10/01/2018 - FRA Roundtable Insight: Yra and Peter PodcastFRA Roundtable Insight: Yra and Peter Podcast
By: Tenzin Lekphell
FRA: Hi welcome to FRA’s Roundtable Insight! … Today we have Yra Harris and Peter Boochwar. Yra’s a hedge fund manager, 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 boockreport.com which has great macroeconomic insight and perspective with lots of updates on economic indicators. Welcome gentleman!
Peter: Hey Rich. Hey Yra.
Yra: Hi Rich. Hi Peter.
FRA: Just thought we’d begin. Today is Wednesday September 26th around noon eastern time and we have the Fed statements coming up shortly, even though this program will be published slightly after, but just wondering your thoughts on what could be said that this afternoon? Yra?
Yra: Well I think we’re all baked in at 25 basis points. I just put something out, a little note on the blog, I don’t know what Peter will say to it. I think the one of more interesting aspect is people are looking to remove the line that policy is not (inaudible 1:23-1:26) anymore. I’m not sure about that but I will be watching the way this vote goes because I want to see, there’s some discussion out there, I don’t know who it is out there of course they never put name’s to it, that there are some who are looking for 50 basis points. I know Peter and I have talked about this in meetings previous. We would of liked to see 50 basis points. I don’t think this one is doable because of the closeness to the November elections but, I want to see the Brainard and Williams will because of their recent hawkishness. I don’t know if Charlie Evans is a voting member but he’s been hawkish of lately. So I want to see some of these Hawks vote in favour of 50 basis points increase. That’d be the most interesting thing to me because that would put up much more hawkish tone to the Fed regardless and we’ll wait for the press conference. Outside of that, I’m not looking for anything else.
Fra: And Peter?
Peter: Evan’s actually is an alternate number so he won’t be voting but we will have some new voters. (Inaudible 2:33) will be voting for the first time and then some relatively new members. (inaudible 2:38), I’ll be voting, and (inaudible 2:41-2:42). It’s a newer complexion and I think that because of it, they’ll be raising 25 basis points and leaning towards a December hike as the market is pricing that in. The Market, or at least the Fad, I think follow up on what Yra said on Brainerd and Williams, they want to keep on hiking and you might as well just do it in December because next year you’re wide open in terms of meetings because every meeting has a press conference. Where is before, the next press conference meeting would have been March and if they did not hike in December, they would have to wait till March.
Now there’s a lot more flexibility next year and then went to hike. You might as well move closer to where they want to go, ultimately that’s 3% or more, and get there sooner rather than later because I think a lot of these Fed people they do speak to a lot of contacts and everyone is telling them wages, wages, wages are going to higher and you can’t find any any workers and these academics still focus on the Phillips curve. They still believe that inflation will likely be triggered by that and then you throw in the tariffs. Hiking today they’re only going to get 2 to 2 ¼ and which tells me that maybe they will keep in that wording that being accommodative because to think that 2 to 2 ¼ is not accommodate is quite comical and Yra can probably speak to this better than I can because he’s seen a long-term level of interest rates much higher and it’s laughable that 2 to 2 ¼ would not be considered accommodative at Fed funds level.
I don’t think Powell wants to be that exciting with the statement. I think the statement will be not much different than the prior one so we’re going to have to wait till the press conference in order to gauge some more details in which way he is leaning but again, whether he raises in December, or January, whatever, they want to get to 3 % plus fed funds rate all else equal and based on what they’re saying right now.
FRA: Any thoughts on that Yra?
Yra: I think that’s absolutely right. Powell and, I think the new voice of (inaudible 5:03), well we don’t have Nelly Ling, that’s her name right?
Peter: Yeah.
Yra: Who seemed to be at least beyond academics and aware of the financial ramifications that emanate from the Fed policy and long held Fed policy, which I find interesting. I think Vince Reinhart was on with (inaudible 5:36) today and I thought that was an interesting discussion because I think Vince Reinhart made a good point which is that these later appointments by Trump, who been pretty responsible Fed appointments, which I’m very surprised, because I wouldn’t put them as easy money people whatsoever. While he’s spoken about easy money, who ever is advising him, who’s ever council he’s taking on, maybe is directly from Powell, these have been responsible Fed appointees and I think these are good thing cause as Peter discussed. We need to get away from the academics. Not that academics don’t have a place, but they dominated the Fed. Greenspan certainly relied on (inaudible 6:19) although he had a gut feeling. Powell said in his (inaudible 6:23) hall of speech he applauded that Greenspan had, what I think Powell would say he has which is, some risk management tools so he’s not knee jerk. Although I would certainly argue that Greenspan, with the start of every meeting raising a quarter like he did at a certain period, really set the Fed at a bad course and the world because every other Central Bank has followed that same policy. For the life of me, I really don’t get it. Your willing to cut 1% which will on only raise ¼ point increments.
Peter: Measure and Pace right? That’s what Greenspan said every meeting in the mid 2000s. Measure and Pace.
Yra: Which I think it’s terrible because you’re not listening to the markets. (inaudible 7:14-7:16) I think a set course is a terrible public (Inaudible 7:18). You can have mandated goals but why should you have set course to reach it. I know that Peter agrees to that. They should have raised half a point long ago. This quarter point is nonsense then they could have stepped back and let the market digest. I’m gonna agree with Peter. It’s a long answer to a short question.
Peter: Here we are in the 10th year of this expansion and today’s hike is only going to bring real rates to zero. For them to call zero real rate not accommodative, if they take that wording out, is laughable. So I’d lean to them leaving it in but we’ll see.
FRA: Let’s go to a macro view on a financial markets. Peter you’ve recently mentioned or observed on the disconnect that you see between the US markets and the Emerging Markets. Can you elaborate on that? Like what and what is behind that?
Peter: Yeah it’s been pretty glaring. The out performance of the U.S versus everybody else. In fact everybody else is down on the year and we know that S&P 500, in particular, has had a great year, even though 40% of S&P 500 revenues are sourced overseas.
Certainly worries about slowing growth in Europe, certainly in China, and by default the rest of Asia and that’s being reflected in their equity markets and we know same problems with emerging markets. I think to believe that the US is immune to that is silly. But right now at least, US growth is well outperforming most other areas. Earnings growth in the first half of the year are very good, still should be fine in Q3, but I do think you’re going to start to see some issues with earnings related to tariffs, related to higher labour costs, that is the largest input for companies and I don’t see how much longer that discrepancy can last. Either overseas is going to catch up or on the upside, we’re going to catch up to them to some extent on the downside. The differential is pretty glaring.
FRA: Right now, has it been due to international capital flows going into the US from emerging market issues, concerns, challenges, and this global slow down looking to the U.S as a safe haven also considering the U.S dollar getting stronger?
Peter: That can be part of it but I think it’s U.S investors are dominated by machines. They don’t respond to speculation about the possibility of a slowdown driven by what’s going on overseas. They only do it when they actually see evidence of it. Whether that’s in earning season over the next couple weeks, if we begin to see some signs of it, or it’s actually in the economic data. So I think that’s why the US market has sort of shrugged off not only the growth story that’s changing overseas but the rates over here where they continue to rise and we have a over levered global economy. We have a very highly levered, over levered U.S corporate balance sheet outside of (inaudible 10:51) and rising rates is usually not a good set up with that. So I think that there’s this belief that somehow the Fed’s can engineer a soft landing. Historically that’s rarely the case. But until they begin to see evidence of weaker data here or (inaudible 11:11) in earnings, they’re not going to respond. So my point is don’t look at the US equity market as a discounting mechanism. I think it’s mostly reactive instead.
FRA: And your thoughts Yra on this?
Yra: I’m going to take a little bit different tactic here. I mean I agree with him but I see things that are going on. The other day, (inaudible 11:35) comments were a 180 degree from his press conference. (inaudible 11:45) sees vigorous pickup in underlying inflation. (inaudible 11:48-11:50) but the dollar didn’t sell off. Thinking that the European are gonna be, as (inaudible 11:54-11:55) says, vigorous. Well this is totally (inaudible 12:00) of what we heard him at the press conference. It’s really raising my (inaudible 12:07) there’s something going on here.
Are the Europeans now all of a sudden are getting a sense that Trump, that if they don’t do something to raise the level of the Euro, that they’re gonna feel the sting of Trump’s tweet or whatever. That really boggled my mind. I just don’t see it. Everything has been the other way from all the other conversation. Then of course (inaudible 12:37-12:39) walked it back even though Watney from Austria was still adamant (inaudible 12:46) by pulling back.
Yesterday, there was a tweet out by, I don’t know who she is, Dr.Julia (inaudible 12:57) that said, “Hawkish Yellen, Unemployment rate is half the full point below the natural rate (inaudible 13:04-13:05) stabilize it and they need to nudge it higher”. It’s almost a hawkish comment but yet 2 weeks ago on the 14th of September, we had Yellen speaking at bookings in that group meeting. In her speech, it’s been lower for longer, lower for longer, lower for longer!
Peter: (inaudible 13:33-13:34) that don’t work and keep on doing things that doesn’t work is what she’s saying.
Yra: Its sending mixed messages. That’s a great point and it’s all making it to the headlines. I think it’s really confusing for markets even though Yellen carries no weight whatsoever. None. But the way people throws these things out, I don’t see (inaudible 14:02-14:03) that Peter’s talking about. Where’s Europe going? Europe’s going nowhere. As I’ve maintained and I know we’ve discussed this for more than a few years already. (inaudible 14:13) locked himself in this terrible trap here and it gets (inaudible 14:16) more and more. I know Peter talked about it this morning with the Italians and what happens and now the French are really caught in this similar trap because they need Macron’s poll ratings are dropping dramatically and even as Peter pointed out, the (inaudible 14:32) strongest of the majors European stock markets. His poll numbers are dropping and he gonna need to placate some on the left with greater spending but their not going to be able to do it and Germany is really in dire (inaudible 14:49) politically. Merkel is having the legs cut under her all over the place and October brings the election in Bavaria in which the S.C.U (inaudible 15:00) is under dire threat and it’ll be interesting to see if they even hold to be the most popular party because that would really bring pressure on Merkel in many other ways.
Europe is a difficult (inaudible 15:14) and I don’t see them, yes they’re going to end QE at the end of December but even (inaudible 15:20) said, ending QE their not shrinking the balance sheet. He was explicit about that and that made the capital key such a dangerous situation for him because he’s got to abide by definition and buy 18% of the assets ECP buys which are German Bunds or German instruments. Well with German surpluses growing, I don’t know where their going to find that much to buy without pushing German rates, even on the long end, further down. So there’s here’s all these things confronting us.
FRA: Could that issue, in terms of the amount of German debt being used as diminishing, prompt the emergence of a Eurobond for the ECP?
Yra: Well there are certainly those who won’t (inaudible 16:07) cause I think that’s what the end game is.
Peter: Germans (inaudible 16:12) try to push that into the future as long as they can.
Yra: As far as they can cause that would mean that the German would have to underwrite the whole debt load. I don’t see any unless you had a denaturalization meaning sell off a lot of publicly held companies, meaning, government held companies in order to be able to buy back some of the bonds with real assets rather than ECP money. It will take a major political upheaval in Germany from those who are (inaudible 16:51) of that because right now the rising forces in Germany, the rising political voices are not in favour of that. In fact, I would say that one of the staunchest platform policies of the (inaudible 17:06) for Germany is less German involvement into the guarantee of the European financial system. The winds are blowing in the opposite direction and Peter exactly is right, they’ll delay that as long as possible. Macron….when he was a rising star couldn’t get her to sign on to a unified financial system, which is the risk that would be absorbed by the European stability mechanism, with the German’s guarantee in that cause the Germans saw through that and she wouldn’t even sign on that when Macron was maybe somebody (inaudible 1742). Right now, he’s a weakened force as she is and it’s the Italians, in my mind, who are holding the cards here.
FRA: So as we go towards the end of the year, could the German-French yield spreads on bonds likely increase as the ECP buys less assets going in to the end of the year? Your thoughts? Peter?
Peter: That’s a good question. I actually just think they’re both going higher, whether the spread widens or not, I’m not sure. As Yra said they both now have political issues. I can’t fully understand why the Macron’s poll numbers are dropping as fast as they are. Maybe it’s the French just don’t like change that he’s trying to bring, but I’m surprised by that. I think either way, you’re going to see a rise in yields in both countries and I think people don’t understand how much of an influence the ECP was and still is barely in terms of their buying in those markets in while they’re continue to reinvest proceed.
They were buying 7 times net issuance of European bonds. The Fed QE at its peak was 25% of net issuance of treasury (inaudible 19:03-19:04). That’s how dominant the ECP was. While we all know what they’re going to do, they told us what they’re going to do, I still think there is this level of nonchalant as somehow European bond yields can stay around these current levels even with the reinvestment. And that’s what I’m most worried about is a rate shock in Europe that could have a ripple effects.
We already seen the Bank of Japan pulling back and you’ve seen a jump in longer (inaudible 19:32) yields there and you’ve seen the 10 year yield creeping closer to 15 basis points as Bank of Japan is more tolerant of that. You’ve seen the US 10-year just a few basis points from breaking out to multi year highs. If you seen these rise in yields, its not for all good reasons, it’s not that the economy is great and the markets are just doing it, it’s that you have this Gorilla in this room thats walking out and buying less and a combination with other things including inflation and others. I think people are way to nonchalant with this move up in the interest rates.
FRA: And Yra, what do you see happening as we go towards the (inaudible 20:09-20:10)?
Yra: I think that’s right. (Inaudible 20:11-20:12) the reason I dig through the plumbing… if you look, German issuance is diminished because they’re running surpluses. France has grown over these last years. The real canary in the coal mine is that their running these budget deficits, meaning France and Italy, with these ultra low interest rates. Lets not minimize that..
Peter: (inaudible 20:49-20:51) by 2%.
Yra: These deficits haven’t shrunk whatsoever and if interest rates start to rise, as Peter and I believe that they’re going to do, it’s gonna put even greater pressure on these deficits. I don’t know if they will get better growth. I applaud Macron. I think he’s trying to turn the tables on what has been a (inaudible 20:19) economic policy from Halland, and even Sarkozy. They did some stupid things. He’s trying to undo them but the deficit is still growing. Its like with Greece. You hear everybody talk about how Greece turned around. Well the Greece debt to GDP ratio, even with all this austerity, it’s still bigger then when it started down that path of austerity and thats with interest rates dropping dramatically. And that’s where the real risk here lies. And from the (inaudible 21:53) aspect of it, German credits are far better than the rest of the credits. Maybe the Dutch and Austrian certainly without the ECP would be able to stand on their own. But the others, (inaudible 22:06-22:08), and that includes France because France is not without its problems. And if Macron fails, the issues in france are really gonna get worse as Peter points out. Politically they don’t like this type of change. The unions in France still have a lot of power. Macron would like to diminish that power but they still have a lot of power. That’s the reason why I like to be long German and short French because right now the spread on 10 years is about 32 basis points which is about mid range over last 3 or 4 years. But based on the shrinking amount of German assets and the fact that German assets are needed for REPO financing, their high quality liquid assets, that will put demand in there regardless. Unless (inaudible 23:00) openly breaks with the capital key, which he has to be very careful because there are those in Germany that will return back to the German Constitutional court and say that this is illegal because your financing individual countries and in violation of the entire edifice of the Central Banks and what their supposed to do. (inaudible 23: 27) there are things waiting out there.
Peter: It will be a real disappointment if Macron is gone at some point. He was the right guy for that job at the right time for France. It’s amazing people don’t appreciate it.
FRA: Given these thoughts on Europe and what we mentioned earlier in the US, could we see another round of more easing by central banks globally? If we go to China and look at the currency there, if the Yuan weakens and we get global disinflation, could that cause more easing by Central Banks globally? Peter?
Peter: It’s a good question. I don’t think the Chinese want to go down the route of seeing a dramatically weaker currency. They are trying to shift their economy from a manufacturer infrastructure, (inaudible 24:23-24:26) investment type economy to more services and more consumption. You don’t want a weaker currency, if that’s the transition you’re trying to make. You don’t want to damage the purchasing power of consumers if your trying to improve consumer spending. I think they are more interested in having a stable currency not a dramatically weaker one. I’m sure the weakness we’ve seen will be tolerant of because it’s relatively modest and it can help cushion the impact of the tariffs but I wouldn’t look for major decline in the currency.
I think the currency that trades (inaudible 25:07-25:08) is the U.S dollar and people should be asking what’s going on with US dollar considering the out performance economically, the Central Bank that is far ahead of the curb relative to others, and why outside of emerging markets where the dollar has strengthened, why against the Euro or the Yen or some of the others has it not traded well? I’m putting aside the pounds because that’s obviously very Brexit related. That’s where I think people should be asking is What’s going on with the dollar and less so with the Yuan?
FRA: And Yra, your thoughts?
Yra: I think that’s dead right on target. I know Peter that’s the Michael Pettis argument which is, “hey, if your trying to build your domestic economy, and China’s certainly is, if I look at the copper market, the copper market is telling me that China’s going to embark on another round of massive infrastructure project whether it’s in the road initiative or just in China itself but that’s what the market is sensing here. You don’t want a weaker currency. Your trying to ramp up domestic spending. You’d like to have a stronger currency because then you can buy cheaper imports so I’m hundred percent agreement and I agree with Peter with the dollar.
The dollar is interesting here because the cost of carry is quite expensive. If we use overnight money in Europe, let’s say German money, it’s 250 basis points going higher. If we’re using 2 year differential, it’s well over 3 percent because German 2 years are about negative 50 and US is of course 2.8. I don’t ever remember, I wont say ever, it’s been certainly over 3 decades that we’ve seen a spread that wide and 2 years or less. So these are things that should be (inaudible 27:24-27:25) the strengthening dollars as a lot of people are positioning for. Peter, from 107,108, but that was based on the Trump Whitehouse as much as anything. Bob White Heiser, who is the power here, is not afraid to promote a weaker currency. I think the markets are starting to accept to (inaudible 27:52) that in but they really haven’t yet. That may be one of the tools they utilized.
FRA: What about Brazil? Are they intentionally driving their currency lower to help their agricultural exports and hurting U.S grain exports?
Peter: They don’t need the help. It’s a business to them.
Yra: They don’t need the help. Its bad politics. Their in a great position now because the Chinese (inaudible 28:31) knows the US for the moment because their agricultural exports from Brazil are so cheap. Even if though they had a (inaudible 28:42) crop because they’re so cheap, it will be interesting to see how much plant the Brazilian farmer grew this year. Even international prices are lower, priced in terms of Real, which the farmers ultimately get paid in as they take their dollars they receive in the international market and convert to domestic currency. Their not suffering whatsoever. The United States farmers are suffering under Tariffs as well as having to compete against the weakened Brazilian Real. They don’t need any help. I think they believe the currency is to weak relative to other policy aims that they have.
FRA: And the finally moving over to Japan. How will the Bank of Japan be able to extricate itself from five years of QQE, qualitative and quantitative easing, since they’ve accumulated so much Japanese debt and equities? Your thoughts Yra?
Yra: Well, I don’t know if they know how to extricate themselves. They’ve just been muddling along here and I mean muddling. They preceded down this path for way too long. Supposedly we heard last week that Abe was backing away from the inflation targets after his new found political strength is (inaudible 30:07-30:09) although he’s got his plate full but I don’t how they get out of here. They’re not going to do it with a weaker currency. We listen to Trump, the sense that he’s looking to throw tariffs on to the Japanese because they run to large of surpluses with the US, the Japanese have to be very careful here and the Europeans can’t be too happy because the Euro against the Yen has been rallying dramatically. The European auto industry is (inaudible 30:51) head wind of a weaker Yen and US tariffs and some really bad fall for Brexit, which not enough people talk about it but the European auto industry could really get hit. But I don’t know what the Japanese are going to do here. They follow this Bernanke down this rabbit hole for way to long and i don’t know what they do here.
FRA: Peter?
Peter: Yeah it’s a great point. I don’t know what they’re going to do. I think that their acknowledging the squeeze that they’re in by allowing a whole 10 basis points extra of a yield grab (inaudible 31:36-31:37) can get in Japan, which is quite amazing from 10 to 20 basis points. They are certainly slowing the rate of purchases. I think they’ve basically cut QE in half. I think they’ve suddenly realized that they are a dominant player in the ETF market and are a top 10 holder in about 40% of Japanese Nikkei companies. I think they got their fingers crossed on generating some higher inflation so they can further get out of what they’ve done but I don’t see how they can ever get out of what they’ve done. I think they’ll just continue to try to lessens their influence and see what happens but Kuroda….talk about overstaying one’s welcome.
Yra: And to add to that, I think one of their plans was, at some point, that they’ll be able to start buying foreign bonds if they needed to but now that they run in Trump, there is no way that the (inaudible 32:39) or even some of those pension funds have to be very careful. The government pension investment fund. They can’t just willy nilly because that will move to weaken the end and they have to be very careful here.
Peter: That’ll be dangerous.
FRA: On that note, we’ll end it there. How can our listeners learn more about your work? Peter?
Peter: They can search it in wealth management. They can go to bleakley.com and reach out to me. If they want to see my daily (inaudible 33:10-33:11), they can subscribe at boockreport.com.
FRA: And Yra?
Yra: My blog post, notes from underground, and you can go to Yraharris.com. It’ll come up notesfromunderground you can get access to it and join the conversation that takes place on regular basis about many of these same issues. It’s just a discussion on what’s going on in the world and hopefully you can find your way to profitable investment from them.
FRA: Great insight as always. Thank you very much gentlemen! We’ll do it again.
