Why You Can’t Blame The Fed For Ultra-Low Interest Rates And Soaring Asset Prices

Joe Weisenthal (0:11)

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

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, obviously, still in the middle of this ongoing crisis. And I think one of the big questions that I've wondered about, or something we've been talking about for a while and thinking about is whether it would lead to any substantive, meaningful economic policy changes going forward that causes the economy to look at different than it did pre-crisis.

Tracy Alloway (0:45)

Yeah, I think that's right. I think there's a sense or a desire that after the worst economic crisis in decades or possibly in modern history, you would want to see some sort of change, something to happen to the global economy so that the next time something like this occurred, you wouldn't see as big of a knock on effect on the economy.

But do you ever get the sense that things sort of become more entrenched rather than change?

Joe Weisenthal (1:15)

Yes, it does feel like that. And I have to say, I don't know what the future holds, but today we're recording this June 4th.

I'm less, I think it's, I feel less confident today than I would have say in early April that this crisis will lead to some sort of major change in policy, some sort of major demand side change or major change in how the world trades. It's not over, and we still don't know the lingering effects at all. And unemployment remains sky high still. So there are incredibly serious issues, but at the moment, the sort of policy momentum that maybe we, it looked like we might see in late March or early April, it feels less strong today. And it feels like, just as you say, the sort of inertia, the entrenchedness of the existing system may yet survive.

Tracy Alloway (2:14)

Yeah. I feel like that's always a risk after a big crisis and tends to happen quite often. I should just mention that this is the week we're seeing a lot of social unrest and mass protests in the US. So the policy conversation is sort of drifting further away from economics.

Joe Weisenthal (2:33)

True.

And also just within the context of the social unrest, I think important to point out just like how incredibly difficult it is to predict anything in the future, let alone, two weeks ago, not many people were anticipating this. So things as they say is kind of a cliche or very fluid in anything that happened.

Tracy Alloway (2:58)

Yeah, I agree.

Joe Weisenthal (3:01)

Yeah, I'm glad we agree.

So that being said, like we're gonna talk about plausible changes or what could change. It's worth discussing what the regime, what the system was like before. And of course we've done a lot of that with like our recent interview with Matt Klein, Adam Tooze, Brad Sensor. A lot of these discussions have centered around this question, what could change, but also understanding the set of conditions that we saw before we got into this crisis that created the economic and market backdrop that we saw.

Tracy Alloway (3:36)

Yeah, I think that's right. And certainly one of the big focuses for us in recent episodes has been in particular, the dynamic between the US economy and the Chinese economy as well. And you mentioned Matt Klein there. That was a great episode where he really dug into it.

But we've also discussed that relationship in the context of the financial system, savings and balances and that sort of thing. And it is basically a bedrock of the way the global economy, the global financial system works. But I don't know, I feel like people forget it sometimes.

Joe Weisenthal (4:12)

Totally. So I think it's worth again, continuing to dive deep into this, into what this system currently looks like. And in particularly this combination that we've seen for a while of very mediocre growth rates in terms of just in terms of GDP, very mild inflation everywhere, despite the sort of effort among central bankers to get it going almost no effect, extremely low nominal policy rates.

The Fed hiked a few times and then had to backtrack on them. And then also the boom in asset prices and the fact that stocks, despite a lot of stuff prior to the crisis being just sort of mediocre, just this incredible 10 year bull market with a huge concentration of asset inflation, so to speak, among like growth stocks and tech stocks. So I think today we're going to try to pick apart what that setup was like, because I think it's important for people to understand the connection between all these things as they think about what could change or what could go back to normal and what that would mean for market.