The Compound and Friends - Unlimited Economic Stimulus and the Yield Curve Indicator

Episode Date: May 8, 2020

Unlimited Economic Stimulus: What Are Your Thoughts? Join Michael Batnick and Downtown Josh Brown for another all-new edition of What Are Your Thoughts? as they discuss:  - US stocks just had their best monthly performance in 30 years  - what was the catalyst?  - Has Warren Buffett's magic touch faded away? Why Berkshire's annual shareholder "meeting" was so underwhelming.  - Josh got the antibody test. Why wouldn't everyone? Maybe because it doesn't mean anything.  - Is there any limit to how much money the Fed and Treasury can throw at the economy? Do we have any choice?  - Michael Jordan talked about the downside of fame in this week's 'The Last Dance' - the press tears our idols down on Wall Street too.  The Yield Curve Indicator is UNDEFEATED Josh here - Okay, so now we're officially in recession. What happens next? How long will this go on for?  Last fall we had Professor Campbell Harvey, partner and senior advisor to Research Affiliates, on The Compound to discuss the inverted yield curve, an economic indicator he had discovered in the 1980's. Cam explained that this indicator - when Treasury interest rates on shorter-term bonds rise above those being paid on longer-dated bonds - has been successful at predicting recessions 7 out of 7 times with zero false signals along the way. This recession means it's now 8 for 8!  Join us for a discussion about the way the signal should be thought about now with the Fed's overnight rate back at zero. We also discuss whether or not the economy is bottoming, what has to happen for the recession to end, and why this environment is like nothing we've ever seen before in history. Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello, and welcome to an all new edition of What Are Your Thoughts? I'm here with Michael Batnick as always. Michael doesn't know what I'm going to ask him. I don't know what he's going to ask me. Stick around. Let's see what's happening. Welcome to the Compound Show podcast. Each week, we let you in on some of the best conversations we're having about markets,

investing, and life. Just a quick reminder, the hosts of this show are employees of Ritholtz Wealth Management. All opinions expressed are solely their own opinions and do not reflect the opinion of Ritholtz Wealth. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Okay, here we go. Did you get a tanning salon in your house? You look dark. No, I've been on the bike a lot and the pool opened. So I'm getting color. I mean, what else is there to do? All right, let's get into this. Your post was awesome about what's the catalyst. And people

will be studying some of these stats for years to come. But you make the point that April was the best month for stock market returns in 30 years. And there was absolutely no what you would call catalyst to explain it. So somebody who doesn't live through this and reads about it 20 years from now, they're going to be like, I don't understand. And I just want to read this one part and then have you react to what you yourself said because I just think it's so amazing. In the five weeks from February 20th through March 19th, there were 1.1 million jobless claims and the stock market fell 29%. In the five weeks since, there were 26.5 million jobless claims and the market rallied 28%. And you make the point that some of the best days during that month happened coinciding with the worst news.

For example, yesterday we got the worst GDP number since the great financial crisis. The S&P gained 2.7%. So talk about this. What made you think to look back at each date that we rallied and talk about the lack of catalyst? Okay. So I'm going to quote myself a bunch here. This is kind of weird, but I called this the investor's cognitive asset liability mismatch because we're looking at the news of the day and then we see the price and we're like, what the hell? This doesn't make any

sense. Even though we know that stocks are forward looking, it's just weird seeing it on the screen and looking down and seeing that happen. So I made the point that people joke on Twitter, stocks rise as, of course, stocks aren't rallying because we had terrible numbers. They fell in anticipation of them. So it's like how quickly we forget that stocks fell 35%. So they front ran this. So they front ran this. Yo, that's like the recipe to get 100 likes on a tweet is to be like blank bad news and the Dow is blank up whatever, 1%. Makes sense. So in March – Hashtag logic.

In March – Look how smart you are. And always when stocks are falling or whatever, people always seem to ask what's the catalyst. I mean we've been on phone calls where we've heard people ask what's the catalyst. And the market is not a biotech stock. Like nobody – and if you knew the catalyst, they would be in the price already. Yeah, no. What's the catalyst that only I can know?

Yeah. Right. OK. It's hard. know. It's hard. It's incongruous because the news sucks so much and it's the best month for stocks in 30 years. And even though there's an explanation for it, which I think you lay out very well, it's still ridiculous. No matter what, it's still – I understand the context, et cetera, but I also get the skepticism that non-market people look at that and say, what planet do I live on?

Oh, I totally get it. This whole thing is going over there. I totally get it because I get swept up in it too. How could you not? Right? Even though you know that the market is not responding to today's news, it's still hard to look and feel that disconnect. All right. like you know look and and feel like disconnect all right i want to talk to you about um about

the berkshire meeting and you wrote an amazing piece on buffett so kudos to you uh what or what is your take on all the takes i only read one other person's take um sorkins i think he has it right um i just i don't want to say it was depressing but like i'm a huge warren buffett fan i've read every one of his letters like i read the whole book of his letters um and i've read them multiple times and i've read the biographies and i've learned so much and just seeing seeing him as a seller during the fastest bear – nastiest bear market ever. Like we were down 32% in two weeks and he wasn't buying. And he already was sitting on $130 billion in cash. It's like if that's not a moment that you want to really put money to work, then like what has to literally happen?

Down 70%. So that was kind of weird. Seeing him puke up the airlines at the bottom. He was the number one shareholder of the four major airlines. I don't know if he sold the exact of these other episodes in the history of Buffettology where he was greedy when others were fearful. He was doing these incredible deals when people were desperate for money. Let me ask you a question. So go ahead. Let me give you two theories of why I think – and I didn't get into this in the post. First theory is he's spending too much time with fucking Bill Gates and Bill Gates is not paranoid but like super vigilant about it's going to get worse and it's going to

come back stronger in the fall and it's not even going to leave during the summer. And he's been right about talking about pandemics for years now. But maybe Buffett is listening to him too much and it's affecting his investing. The second theory is just like he's 89 and why bother? Like what's the difference if he bags another elephant? Like, you know, whatever. And maybe that's an argument for the people that are going to succeed him to step up faster. But either way, it's depressing if you're a fan. So that's where I am.

Here's a counter take. Do you think that the rebound just happened way too quickly, that he was getting ready to swing and he just lost it? The pitch was too fast? That's another thing that people are saying. And maybe that's a better theory than the other two I just laid out. And combine with like the Fed acted so fast. There might not have been an opportunity. That's what I'm saying. So Charlie Munger told Jason Zweig prior to this weekend that the phone wasn't really ringing and that might have to do with the fact that the Treasury and the Fed were acting hand in glove to enact programs within weeks. Well, Buffett said the phone started to ring and then the Fed did what they did.

Yeah, right. So there was more time to craft these types of convertibles and preferred stock rescues, and this time there really wasn't. But we're two months into it. Well, I was about to say, I know Buffett does know the deals in two seconds i don't really know how true that is but this happens so quickly and we have to we can't lose sight of the fact that the market peaked 60 days ago 70 days ago like we were in with this barely started so i think that if the market rolls over again he'll probably probably – I mean he'll probably.

I have no idea. I would imagine that he would be active but that doesn't change the fact that it was very surprising to see him dump all of his airlines. Question to you. Do you think it's possible that in three years from now, we say, wow, great sale by Buffett and the airlines are either nationalized or they're down 50% still from here? Yeah. If the airlines have to now keep six months worth of revenue in cash for events like this in the future, then they're not a viable business. Then they probably have to be nationalized. Another super depressing thing to think about. We know that Buffett, if he does do a huge dip buy, it's not going to be an oil because oil went to zero and a lot of the equities were down like 80% from their highs.

So if he wasn't buying them, and I know he owns Occidental, but if he wasn't out buying Chevron and stuff at the prices that those stocks were selling for that he's never going to. So I think we could check off like a big energy producer buy from the list. Buffett, please don't make me look stupid by acquiring Chevron tomorrow. All right. Did you get an antibody test?

You didn't? Did Robin? No. Okay. I think they're total bullshit. I got my results back this morning. And I think that everyone should get the test because every one of them isn't bullshit. There are 120 tests currently under – I think the FDA said is like, okay, this is a real test.

And all of them work differently. All of them are being collected differently, analyzed differently. There's 120 different companies offering them. And none of them are peer reviewed. None of them have been around for more than a couple of months. We don't know long term that they actually really detect anything. We don't even know if the antibodies stick around for long enough for it to be significant. Meaning with other coronaviruses, the antibodies will be present in your system for two to three years. In this case, we don't have two to three. We just really don't know. You might need to get one of these every week for it to be valid. So anyway, I tested negative

and Sprinkles tested positive. So what the fuck is that? How is it possible? We haven't left each other's side. Like literally, I'll like take a drinking glass from her and take the last sip of it. So I don't get it. So one of us I think is false. But that's my take. Are you going to get one? I wasn't planning on it.

Why not? Aren't you curious? No. Andrew Cuomo said that based on the last widespread test that he saw, up to 12% of people in New York State

had coronavirus. Don't you want to know if you have, wouldn't you feel more emboldened to get out and do stuff if it turns out that you actually had it?

You know, I got to be honest. It has not even crossed my mind. You should go get it. You know where they have it? At CityMD. Okay. But aren't there like a bunch of people? Aren't there a lot of people there? Yeah. And again, we don't even know if it works. But like, aren't you? You're not curious? By the way, it took five minutes.

So, you know why you see people lined up on the street? Because they're not letting anyone inside until it took five minutes. Okay. So you know why you see people lined up on the street? Because they're not letting anyone inside until it's their turn. So I don't know. All right. Just a thought. What do you got? $3 trillion is the latest news that the treasury is going to be pumping.

For what? Stimulus. Municipal. Relief. I don't know exactly where it's going. But is there no limit? And I'm not saying it's good, bad, or otherwise. I don't know exactly where it's going. But is there no limit? And I'm not saying it's good, bad, or otherwise. That's not my thing.

But is there no limit to how much money we can print? I don't know. All right. This is the way to think about it. You're going to spend the money anyway. So how would you rather spend it? Up front where you can prevent catastrophe or afterwards in cleanup when the damage is already done? I'm not –

That's your choice. I'm not – There's no good choices here. I'm not necessarily disagreeing with what's happening. I'm just saying – I'm just like theoretically, is there no limit to how much money we can print without there being some side effects? Like theoretically? Yeah.

Well, the MMT community says there is no limit. I don't know that I agree with that. I don't see how that's possible. However – How about this? However, they keep printing more money and rates on treasuries keep going lower. So like where is that threshold? When do we cross it?

Where all of a sudden the bond vigilantes start selling treasuries because they don't think we could pay it back. I don't know. 10 trillion, seven trillion, I don't know. Here's a potential- Looks like we want to find out. Here's a potential risk

and this is a fantastic risk that I think everybody would sign up for is that the virus just disappears in two months. all go i know i know we all go back to work we all go back to work and everybody's got this money and then the economy overheats inflation picks up and obviously like all that so it's like the best case scenario that's the best risk possible well a lot of the programs that have been enacted are temporary in nature. So it's not like we're doing permanent pumping forever. I'll give you an example.

The extra $600 benefit for unemployment goes away in July. The municipal liquidity facility, aka MILF, I can't believe they named it that, is targeting maturities on muni bonds of up to 36 months. So it's not active in the back end of the curve, meaning it's not like states and cities now have this facility and they could just do whatever they want, launch all this spending. It's like a lot of these things are very targeted and then a lot of them are poised to run off over time. So it's tough to say like, all of a sudden, we're going to have this huge spike in inflation. I think you're getting supply side shortages and things like meat, but those seem temporary. We obviously can't know what potential unintended consequences might happen from this. But I think

we definitely know what would happen if we didn't do anything that would be a catastrophe okay right that's fair um and and i think that's the big picture and then everyone's saying like there's all these mistakes being made and well yeah obviously it's just what we're people are expecting everybody to be happy perfect execution that's never never going to happen. No, of course not. No one's going to be perfectly satisfied. But the question is do you want to keep people in jobs or do you want to let the chips fall where they may, have people get laid off, and then hope that they'll find new jobs? And I think we've resolved to do the former and hopefully in hindsight that looks like it was the right decision.

and hopefully in hindsight, that looks like it was the right decision. And regardless of what the cost is, there's an even greater cost, not just in dollars, but in societal cracks in society. There's an even greater cost than having people lose their job and not get a new one within three months, six months. Believe me, it's much worse. And they know that empirically. The New York Fed just put something out. It almost looks like they did this research just to back up what they're doing, where they looked at the rise of votes for extremist parties in Germany during the hyperinflationary and unemployment period that I guess followed World War I.

And then like in the early 30s, like why were so many people voting for, you know, Hitler and other extremists? And like they were able to control for a lot of things and say, yes, when people are desperate, their politics reflect that. So the timing of that was interesting. It dropped yesterday like a bomb on social media. But I think we have to pay attention to that stuff. I want to ask you about Michael Jordan, the episode Sunday Night. They got into some of the dark stuff where like he was at his absolute peak. McDonald's, Nike, commercials on the air every five minutes, Gatorade, Be Like Mike. And it was almost like he was put on this pedestal.

And his comment was, once everyone sees your face everywhere and how successful you've been, it's only a matter of time before they want to tear you down. The media loves to do that. Everyone loves that story arc, the fall from grace. And he's like, it was just my turn. Um, I think that applies to like investors. And to investors. And without mentioning names, you and I saw a reporter do a story about outflows. And they happen to, in the headline, mention somebody who's well-known personally, even though the outflows from his fund were like a tenth the size of the outflows from another fund that you never heard of. And it's like, well, why was his name in the headline? Because everyone knows the guy. And it was like a way to get people to click. I don't know.

Do you think that's like, Dalio talks about this. Do you think that has a big effect on investors and just like this idea that don't be too successful, everyone is going to hate you? Is anyone immune to that? That's universal. I wrote a piece a few years ago called But Not Too Much where you love to watch the underdog succeed. But there's a level where you don't want them to have too much success where it's like, all right, you root for Tom Brady. Look at this guy. After a second Super Bowl and then the third – by the fifth, it's like, all right, enough already with this guy. We get it.

So people love to build heroes up only to tear them down and then they love the redemption story to follow. I mean that happens in every field all over the world. Right. So I think people forget that it's like a human being still. And you look at somebody who's been really successful and you say like, well, I can say whatever I want. It doesn't touch them. They hear it.

I mean, obviously, this is like such a microcosm. But I blocked a jerk the other day on Twitter, which is fairly rare for me. I tend to mute in a bull market, but I've been blocking in a bear market because people are getting much nastier. And he sent me an email and he's like, hey, man, I'm sorry. I didn't even think that you would see that. So I think that people behave, especially on Twitter, like they're in a car. I don't even go on Twitter anymore. I don't know how you do it.

Like they're in a car. You know what I mean? There's no ramifications. It's not real because you're not – Like they're in a car. You know what I mean? Like they just – there's no ramifications. It's not real because you're not – and they would never say that to your face. I was watching last night Trey Young was on – actually on like Twitter Live or whatever it is. Ernie Johnson was talking to Trey Young and he's asking him about how much his family means to him or something like that. And you should have seen the comments. Nobody gives a shit.

Better questions. No one cares. And it's like, why are you on this why are you wasting your time what's wrong with these people but that's but nobody's immune from that yeah i i once i once people hate i want people hate warren buffett like hate thisises. There is nobody who is universally loved. People hate Jack Bogle. People hate the Dalai Lama. People hate the Pope. Like, nobody has a

100% approval rating. Yeah, like Buffett's gonna, Buffett did the giving pledge and Gates too. Combined, these two guys

are gonna give probably $100 billion or more to charity. But he hasn't been – he hasn't been here. He hasn't been here in 505 years. He's a fraud. Right.

Oh, and there's a Gates conspiracy where something to do with Microsoft is trying to get control of Tyson Foods. So Gates is peddling misinformation on – like people are nuts. He actually built the virus in an Excel spreadsheet. I don't know if you knew that. Right. Anyway, people are insane. Where were we? What do you have?

Oh, J.Crew, Chapter 11. So it's not going away. But between J.Crew and the other company that owns Madewell, I believe it was, 483 locations. So obviously, this is not the first one. What the hell is going to happen to retail and what is going to happen to all the mall real estate? What happens? I think we'll store barrels of oil in the mall.

I don't know what else to do with it because even without the coronavirus, it was very tough to be a mall retailer and the malls were getting by with things like movie theaters and entertainment like the Source, for example. Dave and Buster's arcades. So Dave and Buster's is

at the Source. It used to be a mall. Fortunoff's used to be there. It's an abandoned mall now. There's nothing there right now. No. I think – P.F. Chang's. Yeah. Like P.F. Chang's is there.

So that happens all across the country. Dude, you know what? So Roosevelt Field is an A mall, what's called an A mall. It's owned by Simon Properties. I think Simon Properties has 49 malls across the country and I think they're all considered A, meaning like an A mall would get like the highest end stores. I think Simon Properties is the biggest owner of commercial real estate in the country and I think they're all considered A, meaning like an A mall would get like the highest end stores. I think Simon Property is the biggest owner of commercial real estate in the country.

Could be true. Ticker is SPJ. The stock has been cut in half. So read. Anyway, Roosevelt – here's what Roosevelt Field did. Five years ago, they did this massive remodel and they put in Neiman Marcus, LOL, also bankrupt. And they doubled the size of the food court or maybe even tripled. And then they built all this experiential stuff onto the outside of the mall, like literally adding additions to the mall that

were entertainment. Like they weren't doing that to make room for new stores. They were doing that for more restaurants. And then they went to the existing restaurants to re-up their leases and they went to Houston's, which everybody loves Houston's. Like the best.

Houston's like the best chain restaurant ever, I think. So they went to Houston's and Houston's like, what are you f***ing kidding me? You just added 70 restaurants. Why would we pay you the same amount per square foot when you just brought

all this new competition literally on top of us? So they're gone. So there's a limit to how many restaurants and experiential things a mall can add. Just like there's a limit to how many ads Instagram can show you before you're like, all right, bye. I'm done with this now. Just like there's a limit to how much money the government can print before you're like, all right, bye. I'm done with this now. And just like there's a limit on how much money the government can print before you're like, I want Bitcoin. Or maybe not. Or maybe not. All right.

That's all I got. You got anything else? Nope. I miss you. Okay. I miss you too. Although I saw you two days ago. What were you doing?

You pushing the stroller? Going to bagel boss. Curbside. Going to bagel boss. All right. All right. Good for you. All right.

Listen, let us know your thoughts on these topics. We want to hear it. Is there a limit to what the Fed can do? I don't know. Let's find out. Let us know below what your thoughts are. Go ahead and give us a like. Subscribe to the channel. We're going to bring 40,000 subscribers and I want you to be one of them. We will be back very soon. Hi, everyone. I'm here with Campbell Harvey. And Campbell has been on the Compound channel before. The last time Campbell was here was this past fall, talking about the yield curve indicator, which is an economic indicator that he pretty much invented, discovered, and has been right seven out of seven times in being able to predict recession. This is the eighth time it appears. So Campbell's indicator is undefeated. We're going to talk about how he knew he was right this past fall and what he told us on the compound and what he thinks about the current environment, how we should be thinking about what we're going through, the way forward, when it might end, et cetera. So Campbell, welcome to The Compound once

again. Great to be back. I want to stick with, first of all, what we were talking about from last fall. And we have a clip. Let's just show the clip really quickly. It is inverted before the last seven recessions, and it hasn't rendered a false signal. So right now people are looking at it very seriously. The track record's impressive. It's flashing code red since June the 30th. Okay. So look how handsome you are, first of all, in that clip. Still handsome. And you're in North Carolina right now? I'm in North Carolina. I'm at home. Okay. And you're in North Carolina right now? I'm in North Carolina. I'm at home.

Okay. And you're a partner at Research Affiliates? That is correct. Okay. And what do you do at Duke University? Give everyone your official title. So I'm a professor of finance at Duke University. Okay.

And you've been there for how long? A few years. Yes. Okay. All right. All right. for how long? A few years. Yes. Okay. All right. All right. So last fall, you were basically talking about this idea that when the yield curve inverts, it's not a matter of if we'll have a recession, it's a matter of when. And you are now eight for eight. So the indicator that

you came up with in 1986, in the process of doing a dissertation is now undefeated for almost four full decades. First of all, how do you feel about that? How do you feel about your creation and how it's endured for this long? Actually, you always want a false signal. Nobody wants a recession. So you have to be objective about it. Look, it was code red June 30th of 2019. And look, the recession indicator by the yield curve wasn't the only thing that was pointing to a recession. We had

a recovery that was historically long, more than 10 years, looking back to 1850, anything like that. And the longer the recovery, the higher the probability there'll be a downturn. On top of that, the Duke CFO survey, 50% of CFOs thought there'd be a recession in 2020. And that went to 80% if you included the first quarter of 2021. So there was a widespread perception there was going to be a recession. And I certainly hope that CFOs and CEOs and consumers took that message and became a little more frugal because then obviously the COVID-19 hit. Obviously, my indicator is not forecasting a pandemic. The pandemic just happened. We will never know if a recession would have happened if there was no pandemic. Well, let's wait. Let's back up because that's very important. You did not come on in October

and say there was going to be a pandemic from Wuhan, China that's going to spread across the world and cause a recession. What you basically were saying was, look, the market signals, the bond market signals are telling us that risk aversion is already on the rise and doubts about future economic growth are already here. And so what is the trigger for the recession? I don't know, but I know based on prior instances of yield curve inversion, we're on a code red right now. And that trigger will become apparent soon. I mean that you were right. Yeah. So again, it is eight out of eight. It's also important to note that there hasn't been a false signal yet. So no false signals.

So you can get eight out of eight, but then have like eight false signals. So you have 16 signals and eight of them are correct. So I think that's important also. Again, the pandemic event is nothing that the yield curve was forecasting, but you're correct that the flight to safety, the flight to quality was going on in 2019. People were expecting something to happen, either a recession or much slower growth. And then we got walloped.

Right. It just wasn't showing up in the S&P 500 because the companies that dominate the S&P were going to do fine either way. So that fear was elsewhere. So exactly. You can't just look at the stock market. The stock market is an unreliable indicator of a future recession. We've seen so many false signals both ways, where you go into a drawdown, and then there's no recession. Or the markets have an all-time high, and then you go into a recession. So the stock market is a much less clean indicator, even though it's strongly influenced, obviously, by economic activity, is just an unreliable indicator of future economic growth.

I want to back up really quickly and do two things. I want to get a quick definition from you on the yield curve indicator for people that may not be particularly focused on economics and haven't come across that before. And then I want you to just walk us through the timeline of when your indicator was triggered and how long until recession in this particular instance and where that falls historically. So first of all, somebody came up to you on the street and said, I'm not an economics student. What is the yield curve indicator? What's the easiest way to explain that for people? curve indicator? What's the easiest way to explain that for people? Yeah, sure. So the yield curve is simply the difference between a long-term interest rate and a short-term interest rate. And in my

dissertation in 1986, I looked at a 10-year treasury yield relative to a three-month treasury bill yield. So usually it's the case that longer-term interest rates are higher than short-term rates. We see this all the time, except in certain periods of great uncertainty where you see the reverse. So the long-term rate actually goes below the short-term rate. So that's unusual. rate actually goes below the short-term rate. So that's unusual. And my dissertation showed that that was actually a very accurate forecaster of a future recession. And this happens before the recession, well before the recession. So for someone watching, that makes intuitive sense. If I lend you money for three months,

the interest rate that you're paying me on that loan should be lower than if I lend you money for three months, the interest rate that you're paying me on that loan should be lower than if I lend you money for 10 years because I'm taking more of a risk saying pay me back in 10 years. So you should be paying me a higher interest rate to lock up my money for that long. So that makes intuitive sense for people. And then when that reverses, it's telling you people are way less confident about the economy further out than three months. Exactly. And the indicator is very clean. And indeed, most of the action in the inversion in 2019. So this was happening in the second quarter of June 30th was like the trigger. Yeah. So June 30th is the end of the quarter. And my indicator requires that the inversion,

not just one day, but there's an average of an inversion over a full quarter. So, so that's the June 30th date where I went on the record saying code red. All right. Well, you nailed it. And one of the things that Michael Batnick and I tried to do in that conversation was to give you all the reasons why people say, don't worry about the yield curve indicator. And I think you successfully had a good response for each of those reasons. It was fun playing devil's advocate with you. And so I think people should go back and watch that. I want to ask you a couple of things about the pandemic, the situation we're in now. But I just want one follow-up question on fixed income. Is the yield curve indicator going forward going to be hampered by the absolute level of interest rates?

So the Fed has basically gone back to zero now. Does that make the signal tougher to read or less relevant? Or is it even more important than ever? Like what do you think about your indicator in an abnormal period of time like the one that we're in for rates? So I would say, and the answer to this question is it's not easy to answer because it depends on the sort of scenario that we go to a Japan-like scenario where essentially the only buyer of Japanese government bonds is the Bank of Japan, then I believe that the yield curve indicator would become not useful. So if we go to that scenario, I'm very worried. We're not there yet, even though the Fed has strongly intervened in markets. But as we talked about last time, the Fed has intervened before.

And indeed, the Fed was relatively more powerful in terms of the yield curve in 1960s and 1970s. So the Fed is always going to be adding noise to this indicator. to this indicator. So I would say going forward, given the history, that the yield curve will be an accurate indicator with the proviso that we don't go into a Japan-like situation. Indeed, the yield curve today is upward sloping, suggesting that there will be economic growth, we'll be out of this recession relatively quickly. All right. So let's talk about that, growth will be out of this recession relatively quickly. All right. So let's talk about that because I think people really want to hear your take on the situation we're in and what you think these types of signals might be telling us about the market's expectations for how long it goes on, how much worse does it get, when does it improve? So what are your thoughts on the topic?

How much worse does it get? When does it improve? So what are your thoughts on the topic? Yeah, so this recession is totally different than the last seven recessions in that- I would say. Its cause is biological. That's the key difference. So the global financial crisis, the cause was a structural problem with our economy. Our banks were acting like hedge funds with extreme leverage.

And a small financial event caused a breakdown of the entire system and a recession that was long, painful. And even when it was technically over, we didn't know it was over. So unemployment peaked after the recession was actually over. And we didn't get back to the level of unemployment that we had in 2007. So unemployment peaked after the recession was actually over. And we didn't get back to the level of unemployment that we had in 2007 until 2000. It was like nine years later. So 2016. Yeah, the stock market, right.

The stock market bottomed in March of 2009. Unemployment kept getting worse until I think the peak was September or October of 2009. And then the stock market, you don't get a new high until March 2013. And GDP takes longer to recover. Right. So it's a balance sheet recession. It's a busted debt bubble. It's very, very different. This is almost more like – this is my opinion. Maybe you don't agree. This to me feels more like it's a natural disaster-driven recession and no two are the same but we have examples of those. The big example that everyone thinks about is the earthquake in 1906 where the rescue effort cost a lot of federal money. It didn't really affect people living across the country, but

it was a market event. I don't know. What's your take on this being a natural disaster-driven recession more than a financial recession? Yeah. So this is like a key insight. So in the global financial crisis, we didn't know when it was going to end. So it just went on and on. The policymakers kept interest rates low for an abnormal amount of time. It just went on to uncertainty. So companies didn't want to hire people. Companies didn't want to make capital investment because they didn't know when it was going to end.

So what you're saying about natural disaster is exactly appropriate. So there is an end to this crisis, and the end is triggered by another biological event, and that is a pharmacological solution to mitigate the fatality rate or a vaccine. And people fully expect, and I think financial players in the market fully expect that a vaccine will be deployed by the first quarter of 2021. So you see that there's an end to this. And the vaccine is literally an all clear. It's a little different than an earthquake because earthquake hits, maybe there's some aftershocks, but it's over. This one is longer because we actually need to find a cure in terms of the biological problem. All right.

So put the natural disaster comparison aside. What about this one? People say this is like 9-11 but daily for nine months. That's very dire. But is there some validity to that metaphor or not really? Yeah, I don't think so. And let me tell you why. So 9-11 is kind of analogous to right at the beginning of this crisis, where there was a large amount of uncertainty. We saw these exponential curves in terms of new cases and death rates and people extrapolate it,

that it could be incredibly dire with millions and millions of people dying. So we now have become knowledgeable about epidemiology and the sort of curves that are common for viruses and stuff. I'm practically a doctor now. Right. Everybody has to be. So if you're in finance, given the nature of this crisis, you need to understand the basic concepts of epidemiology. So you need to understand what flattening the curve actually means. You need to understand what's going on in terms of the clinical trials. This is crucial for finance. So everybody needs to be schooled in this. So I do think that it's different now in that we do have this expectation.

We've got a number of actually good news items for a change in terms of the biological progress. And I think that that indicates that this will be, obviously, historically unusual recession in that the drawdown is so fast. I call it the Great Compression, where you get essentially the unemployment of an entire longer recession in one quarter. This might be the only recession in history where the entire world agrees on the start date. In real time, when Adam Silver canceled the NBA season, I think maybe it was like a night in early March or maybe late February. maybe it was like a night in early March or maybe late February, but it was like that one moment where everyone said, okay, this is the real deal. Life as we know it is over. And the stock market repriced for that in 20 days, we lost 30%. So it was like the first

recession ever where everyone just automatically agrees, oh yeah, recession, that's it. Usually, it takes months for everyone to agree. No, not months. It could be even longer. So it's the official people that date the recessions. It's the National Bureau of Economic Research. And sometimes they date the beginning of the recession after the recession's over. That's the sort of lag that you look at. So this one, you're exactly correct. It will be the easiest recession to date in the history of all of dating. March 2020, that's it. Yeah. So February would be the peak and it starts in March. Right. So let me ask you this then, because people that are bearish right now would say, no, no, no, no, no.

Even if we have a vaccine in January of 2021, which by the way is not a slam dunk, but let's concede there will be a vaccine. We're not going to have 500 million doses of it. Maybe we'll have enough for enough immunity that people aren't afraid. But that ramping will take time, even if you get it approved, we know it works. We think it works. So that's a hurdle. And then how much damage is done between now and then that can never be recovered from on an individual level. And then aggregate all of those individuals who, vaccine or not, are never getting their business back. To me, that is the thing to be most – I'm not worried that we'll scientifically solve for this virus. I'm worried if the damage is irreparable. And we take on so much debt while that damage is occurring that the recovery is 10 years from now instead of two years.

Am I worried about the wrong thing? Yeah. So that's the pessimistic scenario, the L-shaped, the lost decade. The cost is enormous. I think our policymakers are realizing this. I think we'll take the lead of other countries. For example, the University of Oxford has got a vaccine in trial, got 1,100 people. They're going to expand it to 6,000 in May. They just contracted with AstraZeneca

to produce the vaccine. Basically, it's in trial. So we don't know. Unheard of. Unheard of. So they want to deploy in September. So our policymakers need to do the same. If there are four candidates and we have a trial that just began. Take them all. Yeah. So produce it.

So produce it, have it ready. And so we can deploy it. Because basically delaying one quarter is just enormously costly. We're talking over a trillion dollars. And surely that trillion dollars is much more costly than actually producing vaccine, which a large part of it we might need to discard. That's fine. That's a simple cost-benefit analysis. Look, what you're talking about is the potential structural damage to the

economy if this goes on too long. And this is a very good point, and I've been very vocal on this, that in the global financial crisis, we had to bail out banks that were offside. They did poor risk management, and we effectively were rewarding bad behavior. In this natural disaster type of recession, we've got firms that have been hit hard that were high quality firms and many small businesses also, 30.2 million small businesses in the US that account for 49% of the employment. So what our policymakers need to do is to mitigate the chance that these businesses that are high quality go under. We'll see bankruptcies and many of the initial bankruptcies are firms that were probably headed there anyways. Okay. So it's an accelerant for weak firms in some cases, and it's also been an accelerant for some of the technological trends that have already been enforced like virtualization and meeting without meeting. So it's accelerating more things I want to get to with you, and we so much appreciate you joining us for this.

The first is Nassim Taleb has gone out of his way to correct the media who are repeatedly using the term black swan. There is nothing black swanish about a pandemic. We've had pandemics since the dawn of time. You make the case that it's not the virus that's the pandemic, it's the government mandated shutdown of all economic activity. That's the black swan. I think that's a really important distinction. Can you talk a little bit about that? Yeah, sure. So I totally agree that people calling this black swan just false, and that we've got a long history. it's not just the uh pandemic of 1918

look at what happened in 2003 um with SARS the MERS Ebola HIV there's a long list uh and indeed and that's before we even go medieval right there's a long list of modern. Yeah, I agree. So bird flu, swine flu, all this stuff has been in the news a long time. So this is definitely not a black swan, but the lockdown absolutely is. So we've never seen numbers. out that was 3.3 million where the next largest historically was like 375,000 that was that was like a hundred and seventy standard deviations and then it went up yeah it was crazy number and then it went up even further so we've never seen anything like this but And this is important. Because it's compressed, we've seen these historically large jumps in unemployment. We will also see historically large jumps down.

We're at probably 20% unemployment, which it took you two or three years to get there in the last recession. We've had an entire recession's worth of job loss. The question is, how many of these are lost jobs versus temporarily put off jobs that are coming right back? I don't think you think it's 100%, but if it's 80%, isn't that great? Yeah. So look at it this way. In the global financial crisis, you worked for Lehman Brothers. You lost your job.

It was gone. And indeed, really hard to find another job in that particular sector, given what was going on. So the word is furlough. So it's a different type of work where people told, well, you're furloughed for two months or three months. And we'll take you back. Yeah. And maybe we'll take you back earlier. Just depends. So the psychology is even different. And given that the firms that are furloughing, most of them are high quality firms, profitable firms, there's a reasonable expectation that you can go back. Again, the key thing is not to inflict

structural damage, whereby if this goes on too long, then some of those high quality firms go away. And that is stuff that will lead to slower growth in the future. So we don't want that. We don't want firms that were very profitable going under. Other firms might be created afterwards, but there's a lot of fixed costs and startup costs to get that to happen. So the faster there's a medical solution, the less danger there is of furloughs becoming permanently lost jobs and frozen businesses becoming dead businesses. And I think we all agree.

It's not just the medical or biological solution. I think we can do much better in terms of strategically having different policies for different areas. Obviously, the density of New York City is different than the density in Durham, North Carolina. So we need to tailor the policies to particular areas. We need to recognize the heterogeneity. We need to basically test and accurately test. We need to trace. If somebody is infected, isolate, and anybody that's traced should be quarantined. That's a smart policy. To have one kind of blanket policy of lockdown is really destructive. Well, it doesn't work and it's not being

enforced anyway. So you're right. And I think as the weather gets nicer, it's going to be harder and harder to keep people living like they're in Midtown Manhattan when they're not. So I'm with you on that. Um, Campbell, I want to thank you so much for joining us. Um, you do great work on behalf of research affiliates. And, uh, anytime I read anything that you've written, uh, I make sure I sit down and I really digest it. And I think your work on the yield curve has been really insightful. And I hope you'll come back as the economy recovers and we have an in-person follow-up to this at some point soon. But thank you so much for joining us. Guys, let us know what your thoughts are.

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