Okay.
>> Everybody on a
>> So we can
thank you, James,
for everybody
how are you and
what do you say?
>> Thanks for all your
messages are really
appreciate I
don't on there.
>> How how's how's Austin?
>> It's awesome,
but a little to
support it with
everything being closed,
but at least the
weather's good.
its probably 85 out today
And I saw a nice,
a nice sort of head back to
New York and a
couple of days.
>> So we'll say,
well, okay, peter
peter you on? Andy's there.
Andy
Yes. The line Hi Peter
and how are you doing
I'm good, I'm good.
>> Although it either
goes into what it is.
>> They're also very good.
should we wait for couple more minutes or
You start now,
what do you think?
>> Peter?
>> I can't tell how
many participants
there are or how
many are there.
>> There are 22,
which makes it a lot.
>> Now, I think
we should start.
>> Okay. Thank you,
Peter. Hello, everybody.
>> Thank you for
taking the time of your
schedules to listen in
this special BQE session
where I happen to have
my former colleague
and good friend Renner.
From that Ally and speak.
>> Andrew is very,
very experienced,
profound commentator on
the capital markets.
>> Actually,
about an hour ago
he was on List  and
Fox Business commenting on
the most recent news,
which was the but
that statement
and Chairman pals
press conference,
subsequent press
conference.
So what we want to
try to do today
isn't into Q and A format.
Just ask Andy to sort
of opine on there's
a remarkable set
of events that
have happened,
how the various
capital market sectors
have responded to it.
Um, of course,
you know, we have
this huge government
intervention,
unprecedented, and I'd like
to get his
opinions on that.
Ultimately, we want
to basically get
some kind of
like a thematic,
thematic concept
or thematic ideas
kind of convey to you about
where we are,
where we're going,
what signals he
looks at it and
the markets
ultimately arrive
at his market intelligence,
market expectations.
So we start, let
me just start,
since it's so so timely.
We had Hofstede
statement at two PM
Eastern time and we
had a press conference
from Chairman pal.
And you want to comment
a little bit on that?
While he's doing that,
he just put up
on the screen,
one of
the most remarkable
things that's happened in
recent weeks is it's
amazing bond market
rally we had,
that's a graph in white.
>> Ten-year treasury
yield going,
yeah, it's leaders
and your tourist rate
over the last two years.
>> What happened
starting in, well,
we actually had a
significant rally
that first happened
in summer of
18 when the general
risk markets kinda
like to grow and that can
be associated happening.
We had some stabilization
in the middle of 2019.
>> And then of
course, we see what's
happened since the cold.
>> The crisis
materialized in
mid February with
massive, massive,
unprecedented
rally from like
an high 1% area down to,
well, right now
we're at about
0.6% for the 10-year note.
>> So Andy, with
that introduction
of kind of a
unexpected in a remarkable
turn of events.
>> As far as that
Raceway smart. Because
you want to comment,
you wanna start with
that sure
>> If you look
at this chart,
which it tells
you that back
in November of
2018 or leave now,
but the tenure on
November eighth,
324 and it got down to
as low as 30 basis
points intraday,
the lowest close ever
was 54 basis points.
And as you said,
we're barely
above it right now.
It's unprecedented in
that Treasury because
the massive deficits
being by Washington,
the fact that the
Treasury can still
come to market with
for ten years,
it's 60 basis points and
one bonds at a buck
and a quarter.
I mean, it, It's crazy.
I mean, I would think
that rates should be
2% 10 years and
probably 3% log bonds
even with this.
So the fact that,
that there still so low,
it tells you a
couple of things.
What it tells you is
that there's still
a tremendous amount of
interest and treasuries.
Treasures are still the,
the cheapest of all
the super sovereigns.
I can't think of one
off the top my head.
That's cheaper and in
the central banks will,
will continue, ought
to be involved.
One thing Paul
did say today
is he doesn't
really seem to
need to buy a lot
of treasuries
and a lot of mortgages
going forward.
He's putting his efforts
into the corporate
bond market.
And he's done some
remarkable stuff.
The, the, the
high-grade market,
which was effectively close
about the end of February,
it's in the
middle of March,
just by the fact that
the Fed announced that
they were going to
buy corporate bonds,
something they
have yet to do.
But also today we'll do
it with the next few weeks.
They've, they've
cut spreads,
have high-grade
spreads have
gone from roughly
high-grade.
Cdx has gone from a
150 and change
down to around 90.
It's, it's cut that in
half and high yield,
this is cut their losses.
Are there widening of
spreads by 50% as well.
And what we've had is
an unprecedented amount
of new issue corporates who
we've already had
since the market
open on March
16th with Oracle,
an exon, we've probably had
450 billion of corporates
come to market.
And there's just,
there's just
tremendous demand.
And again, the Fed
has about a bond,
yet just by the
fact they're doing
it and they're not
the only ones.
Some of the central
bank of VCB is going,
is by corporates as well as
the Bank of Japan just
announced they're
going to double the
amount of corporates.
But you don't want
let's go on to
what Paul said today because
I think that's the
most important thing.
Paul basically is
staying the course.
He's gotta keep rates at
0 until he sees theory,
until the economy
really turned around.
We all know that in
the next six weeks,
you're going to
have the worst
economic numbers
we ever see,
even the worst mentality
has ever seen.
I mean, this is going to be
just horrible, you know,
but, but nonetheless,
the Fed has got
people looking ahead.
They've done
multiple program.
So you're increasing
the balance sheet
in just tremendous amounts.
The Fed's balance sheet,
which you, they
started to increase.
I use September 18th is
is a date where they
stopped letting
Funds run off. It's been
increasing at an
annualized rate
of over a 100%.
And even the past
couple of months,
or the past couple months,
it's probably increased
by 2.5 trillion.
You know, we think that,
we thought that
the balance sheet,
which is about 6.5
trillion right now,
would probably get
up to actually.
But we watched
Richard Fisher
yesterday on CNBC,
who's a former
Fed governor.
And one of the smarter ones
basically said he could
see it going to
10 trillion.
I mean, that's, that's
effectively more than
half the US GDP.
It'll just with the
Fed's going to be happy.
And you know, it's not
going to stop there
vis-a-vis the Bank of Japan
are doing the same thing.
We would anticipate
that over
the next few months
and over the
past few months,
you're going to see
an increase from
the three major
central banks,
almost close to nine
or 10 trillion.
And what their bikes.
So what does that done?
It stabilized corporates.
It's allowed new wishes
to come to market.
It, even though the
Treasury market,
a lot of people say,
well the Treasury
market selling
a different story than
the equity market is.
The equity market
is obviously
rally dramatically
frog from it
slows of I think
was probably
March tenth or
watched Well,
I think very nicely
that march 23rd,
I think March 23rd.
Okay. So it's it's rally
tremendously
since that day.
I mean, I think April
is going to be one of
the biggest upticks in
inequities in many years.
So that is a tremendous
accomplishment.
It, even though
we're going to see
probably 25 million
people unemployed,
we're probably going to
see unemployment rates of
minus 20% are more
We're going to see GDP
in the second quarter,
you know, falter
in 20 or 25%.
People are not
panic by this.
Or at least markets are not
panicking by this.
It in, you know,
I think the key
thing to look
at here and what
we look at is
I'd ask where do I look at
every day I look at
corporate issuance,
I looked good
corporate spreads.
And as long as high-grade
corporates can come
to market an issue
paper and get muddy.
I think that's
a good thing.
That's gotta keep a,
a, it's going to
keep the market from
really going down.
You know, there are
plenty smart people
out there who just
said the last,
oh boy, just got cut.
That's not a surprise.
There are a lot
of people in
the last week who
are very smart in
a very negative,
the markets.
Carl Icahn for one,
Scott minor to
Guggenheim for another
in Jeff gun lack of
double wide for a third.
There are very negative.
But you know what?
I'm not that negative
because what I
look at is, yes,
they've had,
they've looked at
markets and they've seen
into a second way
down many times.
But no one has
ever seen the
Fed this involved.
I mean there are buying
corporates
buying commercial paper,
you know, they're
they're obviously
buy treasuries and
bought mortgages.
They're, they're
doing stuff in in
in other mortgage
related products.
They're doing
some CMBS stuff.
I don't have all the
details and whatever,
but they're
definitely very much
involved in policy today.
He's not done yet.
He's going to war.
And there's
plenty, plenty of
dry powder that is
being backed by
the US Treasury,
where he can do
a lot more than
what he's doing.
But he's had, he's had
a lot of success so far.
I've got on go ahead
and ask and other
let me ask
before I do that
though, I apologize.
>> I shouldn't an interest
on financial news.
You were formerly Andy
There hadn't been
an actual fixed
income and that
aligns which has a Austin,
Texas based regional
dealer very
active in some of the
more esoteric sectors,
that fixed income market.
>> Let me ask you
to follow ups.
>> The first one is,
irrespective of
the intervention,
do you think the markets in
somewhat better shape now
because we have some of
the risk assets held in
stronger hands now than
we had coming
out of her way.
And to as far as
the intervention,
do you think they struck
the right balance
between supporting
the consumer side of
the economy versus
the corporate side
of the economy?
Or do you think that
basically maybe are
shifting or
overweighted towards
one or the other.
So two questions
to you, please.
>> All right. So as far
as their balance and
when they're done,
I think the Fed has
done an incredible job.
Are they helping
the consumer?
What they're doing
is stabilizing
the economy, is
going to help.
The guy who works
for AMC are
carnival cruise liner or
whatever from from
getting laid off?
No, it's not at least
not in the short-term,
but it's going to allow
the markets to come
back and it's
going to allow the
economy to come back.
much stronger, talk about
strong hands we can
so on and so forth.
I'm not going to
comment on 2008
because that was a
totally different crisis.
That's very really
are a lot of
comparisons outside
of the fact
you had huge moves
in the marketplace.
The 2008 strong hands
week hands doesn't apply.
But what does
apply is that was
just too much
money, easy money.
Going through the
last 2019 into b,
into the first couple
months of 2020.
If you smoke
those guys out.
We saw a lot of
liquidations.
We were buying
things or seeing
things trader
ridiculous levels.
And that is calm down.
It's still a little weak in
some of the
municipal stuff.
If you're looking
to get a bid on
on New York MTA bonds,
which are still A rated,
you're going to
find that the
1-year paper's still
trading at 45% tax rate,
which is to me not normal.
It should be
there. You know,
when you look at
other things,
corporate spreads
are still much
wider than the word
January, but they're,
I think the reasonable
now, I think there's,
you know,
both upside and
downside opportunity.
I still think there's
more upside because
even though the Fed has
bought bonds,
yet they will.
And when they do,
things are gonna
get even tighter than
that where they
are right now.
They won't go back to
February 18th or
yet new January
source spread scope,
but things are gonna get a
lot better from
where we see,
you know, we think the
market isn't done yet.
Doesn't mean that the
market is priced right,
but the direction seems
to be very positive.
>> I listened
yesterday to me,
if each call I'm not
to see a low market
>> And two favorite
thing that he
pointed out was one,
they'd pick 18
industries that are most
exposed to weakness
due to the crisis.
>> And look, of course,
the entire universe of
CLO bonds,
which they rate only
about 20% of the,
of the port portfolio
assets were
in those eight
riskier categories.
And to what they
alluded to was
the fact that
the CLO markets
continues to be alive
for new issuance,
of course,
is being supported
by the fact
that one of the funding
program the Fed has
introduced gives
them the ability
to lend against static,
newly originated ClO
product which I will
the supports evaluations
and trading activity.
But in any event,
let me go back
let me go back to
the question of
corporates in general.
I'm you sort of said to you
that potentially want to
sort of meet up at a
right equilibrium level.
Right now, given the break
the breakdown between
risk and reward,
are you saying that
without a covid crisis,
we were really because
inexpensive levels in,
let's say beginning
of this year.
That your observation to
say that last part again,
given that, like you said,
we might kind of at
a fair level right
now for corporates,
given the risk
reward trade-off
suggesting that even
before the crisis,
we would, we would,
we would unreasonably
expensive levels
for later were
out of sight.
>> Expensive levels.
Thanks. Or just absurd.
The hot side there
were trading
that people weren't weren't
weren't  Building in
the appropriate spreads for
the risks they were taking.
High yield spreads
were just ridiculous.
And in a lot of that
stuff is going back.
I mean, I forgive
high yield
might have been
down at 4.5, 5%.
It gapped out to
1100 or 10% or 11%,
and now it's coming back.
In fact, let's take,
you can still see
my screen, right?
So let's take a look at,
you know, high yields.
Let's see those PDFs.
>> And CDHYs each y, y1
and y2, CDHYs each Y.
>> That is one way to
do it, but you know,
what I was going to do
is hit the wrong one.
But nonetheless,
high yield,
right? High yields.
The CDX spreads that.
I know my ed CDX,
high-yield Got us
why does eight eighty?
Eight ninety it had
been to radiate
in it's it's kinda
settled into
the mid 600s, below
six hundreds.
So I think that gives you
a pretty good
representation of
the kinda stuff that,
that you've seen.
It was way too expensive,
everything was way
too expensive.
You know, one of
the markets that is
going to have
trouble recovering,
It's going to be the
real estate market with
so many people not
paying their rents.
And I'm talking about
corporate rents.
I'm not talking about
individual mortgages,
which is another thing
that is probably going
to have a problem.
I would tend to
think that the
real estate market is
going to have a lot of
problems coming back.
And I think you're
going to see a lot of
liquidations and
a lot of change over of
of who owns the bonds.
And a water reached
seemed to be a lot
of trouble as well.
Assume everybody got out,
but we don't think
that's, that's
the end of it.
So not all things are
positive right now,
but certainly the
corporate bond market,
the high-grade gone
Margaret is one of
those that seems to
be a decent shape.
Secondary market for
high-grade is still
market rates.
Certainly the mark.
Your secondary high
yield market is awful,
but things are coming
back and we'll see
what the next four
or five weeks sprint
certainly gotta break
was the economic news.
But I don't necessarily
think that spreads.
You've gotta
watch from here.
>> Want to throw a
wrench in your some
favorable perspective.
What about the fact that in
multiple years since
Christ, we had,
due to low rates and
expensive valuation,
the massive increase in
the amount of corporate debt
This sort of sentences
have to be like
a bad position in
the in the context
I'm low-risk.
>> Uh-huh.
>> Risk intrinsically
in the market.
I mean, we've sort of
had improvement in
the consumer balance
sheet, right?
But the theme was
they improved,
but the core balance
sheets got more
labored in the course
of the years coming out
of the last crisis.
>> Are you concerned
with the that
I'm really not
layoff because
a lot of the corporate
insurance has been
done in ridiculously
low rates.
So you know what, just like
looking at the
Treasury market
when you look at the above,
the massive amount of,
of, of debt that's
been added.
Yet our interest payments
haven't really gone up that
dramatically because the
rates of God's dashed.
Similarly, corporate debt,
which is generally tax,
obviously it's a
taxable expense
when you the after-tax
expenses many times she
talking one handles to
handles type stuff,
at least for the
high-grade stuff.
And as you go out
the current through
the high yield stuff there,
your vibrated some
more problems,
but no, I'm not
that concerned.
But it is something
that I do book that.
But for right now,
I think we're okay.
>> Okay.
>> Okay. Now the
next question.
Naturally one comes up
it and then
people talk about
this all the time
longer term.
What about the
moral hazard issue?
I mean, who should be
the people who we
should listen to?
Who would most
objected and mostly,
and most kinda like
and practical about
the moral hazard issue
and what we're setting
ourselves up for later on.
>> What do you think?
>> Let me give
you an example of
what happens today,
let's claim.
And came to me before
we went on the air baby,
around dance and said, hey,
take a take a look at
yesterday's Wall Street
Journal article on,
on Carnival Cruise Lines
and tell me in
the headline was,
The Fed builds out
Carnival Cruise Lines.
And she said, Is
that fair per se?
It in my feeling
was after I
read the article to
see what the spin was,
that it was fine
because if it didn't
lend money and
Carnival Cruise Lines,
you had the Eliot's or
the world that
we're about to lend
money at 15 or
16% and take an
equity interests.
And then once the Fed
announced that
they were going
to be supporting good
corporate bond market.
You know, carnival was able
to issue debt at first.
It was, it was
the initial price
stock was 13%,
they ended up
crushing at 11.5%
of the bond. Is that okay?
So I mean, I think the fact
is their moral
hazard, yes there is.
But the reality is,
as Paul ways it,
its moral hazard
from people getting
fired and never having
their job again,
or having taking a walk
longer time to
get their job
back vs
is there's some risk.
Yes there is, but it is
far from the Fed's concern.
You know, the
treasury, he's got,
he's got the first loss and
then the Fed comes
in after the fact.
I'm not so sure how
many losses the Fed's
going to say it's not
going to be perfect.
We've watched the ECB by
corporate debt
for I don't know.
I think since
probably five years,
there's been a
couple of big hits.
But generally
speaking, they've made
more money than
they've lost by,
by a good factor.
So yeah, I think there's
some risk or some
moral hazard,
but I think the bigger
moral hazard is having
the country going to
crush that right now.
I think that's going
to be avoided.
>> They pretty
much the spirit of
what he Pal said today
in the press conerence
And actually I'm sort
of in a roundabout way.
I think he did comment
productively on
moral hazard issue, okay?
As far as valuation
will manage this question.
And okay, so the Fed
came in third week of
March with all this
amazingly large
intervention.
So the treasury, are you
surprised that
despite that,
in spite sort of
making risk acid,
whether it's stocks
or whatever,
private investments
or real estate
or corporate bonds
or whatever.
>> Despite making
those markets much,
much more stable and
proceed more positively.
>> Why have we seen
that backup in
the fundamental levels
of treasury yields
y on trade deals
back beyond 1%.
Now in fact, neither
did the scare.
Trade has been mitigate
significantly.
>> Leon, you
know, the, the,
the dealers don't make
the kind of margarines and
treasuries that they've
been in the past.
The the name that we
know over the years,
bond vigilantes aren't
around right now.
I don't think they're
far away from,
from making, from raising
their head above
sea level again.
And I do think we're
going to get there,
but for now we'll,
you have central banks
expanding balance sheets.
The Fed has been decreasing
the amount of
Treasury debt
they've been buying,
but they still bought
a heck of a lot of
Treasury debt over
the last six weeks.
You've got the ECB buying
a lot of their
super sovereigns.
And when you look at it,
this is really a
gum comparison.
Were the were the
least dirty shirt in
the laundry because
our ten years
are still 60 basis points.
And a German tenures,
I didn't say.
I guess I could look to see
where they went out today.
Probably went out
around minus 45.
Let's see. So
German tenures
today went out at minus 50.
So I mean land
if, if you're a,
if you're a Japanese if you are
Japanese insurance
company, if you're
a Chinese insurance
company or whatever,
you're going to
look and see
where you can buy stuff.
Would you rather
buy Italy that's on
the verge of going to,
to junk at 175,
which rather
buy goods which
are pristine to minus 50?
Or would you rather
buy treasuries at 60?
I think it's, it's a,
it's not a fair level.
I think Treasury
should be back for
one to one and a quarter
percent for ten years,
maybe on the way to two.
And like I said before,
probably long bonds above
two on the way to three.
But that's not going
to happen right away.
I do expect as
the treasury is
increasing their
auctions two or three.
So two or 3 billion
every month.
Every auction just bore
the vast amount of money
they're gonna need.
I think we're going to
start seeing higher rates.
But for right now,
there's still
a lot of money
into the system.
Your rates are
at 0. You can
get good amounts of repo.
Balance sheet restrictions
of banks are off,
so there's still
positive carry.
So I think it's
gotta be slow to
see significantly
higher rates.
I wouldn't be
surprised to see
ten years backed up into
the 7580 range next week
when we have let's see,
today's the horse
last day the month.
We've got a very big
duration extension
and treasuries tomorrow,
as well as we're
going to have
a reallocation because as
well as Treasuries
did this,
but the equity
markets did better.
You're going to
reallocation
from equities
into treasures.
So those two things
to keep us steady,
but I'll only until Friday.
Of course, you have
treasury debt and you
have a lot of issuance
of corporates,
so I do expect
things to back up,
but for now it's,
we're the cheapest
for the chip with
some of the big names and,
and we get a lot of
money coming into us.
>> And You mentioned
we've made
for the benefit
of our students.
Could you speak a little
bit about how much,
how much they brought in,
the type of collateral
that defended willing to
lend against than
what the keys
that are in it.
Because historically
respected for
what they used
to lend against,
you know, under
normal times.
>> Can you comment on that
a little bit, please?
>> Sure.
Historically,
since layout and
I've been doing
this Twenty-five years
per se or, or more.
You know, we, we
rarely see the
fed by anything but
treasuries in new,
and more recently
mortgages,
that was pretty much
established treasuries
for a long time.
In mortgages, the
Fed was bigger buyer
as quantitative easing took
place in the early
part of this decade.
But since then,
actually, right now,
that's all the
Treasury owns as far
plus the little
commercial paper now,
or they've went against
commercial paper,
but now they're waiting
against commercial paper.
They're going to buy
corporates there.
They're going to
buy portions of
COO's COO going to buy CBS?
Yes. I don't have
all the details because
those aren't products
that I trade.
But there's no
question that
interface is going to
make sure there's
plenty of money.
This is not good at
evaluation thing.
This has been a
liquidity squeeze.
And you know, one of
the things if
you go back and
a lot of people
are going to
disagree with me on this.
But the 2008
tobacco was really,
was not, was not the
traders of the banks.
They really, they weren't
in the wrong at all.
You know, it was the
banks themselves and
saves it was
some big heads,
sent Bear Stearns
out of business,
who was over leverage said
Lehman brothers
out of business,
but put into Volcker Rule,
which basically
eliminated back books
and probably have to
explain with back books.
Are you going to do to deal
with AID? What's that?
>> You please explain
back books, by the way.
>> Thank you.
>> I will let me just
finish the thought.
And the guy they
they cut dealers
positions down to the point
where collectively,
I don't have the
numbers off the top
my head that maybe
dealers had about
500 billion,
they would quit and
capital towards
their corporate tests it.
Now that number I'm
sure is basically
risk capital.
This is where you come in.
Is risk capital
better than I?
And numbers probably down
inside of 50 billion now.
So dealers don't have
the ability to take,
take on balance sheet
as far as back books.
You know, It's basically
how it sounds.
When I used to
run a desk at
Gomorrah and then
Google per se,
or action to Hora.
We would have a bunch of
guys who would
sit behind us.
And if anything, the
line traders didn't
want to bid on or
what have you,
they would get the
opportunity to bet on it.
Plus they would put on
very large
arbitrage traits,
were on a fives, tens
yield curve, whatever.
It would always have bids
for something
and they might
use might have
balance sheets
in the in the area.
You know, 15 to 20 billion.
And that was that
was the norm.
And I'll show is bigger at
the barrel bunches of
the world that
Goldman Sachs,
I mean, Goldman
Sachs has to
be one big trading shop.
And then they
started to cut
back as to which you have
the Volcker rule
and so on and so
forth to the point
where dealers
are just basically
a very small part
of liquidity.
So when things
started to get bad,
The Fed realized, you know,
even though I
was pounding on
the table over the last
three or four months,
but the quiddity was
bad and the Fed needed to,
to give quick liquidity
in the market.
Then one day they woke up,
they seem to agree with me.
And that's what they've
been doing ever since.
>> Markets are trading
better for our sake,
are exploited
for forgiveness,
the piece was running
at it because at
one level you
would say that
with much less capacity,
as far as balance sheets
ties on themselves,
on the sell side, they
would think it'll
be a negative,
particularly in
times like this.
But what you're suggesting
is maybe mean that
there's more,
there's less product that's
sitting with as risks
in it on dealer shelves,
which probably supportive
overall for valuation.
Jen and I will
activity because
then that basically confine
to managing their
internal risk as
much potentially
rise that we've
heard suggesting?
>> Yeah, no, actually,
Isaac, that's true.
And I figure also
finding the biggest,
the biggest primary
dealer in the world
right now is the US
Federal Reserve.
No question about it.
You know, I mean,
I see your brother
just hopped on his
picture in front of me.
So I mean, when
you guys were
solvent
Brothers, I mean,
that was one of the
biggest pawn shops going
around with Goldman
and there is no
those solvent
brothers anymore of
the city is pretty
respectable.
But the number of
dealers and the,
and the amount of money,
the amount of liquidity
in markets that are
significantly
larger than when
we were in our primes,
you'll find that, that
the Fed is by far and away
the largest primary dealer.
And it shouldn't
really affect,
had to be this way.
But they kinda
back themselves
by poor regulation.
But nonetheless, what
defense doing right now,
I'm a 100% in favor
of the fact that
we're all in and
they're not giving up
and they're just
going after
more and more liquidity
and tried to improve
things once the economy
starts to open up,
which I'm not a medical
doctor by any means,
but as soon as it does,
I think things are gonna
get better very quickly.
>> Okay, let me right now
we have one question
via the chat.
I'll ask you also open up
the floor to questions
from the audience.
Please. Question. And he's
Nepal Louisburg branch one
of my former student.
There's someone
coordinating
fiscal monetary
stimulus. We see.
Do you think that
this will dampen
the back and the
unemployment rate
in consumer credit market.
>> Do you think
the benefits we
would like to on?
Or do you think that
the benefits as far as
consumers will be little to
none though I think,
I think consumers are
going to benefit.
I mean, obviously
the fact that
the Fed has opened up
the corporate marketing
in an exon,
borrows certainly
the relationship
as to how does that help.
The guy on the street may
not be obvious on
the front part,
but what it's gonna
do, it's gonna allow
corporations to stay
in business as well as
>> Quickly. So I think that
even though that there are
a lot of employees,
certainly airline
employees,
certainly restaurant
employees.
You know, you're
going to have,
you're going to have a real
slow bounce back in
these industries in media.
I mean, I'm reading
articles where
airlines are running
at 5% of capacity,
and that might be
generous right now.
So, but I do think
that things are
going to come back and
come back quickly.
That fact, the
fact that that
United Airlines was
able to sell stock,
borrow, borrow more,
bar, issue bonds.
I think it's gotta be
helpful in keeping
United Airlines
and business
will hire back
there people.
So ultimately, I think
it's very positive.
But the fits with
the Fed is doing
helps corporations
much more
than it does individuals.
What the government is
doing with the care.
Zach helps individuals
more than it helps,
you know, helps
corporations.
You might want to
challenge that
last statement,
but that's the
way I see it.
>> Anymore questions?
By the way,
I'm glad there's
one more equation
from my former colleague,
Bill. I'm going forward.
Do you think that
the impact of
the Bool Bool on the lit
capacity will force,
began to actively be
a backup source of
liquidity when the
market in future,
quote, dislocation,
suddenly the Volcker
Rule is not changing.
>> You may like maybe,
could you maybe
explain again to
our students what
the Volcker Rule
is and what its
implications.
>> And then what I'm
going to generalize
the Volcker Rule is
basically cats would,
dealers could do it
used to be the fact
that a dealer could
go back to go out in
the marketplace
and individually
to dealers could
buy bonds for,
or his book
because he takes
the ten years going
to go up in price,
or he thinks at
General Motors bonds,
you're gonna do better or
whatever the case may be,
the vocal rule kind of put
the primary dealers
on, on notice.
They don't want
you to speculate
in the marketplace.
Speculation is witnessed,
made this market again.
What they looked at is
the 20082009 tobacco and
said We have to
kept traders,
you know, it's just
using the analogy.
You know, you run out
of gas and you decide
not to get more gas but
to change your tires.
I mean, what has
nothing to do
with the other?
So the reality is, yes,
this is force the
Feds UP a dealer,
which I think
the Fed's going
to impose its
service today.
But today cow said
today is not the
day of which
we try to analyze,
second-guess ourselves.
But we will glue,
do a lot of deep searching
as to how to determine
how to go forward.
And I think one of the
things they have to
do is get rid of
the vocal rule.
I would also like to
see and get rid of trace,
but that would
probably open
up a can of worms.
Because the more money
that dealers can make,
the more liquidity and
they're going to provide.
You kept them from
being able to big
money and you cap and
you kept yourself from,
from, from a
wider liquidity.
So you're going to have
to have trade-offs.
Ultimately, you don't want
the Fed to have
to do this again,
or at least certainly not,
not the next 20 years.
But you've gotta, you've
gotta solve this.
And I think the
Fed was partially
responsible for the
lack of liquidity.
It just glad that
they stepped up.
Other words, wheat beer to
files recipe or even lower,
reminds me of
an observation
a friend of mine
made to me a
couple of years ago who was
running rates desk at,
uh, one of the
primary dealers.
>> And he said to me that,
Well, you know, look,
I'm analyzing my
allocation of risk,
capital and balance sheet.
I think I can
make more money,
say more safely by engaging
trading repo than
holding cash treasury.
The marketing isn't,
the Fed doesn't want
me to say that to
them because
they assigned me
this responsibility
and making markets.
But from my
commercial rationale,
I'm better off using
my balance sheet to,
to fund treasuries and
to hold them in inventory
and make markets.
And he said it's kind
of a disconnect with
my responsibilities
as a primary dealer.
>> Now, what I'm advising
my management as
to what the Bessie
whiskey is a,
my risk capacity and
my balance sheet.
>> So kind of
similar in spirit
to what you're
talking about,
unintended consequences.
>> So let me, let me
give you an
example on that.
So, you know, one
of the things is
as the treasury
market became,
there was the first hint,
remove the corporate
mark was the first that
the Treasury market was
quickly thereafter.
We were watching markets at
night during Asian time.
And in the bid offered side
on old mod bonds,
which is not a,
not that the liquid
of o, of a body,
you would usually
maybe a quarter boy,
baby, baby
three-eighths of a
point bid offer.
It was five or
six coins bit
offer a lot of times.
And it was only the last
three or four weeks
where the Fed
has come in and stabilize
these markets to the
point where the old log,
what is nowadays or
quarter, you'll
bid-offer ego.
It's just no liquidity.
That is partially
because of what
you're saying.
Guys looked at and said,
I don't need to
be and I'll make
X amount of money
by doing repo
or doing restless
things are
wondering what
each of the FET or
what do I need to go out
and make markets for
so you don't want so
that a lot of the
water truth from that.
>> Okay.
>> Couple more
question from
the chat from Peter.
>> Aren't our
chairperson cannot say
that connects to the
impact on bond yields.
>> And that when you become
more volatile, yields fall.
>> To what extent
are the low yields?
>> We're seeing
reflection of
a higher dissipated
volatility of
interest rates.
>> Also tough question
for the charitable arbor.
Certainly the lower
interest rates
caused customer volatility,
even though we
haven't seen a lot of
volatility in the
last few weeks.
We've been fairly range
about ten years
or me and I think
today ten years
was probably at
a four or five
basis point range.
Few days it was
three basis points,
but going back a few
weeks ago was 20-25,
30 basis points, 10-year
range between
overnight and now.
It's first convexity goes
through a lot of
things happening
in the mortgage market
that I just don't have
a good handle on.
You know, there are a
lot of people they're
afraid of not getting paid.
A lot of people are
not paying their mortgages,
so on and so forth.
I'm not the best person
to answer that question.
So I think I'll just sleep
with their, uh, Peter.
>> Would you like to
elaborate on that, please?
>> Peter?
>> Hi.
>> Yeah.
>> So well, I mean,
I was just I was really
thinking about
mandated treasuries
and just the fact that when
future short rates
are volatile,
this raises the price
of the treasury, so
lowers the yield.
And I was thinking
maybe it's quite
reasonable given
what we're seeing that
the cations are
anticipations,
volatility of
future interest
rates are, have heightened.
>> But anyway, I
like your answer.
Thank you very much for it.
There was an indirect
Peter and Andy.
There's, there's the
Morgan Merrill Lynch
mood index m.
>> Now I don't know
how it's performed.
>> I assume it was
very, very high.
And at some point last
couple of months, I
don't know where it is.
>> Now.
>> You look it up
and eat the move
here and there it is.
>> Okay, wonderful.
>> Versus a one-year
of the movement.
Just try it and see.
Ok, so Really all right,
so it's pretty volatile,
Peter, that's not,
that's Gaussian, right?
>> Of course, right?
>> I'm actually
not familiar
with how it's constructed,
but what were the index
itself as the loop we're
actually interested
in is the level of
the move index in March,
let's say so, which is
very high right now. Yeah.
>> Yeah.
>> So my,
my gases as the way this is
constructed is
similar to say next.
>> So it's the level is
an indication of how,
what the market is thinking
is the volatility
of future,
whatever share, interest
rates, whatever is.
So you know, the like,
just because bond
prices can't go,
negative interest rates can
bid bond prices
cannot, you know,
the fact that so
when rates go up,
and I realize they're
going the other way now.
>> But when they do go up,
bond prices fall, but
it can't go negative.
So there's this
convexity effect, right?
So, so anyway, you
can make money off it
if the level of
the yield is not
taking into account.
But its been thinking
deliberate yield
which is low,
is taking into account.
>> So, so I was
just wondering
if it looks like
things are in line.
>> So that's a potential
explanation for
the low yields besides
the ones that I've
already mentioned,
which is certainly
there certainly
go water supply stubbing
question about.
>> Okay, alright.
>> Yeah, we sort of
see that it looks like
alleyways and come
off looks like
how it looks like the
level is pretty much
where it was in mid-March.
>> I mean well,
actually, it is higher
than mid March is the
red line, is that right?
That's the moving
average with
an on-site Snow White.
>> I'm sorry.
>> I was away.
Yeah. Yeah. Why did
he come down to okay.
>> Thumb down
that's guarded.
>> Discard our watch.
Knowledge that
God or science what 63.
Today it's 57, although it
looks like the 200-day
moving average is 74,
so it's come down
quite dramatically.
>> Agreed.
>> Okay.
>> That wasn't what
I was saying then as
the volatility came down
the internet until 80
anticipations or not,
until he came down from
Marx to the present.
Let's say then what
should happen to yielded
the overlap is that there,
is that what we've seen?
>> There are a little bit
there a little
bit something
like 0.6 as opposed to 1.3.
>> Was little println Andy,
0.3510, year,
something like that.
>> Roy F31 was
the low prints,
yet it was only
varied instant.
It was it was a
gap saying he was
like training at
36 basis points
that trip 3036 and
a closed that day for that,
we have seen a close
below that we haven't even
seen very close together.
>> They understand
that if I told
you in mid-March that
over the next 34
weeks there'll be
massive intervention
support in
the bond, corporate
bond market.
You know, a $2
trillion cares plan.
I would not have
thought that from
March 23rd to today,
the byte would only
be it would only be
higher by 30 basis points.
I just would have
thought that would have
sort of sold off more.
But you made the
observation any about
the global demand for
pure risk product can,
which where the less
least dirty shirt
and a house is how
you phrase it, right?
>> But you know, what are
the sharing of
what goodbye notes
that very interesting
is that what is supply?
Which is something that we
used to look at
when we were much
younger and we kind of
ignored it for the
last ten years.
While they suppliers
worth watching again,
it'll come out
again tomorrow.
It's a one-week whack.
But over the
last four weeks,
you've had what is m2?
You're going up at about
a 75% annualized quip
that a lot of that
has a lot to do with,
with, you know, the
Fed just buying
stuff in issuing credits
and what have you.
But the velocity of body,
which I'm not
about to explain,
is an ordered set of, well,
it up, It's been
going there.
So I find that, I find
m2 is worth watching.
But velocity is
not the bait.
It is value boys
are worldwide.
>> I'm sorry, I cut you
want yet another comment?
>> My apologies.
>> Peter Pan Am
I make a comment about the
about a Peter's statement,
but the volatility also.
>> And he said,
I think that what happens
is when you look at
the volatility
rising so much,
you gotta look at
the effect on,
let's say the
mortgage market,
where those, those are
the options become
more valuable.
And therefore this hedging
goes on an app market.
>> And that causes
treasuries to
move either higher or lower
depending upon the
hedging that goes on in
the mortgage market as
a pass-through effect on
volatility that
goes back into
the prices of the
treasuries from,
from hedging, which
will be part of it.
>> So I think the market
reacts with a high yield,
but a high volatility
in treasuries.
The feedback
loop Magnus and
goes into the headers.
>> The mortgage
hazards, which
then have to shorten up
their duration because
the mortgage
become shorter.
>> So they gotta buy
back their shorts.
That has lot of flow
through that goes on,
which probably affects
the price lot.
>> Right. Andy
>> I figure out who
submit their Robert.
>> Yeah.
>> And also what happens?
There is a secondary,
thanks to the
following, right?
>> The bond market
rallies and
mortgage valuations
cheapen, right?
>> Then as they
get cheaper,
that's a little
bit incrementally
less of an effect
on the reef or
the refinancing
attractiveness because
basically the primary
rates are going
down as my son
attack, if the,
if the bond market
rally brings
cheaper valuation
the mortgages,
you have like a
little bit about
a weaker effect on
prepayments because
you're printing higher,
relatively higher
mortgage borrowing rate.
Suppose the treasuries,
and that's sort
of attenuates
the need for more
duration because
the mortgages are
not cheap and
I shortening as
much as you think.
So also the impact
on of the movement
of the change in rates on
the evaluation where he
has an effect as well.
>> Okay, we're
on a question
from Professor
Avenue later.
>> Aren't colleague Qur'an?
Andy, how Elizabeth that
put for equities over
the next six months and
also the impact of the
upcoming election.
>> Knee or view
how realistic
that put for the
rest of the year.
>> I think that even
though it insert
tremendous appears for
the president
the West ureter.
So we got compliments
in the last four
or five weeks.
I think the Fed, I think
poll, let's back
up a second.
I think Paul's
different than any of
the other Fed
governors we've had in
a long time in that
house, not a banker.
And he's really he's really
more of
an investment banker
that he's looking
at this economy very
differently than yellow
or green achy or,
or, or Volcker or
Greenspan would have you.
And while they
might have done
similar things,
and of course,
Yellen and Bernanke,
he made some
comments early.
Honest this was
looking to start that
maybe defend these to get
a little bit more involved.
I think pose is
such that he's
going to continue
on as long as he
sees problems
in the economy,
as long as he sees very
high unemployment.
But if he doesn't
see inflation,
you know, what's
the reason to
raise rates then of course,
he's not a
negative rate Sky,
which I think is
great because I think
big rates just absolutely
annihilated Europe.
I don't see where
they've done a lot
of benefits in Japan.
So I think the Fed could,
is going to be
there for a while.
One thing that
worries me is
that there might
be a push towards,
has the Fed done too much?
Have they taken
too much risk?
Should we lose
faith in the fed?
And there might be a
down trait from that.
I would not put
that past us,
but I do believe that,
that the Fed put is
there and I think it's,
it's going to stay for
the rest of the year.
Well through the election.
As far as the
election at rates,
one would have
thought that Trump,
being a real estate
related guy,
would have done in
infrastructure
program and would
have done it much earlier.
And in the fact that
interest rates have been
low for a long time,
I would have thought
that you would
force addiction
to issue 40-year,
50-year paper
because the market
will take it.
You know, and I listen
to the arguments that
Morgan Stanley and
JP put up that
they said they
don't want to
issue they don't want to
trade in this log paper
because the government
It might not always
be demanded Ford.
And we should only
issue stuff of
which we have a
regular calendar.
I think that goal, I mean,
I would love to see
the Treasury do
a $2 billion
infrastructure program
funded by Wong,
40-year, 50-year
necessarily not
necessary Treasuries.
We maybe something like
the Resolution Trust Corp
that funded it,
funded savings and loans.
Have that government
guaranteed and have that,
you know, a little bit
different product.
And I think that
worker would
take two trillion
forty years.
>> Well, Australia
did not want to be
a bond hay during
the period of
q0, q0, right?
And they do a
100 year bond,
I think Austria sovereign.
>> So okay. Let me
open up, please.
>> We have about
15 minutes left.
>> Let's open up the
questions, please.
We'd love to hear
your thoughts
on Andy's observations,
challenging some of
his points of view.
And anybody like to
chime in with a
question, please.
>> I will comment about,
I guess about the what's
happening with the
market in terms of
the risks now and
in treasuries
and corporates, if
you look at the,
just the price risk
now and in terms
of duration,
dollar volume at
all one, you know,
and if you hold a
treasury bond right now,
when rates go up a
100 basis points,
you're down about
a quarter and
your principal
immediately and
across the board.
So look at the losses
that will be entailed.
>> Now, if you have
a, even a small
rise in rates on
a basis point,
basis base points
will give you
almost $25 loss and price.
So I didn't offend stuck.
Now the Fed can't
let, let rates
rise at all, ever,
I'm telling you
because if you had
a rate rise of
anywhere near it,
which you had in
the old days when
you had rates go
up 400 to 500 basis points,
you'll have an enormous
principal loss
across the board,
pension funds,
insurance companies,
and globally.
>> So I don't know how to
operate in this
environment.
>> They've sort
of stuck now with
this low rates scenario
for a real long time.
>> Well, I only got
a couple of things.
>> First of all,
what are the,
what are the benefits?
Is that as the government
increases through deficit,
the amount of
money spending for
interest expenses
is going up anywhere
near what it
could be if we're at
much higher rates.
No question about that.
So that's a bad thing.
But at some point
you're going to
have to have higher rates
than just going
to deal with.
In other words, you're
basically going
to have the Fed,
which are talking
about monetizing
the deficit and ready
to have that in perpetuity.
>> And I mean, that's
really hopefully that
all made it to tough
to say how is,
but I don't know how big
these companies could given
the whole pension
problem and
everything happened,
it just copies the beard,
the economy absorb this
kind of a price loss.
You know, the, there
stuck at these levels,
I can go to 8% just
to think of the loss.
>> Well, I'm not sure what
a percent just yet.
I'd be real happy with it.
You know, 1%, 10 years
maybe get into one
and a quarter.
I charged point
around what?
30 maybe.
Maybe I'll see you
on buds get back
to 2% or to 30 or
something like that.
I'd be very happy
with that because I
think it would show
that there is,
there is some
risk in owning
treasuries right now that
doesn't seem to
be any risk.
And it seems like we're at
the same rates that
give or take every day.
And I think that's
about to change
and we'll have to wait
to see what happens.
>> Let's say
that that's been
a problem with, I
think with this.
What's happened with
somebody's hedging,
hedging areas where
the whole risk parity
hedging where he
would, he would,
he would hold
treasuries as a hedge
against styles and then
broke down at some point in
the cycle value was
20% last month or
something like that or
how he did this spot.
>> But yeah, that was a Ali
that almost even cliff
clips fund lost
when there was you
are at the treasuries
didn't didn't balance out.
>> The equity.
Lossless seem
like we've had
sort of likens,
it will highlight like
almost a generation
of people trying to
explain why bond
yields are higher.
>> We had Bernanke in the,
I guess 2 thousand.
Well, no, I guess
it was greenspan,
I guess when we talked
about the conundrum, right.
They were stark highway
2004 looks like
every cycle we have
a new reason for why
bond yields are
higher, right?
I mean, maybe
it's because as
Armando alluded to
many at risk parity,
you FSK were Babu buy
into that concept of
trading off debt
versus risk assets,
whether it's equity
or equity vowel
or corporates are high
yield or whatever.
And I think that's,
that's a persistent
kind of theme.
>> You know, more people
are bought into that.
>> Offsetting,
offsetting effects.
>> Marko.
>> Just ask the
question again, Andy.
>> It's appeal.
>> This is purely
a flight to
quality issue
that's still out
there as a backstop
and that's what
yields are higher when
you how would you
comment on that?
>> So there's some of that,
I mean, there's
no question that,
that central banks are
still big bars and stuff.
I think there's
a little bit
of flight to quality,
but is R1 and said,
what's the
benefit of buying
tenures at 62 basis points?
I mean, your upside
downside risk is,
is, you know, what
are you looking for?
I mean, eventually
money supply
where it is going to
lead to inflation.
But it's hard to
believe. When you had
oil prices at the
beginning of this week,
trading it negative levels.
And you can guess up around
a buck for a gallon
in many places,
in many states.
So I mean, you know,
we wonder when inflation
is going to come back,
but yeah, there's certainly
a flight to quality aspect.
But you know what?
Ask yourself this,
you really want
to be, you know,
expensive flight
to quality thing.
If the Fed is
there, you know,
stopping you, giving you
backstop form for
everything you want to buy.
I mean, his lends
the fence there.
I just don't see where
interest rates this
low makes sense.
I'd rather get
some corporates it
4% or 5% or whatever
the case may be.
And they're out
there cocktails of
45% and you can buy
other things that,
you know, eight or 9%,
they're out there.
And I'd rather, I'd rather
barbed Oh, the risk.
>> I think that
seems to be pretty
pretty, I think.
>> Across the board.
>> Again, I think
you started
off by sort of
saying that you'll
get the wrong market
if you're looking at
the Treasury market to
basically challenge
the effectiveness
of what the Fed and
the Treasury doing.
You kind of like misplacing
your attention, right?
Or other reasons
why yields are
stuck where they
are right now,
doesn't mean that there's
a quite a bit of cynicism,
cognitive uncertainty about
the effectiveness
of these actions.
>> I think we have
about ten minutes left.
>> Fibers. Anymore
questions? Please?
>> Please.
>> Oh, one more
question from
Bill etiquettes.
>> You the question,
by the way,
in the chatter,
should I read it?
By the way, is there
any justification to
the notion that the
Fed purchases of
treasuries represents
their attempt
to monetize the
federal debt.
A sort of modern
monetary theory from
progressive politicians and
economists with
training wheels.
>> Well, that, that's
what's going on.
>> Of course it is that
really the VOR,
but people ought,
the Fed is embracing
some sense them empty,
which is still not
enough. For now.
>> It's been discredited,
but now it's
become accepted.
The dogma, some sense,
I don't know that that's
going to maintain itself,
but that's clearly the case
that we're doing
right now is an
empty Let me audience.
Yeah, I'm sorry.
>> Let me open intensive,
wonderful equation
like Bill,
let me always being high or
Anybody want to
comment on that?
>> It's basically
hidden away
to implement NMT,
anybody nuanced,
any economists
in the audience.
>> And what does
an exponent,
that's what it says that
the cup articles about that
in the FT about that,
that you are making
a statement that we
can monetize the debt,
which is, which was
what the, you know,
there's no way the
Fed could be able
to operate.
>> What Isn't it
is now without
doing that, they're there.
>> And then limit
seems to be no limit.
>> It can be 10 trillion,
can be 15 trillion.
>> Well, yeah, I mean,
certainly the
funny thing is
the Feds still
says they don't
they don't subscribes
to the idea of MMt
As you pointed
out, their actions
could clearly do
so on one side,
they're saying we don't
believe in it and on the otheside
they're doing it
and in what way?
What you're seeing is the,
the liberal side of
the politicians,
the Sanders and the
Casio, so whatever.
But I've also been talking
about him and
see, you know,
the idea that they
could basically fund
the whole government
deficit and
continue to increase
the government deficit or,
you know, liberal
related type
causes without any effect.
You know, at some
point that will come
home to roost and
we're going to have
to pay for it.
But for right now,
it's still there.
And I think once the
economy gets better,
we're gonna really
have to deal with
this government deficit of
unlimited proportions.
You know, a 100% of
GDP or whatever
the case or,
or you know how to put
up a percent of GDP and
so on and so forth.
It's going to
hurt us. But for
right now it's working.
>> And today I think they
say defend those
actions now.
And the way to put
a footnote for
the economy to catch up.
>> He said still thing
that waiting for
the economy to catch up,
maybe couple of years,
let's pull up and you
know, at the end of
the day it's not
outfits role,
it's the government's
role in the government.
You had great economies
over the last three years.
And you're basically at
one deficit increasing
after the other.
So your which scenario will actually
allow you to decrease
the deficit, right?
>> Today, the journal
points out that
we are talking
about a tapestry
that's 18% of GDP.
And that's sobering
when you realize that
the ECB limit is 3%.
Right now we're
printing 18.
So Anymore questions
from the audience,
please pass on your,
your thoughts on
this is very,
very open-ended
kind of session.
>> So we'd love
to hear from
the audience, anybody,
and any final
comments from you,
 I wish
everyone to stay safe.
I look forward
to getting back
to New York. Hopefully
I'll stay there
more than 20
minutes before I
hit up to mate,
but it'll stay safe.
Stay well, it we're
in the midst of
volatile markets 
 Feel free
to reach out to
me if you have
any questions.
Always available.
>> Always on wilbur. Okay.
>> Thank you very much
for your wonderful
comments and you insights.
>> Thank it'll they've
listening and spending
time with us and stay safe 
Hey everybody,
thanks, bye, bye bye.
>> Yeah, good luck.
>> Practical talk about
basics
on anger.
>> I just got a text.
>> You zoom is still
open, is a bunch of
people who are going
to hang it up and
look at the playback.
>> Yeah, how's,
how's your how's
it going? Good.
