Odd Lots - How A Macro Manager Is Trading On One Of The Wildest Markets In History

Episode Date: March 19, 2020

Markets around the world are so extremely volatile that nobody can think of any perfect precedent. There are shades of the Great Recession, 1987, the period in the wake of 9/11, and other moments of extreme turbulence. This week's special episode was recorded on Monday March 16 with Naufal Sanaullah, a macro strategist at EIA All Weather Alpha Partners. He walked us through his thinking on the market, and even discussed how he was trading things, right then, during the market open.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a very big. It's a lot. It's a firm. It's a few. It's a few. It's a few. It's a few. It's commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio.

That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, I don't even know really know where to begin right now. You know, the thought that keeps coming to my head was that life, at least here in the U.S., and the markets in general are so different than they were exactly a week ago at this time, The pace of change of what we're experiencing is almost, is just completely bewildering and unprecedented, it feels like. So I know what you mean, but I am going to say we're recording this on March 16th.

And a week ago, we were limit down on S&P 500 features. And we were limit down again this morning. So it's Monday. Therefore, we must have hit the circuit breakers. I say that with sarcasm. This is not normal. We've hit limit down, I think, like three times in the past week. Right. And I think we've had limit up at least once or maybe twice. The volatility that we're seeing is just relentless. And the pace of change in life, you know, last weekend, I was still out. I took my daughter to the park. I saw some friends at the park. I wasn't like going inside to bars or anything like that or restaurants. This weekend, I was alone. I walked through some of the same neighborhoods that I walked through last weekend. And to say that it was,

the vibe was different, was truly, is truly an understatement. So many of the places that I saw people where they were still lining up, just completely empty in what were, what would normally be busy parts of New York on a sort of like nice pre-spring day.

All I'm going to say is, welcome to my world. And I think you were forewarned, having listened to me, complain about this for six weeks. But social distancing has been well into effect here in Hong Kong. We've had hoarding.

We've had fights over a toilet paper. We've experienced it all. So, yeah, it's kind of surreal to watch the rest of the world, especially Europe and the U.S., now go through what we saw in Hong Kong and China and some other parts of Asia just six weeks ago. Yeah, surreal to say the least. It's also, of course, creating some very rapid changes in our own, you know, micro-podcasting schedule because even the guests that we're talking about and that have scheduled, we're actually having to change the topics on the fly because the original plan, the original discussion

suddenly doesn't feel as relevant as it did even say two weeks ago. Yeah, it's been challenging scheduling all-thoughts episodes. And I think the sheer speed with which markets have sold off is absolutely astounding. So I saw one analysis from Bank of America, Merrill Lynch, where they were talking about how it's been the fastest bear market on record, because we've had just 21 days from the trough until we fell 20 percent from that. The next fastest one was back in 1929. It's never that great to see 2020 right up against 1929 on a comparative markets chart. But I will say one thing that's remarkable about the current market sell-off, and it really puts you in mind of whether or not this is technically driven or at least being exacerbated by technical factors or how much of it is driven by actual fears of the economy. And to me, it could go either way, right? If you assume that big parts of Europe and the U.S. and maybe Asia, again, as we get a second wave of infections, are going to be shut down for the foreseeable future, then clearly that is a serious economic problem. But on the other hand, some of the action that you've seen in markets, these weird

moves like limit up one day and then limit down the next, these sort of self-reflexive moves, do seem to indicate some sort of technical driver as well. Yeah, absolutely. So we were originally going to schedule today's guest. We scheduled it a few weeks ago because he had an interesting thesis that uh congress or senator bernie sanders who's running for president although he is a socialist might not be as bad for pretext corporate profits as many people had expected and we're like okay that's a it's a contrarian viewpoint given the well-known antipathy towards Sanders and his brand of socialism on wall street yeah how about we get a fund manager to talk about that and that'll be a sort of classic odd lotsy, odd lots episode to just sort of talk about something kind of weird like

that. But fast forward a few weeks, times have changed for one thing. It appears now that Bernie Sanders is an extreme long shot to win given the setback that he had in recent votes and so on. And just generally, this sort of the big macro questions, whereas once a lot of focus about it's like, well, Trump's probably going to win the election. But what happens? if Warren wins or what happens if Sanders wins or what happens if Biden wins. Some of these debates are certainly far from people's mind right now. That being said, it's never a bad time to talk to a very smart macro hedge fund manager. Right. And even though no one cares anymore about our original podcast episode idea, I think this kind of gets to the technical versus fundamental point.

like how would a macro manager actually be approaching the current market? Yeah. You set yourself up to deal with moves of the size and the speed that we've seen. It'll be good. Yeah. It'll be good. Let's get right to it. So without further ado, I want to bring in Naftel Sonala.

He is a strategist and portfolio manager at EIA All Weather Alpha partners. Naftel, thank you very much for joining us. Thank you for having me. Appreciate it. So I'm curious, you know, start off, one of the things that has really been striking to people is historical comparisons. And nobody really has any sort of great analogies that they can reach for. But from your perspective, I'm curious when you look at the history of markets from a volatility standpoint, liquidity standpoint, liquidity standpoint, price action standpoint, difficulty of gauging the risk standpoint. This environment that we're in right now,

is there any historical analog in your view? In terms of liquidity is similar to 08. Like, for example, there's this interbank funding spread between LIBOR and OIS, and that is quite wide right now. And the Fed stepped in, and they're going to kitchen sink at this in terms of both balance sheet as well as, you know, we're back to the year rates. And we're still seeing, you know, library OS quite wide.

So there's that element, which is interesting. But in terms of the real economy shock, this is kind of, to me, it's kind of like a 9-11 if it were like over a very long period of time in that, you know, this is just shutting down services activity. Even in 08, you know, you still have to go out and get a haircut, right? But in this type of shock, it's, I would say the closest analog I can come up with would be something like 9-11 over a longer period of time. So what does that mean exactly for the economic impact?

Does that mean we have something more extreme, but hopefully the economy recovers in a few months? Or does it mean that we have a lasting impact? And I got to say, you know, having been in Hong Kong for, well, for all of this and seen how it plays out, even as the cases kind of ebb over here, consumer behavior is still very different to where it was at the beginning of the year. people just aren't going out as much and people aren't really working as normally. So is it going to be a short impact or a lasting impact? Right. I think there's two elements to this. One is kind of the behavioral element you talked about. And so we're tracking, we're very interested to see kind of like how the Chinese and Hong Kong, you know, quote unquote, reopening's work, you know, to what extent there's a bounce back in psychology. We would expect that this would have a relatively lasting impact

in terms of like behavioral dynamics. But then the other element is policy, right? So like how quickly do you open, reopen the economies? You know, that's the whole debate, right, between V-shaped, U-shaped, W-shaped, L-shaped recovery, host reopening. But it's not just a matter of how quickly you reopen or how durable the social distancing procedures are. It's also a function of the policy that we've already kind of had in terms of how quick were the policy makers in terms of identifying the problem and reacting to it. at least in the case of the U.S., quite a very belated response in terms of public health. And to this moment, nothing substantial fiscally.

So we would expect this to be quite a lasting shock. We expect some sort of policy in terms of fiscal policy to be cobbled together over the next couple of weeks, hopefully something substantive. But for the time being, because of how belated the response was in the U.S. from the top down, it's very difficult to, like, imagine a sparia where we kind of just rub the engine right back up or are able to, to have like a B-shaped reopening of these economies, which are really just starting now to shut down here in the U.S. So as noted, we're recording this Monday, March 16th. Futures are currently limit down. Last night, we got an emergency action from the Federal Reserve, slashing rates all the way de facto to zero,

and also initiating a very substantial asset purchase, more or less. SQE, I think we can call it, to the tune of 700 billion. As far as I could tell, it essentially had zero market impact. I was thinking when I saw it, I was like, all right, this isn't going to be enough, but it'll do something for risk appetite. Maybe we get a brief bounce, whatever. It's almost impossible to discern any positive that got out of it. How are you, how surprised are you by the swift reaction, the swift or the swift lack of reaction?

and then what that tells us. At least personally, I could speak for our fund, both the emergency 50 dips cut, as well as this cut to zero rates and expanding QE. We sold the news immediately as soon as the market's open. So I'm not surprised that we're seeing the type of response. In terms of portfolio managers, you know, given all the volatility, balance sheets,

there's grossing down across the board. There's still like, there's still an element of even dealer balance sheets appear to be constrained and they're not able to kind of pass along these lower rates to other sectors of the economy, which is why you see these interbank credit spreads remain wide for this moment. So I think what the market's saying is like, look, thanks Fed for getting, you know, getting down a zero, expanding, you know, doing what you can for, like, alleviate liquidity issues. But at the end of the day, this is going to require very, very strong fiscal policy response. And so far, you know, we haven't really seen anything of real substance. And

And I'm glad that the Fed kind of got itself out of the way quickly because now the debate goes, you know, there's no, there's no Trump versus Powell debate anymore. You know, we're down to zero and it's time for D.C. to get going. And so I think that's kind of the calculus. And so that's why I'm not too surprised that, you know, it wasn't quite enough for the market to kind of feel better. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline.

It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your... client's consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio, all investing in subject to risk Vanguard

Marketing Corporation distributor. Just on the interbank market point, we have seen a lot of weird sort of plumbing issues there. So as we're recording this, I just saw a headline float past about commercial paper, sort of drying up, which for anyone who was watching the markets back in 2008 is going to stir some really uneasy memories. But we've also had some weirdness in U.S. Treasuries, lots of talk about illiquidity there, some really geeky, weird stuff happening with the futures versus the cash market, something that was important enough and weird enough for Fed Chairman Jerome Powell to actually mention on Sunday. How much do those sort of liquidity interbank issues worry you at the moment, or how much do they factor into your sort of data

day investment thesis. As we were watching, you know, bonds just not, like, you know, usually before this crisis, it was kind of funny because you would see, like, stocks would be like flat to like barely down and bonds would just, you know, surge. And if stocks are ripping higher, bonds would be like flat. It's kind of opposite though, right? So like when we're seeing big like 10% down days in the stock market and bonds are only down 3%. That's very concerning because it reflects the fact that bonds and treasuries are not hedging risk assets on a day-to-day basis. And to me, that reflects just like a complete price-insensitive balance sheet, like grossing down among the buy side, just pure liquidations, anything that's liquid just get out of.

And the lack of capacity for dealers to absorb that on their balance sheet for a variety of reasons. combination of Basel three regulations as well as the, you know, the extra federal deficit under Trump's tax cuts and spending. And those kind of combined for this pretty perfect storm. So I think the liquidity is definitely playing a role here. You know, the Fed stepping in on commercial paper would be good. I also think, though, like, you know, these types of issues are a big deal. But even if you stem them, you still need that fiscal response, which is why I think that what would be, what would make for a good cocktail policy would be a very, very

strong this response with direct tax transfers and the Fed stepping in to buy municipal bonds to alleviate the burdens that state and local governments are going to have. You know, they're the ones who are operationally going to have to try to alleviate a lot of what's going on and their tax revenues are going to be plunging. So I think those two things are kind of important. You know, buying treasuries is good. So far, it seems like treasuries are starting to have a little bit more of portfolio hedge value. But we're probably going to need a lot more than this, even if we alleviate liquidity issues. So let's talk about the fiscal response.

And we're in this sort of interesting moment where I don't know about what's going on in D.C. And I don't understand the brains of people who have been in D.C. too long. I think it sort of rots a lot of people's brains. But a lot of smart people who I respect, who have different preexisting ideologies, say a fiscal response,

an aggressive fiscal response is necessary. Explain to us first why fiscal, not just monetary policy, is to you an important element of getting this right. And then in terms of fiscal response design, what is the best way to think about it? Well, so for your first question, you can cut rates and the price of money as far as you want, but unless folks want to take risk, it's not really doing anything. You need folks who are actually expanding balance sheets who are taking risk. in order to access the lower funding costs that are available. So in the case of what's happening right now, you're seeing things like restaurant traffic is down 50 to 75% already.

And right now I'm looking outside through my apartment window here in Dunlow, Brooklyn. I still see folks biking on the Manhattan Bridge and public transportation is still open. So it could get much worse still. And so in this type of environment, what happens to folks who, you know, you know, work at places where there's no traffic. What happens to folks who just don't have the capacity to make ends me, whether it's, you know, paying electrical bills or, you know, your mortgage? The only way to alleviate that would be direct cash transfers.

And I think that's why, you know, there's this big push now to recognize that, look, you know, there's no real risk appetite either in the markets or the real economy, no one's spending money. So, you know, cutting rates is helpful in terms of doing all you can, but it's not going to really move the needle. In an ideal world, and, you know, Joe and I have talked about this a little bit on previous episodes, but you mentioned the Fed possibly buying up muni bonds, but when it comes to the federal government, what would you ideally like to see in terms of fiscal policy? Right. So, I mean, there's a lot of proposals out there right now, and, you know, everyone kind of has kind of has. their own take, but I think the one thing that kind of unifies all them is direct cash transfers, mail some checks or like electronically credit them to account, because you're going to need

kind of like a federal government bridge loan to consumers and businesses to kind of weather the financial shock while we are in this kind of social distancing environment. So there's a variety of ways to do it and there's a variety of ways to target it, but that's the main issue is, yes, you can cut taxes and all this stuff, but primarily, especially among the most vulnerable financial financially most vulnerable parts of the population, we're going to either be furloughed, laid off, or don't have, you know, savings to kind of draw down from. It has to be direct cash transfers to those folks. Before we go any further, actually, I'm curious, you know, I introduced you as a portfolio manager at EIA All Weather Alpha Partners.

But actually, just give us a little bit more about your background. What does your firm do? It's a hedge fund, but tell us a little bit more about that and how you generally go about your framework for thinking about markets in any environment. Right. So, yes, we're hedge fund. There's a macro element to it and there's a long short element to it. So long short equity.

So my partner, he runs the long short equity side of the portfolio and I do both discretionary macro as well as on top of that, you know, because we're in all-water fund, a lot of the risk allocations, risk exposure allocations across different economic scenarios, across different asset classes. So the way we kind of work is, you know, we start from the top and we think about what are the key trends and themes in the macro economy, what are the best regions asset classes to be looking in, and we just drill down from there. My partner will be doing a lot more single name stock picking and looking for, you know, industry type of trends. I'm more focused on broader macro pictures. And so, you know, a lot of different frameworks that I utilize. A big part of it, again,

is just kind of understanding the interlinkages between balance sheets. So like, which balance sheets in the global economy are able to expand, which ones are contracting, and what does that mean to different economic indicators and financial market implications? So walk us through what a typical day looks like for you at the moment. You know, we've mentioned a couple times now that we are limit down this Monday, March 16th. What do you do when you sort of come into the office and and how do you position yourself or think about things? Well, during this crisis, we were lucky enough to be kind of on top of it. So we've, you know, we've been quite short and the long short side of the portfolio has been

grossed down. So we've been navigating this relatively well. But like in these types of environments, you know, a lot of it is just, you know, tactical trade. So the market plunges and we want to make sure that, you know, okay, we made a little bit of money there? Are we able to kind of protect ourselves from the volatility of it's just snapping right back, but at the same time not trying to just enter exit, enter exit? So just looking across, like a lot of what I do is I look cross assets to see which asset

in the moment provides the best asymmetry for upside and downside for risk exposures. But I mean, this is certainly not a typical type of environment. My day-to-day is certainly not as active as it is these days. Usually, you know, I'm just, I'm tracking macroe economic indicators. I'm chatting with folks I consider to be smart. You know, the number one thing I'm always looking at is kind of the forward rate curves across the world to see what's price into interest rates and then how does that affect asset classes across the board? But in this type of environment, it's literally just the only way to trade it is just technicals and watching the cross asset picture for signals. And it really requires kind of like a quick trigger finger

and a reliance on a little bit of instinct and gut feeling. This is another environment where, you know, you're sitting on Excel mapping out, you know, what's the right multiple for the stock market. This is a purely behavioral base case or scenario right now. So it's literally, it's 926. The cash trading in the market, of course, futures have been going on night. Cash trading is about to start. So you got to do some trades. Well, so let's see where this market opens.

I'm thinking it might actually just hit the level two circuit breaker. Let's see. If it doesn't, then perhaps there's a little bit of room before it can get there. But yeah, mostly like what I'm in our tactical side of our macro portfolio, we're quite short right now. So if the market opens and there's a little bit of trading, I'm looking to just kind of lock a little bit of profits and then trail my stop losses a little bit to tighten up the risk exposures we have. Because even if you're bearish and you're doing wellness environment, the snapback rallies are just as volatile. So we're trying to take advantage of like these limit down days to slowly start to gross our portfolio down a little bit and raise our cash levels. What do you mean when you say gross it down just for people who don't know the terminology?

What does that mean? Right. So like in a portfolio, you can be long something, you can be short something. And so like, you know, let's say your long 10 units of risk and short five units of risk. That would mean your net long five units of risk. In this environment, we're trying to reduce our exposures on both the long and short side, especially because. we were able to capture the lion's share of the move since middle late February. So at this point, given all the volatility and all the policy, all the potential

policy coming about, we're trying to just reduce our exposure on boats on the long and short side of our macro portfolio. And I would imagine my partner, he will be starting to kind of gross up. So finally starting to bargain hunts and start to buy a little bit into these little peaks. And this is especially important in terms of grossing down, especially important because, you know, there's rumors of market my close at some point this week. And I'm not really sure, you know, what's going to happen in the interim if markets close. So it looks like, you know, markets will be opening in about a minute. So let's see if they're able to avoid a circuit breaker or not.

This is really exciting. We just wanted to reiterate. I mean, we have no reporting that markets are about to close. Of course, by the time this comes out, who knows? But it has happened at times of national emergency in the past. We don't want to spread any undue rumors, but it is something that people are talking about right now as a concern, as a risk. Officials have denied that it's something imminent or various arguments for against. So just wanted to put that out there depending on when people are listening, that as far as we know, at this point, at Monday 929, March 16th, there is no actual evidence yet.

that a closure of the temporary closure of the stock market is something in the cards, but it is certainly trader, chatter to say the least, and it's getting discussed in some parts of the media. So here we go, it's almost

930, and we'll see how imminently we'll see if we imminently hit the circuit breakers. There we go. I'm not in front of a Bloomberg terminal. You guys are going to have to narrate this. Yeah, we're going to have to narrate in front of. So are we not, are we at a... We got level one. So for people who

don't know what that means, the circuit breakers and level one, what does that mean? Like, what does that tell us? Right. So there's three levels, the circuit breakers. One is seven percent down day. One is 13 percent down day. One is 20 percent down day. When the level one hits, then trading halts for 50 minutes. And then if it reopens and it gets to the level two level, which is 13% down, it's closed for another 15 minutes. And then if it hits the final 20% down level three trigger, then trading is tall to the rest of the day. Okay. So we've hit level one. We opened at 2,500, which is about 55 points lower there than where we closed with the circuit breaker last night, with the limit down last night, and about

it's 182 points from where we close on Friday. So markets are going to be closed until 945, and then they're going to reopen. And if we get to that 2358 level, which is a 13% circuit breaker level two, then they'll close again until 10. And then we'll see, are we able to avoid more? Or do we see some sort of short quees, especially if we see some policy statements or something? But yeah, there was nothing I could do. Markets just opened and closed.

So I'm available talking to you guys. Okay. So just thinking about that level three circuit breaker, which would shut down the market for a whole day, we have seen some people start to talk and some people start to advocate as well for getting that market closure, like a temporary market closure, but one that would last for more than a day just to help everyone sort of relax and maybe even help with some of that social distancing on Wall Street. what do you think about that idea? Do you think it would be helpful at this point? To an extent, I think there might be something to it, especially if we're having like a, you know, 15, 20% down day in the market.

Also, you know, after the Fed cuts to zero, you know, it's possible that like at some point, what ends up happening is you could see the way economies work is there's multiple equilibrium. So like you can see a scenario where, you know, even if we have optimal policy and V-shaped recovery and activity, which we won't even see, even then, just. just a financial hit alone could create emergent feedback loops, and it create kind of like a permanent damage, like irreversible damage. You know, there's a case we've made to, you know, shut down markets for a couple days, for a few days a week or so. As long as in the interim, there's a very, very powerful fiscal policy being crafted, especially if it's a coordinated, globally coordinated, the type of policy.

If you're going to shut down the markets and not do anything in the meantime, you know, you're just going to have like a massive, massive list. of sell orders that are just going to hit immediately when the markets reopen, Pakistan in 2008, they like implemented a floor to the Karachi stock exchange, which is effectively showing the market system. When they reopened, it was now 50%. So like you have to utilize the time in the interim. Otherwise you're just going to make the problem worse because you're just going to have

price and sensitive sell orders. And like right now, for example, because the markets are closed, the stock, you know, the stock market is closed. You're seeing oil get hit. Right. Anything that's liquid, anything you can trade. You know, that's how people are kind of shedding risk or hedging risk because they can't trade the stocks. So in the end, you could shut down one part of the market, but in an environment in which the demand is, I need cash right now, they'll just find something that's trading and sell that as a proxy.

Yeah. So, like, you know, if you shut down the futures exchanges, it gets a little bit more difficult to, you know, trade, you know, crude oil futures or like gold or silver futures. but you can always do it in physical. You know, that's still there. I don't know, I don't really know how you would do that right now, given the social distancing. But, you know, at the very least, you have a scenario where you just have, like, a massive set of cell orders that would all hit at once,

which is kind of what we're seeing with each of these circuit breakers. But speaking to your point about just raising cash, you know, like silver is down 13% to this. Yeah. Gold is down 4% to them. These aren't necessarily super cyclical assets. It's just anything that you can get out of. They exist.

They exist. And so the only safe haven is something that, like, all the liabilities are denominated. And in this case, it's just fee out currency. Yeah. So, Noff, as we originally said in our intro, the original topic, we were going to have you to discuss back before the world went crazy was your sort of kind of contrarian view that Bernie Sanders presidency could actually be good for, pre-tax corporate profits, contrary to what most people on Wall Street would assume. And I guess, you know, that specific angle is a loss some timeliness. Nonetheless, it does sort of relate to something that you said a few minutes ago about how

your sort of core macro framework that you used to think about markets in any condition, whether it's crisis or not, is about the balance sheet perspective. And thinking about interlocking balance sheets between different sectors of the economy. What do you talk about, like, what, what is the balance sheet framework that you talk about? And then how does it apply to crisis economics? Right. So, you know, there's, there's been some really, really cool conceptual frameworks that have been developed. A lot of them by post-Kanstein economics, like Hyman-Minsky, for example. The way it's kind of framed is that you kind of break down the global economy into different sectors. Like, you have the public sector, like the federal

governments, you have households and consumers, you have businesses, you have, you know, the foreign sector, right? So like the, you know, the trades. And so, like, if you're able to kind of algebraically take all of the different sectors of the economy, you're able to create kind of axiomatic models. So, like, you're able to say, no matter what happens, these, these things are kind of accounting identities. And from there, you can kind of navigate through to see, okay, you know, as money flows from one sector every time into the other, what does that mean? And then how do you kind of model out the full effect of that? So, for example, speaking to your contrarian view of like, you know, Bernie Sanders type of policies could be actually a good thing

for pre-tax corporate profit growth. There's something called the Kaleschi-Levy profit equation. I know you've had Srinivodontai on a couple times. He's kind of like, in my opinion, like the expert on this. And the way it kind of works is that you can derive. the profits in the economy, the corporate profits in the economy, by looking at all the other sectors of the economy. The things that help corporate profits are net investments, dividends, and profits, the things that curb profits are non-business saving. So, like, if personal household savings rates go up, if foreign savings rates go up, which would mean, you know, in terms of the trade accounts, and if government savings go up, which would mean the deficit

to clients, those things axiomatically would harm profit growth while corporate investments, dividends, those things axiomatically help profit growth. That's kind of how the flow of funds work. So the question becomes, when you break it down into all these individual sectors, which ones would see expanding balance sheets in terms of expanding investments or expanding the federal budget and which ones would see contracting balance sheets? And then when you look through and net them all out, you're able to derive corporate profits. So I can kind of see how that would work in semi-normal times, but I guess we're far from normal times now.

So how would that framework apply to the current situation? Is it all about figuring out where federal government funds actually flow into, or is there also a sort of movement of money between certain parts of the private sector? Right. And it's true that, like, you know, where in the private sector, money is flowing, it does matter. Like, for example, you know, wealthy folks, they save most of what they earn because, you know, they have plenty of free cash flow and that money goes into stocks and bonds. Whereas folks who are further down to the income distribution, you know, they're like

hands to mouth, you know, excess cash in their income, most of that gets respent right back into the economy. So there's different multipliers as well within the private sector. But for example, let's talk about this framework right here right now, right, for this current scenario, this current situation. Okay, so what's going to happen to corporate net investment? Well, why would you expand investments when demand is collapsing, right? So that looks to be probably going to be taking a big hit. Household savings.

Are households going to be spending or are savings rates going to rise? Most likely, they're going to be rising. Both of those things are bad for corporate profits. growth. Foreign saving, right? Are we going to see the current account a deficit expand or contract? And in this case, again, trade shutting down, same situation. And so what you're left with is government saving. You need the government to dramatically dis-sase to offset all of what I just mentioned beforehand. And so if the government has a very large expansion of a deficit and it's targeted properly, hopefully, then you can start to see the offset the corporate profits start to occur.

But without it, you can't rely on the private sector alone to do this. There's no ability for the private sector to do this by itself. How confident are you that we are at some point going to see the public sector bazooka, the big guns come out, that will have to be voted through by Congress, which is split and have to be signed into law by President Trump? How confident are you that we will see that at some point and how big do you think it needs to be to provide the necessary level of economic stabilization so that this is not turned into a Great Depression type scenario? Right. I mean, those are both tough questions. We kind of have been relatively pessimistic about the response. You know, there was such a belated response to the public health aspect of it that we didn't really anticipate. the White House would be necessarily really on top of the wall in terms of the size and scope

of a fiscal stimulus required. However, at this point, there's got to be some panic in D.C. And not just in the White House. I would think at some point, we're going to see a quite strong response. You know, the way we've been kind of thinking about it is like kind of like the trade deal, like phase one, phase three. Yeah. So like the phase one, we kind of got like, you know, the blowsy bill, which, you know, it's just not going to move the needle that much. Like, you know, we're talking about only 20% of the population is really going to get paid sick leave. Right. And it's just not going to be, there's no like helicopter drops us and that.

We probably get a phase two in response to the recent market volatility. And hopefully there's some sort of global coordination with that. If it surprises the market, it's enough. Perfect. We don't need a phase three. But I wouldn't be surprised if it kind of creates a squeeze. higher the markets and then the markets ultimately are still, you know, there's still risk to be shed and it goes a little lower and then maybe we get a phase three where, you know, you'll all out

bazooka. Originally, you know, like back in, back last month, you know, we were saying if we do implement social distancing quick enough, then, you know, maybe something like 200, 300 billion could be sufficient because of just how belated everything has been. I mean, even in New York today to this moment, there's really not that much testing being done. I know folks who are symptomatic and being turned away. Because of how late the response has been, we think by the day it's growing. So, like, you know, the IMF just announced or suggested they're going to do a trillion dollars of a package.

You know, maybe we're talking, you know, like 2008 part type of numbers. You know, at this stage, it really is just path dependent. the way to do it is just aim big and go. And like, you know, don't worry about if it's too big. There's no inflation in the economy, which is the constraint of this stuff. And it's not like you can't take it back or retract some of this stuff in the future. But in the interim, you know, I would say definitely, you know, multiple hundreds of billions and growing by the day. You know, the first fiscal package that was suggested was $8.3 billion.

And I was on a podcast last month with the colleague of yours, Mike Regan, and I was saying, you know, add a zero to that minimum, right? If you look at 9-11, you know, you look at these types of shocks, you know, even Hurricane Katrina and Sandy, you know, we're 50 to 100 billion dollar packages. We have a much, much bigger shock. And we're just not there yet in terms of the fiscal response. The markets are perhaps scaring them into one. We just reopened. We're now at 2419. So it looks like we are going to have a little bit of a little bit of.

bit of trading for a time being. Let's see if we get to level two or not. We're down about 10% right now. The impulse macroeconomically from China is very different than it was in 08. And it's also very different than it was during SARS. So the reopening of China's economy is going to be really important to gauge, you know, what's the long-term impact going to be like? Are there behavioral shifts that occur and what's the duration of these social discipline procedures? Yeah, I got to say, We did get some China eco data out today that was much, much worse than forecast. So industrial output down, I think it was 13.5% for January and February. And the forecast was for a 3% drop.

Obviously, that's backward looking. But, yeah, all eyes on China for the foreseeable future. And make sure to wash your hands, guys. Yeah, that's the key thing. Good last message. Absolutely. Thanks so much for having me, Joe and Tracy. Yeah, that was fantastic.

Really appreciate you joining us. And that was pretty fun watching one of the most historic market open in real time with someone trading it live. So really appreciate you taking the time to do that with us. Absolutely. Thanks, Noff. That was great. Joe, that was really fun, as you said.

I'm kind of disappointed that we immediately hit the circuit breakers and we didn't actually get to trade anything. But I guess that's unfortunately becoming the norm nowadays. Yeah, no. it totally is. I mean, it's just like, I don't even know where to begin with talking about markets anymore because the size and scope

of the moves are so far outside of the bounds of anything that I'm used to that I've covered in the last 10 years. I was hearing another fund manager talk trying to reach for analogies. He mentioned novels, the post-9-11 analogy,

but also shades of the great financial crisis and the euro crisis and the long-term capital management blow up and the flash crash that we had in 2011 or whenever that was. So there's like, it's almost like people can't find any analogies for what's going on in this market. And it's like the sum of all analogies, which explains in part why the speed of the decline of the speed of this bear market is really just unlike anything we've ever seen before. Yeah, absolutely. And I think that's where the technical versus fundamental stuff becomes really, really important. And the thing that worries me at the moment is the fiscal factor that we've all been talking about, the notion that if the government can get its act together

and announce the big bazooka that the market seems to want it to announce, that only works if people genuinely, if markets are genuinely moving because people are concerned about the economy. and that's certainly part of it. But if markets are moving because we're getting a weird sort of liquidity-driven dynamic or a value at risk shock, I think it becomes a lot harder to stop those sort of self-reflexive moves. That's what worries me. But on the other hand, markets aside, we know that just what we've seen so far already, have been absolutely devastating to huge swathes of the economy,

especially anyone who works in tourist industry, hospitality. I mean, those are real. The numbers are, I read in the Seattle Times this weekend, 50 restaurants already shut down. They called it the Great Recession on Hyperdrive. So no matter what's going on in the market, there are people already massively hurting for real who could use serious support right now. Right. Stopping the sell-off in markets is clearly not the first reason or the primary reason that we should be

implementing some sort of fiscal support at this moment in time. Yeah, exactly right. It's rough out there. But on the plus side, and, you know, we're always trying to find the silver lining when we can, as Knopf was saying, we are starting to get sort of return to normalcy in China and in Hong Kong. There's an open question about whether or not we're going to get a second wave of infections as the disease sort of heats up in Europe and the U.S. but if everything goes okay, we should have some idea of how and to what extent things start

returning to normal after this type of disruption. Exactly right. One other point I wanted to make an awful mention, you know, we've had Srinivovas of the Jerome Levy Institute a few times and his thoughts are helpful. I also have been thinking about like some of our conversations with the Zoltan Pozhar and his point that it's like, you know, the sort of traditional economic models. that mainstream economists use, DSG, e-models that sort of assumes some sort of equilibrium. We know they fail massively all the time.

And Zoltan's perspective, it's like, it's all about the balance sheet, it's all about who has money and who needs it, is really what comes into view in times like this. Because the only priority that most economic actors have, whether it's a company or a household, is who get, I want cash. Everyone wants it. Everyone wants to hold on to cash. You want to survive. Yeah. Cash is gold. That's how you, you know, it's like it's, as Olten said in one of our own episodes, he's like, cash or repo is how you live to survive another day. Cash is how you survived another day. And when you see the liquidations in gold and the liquidations in oil and the liquidations in selling anything off, we're in this environment in which the name of the game for everyone is survive another day by getting their hands on cash.

Right. So even if there was a good investment thesis. for gold at the moment. And, you know, I'm not going to say whether there is or there isn't, but even if there was, you could still experience a massive move down because it's the only thing that's trading at the moment and the only thing that you can actually convert into cash. And again, that's how we get to this position where we are seeing all these weird and somewhat unexpected moves in the market. Absolutely right. Should we wrap it up there? Yes. On that happy note of complete randomness. liquidity issues and meltdowns in markets.

This has been another episode of the Oddlots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Wisenthall. You can follow me on Twitter at The Stallwart. And you should follow our guest on Twitter if he'll let you follow him. He's Nawful Sonala at Nolfel Sonala at EIA All Weather Macro Partners. And you should follow our producer on Twitter.

Laura Carlson. She's at Laura M. Carlson. You should follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines. in-depth analysis and big interviews, all the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture.

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