08/23/2018 - The Roundtable Insight: Yra Harris & Peter Boockvar On Global Risks And Central Bank Policy Trends
Yra & Peter Podcast
By: Tenzin Lekphell
FRA: Hi welcome to FRA’s Roundtable Insight .. Today we have Yra Harris and Peter Boockvar. Yra is a successful hedge fund manager and a global trader in foreign currencies, bonds, commodities, and equities for over 40 years. He was also a CME director from 1997 to 2003. And Peter is Chief Investment Officer for the Bleakley Financial Group and Advisory. He has a newsletter product called the BoockReport.com which has great macro-economic insight and respective with lots of updates of economic indicators. Welcome Gentlemen!
Yra: Hey Richard!
Peter: Hey good afternoon guys!
FRA: Great! I thought we begin with a reflection on the FOMC Minutes today and the observation that you made recently Yra and your blog that Peter Boockvar, Jim Bianco, and the former Bank of India governor, Raghuram Rajan, have all raised concerns about the Feds raising rates while shrinking its balance sheet. This is leading to a rapid rise in borrowing costs for emerging market economies that have high levels of dollars denominated debt. And so what is the consensus today from the FOMC minutes meeting perspective?
Yra: Well I am sure Peter will speak more to the FOMC Minutes. I have read through some and I am sure he’s much more ahead of me on this but you know Peter and Jim and certainly professor Rajan have discussed this and its impact on the ripple effect. You know every central bank because the media is so enamored and the fact the equity market has risen and the central banks all raised the great concept of counter factual wealth we haven’t done this. Well they did do this and I know that Peter and I and Richard you have discussed this for years they have overstayed this hand and did they need Q.E 2 or 3. But the effects of the Bernanke Fed taking this, to me a ridiculous and which prompted the Yishibe and of course The Bank of Japan to take this to ridiculous end, have sent global interest rate to very low levels and I think has enabled, I think that’s the right word, cause when we enable an addiction to this ultra-low interest rate and led this to a huge amount of borrowing because of these low rates. Now that interest rates are moving up as Peter pointed out since he framed the QT or Quantitative tightening, that now liquidity is being withdrawn especially from the world reserve currency, which has greater effects than any other. And it causing some dislocation because interest rates are going up and we feel liquidity is tightening and now this you know, all these people who are borrowed up are now having to paying it back or if they are not paying it back yet, their debt services costs will rise dramatically. So that’s where we sit in the world so I think it has great ramifications but I will leave my voice there and let Peter go on with it.
Peter: Yeah, I agree with Yra’s points and one ironic thing about Monetary Policy is that when you look at that over 20 years ago, each successive cycle saw lower and lower interest rates because the debt build up that has taken over many years meant that we needed lower and lower interest rates not only which encourage the borrowing but meant that higher rates than that would cause a major problems cause of all the debt so here the Feds says I’m going to cover it to zero and I’m going to encourage you guys to go out and borrow and borrow and borrow and now you have taken on a lot of debt now its time to raise interest rates well they can’t raise the interest rates to much because of all the debt that’s accumulated. So we are going to the next recession or down turn whenever that might occur with the fed funds rate well below what it’s been in the past. Likely Europe will go into to the next recession with rates that are negative and Japan will probably do the same. So that’s what going to differentiate the next recession from the previous ones is the inability of central banks to be able deal with it because so many (4:52 Inaudible) have already been expended. So one of the problems there to leave it at that. But with respect to Yra mentioned the Minutes, The Minutes are in a way in addition to FOMC statement, the minutes are not really minutes. When you think of minutes, it’s okay let’s take notes of about what discussed. The fed has turned Minutes into another messaging machine, to be sort of an addendum to the Minutes the actual statements that comes out the day of the meeting. And typically nothing comes of it and I don’t really think nothing really came of it this time but those that think that the Feds are going to be talking about trading and worried about that that there are going to be almost done, well there are plenty of comments within the minutes that talked about company’s having more leverage in raising prices. There is also a great discussion on the yield curve with some saying that we outta to pay attention to the yield curve and we don’t want to invert it. And others have said that you can’t infer economic casualty from some statistics correlation because there global factors that are surpassing long term interest rates such as, as Yra said, very low rates in Europe and Japan. The question is to which side is of that argument is Jay Powell and I’m not sure of that answer.
FRA: Okay and what about the effect of this on the US equities markets Yra you observed that there’s a rallying of the US markets relative to the rest of the world with the (6:32 inaudible) US dollar. Could this be a trend, a change in trend from prior correlation of weak currency and strong equities market?
Yra: Well you know with the algorithmic world and the way we respond to things, can it be a trend? I do not how to define trend anymore. You know it seems 24 hours is a momentum trend so it switches again. So in the big picture, I don’t believe that those fundamental have shifted dramatically and I always find the currency are (7:06 inaudible) interesting because they will roll out, you know I love the different financial media because they will roll out a CEO who when the dollar is rallying or its affecting our outlier that is affecting our profitability of the strong dollar but I yet to hear of a CEO in America who when the dollar is weak and the profits are growing stand up and say, “don’t increase my bonus this year cause its really due to extraordinary circumstances way beyond my control and that’s the dollar is so weak that you couldn’t help but make money”. So the argument about the dollar it’s right now you got both going together because of some theory that the United States is some haven for money flowing in, it’s still the same thing in China with a weak currency but you have a real weak equity market. These are things that we haven’t seen sustain themselves and I don’t believe they will sustain themselves as far as equity markets correlative with currencies that they will have long held view will resurrect itself, But right now we are in a situation where several correlation that we have seen have broken down we also saw oil prices rally with quite a bit with the dollar rally initially. So you know what that’s the thing about correlation they work until they don’t work anymore. But certain along the held relationships we will always reassert themselves. I almost sound like the feds giving enough time (8:56 – 9:01 inaudible)
FRA: And your thoughts Peter?
Peter: Yeah I agree. Even with the European stock markets this year with the recent weakness in the Euro it has done nothing to help the European markets. (Inaudible 9:15) in Germany in which, 40% depended on exports. So and to the point of algorithms, I stopped thinking that equity market was a good discounting mechanism like it used to be and I see it just for responding to events and circumstances that’s smack in the middle of its face and like you take now for example, you see the weakness in overseas economies. Well 40% of the S&P sources goods from overseas but there is not one (Inaudible 9:48) saying that our revenue growth can be clipped here. To think a lot of it does have to do with Algorithms cause in algorithm the input is the data that is out here. It’s not guessing what the data will be. So it’s not saying that China’s growth is falling therefore 6 months from now, it will start to impact the US and I should trim equities today. Its saying, China’s growth is slowing but it hasn’t affected the US and the US is still good therefore buy stocks. So I wouldn’t look at US equity market as a good discounting mechanism just look at 07. The credit markets were literally on fire in the beginning of 07 and the stock market hit an all-time record high in October 2007 because the feds were cutting rates and they thought the feds are here to save us. Buy stocks when they cut rates. In the flipside, buy stocks 2013, 14, 15, don’t fight the feds don’t fight the feds. Well now, you don’t hear anyone talking about, “be careful of feds be careful of feds”. It’s just buy stocks buy stocks things are good! So the narrative always changes and the circle of relationships are difficult to apply now because we never had an experience of negative interest rates. The (inaudible 11:05) 2 years minus 60 basis point historical approximate so don’t give me a seasonal analysis or historical analysis of the yield curve when we are in a rate environment when it’s never been seen in the history of the world before.
Yra: (11:22 inaudible) because you’re in Canada Richard so one of the most interesting things is the flattest yield curve, except outside Iceland which is a different situation, but the Canadian curve is really flat. Flatter than the US. I think its 15 basis points this morning. Which is interesting because they never had a Q.E program. So what is flattening the curve? Is it that the Canadian are now following the US in raising the rates and that the Canadian market a very effective barometer that hey, “you might be wrong here that there are things you ought not to be raising rates in this fashion. I find that very interesting what the Canadian curve is doing and I’m starting to pay attention to it only because it’s a pure view although of course it’s affected by international capital flow which are all affected by the major central banks. But I do find that curve, being as flat as it is, very interesting and something to watch for.
FRA: Yeah could be partly also because on concerns with trade like with NAFTA, with the US and concerns there on discussion on the treaty, revising the terms of the treaty, which could be negative to Canada, and also on real estate, there’s been lot of international capital flow into Canada recently but theres been new measure in terms of taxation or tariffs, penalties imposed on foreign nationals/ foreign entities outside of Canada on the real estate market so it’s no longer as it was before so a lot of jobs recently created due to the real estate boom. So I think maybe those two concerns are bearing on Canada.
Yra: I know it’s worth discussing so you know everybody has ancillary reasons for why this, and what’s interesting because Peter brought it up from the (13:41- 13:42 inaudible) about foreign flow funds are we back to Bernanke argument about the surplus savings. I guess there’s still some people in the feds making that argument for the current state of affairs. That didn’t sit well with me in 2006 and it sits less well with me right now because it fails to take into account the real impact and the damage done by central bank policy but that’s an objective opinion on my part.
FRA: Yeah, exactly. So we talked about the Fed. But what about what about the Japanese central banks. There’s been some potential trends there in terms of the Japanese central bank buying less equities they bought a lot of the in the past and due to changes in the central bank policy, what are your thoughts on that and let’s start with Yra.
Yra: I deferred to Peter and I think he has a better sense of that. So Richard I’ll defer to Peter.
Peter: So what’s most interesting when the Bank of Japan decided to go to Yield curve control, it was there way of saying, “we already broke the Japanese bond market we need to start buying less, lets figure out another way of keeping the rate low. So they went from focusing on the price of money from the quantity of the money they printed. So they said let’s keep the spread the overnight rate and 10 year rate close zero give or take 10 basis points. And that worked in a sense that it allowed them to dramatically cut Q.E. Where they were running at peak 8 trillion yen a month to 50 trillion yen. Problem was that by destroying and flattening the yield curve to nothing, the you damaged profitability of the banking system and if your banking system is your transmission mechanism of your policy, you actually end up tightening via the easing because the banks are reluctant to lend because there’s no yield curve, well you are tightening they are now cutting back on what I’m hearing purchases of stocks. Well when they become dominant holder of Japanese stocks, you actually scare Japanese equity investors because you know it’s not sustainable unless the Japanese want to nationalise the Japanese stock market but I don’t think that’s on the agenda, you actually scare potentially buyers of Japanese stocks because you wonder and fear what’s gonna happen when the Japanese are done buying stocks the markets gonna fall. So their easing becomes into tightening while they still ease and I think that’s why Korota shifted the yield curve control to 20 basis points give or take from 10 but even 20 basis points really isn’t much from 10. So they have a major problem. The end game is somewhat over for the Bank of Japan. I just don’t know how they are gonna figure out a way of getting out of it.
Yra: Yeah I would agree. Peter has that absolutely right. Their QQE, is they refer to it of course, it was quality and quantity as they were buying stocks. I think they have been under buying for a long time that’s why I wasn’t so surprised when they made that announcement in the initial reaction was a quick shutoff of in the equity and a quick reality in the Japanese Yen. So but I don’t think it really was that great of a surprise to the market because they’re not very transparent. It was like watching the Yishibi who would publish where they were at the end of every week and you can kind of follow and map that you knew exactly what they were buying according to the capital keys. The Japanese have really been very secretive here and I think Kuroda has followed. I agree with Peter and I think it’s a terrible policy and I think he was able to do what he was to do because he could do it out of the heels of again Bernanke. I respect Jay Powell and it’s interesting to hear these views but the United states does have a global fiduciary and when it fails, it does things to creates havoc in the system and then everybody else follows as it goes (18:40-18:42 Inaudible) their doing it and (Inaudible) okay I’m going to do this here. So we’ve gone to preposterous measure of central bank activity in the world and I think the first rumblings in the emerging is some of the coming price that’s going to be paid. I can’t tell you when, I wish I could cause then I could retire and then I could do these podcast fulltime. But I think it’s coming to watch out for and I think Peter is picking up on that. With the Bank of Japan, I think they have gotten themselves into a terrible situation.
FRA: Yes and Peter what about the Japanese currency and the last couple of months. It seems to be increasing or strengthening at even faster rate than the US dollar?
Peter: It’s amazing it’s like a conundrum. I mean when you look at the Japanese monetary and fiscal situation you tell yourself, “Why isn’t it 250 instead of a dollar let alone 110 or 112? But I think the recent rally is strictly due to the change in Japanese policy in terms of the yield curve control and continuing to trim Q.E. It’s really as simple as that. Where the end goes from here is, you could flip a coin. As I said on paper, it deserves to be a lot weaker but considering how the US has been handling, its finances. The dollar should be that much stronger than the Yen. So I think what the end results is that printing currency and weakening your currency is not necessarily the pathway to higher inflation. And that was the goal of Bank of Japan was to create 2% inflation even though it’s completely unrealistic benchmark, particularly in a country that had a shrinking population and a growing, aging population that needs to save and really spend less therefore, another reason why you are not going to get the higher inflation. So, here we are with their balance sheet that is almost 100% of their GDP and they are the top 10 holders, 40% of Japanese equities listed on the Nikkei and the CPI number, which comes out tonight, core CPI or core core CPI ex energy and food, is expected to be up all 3/10’s of the year. Astonishing!
FRA: And moving from Japan to China, Yra you referenced the Financial times news item and which it was stated that China’s banking regulator has ordered to boost lending to infrastructure projects and exporter as the government seeks to bolster economic confidence on the eve of a new rounds of trade negotiations with the US. Your thoughts on that?
Yra: Well my thoughts are that is when I wrote that there was a weekend article which I thought was very important article and I did exactly what I thought it would do which is that is coppers and everything that has been down been up all this week. Including everyone was bullish the dollar but this was done to assuage the immediate pressure. I don’t think the Chinese have as much room as they would believe but I thought it was a very interesting switch because they are evidently a little bit nervous about too much slowdown too quickly in the Japanese economy and I know Peter has been watching the Chinese bonds are also approaching are approaching the very low levels they are almost as low as the US ten year. In a country if we believed in numbers, you know over 6% GDP growth. There getting a little worried and their worried about how far Trump’s going to take this Tariff issue? So I thought that was done in way to politically assuage some in the White House and hoping that they would be able to control more of the dialogue between the two and soften some of the rhetoric. It was interesting. Another thing that took place, today or yesterday, the German foreign minister. You know, lets hold off for a bit. Peter you go with China then I will come back with the German foreign minister thing cause he did some interesting things.
Peter: China’s in this tough spot where they acknowledge the success of credit groups that has led to so many imbalances in their economy on top of the massive leverage ratio and that’s why they have been pushing to try to at least bring lending on to bank balance sheets and off the (Inaudible 23:45) outside but at the same time, they don’t want to suffer big decline in GDP growth and they still want the 6.5% type growth and you throw the tariffs in that is a threat to growth which causes another policy conundrum because they want to slow credit growth but they want to speed it up to offset the tariffs. How this plays out is again going to be a mystery because China’s economy overall is a mystery. I think over time, slowing credit growth and trying to maybe privatize is the wrong word but continuing to shift their economy to more private sector dependent area and business’s are a good thing and actually bullish in long term but how they manage this in the next year or two is going to be extraordinarily difficult particularly if Europe is going to slow at the same time because of their own challenges and the end of QE and the Europe is a huge customer there and how they manage further relationships with the US. Now today, delegation comes to US to discuss trade and I’m beginning to now wonder whether China’s saying you know what, we’re not giving in and we’ll wait after the election, the midterm election in the US, because when the democrats takes the house when Trump is going to have less leverage, and maybe we cannot give in as much as he wants us to do. So where the Chinese economy goes is will be how much do they dig in and I think they at least they show some interest in digging in and not giving in to what Trump wants and you throw in this whole Michael Cohen thing and I think that’s kind of irrelevant for the whole US economy and markets and they take this as a sign of vulnerability, which gets them into digging even more. We’ll just have to wait and see.
FRA: Back to the German foreign minister Yra?
YRA: Yesterday, German foreign minister. Hold on one second…It was the only thing I was interested in reading today (Inaudible 26:01- 26:03) it was out and I recently saw this story and nobody really talked about it but discussing it that Europe and others need to break away from the strangle hold of the United States especially office for Foreign Asset Control which is under the US treasury and its ability through sanctions and other mechanisms to control, of course, fund transfers globally which is what the Russians and others, the Iranians, the Turks yelling about, because the US treasury really has the power to affect your ability to move money and the German foreign minister came out and said, they have to be get ready to move beyond this. I thought it was interesting that he came out with that following the Putin and Merkel meeting over the weekend. And Merkel actually this morning came out and supported the article (Inaudible 27:00 27:01) and she came out to supported the foreign minister and those views and it’s really all directed at trying to circumvent the ability of the Swiss system because its price and dollars and the United States has disproportionate amount of power to control a lot of global events because of it. So they want to circumvent it. I think that’s what the Chinese would ultimately like to do and I think that’s what the Russians would really like to get themselves out of which is why I talked about these sanctions they want to remove it is a matter of what negotiating power Putin has with the Trump White House and I’m not talking about the more sorted events, I’m talking about the ability for the Russians to be able to influence and dramatically influence the events in the mid- east. So this is all coming together at an interesting time and I think it’s really a sense of push back against the US “bullying”, as I think the world would say, in regards to foreign exchange flows. This is really nothing new. It really goes back to the 50s and 60s when the French were complaining about the same thing for the different reasons that the US had way to much influence because of dollars rolls reserve currency. But I think this is important and I think it needs to be on everybody’s radar screen to pay attention to.
FRA: Peter any comments on that?
Peter: I agree with Yra, it’s definitely something to watch. All the goings on with the emerging markets right now is important to watch. It’s no coincidence that just within a 6 month time frame that Turkey, Argentina, the time bonding market, the short (Inaudible 28:53) trade is blowing up. The liquidity flow is going the other way and monetary tightening is taking hold and stuff beings to happen and accidents begins to happen and things get more exposed, investors become more discriminating, they become less tolerant to problems. I expect more of these accidents as the months and quarters progress. The questions is how insulated or how (Inaudible 29:18) U.S economy gets impacted by that.
Yra: I think, Richard, that the world is more concerned now because they’ve seen a president or a political leader in the United States who is trying to change the entire narrative of the last 60 years anyway and their going, “wow, we really made our selves sub-servient” because of our needs for dollars but when they see the ability to use this as political leverage, I think the world is very nervous about this important piece of discussion
FRA: Yeah and finally on that relating to the emerging markets, if we look at countries with high risk for currency crisis, like Indonesia, Brazil, Argentina, Turkey, what do you make on Turkey president Erdogan and the possibility of capital controls? Yra?
Yra: Well I think that’s a great possibility. I know everybody you hear all these what I call a (inaudible 30:34) analyst who come out and that’s not going to happen because he’s a rational actor and why would you do that? I would be very careful with Erdogan. First off, he’s very good friends and very close to Mahatir Mohammed, well now he’s was back in prime minister of Malaysia, but back in 1997, 98, during the Asian contagion, Malaysia did put on foreign exchange controls in September, I believe 1998, and it actually aided them and they did it by thumbing their nose at the IMF so everybody else is running to the IMF and dealing with well we’ll borrow money from you but the IMF of course could lend playbook was raise interest rates and cut the spending to reign in the deficit so your basically forcing yourself a severe economic slowdown, Malaysia said no. They went to foreign exchange controls where they tied up money for a longer period of time and if you would do this now, I think first of all, it would cause a lot of havoc in Europe cause so many European banks are involved in Turkey then other banks because of the close ties but the foreign exchange controls are something that this global market really fears because anything that ties up, this whole market is built on the free flow of capital so a country of Turkey size with that much amount of debt, I think that will cause negative reverberation throughout the system and setup a very potential negative feedback loop as far as global liquidity and I think that could really cause problems something that you would have to watch out. Erdogan is, you know, he’s first off foremost curious about Erdogan so I think we should be very attentive to this.
FRA: And Peter?
Peter: I agree with Yra because you can imagine being an emerging market and investor in Turkey and all of a sudden you can’t get your money out. Well you’re going to sell everything you can to offset that so the capital flight from other emerging market could be rather extreme. Now Turkish government has it that there not going to go there but it doesn’t mean they’re not going to change their minds tomorrow. Yra mentioned the precedent that we saw in Malaysia 20 years ago so it would definitely cause a lot of problems and this is all related to excessive leverage, a lot of it at the corporate level, a lot of it dominated in dollar, which is not the currency they collective their revenue in. A classic repeat of this search for yield and okay give me zero interest rates then get me yield. If I can lend money to Turkey for 8%, I’ll take it. Classic search for yield that is now causing a rethink and as I said earlier, a more discriminating view. (Inaudible33:43) Investors when interest rates rise, and monetary tightening picks up.
It’s like we keep repeating this same movie over and over and over again. Just some different colours and different acts the same underlying themes. Over and over and over again in the history of financial markets.
FRA: Yes exactly and we’ll end it there. Great insight as always gentlemen. How can our listener learn more about your work? Yra?
Yra: I blog at the notes from underground and all the podcast I’ve done with Peter, and Financial Repression Authority is a good way to get the discussion out there and I’m very happy to have this opportunity to do this because I think investors needs to hear about these things that you can’t just put on rose coloured glasses and oh earnings are forever and going up and it just doesn’t work that way. Peter just reminded us that things are changing and you have to be attentive to them and whether you agree or disagree, you have to put it into your quiver and at least have the knowledge of it because when these things happen, and it’s not that there not going to happen, it’s just everything else in life is about timing and understanding it. So I just push the idea of understand it so that what you will find in my blog, notes from the underground.
FRA: Yes exactly, and Peter?
Peter: So you may read all my work at the BoockReport.com and if you’re interested in asset management and other financial planning, and you can check us at Bleakley.com.
FRA: Great! Thank you very much gentlemen! Thank you!
Yra: Thank you Richard! Peter good talk with you!
