Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe, wi Isn't Thal, and I'm Tracy Allaway. Tracy, So, obviously, UM markets continuing to have an extraordinary year at least risk assets. For the most part, stocks continue to power to new all time highs all around the world, optimism breaking out. But I'd say like the nature of the stock market rail or the nature of the market rally in general, is sort of taken on a different complexion lately. I think people have been nervous about valuations for some time, and the idea that even though we've had the biggest pandemic in over a hundred years, which is really eaten into economic activity, we still have stocks at a record people sort of naturally feel a little bit nervous about up. And then recently we had the sell off in U. S. Treasuries as well, and a little bit of a pickup in inflation expectations, which might be the beginning of UM Well, some people are talking about it being the beginning of a bigger change for the market, and this would be a good time actually to mention that we were recording this on Thursday, December three. Caveat yeah, that the whole world may have changed by the time anyone actually listens to this episode. But yeah, we have seen a little bit of an uptick in treasury yields, market based measures of inflation actually higher than they were pre crisis, some measures back to levels not seen since. And also if you look at some of the really hot stocks lately, it's some of the real like sort of back to normal, unsexy stuff out there. So it's like airlines and physical retail I think like shares of Macy's are up in November. US steel uh Steel Company, absolutely wild chart. If you take a look at that sore is it in the beginning of this rally, and it you know, thinking back to the spring, it was very much like tech and the stay at home trade we're starting to see broadened out and so people like buying energy. Another area oil doing very well. So these areas that did not participate in the first part of the recovery or for several months into this have been getting a lot of excitement later enthusiasm. Yeah, that's right. And of course we have talked about you know, another sort of great rotation coming up. Yeah, right, And of course every time we talk about these rotations, there's the question is like is this another head fake so we just get is everyone just gonna go back to buying Fang and Microsoft and you know, of course treasuries in a couple of weeks or is this something new? So lots to think about as we close out from a macro perspective, all kinds of different moving part going into Yeah, and I think, you know, there's clearly a lot going on. But UM is going to be an interesting year, right, Like if you just look at the market currently at all time highs, you have that broadening of the rally. The big question is whether or not it's going to keep going, and then you have all these idiosyncratic events like what happens with the vaccine and of course how do central banks respond to that. If we get a vaccine and the economy really starts to recover, then could you finally finally get inflation, which you know could unsettle the market in one way or another. So I think you're right, like there are these turning points that you can sort of see on the horizon, but the big question is whether or not, um, you know, we're just gonna be talking about them or actually experiencing them, whether or not it's another head fake. Yes, yeah, no, Yeah, it's gonna be a really interesting year. Let's hopefully it's not as interesting as but you know, for our sakes from a stuff to talk about the standpoint, we hope it's at least somewhat interesting anyway macro. So yeah, to talk about the outlook, I thought we'd bring on two of the smartest, uh people who know who discussed macro from both of pure econ perspective and the market's perspective. Both have previously been on the show. I wanna bring on Novel Sinala, he's a macro strategist and portfolio manager at e i A All Weather Alpha Partners. And John Turk. He's the author of the Cheap Convexity blog, which has been a must read all year for people in the know on macro and market, sort of tying together both the price action and the bigger economic themes of the year. So Novel and John, thank you so much for joining us. Thanks for having me, Yeah, thanks for having me absolutely, thanks for coming back. So sort of started off broad and uh, either one of you could pick up, but sort like, what's the number one thing on your mind right now in terms of this sort of the big questions are the big the big things to get right when you're thinking about the outlook for market. I think we would probably both agree that the dollars, you know, kind of at the focal point of our analyses. Um, you know, we we we are in a very new interesting regime with the FED. And if the FED is to follow through on this um you know, new regime and framework, then what that would suggest is that, um, you know, as we get positive outcomes in the macar economy, it should actually lead to feedback loops via a lower dollar. And so that's why we've been, you know, here at we've been really focused on expressing a lot of our bullish trades through short dollar expressions. UM So, I think, I think getting the dollar right, getting the FED right, and then fit figuring out the similarities and differences between what what is a vaccine type of reflation and what is a you know, typical stimulus type of reflation. And and John's written about all these things, um and and a lot of detail and and that some great frameworks. I'll let him jump in a little bit too. Yeah. No, I think I think as has been the case, you know, in the last few weeks. I think the dollar will probably continue to be like the folk grim instrument for kind of how the market digests and prices going forward to this recovery. UM, I think what's kind of interesting is and as not fools suggesting with the with the new FED reaction function, is that the FED has moved from like their primary objective of being able to cut off left tails right to suggest that, Okay, something's bad has happened. How do we respond, either through you know, financial markets or whatever. And now as there's a train in motion, the Fed's best move in terms of kind of accommodating this recovery will basically be pushing whatever the train is and giving it another nudge. So in the QT end of Q three, we thought this train was probably going to be fiscal, and in August we were kind of pricing this more MMT type world, and then fiscal negotiations kind of fell apart. We had an election where we're likely gonna have a divided government, so the market scope for fiscal kind of came down. And now post the vaccine news, we kind of begin to entertain a market that is like goes from a fiscal lead recovery to a private sector lead recovery and UM, and that maybe change the channel, but it still gets the train in motion. And now the FED can jump on and say okay, like there was you know, an awful pandemic last year and now we're in one with a vaccine and that doesn't really change anything for policy. And that's a really powerful, i think macro tool for them to basically push push forward this recovery. Now you mentioned the idea of a week or dollar and feedback loops, could you maybe go into some more detail about how exactly you see that working. Yeah, So with respect to the dollar more structurally, you know, if you if you think about the regime from say the financial crisis until COVID, UM, you know, the dollar was like the only game in town in terms of collecting yield and having positive growth prospects in the major economies and the major accessible markets. UM. COVID's really changed that dynamic. As you know, the FEDS uh kind of caught down to like Europe and Japan interest rates wise, as well as has changed its reaction function to be far more devish and far more accommodative to positive outcomes. At the same time, China has kind of taken the rule of you know, the yield premium uh and and they've made some changes to their to their markets. UM. You know, since especially since when they when they had their FX policy shift, and you know, the the Chinese government bond market has has really turned into this UM. You know. I think the way John put it once is just you know, it's like one big sucking sound of capital, just really big one way flows. And so what that what that kind of means to me is that um, you know, there's a structural, structural headwinds to the US dollar and those those um will not only be reflecting positive outcomes and reflationary outcomes, but will also likely be driving them UM in a feedback loop as well, UM through a variety of channels, both through you know what that means, UM to to create accounts as well as you know, just general credit creation. I'm curious about this idea, and John, You've talked about a lot, both of you, but the idea of there being a meaningful difference between a fiscal stimulus lead reflation and a vaccine lead reflation. So it's funny because you know, it's you discuss John, it's like going into uh Q three and beginna give Q four. That thought was like, Okay, maybe we're gonna get a fiscal deal, or maybe Biden is going to win with and get a Democratic Senate and then they're going to pass a massive bill next year. But then that didn't happen. We didn't get the unified government. There's no fiscal deal as if yet. And yet like a couple of days after the election, we got the really good news about from Fiser about their vaccine, and suddenly people realize that a vaccine is likely coming and it's going to be effective, and the renormalization of economic activity might truly begin in earnest sometime in the beginning of So from a sort of market standpoint, what are the meaningful distinctions between that recovery led by a vaccine and a return to normal verse or recovery led by a sort of Cares Act two point right? I think it's I think it's that it's such a key point, honestly, and it has been a big theme for the last few weeks. And I think it works through two channels. I think one is the fundamental economic channel, which is to say that a fiscal deal that has a very heavy composition towards transfer payments, has a much more immediate nominal impact, right, because it goes into people's pockets, people can spend. There's a consumption element, and it's it's much more nominal because it's not followed by there's no new productivity, there's no new investments that are it's very consumption focused, and that kind of that is you know, trickles out through the trade deficit. It's a weaker dollar, but it's you know, it's consumption lead, so it has a much more nominal impact. The vaccine, on the other hand, is different in the sense that it's much more on the corporate side in the sense that it gives business is kind of more clarity in terms of capex, inventory, restocking, more you know, business related decisions, and that has more of a real impact um in terms of, you know, leading to potentially like higher levels of real growth UM in the coming year. And I think basically what the mark it kind of did with this transition from a fiscal regime to e vac's regime, is it traded scope for certainty, right, the potential of like more of an mm T type fiscal approach was kind of like, oh, we could have like high levels of nominal GDP and that could be pretty cool. But what the vaccine regime brings is like we kind of know what the world's gonna look like end of Q two on next year, and that has a massive reduction in risk premium, and the market can levitate off that. And if I could add a little bit to that as well, you know, um, and you know, you definitely have seen this what what John's mentioning, You've definitely seen it in the markets, whether it's you know, some of the beating down cyclicles, um, whether it's you know, the trade sensitive places like you know, the kneek has been one of our our long stuff to play, this vaccine trade um, and even you know, these these dislocations between gold prices and real yields. I think all three of those things reflect exactly what John saying with respect to the reduction of risk premium. But in addition as well, I think one other distinction between the two types of you know, two types of reflation are that the consumption basket mixed should likely shift towards services as um. You know that we get this normalization type of dynamic, and that should be really interesting to me because for two reasons. One one tail wind to the short dollar and and and long room and b type of dynamic has been so far has been how much um, you know, the consumption basket mix has has flattered you know, the the goods exporters like China, um and and so it's you know, we may see some hiccups, UM you know, also retracements or this or that, uh sometimes you know early next year, but especially if you know the trends able to persist and and you know ultimately get through those, you know, those types of transitions that would really reinforce UM the case that this is a structural shift and has you know a lot of likes to go. And the second point with respect to this, uh, you know, the consumption basket mixed shifts to services is one thing I'm really interested on and to see is um if there's been if COVID ends up being a permanent downward truck to the labor intensity of services output as in, you know, the services output and services demand rebounds, but does the employment side of it under underperform the output side of it? Um And and that would be that be really interesting. You know, the idea of being you know what the w t O and and the Chinese entrance of w t O what it was too goods and and the labor intensity of goods. We could see a smaller version of that materialize and services. Um. I don't have a strong view yet about this. I think it's really gonna be just something to keep in the back of our minds and and see how it unfolds in real time. But if that were to materialize, that would um just give that much more of a of a tail wind for the FET to remain at commendative because you know, the the employment would not be the employment picture wouldn't be recovering, um, you know, necessarily as as as swiftly as expected on the services side. So just on that note, I mean, we are starting to see some commentators, including some former All Thoughts guests, but you know, people like Tim Dewey at the University of Oregon talking about the potential to have a supercharged economy next year, where um, you know, everything looks pretty good, you get a vaccination, people go back to spending, unemployment rebounds and isn't actually you know, as bad as maybe the FED was expecting, and perhaps it sparks a little bit of inflation that puts the FED in an awkward position. Is that a risk that you see for next year or do you think the structural changes that you just described you're going to be enough to avoid that scenario? I leave at me personally, I think the FED will likely an accommodative. What should be interesting is, you know, to the extent that we see these dynamics start to emerge in the conversations, it's it's likely to be reflected in internal divisions within the f OMC. And so what I'll be really interested to see is how chair Power kind of navigates those decisions, those divisions and you know, kind of put on a bit of like look at some of the statements to do more of a political lens along those lines. Um. But yeah, I I think that, Um, there's a there's a pretty high chance that we have a very strong economy next year. UM. You know, some some of these south side forecasts may actually be you know, a little bit lower than you know, what I would expect. And you know, we'll we'll we'll know more, um, you know later this month, but especially around the March f OMC meeting. Um. But the side so far suggests to me that, um, you know, this is a new regime shift and we were not really gonna, uh, they're not really going to get ahead of it. And and just to be clear with respect to what I was mentioning with with the labor intensity of output of services, that would be more of a question about on the back end, like not necessarily in the next few months, um, but more so about you know, what's the what's the long term run rate of you know, employment growth in the service aside um, and what does that mean for you know, fat forecasts where where are they're likely to have to mark up and down you know, the longer term forecast. But I know this is another question that I'm sure John has some some great thoughts about two, so I'll let him jump in. Yeah, no, I I think it's it's it's really interesting in the sense that the recovery next year is going to look very different than ones of at least the most recent past in terms of output shocks, in the sense that balance sheets are in a much better position, as people like you know, Tim doy have said that there's you know, there's this element of excess savings and that's kind of come from this combination of the cares act kind of having this huge multiplier, but also having the you know, with the virus, having these con strains in terms of people's ability to spend it. Um. And I think the other thing is we actually went into the crisis um with you know, household balance sheets in relatively good shape. Um, So coming out of it, it's not that Usually in a recession you kind of have this lethargic hystory sis kind of as people have to repair balance sheets and that's that's why it takes time for recoveries to get off the ground. Um. And I think that could be very different this time, given that it's just we had a we had a recession where disposable income went up, so um it could you know, very much change the scope of the recovery. And as it relates to the FED, I think and I think, um, this is this is something I'm fairly confident, I think, and people are underestimating. Is I don't think the FED reaction function or response so far is cyclical. I think it's structural. And what I mean by that is I think the FED is kind of is not saying like this was the right reaction to a COVID shot in the sense of their forward guidance, Balancie policy and there and and and etcetera. I think what they're saying is is like, we got things wrong a few years ago and that's not going to happen again. And the manifestation of that will be that, yes, things are going to be quote unquote back to normal in the middle of next year, but the FED won't because it's not a cyclical response, it's a structural response. So I I think the FED will be much more dubbish than I think a lot of people think. The recaliboration of their approach, especially with respect to the Phelps curve, pre Dace COVID. Right, So what what John saying makes a lot of sense to me, and conversations with John have actually kind of influenced my view here. One last point I'd like to add there is, you know, I think that one of the biggest things that um, you know, I had to adapt to in real time and it kind of change my mind on is exactly that Tim Dewey hypothesis of excess savings. And you know, John and I have talked a little bit about, you know, what would be cool ways to maybe think about the distributional aspects of this and if if the data you know exists for that, and that could be a key question to really gauge how far it can take us through next year. But it is really interesting, you know, the the initial conditions really do matter in terms of macro economic thinking, and the initial conditions the balantie wise on the household side especially, don't really suggest that we have to have very elevated savings rates for a long time, as as balanties have to have to get repaired and to the extent that we would need elevated the savings rates in response to the you know, virus uncertainty. It's kind of similar to what John was saying with respect of the risk premium compression on the back of the vaccine news. You trade scope for certainty, and that certainty ends up being a pretty big headwind. Tom, you know how high personal savings rates you know, end up being next year. So one of the questions that I think the off all I've asked you this before, but it's something I've been curious about a lot. Like or we talked about regime shift and the FEDS regime shift is fairly clear and you believe it. And they're going to be uh much less aggressive they claim in um hiking raids. They're not going to be trying to get ahead of inflation in the same way. And so that's potentially quite significant. Obviously, the post COVID economy could look different than the pre COVID economy in ways, and we'll talk about that more. But what does that mean for then sort of like normalized markets? And obviously right now, as we said in the intro or in this era or this not era, or in this like moment where people are buying like Macy's and airlines and steel companies, companies that were not sexy at all pre crisis um suddenly getting some sort of back to normal appeal. But in as we normalize and maybe in just sort of like Q three of next year, things start to look genuinely normal. Do uh, do people just go back to buying Microsoft and Netflix and Tesla as their leaders or do something fundamentally changed where like new winners can emerge on a more sustainable basis. That's a great question, UM. I wish I had a great answer to that. Um. You know, on one thing that should be interesting along these lines is Um, the results of the of the Georgia elections likely give some signal with respect to what we can expect on the fiscal front until the next batch of mid terms two and that should be kind of interesting to keep in the back back of our minds. But but yeah, you know, I think that at some point next year, I wouldn't be surprised if, you know, we kind of pivot back to you people are long and long the long end of the botto market and long you know, NAZAC and and and China tech um and And it's it's interesting actually seeing how we've already kind of we we despite the fact that we've had this huge cyclicles m rally. You know, the NAZZAC actually did kind of catch catch up a little bit in in in recent sessions. So I think there's still gonna likely be a structural demand for that type of stuff. UM. And you know, I would say though that like I'm I'm actually more interested in like in terms of normalization trades that have durability. I'm more interested in um, looking at things in the emerging markets and looking at stuff that's sensitive to global trade growth like th nik UM as opposed to you know, just buying you know, US energy stocks and and you know retail operators. I think, I think, I think, I think it's right. And I think one maybe of the more interesting transitions to come in, you know two could be in terms of like these narratives of like a fiscal reflation to a vaxx reflation, is that the vax reflation kind of morphs into this broadening of a risk premium compression. And I think like one of the I think a lot of the market action post the vaccine kind of felt like like the market was exhaling a little bit, right, Like it had all this built up risk premiums and like all these cyclicals had no idea um and you saw like across asset classes in terms of like trade sensitive currencies, etcetera. E. M. Bond markets where there's just this very high level of risk premium. And I think this kind of really dated back dates back a while. And why I think this could be maybe a bigger theme is that it's it could be another one of these regime shifts, because what we had in two thousand ten to two thousand twenty was basically post financial crisis was basically exhausion, a shock after exhaus A shock, and we had we went from the euro crisis to China devel concerns, to Brexit, to trade war and finally the mother of all shocks in terms of COVID and unfortunately passed away this year. But Emmanuel Farhi had Harvard actually did a lot of work on kind of why the market price so much risk premium when discount rates were so love and I think it has something to do with this, and it led to things like, you know, we'd have like the you know, swissy currency on a on a effective exchanger evaluation metric, be it like you know, just going a straight line from two thousand ten to two thousand twenty, when things that were like cyclically driven like the Swedish chrona or the AUSI doll or things like that would kind of just be in a decline lower. It was basically the market just saying I want safety at all costs, and I don't want I don't want anything to do with cyclicals. I don't need that. There's this embedded it is premium, and I think it's right for it to be there. And I wonder if kind of the vaccine and the combination of all these left tail measures we've taken with fiscal filling in for deflation with the European um with the European Deal, and and and things like that. UM, I wonder if the combination of of left tail changes and this catalyst to reduce risk premium kind of you know, can have a higher trajectory than people think. You know, I'm looking right down on the Bloomberg terminal of the IMANXI have the Emerging Market Index and on a large term scale, and so interesting because you know, we haven't gone anywhere since two thousand and seven. Um. You know, it's just been a bunch of zigs and zags along the way. So you know, a lot of altility long the way, but we're basically you know, haven't made any upward progress. UM. I think this is before carry albeit. But you know, if if if the framing that John and I are presents, especially with respects to the dollar, if those end up being right, then I wouldn't be surprised. If you know, some of these emerging markets are are really kind of coiled and and and could could be a really interesting and more durable trade. And as we as we kind of handoff, like like John said, from just a pure vaccine excellation to a broader based you know, reduction risk premia, and I would I would expect, you know, the emerging markets trade to probably have more durability along those lines than just you know, the US cyclicals and US small value. So this was actually going to beat into my next question. But we started this whole conversation talking about how the dollar is going to be really important to one and the more you talk about sort of your specific ideas, I can see why you're so focused on the dollar. So clearly, if you're long emerging markets, that matters quite a lot. Do you think, well, first of all, what would it take to get a higher dollar in this environment? And secondly, is the suggestion here that the Federal Reserve has sort of become comfortable with this idea that it's the world central bank and that it's actively looking at financial conditions and actively caring about a stronger US dollar and what it does to the rest of the world economy with respect to what it would take for a higher dollar. I mean, one one thing that I would obviously do that is if the Fed ended up being less debbish or less you know, authentic, and its reaction function shift than then we might be thinking in this conversation UM and and more more tactically in terms of like shorter term trading. I think that like I mentioned earlier, you know, the combination of of the consumption basket and make shifting towards services at the same time as potential for you know, maybe a little bit of uh comp of the of the yield spread between US and China. UM that could doubt that could give some pickups along the way, UM, although I think they would be opportunities to add or enter into these types of trades UM. And with respect to the FED, UM, I do think that you know, they've become more comfortable with this, this notion of being in the World Central Bank, you know, BRAINER has been really influential along the lines of how how the international conditions kind of UM, you know, are part of the analysis to f OMC has to make. But I think more generally, UM, you know, and even before COVID, it was just this notion that why were we hiking in the first place, Like why were we short circuiting these recoveries when you know, our Phillips curve kind of based models UM never really showed like UM and never materialized, the inflation never came, and um, you know what what are what are the costs benefit trade offs? Um? And I think they have come to the conclusion that it's time to letter rip. But again, you know, you know, I think John is a little bit more confident and I am about this, although you know, I wouldn't be surprised if I kind of converged to his views. But um, you know, the question there, I think is going to be about how how does Chair Powell navigate what are likely to be kind of emerging internal divisions, even if they're not super strong. Um. You know, as as these uh you know, as members of that form, you start thinking about the back end of of of this recovery more so than just to hear and now, um, that should probably become more more in play as a debate, and um, you know, it should be interesting to see how he navigates that. And I'll let I'll let John hoppin about about both questions as well. Yeah, I mean I think on the on the FED. On the FED part, I think it's I think the FED really nailed And there's a brain Arde speech in July that kind of really crystallized this when she talked about kind of stabilization to accommodation, and and I think that the FED is very now comfortable in the idea that a lot of their policy effects kind of happened in the second derivative. And it's not like the traditional Michael Woodford, Oh, we do que real interest rates, ball term premiere compresses and aggregate demand goes bonkers. It's not like that anymore. It's how do we, through financial markets, through financial conditions kind of create these feedback loops that basically allows our policy posture to expand for us. And it's actually much more durable because they because their feedback loops, they play off each other. Right, so the FED can say that Okay, things are going well, that changes nothing for us. That has an effect on the dollar, which has an effect on real yields, which has an effect on the dollar. So kind of setting these things in motion, um I think, well, kind of I will add power to the FEDS very procyclical ability to ease and in terms of the dollar, in in the sense of what could possibly be potential positive catalysts, I mean, I think number one is I think probably positioning um as like we kind of get into January and it becomes a very consensus view. Um, there's always these Q one shakeouts. Um, it seems in terms of the popular trades. Um. But I think what maybe actually kind of may be able to offset that is that a lot of people, I think want to play um, these trades in a catch up stence. Right, So you see these things like oh, copper gold ratio has gone vertical, and and and Russell versus SMP, etcetera. And the tenure bondild has done pretty much. I mean it's you know, marginally higher, but it's not really done anything. And I think a lot of macro is still kind of looking at like, Okay, how do I pay rates to play this catchup or how do I do? And I think that's really missing the point because the reason these things can go vertical is because they keep looking over there. Russell luson P ratio keeps looking over its shoulder at the bomb market and seeing nothing. So that's what allows it to go nuts. And saying with a lot of the cyclical data. And so I think that a lot of these things, Um, yes, there will be probably hiccups in terms of you know, in terms of the recovery, in terms of the vaccine rollout, etcetera. But in in bigger picture terms, I think the trades that are working now are still the bigger trades going. I want to actually, like, really have you spell out that last point, because it sounds pretty important. People look at the rebound and small caps value commodities copper to the commodity, and they're like, all right, but when are yields going to catch up? But it's not like that. There's no inherent with this new FED regime. There's no inherent reason for yields to catch up. And if anything, it's this ongoing compression of the long end of a curve that further accelerates the gap between the two. Just sort of explained that, or if if I'm if I'm summarizing your view correctly, and how much longer that that dynamic could potentially run. Yeah, I know, I think you actually summed it up perfectly. I think that it can run further in the sense that there will be these times when people are like, oh, maybe we can like price in hikes three And you've seen this recently a little bit on the backs on the back of the backs reflation narrative, where within the bond market, if you look at like a butterfly, you'll see that the belly is kind of cheapening at the same rate and the long end is and that's kind of saying like, okay, like maybe they'll be you know, because usually when the belly leads, like the belly lead the bond market lower, so that's like five seven tens, and when that happens, you kind of say, like, Okay, this could be a policy changes coming. But I think bigger picture is that all this stuff is kind of there. There used to be these cut off mechanisms to these moves, right as in cyclicals would get off the map, the dollar would start going lower, and then we'd say, oh, and to this means in two years that the FED can remove accommodation. And now we're saying that in two years the Fed's accommodation level is going to look really similar to what it is now. And I think that's a very powerful point going forward. You know, before we wrap up novel, i'd love to go back to your point about could the COVID nineteen crisis b two services productivity as China's entry into the w t O and two thousand was too uh goods productivity and the sort of deflation or disinflation that we start for the next couple of decades in goods. Walk through your thinking there. What do you see happening out in the real world, out in the economy that you think could cause this where we return to services pre crisis levels of services consumption but not pre crisis levels of services employment, and sort of a why do you think that's a possibility, And what do you see as some of the not gund effective that well, the you know, first of all, this is very speculative of a view. It's something that I'm just kind of you know, I just want to see how it materialized is more of a question than a view. But this this was a huge shock, and it was very very concentrated in the services sector. And so there's there's always this kind of you know, necessity is the mother of invention type of thing, type of dynamic. So that that's one thing I think that you know, service services oriented businesses have been likely focused a lot on the technological side um in terms of how they kind of restart um their businesses. And and secondly, you know, the COVID, the COVID shock kind of just digitize everything and um pulled forward a lot of this kind of technological um you know, implementation of a lot of things, and so you know, I wouldn't be I wouldn't be surprised if if, if that's how it materialized, what it would look like in terms of, like on the ground the real economy. It's a good question. I don't I don't know if I have a great answer, But in terms of knock on effects, what it would mean is that we would have another kind of wave of you know, positive output shocks that the FED doesn't necessarily need to a short circuit because it's not seeing the same um impulse on employment and inflation. And you know that's likely you know, if that were to materialize, that would likely be you know, another inequality widening dynamic, and you know it would it would lead to kind of like a Goldilocks type of environment for the markets. UM. So you know, that's that's one thing I'm interested to see as we restart the services sectors, what are we seeing in terms of the output res employment picture, especially like later in the year once we're kind of because and you know, on the front end of of reopening and we normalization, you know, the we should see a very robust hiring response in response to you know, a rebound and demand. But I'm interested to see if if that kind of tapers off a little bit relative to output, and if that does happened, that that probably has some implications for longer term bond yields until unless, and until we do see some sort of more structural um fiscal policy shift, because um, you know, I think that that's gonna be necessary, uh to offset some of these inequality widening forces. And and that's that's kind of when you know, you start looking at the two mid terms and stuff like that, to an extent, the Georgia elections too. But even with the Georgia elections, you know, even if both seats go Democrat fifty fifty with a Vice President Harris tiebreaker, the folks with the most leverage in that environment would be the centrist Democrats. Um, you know that you need Joe Banshon on board for a lot of a lot of stuff. Um, it's very different than you know, if you have like fifty three fifty four seats UM in the Senate, and you know, the progressives would have a lot more leverage. So that that's kind of a messy wave of me trying to lay out how I'm thinking about this. So I'm thinking back to the beginning of this year and when I think about all the crazy things that happened. I mean, just just in January, we had the beginning of the COVID outbreak in earnest in Luhan, we had UM, you know, the US and and Iran getting pretty close to an all out war. UM lots of things happening. I mean, Kobe Bryant dying in a helicopter crash like that was a big deal as well. I mean, I'm thinking about how to phrase this question, but like, what what is your tail risk that you're watching out for in UM one but not the obvious ones, Like we don't get a vaccine that works, what's your sort of out there, what's your left field tail risk for? Yeah, the the the the unknown unknown. I think that I'll I won't I won't try and predict that, but I'll go with I think that it will be very interesting in a policy sense, not only like kind of gauging new reaction functions in fiscal and central banks around the world, but kind of gauging UM, when when will when will the rate of change matter? In terms of policy easing, right, and it's like, will the end of one be kind of these rolling cliffs of either central bank accommodation and ending and fiscal accommodation ending, because we like to forget that even though that, you know, the US has had a messy kind of fiscal picture, even though the Cares Act was obviously such a success, the rest of the world is actually kind of doing it a lot more effectively. I mean, Europe has its issues with disbursements of the you know, this supernational project, but Germany and France both acted when mitigation measures went back into effect. Canada is, you know, promising more fiscal next year, Australia, New Zealand the same, even Korea surplus. Korea has an expansionary budget for next year. Japan's on their third or fourth supplementary budget. So a lot of these, you know, these changes in what was previously pretty dogmatic behavior from a lot of fiscal actors has happened. And the question is, I guess, kind of looking at it for more of a tail risk scenario is what if a lot of this goes off kind of cliffs off at the same time, and then the market kind of becomes uncomfortable with this fiscal transition, you know, into the private sector, because for the last ten years, the private sector hasn't exactly achieved escape philocoity on its own, or it doesn't have a good track record of it. So I think, in terms of risks, I guess that would be my risk. I think that makes a lot of sense to you know, um as John's mentioned, um a lot about how there's kind of a procyclcality element and dynamic with respect to this fat regime. So if we do see some rolling cliffs in terms of greater change of of of policy accommodation, at the same time as kind of the the big normalization boost kind of starts to taper off, um that that would be kind of a nasty cocktail, especially because you know, this is a question I'm really I'm really interested to see in the back half of next year. You know, what is what is the run rate that we kind of converge back to, like, you know, has nothing really changed in the underlying picture? You know, once we're past you know, the COVID shock and then the real the real the normalization shot upward shock, you are we in the same kind of nominal growth environment as before, because if so, you know, tapering off to that to that kind of run rate at the same time as as um, you know, if if, if, if we do see some sort of cliffs on the policy front, it will be approachately could go on the way down as well, the same way it's been really effective on the way up. And I guess the other other thing I would mention would be, you know, just a typical classic macro punter geopolitics, Right, anything can happen with respect to geopolitics. I I think it'll be interesting to see the approach that Presidental like Biden takes with respect of China. I I understand that you know that it's it's it's nice to have a lot of the uncertainty removed. But um, you know, as I, as I mentioned a couple of times on on Bloomberg with with You Joe, during the trade war, I I always kind of looked at it as it was a lot more bark bark than bite. Um. And ultimately, you know, the trade deal quote unquote was you know, it didn't really change anything structurally and and actually it's cemented financial entanglements between um, the the U S and China. President Elect Biden's approach may kind of depart from that, and so we could see some geopolitical hiccups along the way, especially because China is becoming a little bit more aggressive with respect to UM what it considers its clients. I'm sure that you know we're gonna see Alliance building UM start to emerge or Alliance rebuilding start to emerge. But you know, the transition has the potential to be a little bit messy. And in fact, I think that you know, the personnel decisions that the transition team is making is interesting because the Under Secretary of the for the for the U. S. Treasury of them UM, he actually was the lead negotiator for TPP. I think it signals that president like Biden wants to take a relatively active stance with respect to China. So you know, that's always that's always kind of in the cards, and it's probably a little bit less top of mind than it was under the Trump administration. So that could be something that catches us by surprise. Well, John and uh novel, So great to talk to both of your real treat tons to think about into Maybe we'll do like a mid year update like next June or July and sort of take stock of how things are going. I think that begin absolutely all right, Well, looking forward to it, and I appreciate both of you and all of the work you've done this year and helping us understand this. Thanks for coming out and out love. Thank you, Yeah, thank you, Look forwards the next time. Take here you guys. That was great. I really think it just in terms of understanding this year, I mean throughout following both of them on Twitter, following their writings, etcetera. I don't think there's any two people that I think have had a clearer sense of the moving parts of the macro picture than those two. So's uh great to talk to them about what they see happening next year. Yeah, it was a really nice framing of the big macro trends. Fore, I gotta say, you mentioned this idea of coming back and doing a midyear update. I really hope, I really hope that January is relatively boring and that it's not a repeat of what happened in January, and that we don't have to have them come back on in February or something because the world is following. I really hope that's the kind of um. But so like I wanted to be, like I said, it was at the beginning, a little less interesting, but you know that I don't want to boring year, but a little more boring. Well, I think even if even we get a vaccine, and even if we get a global economic recovery, which might normally be considered boring for financial journalists, I think it's still going to end up being an interesting year. As John and now we're saying, because of the policy implications and and this this handoff or the interaction between fiscal inflation and vaccine inflation, Like, even if everything goes as they were describing, there's still a big question mark over how the FED reacts to that combination. You know, the point that John made and both of them about the pro cych locality, the feedback loop of the current FED posture. I just think like cannot be sort of understated. This idea that like, okay, the FED has let's say the FED holds rates at zero and so um, you know, earlier the year we had unemployment at over ten percent, So zero raids unemploye and over a ten percent, you know, they have this accommodative level. If the FED is still holding rates at zero with no intention of hiking anytime soon. When the unemployment rate is blow seven percent, then that is implicitly more accommodative because the level of the economy has improved, but we haven't got any corresponding tightening. So implicitly we've been having this ongoing easing ever since the economy started rebounding in late March and early April. And I think that helped really helps explain some of the extremity of these moves. That it's like if you're sort of easing further implicitly as the economy recovers, we you know, you could see how you know, there's the feedback loop that's sort of like, uh, I think I remember someone put his like rocket fuel for the market. Yeah, I think Knof actually said that. Um no, that's exactly right. It's and I think they mentioned that Brainerd's speech about going from stabilization to accommodation, like there's a policy shift that is taking place. Um And so when you when you look at it through that framework, thann u s stocks at an all time record, like it doesn't seem as divorced from economic reality as as it would be otherwise. I do think like that like the big question mark, however, is still like in the post crisis landscape, whenever we could declare a post crisis, which is probably at some point when everyone a lot of people have had the vaccine and it's just not a big issue anymore and everything is totally reopened. Do we just go back to the pre crisis environment of people buying tenure bonds and Microsoft and calling it a day, or is their new leadership? And like, I'm kind of skeptical that anything meaningfully macro changes, And I'm thinking back to our conversation with Paul McCulley. It's like, in theory, want to see some new like fiscal lead permanent change to how we do macro management, and that could produce a shift, but in fact, like we can't even like get a minor extension to the Carres Act. And if you look at Biden and h nominees, you know, like a lot of them is sort of like progressive new thinkers, but also a lot of like you know, pretty mainstream conventional ideas, which means like it's still really hard to see like where the big long term macro shift comes from from. Sort of yeah, and then when we how do you get a big market ship without a big macro policy shift, hard to see much changing. Yeah, I think that's fair. That's fair. I mean people are so focused on how to get from the current situation from right now to this sort of endpoint um in one when things go back to normal that I think a lot of people like, we're so focused on the journey that we're not necessarily considering the destination of what that endpoint actually looks like. And I think you have a strong argument that maybe it just looks like, you know, what the earlier years actually looked like. Yeah. Absolutely, Well, I'm gonna be uh an interesting year and plenty of talk about and we'll have them back either way. And that's that. Should we leave it there? Too interesting? Hopefully? As you mentioned, all right, let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wi Isn't though. You could follow me on Twitter at the Stalwart. Follow our guests on Twitter. Novel Sinala. He's locked, but maybe he'll let you follow him at novel Sinala. Follow our other guests, John Turrek he's at J Turrek eighteen. Follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levie at Francesca Today, and check out all of our podcasts at Bloomberg under the handle at podcast. Thanks for listening to