Comments
Transcript
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REDave has a talent for taking potentially difficult market topics and using the proper analogies to make them very easy to understand. Thanks
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MHI cannot possibly exaggerate how much I like that interview. Excellent.
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RHI deduce that inflation (rising cost of living) has been present in the various levels of government themselves, in taxes. So we've had inflation all along, no?
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FBWell by the comments after this interview the crowd was restless. What I found interesting was the focus on something other than trade,as most know the economies of the world were slowing before the trade conflict started.Were the comments on risk parity simplified,probably,will the affects of negative interest rates make the strategy less predictable,likely,were the comments on why the FED raised rates incomplete,yes. RELAX and understand the limitations of a forty minute interview. One thing I didn't appreciate was the commercial by Zervos at the end. Ed,great job,you let the speaker talk but interject strategically.
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DSIn a last-ditch effort to make a United Europe, Christine Lagarde will try to implement a controlled MMT to kick start the slowing economies. Her legal and negotiating skills will be needed, There is a chance that even Germany will step in as its economy is slowing. It will not work. The Euro, QE and negative rates have not worked, but that will not stop the politicians from trying. With all the different countries needing to agree, it will be a "Glass Bead Game" to the max. Another option is to break up the Euro, but they will try everything possible before they allow the Euro to crumble. DLS
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LLLoved the high level macro section on disinflation increment from demographics, technology and low rates/cheap capital
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JHGood interview. I only detect inflation in the 3 biggest asset classes in the world. U.S. stocks, bonds and real estate in cities over 250K. College costs are up 1,375% since 1978, 4x's the CPI. Someone should ask Liz Warren why this is so? Give her a Ph.D. in Chutzpah. The cost of funding retirement, the biggest liability anyone of us will ever have has soared. Ask any CFO still overseeing a DB plan. My health care premiums and OOP costs are surely up more than the CPI since Barry Care took hold in 2010. I think the Fed has overshot it's inflation goal. Mission accomplished Chairman Powell. Stop.
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DHSo now holding prices steady (the fed mandate is no inflation) is dissed using the Laffer curve. This is academic baloney. I enjoyed the conversation except for this. Inflation is only good for debtors and bankers.
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PUReality check: after 10 years of nonstop intervention & record debt expansion we’re right back where we started: Without more stimulus, rate cuts, and coming QE everything falls apart. What’s that tell you about the true state of economies and financial markets?
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PU"For all of their faults leaders like Donald Trump, Matteo Salvini and even Boris Johnson understand that to regain the confidence of the people they will have to wrest control of their governments from the central banks and the technocratic institutions that back them. That fear will keep the central banks from deflating the global money supply because politicians like Trump and Salvini understand that their central banks are enemies of the people. As populists this would feed their domestic reform agendas. So, the central banks will do what they’ve always done — protect the banks and that means inflation, bailouts and the rest. At the same time the powers that be, whom I like to call The Davos Crowd, are dead set on completing their journey to the Dark Side and create their transnational superstructure of treaties and corporate informational hegemony which they ironically call The Open Society. This means continuing to use whatever powers are at their disposal to marginalize, silence and outright kill anyone who gets in their way, c.f. Jeffrey Epstein. But all of this is a consequence of the faulty foundation of the global financial system built on fraud, Ponzi schemes and debt leverage… but I repeat myself. And once the Ponzi scheme reaches its terminal state, once there are no more containers to stuff more fake money into the virtual mattresses nominally known as banks, confidence in the entire system collapses. It’s staring us in the face every day. The markets keep telling us this. Oil can’t rally on war threats. Equity markets tread water violently as currencies break down technically. Gold is in a bull market. Billions flow through Bitcoin to avoid insane capital controls. Any existential threat to the current order is to be squashed. It’s reflexive behavior at this point. But, as the Epstein murder spotlights so brilliantly, this reflexive behavior is now a Hobson’s Choice. They either kill Epstein or he cuts a deal or stands trial and hundreds of very powerful people are exposed along with the honeypot programs that are the source of so much of the bad policy we all live with every day. These operations are the lifeblood of the power structure, without it glitches in the Matrix occur. People get elected to power who can’t be easily controlled. The central banks are faced with the same problem. To deflate is worse than inflating therefore there is no real choice. So, inflation it is. Inflation extends their control another day, another week. Whenever I analyze situations like this I think of a man falling out of a building. In that state he will do anything to find a solution to his problem, grasp onto any hope and use that as a means to prolong his life and avoid hitting the ground for as long as possible. Desperate people do desperate and stupid things. So as the mother of all Battles of the ‘Flations unfolds over the next two years, remember it’s not your job to take sides because they will take you with them. This is not a battle you win, but rather survive. Like Godzilla and Mothra destroying the city. If Epstein’s murder tells you anything, there’s a war going on for control of what’s left of the crumbling power structure. And since inflation is the only choice that choice will undermine what little faith there is in the current crop of institutions we’ve charged with maintaining societal order. As those crumble that feeds the inflation to be unleashed. For the smart investor, the best choice is not to play. Wealth preservation is the key to survival. That means holding assets whose value may fluctuate but which cannot be taken from you during a crisis. It means having productive assets and being efficient with your time. It means minimizing your counter-party risk. Getting out of debt. Buying gold and cryptos on program or on pullbacks. Most importantly, it means keeping your skills up to date and your value to your employer(s) high. And if you’re really smart, diversifying your income streams to keep your options open. Deflation and inflation are two sides of the same coin (or the same side of two coins). Both are just as destructive." - Mr. Luongo
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PUZervos at 32:08 "But we have other disinflationary trends. Just tightened monetary policy 250 basis points with $800 billion of QT. Why did they do that? To slow aggregate demand and produce disinflation to fight, theoretically, higher inflation." WRONG AGAIN DAVID. Fed wanted to move further from the extraordinary monetary policy framework that we have been stuck in for 10 years! David, I have been listening to you for a long time. You are a dangerous thinker as it relates to monetary policy and the role of Central Bankers. You encourage price fixing in interest rates via "we need inflation". You "normalize" the concept that the Central Bank can work closely with the Treasury and purchase all outstanding debt and this doesn't fly in the face of real economics. Specifically, economic prosperity is not a magic trick (e.g. CB working with Treasury to buy all the outstanding bonds). It takes hard work, social cohesion and discipline, innovation and creativity, and savings and prudent investment (PROVEN F ECONOMIC VIRTUES - DAVID). The extraordinary monetary policies like QE (in the form of CB purchases of sovereign bonds, corporate bonds, mortgages, equities, and junk bonds) zero interest rates, and negative interest rates implemented en mass since 2008 (now > $17 f Trillion - DAVID) HAS NOTHING TO DO WITH PROVEN ECONOMIC VIRTUES. These unprecedented monetary policies (that YOU F ENCOURAGE YOU DANGEROUS TWIT) are utilized to avoid short-term economic "pain" and these policies will ultimately wreak economic havoc just as prior "SOMETHING FOR NOTHING" monetary policies have done throughout history. IMHO, you are intellectually F DISHONEST as I know you aren't stupid on this subject matter.
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SBJay Powell not academic enough? He has seen more markets than probably every PhD at the Fed combined. I'd trust my money, and our monetary policy, to a non-academic like Powell any day. The more academic central bankers become, the more detached from reality the are. In any other science, a good ability to forecast implies a good understanding of the subject. For some reason we keen looking to academics with terrible forecasting records, and listening to those who promote them, more than we should IMHO. I suspect most people who have had skin in the game will agree.
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BCThis is as close to unwatchable as Real Vision gets in my book. Shallowly boiling down every market problem to there not being loose enough monetary policy in what is already the loosest era of DM modern history does not pass for thoughtful analysis to me. Once rates get pushed below zero nearly everywhere, the argument is then not deep enough negative rates I'm guessing? Care to venture into more structural or meaningful territory perhaps?
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ECWow and I thought Raoul was sticking his neck out on his call about European banks & all that entails. Appears Dave Zervos wants a bold call type arms race with him by predicting US interest rates will not go negative tomorrow. According to him the world economy must have been much stronger than I realized when the trade war erupted. I did enjoy viewing this & did get some insight I lacked about the inner fed workings.
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asThanks David
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RGI appreciate the well thought out Macro views David presents. But it continues to confound me how profoundly misunderstood the basic concept of Risk Parity continues to be even with well versed financial professionals. While there are many misunderstandings, the biggest has to be the assertion that Risk Parity will do poorly in an inflationary environment because both bonds and equities will correlate and lose money together. This is simply and categorically incorrect. Traditional Risk Parity intentionally implements a pro-inflationary asset class bucket that may include TIPS, commodities and gold, in equal risk contribution to the bond bucket and the equity bucket. This is a crucial and inextricable part of what makes Risk Parity “All Weather” as Bridgewater puts it. In the 70’s when bonds and stocks correlated and made no real returns, the pro-inflation bucket would’ve provided returns in the thousands of percentage points to offset that poor performance. It appears from David’s comments that his RP portfolio is merely comprised of US bonds and US equities in equal risk contribution with leverage. That is, the two best performing ex-post asset classes on the planet levered up. A traditional RP portfolio includes foreign equities and foreign bonds and inflation assets. This portfolio, long term provides a fantastic steady return stream but at a Sharpe of no mare than 60bps. Sorry I went long, lol, but I thought it would be a disservice to RV viewers if a didn’t add my two cents here. Keep up the great work!
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EAWhat did Zervos mean by “major inflation framework change” at the beginning, that he said the Fed won't do before the election? Also I don't understand why the description says anything about a "paradigm shift at the Fed", it seems like he said the opposite, that it will be business as usual until at least after the election. I do agree that technology is a massive deflationary pressure that does not get talked about on this site very much. Also it drives inequality because there is no structure for the efficiencies from automation to be equally shared between capital and labor, they all go to the top. That's why massive fortunes can be made during periods of rapid technological progress, but it's also why it tends to make working conditions and compensation worse in the short run. If the US wasn't so allergic to any form of wealth redistribution maybe we could do it voluntarily before a crisis forces us to.
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JNI will summarize the 39 minute video: the Fed does not know what they are doing and is always playing catch up. Internal strife in the fed is lowering the feds ability to be flexible and logical. We all know the fed knew exactly what was going to happen in 2008 (they didn’t)
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CHEvery time I see those two coffee stands, which look much more like maces for serious melee combat, I wonder which interview will break down to the point that the interlocutors wield them in anger and take a few swings at one another.
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MJThank you David Zervos for this excellent, 40-minute endorsement of bitcoin.
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JTThanks guys. Excellent content as usual. Like the kicks, Ed.
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CLThe last 10 min I know why his trophy wife was hitting the personal trainer
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KSMs. Magoo Janet Yellen was a titan. LOL!!!
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TOEd is an excellent interviewer.
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HvHi Ed and David Is there any way we could get more info on how to trade in the Bond-Stock risk parity structure? The Spoos and Blues trades, S&P and Eurodollar futures, as David calls it. I’ve put on Raoul’s Eurodollars futures trade: Dec2020 and Dec2021. I’d like to know more about working with this style of strategy especially incorporating the S&P angle as well as setting up the ED component beyond the one-time trade I’ve got on at the moment. Thanks to both of you for a great interview. It was a pleasure to listen to. Hannah
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SAA phenomenal interview. This was one of my favorites on this platform and a real mind bender. Zervos is just a great articulator and his FED commentary was exceptional. I really, really enjoyed this interview. What a guy. Couple of things: Much of Zervos' outlook is not unbiased. He is a risk parity guy by profession and he needs the FED to keep rates low. The FED is the only risk to his trade. He explained in detail that I have noticed that his professional bias colors his opinion on FED policy. He won't argue for higher rates even if that is the correct economic policy for the country and produces jobs and prosperity for the greatest amount of people. He is absolutely correct that inflation is a tax but what he forgets is that inflation is a highly regressive tax just like a sales tax. It hits the poorest the hardest. Thus it exacerbates inequality and inequality itself is a growth destroyer. Imagine an economy where you have one guy with $200 and 9 guys with no money - you have an economy of 1 guy spending $10. If you take $90 from the 1 guy and give it to the 9 guys ($10 each), you have an economy of 10 guys spending $100. The 1 guy is upset at his lower net worth but you have a much bigger economy. Redistribution when configured correctly produces growth. So you can configure inflation higher but at the same you are likely also configuring growth lower because inequality is higher. Because inflation is a regressive tax is one of the least preferred ways to tax - for progressives that is. Republicans love regressive taxation. However, the question ultimately isn't why the FED is missing its inflation target, the question is why the FED is missing its growth target. We have had fiscal stimulus of 1.5 trillion in tax cuts in 2018 and 1.5 trillion in spending cap increases in the budget deal this summer and the shutdown deal in January (and a whole bunch of other spending from the Paul Ryan Congress which I will not enumerate). The fiscal stimulus under Trump has been massive. So why growth still sputtering? The answer to that is not the trade war. Trade deficit and imports from China hit new highs every month, US exports hit new highs every month. Total volume of trade hits new highs every month. The trade war is largely a media fiction. Trade between US and the world has never been bigger. The answer to our growth problem is in fact higher inflation and the resulting higher inequality. GDP deflator was 2.3% in 2018 highest since 2007 and GDP deflator was 2.55% in Q2 of 2019. Phillips curve may be broken according to Zervos but very low unemployment rate and massive fiscal stimulus has us at the highest GDP deflator readings since 2007 and those have cut growth significantly from near 3% to 2%. Nominal GDP is largely constant, if inflation gets stronger, real GDP goes down. He may focus on PCE, but at the end of the day we calculate real GDP using the GDP deflator, not PCE. FED is here to produce growth and prosperity for the most amount of people. Zervos focusing too much on PCE leads him to ignore the larger inflationary threat which is undercutting growth quite significantly as we speak. Risk parity guys keep lobbying for the FED for policies that makes them rich and the FED actually listens to them, it creates higher inflation and that's a big part of the reason why the US economy can't produce the growth everybody wants.
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HvEvery Real Vision Interview video is the academic equivalent of a 4-month university course.. with a tuition of $180USD per year. Love you guys!
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CL'Ol Davey just doesnt look the same without the "I <3 QE" hat.
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DGThis was a thoughtful and insightful discussion but I want to point out that commercial risk parity strategies own commodities as a hedge against unexpected inflation. The premise that risk parity will fold when rising inflation causes high correlations between stocks and bonds becomes subject to review if commodity exposure is considered. David stated that risk parity would perform poorly in the 1970s, and it certainly could, but compared to what? Strategies without commodity exposure may actually perform worse despite larger (leveraged) bond exposure in risk parity. Again, the interview was excellent and I couldn't agree more that a regime shift to inflation is a major risk that cannot be ignored.
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AJBrilliant thinker. In my opinion the most illuminating interview in months. Well done Ed and Real Vision. Zervos' insights into structural deflation and his explanation on the inner workings of the Fed were very helpful. His short-end leveraged risk parity model is perhaps the best asset allocation model since the financial crisis. I love the way he cut the duration and increased the leverage.
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TWHis argument isn’t really that strong. If central banks had so much control over an economy why haven’t we seen strong growth from Japan and Europe. In addition, the Fed raised rates for good reasons unneeded stimulus when the economy is strong and unemployment is low is typically inflationary. Not to mention, that tariffs are also inflationary. Also the idea that Fed official not wanting to raise rates is unfair and dismissive. There have been growing financial imbalances simmering for a while primarily because rates were too low for too long. In my view weakness in the economy is largely due to market shocks due trade and geopolitical tensions. The impact that rising rates had on turkey and Argentina is peanuts compared to what has happened in Germany and China as a result of rising tariffs.
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DPHere is one thing I can't wrap my mind around: what happens to Risk Parity under negative rates? Surely there is a limit to the negative carry that you can withstand...
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FAI can't believe Ed said "Inflation is just a tax like any other tax". This is a completely false statement in that it is NOT like any other tax. Far from it from on a societal basis. After that .... couldn't read the rest.
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JCOne point he made which was new to me was how the Fed underlings really don't like Trump (gee I wonder why) and thus there is internal pressure there underlying the whole edifice to maintain their faux independence and keep pursing their nutty academic policies. So its not just the superficial pressure on Powell to not 'give in' to Trump's crazy attacks. An angle that was overlooked during the conversation is Hedgeye's views on "PE Powell", i.e. his private equity background and how that whole ugly industry is based on low rates to help finance the companies they buy (and subsequently destroy most of the time). The PE lobby will be clamoring for low rates forever and when the time comes he'll rush back to low or zero rates 3x faster than they raised simply because he will have to. So it won't just be Trump, or 'the market' clamoring for 'lower rates' in a few months after we get some bad earnings numbers and more market hiccups. A whole chorus of folks will be doing so. Big part of the reason why I love Raoul's Eurodollar trader more and more these days.
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AMWhat is the strategy exactly that gave such a performance?
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DSWe are in a CapEx/balance sheet manufacturing recession and the Fed cannot do anything about it. The US GDP may not actually go negative as the manufacturing sector is down to 15% from 25% 20 years ago. The Fed was trying its very best to raise rates to normalize rates to have some ammunition in the next recession. In a CapEx/balance sheet recession it would not matter anyway. That is the old game plan. Companies are too deep in debt and afraid of investment. The new reality is the Fed and most CBs no longer can affect the economy. They do affect the markets because of historical psychological market linkages; not reality. We are better off letting the FX markets apply currency discipline to the markets. The trade war like any lawsuit/government policy now has a life of its own. The daily tactical moves by the US and China do markedly affect stock markets as they make a difference in the real economy. The next big move is MMT as both sides of Congress feather their nests. This was totally unnecessary if the Western Democracies would have maintained fiscal responsibility. Fiscal responsibility, however, may just not be a normal human behavior. Oscar Wilde: “I can resist everything except temptation.” DLS
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WBSPus and Blues. So simple and he's crushed it.
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AMLots of valuable insights in this interview. I voted thumbs up even though I disagree with one or two insights. For example, one difference between the inflation tax and any other tax is inflation is a hidden tax whereas others provide 'full disclosure' to society. This difference has longer term and asymmetric consequences that I think needed to be fleshed out a bit more in the interview. For sure it's a small probability event, but the outcome is definitely not benign.
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EKThe interesting question here is that the US managed to inflate the debt from WWII and still have a growing economy. Irrespective that demographics are different (or maybe critical to it) and advantage of having only mfg infrastructure how can this be potentially be replicated or maybe the world is just too interconnected, technologically-driven, and old.
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TOi don't know this guy but he sounds like a salesman?
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PUBlackRock CEO Larry Fink Says ECB Must Buy Equities to Stimulate Euro Zone NEW YORK (Reuters) - BlackRock Chief Executive Larry Fink said on Friday the European Central Bank will need to purchase equities to stimulate Europe's economy, and that leaders should find ways to have investors embrace an "equity culture" there. Zervos is supportive of this. . . . crazy!
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TEI think that for anybody who has ever had anything to do with the fed deflation / deflationary is a forbidden word. Only allowed to mention disinflation.
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PUPer Mr. Luongo - "The central banks have run out of room to battle deflation. QE, ZIRP, NIRP, OMT, TARGET2, QT, ZOMG, BBQSauce! It all amounts to the same thing. How can we stuff fake money onto more fake balance sheets to maintain the illusion of price stability? The consequences of this coordinated policy to save the banking system from itself has resulted in massive populist uprisings around the world thanks to a hollowing out of the middle class to pay for it all. The central banks’ only move here is to inflate to the high heavens, because the civil unrest from a massive deflation would sweep them from power quicker."
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PUI see David cleaned up his appearance and got rid of the flowing long hair.
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DHIts trade war It’s not trade war Its global slowdown Oh it’s not that terrible Opinions, welcome. Make your own call.
DAVID ZERVOS: If you really look at the meat and potatoes of trade and what has been done, 25% tariffs on $200 billion worth of stuff is an odd lot in the global economy. The real story is not trade. The real story is that the Fed tightened a bunch in '17 and '18-- 250 basis points and $800 billion of QT. And that slowed the economy down in '19 and will do it again in '20, because monetary policy operates with long and variable lags.
Inflation is just a tax like any other tax, and it's a way to raise revenue like any other tax. I think what we're finding in developed markets is that we're not using the inflation/taxation structure optimally.
ED HARRISON: This is Ed Harrison for Real Vision. Today's interview is with David Zervos he is the chief market strategist at Jefferies. And he's also a former Fed insider. So we're going to talk to him about where the fed has come from in terms of its model, in terms of how it applies monetary policy and where it's going, and what impact that's going to have on asset markets. Hope you enjoy.
David Zervos, it is very good to have you here at Real Vision. I want to talk to you because we're at a pivotal point in terms of this economy, many people think, in terms of monetary policy. We had a massive above phase from the Federal Reserve, and we're moving potentially into a new paradigm.
So maybe we can start there. What's going on at the Fed in terms of the switch that we saw in December of last year. And where is it going to head?
DAVID ZERVOS: So I think it's been a kind of crazy year if you look back at what's gone on with the Fed. Jackson Hole August of last year, Jay gave a speech about the stars, if you remember, astrology. He was comparing our star and you star and pi star to astrological constellations, things that we don't know a lot about, things that aren't very scientific, things that are pretty nebulous concepts.
And I think that was a great speech. It actually coincided with S&Ps at record highs. I think we touched almost 2,950. Nobody was getting too worried about interest rates at that point. They were obviously higher than they are today, but we had kind of come off the highs. The inflation scare of the early part of '18 went away as some of the wage data dissipated.
But the Fed went through some sort of transformation that summer. Jay went through some sort of transformation, and he came out in October and he started talking about being a long way from neutral, making a couple of off-the-cuff remarks about autopilot on the balance sheet. And the market just couldn't handle the flipping and the flopping, and we flopped pretty hard by December.
I'm not really sure what caused the Fed to get that sort of overly aggressive bias, or Jay, throughout the year. It might've been the fiscal stimulus that was coming through. Nobody really liked end-of-cycle fiscal stimulus. They were kind of worried about the inflationary component of that and probably didn't like it for political reasons as well. And I think there was just still a lot of confusion about the models at the Fed. Like, are we going to get with near 50-year lows in unemployment a bunch of inflation?
And Jay just had a pretty rough time communicating with us. And it took a big shift in January and all of Q1 to kind of get those multiple rate hikes in 2019 out of the system. And July was really, I think, the culmination of taking a very hawkish-- much more hawkish than necessary-- view, shifting it to kind of a neutral, OK, we know exactly know where we're going, ultimately to the cut that we got in July. And that was the culmination of many months, a few quarters, of change.
And I think it's indicative of a Fed that's probably a bit tormented by its models, the Phillips curve being dead or near asphyxiated at this stage, and a Fed that's probably got some political demons. It's fighting Trump on one side, and it doesn't want to seem like it's under the thumb. But also, if you look underneath the committee, there's not a lot of Trump supporters amongst the staff or the FOMC. And the idea that they're going to do something particularly friendly for the administration going into the election year is probably a little harder pill to swallow.
So you've got two political undercurrents that I think are difficult to manage at the Fed. That said, look, the reality is that they've missed their inflation target by a lot for many years.
ED HARRISON: For a long time.
DAVID ZERVOS: For a long time. I mean, if you go by the numbers-- and this is the eighth year-- then we're going to have missed probably by an average of something like 70 basis points, cumulatively over 500 in the PCE.
So I think they've got a lot of soul searching to do. How can you have a whole model based on labor market slack being the driver of inflation when we're sitting at a 50-year low in unemployment and the PCE's coming in at 1,516 and it's not accelerating at all? In fact, at least according to the PPI, last week there's a little bit of deceleration in core, and we keep getting these undershoots.
So I think that's a big issue for the Fed, and that's why they're changing or thinking about changing their inflation framework. That was what the Chicago conference was all about in the early part of this summer.
ED HARRISON: So two things I think about when you say that. One is about the inflation framework, which I want to get to. But almost the immediate thing was this pivot that the Fed's now doing.
I get the sense, actually, that they're not as dovish as they initially were when they first made the pivot. When Powell was talking in July, he almost made it seem like, I want a one-and-done kind of thing. And it seems like Powell's been dragged along, kicking and screaming the whole time.
DAVID ZERVOS: Today I was watching some other program where they were playing Pinball Wizard before they were talking about the Fed. So it was a pinball machine kind of back and forth. It was one of the TV shows out there.
And I think that's kind of how Powell has come across. One minute, at the semi-annual testimony, he's talking about the inflation misses. And it's a big deal, and we need to think about changing the inflation framework. And we're going to go ahead and cut, no matter what the data are over the course of the next three or four weeks. Doesn't matter how strong it is. And then we get the press conference where he's kind of like, yeah, it's a mid-cycle slowdown. We're going to do one. Maybe we'll do another. We'll see how it goes.
It's just the market's getting tired of someone who just can't keep the ship on the same trajectory. And in that sense, I think, Powell's statements that seem to flip and flop become less relevant, because we've all kind of gotten used to what he is. He's just sort of not navigating a direct line. He seems like he's kowtowing to one faction and kowtowing to another faction, dealing with the president, dealing with Congress, dealing with the markets.
There's lots of factors that are driving him in different directions. And I don't think he has-- I don't know this for a fact, but I don't think he has that strong a view. I think there are other people on the committee that have more passionate views about things like price-level targeting or nominal GDP targeting or average inflation rate targeting. John Williams has spent a good part of his career writing about average inflation rate targeting. And I think Rich Clarida the same, and Charlie Evans the same. Jim Bullard obviously a big supporter of these sort of look-back strategies to make up for past misses.
And then you've got a faction on the committee that just kind of wants to stay out of this and not get too involved, whether it's the Esther George on one side, who dissented in the last meeting, or the surprise dissent, which was Eric Rosengren. Someone who's been a dove has actually--
ED HARRISON: Has become a lot more hawkish.
DAVID ZERVOS: And you know, you have to wonder how the political dominoes are falling inside the committee. And there's plenty of people on the committee that are-- they're not very excited about changing the inflation framework at a time when that would imply a lot of dovishness just in front of an election.
ED HARRISON: I mean, to wrap up what you're saying from my perspective is that there are so many moving parts to this. There's the Trump part. There is the unspoken part about, we got two dissents here, but we could if we did the wrong thing get a dissent on the other side from Bullard or someone else who is a little bit more dovish.
DAVID ZERVOS: We could also get more than two. We could get three or four dissents on that side.
ED HARRISON: Right. And so basically Powell is having to juggle a lot of things. And as a result of that, he's not coming across in a clear way.
DAVID ZERVOS: And he's also not as commanding of a presence as a Bernanke, a Yellen, or a Greenspan. I mean, I think you had titans in there before, and he's-- I think part of the reason he got the job to begin with was he didn't have these strong economic views. He wasn't a PhD economist. He didn't come up through the ranks debating all of these concepts like Taylor rules and Phillips curves and price-level targeting and nominal GDP targeting and all the-- he's more of a technocratic-- he brings a more technocratic structure.
And I think the reason the Trump administration went with him over someone like, say, Kevin Warsh or John Taylor is they felt like the other Republican candidates would have a little more grounding in their models, a little more grounding in their beliefs. And it may have made them less likely to be politically swayed.
So it kind of backfired, I think, for the administration. But nevertheless, I think that was the original thinking on why Jay probably got the job to begin with over others that may have seemed more consistent with historical figures that populated that chair with the academic credentials to go with it.
So I think, look, Jay's in a tough position. If we get a Trump win, he won't get reappointed. If we get a Democratic win, he won't get reappointed. He's kind of got to make the best of a pretty messy situation, and he's got a lot of factions inside and outside that are pressuring him. And so his communications do become quite complicated.
And the good news, as I said before, I think the market is getting used to this flip-flop thing. So they know he can change on a dime. So if things get messy and S&Ps drop 250 points, we kind of know where Jay's going to be. And so the backstop story really hasn't gone away.
The question is, in the big picture, are we headed for some sort of major inflation framework change which would actually cause a very significant rate structure move? I think the likelihood of that before the election is really low, just because it would be such a momentous change for the Fed prior to an election that's so controversial.
ED HARRISON: And you were on the inside of the Fed. I mean, who would be driving that process in terms of making it happen of the present governors and presidents at the Fed right now?
DAVID ZERVOS: I think the academic sort of push for that would be-- the two more powerful figures there would be Clarida and Williams. I think you'd have Evans and Bullard behind you-- again, academic powerhouses themselves. I think there are others that are certainly willing and open and want to think about it. Obviously, Neel Kashkari's involved in that, would be another one, although I don't think the academic credentials are as strong on that particular case.
But I think this is going to evolve, but it's got to evolve outside of a political structure. And this next year-- look, we're going to be in the fall. This is August. You're going to