Financial Markets Remain Abnormal | Andy Constan on Flat Yield Curve, Expensive Stock Market, and MicroStrategy
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door. Very pleased to be joined by Andy Constant, veteran macro trader and a publisher of the Damped Spring Report. Andy, it's great to see you. Welcome to Monetary Matters.

Hey, thanks for being on, for having me on, Jack. My pleasure. Andy, so you've got this report out talking about what's normal and what's not normal. So what is normal and what is not normal? The economy is near normal, but it's really struggling to become normal. And my view is the reason why it is not normal is because the financial markets are nothing like normal.

And what I mean by that is in a normal long term, if you think about the long term situation for the financial markets, typically what it means is there's a balance between those who want money to consume in the real economy or to invest in plant and equipment or hard assets in the real economy.

get their money by issuing securities, government bonds, issued municipal bonds, those who want to buy a house issue a mortgage, and those who want to start a business or add to, you know, grow their business through capital investment.

raise capital via the corporate equity and debt markets. And none of those markets are normal in the sense that to get that money, you have to get it from someone and that someone should expect a risk adjusted return that compensates them for handing you their money. And right now, no market really offers a end investor

a reasonable risk-adjusted return for their money. That's not sustainable, it's not normal, but what it does do is it supports the economy because all those people that want money to consume or invest in the real economy can get money very cheaply.

And that's just not normal. And it leads to an economy that has more than normal consumption, more than normal demand, broadly speaking, in the real economy. And so until that financial market returns to normal, the economy will be supported above what is normal. And that's what I call the, in my piece, the

near normal roundabout? So there's two things. There's the real economy and the financial economy. The real economy in many ways is close to normal. So you've got this great chart showing how nominal GDP just below 5% over the last annual period. That is basically at the 30-year average. Real GDP is also basically at 30-year average. Payroll growth, the jobs market, slightly above trend. Core PCE, core inflation is also above trend. So what's not normal in the real economy is

The labor market payroll growth is still high, but in particular, spending is still high and core inflation and inflation is still above 2%. But a lot of things in the real economy, according to you, are somewhat normal. Whereas in the financial economy, it's extremely non-normal. Go through what in the financial economy is non-normal. We're looking at bonds, looking at stocks, looking at gold, looking at everything. Yeah. So let's start with the thing that I think is...

Most important, which is when you think about what drives the economy in many countries today and in the long history of the United States, what drove the economy in terms of being able to tighten monetary policy or ease monetary policy has been short term interest rates.

And so that's the lever that global central banks have always used prior to 2008 to lean against economies that are too strong and support economies that are too weak by flicking that lever.

In Canada and in Europe and in Australia and those, that lever still actually works pretty well because so much of the borrowing is linked to that rate. In particular, housing is linked to that rate. There is...

Only the Netherlands and the United States have mortgages that are fixed. And so that fact, and along with the fact that those who had homes leading into, you know, for the last 15 years, basically, but particularly leading into the financial crisis, not the financial crisis, the COVID crisis, were able to refinance their mortgages at very, very low rates. And in so doing, they...

are not sensitive to changes in short-term rates and I would posit that by and large the US economy has very little sensitivity to short-term rates but short-term rates do have some impact on the economy and the Fed attempts to impact not only short-term rates but longer-term rates by using forward guidance and so where are we? Well

The Fed seems to me, based on the data they had, they may have made a reasonable decision. I didn't think they should have, but that's because I've been pretty optimistic about the economy for a long time and really discounted the weakness in the summer. But they cut 50 basis points in September. And subsequent to that, even two-year rates rose 60 to 70 basis points.

And 10-year rates and 30-year rates rose 70 to 80 basis points. Which is not normal, Andy. Normally, you know, interest rates down, bond prices up. Interest rates down, bond yields down. So cutting interest rates and then having the 10-year yield go up is not normal, right? Well, it's actually normal if you think that the cut was not needed and, in fact, counterproductive to the extent that the economy is

is strong enough to handle interest rates where they were by cutting, you make the economy potentially stronger. And most importantly, you make the

credibility, I hate to use that word because most people think Fed is not credible. And it's really what I use that word, I'm using it in a relative sense, not in an absolute sense. Whatever credibility they had, and that's up to the viewer's opinion, by cutting 50 and then having the economy heat up very quickly with NFP and GDI, all

and inflation numbers all rising since they cut, they've lost some credibility and that puts some uncertainty in long-term interest rates, which is reflected in term premium expansion. And so that's what's been driving these higher rates.

Normally, when you cut short-term rates, long-term rates follow. And normally, when you hike long-term rates, short-term rates, long-term rates follow. This is not normal to the extent that... I mean, it's a very normal reaction, but it's not normal if their intent was to lower long-term interest rates to ease the economy, ease conditions. They fail miserably. The short-term interest rates, the Fed has complete control over that. We were at zero. Then we get hiked to...

5.3%. Now it's at 4.75% around there. You think that that is not what is driving the economy. In 1980 and 1981, Volcker raised interest rates.

immediately caused a recession, then interest rates went down, immediately exited a recession, they went back up, immediately reentered a recession. You said we do not live in that world anymore. And that what really is sensitive is the longer term interest rate. And actually, so maybe was the September cut, short term rates down 50 basis points, and then the 10 year yield up, whatever, I don't have the exact figure, but a lot. Was that a net tightening in financial conditions? Yeah.

Yes. So financial conditions have tightened since they cut, which is not what they desired. So you have to ask, how can the Fed cause financial conditions to ease if that is in fact their desire, which it seems to be? But we'll come back to the Fed. I want to just focus on what happened to two-year rates. And in my view, what was not normal was that the

As we approached the FOMC meeting, the market had discounted a trough interest rate, or some people call it a neutral rate. It's a market rate that reflects where the market believes the Fed will end its cutting cycle. And that trough rate was at 2.8%.

And that's a market-based thing. That has nothing to do with the Fed. It's just an expectation of what the economy will need and where Fed funds will need. And that rate has reversed by 100 basis points. Currently, the trough rate is at 3.8%. And that is also... So what I thought was nuts was that aggressive amount of cutting. Now we have a...

Fed funds rate, Trough expected Fed funds rate, that's close to 4%. And to me, that's pretty nuts too. That's a pretty high rate relative to what I think the economy really needs.

So that's in the other direction. You think that's in the other direction? Yeah. Somewhere in the middle makes more sense to me that, you know, a trough fed funds rate of around three and a half percent would reflect a real interest, a real trough rate of one to one and a quarter percent and an inflation rate of two to two and a quarter percent, two and a half percent.

And to me, that's sort of normal. So we've flipped from very abnormal two-year rates to very modestly abnormal two-year rates in the other direction. And so let's talk about extending out the curve, which is the next important thing. So by and large, I think the short rate is a bit too high.

But let's be clear about normal and why things, what is a normal financial market? And a normal financial market has positively sloped yield curve, risk-free curve, treasury curve. And why is it positively sloped? It's consistent with an investor who could choose any point on the yield curve, including keeping their money in cash.

needs to have some form of extra yield in order to entice them to lock up their money for longer. And so what's that extra yield? That's a positively sloped yield curve. And if you look at normal, the normal US Treasury yield curve over many, many, many decades, it's been positive with twos being about 100 basis points lower than tens. And currently they're flat. Like today, they're literally flat.

And so that's not a normal yield curve. And what you're finding is that the long term interest rate remains extremely stimulative to financial conditions.

And that's supporting the economy above trend. So, Andy, just to spoil things a little bit, you think, you know, what to you, what looks like normal is a Fed funds between 3.5 and 4 percent, a 10 year yield between 4.7 percent and equity multiples between 17 and 19. What we have now is Fed

The 10-year is way lower. The Fed funds is way higher. So based on that, I expect you think there to be a steepening of the yield curve. And also, you said normal price to earnings multiple for the S&P 500, 16 to 19. Now it's at 22. So equities are expensive.

Credit is very expensive. High yield spreads and credit default swaps are very narrow and cheap. Realized equity volatility is low. And you also say gold is not trading based on real rates. So when you say that the market's not normal, that is primarily what you're referring to. Basically, financial conditions are very easy in everything except for short term interest rates, which the Federal Reserve controls. Absolutely. Thanks for summarizing. That's exactly right.

And, you know, the point being that if somebody wants money, most don't need it, frankly, but if somebody wants money to consume or invest in the real economy, build a factory, it's very cheap. And so that is, that leads to the potential for, if for some reason animal spirits kick in, the economy can heat up because people

instead of just spending their income, which is growing fairly rapidly, people and corporations can start tapping the financial markets and investing the proceeds into the real economy. And so my view is that is,

just keeping us in the roundabout where the Fed looks like it's going to be dovish, then data heats up, then they aren't going to be dovish and data cools down. And we just keep going in this roundabout, not making any progress.

and staying near normal. And that roundabout, if we can start it on screen, it's just the financial conditions are too easy, and that causes above-trend growth and sticky inflation. That causes a pause in Federal Reserve policy. Basically, they stop cutting or they're more hawkish. Then markets sell off. Then that causes a tightening of financial conditions and there's weaker data. And then that causes a soft landing as there's going to be a dovish pivot. And it kind of

It's a circle and it never leaves the circle. And yeah, over the past two to three years, I've seen this many, many times I've seen this cycle repeat where everyone thinks there's going to be a recession, assets sell off, and then the Federal Reserve is very dovish. And then that causes data to be strong once again. And it's a seesaw. It's a cycle, whatever metaphor you want to use.

to use, that's where we are. So, I mean, how do you determine if this cycle continues or if we've returned to a normal environment where equity multiples are lower and bond yields are higher? Right. So you never know when it's going to end. And it doesn't have to end if the

Policymakers are willing to accept not near normal economy versus not normal economy versus the normal, a normal economy. And that really is going to depend on their tolerance to accept, you know, above trend, real growth and above well above target inflation in the order of three to three and a quarter percent, not runaway inflation. If they're willing to tolerate that,

There's no need to change policy in any fashion. However, what it depends on is that the bond market accepts that and plays along. And there's lots of reasons why it could play along. For instance, I've been writing for two and a half years now how the bills issuance by Treasury, which is

of all net issuance in the last, since QT was started, has been 50% bills. If a treasury secretary continued to go down that path, there wouldn't necessarily be a reason for bonds to sell off because the supply just is not adequate for the demand for bonds. And you can maintain this size circle, but the consequences are higher inflation. And so,

The bond market could see, hey, the government is likely to want to extend its debt. The inflation expectations we've had are, they're not too high, but they could get a little higher. But really, the risk associated with a Fed that policymakers that no longer respect the 2% inflation goal,

and are willing to let the economy be hot could result in people saying, you know, long-term bonds are just a little bit more risky than they've been. And that little bit more risky could steepen the curve 25 to 50 basis points.

And what I've called that, and people try to associate these comments with bond vigilantes and extreme bear cases of treasury bonds melting up in yield. I'm talking about 25 to 50 basis points. I'm talking about a steepening, a modest steepening that still is steepening less than normal. It's not even a big move if you compare it to the normal curve, which is 100 basis points steep.

But that steepening, that bear steepening, is almost certain to create some disruption in risk assets.

And I call it the Fed losing the bond market. Right now, the Fed has had the bond market. It has allowed the Fed to be very patient, staying on this roundabout, near normal roundabout, hoping to arrive at the destination. But they're never going to arrive at the destination unless the bond market says,

Let's drive this economy into the ditch because we don't trust the Fed. Now, I call that the ditch scenario. There's a much, much more sensible. Oh, by the way, so that what that means, that disruption creates a more rapid markdown of equity prices, a more rapid markdown of equity prices could happen.

create economic damage, real economy damage, including job loss and so on. So it's not the desired path if you want a soft landing to have the bond market drive the economy in a ditch. We can have an alternative. And what I call that is the exit ramp to a new normal. And on that exit ramp, all the Fed has to do is not be dovish.

Just pause, pause, pause. Accept the fact that the economy will slow down. Accept the fact that there'll be some job loss. And that, accept the fact that that will bring inflation down to target. But it doesn't have to be a disaster. It doesn't have to be a 20% equity sell-off.

For instance, if you just said, how long can a, how, if we took three years to get back to normal financial markets, not rapidly, not disruptively, just by being relatively tighter,

in terms of the Fed's policy. Equity earnings over those three years are likely to grow, I don't know, 8% a year. You know, they're priced to grow 11% a year, so maybe they don't grow that much, but 8% a year, you know, that's a 24, 20, you know, three times eight, it compounds, I know, but 25% increase in earnings. That should support equity prices more than

the two points or three points of decline in multiples. And so you could actually have equities not fall and that would not be disruptive and it would bring the economy and bond prices wouldn't have to fall much. You could have the Fed cut to three and a half, 4% over a long period of time and the curve steepened by 50 to 100 basis points. And where are 10 year notes? They're about here.

So you could manage through the economies going from near normal to normal and financial markets correcting to normal without major disruption. To do that, you have to have the courage

to get off the near normal loop or the bond market may drive you into the ditch. And so when I think about what I would do as a policymaker, and that's an arrogant thing to say, but- You do look more like Ben Bernanke than the average bloke, I think. Yes, true. Though it's getting out of hand. What I would do is I would just-

Be patient. Let the economy actually weaken. Like, don't be concerned about the economy weakening. You have 500 basis points of interest rates to cut if you really do make a too tight policy mistake. But you have nothing to protect your credibility if you're too easy. A point on the equity valuation.

current forward price to earnings ratios are 22. You think you want them to return to 17 to 19. And by the way, no one comment, actual price to earnings ratio are 28. That's trailing to Andy and I are talking about forward. So 22 for price to earnings ratio to 19, that would be a 15% decline. So yeah, if over the next year, stocks go down 5% and earnings go up 10%,

equities would be- Multiples achievement. They would be in the normal range, slightly overvalued, definitely more overvalued than undervalued, but slightly in that normal range. So it doesn't have to be a crash at all. So you think that a 25 to 50 basis point move in the 10 year up from 4.3% to 4.8%, let's say, that would be bearish for equities. Describe how that motivates your view, because I know

There are different regimes about whether a move up in bond yields is good for stocks, is it bad for stocks. I know in 1997, stocks and bonds had a mildly positive correlation. And then after 1997, they had a mildly negative correlation.

But in 2022, stocks and bonds sold off at the same time, which was a total disaster. How are you tracking the stock bond correlation? And how are you hedging against the risk that your view on bonds is right? And that if we record in six to 12 months from now, the 10-year is at 4.8%, but the S&P is at 6,300. And the S&P has rallied alongside a sell-off in bonds.

Right. So I just look at it very simply. Bonds are driven by three things. They rise in yield when growth is strong. They rise in yield when, sorry, whenever I say strong, I mean above expectations. So when expectations of growth rise, bond yields rise. So that's A. B, when inflation expectations rise, bond yields rise.

That's B. And C, when the riskiness of bonds rise, I call that risk premium, yields rise. Now, A, B, and C apply to stocks too. A is about growth. When growth expectations rise, stock prices rise. So high yields can mean higher equity prices if growth is the driver. If inflation is the driver, it's...

generally true

that equities are less sensitive to inflation than most people think because inflation helps top line and may or may not hurt expense line depending on where the inflation is in the economy. And what we saw certainly in the initial parts of the post-COVID circumstance, top line grew significantly

And wages did not grow. And so that was a good time for equities when inflation was rising. You're talking about 2020 and 2021 where after March, obviously, you know, inflation in April 2020, it was extremely low, but it technically was still rising from zero. Right. Yeah. So what I'm saying is that the inflation rate,

correlation is is is just a little second order and nuanced. And so I'm going to just say, let's ignore it for the moment. But what is definitely true is when expectations of future returns on assets because they are risky, because they are perceived as well, let me step back. Let's start again. So the C is the riskiness of assets.

When expected risk of holding assets goes up, prices fall. And that means yields rise and stocks fall. So there's your dynamic. You have A, where yields and stock prices are positively correlated.

bonds and stock prices are negatively, bond prices and stock prices are negatively correlated. B, where bond prices are very correlated to inflation, higher inflation, lower bond prices, but equities are softly correlated. And then C, where risk premiums create correlation in prices.

And so to answer your question, if the economy grows, the real economy in particular, grows due to population increases or meaningful productivity, extension of this productivity miracle we have, yields can rise and stocks can rise.

My view is that what's not normal is not the responsiveness to growth. That's working fine. And if that actually happens, bond yields arise and stock prices will rise. Fine. What's not, that's not an, that's not abnormal. What's abnormal is the return people get on holding a portfolio of assets. And lots of people have been publishing about that. My friends at Elm Wealth, the guys at Goldman and

And Jeremy Grantham and others have said that the return on portfolio of assets is extremely low on a forward-looking basis. And that is what's not normal. If you are a saver, you want the expected future return to be adequate for your risk.

that's not what I would project and that's not what most people that study this particular area suggest. And so what that means is that returning to normal is getting a normal return for your cash when you take risk in buying financial assets. And until

Until that occurs, the economy is supported by your allowing others to have your money at an inadequate cost. And the cost of money at the overnight risk-free rate of 4.7% at the Federal Reserve, or I guess

4.8%, let's say, that is a lot higher than it used to be. But you're looking at high yield spreads, you're looking at the 10-year Treasury note, at things that the Federal Reserve doesn't control. Let's look at the costs that high yield borrowers are actually paying. So the high yield spread, you're absolutely right, is extremely low, probably closest to the lowest ever.

probably the only other time was like 2006 or 2005. However, if you take into account the high nominal yield, yield to worst, I'm just looking at is 7%, which is higher than most of 2010 to 2019, let's say. So what corporations are actually paying is still quite high, as well as a bank loan. I feel like a lot of commercial activity is financed by bank loans or private credit, which is a lot of...

what used to be in banks are now outside of banks, which is short-term money. Or rather, I should say, even if it's a long-term loan, it has a duration of basically zero because it's a floating rate. So it's SOFR plus 3%, or SOFR is the overnight rate, which is basically Fed funds. So isn't there a lot of interest rate sensitivity in the short end that you're right, has not played out so far over the past two years, two and a half years, but maybe it will in the future?

So corporations, in terms of new financing, it is high, right? Or are you just saying it's high, but the economy is in a better place than it was from 2011 to 2019? So it actually is net stimulative still?

Yeah, I mean, I think that's what you have to think about when you are trying to understand whether conditions are tight or easy. So let's just play this forward and say that there's this rate that's at 10%. It's much higher than it has been. It's high relative to history.

Does that by definition mean it's tight? No. No. It could be that the economy is generating, I don't know, 8% nominal GDP. And anybody who can put a little bit of their equity into

and borrow at 10% and invest in a lemonade stand is going to make a killing at that cost of funding, at 10% cost of funding, because their revenue is going to grow at 8% a year and they're levered. And so they can easily cover their interest costs. Similarly, and Japan is still in this situation,

interest rates could be 0% and very tight. And so you have to listen to that again, if you didn't get it, it's not the level of interest rates, it's the level of interest rates relative to the conditions that determine if things are easy or tight. And so

Where are we today? As I said, pretty much no financial asset is tight except possibly two years and fed funds and things that are since the very small, the smaller than historical percentage of the economy that depends on short term interest rates.

Right. So Andy, I totally agree with you. The 10%, if it's went from zero to 10%, doesn't it mean it's tight? If inflation's at 15%, it's not tight. Likewise, a 0% interest rate, if there's deflation, inflation's at negative 2%, doesn't mean it's loose at all. So we wind the clock back, Andy, two years ago, the same argument, I'm totally with you. Interest rates are at 4%. Everyone's going on TV, losing their minds. Inflation is still at 7%. So at 4% wasn't tight. However, at

As you know, inflation has gone down from peak of 9% to 7% to now below 3%. And I'm just looking at the great Nick Timros, like CPI,

Three-month annualized is basically 2.5%. So above the Fed's target, of course, their target is PCE, not CPI, but it's way lower than it was. So you have to make the adjustment of if inflation is at 15%, 10% is not tight, but hasn't the adjustment gone way, way down? So actually, even if interest rates have stayed where they are, a 5% used to not be restrictive, now it is restrictive.

Maybe. It certainly wasn't restrictive at higher rates. That doesn't prove that it's restrictive now. It just proves it's not as easy. So I don't know. The Fed has fairly myopically, in my opinion, that has left them in this...

near normal roundabout focused on measures like real fed funds, which is sort of intrinsic in the Taylor rule sort of way of thinking about the world, which by the way, is not a problem. The Taylor rule is a good way of thinking. It links employment or GDP gaps to inflation, to inflation targeting, to terminal, to the natural rate of interest. It's a reasonable model.

Some think that it could do the job itself, but it's the input. The input is real Fed funds. And the measure of inflation is, you know, arguably, while we had that 9% inflation, inflation expectations were never high.

And so if you use inflation expectations as your metric of forward-looking inflation and not in the rearview mirror, nothing's changed. Inflation expectations haven't changed. So why should policy change?

The point being, the economy is different than it was decades ago for the sensitivity toward interest rates, which I mentioned earlier, and also the conditions of those who are willing and able to print money and lend, banks. Banks are flush, capable and willing to lend.

And that is very unusual and not consistent with any sort of tight financial conditions. And so whether the front rate myopically is rising, the real Fed funds rate using

some backward looking measure of inflation is rising and thus tightening. There's no support for that in terms of what is happening in the real economy. But what about all the corporations, small businesses that fund themselves in the

short term interest rate market, but they pay so far plus 3%. They're suffering. Yeah, the ones that they're the ones that are feeling the tightening of short term interest rates, and yet, they operate in an economy that is macro doing great. So while they may be suffering with high interest costs, they're benefiting in sales.

in margin x interest rate costs because the economy is roaring because broad conditions are supportive of the economy. So yes, they are the ones that are most sensitive to short-term rates, but they also don't matter as much in the context of

of what's happening in the broad economy and they are the beneficiaries in terms of sales based on that what's happening in the economy so where they will suffer even worse as things as we actually get toward normal which is a shame you know as a human it's like why do you want your small businesses going uh to feel pain if they don't feel pain the bond market will cause more disruption

And then there, the people that get their coffee from the local coffee shop on their way to the corporate job in the S&P 500 corporation will all of a sudden stop showing up because they'll have been fired.

And so it's going to be it's going to there's going to be pain. And the first that are going to feel it are small businesses. But that'll be because either the Fed dishes out small pain for many years or the bond market says, get it. You guys aren't willing to land this plane. So we're recording this in late November 2024. The Federal Reserve Department

December FOMC meeting, which will also have a summary of economic projections, a dot plot that's coming up. That's going to be really important.

The market, I think, is pricing 50-50% chance of either a cut or pausing. Needless to say, you are in favor of a pause and a hawkish pause. You've got some specific recommendations. But setting aside what you think the Federal Reserve should do, what do you think they will do? Honestly, I don't know. I mean, the Fed has been leaning dovish for at least a year. It'll depend on what happens in the next, you know, the...

My projection for the PCE tomorrow will be 0.3% month over month. The expectation in Bloomberg consensus is still 0.2%. So I think the PCE will...

auger to pause, but might not. And then we have an NFP and another set of CPI and PPI data. I'm pretty bullish on the economy short term, both unfortunately with higher inflation, but also higher growth. And so it augers for a pause to me, but the data may not support that. So 50-50 seems about right. And in terms of the SEP, I don't think they could be hawkish enough.

And why I mean that is in the September SEP, they had a terminal rate of 2.9%. It's currently almost 4%.

to move the committee from 2.9% longer run interest rate anywhere close to where it is, it's just too heavy a lift. So I don't project the SEP having a sudden extreme move in the longer run interest rate. And they have 100 basis points penciled in for 2025 cuts.

Do I think that could be where the market is? That's like 60-ish, 65-ish at last I looked, but I don't think they're going to be more hawkish than that. And so I don't think they can be as hawkish as market pricing. And so that's why I'm actually fairly optimistic that if we get some hot data and two-year yields rise, that that'll be a great buy.

Really? Okay. Because though I expect them to pause, and I think they should, and I think the data will support a pause, and I think they will be hawkish on their SEP, the market's already there. So like many smart people, it's tough to actually simplify what you're saying. So you couldn't see yourself being bullish on the two-year yields, meaning that the market has priced in not enough cuts.

So you think the Fed should do what it's currently priced in, i.e. not a lot of cuts, but you think the Federal Reserve will do a lot more cuts, yes? So what I think the Fed will do is not do a lot more cuts, but what I think they will do in December is about, you know, they might cut. And I think what they'll project in their SEP is lower terminal rate, which means more cuts. Right.

than what the market is pricing. - So your longer term view is, I guess, bearish on those rates, but over the next month or until the FOMC, you could see that being a bullish event, rates going down. - Yeah, absolutely. Because they won't be as hawkish as markets are currently priced. And by the way, I don't have a long-term view on interest rates. I have a three month view on interest rates. And I think three months from now,

Having a long-term view doesn't help me. I think it'll depend on how the economy plays out and what policymakers do. And we do have a lot of volatility around a new political regime. So that's going to have impact. But in the very short term, long-term assets do not offer adequate return relative to cash and so are easy and support economic growth.

The two-year note has already priced extreme hawkishness from policymakers. And if, and again, if data comes in hot, I expect it to even price in more hawkishness, meaning

I'm not a buyer of two years at current price, but if we get hot data, I think two-year notes will generate 4.5% yields. And at that point, I think they're a very attractive near-term buy.

So as you record the two year yield is 4.28%. You're saying if it goes up to 4.5%, it's you are, you would be a buyer at those levels. Absolutely. Absolutely. I don't have a position today. And I think that that would be a very good level to get into two year notes because

because of expectations of extreme hawkishness from the Fed, which I don't think are valid. And so you don't have a position in the two-year note. Do you have a position in the 10-year note, which you also said you think could go up a lot? Yeah, I bought some puts yesterday about my normal position. My normal position size is when I buy options is 1% worst case loss of my alpha portfolio.

And I bought some puts yesterday and that amount and, you know, tactical two month trade. And, you know, if they start, if yields start rising, you know, I'll take profits on that. And if they start to continue to fall, I could easily imagine doubling that risk.

And so are you, what are you more bearish on right now? Stocks or bonds? Stocks are in a funky position right now. I think they're going to suffer. You know, they've come up a lot on the Trump tax cuts and, um,

which totally makes sense. Like they should have rallied on a red sweep and they did. But, and then there's this, you know, this long Santa Claus, which I'm trying to mimic today type rally flows that, you know, are supportive. And I have a little thing that I'm,

pay attention to regarding month and just the quarter end where a large position of by a large mutual fund causes a magnet to 60 55 on the spx which you know currently we're at 6 000 so you know i could see us drifting up 100 points and then settling up 50 but

But I also could see, you know, that's very, to me, again, who knows? You're just guessing. But it seems very significant positive outcomes for equities, including ongoing dovish central bank, strong economy, multiples, all of those things are, and positioning. I mean, you look at positioning right now and the global economy

Market portfolio, everything, all the assets is massively overweight, long US equities.

So, lots of people talk about shorts and longs and all, and where's the pain trade? Just look at what's happened to assets. And you can see that the assets, forget who's long or short them, but the assets, which is only everyone is long. There's no, anybody that's short is offset by somebody who's extra long.

people who are long assets are massively over long us equities and that creates an unbalanced portfolio which eventually gets rebalanced when does it get rebalanced that's hard to say but eventually that gets rebalanced so i look at equities as being just not having any adequate return and so

Then you look at potential catalysts in the very near term, and I see three, three, four catalysts that could create a little bit of pain in equities in the near term. And there's tomorrow's PCE, there's the NFP, which I expect to be hot, there's CPI and PPI, and then there's the FOMC. And when I look at, and then there's also potential policy implications, which is just

another podcast. But when you add all those things up, I also like to own some puts. Though my expectation is we drift 1% to 2% higher. I'm also long some puts and I bought them recently. And they're basically at the money.

and not underwater yet, but I wouldn't be surprised if we saw three to 4% sell off in the next three weeks and then possibly a Santa rally. But so my equity thing, equity positioning is very tactical right now. And this is to be clear, only in my alpha portfolio, my beta portfolio is always long everything and continues to be always long everything. As a

short-term person trying to generate returns. I'm short some stocks, but I also have a little trade that's a lot if we end up around 60, 55, and I'm short some bonds. And I guess, Andy, the scenario where being short stocks and bonds would not work is if what has been happening, which is inflation continues to fall without there being a recession, if that continues. So how are you off...

How are you thinking about the odds of that risk? To someone who's short stocks and bonds, it is a risk. To the beta portfolio, it is not a risk. It's very good. But how are you offsetting the risk of a continued Goldilocks, inflation continues to fall, and we're not in a recession? Well, I'm not. I'm putting a bet on that suggests that that is the direction we go. And if it doesn't pay off, I lose money.

You know, that's my bet. And it's small relative to my normal bets. I'm not at max size, but I'm fairly chunky. I'll lose money and that'll be that. However, of course, I'm looking for opportunities. For instance, paying attention to gold, paying attention to currency markets, and looking for situations in which there's asymmetric risk on those things that could add to my portfolio.

Currently, for instance, I'm interested in buying the euro, which is a very contrarian trade. The dollar has been going in one direction, and it could offset some of my risk if I'm able to enter into that trade at my level. So I'm constantly looking at ways to diversify my bet, and I'm actively trading as things happen.

But that's the life of, you know, someone with a two month horizon. And I think a lot of what you said so far has been like a, I think a long term analysis, like saying stocks are overvalued. In my view, it is a very good long term predictor of, you know, five to 10 years, but short term, you know, a PE of 21 can go to 22. I feel like there's a lot of

your work that we haven't talked about, which is it involves catalysts and specific macroeconomic data, such as tomorrow's inflation report and the December FOMC report. So it's, right? Yeah. I mean, to be very, very clear,

If you have a two month horizon, valuation is not a factor. It's something you should be aware of, but being aware of it versus basing your trade on it is dramatically different. What I do is I add up a lot of little different things and weight them based on what I think has the potential for a driver in the horizon I'm using. And obviously valuation is not that important.

heavy in a waiting like that but what is heavy is um you know one of the things that I find most useful is positioning and where the leverage in the system is and in that metric people are long just very you know when we talked about that in aggregate everyone's long but on leverage

there is much more vulnerable longs than there are shorts at this stage. And for that reason, I think there's the potential that the potential for an asymmetric move is high, higher than normal. And so I'm willing to make that bet. Plus you have the potential for catalysts. And as you said, my bet is that the market will, that the Fed won't cut, which I think equities expects that they will.

that they will be hawkish, that data will support that, and that market participants are going to be, and bond markets have the potential of rising in yield meaningfully, which could be a catalyst for an equity correction, but not a big one. I'm not betting on 20% down. I'm betting on 3%, 4%. And if the Fed Reserve doesn't cut, the 10-year could go up by more. I think if they are dovish investors,

You're going to get another reaction that surprises people. The abnormal reaction that we started the show with where short rates might go down, but long rates go up. Yeah, I think that's a real possibility. And that would be bad for stocks as well. So you still like shorting assets?

You know, I stopped shorting assets in October after the big bond sell-off and sort of decided to be pretty neutral for October. But yeah, at this point, at this point, it makes sense to me. There's not adequate return in them. And I don't expect cash to see a significant reduction in its return by Fed cuts. So yeah, I think it's a decent place to be short assets.

And I think most of the time I've interviewed you, Andy, I think you have been

either short bonds or short stocks or short both. So I think maybe people who have seen my interviews with you think of you as someone who has always been bearish. But I think it's important to say that there have been times in between where you've been long or flat. And I think it really is truly an accident or just a random chance that I always interview you when you're very bearish on both assets. Yeah, I mean, people like to... I think bears make more news than bulls.

You know, when I started out on Twitter and throughout most of my career, but particularly as I started out with Twitter, I was accused of being, you know,

a massive perma bear, bull, perma bull. I was bullish from April of 2020 to February of, February, March of 2020. Just bullish, just straight out bullish, occasionally bearish bonds, but bullish equities, bullish the economy. And I overstayed my welcome and got a fair amount of, of

trolling by those who said I was a perma bull. That's just the way it is. And my view is I just look at markets and say, you know, I'm looking to be very bullish twos. Is that a perma bull? A perma bear? It is what it is. I just look at every asset and how they add up collectively in a portfolio and make bets and try to earn a living, you know, a small return for, you

My adequate return for the risk I take for my clients. Thank you, Andy. Let's now talk about something I want to talk about, which is MicroStrategy. This is a company that it is a levered to Bitcoin. It is a stock. They do have a software business.

Not a particularly profitable software business is my understanding, but they have been issuing stock and issuing convertible bonds to buy Bitcoin. They've been doing this for four years now. And, you know, so in the last bull market in Bitcoin, they went up way more than Bitcoin. And then when Bitcoin went down, they went way down, way more than than Bitcoin. Now they have been going up tremendously more than Bitcoin. Now Bitcoin is a little over 90,000. You flirted with 100,000.

So I think MicroStrategy, I think the best performing stock this year. Over the past month, it has just been on a rocket ship. What is your view of this, Andy? Needless to say, this is a hot topic. Yeah. The only reason I'm even discussing the topic is because I have spent a significant portion of my career trading convertible bonds and inventing structures around the convertible bond market and investing

arbitraging them, et cetera. And so the master's convertible has been why I've been brought in. - MSTR, MicroStrategy, yeah. - Yeah, MicroStrategy, MSTR.

I don't have a position in Bitcoin. I find Bitcoin to be an interesting potential alternative hard asset, hard money asset like gold. I don't currently have a position in it, but that doesn't mean that I don't see its potential value. One day I'll warm it up enough to say that it is going to act like a hard asset and add it to my beta portfolio. But today is not that day. Now,

Obviously, a lot of people do think that it is one of those things. And then the question becomes, in what vehicle should one buy it? And historically, you know, the only way to buy Bitcoin was through an on-chain transaction and keep it in a secure wallet and so on. Then we had exchanges like Coinbase, et cetera, where you could buy it on exchange. And then we have

ETFs. And before we had ETFs, we had a number of alternative vehicles, master MSDR being one of them, where corporations, Grayscale was another, where corporations or investment vehicles bought Bitcoin and you bought shares in those things. And then we had ETFs. And along the way, we also got futures. So there's many ways to decide to buy ETFs.

to use to buy Bitcoin. And so now the question is, which one do you choose? And some are not available to certain investors because they don't have a futures account. They don't want to manage through the

hassle of creating their own wallet. They don't want to join a crypto exchange or they're foreign and can't buy ETFs for whatever reason. There are many different reasons. And so they all trade slightly differently in price. But only one really trades at an extraordinarily different price from what it's worth. And that's MSTR. MSTR currently trades at two and a half times

its asset value, meaning you take its shares, you take its assets, which you put any value you want on the any reasonable value you want on the small software business, and then you multiply the market price times the number of Bitcoin they have, which I think is 386,000. And you get the value of the assets.

The value of the liabilities, you know, there's some debt, about $7 billion of convertible debt. Subtract that from the assets and what you have left is the value that the current and future shareholders, if the converts convert, claim on the assets. And that claim is currently about two and a half times the value of the assets themselves.

And so when you buy a share of MSDR, you're buying something that is two and a half times more expensive than if you bought all of the alternative forms. And so the question is, you know, why do people do that? And again, there's many, many reasons why particular investment vehicles trade at a premium. And so I think it's the richest way to buy Bitcoin there is.

is. So anyway, that's the vehicles. But now we have this convertible bond that was issued. And the convertible bond is really just a corporate bond that is

has no coupon, so isn't worth 100 cents on the dollar. It's worth, I don't know, call it 50 or 60 cents on the dollar. And stable to it is a roughly five year call option on master stock, not on Bitcoin, but on master stock that is MSTR stock that is struck at $672.

which is a fairly healthy premium to correct stock. Do you know how long do these, from MSDR convert or typical convert, how long is the option? It depends. When I started trading converts, there were convertible preferreds, which were perpetuals that had a perpetual option. And there were convertible bonds that had puts in a year in which the option was one year.

The convertible market has evolved over time and Master seems to, MSDR seems to have found a sweet spot in about five-year corporates plus calls. Got it. And yes, I'm just looking up the most recent note. It matures on 2029 and then it has a, I guess, a redeemable thing where MicroStrategy may redeem on December 4th, 2026. So it is a long-term option and long-term options are,

have value and they have a much higher value if implied volatility is high and MicroStrategy implied volatility is very high. Like based on recent readings, its volatility is like annualized 200%. Realize that. So they sold a corporate bond and a call option in this convert.

And it struck off of the common stock. So you add up the parts, what Michael Saylor sold, what the MicroStrategy sold to the market, it's the stock portion of the call option, which we call the delta, is two and a half times rich. The implied volatility of the call option they sold is

is very high. Is it rich? I don't know. Very. It's very, very, very high. And they sold a corporate bond, which they don't have any other corporate bonds, so you can't tell. But it appears that they sold that at around a fair market value. And so what they did is they sold a lot of stuff at very high prices to buy relative to what they're worth.

Forget what they spend the money on. They could have put it in cash. They could have put it in Bitcoin. They could have put it in whatever. They sold a security at way more than it's worth.

And that is something they should be doing every day, day after day after day. And that's the business model for that I would pursue if I were in Michael Saylor's shoes. And it seems that that's the business model he is pursuing. And that is to issue as much rich paper as possible. And then, you know...

Use the proceeds for something that he likes. He happens to like Bitcoin. So this is such a crazy topic. So yeah, that micro strategy, the market cap, as of a peak a week ago at $100 billion, it could

It could go to more. Now it's at $80 billion. The Bitcoin is worth substantially less than $80 billion. So it now has a premium of 2.5 times. That's the value of MicroStrategy relative to the value of the Bitcoin. That premium peaked at actually above three a week ago.

these things move very, very much. And yeah, I mean, I don't tell people what to do to buy Bitcoin, to sell Bitcoin, to buy MicroStrategy, to sell MicroStrategy, but I

I would urge caution on MicroStrategy stock, given that it is at such a premium and you can get exposure. But I mean, some people say that this is a magical money printer because they can issue stock and issue convertible bonds at a premium and continue to buy this thing. So I'm not saying that this thing can't last for a month, multiple months, but

I suspect that this thing will end badly as it did before, but I definitely could be wrong. But so, you know, some people, based on what I say, I didn't say this, but some people might say to buy a MicroStrategy common stock right now, you'd have to be a schmuck. I'm not saying that. I'm only implying it. But you're making the argument, it's interesting to me, that...

to people who are buying the convertible bond of microstrategy, actually that might, they have rational reason to do so because the common argument is, and I've made it up, why would anyone ever buy a convertible bond if you have zero interest? But actually, if the implied volatility is so high, I mean, microstrategy is down 6% today.

There were days it was up 15%, days down 10%. These are very volatile moves. That's an annualized volatility of like 150. And on some days it's up even more. But that implied volatility of 150 on a multi-year option is very valuable. So why? I know recently, what is it? Allianz.

A huge institutional investor bought a large amount of this MSTR convertible note. Describe why Allianz might buy this or you and your old job as a convertible bond arbitrageur would buy this. And you're not buying it. The institutions aren't buying it because they think Bitcoin is going to a million. They have other reasons to buy it.

Right. So I don't know why Allianz bought it. They are a major force in the long-only convertible bond market. To the extent that they are benchmark replicators and are trying to perform, and their end investor, which is not the company itself, not the insurance entity, but who they distribute their fund to, may just want...

the convertible bond index. And if master MSTR convert is part of the index, they got to own it. Now, I don't know. I do know that they have a long only convertible product and they buy everything. In the same way, sorry, like Supermicro was added to the S&P 500, a once soaring stock that is now tanking, tanked almost as soon as it entered the S&P 500, like a month after. And institutions would be buying

SMCI because they want to replicate the S&P 500, not because they think it's the future of AI, but just because they're benchmarking. You're saying the same thing. There's lots of reasons why long only just buy stuff because that's what their investors want them to do. They try to outperform and some say, well, I want some Bitcoin, so I'm going to buy the only thing I can buy. I can't buy Bitcoin. I can't buy Bitcoin ETF. I can't buy Bitcoin futures. But

I'd like some Bitcoin exposure in my convertible fund. And so they say, okay, I'll buy some of this. So remember, there's lots of frictions in life in terms of who buys what for what reason.

And those frictions are dealt with through arbitrage. And so right now, Mike Saylor says, I can sell 100 vol in this convert. I can sell two and a half X value in my equities and raise a corporate bond at fair price. And the convert guy says, I'll take that. And I will sell same strike two year options

At 670, at 200 vol, almost monetize the entire call option I've bought for that's five years in expiry, short stock so that I'm delta hedged neutral to the stock and hold the corporate bond, which I think is of value and pursue that arbitrage.

OK, so now they've maybe they think, oh, I'm going to squeeze a few percent out of that arbitrage and I'm a levered hedge fund and I'll just, you know, on 10 percent on 10x leverage, I'll make 20 percent a year on my convertible bond arbitrage. OK, I'm out of the market.

But they sold a call option to some DGN long-term equity call option buyer who paid, you know, 200 vol. And they sold stock to some other DGN who's willing to pay, who may not even be able to buy alternative exposure. They may only be able to buy MSTR. And if that's the case, they don't care. They want to buy it. So they buy it and the hedge fund sells it.

Now, who's got the bags? I think it's pretty clear who's got the bags. And, you know, I can't provide investment advice because I don't know who the heck any of our viewers are. When I look at

all of the alternative ways to buy Bitcoin. This is the only one I wouldn't touch. And so as an arbitrage person, go short it, buy some puts on it. The problem is everyone knows this. And so everyone's short it. And so what you really have to wait for is the guy who has infinite supply, use of proceeds needs to sell the thing. And he's doing it.

and the premium will converge. Now that doesn't mean it won't go up a lot. Listen, if Bitcoin doubles, Master Stock can actually it can end up being unchanged if the premium decays completely, but it's not gonna. Yeah, probably. If in over the next year, Bitcoin doubles, MSDR will do well. Who knows?

It's likely to do well. Why would you bet it's going to go to a bigger premium than the current premium? You would have to bet that.

If it just stays at the same premium, you're better off in Bitcoin. Yeah. And I guess Michael Saylor, did you see his interview with Andrew Ross Sorkin on CNBC? Yeah. Yeah. I mean, he made the case and, you know, I mean, Michael Saylor, he has conviction. No one will accuse him of not having conviction or not having a strong force of personality. Yeah.

Andrew O'Surker made the points, similar points we're making. It's trading at such a premium. Why would you buy MSTR? And he said, that's like saying, why would you buy Microsoft or Apple or other companies that trade at a premium to their book value? I mean, JP Morgan, a bank, which is, it has assets. It probably trades at like 1.82 times its book value, but it, it,

has an ability to generate a return. And like most high quality stocks have a price to book ratio higher than one. And in some instances, way higher than one. Okay, sure. But he's saying that instead of selling iPhones or selling the Azure cloud for Microsoft or all these other companies, his business model is issuing convertible bonds and then buying Bitcoin, which works great if the price of Bitcoin goes up, which he thinks it will. Right. So let's step back and say when Microsoft...

sells its equities, the equity price isn't worth two and a half times what the assets are. It's worth exactly what the assets are. That the price of Microsoft relative to

it's book assets is irrelevant. Where book assets matter is when they are liquid and saleable. Liquid, saleable market value of assets. We know what it is with Bitcoin, with MSTR. It's about, I don't know, 40 billion. There's no doubt. Microsoft,

In that case, we don't know the market value of the assets. The equity price tells us the market value of the assets. We can't intuit the market value of the assets. In this case, we know what the market value of the assets are, similar to a bank. Unfortunately, a bank is less transparent than this. A bank, and we've talked a lot about this over the course of our conversation,

shows together and online stuff and all that. What's the book value of J.P. Morgan? We know what it is. They tell us. What's the market value of J.P. Morgan's assets? We don't know that. So the market value of J.P. Morgan's assets include its books.

physical assets that are on the balance sheet and some franchise value that having branches and a banking business provides you that creates earnings, not

There is none of that in the MSTR model. It does not exist. So Andy, I think you and I agree on this issue. But just for the sake of argument, Michael Saylor says his franchise, it's not JPMorgan. It's not having deposits. It's not the wealth management business. It's not selling iPhones. His business is selling convertible bonds and buying Bitcoin. He's right. He's right. That is his business.

That doesn't mean it's a good thing to be a shareholder in. Michael would be irresponsible not to keep doing what he's doing. It's a miracle to be able to plug shareholders with stock that is two and a half times what it's worth is a business. Keep doing it, Michael. I don't even care if you buy Bitcoin.

Buy anything, buy cash, buy whatever you want with the money. But you're taking a shareholder who's willing to pay you two and a half times what they could otherwise buy the exact same thing. There is no value to Bitfinex.

What the value is, is Michael Saylor should be doing this until the premium goes negative. By the way, once the premium goes negative, what should he be doing? He should be selling his Bitcoin and buying shares. I don't think so. And I guarantee you, he will be doing that. He won't be doing that. No, he will be. Oh, really? 100% chance that if MSTR ever

trades at a discount to book, he will be selling Bitcoin and buying his stock back because he'd be irresponsible if he didn't. Andy, I think you're thinking a little too rationally. His brand is the guy who only buys Bitcoin and doesn't- Today it is. Yeah. Today it is. Who knows what it'll be a year from now or five years from now or 50 years from now.

He runs a fund that is trading at a NAV of two and a half times. It's a two and a half times NAV premium. What you do when you have that is you issue more.

And who cares where you invest it? You know, if you invest in Bitcoin, fine, it keeps the business model alive, but it doesn't matter. But even issuing shares and buying cash would be a wise decision. Anything! He can buy anything. His job is to sell Mortimer, not to buy Bitcoin. And I mean, it irritates... I think...

you are making a rational case that expensive equity should be sold. And I agree like FICO, a wonderfully high quality company, you know, their price to earnings ratio is literally a hundred. And I think they're buying back stock. And if FICO isn't, there's another incredibly rich value that's buying a company that's buying stock. It's not that it's not that I don't mind companies buying back their stock. If it's when the true market value of the assets are trading at a, are,

that the equity is trading at a huge premium to the transparent market value of the assets. You pick any stock in the world, including most banks.

We don't know what the stock tells us is what the market value of the assets are. The book value is irrelevant. And the only time one should sell equity is one, you might need the money or two, if you believe the market is mispredicted, the market value of your assets, and then you should sell stock. And that's what Michael's doing. He's selling stock because

The market is mispricing the market value of his assets. In this case, and by the way, the same is true with every closed-end mutual fund, everything in which the market value of the assets owned is extremely transparent.

Everyone is in the business of issuing claims on that assets at a premium and buying claims on that asset at a discount. And the only anything you pick that is anything other than perfectly transparent market value of assets like this is this is one of very few cases.

certainly very few corporate cases. All that's happening is people are saying that the market value of the assets is worth this. And it may or may not be true, but that doesn't make it fundamentally rich.

This is the assets are worth this and the liabilities are worth two and a half times that. That doesn't make sense. And so your only job is to issue. Yeah. But Michael's saying his business is issuing and that is, you know, we're making dollars a day. His business is issuing until the premium goes away. Tell me what his business will be if there wasn't a premium. Software business. Yeah.

there would be no business yeah he would he would if he let me tell you something if he keeps selling your shares at zero premium to the assets i don't i don't see his motivation

But what he's depending on is the premium. And until his business, as you describe it, is to sell equity and converts until the premium goes to zero, and then he'll have a different business. And then we'll see what his business is. And then there is a reflexive loop. And I'll shout out, you know, Citrini, who said that this is the ultimate reflexive loop. And, you know, Citrini knows about reflexivity. I mean, he, I believe the name Citrini is a reference to

George Soros. And basically, by issuing stock and by issuing convertible bonds, you then buy Bitcoin. That drives the price up. That drives the price of MicroStrategy higher. That drives the premium higher. I'd also say that

Yeah. People who, who are buying the converts, I think, and there's also an element of MicroStrategy is issuing shares while it's issuing converts. So the bonds could be made, the bonds like probably will be paid back and it'll be the equity holders who suffer if, if, you know, so that is, that is why Alliance is, and the institutional investors are willing that they're going to be paid back. It's because there's a lot of dilution that is, that is funding the,

Right. Every time they do this deal, the credit gets better. Yes. Yes. Every time. Because why? Because the premium accrues to the credit. That's a key point. And Andy, are you aware that there are micro strategy levered ETFs?

I am. I follow them carefully because that dictates the final, the last hour of trading and microstrategy, which I don't trade. I don't even mess around with it. But just because it's fun, I follow them. Yes. I have been following them too as well. And I think these microstrategy long ETFs, and by the way, these are up like 800% over the past few weeks. So, you know, what do I know? But I think that these things are almost mathematically...

like designed to end really poorly because this whole thing that keeps this train going is the implied volatility being really high. That's why people are willing to buy the converts because they can, you know, Delta hedge and sell calls. But once that train stops, so the reason, you know, MSTR, the premium is high and MSTR is high is because implied volatility is high. However, for these levered products, volatility is the, especially daily volatility is the enemy of these products.

So if my MSTR is up 10% on a day, this thing will be up 20%. But if MSTR is down 10%, this thing will be down 20%. And 1.2 times 0.8 does not equal one. Yeah, it's an interesting... The levered ETF space is an interesting space. I've written a bunch of things on my website, which you can...

sorry, on my Twitter feed, one-on-ones about that. I would say, broadly speaking, levered ETFs have a drag in their returns that is, to me, disqualifiers as a long-term holding, but as a short-term holding, they're plenty of fun. Andy, it's been a pleasure talking to you. Could you just briefly summarize your review and could you use the word the ditch? Because that, as I found, was one of some of the most poetic and

a compelling part of writing from your piece. So what is exactly the ditch and why do you think will happen? Right. So I hope it won't happen. I don't think it will if the Fed does what I think they will do. Sorry, what I think they should do. And what I think they should do is continue to be relatively hawkish on an ongoing basis until the real economy actually starts to slow down and we get closer to normal.

Part of doing that should cause cash to outperform bonds and stocks, but not by a lot. Equities, multiples contract while equity earns into its multiple and bond yields steepen and rise 25, 50 basis points. That's what I hope happens. And that's what I...

I think a Fed that continues to, that gets the job done, that commits to getting the job done and returning both the real economy and the financial economy to normal over time will result in. And so that's what I hope happens. What I think could happen is the Fed remains too dovish and that causes the Fed

bond yield to steepen quickly and more aggressively, which causes the equity multiple to contract before the earnings can earn into that multiple and cause a stock market correction of some percent. It actually then starts feeding back into the real economy. And because the Fed was and policymakers in general were too easy,

and the bond market steepen too quickly the real economy gets driven into the ditch i hope that's not what happens but if it does happen that would be a meaningful disruption in market and

Andy, the Federal Reserve in 2022 and 2023, obviously, they thought the inflation was a far bigger risk to the economy than slowdown and a recession. They have since said that the risks are now balanced between inflation and recession. And some people think, you know, what the Fed actually thinks is that a slowdown is the actual bigger risk. They're just kind of bringing the very large ship. It sounds like you disagree that you think inflation still is the far bigger risk than recession. Is that right?

I think an abnormal financial market is the risk. That an abnormal financial market does not provide the correct incentives for the real economy and supports it for reasons that are not sustainable.

And that creates a fragility to markets that could be disruptive. And I would like to see the market be less the economy and markets to be less fragile and offer a more balanced return. I don't know what they're talking about when they say the risks are balanced to growth and inflation. I think they talk a lot about a lot of stuff without knowing. And as a risk manager, I see no doubt I see no evidence

downside risk to the economy and infinite capable tools if downside actually occurs. So I don't get it. I haven't gotten it for, by the way, they have been pretty damn hawkish and they've been with me on Hire for a Longer Island for most of the time. But whatever it took a year ago, whether some people say it's politics, I don't know. They've been too dovish and it's backfired.

And so you think, just to be clear, that inflation is the bigger risk than recession? It's not like, that's not how I think about it. I don't think inflation is going to be 5%. I also don't think we're in a recession. I think they have work to do in a market that is overly supportive of the economy to withdraw that support in a conscious way instead of letting it fall apart in a disruptive way.

And so to do that, they have to be more hawkish. That doesn't mean I think there's risk to inflation exploding, nor does it make me think that there's significant downside risk. Who cares whether the risks are balanced? What isn't balanced is the financial markets relative to where they need to be to offer a

financial markets off landing and without a financial markets off landing, an economic hard landing is a meaningful risk. And so where do you think inflation is going to be over the next year, like around 3%? Depends on what they do.

If the bond market pukes and stocks fall 20% and people start cutting employment, we're going to have disinflation. That's the disruptive case. I hope that's not the case. What I hope is it continues to make further progress on its goals by the Fed,

withdrawing, maintaining a restrictive policy and causing the bond market to continue to rise in yields and be more restrictive than it is. And then inflation ultimately soft lands in a year or two. Thank you.

Andy, it's been a pleasure hearing your reviews. People can find you on Twitter at Damped Spring. Andy, tell people about your institutional client service. Where can people find your website and what are the kind of advice and insights that you provide? Yeah, most of my clients are the largest macro hedge funds on the world. They receive high touch research and calls, etc.,

And you can get information on that at DemSpring.com. And I also have a offering that's more consistent with those who are smaller and may trade on their own, but more likely are part of an institutional money management activity. And I offer subscriptions to that in a very high touch way in which you can interact with me about my thoughts and my ideas real time.

And both of those are available at dampspring.com. One last plug, Nick, Eva, and I offer a very low touch, but also fairly informative weekly video at twograybeards.com that can help you if you're in a situation

stay-at-home investor or a, more likely, a wealthy person who has no investment skills and lets his money be managed by a financial advisor who needs help understanding what their financial advisor is saying from week to week and why it matters to their investment. That is an important skill. I feel like there is a lot of

a lot of jargon in finance. And that's part of what I'm trying to do is break down the jargon. Andy, thanks again. Thank you everyone for watching. A reminder, people can find Monetary Matters not just on YouTube, but on all podcast apps, including Apple Podcasts and Spotify. Until next time. Thanks, Jack. Thank you. Just close this door.