Volatility Suppression Turned The Entire Economy Into One Big Carry Trade

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

So Tracy, one of the things that we've been talking about lately, and we really sort of drove it home in the last episode, was this idea of the entire market kind of implicitly looking like it's one trade. So many things seem to go up and down together that while you sort of think that, okay, investing should be some search for interesting, individualized opportunities, everything kind of looks like it all trades as one.

Tracy Alloway (0:47)

Yeah, that's exactly right. And I think there's been quite a lot of discussion at this point, including on that last episode about how the market is being generally driven by interest rates, aka the central banks.

Joe Weisenthal (1:00)

Right. So the story that multiple guests have told us is that, well, we get into this situation in which growth is slow, perhaps due to income inequality. That means that asset prices, rather than sort of actual demand, becomes a key vehicle of what drives the economy. That means the central bank then ends up becoming more sensitive to asset prices when it comes to easing policy that further fuels asset values, that further exacerbates the inequality problem, that further causes weakness and growth, that further causes the central banks to then act, and that we're in this spiral that by some accounts maybe has gone on for decades.

If that's the story, then I would say it really feels like COVID right now is sort of an accelerant of that whole process.

Tracy Alloway (1:53)

Yeah, I think that's right. I think it gets to a theme that we keep coming back to in all these episodes, which is if we are slowly recognizing that the financialization of the economy is not a good thing and we're trapped in this sort of endless cycle, then how do you actually break out of it? And we've had so many of those discussions now with proposed solutions ranging from fiscal stimulus to full employment policies and that sort of thing.

Joe Weisenthal (2:21)

Right, and it sort of gets to this idea where it's like, okay, if you know that every time there's going to be a crisis, like I was saying, before the crisis, and this is something that you and I talked about a lot, and you've written about it a lot, the rise of private sector debt, particularly corporate debt, share buybacks, corporate leverage, private equity leverage, people are like, okay, but this is all fine, but if there's a downturn, then this will all explode.

But of course, if the central banks expand credit, start buying bonds directly, then you can have an economic downturn in theory without the financial market exploding. And that's kind of what we saw happen in March and then through now.

Tracy Alloway (3:02)

Yeah, exactly. And I think, I mean, this is one of the reasons why we're talking about this, right? People intuitively feel a little bit uncomfortable about the real economy being in a terrible state while financial assets are booming.

Well, well, they never mind.

Joe Weisenthal (3:18)

Were you going to say that they were booming up until a few weeks ago?

Tracy Alloway (3:22)

Yeah, I was. I'm trying to caveat just in case the market crashes further over the next few days.

Joe Weisenthal (3:28)

Well, we are recording this on Thursday, September 24th. I think the episode will be out in a week.

So who knows? Either we may have had a crash since then or we may be back to all time highs on the S&P 500 But hopefully, whichever way it is, or maybe it will just be flat. Hopefully, whichever way it is, I suspect that the conversation will still be useful.

Tracy Alloway (3:49)

Still be relevant, I agree.

Joe Weisenthal (3:51)

I think so. So today we are joined by three guests who are all the co-authors of a new book.

It's called The Rise of Cary, The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis.

That last line, decaying growth and recurring crisis certainly feels like a theme. And I'll do a quick bio, a quick intro of our guests. So we're going to be the three authors are Tim Lee. He's the founder of Pi Economics and has a long time study of the field.

Jamie Lee, he works for Jeremy Grantham, also a long time expert also in environmental research and volatility trading. And then Kevin Coldiron, a lecturer in financial engineering at UC Berkeley's Haas School of Business. So we're going to see how this goes. We're going to see what the rise of Cary is all about before we bring them in. I was just reading the dust jacket again and the questions at the beginning feel like the questions that I really do think are on everyone's mind. Why have markets risen and crashed so spectacularly over the past 25 years? Why is the stock market outpacing the growth of the economy? Why do companies buy back stocks? And this is a really big one. We should probably question ourselves this a lot at the media. Why do traders take every utterance of central banks as the word of God?