🔴 The Consequences of the Fed’s Monetary Policy (w/ Stephanie Pomboy)

🔴 The Consequences of the Fed’s Monetary Policy (w/ Stephanie Pomboy)

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STEPHANIE POMBOY: If this is the
underfunding situation now, when we’re arguably at the peak of economic
and financial activity, what is it going to look like when heaven
forbid, the market actually sustains a downturn?
It’s remarkable. The complacency around the corporate
sector’s ability to service all of this
debt. It’s going to take people a while to wrap
their heads around the size, the sheer magnitude of money printing that’s
going to be required. GRANT WILLIAMS: I’m about to have a long
overdue conversation with my dear friend,
Stephanie Pomboy. I’ve been trying to get her come back on
Real Vision for a long, long time. And she has resisted for reasons best known
to herself but there’s a whole bunch of stuff we want
to talk about. I’m going to ask her why she resists and
she’s going to blame me but don’t believe
her. The Fed, corporate bond markets, junk bonds
equities- there’s so much going on and Steph does some of the best work out
there on all of it. Much to our chagrin, she’s going to hate me
saying that. So, let’s go and sit and talk to Steph. Well, well, well, fancy seeing you. STEPHANIE POMBOY: Here we are. GRANT WILLIAMS: Here we are again. Now, this
has taken a long, long time. Personally, I blame your almost
pathologically misplaced modesty. You’re probably going to blame me. STEPHANIE POMBOY: No, there’s no blame
whatsoever. GRANT WILLIAMS: But we’re here. We’re here,
finally. STEPHANIE POMBOY: We made it. GRANT WILLIAMS: Steph Pomboy, welcome back
to Real Vision. STEPHANIE POMBOY: Pleasure to be here. GRANT WILLIAMS: It’s been far too long. So,
so much to talk about. And as you and I tend to do when we get
together, we have to start with the Fed. Seems a logical place to start because from
the males of the Fed, all sorts of things tumble out. So, I’ve got to ask you, what do you make of
Powell’s flip flop? How important is it? Are we wasting our time
worrying about it? STEPHANIE POMBOY: It’s amazing to me the
speed and magnitude of turnaround at the end
of October, they were debating whether they were going
to raise rates two times or three times. And everything was fantastic. And in the span of six weeks, now, they’re
talking about not just not raising rates, but pausing the balance sheet unwind, etc. And what’s been stunning to me isn’t even
that the Fed reverse course, but the way the markets interpreted that. Going into it, when they were talking about
raising rates two or three times at 2019, everyone was saying, hey, this economy is so
strong, we can handle the higher rates, bring it on
Fed. And then when they flipped in a whiplash
inducing fashion, the narrative was, oh, this is great because they were going to
continue to get liquidity. So, there was no reflection on why they had
to abruptly reverse course and what that says about the fundamental
state of the US economy and more broadly from our long discussions
about the Fed, how they can ever extricate themselves from
this box that they’ve neatly drawn around
themselves where they can’t ever raise rates, we got
10-Year Treasury Yields just above 3%. And you could feel the economy starting to
shake like an old car on the highway. GRANT WILLIAMS: I think that’s exactly it.
They’ve built this trap around themselves. I remember putting a picture a couple of
years ago of all the central bank governors, Bernanke was in the chair at the time, in a
corner with a painted floor whether the last bit of floor painting was
right in front of them, and that seems to be what they’ve done and
yet, for now, they’ve gotten away with it, which I’m just baffled by it. STEPHANIE POMBOY: It is baffling. They’ve demonstrated a perfect record in
getting it wrong every time and yet the markets continue to endow them
with some great gift of insight and ability to navigate us through any economic or
financial shawl. All evidence to the
contrary. GRANT WILLIAMS: Is the market thinking that
or is the market- I think liquidity cheering thing is just
that- Okay. Almost as if they expected this
to happen. They’re going to keep going. There’s no way they’re going to get these
four rate hikes away in 2019. So, we’ll keep on and we had that wobble in
December. And as soon as they’re about to turn, it was
like we knew this would happen. STEPHANIE POMBOY: Right. The status quo is
great as far as Wall Street’s in the
theorem. What happens in the underlying economy is
almost irrelevant at this point, as long as you keep the liquidity pumping,
and there’s cheap credit to buy back shares. What’s to stop this game from going? GRANT WILLIAMS: Well, let’s talk about those
buybacks, because it’s such a massive component of
what’s going on. I don’t have the numbers to hand but the
percentage of the advances down to
[inaudible] is so staggeringly beyond anything you could have
imagined. But again, it’s hard to see how people
aren’t looking at [inaudible]. This is
terrible thing. STEPHANIE POMBOY: The numbers are
staggering. And it really the corporate
sector, I guess is the largest purchaser of stocks
in the post crisis period. I was looking at- we’ve seen this ballooning
in corporate debt in this whole recovery
phase. And I was looking at that relative to
buybacks, because we all know intuitively that
buybacks have been debt-financed primarily. And the numbers are actually even more
remarkable. So, according to the Federal Reserve flow of
funds numbers, there was 3.3 trillion increase in corporate
debt, buybacks over that same stretch were 3.4
trillion. The numbers are just truly staggering. And one window that I think is really
important into the role that buybacks have
played is the difference between S&P earnings numbers
which are heavily flattered by these
buybacks because their per share earnings numbers and
the profit numbers reported by the
government as part of their GDP report. And this is
super wonky, only nerdy economist like me would look at
this. But it’s been amazing to watch the gap
between those two measures expand. We had this huge obviously 24% increase in
the S&P earnings last year. And the rule to which that was influenced
even notwithstanding the task that by the record amount of buybacks is so
underappreciated, and it’s had me worried that as we come into
2019 and that tax cut Lyft phase, people might start to realize, hey, the
underlying fundamentals aren’t really that
strong because while the S&P was reporting earnings
of 24%, the broader government profit numbers were
only up 7%. That’s a massive gap. And you’ve only seen gaps like that a
handful of times in the last 50 years. And every time you’ve seen a gap where the
S&P ran ahead of the government numbers, it’s been ultimately reversed down. GRANT WILLIAMS: It’s catch down or catch up,
yeah. STEPHANIE POMBOY: The BEA, the government
has had the numbers right, and S&P ends up moving back into alignment
with it, which would be really painful if it happens
this time. GRANT WILLIAMS: Well, and also the estimates
for earnings growth are plummeting, right? It was a great chart that you put up at
Macro Mavens, which I shamelessly stole. I would have tried to pass it off because I
want you to know that was not me. But these things are falling off a cliff and
yet- STEPHANIE POMBOY: Right. The chart is you’ve
got the earnings revisions going down. And the stock market just kept going up. And I guess part of it is that we’re really
kitchen sinking, if that’s a phrase, that weakness into the first quarter. And if you look at the trend in estimates
going out, they see earnings picking up and they’re ultimately going back to double
digits in 2020. So, this is just temporary. GRANT WILLIAMS: Transitory. Yeah. STEPHANIE POMBOY: Right. It’s seasonal. It’s
the one-time effect of the tax cut. So, nothing to see here. GRANT WILLIAMS: But everywhere we look and
the work you do and the work that your brother Eric does,
these charts with these alligator jaws, it’s almost hard to find one that doesn’t
look that way at the moment. And look, we’ve seen this move and you and I
are worried. You and I, when we get together, we worry,
right? That’s what we do. And for many reasons,
that’s been the wrong thing to do. You should just lay back and let it all go
over here. But at some point, you have to do the
worrying because at some point, it will
matter. When you talk to your client- STEPHANIE POMBOY: When is that take going to
be? That’s right. GRANT WILLIAMS: Right. I don’t know. I
really don’t know. And how bad is it going to be by the time we
get to it? But when you talk to your clients, what’s
the sense you get of the white paper
approaches? Are they genuinely thinking everything’s
great and forget all the stuff? Or are they thinking we’re going to ride
this Fed wave and then we’re going to jump off right
before it crashes onto the shore? STEPHANIE POMBOY: No. I think and there’s
much more complacency. I think there’s an acknowledgement that there are some fundamental and structural
issues to debt, the funding issues around
pensions. People acknowledge that these are big
headwinds for the economy long-term. But they don’t see any cataclysmic event-
they don’t- I think the path of least resistance for the
average investor is this muddle through
scenario where maybe the economy slows a little bit,
but that’s fine, because then the Fed doesn’t have to raise
rates. So, it’s Goldilocks, and then not everything
moves in a straight line. We’ll have little slowdowns here and there. And it’s really, we’ll be able to navigate
our way through this. How we’ll be able to do that is unclear. But
the burden of proof is on folks like you and
me, because so far, it has muddled through and we have been able to move forward
despite what we worry about as major, insurmountable obstacles that will
have to be addressed at some point. GRANT WILLIAMS: You mentioned pensions
there. And that’s something you’ve done a lot of
work on over the last few years, and you put a chart up. I forget who it was.
But the underfunding of the pension system. And this was two or three years ago, maybe
you put this thing up there. And when I looked at it at the time, I was
like, holy cow, this is really dangerous. And I keep going back to the chart, and it
doesn’t get any better. STEPHANIE POMBOY: It’s probably doubled
since then. GRANT WILLIAMS: So, just talk a little bit
about that and what you see there because it’s really,
really dangerous. STEPHANIE POMBOY: Yeah, I think this is-
obviously, there are a lot of unintended consequences
of monetary policy. And right now, I think this is the most
blaring and dangerous side effect of these
repressive regimes that we’ve had here and around the
world for the last almost decade. And to be fair, I think when central bankers
gone into this thing where they pushed rates down and decided
we’re going to hold rates down at absurdly
low levels, they never imagined they’d have to hold them
there as long as they ended up doing. So, they probably thought we’ll hold rates
down to the point where we spur animal
spirits again, and then we’ll be able to lift things up.
And we’ll have that handoff between reliance
on debt to drive the economy to finally getting to
income growth. Households will be able to- rather than
borrowing to sustain consumption, will get
wage growth and everything will be able to move on its
own. Of course, we went through a long, long,
long period where that was not. And they couldn’t make that handoff. So,
they had to hold rates incredibly low. And what happened is there is essentially,
they silently bankrupted the entire pension
system. GRANT WILLIAMS: Right. You slightly changed
your message, but that’s exactly right. STEPHANIE POMBOY: Yeah, no, it absolutely is
true. When we started this, I think we were at 3
trillion in total underfunding public and
private. And today, we’re just a hear under 7
trillion. That’s 33% of GDP today. And the scariest thing to me about that is
that again, this is after a decade long, almost decade long economic expansion, and
the longest bull run in stocks in history. So, if this is the underfunding situation
now, when we’re arguably at the peak of economic
and financial activity, what is it going to look like when heaven
forbid the market actually sustains a
downturn or we go into a recession? The answer, if
you want to look back to 2000, when we had the .com bust, and then the 2008
is on average of those two cycles, the funding deficit doubled. So, we would go
from seven to 14 trillion, which if GDP is where it is today, so you go
to two thirds the GDP. GRANT WILLIAMS: Yes, yeah, exactly right.
Yeah. STEPHANIE POMBOY: At what point do those
numbers actually start to matter? I would have thought at 33% the GDP. GRANT WILLIAMS: I was to say four years ago,
right. STEPHANIE POMBOY: Right. And that would have
been enough of a wakeup call. And again, when you start talking about
pensions, it’s something people see as a
long-term problem that we have the luxury of time to
solve. But that’s really not true. Because we have an aging population, and we
have more and more people every day who are
coming to collect on these pensions that aren’t
funded. So, the problem is really coming into focus
now. We had a brief example with the Dallas
police pension three years ago. GRANT WILLIAMS: But that was three years-
four years ago? Yeah. STEPHANIE POMBOY: At least. Yeah. And it was
really an interesting window into what we could see more broadly but a
terrifying window because basically, what
happened there was that word got out that the Dallas police
pension was woefully underfunded. And it started a run on the pension where
people who are nearing retirement said well, let’s get that the first mover advantage.
Whatever money is there, I want to collect
mine. And it didn’t take long before they actually
had to close the doors and say, look, we’re not allowing this
anymore. So, you could see a situation where those
examples could happen in Chicago, New
Jersey, so many places where you have really problematic
pension issues. And they’re not going to be resolved as long
as the Fed keeps these rates artificially
low. But on the other hand, raising rates is also
a problem. GRANT WILLIAMS: Exactly, exactly right. We
didn’t have- this fascinates me because I
remember when I moved to Japan in 1989, they were
talking when I got there that in 2015, the Japanese population will begin to
shrink. And 2015 was a lifetime away. And so, it was such a big concept and such a
big thing to be worried about. It’s like we can figure it out and we’d
figure it out. And of course, 2015 comes, the population starts declining and people
are going, how the hell do we solve this
problem? And this is- when I look at this pension
situation, I see that exact same thing
happening. It’s such a big problem. And we’re talking
possibly 14 trillion in unfunded
liabilities. How do you even think about a solution to
that until it stands up, slaps around the
face, and you have to deal with it? So, does this
almost have to fall over it’s going to be
done? And can people just go it’s not a problem,
because they’ll fix it when they have to? STEPHANIE POMBOY: Well, the pushback I get
on this one is interesting to me, because most people will say they’ll just
renegotiate the pensions. It’s obvious we can’t possibly fulfill the
obligations as outlined right now, as
promised now. So, they’ll just renegotiate as some
companies have done. The problem is while that very well may end
up being the solution, it simply passes the saving burden from the
company or the state or the city, to the person who’s trying to retire. So, if
you haven’t set aside the money because you
think your city or your state or whatever pension
is going to be there, and all of a sudden, they say, look, Joe Blow, we’re going to pay
you half what you thought. Now, either you have to continue to work- no mystery why the labor force participation
rate of people 65 and over is the highest since the 1960s right now- or you’re going
to have to cut your spending and downsize your lifestyle, etc., which has
all of those things have a real economic
impact. So, we’re either going to have to address
the pension thing in some cataclysmic crisis
way or we’re going to have this steady economic
drag exerted by people who were finding
themselves disenfranchised, who now have to find other
ways to support themselves. And I do think ultimately, it ends up
bringing up this whole conversation, which is really terrifying to me about MMT.
And it’s just hard to imagine that we could go through a downturn in a
pension crisis, where people stand by and
say, it’s okay not to bail out would-be retirees.
It was great that you bailed out the banks. We don’t really care whether you bail out
the average work, that’s just not going to
fly. So, it’s pretty easy to see where this
theory starts to gain some real traction. And of course, what’s the downside? You just
print the money, you pay the obligations, and everyone’s
happy. Right? GRANT WILLIAMS: Well, this whole thing, it’s
interesting because obviously, it’s the boomer generation that is going to
be the trigger for this because they’re the guys having a lot of
money- until the millennials, they were the biggest generation that the
world had ever seen. But the boomers are also the ones in power
of the money. And we have this situation where you have
the millennials, I spoke with Neil Habit just recently- he
said the Gen X generation basically skipped
politics, they basically just didn’t take an interest
in it. So, you have this tug of war for power in
politics with IOC and these young Democrats coming through
with all these ideas, which was to you and I are fanciful, and our
decades of experiences tell us that it won’t
work. They don’t know any better. Their entire lives, they’ve been witness to
the state will use that pejorative term, but the state funding everything and
printing money and everything has been fine. So, you can totally see how they think that
this is the solution. But I just want the how that resolves
itself, not so much from the money point of
view, but from this battle between the guys who
have power and who are essentially voting on whether to pay themselves an annuity, and
the people coming through to say, no
grandpa, that’s not going to fly. How do you see that
battle playing out? STEPHANIE POMBOY: Wow. It’s terrifying to me
to watch it because of you’re talking about these fanciful notions are really gaining
traction in a way that as you mentioned, MMT is a serious proposal a year ago. I
wouldn’t even- GRANT WILLIAMS: I thought it was a cage
match. I have no idea. STEPHANIE POMBOY: Why are we even wasting
the breath talking about this? Because there’s no chance anyone would do
something so asinine? GRANT WILLIAMS: Except maybe Japan. STEPHANIE POMBOY: Right. So, that’s
interesting, because that’s always held up as the example
of see, it can work. And it’s the perfect crime. No one loses.
What could go wrong? Well, there happened to be some pretty
important differences between the US economy
and Japan. And the most obvious to me is that they’re
internally financed, they don’t rely on the rest of the world to
finance themselves. So, as we sit here running dollar bills off
the printing press or trying, Japan and
Russia and all these people are going to say, yeah,
that’s good by us. No problem, you can completely inflate away
all the obligations that you owe us. So, it’s very difficult for me to wrap my
head around it and see how it plays out. But I will confess to being scared at how
much traction it’s gaining and that I really need to start to figure
out how this could possibly happen. Because talking about how this is a long-
term problem that we might have the luxury of not
addressing right away, I think the catalyst for this whole pension
crisis becoming immediate is going to be the bursting of the corporate
debt bubble. Because obviously, if you can’t make 8% in a
zero percent risk-free world, you’ve got to load up on all of the most
toxic claims you can out there. So, we know that the pensions have massive
exposure to this corporate debt bubble. And it wouldn’t take much of an increase in
rates to really wreak havoc in that
corporate market. I think there’s an appreciation now about
the increasingly low quality of corporate
debt even in the investment grade sphere where
half of the investment grade debt now is one
run. But I like to call it pre-junk. GRANT WILLIAMS: Pre-junk. STEPHANIE POMBOY: And then, of course,
you’ve got another 1.2 trillion in actual
junk and then you’ve got 1.2 trillion in levered
loans with no covenants. So, you’ve got about $5 trillion in
corporate debt of the 9.5 trillion out
there. So, more than half of it that’s really
vulnerable to any increase in rates. And we’re going to really find out who can
withstand an increase in rates because we got almost 800 billion of that
debt rolling this year and another 900 billion next year. So, there’s no relief in sight. It’s not like or if they could just make it
to the end of this year, everything’s all
clear. So, this is really going to be an issue I
think moving forward. It’ll be interesting to see how it unfolds
over the course of the year, but it will certainly reveal the degree to
which the averages that everyone looks at in terms of the health of the corporate
sector, in terms of corporate profits really don’t tell you anything. It’s so much
like the consumer where you’ve got the top that have all the assets and none of the
debt. And then you’ve got the bottom that
obviously, we’re in the reverse situation. And frankly, I think the numbers in the
corporate sector are even more dramatic than they are in the consumer side. I was
just looking at with the fourth quarter
numbers for S&P earnings, the top 20% of companies
accounted for 75% of the earnings. That’s in the S&P 500. Those are the largest
500 companies out there. If you looked at those government profit
numbers that I like to look at, the skew is even more dramatic, obviously. And then when you look at cash positions,
it’s even more profound. The top 20% have 80% of the cash. In fact, if you add up the cash of the top
three companies in the S&P, the biggest cash
holders, they have more cash than their bottom 450
companies, just three companies. So, it’s remarkable. The complacency around
the corporate sector’s ability to service
all of this debt because really, outside those top
20%, there is no ability to service any
increase and there is no ability to withstand any
increase in debt service. And who knows if they can even handle what
they’ve got already depending on what
happens with the economic activity and where that
profit growth number actually goes this
year. GRANT WILLIAMS: Did the Fed start reading
Micro Mavens and so they go, oh, my God? Because when you talk about all this stuff,
and then you ask the question, after doing
so, why did the Fed flip, it suddenly starts to
make an awful lot of sense if they’re
looking at this stuff and seeing the same thing as you
are? Because they can’t withstand high
rates, and then to me, it becomes an [inaudible],
okay, how do we sell this? How do we sell the flip flop? What really surprised me, and you and I
spoke about this before is we knew Jay Powell was a real guy. He had a
real job. He understood finance. He understood the market. And based on his
comments at previous FMC meetings when he
was just one of the voting members, he totally got
not only what the Fed were doing, but the market’s response to it and what
would happen if the Fed reversed. So, we had to wait and see what he did to
understand, okay, is this whole charade a
charade? They know it’s a charade, and they’re just
saying whatever, they want to keep the whole thing together,
or are they really dumb and clueless? And it seems as though it’s the former. It seems as if they know but they’ve got to
try and just keep this together anyway. STEPHANIE POMBOY: I don’t know. I almost
fall into the latter because if they had a PR person who was
managing their image, wow, he looks like he got his Twitter feed and
said whoops, I just got a reverse course. So, it doesn’t really give you a lot of
confidence that the Fed has any idea what’s
going on. GRANT WILLIAMS: So, you don’t think they’re
looking down the pike and they were saying we’re speeding up into the rocks. So, we
need to try and slow the boat down. STEPHANIE POMBOY: I think what happened is
very similar to what happened to Alan
Greenspan in 1987 and that he had just become Chair of
the Federal Reserve in late 1986. And he started raising rates. And of course,
you got to October of ’87 and you have this spectacular crash. And that, basically, from that day forward,
transformed his posture as Fed Chairman in a
way that we still live with today, the Greenspan
legacy and the Greenspan put was
established. So, that experience of the markets basically
schooling him you’re too tight, you’re too tight was one that was very
impactful on monetary policy going forward. And I think you could argue today that the
impacts that financial markets have on the
economy is so much greater than it was in 1987. So, you
could see where the Fed- they like to say
that the stock market and financial conditions
are just one of a variety of indicators they
look at, but it’s increasingly clear that- GRANT WILLIAMS: It’s like nine of the other
ones. STEPHANIE POMBOY: You could pretty much see
that they all sit there in front of their Bloomberg terminal and
they look at what’s happening and that’s how they basically develop their
outlook for policy. But the other thing that makes me feel like
they’re not looking down the pike and saying we’ve got to make sure we steer
away from this possible problem is that they’ve talked about this a bunch, but
Powell was specifically asked the very last
question in the last press conference was are you
worried that by reversing your planned rate
hikes that you might be feeding this bubble in
corporate debt? Which I thought was a refreshingly useful
question. Because you usually sit there for an hour
and you’re like, I can’t believe that this- so, his answer to that was really telling
because he basically said we have called out the levered loan market as an area that
we’re watching, and we’re concerned about. However, we don’t think that the corporate
bond market- levered loans or the corporate bond market
more broadly, pose a threat to the economy. We think that to the extent there’s a
problem there. It might amplify any existing problem in the
economy. But it’s not going to be the catalyst for
it. And then he made a comment that was eerily
reminiscent of Bernanke’s isolated and contained description of the subprime
market and may have 2007, in basically
saying that there was no spillover risk to the financial
sector either. So, I think the Fed- and again, this is Jay
Powell who seems like a straight shooter. Who’s really frank and i think is a
dispassionate analyst of the data. That’s
his takeaway. So, I have to think he genuinely believes
that to be the case. And that’s scary because I think it couldn’t
be farther from the truth. GRANT WILLIAMS: Trump is- I’m in the other
camp to you, but the outcome of either versus right is
the same. And that’s the problem. We’ve had Janet Yellen going from saying I
don’t think there’ll be another crisis in my
lifetime to saying, look out, a levered loan market
is a real problem. We’ve had Bernanke saying similar soothing
things when he’s in the chair and then now, he’s a lot more cavalier with
some of the things he’s worried about. Jay Powell seems to almost be kept if the
same thing and that those comments about the corporate
bond market just strike me as surprising to
have like his fingers crossed across his chest
just to signify that he was a hostage to
someone. Because when you read things like Powell
saying that the fact that we can’t generate
enough inflation is one of the biggest problems of
our times, I just want to smash my head
against him. How do you tell a working man somewhere in
the Midwest that we can?t make your cost of living go up
faster now? STEPHANIE POMBOY: And your real wage has to
go down in half. GRANT WILLIAMS: Right. But all of this, it
seems stems from the same thing, which is don’t let the wheels come off. At
any point or any circumstances. How far does that go back? How far do we
have to go back before it was okay to have a
recession and then fix it maybe instead of trying to
prevent it? STEPHANIE POMBOY: I think we are so far away
from that, which is amazing to me. One thing I’ve been noodling about since the
Fed basically dropped its pants at the end of last year and said, okay, we’re not going to have any pretense of
monetary integrity here was whatsoever. If the stock market has even the smallest
blip, or the economy does even a temporary thing,
we’re going to make sure that we’ve rush in
with accommodation. That has me thinking about-
and maybe it’s too cute, but I feel like it’s now the market’s job to
impose the order that monetary policy used
to do. And I’m thinking specifically about the
return of bond vigilantes from way back in
the day, where if you know- let’s say this morning,
we got a much stronger retail sales number than we have seen, and I expect in the near
term, we’ll see a lot more upside surprises
just because we’ve seen such- so many- and a lot
of that was due to the fourth quarter
meltdown that really depressed activity and CEO
optimism, blah, blah, blah. And obviously, that’s reversed with the
pension. So, you think you’d start to see some follow
through. So, even just from a dead cat bounce basis,
you’d expect we’ll see some stronger
numbers. And it’s going to be fascinating to see how
this works out in the market, because now, we’re going to see some
stronger headline numbers at a time when the
Fed has basically said, we’ll just let inflation run
hotter. We’ll let the economy run hotter. We’re not going to dare touch this
situation. So, at what point does that start to get
people nervous that okay, maybe we really are going to have inflation
or maybe this really is it. Maybe we are a little too lax. And you’d
bring back these bond vigilantes. If that happens, obviously, given what we
just talked about on the corporate debt
side, that would not probably go over too big for
stocks and ultimately, economy and pensions. GRANT WILLIAMS: But that’s it, right, to
your point earlier, we’ve reached this point where it used to be
that if the economy was strong, the stock market did well. And now, the
transmission mechanism is completely
reversed. If the stock market does well, the economy
seems to follow it. And it has to be an illusion, right? It just
doesn’t work that way. The stock market can generate economic
activity. STEPHANIE POMBOY: But it can destroy it
really quickly. GRANT WILLIAMS: Really quickly. So, when you
when you look across this landscape, which you and I worry about all this stuff,
and we are in the minority, but are there any bright spots where you
look across it and you think, okay, look, there’s some good stuff going on here, or
there’s a little bit of value here. Where do you see- I know you- last year, you
saw it in Asia? Do you see any bright spots? Please, give me
one. Please, just one. STEPHANIE POMBOY: Oh, treasury yields.
Obviously, we’ll have more volatility, I
think. But what we have learned is 3% is pretty
much the absolute ceiling. So, you have a great opportunity there to
just trade that channel. As you get toward three, you sell them and
as you get toward three, you buy them. And as you get to one and a half, you sell.
So, there are some opportunities there, I
think. And I do still think that China with
reference to my views on Asia, continues to
be underestimated. And it’s amazing to me that there was all
this consternation about the reliance on
exports and how they really need to develop a self-
sustaining internal economy. And they’re doing that which, by definition,
will entails taking some hits that in the
transition. And yet, the moment their economy starts to
slow a little bit as they’re engineering this transition,
people get hysterical that it’s oh my God,
China, they’re going to cease to exist. They’re
going to disappear from the face of the
planet. Meanwhile, they’re focused on this very
long-term path. And their- Z doesn’t have to worry about being
reelected in two years. GRANT WILLIAMS: That’s true. STEPHANIE POMBOY: So, he can take that long-
term perspective and take some pain in the
near term to get where he wants to be. So, I still
think China is underestimated. I still like it. Obviously, there’s plenty
of volatility there if you want to get your blood pressure
going. But ultimately, where this whole
conversation leads me is to the outlook for
the dollar. And to me, that outlook is increasingly
grim, I guess. Because whether it’s just more QE or MMT,
we’re talking about a situation that’s going to require a substantial amount
of money printing. That’s not going to be good for the value of
the dollar. And I think that’s probably best expressed
by being long gold just because presumably, as we get into this situation, all of our
developed economy peers that have all the
same problems, we do massive debt, terrible
demographics, woefully underfunded pensions, they’ll all be doing the same thing. So, it’s going to be an ugly contest like it
has been between whose currency is worse, one day or the other. And Robin have been
trying to play that game like, I just think it’s easiest to own gold, which is the ultimate bet against all of
those pieces of paper. GRANT WILLIAMS: Well, we had to end up with
the dollar at some point, right? Because it does- everything seems to key off
it and yet again, I’m amazed at the divergence of views on
this because no one seems to think the dollar will muddle through. People either think that it’s the beginning
of the end and that this de-dollarization trend is not
only real, but it’s picking up steam as we
go. And then the other side, and I give great
credence to both arguments. I’m in your camp for full disclosure, but I
understand the bull case that we’re going to see in this melt-up,
everybody needs dollars, and there’s going to be a massive rush for
dollars. And there’ll be a massive rush for dollars,
there’ll be a massive rush for treasuries when finally, any unraveling is allowed to
take place or if the bond vigilantes who’re responsible is forced upon the market. STEPHANIE POMBOY: Yeah. And I don’t disagree
with the idea that you have an interim melt-
up before the complete collapse, because it’s
going to take people a while to wrap their
heads around the size, the sheer magnitude of
money printing that’s going to be required. I just keep coming back to that 7 trillion
pension deficit. Even if it goes to 10 rather than 14, we’re
still- what’s the Fed’s balance sheet is just under
4 trillion. It’s just enormous. And I don’t see how there’s any other way
around it really. GRANT WILLIAMS: Well, organic 3% growth, but
that’s not going to appear anytime soon it
seems? STEPHANIE POMBOY: No, and you have to do
more growth than that in the near term. Because again, the fuse has been lit on this
pension thing because we do have a rapidly aging
population. So, it’s not as though we can just have a
decade of 3% growth and grow our way out of
it, because these claims are due materially. GRANT WILLIAMS: Yeah, exactly. But what
about- you’ve talked about a possible
solution to that being retirees cut their expenditure in
half. So, let’s get into the consumer- because
this is something you’ve done some fantastic
work on, you spend a lot of time focusing on it. What’s the state of the consumer and how big
a risk is he or she to this whole kind of
cards? STEPHANIE POMBOY: Well, ultimately, I guess
it all blows back to the consumer in terms
of the pension issue and the impact that a
meltdown and the financial markets would have on the
economy. But right now, when I look at the economy
and try to assess where the weaknesses are, it’s corporate sector that I really worried
about. I think, obviously, low-end households are
still struggling. There’s clearly an issue in the consumer
sphere that hasn’t gone away. But in terms of the real drama and the
biggest shift from where we are right now, it would come from the corporate sector. That said again, if you have a major
correction in financial assets and these
pensions end up having to be renegotiated, you’re talking
about, ultimately, a massive increase in the
federal deficit, because those people who have to cut their
spending in half aren’t going to- a lot of those people can’t afford to cut
their spending in half. They’re spending every dollar they have just
to maintain an existence. So, they’re going to place huge demands on
all of the safety nets. And the government is going to have to
greatly expand those supports. So, whether those pensions are renegotiated
or not, it’s all going to end up blowing
back to the federal deficit and to state local finances
as well. And that I guess, more broadly about the
consumer, I think it’s, again, a situation where we’ve seen some increasing wage
growth. Obviously, the employment numbers look a lot
better, although the unemployment rate isn’t telling
you the full story in terms of labor force participation, which is still incredibly
low. So, there is a lot more slack out there than
popularly perceived. But again, I don’t really worry that the
consumer is the problem. I don’t worry about them the way I did when
we were having the housing bubble. Everyone was levered up to their eyeballs
and they were taking out second home loans so that they could go on vacation and
whatnot. That isn’t the problem today. But that’s not to say that you won’t see a
real good hit to consumers when push comes to shove through this
blowback on the pensions. GRANT WILLIAMS: But the data suggests that
[inaudible] are back, only people are actually now taking money at
their houses not to go on holiday and buy a
boat, but to pay for college tuition and health
care and the cost of living? STEPHANIE POMBOY: Absolutely. Well, it does
speak to those distress consumers at the low
end who are really having to do extreme things
like that to make ends meet. And there’s no question that the average
numbers- just as this is the case on the corporate
side- aren’t telling you the full picture about
the skew between the haves and the have
nots, because obviously, you’ve got the high-end
doing just great, and it’s masking a lot of this weakness. But I do think that the consumer’s in better
shape than they were in 2007. And that they’re in better shape than they
were even, let’s say, three or four years
ago. I do think that recovery has started to
generate real job growth and wage growth, which has been helpful. It’s not enough. And
you look at this numbers on who can- how many households actually have $400 in
saving if they got into an emergency
situation. And those kinds of statistics are really
terrifying. And come back to that whole broader question
about how we’re saving for retirement. But I guess in terms of trying to say
something nice and positive, I do think that the tax cuts and maybe more
importantly, the cuts to the regulation have been helpful in terms of really
promoting economic activity here. And so, I’m grateful that we’re going into
this situation that I am so terrified about with how vulnerable we are to any meltdown
in the financial markets. By that in there, at least we’ve got some
regulatory and lower tax environment that will be helpful and sets us up better
to withstand it. It’s still going to be
brutal. But it wouldn’t be as bad as would have been
the case had we not had those policies. GRANT WILLIAMS: But this push to for
redistribution, that the MMT is pushing for, that the Bernie Sanders of the world are
pushing for. It’s pretty clear that next time around- and
there will be a next time, maybe it’s not for a decade, and I doubt it,
but we don’t know. But next time around, there’s going to be a
need instead of just bailing people out, to bail people in to tax assets, to- where
do you see the potential places that the
government can actually say, okay, right, we need some
real money here. We can’t just use the funny stuff all the
time. Is it real estate? Is it increased capital gains taxes? How do
they generate this stuff? STEPHANIE POMBOY: Marijuana. GRANT WILLIAMS: Marijuana. What? They just
smoke it and forget about it, or they tax
it? STEPHANIE POMBOY: I think that’s why it’s
becoming so popular to legalize is that you
can tax the hell out of that. It’s a great source of
revenues for a lot of cities and states. So, that’s only partially sarcastic. I think
that really is- GRANT WILLIAMS: No, that’s fine. STEPHANIE POMBOY: So, to me, that seems to
be the direction that people are going. Obviously, there are some societal
consequences that they’ll take are rather
unfortunate and will have to be addressed while they’re
paying for. But that’s an easy place to drum up revenue
really quickly. The other taxes that you’re talking about,
like oil taxes, any effort to redistribute income just
strikes me as going to destroy any entrepreneurial spirit
whatsoever that’s so important to keep this capitalist
system thriving. GRANT WILLIAMS: But is capitalism under
threat, like serious threat? Because it seems to be at the moment, seems
to be this movement that is saying it’s done its recent slips. Of course, we
don’t have capitalism anymore, free market
capitalism. But is that a legitimate threat you think? STEPHANIE POMBOY: It’s something I worry
about a lot. And of course, it’s something that becomes
even more terrifying if you think we’re
going to have a meaningful correction in the markets,
where you basically are annihilating all of
that, that perceived wealth that was created gets
destroyed. And then the solution to that is to go out
and destroy the economy a little bit more and kill the animal spirits that would be
necessary to rebuild from something like
that. So, that’s really- I’m trying not to get to
such a dark place, and you keep dragging me back into that. GRANT WILLIAMS: I’m sorry. I’m sorry. I feel
bad now. STEPHANIE POMBOY: No, no, I think it’s
remarkable, again, that we’re in this place where we’re having a conversation about
capitalism versus socialism after a 10-year economic expansion and the
longest bull market in history. That’s what’s most stunning to me- isn’t
that the conversation is taking place, it’s that it’s taking place against this
backdrop, and that is terrifying to me as to what it says about what the conversation is
going to be if that backdrop changes for the
worse. GRANT WILLIAMS: Yeah, it is a dark
conversation. But to me, it’s worse to just think of it as
too dark to talk about. When you look for parallels to this, this
massive disparity, the only one you can find in living memory
is the 1920s. Right? We saw what happened there. It was almost
identical. The Robber Barons versus the oligarchs and
that massive disparity between the 1% and
the 99%. And we all know what happened after that. And that’s not to say it’s going to happen
again. But a big part of this is understanding what
can happen and then handicapping it if you think
there’s a zero percent chance, great, move
on. But there isn’t a zero percent chance of
history repeating itself because it always
does. STEPHANIE POMBOY: So, a war is that what
you’re afraid of? GRANT WILLIAMS: Depression first and then a
war. Those were following an order. STEPHANIE POMBOY: Just trying to get the
order of pain and misery. Correct. GRANT WILLIAMS: As I said, I don’t think
either of those things are going to happen
again. But it’s interesting when you when you
listen to our friend IOC talking. If you count the number of times she uses
the word crisis, she uses it virtually every
sentence and that idea of a crisis is when big
changes, you need a crisis to make the kinds
of changes that everything we’ve talked about with
regards to where the system is, where capitalism itself is, without a
crisis, you can’t make the sweeping changes
that you need. So, to me, when I think about it, there has
to be a crisis of some sort. And maybe- STEPHANIE POMBOY: And you don’t think
plastic straws for that crisis. GRANT WILLIAMS: Well, look, I’m very pro-
dolphin, I will have that on the record, I’m pro-dolphin, but I don’t think plastic
straws are necessarily a big one. I don’t think what we’re talking about, yeah, the plastic straw crisis of 2020 and
years to come. But you have to think these things through
and work out, okay, where could this go? And when you get to a point where you think,
okay, it’s not going to go, then you can start walking back and planning
for slightly less dark outcomes. But I’m amazed that- you use the word
complacency half a dozen times in this, I’m amazed at the complacency of thought
that people have where we’re not in extreme
in markets. We’re not in extreme in all kinds of
benchmarks. And yet people either don’t want
to or are afraid to go to extremes in terms of
contemplating outcomes. And that just seems dangerous to me. STEPHANIE POMBOY: Yeah. I think it’s maybe in part because it’s just
so hard for people to fathom these
possibilities. And in part, it’s a function of what we’ve
been living through for most of our lives. And we’ve lived in an era of the Greenspan
put and no economic or financial downturn could
ever be maintained. We have to come in and always make sure
everyone is put on of equal footing and we’ll bail out everything at every turn.
We won’t have economic cycles. We won’t have financial cycles. So, we’ve lived in this era that has been
fairly Goldilocks, and to tell someone that may all cease to
exist and not only that, but the US economy as you know, it could
change dramatically. It’s just I think it’s maybe in part that
people just can’t mentally get their heads around that. GRANT WILLIAMS: Oh, like a $14 trillion, how
do you get your head around that, right? STEPHANIE POMBOY: It’s ridiculous. That’s
monopoly money. It means cannot fathom that money so why
talk about that problem? It’s just absurd. GRANT WILLIAMS: Well, I’m still reeling from
you calling me dark. I need to think of some way to [inaudible]
and I’ve come up with the most genius idea and I’ve never- of all the times you and
I’ve said- I’ve never asked you this. Cryptocurrencies, I’m going to throw you
under the bus right now. Let’s talk about cryptocurrency because I
honestly don’t know your view on it. It’s just occurred to me. STEPHANIE POMBOY: Well, this is
embarrassing, because I’m going to put
myself in the category of people who just don’t get
it. My mind cannot grasp cryptocurrencies. I am so clueless about cryptocurrencies that
I understand the idea of a digital form of
money. That I get. Okay, fine. So, that will have a
future. We’ll have digital money. But why a Bitcoin should command a premium
over any other form of money, especially when the digital format hasn’t
really lived up to a lot of the billing that
it had that it would be easier and more convenient
and I don’t know- what was the story about
the guy who lost his serial numbers and lost all of
his money? What happens if you don’t have an internet
connection? You have no access to your
money? GRANT WILLIAMS: I can hear the fingers
flexing over the keyboards in the comment
section right now. STEPHANIE POMBOY: This is how clueless I am.
These are the thoughts I have because I just don’t understand it. It’s
beyond my realm of comprehension. I am one of those people who just- I’m a
Luddite. I’d rather own gold. I can touch it, I get it and I can store it
in my cozy little home. GRANT WILLIAMS: Don’t say where, don’t say
where, don’t say where. People are
listening. But let’s talk about gold. It’s a good way
to finish because you and I have talked
about gold. STEPHANIE POMBOY: So, you’re letting me off
the hook. GRANT WILLIAMS: I’m letting you off the
hook, because you are officially under the
bus already. The comments are being written before this
airs. And they type with two fingers really all
cash, I’m telling you. So, let’s talk about
gold. STEPHANIE POMBOY: And I’m putting
exclamation points here and here. GRANT WILLIAMS: More than you can imagine. And hand clap emojis, I think that’s the new
thing. But let’s talk about gold because you and I
are both on the records being advocates of
gold, of being believers in gold as a portfolio
component. GRANT WILLIAMS: Can you hear all the people
turning off right now? STEPHANIE POMBOY: No, they’re just typing
harder now. They’re just typing harder. Luddites, so
we’re obviously both Luddites in that
respect. But when you look at everything we’ve talked
about, and if I’ve woken you up from a Rip Van
Winkle sleep and said, here’s the state of
the world, watch this interview. Where’s the gold
price? I guarantee you- yeah, right. You got
it wrong. So, what do you think is going on in the
gold market? What do you think? Is it just nobody really cares? Because
central banks seem to and nobody else really
seems to. They’re talking one thing and they’re doing
another thing. What’s your view on the gold market right
now? STEPHANIE POMBOY: Maybe I’m copping out on
this one. Because I think I’m not going to buy into
all the conspiracy theories about how it’s
manipulated, and they may not be conspiracy theories,
maybe it is manipulated, and I’m sure the people who are focused on
that have arsenals of evidence to support
that. But I just think about it more in terms of
conversations that I have with my customers and the response I get, the body language,
the snickers, the hard typing on the keyboard to
suggestions that gold might have a place in
your portfolio. And I think it gets back to that idea that
things that you and I have talked about here
are just so beyond the realm of what they view as
possibility that gold just really- that’s for people who actually believe the
stuff that we’re talking about. Like, come
on. So, it’s not something that the average
investor really thinks has a place in their
portfolio. Why would you carve out 5% away from an
investment grade bond that’s actually a pre-
junk that could earn you 4% if you get repaid for
this piece of metal that- GRANT WILLIAMS: This is what I always start
with, because when you think about this
stuff, and this conversation has really brought it
into perspective for me is that one by one, the subjects you and I have discussed today,
you can argue very cogently that gold is a
solution to each and every one of them, right? You
said what’s the solution to MMT? Well, gold. What’s the solution to massive
corporate debt defaults? Well, there’s gold. Equity markets falling,
it’s gold and yet the dollar fall, it’s
gold. So, I really find it interesting that that
the price is just not doing much, and people not really bothered about it
except the fanatics on both sides of the
argument who are still in there waging war against
each other on Twitter. STEPHANIE POMBOY: Beating their heads into
the war. GRANT WILLIAMS: But at the meantime, central
banks are buying gold at a faster pace than I can remember the last 10, 15, 20
years. STEPHANIE POMBOY: And they’re not
necessarily trying to hide it anyway. GRANT WILLIAMS: No, no. Something is
happening. It’s not reflected in the price. I’ve no idea why that is. I’ve read some
smart arguments as to why the price would go
down when central banks are buying it. And it
makes sense to me. But I really struggle to understand why more
people aren’t just thinking about it a bit
more and saying, well, let me let me talk to
Steph about it. She’s always been hammering me about gold.
Let me have the conversation with her on it. STEPHANIE POMBOY: Well, can I put it back to
you? GRANT WILLIAMS: Please? STEPHANIE POMBOY: Because some of it I feel
like is why wouldn’t I own cryptocurrency rather
than gold? And I’d be interested because I, as I
demonstrated, am clueless about why cryptocurrency should be viewed as
better than any other form of money much
less gold, but when you talk to people or you think
about it yourself, how do you compare gold versus
cryptocurrency isn’t alternate? GRANT WILLIAMS: No, I’m probably 80% the
Luddite you are. Actually, not probably 40%
Luddite. STEPHANIE POMBOY: Yeah, I was going to say I
don’t think you’re that. GRANT WILLIAMS: Yeah. I was way less than
that. But again, the crypto thing- I totally
get it. I made a conscious decision a while ago that
if I want to stay current on- STEPHANIE POMBOY: You have to own some,
right. GRANT WILLIAMS: You have to own some which I
do a little bit, but it’s neither here nor
there. But you also have to follow it every day
because it changes so fast, there’s so much
going on. And the intellectual capacity of the people
who are deep in that space is so much greater than mine in the area,
that I’m always going to be at a
disadvantage. And so, I have friends of mine that pay
attention to this and I leech off them their
knowledge. The one thing I keep asking myself, and I’m sure I’ll get plenty of answers
again in the comment section. Thanks for dragging me under the bus with
you- is we’re 10 years into this thing now. And for all the promise and all the
potential of this thing has, I’ve yet to see
the killer app. I don’t see someone saying aha, there’s the
perfect demonstration of what blockchain’s
about, except Bitcoin. People argue that Bitcoin is
the killer app. Well, that’s been around since day one. So, there’s all these companies doing
amazing things in the crypto space. And I’ve spoken to a lot of these people, and they’re incredibly bright, incredibly
smart people with big ideas. But I’m still waiting for someone to say,
oh, yeah, here’s something tangible that you can understand why this thing is
the future. Conceptually, I get it. But it seems to be taking a lot longer than
I would think when I look at the amount of brainpower being thrown into
this thing. So, I’m like you. I’d rather have some gold
because I know what it is. I know how it acts in a crisis. I know that
if the electricity gets cut off, as long as I’ve got a torch I can find where
I buried it. The address of Google Maps. So, yeah, I don’t understand what the price
is doing. I don’t understand a lot of the movements in
the gold markets, but what I do understand is what it does in
a crisis and that’s really what I care
about. I don’t care about the price between now and
the crisis. I care about when the day you need to have
some. If you don’t have any, it’s too late. STEPHANIE POMBOY: Yeah, you’re not going to
be able to get it for sure. GRANT WILLIAMS: Well, I know. I hate to be
me, the one that finishes the conversation. It should be you as the guest. But look,
it’s been way too long. It’s been way too
much fun. STEPHANIE POMBOY: Even though you ran me
over in the bus. GRANT WILLIAMS: Well, you don’t [inaudible].
If I have to wait this long to do this
again, there’s going to be trouble between you and
me. I don’t want that happen, all right? Steph, thank you so much for doing this. STEPHANIE POMBOY: Thank you. GRANT WILLIAMS: I appreciate it. STEPHANIE POMBOY: My pleasure. GRANT WILLIAMS: All right. Well, I promised
you we’ll get into all of it and we did some fascinating insight. Steph is someone whose
work I rely on way more than I should. It’s always great to read. She has a
fantastic grasp on these things except
cryptocurrencies, it would appear. So, hopefully, you enjoyed
that conversation as much as I did, despite the fact that Steph’s convinced
we’re going to have to run the Samaritans helpline number across the
bottom of the screen.

8 thoughts on “🔴 The Consequences of the Fed’s Monetary Policy (w/ Stephanie Pomboy)

  1. I want to see more of her. There's a lot to learn from her slightly sarcastic world and witty mindset alone. Thanks for posting / producing this. I'm delighted and will definitely watch this again.

  2. Economy didn't start to shake because the stock market is not the economy it's the distraction to get people believe we have a ok economy

  3. Great interview and lucky to have her…lucid…thinking. Just wish she didn't look so sad…or maybe it is scared?

  4. She has such a charm! There is no reason for her to at all be nervous about an interview, it was a delight to listen to.

  5. This was a wonderful interview! I love her insights and even though it’s a dark look at the future, it’s more than necessary to help us to form ideas about how to navigate what may be to come.

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