrative of political risk and what can happen in that window. I don't know.

I mean, it's you know, I can try to be imaginative, but the broader point is like we all need to be imaginative about that window irrespective of like what things you're looking like going into the election or even coming out of it, and so, and that means it's likely to be the case of vultility. The electoral vultility extends

past the election, unlike most times. And that's one of the reasons that, like, if you look at the term structure of the VIX, you know you have the typical electoral king election king quote unquote, where you know, the vix, the implied Ford vix pops in November and then kind of starts to come back down because of the election risks. But unlike most years, it remains a little bit elevated

even past the election. I think that makes sense. In fact, I would argue that that window between the election inauguration. I would actually argue that Ford volatility is cheap because there's just so many scenarios that can materialize in that window. And some of them are great, you know, um like uh, there's a right tail too, not just the left til

right um. And some of them are really bad. And so the uncertainty along those lines, I think that's going to be where all the all the focus ships to the moment we get a fiscal package and or a vaccine pump, because that will be the moment where everyone who's been trading in anticipation for these things is like, Okay, it's baked in. I'm gonna do what the Fed traders

did on Jackson whole day. I'm gonna book by trades, i gonna book by Fed trades, I'm gonna book by Fiscal trades, and a book by VACS trades, and and just the price action because of that can start to read, you know, narratives follow price, so that can start to recalibrate and reframe the narratives in the market towards this political risk. And I do think that that window is going to be rite with political risk and likely also rife with marketing autility, probably the likeliest window for us

to see real market of all autility. Since Koder sounds like a fun end of the year, right, yeah, fun, it's fun. It's fun for me and fun for you because I'm a trader and you either journalists, but hey, everybody else. But it's that time, I believe. Is it that time? It is that time? Stand clear of the craziest things we saw in markets this week. Alright, Sarah, what did you and vill Donna come up with this week.

Well vill Donna came up with it. But I'm really going to have to amp this up to make it seem crazier maybe than it is. It is pretty crazy, though, I will say so. The AP reported that KFC Kentucky Fried Chicken is temporarily suspending its tagline. It's very popular tagline known as quote unquote finger looking good. And the reason that they're doing this I kild you not is. They say it is quote the most inappropriate slogan for

end quote due to the coronavirus um. So because of the coronavirus, they don't want people licking their fingers after eating. Kentucky Fried Chicken completely changed their slogan, at least for the time being. And of course Young Brands is the owner of CAF So what is It's like, wipe on your shirt? Good, now, wipe your fingers on your What are you supposed to do? Not? Not even wipe on

your shirt. It's like run to the nearest bathroom, wash your hands for twenty seconds, singing the ABC all right, that's pretty good, that's pretty good. I'll give you mine. Kind of funny, I believe not ful? Is is striking out on crazy things. But in your honor not I've got one, uh for you. I think you'll like this one as a hip hop Before you continue, Mike, before you continue. You know when you asked me, like, what's crazy a the market right now, it's like, you know,

give me a shark, give a ticker. I'll tell you. You know, it's the whole thing. That's true. That's true. It's hard to differentiate anymore from from the normal things in the But please continue, Mike, and I love I love the segue on about hip hop. You know for sure. Yea sonos hip hop aficionado and Southern bees. Sarah will tell you why. When I look at market stories, I like all the alternative asset classes and this is about

as alternative as it gets. Southebys in September is gonna hold its first auction of hip hop related memorabilia and items and sort of the main attraction of this auction is, if you remember back, it's way back in Biggie Smalls. It was just a few days before he died. He did a photo shoot, uh for Rap Pages magazine in which the photographer wanted to portray him as the King of New York. So somewhere he got this really cheap plastic crown and put it on Biggie's head. Some pretty

famous photos came out of it. He did, he said he it made him look like the Burger King. He didn't like it anyway. This is the highlight of Southeby's first hip hop auction in September. And he guess, Sarah, not, what would you guess that the estimated sale price of this crown is no. If I'm gonna let you go first, h I might go higher. Yeah, I might up it to two fifty Why not you you're like prices, right,

You're gonna go hundred and fifty one. They're saying they're putting a ballpark estimate of two hundred to three hundred thousand dollars for this crown. It is signed on the inside by both Biggie and the photographer. But here's what I think is crazy. Elsewhere in this auction twenty two handwritten and signed love letters from none other than a sixteen year old Tupac Shakur to a woman named Kathy Lowe who was his high school sweetheart back in Baltimore

back in the day. So two handwritten love letters, including one It's It's adorable, it says Tupac hearts Cathy with the heart you know, all signed, all all original, Some include some verses, some poetry from Tupac. What do you think higher? Lower than Biggie's Crown? I personally, I would say lower. I could see you doing much more with Biggie's crown than just twenty two love letters. I'll be there from Tupac lying around, but I'd have to say low.

But you're but you'd like to wear the crown out on the town and stuff stars obviously, how about you? What what's your what's your price? Is right? Bid for for Tupac letters? You know, I would guess lower, But if it were lower, I would try arbitrage in the difference, because that's it's much lower than estimating love letters at

sixty thousand to eighty thousand. I think there's a little East Coast bias going on in the pricing here from Southebes, you know what, Like, I think we need to hit up South Beast because I wonder how much my high school jazz and hip hop instrumentals would go for right now. I hope they would get a little bit close to the love letters at least maybe I could. Maybe I could pay for my Blue matterminal for a year or something. You know, let's do it. Let's get them in the auction.

We'll get him in the auction. I expect you to bid in this auction. Novel. I next thing, you know, Mike's gonna see. Mike's gonna see a headline. It's gonna say your name wins out the auction at Stubbs. The next time we have you on, yes, you will be uh wearing the crown and reading. I would love that more than anything. And by the way, last saw real quick my puppy that I recently got that we were

talking about. His name is Nas, named after Nas, the rapper from Queensbridge who has a who has an album came out which came out this week. So, you know, much respect to my East Coast rappers as well. But where's the love for tuplock right now? But I think they need a West Coast auction house for handle well. I feel like we could talk about hip hop for days. I don't know if you definitely could, but not ful Sonala, thanks us so much for joining us on the show

this week. Always a pleasure. Guys, thank you so much for having me until next time. 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 Podcasts so more listeners can find us. And you can find us on Twitter, follow me at at Sarah pont Sack, Mike is that reganonymous, and you can also follow Bloomberg

Podcasts at podcasts. Remember, you can also give us a call at our very own Bloomberg Podcast hotline. That number is six four six three two four three for nine zero, and if you leave a message, we may even play it on the show, of course. Thanks Charlie Pellett too, of Bloomberg Radio and the voice of the New York City Subway System. What Goes Up is produced by Jordan gas Bore. The head of Bloomberg Podcast is Francesca Levie. Thanks for listening. See you next time.