The coronavirus has thrown us into truly unprecedented times. Most countries have enforced a lockdown, and global travel has ground to a halt, and this, in turn, has had an enormous impact on the economy.
Stock markets all over the world experienced huge volatility. Wall Street suffered its worst day since ‘Black Monday’, oil prices went negative for the first time in history and governments all over the world have been implementing extreme fiscal and monetary policies.
Many analysts have suggested that rather than coronavirus being the cause of this economic downturn, instead, it was merely the pin that popped the bubble and the enormous debts that have been amounting since long before the 2008 global financial crisis was a disaster waiting to happen.
So, how do we get out of this mess? Who stands to benefit from government money printing? Who has to pay this money back? And, why the fuck is Steve Mnuchin, the Secretary of the Treasury?
To answer these questions and more, I am joined by leading finance experts: Andrea Ferrero, Andreas M. Antonopoulos, Caitlin Long, Ben Hunt & Raoul Pal. We look at the corruption and mismanagement of the economy by central banks and governments.
Transcript00:00[Music]00:08alright thanks for staying with us here00:11this is the third one in a row again00:13it’s my pleasure actually it’s the first00:14time that I’ll have Jim Bianco on edge00:16ITV so it’s a real pleasure to have you00:18here Jim thanks for thanks for making00:19the time to do it yeah thank you for00:21having me looking forward to it you have00:23a you have a lot of fans on both Wall00:25Street and on Twitter and I think you’re00:27one of the guys that can can merge the00:29gap you know if you will between the00:31real world and the economy and and what00:33Wall Street would maybe like to see00:35sometimes so I certainly appreciate that00:37there’s been a lot of comments back and00:39forth on free market capitalism a lot of00:41people are kind of concerned that that’s00:43been last year but I know that you have00:45a lot of different thoughts on that and00:46that’s really the first topic that I00:47want to start with was you know the00:49legality of what the Fed has done or00:52purports to be to be doing and just00:55generally how you think about that it is00:59legal what the Fed is doing the 13-301:02provisions that the Fed has that were01:04revised in the dodd-frank bill give them01:06the ability to do this and here’s an01:09important caveat provided that the01:11Treasury secretary approves of it and01:14that’s been what I’ve been trying to01:17hammer along was that what effectively01:19has happened is we’ve merged the Federal01:22Reserve with the Department of Treasury01:24and that what’s effectively happened is01:27is that the Fed is not buying corporatebonds or ETFs or commercial paper or nowmunicipal securities as of last Thursdayit is the Treasury it is the governmentthat’s buying it the Fed is justproviding the financing and when I hearFed officials say to me well we’ll get01:45out of this when the time is appropriate01:46no you have to get the Treasury01:49secretary to approve of you getting out01:51of it and that means you need DonaldTrump to say I think you guys are donemoney printing I think you guys are doneramping markets up higher and I have ahard time believing especially in anelection year that that’s going tohappen anytime soon so getting intothese programs is easy getting out isgoing to be the real tough part I think02:10and that’s to come and the problems02:13associated with that yep oh and we’ll02:15get into like you have an explicit02:16opinion on whether02:17not that this creates a new version of02:19economic gravity or not but just you02:22know is the beginning of that I mean02:23that that isn’t that essentially what atleast phase one its Trump we probablycall it of mmt looks like when you mergethe Treasury fiscal spending with moneyprinting I think that’s exactly rightI’ve been actually causing calling thismmt version 1.0 is what we’re doing lookall in all the stimulus is something02:46along the lines of four or five years of02:47tax receipts and I think a lot of people02:50have asked a question of if the Fed and02:52the Treasury believes that this works02:54that they can print five years worth of02:56tax receipts and not have any02:58consequence then why do we have a tax03:01why do we have a dir S can we just give03:03it the IRS then at that point and just03:04have them print all the money that they03:06need of course not I think that there’s03:08going to probably be somewhere down the03:10line some kind of consequence to all of03:13this money printing what and how we can03:17debate but I have a hard time believing03:19that we could print several trillion03:21dollars for up to a trillion dollars03:23right now and it will have only pleasure03:26and no pain because if it did then we’ll03:29print another a trillion and then we’ll03:31print another a trillion until we go to03:33the point that it becomes too much well03:35isn’t it doesn’t that just mean that03:36your and thanks for simplifying it that03:38by the way not not many people can do03:39that in 30 seconds or less03:41but again you isn’t that just at the03:44pleasure of the people deciding to pay03:46their taxes uh yeah I think that there’s03:50a lot of that right now although tax03:52payment is not at the pleasure of people03:54you know as the great economist Walter03:57Williams says you know if you don’t pay03:58your taxes they’ll kill you what he said04:01go ahead try and barricade yourself in04:02your house and not pay your pay taxes04:04and see how long that works eventually04:05guys what guns will come through the04:06front door looking for their taxes so it04:09isn’t not quite at the pleasure of the04:11people but there will be an argument to04:13be made at some point that if it’s not04:15let’s do away with taxes it would be why04:18do we have to end the money printing why04:20do we have to end this stimulus or the04:22bailouts or whatever we’re calling it04:24this week if there is no consequence to04:27it why is it only in a crisis we can04:2904:31and borrow a trillion dollars to try and04:33get us over the hump but not in a crisis04:35why can’t we keep doing it then – that04:37will be a debate and a discussion we’ll04:39have to have at that point well I mean04:41there’s there are plenty of academics04:43obviously you and I that’s not that’s04:45that’s not where we live day to day it’s04:48certainly not where I want to go I think04:50I’d be pretty bored but I mean people04:51always say hey look can you give me a04:53white paper on why use the base effects04:55– to predict their use your now Cass I’m04:57like here’s the white paper the back04:58test it’s like one piece of white paper05:00have at it go for it but no stephanie05:02kelton for example I mean what do you05:04think about that I mean she obviously05:06feels like she’s got one step in the05:08door on this and maybe Trump or whoever05:10beats Trump or if Trump wins and both05:12would quite like that yeah I think so I05:15think you know to put the Calton in the05:17MMT argument you know – a simple taskthey believe that you can print money orborrow and you know increase governmentspending pay for college pay for healthcare pay for whatever you want to payfor without inflation until you hit theend point of inflation their argument iswe can borrow a lot more before we hitinflation I think my argument would be Idon’t think we’re gonna be borrowednearly as much as you think we canbefore we get to the inflation point theemmab tiers do have a point they saywhen you get to inflation then youyou’ve gone too far and they they’retheir remedy for that by the way is toraise taxes and that’s the way youremove money out of the system good luckwith thatyou know it’s trying to turn over turnover – they want to have tax rates belike the Fed Funds rate where it goes upand down with the right level ofinflation set by a bureaucrat like theFederal Reserve I’m not so sure thatsociety is quite ready for tax rates tokind of go along those lines but to thelarger point I don’t think they’re gonnathey’re gonna find we’re gonna findthey’re printing and borrowing to theextent that we are is going to have aconsequence a lot sooner than we thinkit’s going to be the mmm tears thinksit’s like 10 20 30 trillion dollars wecould do before we hit that level I06:36don’t think it’s gonna be nearly that06:37much before we start seeing problems06:39well what if the consequence is the one06:41that we’ve already seen in o8 and again06:43it’s not a wait I just don’t06:44want to make sure that everybody knows06:45that I don’t think it so late I think06:46it’s 2020 and it’s quite different it06:48could be worse but again you know what06:50if the consequence is that people don’t06:51believe the bullshit and asset prices06:53just go straight back down that is if06:56that is a big consequence I think right06:58now because it’s a flip side of this07:00story is we are going to take you know07:03what the Fed is doing in supporting07:05markets let me go back to my first07:07argument what the Treasury is doing07:09through the Fed is nationalizing the07:10markets right they are basically taking07:13them over and by the way and I’ll giveyou the names to Wall Street is cheeringthis as loud as they can Bob Michael07:21this chief CIO fixed-income of JPMorgan07:23Investment Management he’s thinks they07:26haven’t gone far enough he wants them to07:27set the price of every bond in the07:30country07:31Rick reader at Black’s Black Rock has07:33been cheering this program as well Mike07:36Wilson at Morgan Stanley07:37David constant at Goldman Sachs has07:40abandoned his 2000s a peak all becausemoney printing is good and what the Fedand the Treasury are doing is good well07:50we’re going to put that to a test right07:51now and here’s the simple question you07:53have to ask yourself is the market near07:56fair value is the market somewhere where07:59it would naturally be and I like to say08:02if if a red headline came across my08:04Bloomberg and it said Jay Powell08:06changed his mind cancelled all the08:07programs with the market go down a lot08:10yeah what because we supported it an08:12artificial level I think the Fed can do08:15that for a while support a market at an08:17artificial level but not forever08:19eventually the weight of where the08:22market should be will come to bear on it08:24and it will fall and it will fall down08:26so we’re gonna put this money printing08:29thing to a test the difference in o.908:31was they started it after the market was08:34down 50 percent and two years later so08:37they got if you will lucky or maybe they08:40got smart they started it when the08:42market was somewhere near a fair value08:44level anyway this time around they08:46started it two weeks after the all-time08:49high and then kept ramping it up all the08:51way to last week and continue to ramp it08:55up and the question is if the markets08:57near08:58would have been anyway then this will09:00appear to work if it’s if the market09:02should be severely lower and that’s what09:04my fear is is then it won’t work over09:07the long term and work for a while it’s09:09it’s a it’s amazing thing I mean I was09:11back and forth with Danielle DiMartino09:14booth on this there’s this and and you09:16you probably could empathize with this I09:18think I’m probably barking up the right09:19tree if I’m not then too bad but you09:22know this this whole discussion you and09:24I have discussions with the same types09:25of people don’t forget the JP Morgan09:27gentleman that you that you named he09:29doesn’t quite want to talk to me and I’m09:30not completely surprised why JP Morgan’s09:33a client to be clear in terms of09:35independent research they pay for a lot09:37in independent research but again the09:39whole haha you didn’t get it you didn’t09:42know that you shouldn’t fight the Fed09:43like that discussion tell you Jim that09:46tries to mean bananas like that that09:49tries to be bananas like all you great09:50fundamental investors who only talk to09:52me about how good the cycle is and how09:54it’s different this time as soon as it09:56turns fundamentally you turn tail to09:58that and you tell me I’m the idiot III10:01have a hard time with it you know let me10:04let me jump in and say I agree because10:06what you’re saying is and let’s let’s10:08not mince words here what we’re saying10:10is all this analysis we do is bullshit10:12right because he works it enough where10:14it works in the op but then in the down10:16you can forget everything you’ve learned10:18about how finance works don’t worry10:21the printing press will just bail you10:23out well why don’t we even need analysts10:25why do we even need anything if that’s10:27the way the markets going to work that10:29it always is going to be supported by10:31some artificial force on the way down10:34you know if you believe in free markets10:37free markets is remember what free10:39markets are supposed to be let’s not10:40forget what we were talking about here10:42we have an a finite source of capital we10:45don’t have is all the money in the world10:47you think we did with the Fed and we’re10:49trying to efficiently allocate it we’re10:51trying to give it to good ideas and take10:54it away from bad ideas if we continue to10:56go down this road where I’m going to use10:58an Austrian term we’re gonna create11:00malinvestment we’re gonna just give11:01everybody you know Bob Michael JPMorgan11:04he wants to fix the price of every11:07corporate bond at 2% he said that last11:10week on Bloomberg TV11:12okay if you fix the price of every11:14single corporate bond at 2% there’s no11:16point in doing credit analysis everybody11:18gets the same price whether it’s11:20Carnival Cruise or it’s Amazon whether11:23it’s a disastrous business model or a11:25great business model everybody’s going11:27to get funded and you’re going to create11:29an all kind of dislocations and problems11:32in the economy because you’re not being11:34efficient with getting rid of bad ideas11:36and rewarding good ideas well you’re11:39being you’re being you know completely11:41conflicted and compromised for your own11:43interests I mean you know that Bob11:44Michael I don’t know who that it now I11:46know but his son if he has a son named11:49Billy Bob Michael isn’t gonna work on11:50Wall Street because like he said there’s11:52no job to do right exactly and I think11:55you know you know this is what this is11:58what the the idea is supposed to be I12:00mean in in theory if you believe that12:03the market was overreacting in March12:07because the what’s happening with the12:09virus is not nearly as bad as the market12:12was saying then bring it on give me12:15great opportunities to make money but if12:18you’re going to arrest it before we get12:21to some kind of a settling out in the12:24market you’re just gonna create more12:25problems in the long run I think at that12:27point but you know what if you look at12:29Wall Street and if you look at policy12:31makers no one’s thinking about the long12:33run one of the things I’ve really been12:35railing against is everybody talks about12:38well what’s the second quarter gonna be12:40like and what’s the third quarter gonna12:41be like when’s the restart gonna start12:43and I’ll use some some technical terms12:46for you here the second quarter is gonna12:47be a shit show the third quarter is12:49gonna be less so of a shit show that’s12:51all the analysis you need to know what12:53we really need to discuss is when this12:56is over the virus and it will end what’s12:59the long-term consequences of it are13:02there going to be changes in social13:04behavior are there going to be changes13:06in the way we conduct business is there13:09going to be some kind of de13:10globalization as well and those 1713:14million Americans that have been13:15unemployed in the last three weeks if13:17you believe tomorrow’s numbers supposed13:19to be another five million added to that13:21role 22 million how many millions of13:24those people13:26don’t get their job back or have lost13:28their businesses because of that what13:30kind of anger resentment does that bring13:32up to boy these are questions everybody13:34looks at their shoes and says point13:35let’s just not go there let’s just talk13:37about how bad the second quarter is13:39going to be so we could talk about how13:40much less bad the third quarter is going13:42to be and that seems to be the extent as13:45far as they want to take it right now13:47well I and Wall Street just voted on13:49that I think like if you even if I look13:51at my own client base which is you know13:53hedge funds mutual funds I think we have13:55actually the same client base so you13:57probably had the same feedback there’s13:59this like super super short-term panic14:02obviously the pressure on people to14:03perform on a very short-term basis at14:06the hedge fund level in a quote-unquote14:07neutral environments never been higher14:09so people are just flat-out you know14:11running in fear of their own job but14:13yesterday JP Morgan was quote-unquote up14:15on the bad news and I’m like just chill14:18out I mean let let gravity play out I14:20don’t think that people are gonna14:21actually believe Jamie diamonds loan14:23loss reserves here I don’t think that14:24they’re gonna believe his outlook and by14:26the way I do believe in economic gravity14:28so the credit cycle exists gravity14:30exists and we’re gonna go through it so14:32I agree you’re gonna have to go through14:33the shit show and look at what the14:34financials have done in the last 2414:37hours14:37I mean they’ve led the market lower and14:39they’re the first ones to report their14:41version of reality which I don’t know if14:42you agree or disagree whether you call14:44it a shit show or not they have no idea14:46yeah I know not only that they have no14:49idea but if you look at what they’ve14:51done is they just made a guess as to14:53what their loan loss reserves are gonna14:55be exact yes it’s on those long lost14:58reserves are much larger than the15:00analysts to cover these companies15:01thought that they were going to be as15:03well so there is just a guess so far cuz15:07for the moment no one has really15:10defaulted on a loan if you stop paying15:11at three weeks ago it’s not in default15:13yet it will be soon but it isn’t there15:15just yet and so we have no idea you know15:19where this ultimately is going to go and15:21that’s what we’re what we’re trying to15:23guess and stuff but I ultimately think15:26it really comes down to that long-term15:28question that no one wants to touch15:30right what happens on the back side when15:33this is over do we want to have a more15:36conservative attitude do we want to15:38de-risk15:39we wanted to globalize away from China15:41do we want to reward to use a Mohamed15:44el-erian term do we want to reward15:46resiliency in a company’s business plan15:48/ efficiency in a company’s business15:51plan right now it’s closed everything15:54and send it to China cuz it’s cheaper15:56but now we’re might say in the bet and15:58on the other side we might say how is16:01your company going to respond when we16:03have to close again for three months are16:05you gonna be able to survive and are we16:06going to reward companies that set16:08themselves up like that well that means16:10that we’re going to have a slower growth16:13less aggressive attitude than we did16:16have say in January of this year now16:18Wall Street wants to believe there’s16:20going to be none of that that it were16:23just it’s gonna be right back to January16:242020 as soon as we’re done with the mass16:26graves on Hart island it’s right back to16:282020 and everything’s going to be okay I16:31tend to think that that’s not going to16:33be the case there is gonna be changes in16:35how we do things I may be wrong on what16:37the changes are but what would shocked16:39me is if the answer is nothing changed16:42by the end of the year now we’re just16:45back to the way it used to be less16:4825,000 dead people yeah that’s I say16:51that sarcastically it kind of men you16:53know emphasize my point no it’s it’s16:57it’s classic actually and predictable16:59proactively predictable indeed you know17:01that’s how Wall Street thinks they think17:03linear and on a linear basis they think17:05you go down to one side of the Vienna17:08linear basis you could go right back the17:09other side of the vena Bob can mark all17:11the prices at the top end of the V you17:13never have to worry about having any17:14double use in between so it’s like it’s17:16a that is a shitshow in my mind I mean I17:19wonder what you think about this17:20framework because you know on the fly17:22I’m trying to go from depression to17:24what’s the recovery into some version of17:26a recession to an actual recovery17:28there’s a the work out period you know17:30of unemployment what that means and the17:33credit cycle which is one in the same17:34thing you lose your job if the company17:36loses their cash flows liquidity is not17:38solvency you know so again that’s one17:40two is behaviorally like to your point I17:43don’t know point number three is17:45actually the one we start talking on a17:47research call about a little bit more in17:48the last couple days which which is the17:50regulatory environment like you know17:52what is the new America in terms of how17:54you’re allowed to operate how you’re17:56allowed to have your liberties or civil17:58liberties and your consumption versus18:00the prior like this a whole new world so18:03those three things to me like and that’s18:05that’s starting with a lot you know have18:08I left anything big out that I need to18:10think about from a from a intermediate18:12to longer term cycle perspective no I18:14think that that’s exactly right I mean18:16those are going to be the things and18:17you’re right about the third one which18:19doesn’t get which gets talked least of18:21all is going to be the regulatory18:24environment look what a lot of these18:26states have done has been nothing more18:28than turn their state into a police18:30state now I get it18:31there’s a virus out there and we need18:34the social distance in hand wash and18:36what are we hearing from the White House18:38right now hey it’s not gonna be a18:40hundred to two hundred thousand dead or18:41two million if we did nothing but it18:44might be far less than that because18:46everybody understood and I was like you18:49know you don’t trust people why don’t18:51you just lay out the case here’s a virus18:53this what you need to do stand six feet18:54apart wash your hands wear a mask and18:56McDonald’s you can stay open but figure18:59out how to work within that framework19:01instead of just some merrily closing19:03everything right and then deciding when19:05we’re gonna open or doing like the the19:07governor of Michigan has decided big-box19:10retailers have to close their garden19:12department but can keep their grocery19:13Department open so if you so if you go19:15to Target and you buy groceries it’s19:17okay but if you go to Target and buy a19:19garden hose you’re gonna be arrested I19:20mean they’re coming down to that level19:22of detail right now in terms of what19:25they’re doing with a lot of these19:27companies I don’t think they’re going to19:28give that back so easily and I do think19:31that there’s going to be some anger and19:32resentment as they are very very slow to19:35give that back and they’ll use the19:37argument of reinfection way and when19:40months come one week’s come in two19:42months which come in two quarters of19:44having these restrictions it’s going to19:47weigh not only on the economy but on19:49society in general19:50well that work out period I mean if you19:53only use economic never mind19:55shallow recessions which we had a very19:58long work up19:59of corporate leverage come you know in20:00as you guys could throw up the history20:02of it all guys if you can on slide 3320:05we’re just showing Jim what you know20:06obviously on the back side of your hand20:09what’s happened economically across20:11cycles but you know you can look at some20:13of the the most actually slide 34 the20:16shallowest recession which was again a20:18corporate credit bubble in 2001 you know20:21the work out period was nine months the20:23similarity was that you had an economic20:24shock at precisely the wrong time in the20:26cycle I think a lot of people screw that20:28up too20:28they’re like nobody could see this20:29coming that’s total bullshit just like20:32you know one the economy was slowing in20:332019 and then it just made the virus and20:36in that case 9/11 made it slow faster20:38but again the work out period was at20:40least nine months for the corporate20:41credit cycle you know and in terms of20:44the economy actually bottom Dazz you20:46know in oh one before20:48actually the stock market did and and20:50that’s that was back that took them till20:52Oh – so I don’t even know like where20:54people are going when they think like if20:56they only studied economic history I20:57know it’s never the same but even if you20:59took the 44 months of the depression in21:01the nine months of oh one you know it’s21:02not two months no exactly if you could21:05put that slide back up I’d also point21:07out something else too if you look at21:09the Oh 8 December December December oh21:13seven oh nine period peak to trough21:15decline was five percent right we’re21:18expected in the second quarter to have a21:21decline and a total decline in the US21:24economy is six percent just in the21:26second quarter the second quarter alone21:28will be worse than the entire Great21:32Recession will be and you know I’ve21:35heard people say this without21:36understanding some of these numbers21:38they’ll talk to me about China and21:40they’ll say well China’s 80% of the way21:42back to where it was as if that’s a21:43bullish argument you mean they’re 20%21:45off the top21:46you mean that the Great Recession was21:48five percent off the top dates four21:50times worse that’s it that’s a21:51depression it’s what you’re in if you’re21:5320 percent in the way the time you have21:55to get back to 98 99 percent of what we21:59were in January in order to say that22:02there’s really no impact if we get back22:05to 90 percent of where we were in22:07January it would be devastating for I22:11think a lot of people keep him22:12– at the bottom of the Great Depression22:14in 193422:16we still had 75% of the economic22:19activity we had at the top and we had22:2278% of people still had their jobs that22:25means moving 25 percent off the top we22:27had 22 percent unemployment so I think22:29what you need to understand is it22:32doesn’t take much for this to upset the22:35applecart as well as where we’re gonna22:37go and people are not ready to go there22:40they’re all mean reverting thinkers they22:42all have their model that’s pre virus22:45and they think that the virus is just a22:47temporary interruption so we can go back22:49to that model and we revert back to that22:52mean but what I’m worried is they’re not22:55really understanding that this is a new22:57era and that we need a new model of23:00where we’re gonna go it doesn’t have to23:01be a disaster23:04Madonn handle it right we’re gonna make23:07it a lot worse than it needs to be god23:09I’m a amazing disconnects between what23:12you just said and where our friend Bob23:14wants to mark the price or the valuation23:17ever you want to you know contend it23:19should be there of markets it it’s just23:22that is the disconnect and I guess to me23:24if that’s what you’re saying is if the23:26if there’s a widening disconnect between23:28where the officialdom wants the market23:30to be priced you know again centrally23:32planned in price versus where the actual23:34economic gravity is everything in23:36between last price to where that washes23:40out is the risk I mean that right so23:42like have at it I mean it’s a I don’t I23:46don’t I don’t I don’t know how else to23:48think about that and the answer isn’t23:49buy stocks right you know I’ll give you23:52an giving an example of what we’re23:54talking about with the disconnect if23:57something interesting has been happening23:59in the bond market which has not been24:01appreciated so on march 13th the Fed24:04ended this not QE QE argument by saying24:07okay we’re going to do a QE we’re gonna24:09buy out two 30-year bond and they ramp24:12that up to two weeks ago they were24:14buying six hundred billion dollars a24:16week a week in bonds that since March24:1913th they fought over one and a half24:22trillion dollars worth of bonds now24:24these numbers are hard to understand24:26that you bought a trillion and a half24:28dollars worth of bonds you know if you24:31watch mutual fund flows if you had like24:32a two hundred billion dollar year that24:35would be a big you know this is a24:36trillion and a half in a week so now if24:39you look at yields you go okay24:41but they haven’t moved much in the last24:43two weeks and I’ve argued if this market24:45was anywhere near normal with that kind24:47of borrowing the 10-year yield would24:49have opened at zero and it would have24:50been on its way to negative why hasn’t24:53it moved because if you look at bun24:55flows from ETF’s for mutual funds from24:58households from central banks you can25:00measure six hundred billion plus of25:03selling that has been going on and25:06that’s just from the finite set of25:08measures we have there’s four other25:09metrics that we haven’t seen so when you25:12add it up what is happening is official25:15term has been buying bonds at the rate25:17of trillion plus a month and everybody25:20else has been saying you’re holding it25:22this at the wrong price and if you’re25:24gonna do that I’m selling it to you and25:27they’re selling it to their their25:28massively liquidating to the central25:31banks in a big way they’re making a25:33powerful statement that when all of this25:35is done I think interest rates are going25:37to be a lot higher than they are right25:39now either it’s a combination of25:41inflation is returning or it’s finally25:45that supply is going to crowd out the25:48market I started in the bond market in25:491987 and for 33 years I’ve heard people25:53say to me that we’re gonna have these25:55massive budget deficits that are gonna25:57crowd out and drive up interest rates25:58and for 33 years that wasn’t the thing26:01because we were playing child’s games26:04between a 1 or 2 or 3 percent deficit26:06maybe 4 or 5 in the middle of a26:09recession now we’re talking 15 to 20 is26:11what we’re talking now you’re gonna26:13finally start to see that crowding out26:16so the bond market is trying to tell you26:18that the that the fair value is probably26:22a far lower price or a much higher yield26:26and the only reason you’re not seeing26:28that is you’re getting astronomical26:30types of buying out of the Federal26:32Reserve through their quantitative26:34easing program that’s all holding it up26:36but eventually like I said they can’t do26:39that26:39forever and I think that that will26:41eventually give away to higher interest26:43rates as we move forward from here well26:46if you look at them and when you come on26:47and people like to talk about the other26:49side the other side could also be26:50stagflation a recessionary stagflation26:53and to get that in the way that my model26:56works my 4 quadrant model is that the26:58the faster and deeper you go and what I27:00call call quad for both inflation and27:03growth slowing at the same time quite27:05clearly that’s happening despite27:07president pump on oil you know to the27:10point that you get deep enough you can27:12only reflect from there so it doesn’t27:14take much you know for that switch to27:16turn for you to go from deflation to27:19reflation and you know given the27:21economic conditions I mean that to me27:23every single time I make a call on27:24reflation it’s not like german-style27:26reflate it’s reflation or inflation and27:28i don’t know who knows it could be27:30anything to me I don’t I care but I do27:33more what the markets doing that’s the27:35point27:35and it isn’t it amazing that you know I27:38call net I think just because it’s got27:40some good alliteration and he’s a good27:41marketer so I mean I think that wheat27:43you and I can do some good marketing to27:44president pump did everything that he27:46could he made up quite literally the27:47barrels per day on one day of tweets27:49because he saw that you know he saw he27:51was having some impact in the equity27:52market and look what our oil does today27:54I mean oil the feds not buying oil the27:56feds not buying Jamie Dimon stock you27:58know so they’re free to fall you know28:00and and at some point they’re gonna stop28:03falling I guess right you know oil oil28:06what’s happened when oil by the way I’ll28:09tweet this out for anybody’s watching28:11after I get off this call with you is28:13the DIA the energy and information is28:16association put out there implied28:18gasoline demand numbers lowest ever yeah28:21down 50% in a down 50% in three weeks in28:26other words think a gasoline demand as a28:29metric for economic demand and it’s half28:32it’s half in three weeks yes man that it28:36means it if there is a world of hurt out28:38there but to the inflation argument yes28:41for the next couple of quarters the big28:43story is going to be deflation as we28:45deflate the economy but if you’re gonna28:48print and borrow trillions of dollars in28:50hand 22 million people unemployed28:53an extra 600 bucks a week and maybe28:55paycheck protection loans and try and28:58support these markets you’re gonna28:59support demand as best you can but29:03supply company’s not working going out29:06of business they’re gonna produce less29:07stuff higher demand less supply on your29:10prices more inflation that seems to be29:13where we’re gonna go after we go down29:16because I think what we’re doing when29:18people ask me what letter we’re gonna29:19have I used to say we’re gonna both avi29:21in and out we’re gonna have a V which29:23means we’re gonna have a big sharp to29:24contraction we’re gonna recover some29:26after the ricotta after the virus passes29:29but we’re not gonna go all the way back29:31to the high so that’s your L and if29:33you’re going to artificially support29:35demand even though you don’t have that29:37supply going on you know that we’re29:39making things you’re going to have29:42higher prices at the end of the day29:44you’re going to have some lower prices29:47in the form of commodity prices gasoline29:49and other things are going to be29:51demanded less but people are gonna be29:53out there going well I got some money29:55here I might as well go buy a29:57Playstation or I might as well go buy an29:59iPhone because the government’s been30:01giving me money they’re not gonna be30:02making as many of them because the30:04D’Amico’s the supply constraints are30:06going to be on them as well – you’re30:08gonna have all kind of distortions in30:09the economy of course so yeah you can30:11have both deflation and then inflation30:13be coming out of this both at the same30:16time I think I mean that that’s classic30:18what the market the market stocks and30:21credit which have had you know basically30:23a hundred different w’s in terms of30:25expectations into it since the market30:27crash you know the bond markets got that30:30they had that right deflation that’s30:31when bond yields go down obviously it’s30:33where the Fed panics it’s what the30:34commodities markets told you it’s what30:36the foreign currency markets have told30:37you it’s just this this this this30:39incessant debate about the stock market30:41that can drive can drive human beings30:43mad okay I’m gonna start – if you don’t30:47mind gonna start to knock out some of30:48these questions here in the queue30:49because sure you have a lot of like I30:51said wide following and some there’s30:54some really good questions here on on30:57the first one you know why why why there31:00seems to be no movement or revolution31:02away from the Fed I think that this is31:05like you know why are in bay31:06who the question is why are Americans31:07fine with this I don’t know if they are31:10they’re fun they’re fine with it because31:13they think it’s gonna work31:14they’re like wall street at the end of31:16the day you know Wall Street can say31:19this is how the world works this is what31:21I believe but all they want is they want31:24prices to go up31:25and if they think this is gonna work31:27there’s going to be no pushback on it31:30right now and their argument is going to31:32be has it worked the last time they31:34tried it which was in o8 and so I think31:38the pushback comes at the failure of it31:41to work at the failure of it who to come31:46to pass and I’ll give you if you want a31:48statistic to look at in fact I was just31:50writing this a few minutes ago I think31:53right now the most important economic31:55statistic everybody watches his initial31:57claims how many people lost their jobs31:58this week31:59remember that’s initial how many people32:01filed this week for unemployment32:04insurance there’s another statistic32:05called continuing claims how many people32:07are staying on unemployment next week in32:10the week after the week after that32:12number is expected in the next two weeks32:15to go above 20 million well if the32:17Paycheck protection plan loans and the32:20Fed is going to work that 20 million 2532:24million of people on unemployment claims32:27should start to follow fast because not32:30because the economy is recovering but32:32because the assistance programs are32:34getting them back in their jobs even32:36though they’re getting paid to do32:37nothing I’m a fear it’s not gonna happen32:40that they’re gonna stay unemployed and32:43then at the end of the day all this talk32:46about this program and that program and32:49the Fed did this and the Fed did that32:50I’m gonna look at continuing claims32:52you’re gonna look at continuing claims32:54I’m going to go there’s tens of millions32:56of people that have lost their jobs yeah32:58it nurse that is going to then feed that33:01resentment that we’ll see look we could33:04be wrong and maybe that 20 million of33:06Continuing claims will quickly become 833:10million or 7 million of Continuing33:13claims because remember if a company33:15takes out a personal a paycheck33:17protection a ppthey alone they have to33:19hire bad33:20everybody and then they have to apply at33:22the end of the summer to show that they33:24still are they still have everybody33:26didn’t lay off of anybody and then that33:28loan is forgiven and they get to keep33:30the money so if we see that continuing33:35claims dwindle away to very little33:37numbers then these programs work if we33:40don’t they didn’t work and if they33:42didn’t work then you’re going to see the33:44resentment right now no one’s mad33:46because they think that these things may33:50work they’re waiting to see whether or33:52not they work or not but if they don’t I33:55don’t think you’ll see that resentment33:56well that’s that’s another way to talk33:58about like the short-term panic by both34:00the Fed and the fiscal is that it’s34:02trying to get it all done now in the34:04absence of having the time for it to34:06actually play out and the way that I’ve34:08looked at that is that it finds its way34:10into market volatility so the market34:12volatility shows you that markets are I34:14think there are equity markets and parts34:16of high-yield are uninvested but again34:19until the volatility goes away the34:20volatility goes away when the economic34:21circumstances become clear that34:23generally is a function of cash flows34:25coming back people getting their jobs34:26back but on slide 78 guys just so that34:29people can see what Jim means because34:31III think I said this every meeting that34:33I had for the last year because US34:35economy as you know peaked at the end of34:37q3 of 2018 you know initial claims in a34:40recession is weekly number the number34:42one causal factor to be watching in34:45terms of the pace of the economy this34:46thing is way off the chart like there’s34:49no like if you and I like bean counters34:52like we can’t analyze it I can’t believe34:55that all these people are so certain in34:57their grand central plans that you can34:58knock out essentially don’t forget to do35:00not you’re gonna knock out depending on35:02what this number is on the right side35:03there the cumulative employment gains35:06you’re gonna knock up 90 percent of the35:08cycle that’s a hundred and twenty nine35:09month economic cycle and then35:11everybody’s just gonna magically come35:13back I mean our our you know we’re35:15saying that at least two-thirds of the35:17jobless claims are permanent right and I35:20think that that’s going to be the real35:22fear is that the officialdom is hoping35:25that these plans are going to get35:26everybody back to their job and that35:29their you’re going to get paid to do35:30nothing but you’re going to be there for35:32the restart is what they’re going to35:33want35:34to do right um but if you’re right35:37two-thirds of it is permanent there’s35:40gonna be a big backlash that’s going to35:41be considered a gigantic failure on the35:45part of official demand if that happens35:48and at the same time those markets are35:52perceived to have not fallen apart which35:55is for the moment where the authorial is35:58on this 50% retracement of the decline36:00you’re right back to the anger that you36:02had in late oh nine with the Tea Party36:06movement in Occupy Wall Street that the36:08rich and connected got bailed out36:09through artificially supporting in their36:12their asset prices at high levels but36:14everybody else didn’t get bailed out as36:17well too so that’s going to be a real36:19problem I think you’re right that36:21ultimately the thing that’s going to36:24matter the most is going to be that36:26initial claims which becomes continuing36:28claims yeah how many of those people get36:30their jobs back because if not enough of36:33them get their jobs back then this36:35didn’t work this being these bailout36:37plans and everything else to try and36:39support the economy didn’t work and if36:42the stock market decides to have you36:44know bubble fever again and make a run36:46at 3,000 on the S&P and you’ve got CNBC36:50and Bloomberg and Fox Business telling36:51you the markets are okay but you lost36:54your job you lost your life savings in36:56your restaurant yeah that’s not gonna36:58sit well those two things are not gonna37:00that’s oil and water trying to put those37:02two things together at the same time37:04yeah that’s that’s correct that’s37:06Batsuit crazy I mean to think that37:07that’s all gonna work on a linear basis37:09right the another question here and this37:12is this is an important one as well and37:14and you know Trump being as37:16chameleon-like as he always is as most37:18likely and already has moved towards the37:19new narrative like calling it the Wuhan37:21crisis one of our clients the other day37:23called it the China 19 you could see how37:26people go there on the blame game but as37:28US companies reassess their reliance on37:31China or wanting to do with them at all37:33is there a possibility of another China37:35trade deal follow up before the election37:37oh I think that there’s very little37:40chance of a China trade deal before the37:42election at this point I do think37:46the thing about whether or not you think37:48China was at fault or not the fact of37:51the matter is it started there and it37:52came out of there and so we know that37:54when you start hearing rick scott37:57senator from florida last week on TV38:01getting very emotional and angry and38:03saying something along the lines of38:05anybody that buys a product made in38:07china is immoral now 60 days ago he38:10would have been mocked and laughed at as38:12a kook for saying that today who’s gonna38:15support china who is McCrone gonna38:18support china he’s got 17,000 dead38:20people in his country is italy gonna38:22support China is Boris Johnson go to38:24support China he nearly died himself38:26from this as well so anybody that’s38:29gonna want to push on China and say38:32they’re at fault remember it came out of38:34there and it’s your fault and we need to38:36punish you there’s gonna be no natural38:39constituency that’s gonna push back38:40again is Biden gonna push back against38:43it does he think that that’s going to be38:44a winning strategy to defend China after38:47what everybody has gone through so there38:50is going to be the scapegoating from38:53China now maybe it’s not skipper maybe38:54it is appropriately assigning blame38:56because of the way that they’ve38:58mishandled it as well too and I think39:00Trump opened the door for that yesterday39:03with his I’m not gonna fund who anymore39:06the World Health Organization that is39:09almost by definition saying that who got39:12it wrong because China told them to get39:15it wrong and that’s what we’re gonna go39:17so there’s gonna be a lot of anxiety39:19let’s put it that way with China I don’t39:21know if I I’d be shocked if we’re gonna39:23be looking at more trade deals look over39:26the weekend Larry Kudlow who signed off39:29his shelf for 10 years I believe free39:31market capitalism is the best way to39:33prosperity said the government should39:36pay the moving costs of American39:38companies to relocate back to China39:40that’s not very free-market capitalist39:42but it might be something that will get39:45a lot of play and a lot of understanding39:48in the country as well too so in that39:51environment no there’s gonna be no trade39:53deal Trump I think is you know he keeps39:57saying the Chinese are gonna buy all39:59these soy bean39:59from us and we’ll see whether they do it40:01I think he’s waiting for them to not do40:03it and then he’s gonna unleash on them40:05as well – funny – do it40:09the cuddler thing just cracked me up but40:11I mean I remember going on Kudlow and40:15company for probably as long and not as40:17long as you did you’ve been doing it for40:18longer than I have but I’m 45 years old40:20I was he would start every show with you40:23know like you said free market40:24capitalism King dollar Jim King dog you40:28know right and cash flows are the40:31Mother’s Milk of the stock market now40:35you have cash flows pre virus that it’s40:37loads of 0% growth in the US he doesn’t40:39say jack shit about the dollar at all it40:43got this part which is just like I mean40:46I yeah yeah some of these questions – in40:48the queue and maybe you know I don’t40:50know if you want to address it just40:51generally but people are apoplectic40:54watching like these discussions saying40:57how can these the kinds of discussions41:00that that you and I are having right now41:01how can this not be had in America you41:04know as in the face of the establishment41:07like you have any ideas on that because41:09I’m certainly a game for it if there’s a41:11way to do it right I mean these41:13discussions again I think they really41:15come down to this giant hope that that41:19official term whether it’s the Treasury41:22it’s Washington it’s the Federal Reserve41:24it’s the foreign entities that are the41:27equivalent of them all together can fix41:30this problem and that’s what they’re41:32really hoping for is that they can fix41:35this problem this problem really being41:38that my portfolio has lost a lot of41:41money and that’s really what’s untenable41:43and I need that to go back up they don’t41:46believe in the Schumpeter creative41:48destruction for every decline in every41:51change there’s an opportunity and if you41:53let the if you let the organism of free41:57market capitalism exist it will bend and42:00fold and change itself into something42:02else that’s better we don’t want to42:04change anything right now we want the42:07status quo and that’s what they’re42:09really pushing on is the status quo to42:12hold42:13print all this money hold the market up42:15at these levels as well too if you want42:19to look at a good example is you know42:22the the auto bailouts of ten years ago42:24we couldn’t allow because everybody’s42:27got this perception that when a company42:29goes out of business it goes away it42:32doesn’t go away it restructures is what42:35it does it changes in what it is and42:38that we didn’t allow the auto companies42:40to restructure and change to the point42:44that we allowed a Tesla to become the42:47bubble that it became because everybody42:48looked at Tesla and said they’re leading42:51the way to where autos can go now maybe42:54the evaluations became insane and42:57ridiculous but what we also are saying42:59at the same time is for GM Chrysler and43:01the rest of you you can’t you are43:03incapable of leading us to where we need43:06to go so we look to these messiahs like43:09the Tesla’s of the world and say they’re43:11going to show us where we need to go43:13with these industries because we don’t43:15allow them to change because change43:17means somebody might lose a job but43:20another job might be created along the43:22way so we are really trying to really43:26recreate January 2020 that’s what we’re43:29really what we don’t want anything to43:31change from that but it’s going to43:33change from that and that doesn’t43:35necessarily again that doesn’t mean it43:38has to be a disaster it can just be43:41different but we don’t even want43:43different we want January 2020 and43:46that’s why we’re printing all this money43:48and doing all this stuff to try and go43:50right back to there and you know the43:52political establishment Trump he wants43:54twenty twenty more January twenty twenty43:57more than anybody else43:58remember he famously tweeted in January44:00twenty twenty the stock market’s up44:02ninety percent since I got elected44:04you’re not up for ninety percent what44:05did you do wrong that’s what he wants he44:08based his whole election strategy on the44:10Dow going higher and higher and higher44:13and and so we’ll see right now there’s a44:17big hope especially among the JP44:20Morgan’s of the world and the Goldman44:23Sachs’s of the world that this will work44:25in44:25them back to where they were in January44:28but when the reality comes in that they44:30can’t get us back to January then we44:33have to start asking a hard question44:34okay we don’t have no economy we have a44:38different economy and how is it44:39different and who are the winners and44:41losers in the new economy we’re not44:44ready to go there just yet yeah that’s a44:46that’s a good wind up here man that’s44:49that’s that’s a lot and it’s and it’s44:51the truth and and maybe my last question44:53on that is you go back to January and I44:55mean not withstanding when it was44:58shortly thereafter that Robin hoodie44:59accounts for driving Tesla to 925 bucks45:02I mean there’s you know people couldn’t45:03see any of this coming of course we had45:05we work we had plenty of imbalances the45:06biggest corporate credit credit bubble45:08in US history but I remember and I’ll45:11never forget I live in the great state45:13of Connecticut which sure certainly is45:15in a Republican state I’m not a45:16Republican or a Democrat I’m a Canadian45:17guy I just don’t like politicians45:20generally but my most raging Democrat45:25clients let’s just say in you know45:27institutional money managers they were45:29kind of okay with Trump you know they45:31they’re okay because it was working45:33right they’re getting paid markets going45:35up they’re levered long they say yeah45:37you know he’s clever he’s gonna keep it45:39going you know I don’t know how much of45:40that you’ve got in your neck of the45:43woods but man they’re gonna be quick to45:45turn if that if if what was getting em45:47paid through the lens of dig they were45:49willing to ignore it but now they’re45:52certain ask the questions was he telling45:53the truth it’s just like the words45:56turning pretty quickly here you know45:59everybody that’s listening to this46:00podcast isn’t is interested in the46:02investment markets in one way or another46:04has their in the history of the world46:06ever been anybody to bitch and complain46:08that they made money whether or not it46:11was they made it by luck or they made it46:13by smart or they fell into it or they46:16saw it coming if they bought something46:18and it won up they’re good with it and46:20you know don’t don’t start telling me46:22that I got lucky or I maybe I did and46:24I’m I’m good with the president good46:27with every if this guy keeps tweeting46:29every three days that he’s causing the46:31stock market to go off even though I46:33might believe he didn’t it’s going up46:36and I’m making money and there’s no46:38complaints here46:39and then the minute thought stops going46:41up this one everybody then starts asking46:43the real hard questions yeah that’s a46:45real hard questions it’s getting harder46:47I mean he had a tough trade their46:48president pump on that oil trade right46:53you know it’s it’s it’s an amazing thing46:56that what’s happening with the with the46:58oil trade is Trump has you know he might47:01not be wrong on it but he’s he’s decided47:04that the energy sector is as important47:08as the consumer sector now from an47:10economic standpoint that’s actually47:12right if you look at the amount of GD47:14the energy sector puts out and the47:17amount of GDP would that would be47:19enhanced by an oil price cut it’s about47:2250/50 and so he’s not entirely wrong on47:25that but boy he does really come off as47:28is trying to say that he doesn’t want47:30anybody to have a cut of gasoline prices47:32they should if the economy is gonna go47:34down this hard then that should be the47:36natural consequence of it is one dollar47:38gasoline is what it would be um gasoline47:41is supposed to represent some measure of47:44economic prosperity in the country too47:46because it’s its demand will move up and47:49down with it and if we are unemployed47:52remember the biggest reason you drive is47:54to go to work and if you are unemployed47:57then you get the gasoline demand numbers47:59we got today the lowest ever cuz48:01everybody’s sitting around talking to48:03people on skype like we are right now48:06and we’re not in our car yeah and that’s48:08going to continue to be the case as we48:10move forward yeah if you haven’t looked48:11at it which I’m sure you have maybe48:13others haven’t the mannheim index you48:15know used cars just complete collapse48:18and that that index used cars has been a48:20pretty good leading indicator for a long48:22time but it’s it’s episodic and48:24generally not trending but when it48:25crashes it crashes for for a reason and48:28adjust it again so that’s kind of sad48:30there’s a lot if there’s a lot of about48:31this Jim that’s that’s just set and you48:33know I appreciate that you’ve been open48:37and honest about it I think there’s a48:38there’s an analytical weaponry to that48:40but there’s also a courage48:42you know not everybody to your point on48:44Wall Street’s willing to again we’re not48:47making shit up here this is the truth48:48and you’ve been illuminating suffice to48:51say and48:51educational in terms of laying it out48:53there so thanks for thanks for taking48:55the time to do that with me48:56thank you I appreciate it he’s Jim48:59Bianco you can actually find him on49:01Twitter he’s a great contributor to the49:03debate out there and I think he’ll be on49:04the front lines of it I think you’ve met49:06three people in particular today that49:08that will be I think courage is a big49:10part of leadership and I’m gonna you49:12know it depends on what people wanted to49:13find Americas but that’s how I’m gonna49:15define mine thanks for joining us today49:17we will be right back at it tomorrow for49:19the final day of the investing summit49:21[Music]49:28you
Imagine being furnished with generational wealth under one condition – you must choose only one asset allocation for your portfolio and stick with it for 100 years. Where would you even start? Chris Cole, CIO and founder of Artemis Capital Management, returns to Real Vision to answer that very question. He sits down with Danielle DiMartino Booth of Quill Intelligence to discuss the optimal portfolio construction for the long run, regardless of market condition. With uncertainty everywhere despite all-highs in the market, Cole discusses how to navigate Charlie Munger’s “death of the efficient frontier.” He explains the allegory of the Hawk and Serpent and breaks down the construction of his 100-year portfolio. Cole and Booth provide viewers with the tools to traverse the “incremental death of alpha,” and markets that are increasingly subject to the amplified volatility of increasingly passive investments. This piece is a much-watch for the pension fund or endowment that has no long-volatility exposure in their portfolio. Filmed on February 7, 2020 in Austin, Texas.
DANIELLE DIMARTINO BOOTH: Well, hello.
This is Danielle DiMartino Booth with Real Vision, and today we’ve got a real treat.
We are bringing your Christopher Cole with Artemis Capital.
We’ve been waiting for over two years for a follow-up to his seminal paper.
It’s out there.
You have to read it.
Share it with people– maybe not people under 18.
They wouldn’t understand it.
But everybody needs to get a copy of this and read it.
We’re going to discuss what it’s all about today.
CHRISTOPHER COLE: Thank you.
It’s a pleasure to be here and back on Real Vision again.
DANIELLE DIMARTINO BOOTH: So I’m going to start with an anecdote.
Years ago, I was in Omaha, and I visited with Charlie Munger.
And he made the comment to me that the entire pension fund advisory business one day would
go out of business.
It would go the way of the dodo bird because of the group think that surrounded the industry
because of the way that the portfolios were being designed in a world where central banks
were effectively running the show.
And he made the comment to me that he saw in the future, he said, I might not live to
see, but you will, the death of the efficient frontier.
So I’m curious about your thoughts on portfolio construction, how it’s done, and how it that
evolution has changed basically the way this entire generation approaches investing.
CHRISTOPHER COLE: Well, beginning with that and looking at what Munger has said, as a
follow-up to my last letter, the Ouroboros letter that talked about the cycle of risk
and how volatility has been used as both a proxy for risk and also as a source of return.
I thought, how can I– what will disrupt that– what will disrupt that cycle?
I posed a question to myself saying, well, if we’re going to see what happens in the
future, we have to look to the past, and the distant past, not just the recent past, not
the last 10 years, not the last 40 years.
We need to look back 100, 200 years to understand the cycle of capital creation and destruction.
And I posed this question to myself.
I said, imagine that someone gives you generational wealth, enough money that you can live and
your children’s children can live at a high level.
But it’s subject to one question, one dynamic.
You have to choose an asset allocation and stick with that allocation over 100 years.
What allocation do you choose so that your children’s children will have prosperity?
And taking that cue, I went back and looked at 90 years of historical data, backtested
a wide range of popular financial engineering strategies, everything from risk parity, the
traditional pension portfolio, short volatility, long volatility strategies, commodity trending
strategies, and looked and how do these perform?
And what asset allocation is the allocation that’s going to provide wealth, not only consistently
over 90 years, but through every generational cycle, through both periods of secular growth
and secular decline?
And what I found surprised me, that echoing Munger’s statement, the allocation that the
majority of US pension systems and retirees are following, which approximately today is
about 70% equity-linked products- – that could be everything from stocks to private equity,
things that are the profit from secular growth– and about 20% bonds.
That portfolio has done incredibly well over the last 40 years.
But when you look at that portfolio over 90 years, you see a very, very different reality.
And that has a wide range of social, economic, and social ramifications that become quite
But looking at that, I say, what asset allocation can I find that will actually provide protection
over that 90 years consistently?
And that answer came not from a macro view.
It doesn’t come from me having an opinion about whether or not we’re going to go into
a recession or whether or not there’s going to be some continued economic prosperity.
It comes simply by looking at data, using mathematics, looking at data, and looking
at empirical data over a lifetime to come to that determination.
And I think the results are quite shocking.
And I think they run somewhat counter to the consensus knowledge as to what optimal portfolio
allocation should be.
DANIELLE DIMARTINO BOOTH: So Charlie Munger was right.
CHRISTOPHER COLE: I think he’s right.
DANIELLE DIMARTINO BOOTH: Take a step back to the October 2017 paper, if you will.
Back then, you drew the scope of the financialization of the markets of the economy.
You talked about risk parity, and share buybacks, and the massive effect that they had had on
the crowding in to certain asset classes.
So talk about what effect this herding instinct has had on the way this generation views investing.
CHRISTOPHER COLE: You and I have a very similar writing style.
I love metaphors.
I think visually.
I think I think you do too.
DANIELLE DIMARTINO BOOTH: Yours are better.
CHRISTOPHER COLE: Yours are– they’re very good.
But in that 2017 paper, I think I wanted to use the idea of an Ouroboros, this concept
of a snake devouring its own tail.
And what this was a metaphor for– what is now about $3 trillion in equity markets alone.
This is just equity markets, US equity markets.
The number is much larger if you expand that across asset classes.
But of strategies that use volatility as an input for taking risk, but also seek to generate
excess yield, either through selling volatility or through the assumption of stability.
So in this number, you have implicit and explicit short volatility strategies.
And I think there’s a lot of confusion as to what this means.
Explicit short volatility strategies are strategies that they will sell derivatives, so they’ll
DANIELLE DIMARTINO BOOTH: So the easiest would be selling the VIX.
CHRISTOPHER COLE: Selling the VIX, that’s right.
So this paper came out prior to the XIV blow up, and it talked about how the VIX ETPs were
likely to have significant problems.
But that’s a very small component of that short volatility trade.
A much larger component of the short vol trade are strategies that replicate the risk parameters
of short volatility trades but may not actually be shorting volatility.
So strategies like this might be things like volatility targeting funds or some elements
of risk parity, for example.
DANIELLE DIMARTINO BOOTH: Risk parity is still something we don’t hear a lot about, even
though it’s massive.
CHRISTOPHER COLE: Yes, yeah.
And indeed, the framework there is– this could be anything between literally shorting
vol– literally shorting volatility, what I’ll call short gamma or being short trend–
and we could talk a little bit more about that– short correlations, short interest
These are risk factors of a portfolio of short options that various financial engineering
strategies will replicate, maybe not all of them, but certain aspects of them.
That doesn’t mean all these strategies are bad.
It just means that they are formulated to a world where interest rates are dropping,
assets are mean reverting, and that volatility is quite low.
And guess what has happened the last 40 years?
We are at generational lows in volatility across asset classes.
Asset trending– I think this is something most people don’t realize that, actually,
assets, equity for example, used to trend higher and lower.
You can measure that through something called autocorrelation.
All that means is that if today was down, it is likely that tomorrow will be up and
DANIELLE DIMARTINO BOOTH: Buy the dip.
CHRISTOPHER COLE: Buy the dip, that’s right.
So the assets for the greater part of a lifetime were autocorrelated in the sense that higher
prices resulted in higher prices, and lower prices resulted in lower prices.
That autocorrelation peaked right when Nixon delinked the dollar versus gold, or the US
dollar versus gold.
And we have underwent a multi-decade decrease in autocorrelations.
And now, we’re at really peak mean reversion markets.
So a lot of strategies make the assumption that mean reversion is implicit to asset price
That’s definitely not always the case.
So to that point, one of the strategies we actually tested was buy the dip.
How would buy the dip perform going back 90 years?
This is very interesting.
Buying the dip, you don’t think of it as a short volatility, strategy but it is short
gamma, what’s short that autocorrelation effect.
Well, buy the dip has performed incredibly well over the last 10 years, and really over
the last 20 years, as central banks have been very reactive to market stress.
DANIELLE DIMARTINO BOOTH: That’s an understatement.
CHRISTOPHER COLE: Right?
Well, it’s very interesting.
If you go back and you test buy the dip over 90 years, that strategy goes bankrupt three
DANIELLE DIMARTINO BOOTH: Bankrupt’s a big word.
CHRISTOPHER COLE: Flat out loses all of its money three times over a 90 year history.
It is only really in the last 10 years where it’s compounded at about 10% a year where
we’ve seen that outperformance.
DANIELLE DIMARTINO BOOTH: I think that might– let’s see.
Is that the quantitative easing era?
CHRISTOPHER COLE: I think so.
It’s not a coincidence.
Yes, not a coincidence at all.
DANIELLE DIMARTINO BOOTH: So you tweeted out something a few days ago about long-term deflationary
CHRISTOPHER COLE: Yeah.
DANIELLE DIMARTINO BOOTH: It feels like we keep going there.
What in your mind could possibly ignite inflation?
Because it’s the one thing that nobody is expecting.
We’re all expecting wash, rinse, repeat.
More deflation next time there’s a disruption of any kind, and again, every central bank
comes riding into the rescue with more stimulus.
CHRISTOPHER COLE: More stimulus– so look at looking back at– there have been other
cycles across history that are like an Ouroboros eating its own tail.
If we take this beyond just short volatility, we can think of it as part of the entire debt
So this idea that you start out with something good, you start out with real economic growth,
technology, and demographics, and that leads to growth.
And fantastic– you’re growing.
The economy is growing.
It’s fundamental growth.
At a certain point in time, the fundamentals get stretched and we become reliant on fiat
devaluation and debt expansion.
DANIELLE DIMARTINO BOOTH: So think of the baby boomer generation generating genuine
economic growth, and then they’re starting to move to spending less.
And how do you fill that gap?
CHRISTOPHER COLE: Exactly.
So to this point, we start out in this framework.
It’s in the period of 1984 to 2007– one of the most incredible periods of asset price
growth and asset appreciation growth in not just American history, in history period.
90% of the returns of a 60-40 stock-bond portfolio came from the 22 years between ’84 and 2007.
Just 22 years drove 90% of the gains of that portfolio over 90 years.
DANIELLE DIMARTINO BOOTH: I probably couldn’t count on one hand the number of investors
who have been around since before 1984.
CHRISTOPHER COLE: Exactly.
The average investment advisor is 52 years old.
They were a kindergartener during the stagflationary period of the 1970s.
So you have all these baby boomers, 76 million baby boomers– largest generation in American
They’re teenagers right into the devaluation of gold in the 1971.
That is driving a tremendous amount of inflation at that point in time.
Interest rates go up to 19%, and then these baby boomers, 76 million of them, enter the
workforce in the early ’80s.
And they start making money.
They start making money, and they start spending.
They start investing.
So you have baby boomers coming on in.
Then you have a trend towards globalization, so we’re able to export our inflation overseas.
You have a technology boom as well.
And then, interest rates begin dropping.
DANIELLE DIMARTINO BOOTH: Oh, yes.
CHRISTOPHER COLE: So and– DANIELLE DIMARTINO BOOTH: May he rest in peace, Paul Volcker.
CHRISTOPHER COLE: Exactly.
And as if that’s not enough, taxes start coming down.
So you have this once-in-a-generation, once-in-several-hundred-years economic boom, asset price boom that occurs,
driven as baby boomers come into the workforce, begin savings, enter into their prime earning
But now, those boomers are going to be retiring.
They are going to be drawing $20 trillion dollars out of markets instead of putting
that into markets.
This, obviously presents a tremendous deflationary force.
So I’d like to think about this as a snake.
If we take the snake metaphor and we pull it out, it’s not just short volatility.
It is almost like a snake devouring its own tail as part of a business cycle.
The snake is eating prey and naturally compressing inwards through secular growth.
And that’s healthy.
But towards the end of the secular growth cycle, that snake relies on financial engineering,
excess leverage, and begins eating its own tail.
And that is where we’re at, I would say, in the cycle right now.
And you’ve written beautifully on this about some of the debt problems out there.
Currently, we’re at 48% debt to GDP, highest corporate debt to GDP, highest level in American
DANIELLE DIMARTINO BOOTH: You tack on– you aggregate non-financial, we’re at 74%.
CHRISTOPHER COLE: 74%.
DANIELLE DIMARTINO BOOTH: Unheard of numbers.
CHRISTOPHER COLE: And what are we doing with this?
What are corporations doing with this debt?
They’re issuing debt to buy back their own shares at a trillion dollars a year.
And then institutions are funneling that in in order to– they need to find ways to generate
yield absent any fundamental growth.
So we had a year like last year, where there’s no actual earnings growth, but it’s all multiple
expansion driven by share buybacks and speculation.
So this is– we’re at this end of the cycle, where the snake is devouring its own tail.
Now, this can go on for a long time.
DANIELLE DIMARTINO BOOTH: Clearly.
CHRISTOPHER COLE: Well, what breaks that cycle?
And this comes to the image in the paper of the allegory of the hawk and serpent.
And I was thinking about this.
Outside our offices here, we have a peregrine falcon that flies around.
DANIELLE DIMARTINO BOOTH: I saw that on Twitter.
You need to tweet more often, by the way.
Got on “Real Vision” thumbs up on that?
CHRISTOPHER COLE: I do a lot of research and work, but I’ll try.
I’ll try a little bit more.
I’m still getting used to it, by the way.
The whole retweet thing– DANIELLE DIMARTINO BOOTH: It gets tricky.
CHRISTOPHER COLE: It gets tricky a little bit.
But that hawk– I noticed the idea of hawk.
And there is an old symbol of a hawk fighting a serpent.
And this symbol has deep roots.
It’s actually on the great seal of the US.
It’s on the coat of arms of Mexico.
It has important ramifications across different traditions ranging from Aztec to Egyptian
But this idea to me, what it represented is the serpent represents the secular growth
cycle that becomes corrupted at a certain point in time, where the serpent begins devouring
its own tail.
It is unable to generate growth naturally and has to self-cannibalize.
And the hawk comes down and represents the disruption of that cycle.
But the hawk has two wings, which also work with the probability distribution.
On the left wing– DANIELLE DIMARTINO BOOTH: Wow, that’s deep.
CHRISTOPHER COLE: So the metaphor goes deeper.
On the left wing, we have debt deflation.
This is what Japan has experienced.
That’s one way you get out of this decaying growth cycle.
DANIELLE DIMARTINO BOOTH: Slowly.
CHRISTOPHER COLE: Slowly.
That’s what the US experienced in the ’30s.
But on the other end of it, you have fiat devaluation and reflation.
That is where you simply devalue your currency.
And that could be helicopter money, devaluation currency, money printing.
That is another way that you get out of that crisis.
This is as old as money itself.
And one wing can occur before the other.
You can have a deflationary crisis before you have a reflationary crisis.
So to get back to your original question, what will cause– what I see causing inflation.
You have a scenario today where the two largest blocks of the US population are baby boomers,
at about 22% of the population right now.
They have a lot of money.
They’ve lived through one of the most incredible periods of asset price growth in history.
And they want to protect that money.
So they are going to– they’re going to support policies or are incentivized to, I should
They don’t need to, but they’re incentivized to support policies that protect their retirement
and their entitlement benefits.
Now you have millennials, which are now the largest generation at 26% of the population,
and Gen Z following, are likely to be the first generation in American history to be
poorer than their parents.
DANIELLE DIMARTINO BOOTH: Remarkable.
CHRISTOPHER COLE: Remarkable, yeah.
Lower household creation rates– they have– the average millennial has substantial student
DANIELLE DIMARTINO BOOTH: Low savings.
CHRISTOPHER COLE: No savings, that’s right.
So the incentive of the average millennial, they’re incentivized in essence to pursue
policies that represent redistribution of wealth and seek to tax, redistribute, and
So I think the time to look, and maybe what could cause inflation is the political sea
change towards– DANIELLE DIMARTINO BOOTH: At some point– we’re at $23 trillion now.
But to your point, at some point, you’re going to hit a level of debt if truly all of these
social spending initiatives are financed by printing money.
Theoretically, at some point, you will hit a limit.
I agree with you.
You talk about passive investing.
It’s a hot button.
90% of flows go into passive strategies.
Even pensions are in passive strategies.
Talk about the perfect– perfect liquidity of passive investing.
CHRISTOPHER COLE: The concept of passive– and now, we are at a point where passive investments
have eclipsed active for the first time in history.
And my friend Mike Green who’s a friend of “Real Vision” has a lot of fantastic research
DANIELLE DIMARTINO BOOTH: Yes, he has.
CHRISTOPHER COLE: And I’ve done some work, in essence, trying to replicate his assumptions
using some toy models and was able to do that.
His theory, at the end of the day, is that at a certain point, if the market is dominated
by passive actors, it not only amplifies volatility, which I completely agree with– if there is
no other incremental seller against a buyer or buyer against a seller, each incremental
buy or sell will result in massive movement in the underlying.
DANIELLE DIMARTINO BOOTH: It’s an amplifier.
CHRISTOPHER COLE: It’s an amplifier.
Because if you look at active investors, active investors are a volatility dampener.
Value investors will come into the market, and they will buy when there is a big collapse
in asset prices.
So they will in essence put a floor underneath asset prices.
And they’ll sell when asset prices go to high.
Well, you remove all the active investors, and that will amplify volatility.
The other factor that comes into play a lot of the time is this idea that it actually
reduces the alpha available to active participants.
DANIELLE DIMARTINO BOOTH: Clearly.
We’re watching one asset manager after another, one hedge fund after another go away.
CHRISTOPHER COLE: Because, in essence, passive is in its own right a systematic strategy.
It has elements of– it is a basic systematic strategy.
So it goes back to the soul of investing.
There are two different competing thought processes, I think, that are at war with one
The one thought process is that assets should have a value, that there should be a value,
and that market participants are fighting to determine what that value is.
But there is, in theory, some intrinsic value to it.
DANIELLE DIMARTINO BOOTH: Price discovery.
CHRISTOPHER COLE: Price discovery.
There is a second school, which I think is gaining strength right now, which is forget
All that matters according to this school of thinking is the price momentum of the asset.
DANIELLE DIMARTINO BOOTH: You can burn your MBA.
You don’t need it anymore.
CHRISTOPHER COLE: That’s right.
So aspects of factor investing follow this principle, whether it’s momentum, quality,
whether it’s FANG, or whether it’s ownership of company management.
Whatever the factor is, as long as people believe in the factor, and keep buying, and
keep providing– as long there continues to be liquidity, that creates value.
I’m clearly in camp number one.
I clearly believe that there’s intrinsic value.
I believe– DANIELLE DIMARTINO BOOTH: Well, if you go back 100 years, there is.
CHRISTOPHER COLE: There is.
And I would like to quote Harley Bassman, who once had a fantastic quote.
He always says this, that pigs can fly if shot out of a large enough cannon.
They always return to earth as bacon.
He’s so right on the money with his usual wit.
With a large enough amount of central bank stimulus and enough ability to create debt,
you can create this illusion as to momentum in these factors that– so I actually think
passive investing is actually just a liquidity momentum trading.
DANIELLE DIMARTINO BOOTH: I would agree with you.
Look– well, October 2018, it was not pretty.
It acted as an amplifier, but on the downside.
But we haven’t seen a lot of that.
You put venture capital and private equity into your 70% slice of the pie.
Because I don’t think that if you went down to Texas teachers, for example, I don’t think
that they would say that– they would say it would be at the opposite end of the spectrum,
and it would be a diversification strategy against publicly traded equities.
CHRISTOPHER COLE: So one are the concepts on doing this paper is I wanted to find a
asset allocation that is a solution.
What asset allocation can work over 90 years that can protect you against the deflationary
elements of the left wing of the hawk and the reflation three elements of the right
wing of the hawk?
That led me to a very big conclusion, and it ties into the question about private equity.
Most people think that excess return– that you want to take to asset classes that both
have solid returns, and bring them together, and that you’ll get a better result from.
That they prioritize the search for yield and prioritize excess return.
And what I found is that, actually, what people should prioritize is secular diversification.
And what that means is that you should look to large asset– look to asset classes that
can perform on the left or the right tail, and boldly size them in your portfolio.
That means boldly sizing countertrend asset classes that perform when stocks and bonds
DANIELLE DIMARTINO BOOTH: So gold’s not like the little 10% just in case?
CHRISTOPHER COLE: That’s right.
Gold shouldn’t be 1% or 2%.
It should be 20%.
Volatility should be 20%.
Commodity trend should be 20%.
And then stocks and bonds can make up the other remaining 20 and 20.
Well, so private equity– DANIELLE DIMARTINO BOOTH: That stands the conventional wisdom
on its head.
CHRISTOPHER COLE: It does, where many individuals have big problems trying to even allocate
3% of their portfolio to gold.
Well, this gets back to the private equity VC question.
Now, these are relatively new asset classes.
It’s tough to see their performance going back 100 years.
But Cambridge has fantastic data going back a good 20 years, 20, 30 years.
DANIELLE DIMARTINO BOOTH: When I was at DLJ, we had a merchant bank.
Private equity was this cottage industry.
Leon Black used to walk the halls.
This was way before– what, they’ve got $4 trillion?
CHRISTOPHER COLE: Yeah, it’s massive.
DANIELLE DIMARTINO BOOTH: Massive.
CHRISTOPHER COLE: Massive.
Well, it becomes very clear from looking.
You can just look at the return data from private equity NVCs to see that these asset
classes are secular growth asset classes.
They are correlated to the business cycle.
DANIELLE DIMARTINO BOOTH: So they move in concert with publicly-traded equities.
CHRISTOPHER COLE: They move.
Sure, you might get some excess return, but they are correlated to equities.
They will lose money in the event that there’s a widescale recession.
Well, I should say, they have historically lost money when that has occurred.
I cringe when I hear leaders of very large– and I’ve heard this.
Leaders of very large pension systems, huge, huge systems that have a lot of money, and
they say that private equity and venture capital are diversifies because they’re lagged.
This doesn’t work with the data in view.
DANIELLE DIMARTINO BOOTH: I’ve been harping on this issue for years and years.
When we went into the crisis, the baby boomers were still an actuarial accounting assumption
you could fudge with.
Heading into the next downturn, they’re going to be a cash flow issue for pensions.
And when you factor in the illiquidity aspect of the alternatives, it just makes no sense.
CHRISTOPHER COLE: No, it does not.
And this is what we’ve seen.
So I put about a post on Twitter.
And I had three asset classes.
And they were just sine wave graphs.
The two asset A and asset B were highly correlated with one another, and they were slightly offset
from one another.
And asset C, the last asset, was a countertrend asset.
It was an asset that didn’t make any money, but made money when all the other assets lost
DANIELLE DIMARTINO BOOTH: Did it lose?
CHRISTOPHER COLE: It lost money, actually– lost a little bit of money.
It was flat.
DANIELLE DIMARTINO BOOTH: A little– OK, critical words.
CHRISTOPHER COLE: And I posted to Twitter.
I said, which of these would you combine.
You can choose two assets to have the optimal portfolio.
And of course, everyone says, well, we’re going to choose the high returning asset and
the countertrend asset because that’s going to result in a dramatically better risk adjusted
return as opposed to combining the two assets that have similar return profiles, which results
in bigger gains, but bigger losses.
So Twitter got that answer correct.
80% of people chose the trend and the countertrend asset.
But what’s interesting is that the big institutions around the world are doing the exact opposite.
They’re taking equity exposure, and then they’re layering on more and more private equity exposure,
and more VC exposure, and more high yield credit exposure, and short volatility exposure,
and you name it, all because they have to reach the 7.25% return target.
And at the end of the day, what you have is a portfolio that is tilted to secular growth.
Will perform in secular growth, but in the event that we have any regime change, any
period of secular change, either on the left wing of the hawk with deflation or the right
wing of the hawk with reflation fiat devaluation, that portfolio will struggle and struggle
DANIELLE DIMARTINO BOOTH: I wasn’t surprised about most of what you wrote.
But I was intrigued about how you view real estate as an asset class.
It’s got the highest return, but– CHRISTOPHER COLE: Yeah, so real estate is– real estate’s
quite interesting as an asset class, because I think most people don’t really think of
it as– it is a levered secular growth asset.
And your average person, I think, the average retiree– maybe not the institutions, but
the average retiree, they would never go lever their stock portfolio five times.
But you own a home, and that is a levered investment.
That’s not saying it’s a bad investment.
I’m not saying that.
But most people don’t look at it in that light.
So in the same way that you structure– that one should structure trend and countertrend
assets to balance the hawk and the serpent, the idea of including real estate in one’s
thinking about one’s personal portfolio, I think, is really important because, oftentimes,
your job is driven by the economic growth cycle.
Your home is driven by the economic growth cycle.
And then you’re Levering that exposure to the economic growth cycle.
And then you’re also adding stock exposure onto that.
So the average retiree with some– or the average working individual with a mortgage
has tremendous exposure to the secular growth cycle levered– DANIELLE DIMARTINO BOOTH:
And there’s an extraordinary percentage of baby boomers with mortgages.
CHRISTOPHER COLE: Yes, yeah.
DANIELLE DIMARTINO BOOTH: And the rest of their portfolio’s in an index fund.
CHRISTOPHER COLE: And very few people think about this.
And the concept at the end of the day that somehow that will be insulated– stocks dropped
86% in the Great Depression, and real estate dropped to the same degree.
Now, in prior cycles, when interest rates were at 19% and were able to be lowered, that
created a dynamic where real estate performed somewhat like a bond.
Every single time that rates went down, it increased the affordability for people to
buy bigger homes.
So that provided a cushion for real estate.
Well, when rates are at the zero bound, several bad things begin to happen.
First of all, your 60-40 portfolio can struggle in the sense that your bonds are not getting
as much benefit.
But on top of that, your hold price is not going to get as much benefit if rates can’t
DANIELLE DIMARTINO BOOTH: At the margin.
CHRISTOPHER COLE: At the margin, yeah.
So I don’t see people realize this.
Rates where they are today, for us to get the same benefit on a bond portfolio, on a
long-duration bond portfolio, or the same pickup in mortgages that we got after ’08,
the Fed would have to lower interest rates to negative 1.5%– DANIELLE DIMARTINO BOOTH:
Ooh, don’t say negative.
CHRISTOPHER COLE: –to get the same benefit as people got right based on where they lowered
I’ve never going to say that’s not feasible anymore, because God knows what is feasible
But I will say there are major social ramifications if they pursue a course like that.
DANIELLE DIMARTINO BOOTH: Talk about one way that you would play volatility long.
Or if there is no way, one way, how do you– you said 20% long volatility.
How do you do that?
CHRISTOPHER COLE: Now, I take a very broad definition of what long volatility is.
So let’s start out with specifics.
I actually went back and I tested using very defensible assumptions.
What different traditional explicit volatility strategies, how they would have performed
over periods like the Great Depression, over the 1970s.
So for example, it’s very popular to do covered calls.
People will own stock and they’ll sell calls against that.
Large pensions do that as well.
Some people will do tail risk catching.
They’ll buy put options– various strategies.
So I tested all of these strategies using very realistic assumptions going back to the
And those assumptions are laid held in very high detail in my paper.
So one of things I found, just to start out with– short volatility strategies, which
in equity markets, currently there’s upwards of about $200 billion of these strategies,
are very popular, have performed extremely well since the ’80s.
These mean reversion short vol strategies, pretty much every single one of them showed
complete annihilation of capital over 90 years.
And I would say that based on very defensible assumptions that people should not only avoid
these strategies, but also institutions that robotically and systematically apply them.
And I believe there is a place for these strategies if they’re used tactically.
Using human discretion, say, this asset has overpriced volatility.
We’re going to sell it as part of a trade.
That’s very different than what a lot of institutions are doing, which is they are constantly systematically
selling volatility for excess yield.
And this includes even collateralized short vol strategies.
So most people have come back and said, well what about something like a covered call strategy?
Why would that show impairment of capital.
And well, let’s take a look at that.
In the 1930s, the stock market dropped 80%.
Now, if you were selling calls on the way down, you would have done a little bit better
than someone who was just holding the stock.
But then, we had the deflationary left tail.
Then you have the right tail, where they do the 1932 Banking Act, and they devalue.
Lower rates– devalue, and also, devaluation versus gold.
At that point, you had a 70% rally that occurred over a month and a half.
So imagine that you’re selling calls, earning a little bit of money.
But you’re holding that against stock.
And you’re losing all the way down.
You lose 70% of your capital that way.
And then, you’re selling calls into a 70% rally that occurs over a month and a half.
And that wasn’t the only rally.
There was another rally that occurred in the ’30s, that over 80% over four months.
And that was the Roosevelt devaluation versus gold.
DANIELLE DIMARTINO BOOTH: Hard to pivot in that short period of time.
CHRISTOPHER COLE: That’s right.
DANIELLE DIMARTINO BOOTH: That’s your point.
CHRISTOPHER COLE: So these are political risks.
You have deflation.
And then, you all of a sudden have a political shift that causes reflation, either through
monetary or fiscal policy.
And if one thinks they can predict that, they’re wrong.
There’s just no way unless you’re psychic.
So with that same understanding how shortfall performed, we can look at how longfall has
Long volatility, truly buying a straddle, buying puts and calls, would have been positive
carry for decades.
It would have made money in giving you diversification over the 1930s all the way through the ’40s,
and also would have given you income in the 1970s.
So to this point, one of the things we’ve advised is something we call active long vol,
which is this idea that you forego the first movement in volatility.
You’re not looking to protect against exogenous risks.
But when the market moves a little bit, you catch the momentum of volatility.
And this is how we modeled it.
It is an attempt to model systematically what active long volatility managers seek to do,
which is provide portfolio insurance type of protection for lower cost security.
But there’s other long volatility strategies or countertrend strategies that are also really
Commodity trending is an example of a strategy that can be very effective.
Commodity trend has not been very popular in recent years, but was particularly effective
in the 1970s during that inflationary period and was effective in the 1930s.
And then finally, gold, is a long– I would say a long volatility asset because it plays
off of that fiat devaluation that occurs.
DANIELLE DIMARTINO BOOTH: Of course.
CHRISTOPHER COLE: So in this sense, by having parts of the portfolio, all of these asset
classes, all of these asset classes are countertrend to equities and are uncorrelated to bonds.
They show no correlation to equity and bonds.
So to the same point, instead of chasing excess yield, what people need to be doing, particularly
the large institutions need to be positioning portfolios boldly in asset classes that are
non-correlated to stocks and bonds, preparing for a period of secular change.
Danielle, the numbers are amazing.
The numbers are amazing.
In my portfolio, the replication portfolio going back 90 years that we show in the paper,
you’re able to achieve consistent performance above the 7.25% pension return target that
is consistent through every generational cycle.
DANIELLE DIMARTINO BOOTH: And that’s how pensions should be invested for the long haul.
CHRISTOPHER COLE: That’s right.
DANIELLE DIMARTINO BOOTH: Absolutely.
We’re going to go in the weeds, and then we’re going to pull back out.
Describe the evolution of cross-asset volatility.
There used to be an order of things– FX, rates, equity.
Has that been destroyed in this era of all– you name it– VIX, move, every gauge of volatility
is at a record low.
CHRISTOPHER COLE: That’s right.
Actually, equity vol, US equity vol is actually relatively expensive comparative to other–
comparative to like currency vol, for example, which is truly at all-time lows right now.
DANIELLE DIMARTINO BOOTH: And that’s a massive market that nobody ever talks about.
CHRISTOPHER COLE: I think one of the things that’s really– we talk about the short volatility
And I say, OK, it’s close to $3 trillion in equity markets right now.
The portfolio insurance was only 2% of US equity markets, but in 1987.
And that, now, these short volatility strategies of all of their styles are now closer to 10%
of the market.
That same trade is being replicated across multiple different asset classes.
so we’re seeing it replicated across multiple different asset classes.
And of course, you have the, which is something you’ve written quite brilliantly about, the
reaction function of central banks.
And that’s something I also talk about in a 2015 paper, where they are preemptively
getting in front of– DANIELLE DIMARTINO BOOTH: Yes, this is– I’ve tried to communicate this.
And I don’t think that the market quite understands Jay Powell and how different he is because
he does understand credit volatility, and he does understand what’s at stake.
So he’s unlike his three predecessors.
He’s actually trying to get out in front of what’s happening.
And that– it truly changes– it’s not reaction function right now.
He’s trying to proactively get out in front of this.
CHRISTOPHER COLE: That’s right.
Preemptive– very similar to the way that the Bush administration sought to do preemptive
strikes against terror.
They are doing preemptive strikes on financial stress.
And I think we saw this– we have different models that look at thousands of different
But this last– economic and technical indicators.
And a lot of the drivers of volatility were there in the fourth quarter of last year.
We saw CCC yields begin exploding higher.
DANIELLE DIMARTINO BOOTH: They still haven’t come back in, a lot of them, though.
CHRISTOPHER COLE: They still haven’t come back in, yeah.
We saw value begin to outperform momentum stocks– very interesting.
We saw, obviously, a re-steepening of the yield curve after an inversion.
That’s a bear signal.
And then, finally, the granddaddy of them all, we began to see blow outs in the repo
Of course, what that will do is, inevitably, if that continues, you have a deleveraging
of various hedge fund strategies that will impact asset markets.
All of these things were big risk-off flex.
However, I think the Fed obviously saw the same thing.
I don’t think people fathom this.
They created $400 billion worth of liquidity to inject into the repo system, the largest
expansion of the balance sheet since 2009.
DANIELLE DIMARTINO BOOTH: Well, it was only $85 billion when it was QE3.
So this is bigger.
CHRISTOPHER COLE: Bigger.
DANIELLE DIMARTINO BOOTH: It is bigger.
And I understand what J Powell is trying to do.
I get it.
Because he saw the credit volatility genie start to come out of her bottle in the fourth
quarter of 2018, and it scared the Dickens out of him.
Public pensions had the worst returns for that quarter.
It’s anarchy, and we’ll get to that in just a minute.
So he understands the gravity of the situation.
But it seems like the market has begun to play him.
For every 100 decline– 100 point decline in the Dow, you have 1 basis point of rate
cut immediately priced in.
You can follow it on your Bloomberg terminal.
It’s like clockwork.
CHRISTOPHER COLE: It’s the moral hazard of the problem.
DANIELLE DIMARTINO BOOTH: And they’re playing the Fed.
The market players are playing the Fed.
And I don’t think people– this is the last thing that Jay Powell wanted.
CHRISTOPHER COLE: Yeah.
It absolutely has become this point where it appears that they’re really between a rock
and a hard place.
Because on one aspect, you are risking a complete melt up in markets, which is already occurring.
You look at the behavior of Tesla, for example.
It’s fun to try to watch the media justify it, but there’s no justification.
I think Tesla’s vol term structure was dramatically steeper than the vol term structure of the
VIX the other day.
DANIELLE DIMARTINO BOOTH: Yeah you tweeted that out.
I was like, wow.
CHRISTOPHER COLE: It’s really– DANIELLE DIMARTINO BOOTH: There’s so many different ways to look
But the main is there.
This is like 1999 and 2007.
You walk into a bar and hook up.
Sorry, that probably wasn’t very politically correct, but you’ve got the leverage and you’ve
got the mania.
You’ve got the two of them together.
CHRISTOPHER COLE: I could not put it any better myself.
I think you’re right.
And these are the two realities.
And maybe they’re trying to keep it together until the election.
DANIELLE DIMARTINO BOOTH: We don’t have to go there.
But I don’t I think Jay Powell is probably the least political fed chair since Paul Volcker,
but he also understands credit volatility, and he talked about it in October 2012 specifically.
CHRISTOPHER COLE: And this ends up– it’s interesting how this ends up impacting so
many different things, because not only is there market expectations built on this, this
results in the enhancement of that mean reversion effect that we talked about.
I think one of the reasons why volatility worked for 70 years in all of its forms is
because there was not mean reversion in markets.
It had less to do, sometimes, about the absolute spikes or the big down days or up days in
markets and more to do with the fact that markets would trend.
Well, now, because people anticipate this reaction function, the mean reversion is so
baked into markets, and then that incentivizes people to follow financial engineering strategies
that profit from that mean reversionary expectation.
And today, there’s a whole cottage industry in the vol world about gamma hedging.
That’s something that people talk a lot about now.
And it’s a complicated issue, but effectively, when big institutions come out in short volatility,
the hedging of those volatility shorts reinforces mean reversion to markets.
It’s a little like a rubber band, the gamma hedging.
And what I mean by that is that the rubber band stretches out, and you have a down day
or an up day.
And the hedging of all the short volatility products results in it coming back in.
So people will buy the dip or do the opposite of what the market’s doing.
The dealers will do this to hedge.
But if you get a big enough shock where that rubber band stretches too far, it could snap
in either direction.
It can snap on the left tail or the right tail in either direction.
So in essence, it’s not just the human beings that are now anticipating what the Fed– anticipating
this behavior pattern from the Fed.
But now you have machines that are being attenuated– DANIELLE DIMARTINO BOOTH: That’s why it feels
CHRISTOPHER COLE: That’s right.
DANIELLE DIMARTINO BOOTH: Speaking of systemic, let’s end this– I could talk to you for hours,
by the way.
This is just fascinating.
But let’s wrap this up today with where you conclude this wonderful paper.
Richard Fisher and I met years ago when I was still inside the Fed.
We had lunch there were riots in the streets of Athens at the time.
And I said, I said, Richard, what do you make of this?
What can we draw from this?
I’d been writing about pensions for 20 years.
And he said, Danielle, I fear that we’ll have those riots in our streets one day, that the
public pensioners and the people who are paying for the public pensioners— if you’re Joe
Q with an IRA or 401(k), and you lose most of the value of your equity holdings, and
you’re told that your property taxes or your income tax, state income taxes are going to
have to go up to top off the pension that’s just lost as much– you talk about these things
in public forums, and individuals go at each other.
Talk about the societal implications of where we are today what you see potentially happening,
because you used the word systemic.
CHRISTOPHER COLE: So the way that the average institutional entitlement portfolio is structured
today- – and this is not an opinion.
I’m looking back across history.
There is a recency bias.
This is constructed for the last 40 years of unprecedented asset price growth.
But if you look beyond that 40 years and look at how that portfolio will perform, at a best
case, you’re looking at a 5% type of return.
In a worst case, given where debt levels are and where leverage is, you’re looking at something
much, much worse.
So if we just assume the best case, it makes 5% or 4% over the next 20 years, these entitlement
DANIELLE DIMARTINO BOOTH: Which is not enough.
CHRISTOPHER COLE: Not enough, because they’re targeting 7.25%.
That will cause an expansion of the unfunded liabilities in just the state systems alone
to about $3 trillion.
If we end up getting a lost decade, that could go as high as $10 trillion.
That $3 trillion number, that is the cost of four bank bailouts.
It is the entire tax revenue of the US government over the next year.
That is your base case.
These entitlement programs, which right now, based on the 7.25% assumption, will go from
70% funded to under 50% funded, and a third of them will be under 30% funded.
And this is not including corporate programs and other personal retirement programs.
This issue of asset allocation is an issue of systemic risk.
It is an issue of social stability, because we will be at a point where these entitlement
programs will go belly-up and face insolvency unless we can think differently about the
I could see a lot of different things happening.
I could see a day where the Fed prints money to buy pension obligation bonds.
DANIELLE DIMARTINO BOOTH: Chris, if I can tell you something, during the crisis, when
I was inside the Fed, it was debated.
CHRISTOPHER COLE: Wow.
DANIELLE DIMARTINO BOOTH: The idea– if you tech logic to the end game, the idea of the
Fed buying municipal bonds is perfectly feasible.
CHRISTOPHER COLE: That’s right.
And that will be a backdoor bailout of Wall Street if that happens.
You could see a radical progressive dynamic, where we shift to seize capital, and where
there’s– it causes massive inflation.
There’s numerous ways.
But the question at the end of the day is the average portfolio is only attenuated to
this last 40 year period of growth.
It’s not about being afraid.
It’s about being prepared.
So my parents, during the great financial crisis, they came out ahead because they had
allocations to volatility in gold, and that saved them and allowed them to retire on time.
I think the institutions, the large institutions and the average investors, if they can find
ways to invest large portions in countertrend assets, not only will they get a better overall
return profile and more safe return profile, but this will be a way for these institutions
to be able to prosper during a period of secular change, rather than suffer.
So I think this is a major– it is more than a financial issue.
It’s a social issue.
That these defensive assets, they’re not for a rainy day.
They’re for a rainy decade.
The problem that we face is not a problem of financial management or economics.
It’s a problem– it’s a social problem.
It’s an emotional problem.
It takes a lot of social discipline and to think differently.
Many of our leaders would rather fail conventionally with the herd than succeed unconventionally.
DANIELLE DIMARTINO BOOTH: They’re not Genghis Khan.
CHRISTOPHER COLE: That’s right.
That’s absolutely right.
DANIELLE DIMARTINO BOOTH: It was great talking to you today.
Thank you so much– CHRISTOPHER COLE: Thank you.
DANIELLE DIMARTINO BOOTH: –for being with Real Vision.
CHRISTOPHER COLE: I had a great time.