>> Nommy let me start with you, we're talking about what does the future look like, it's
a conversation I love to have. So, we've talked about race with the director of the NAACP
and Dolores Huerta and we realized well, in some ways, we're at the nator of racial relations
at this point in our lifetimes, and then we talked to an infectious disease expert from
Yale.
We're at the nator there, too and we talked to some of the top climate change activists
in the country. Boy 343, right? Now when we look at the economy, well now we're in a more
puzzling situation, so the stock market is doing great, and the rest of us appear to
be in disastrous shape.
So riddle me that what in the world is going on?
>> So that's absolutely true, so what I can't do is sort of break the 343 thing and say
the economy's amazing, cuz it's obviously not. There is what I have decided to call
a sort of permanent distortion between what's going on in the stock market, and what's going
on in the real economy that's only been made worse by what's happened in the wake of the
pandemic, but it was actually bad to begin with.
We did not end 2019 on an exuberant economic footing whatsoever at all, we didn't start
2020 that way. So what the pandemic did was it stopped economic activity, a lot of economic
activity for a lot of people, a lot of small businesses, a lot of small businesses who
could not get access to loans that were sort of on offerish, because they weren't involved
in that sorta pipeline.
They didn't have large accounts with JP Morgan Chase and the like and so, it really didn't
get that kinda a benefit. We have a kind of impasse right now with Congress in terms of
the idea of additional fiscal stimulus. And we have a Federal Reserve that's on like complete
massive steroids in terms of giving monetary stimulus, i.e low rates.
Lots of ability to buy bonds, which basically come from banks because they're the middle
men, people, brokers whatever. And there's been a lot of an injection of money into therefore
the stock market, so it's just like the stock markets it's like arm the Fed has this major
adrenaline or whatever kind of drug shot, and that's basically what's lifted the stock
market.
The economy doesn't have that capacity to receive that, to get that to have access to
that, and that's why we're seeing such a disparity between the behavior of financial markets,
and what's going on in the real world. >> Yeah Nick, I'm concerned that, as Nommy
points out, that this is not just an issue regarding the stimulus bills that have been
passed during coronavirus.
That there is a major disconnect between the stock market in two ways, one is the way that
Nommy described the stock market doesn't necessarily match what people are actually feeling in
the economy, we talk a lot about that on the show. Wages are stagnant to say the least,
and they have been for 40 to 50 years.
But there's a second disconnect which is, in an economy this hurt with so many small
businesses nearly out of business, with 21 million people unemployed at least, why is
this market so inflated? It makes no sense, and and the markets going on like, yeah, we're
on top of the world, everything is great, what is going on?
>> Well, my best guess is that it ties into technology in that, partly it's random partly
it's unexplainable, but partly it's that, the performance of the market is based on
expected future earnings. And there is an assumption by a lot of investors and a lot
of people deeply involved in the markets, that Coronavirus has spurred a kind of technological
innovation that this country needed.
So as the argument goes, we've all learned how to work from home, we've all started to
develop new applications for artificial intelligence, we've started to move towards a more efficient
kind of automation. Now, that may not be an economy, ultimately that works that well for
people, lots of work that we could get into.
But I think one of the reasons there is such a disconnect, is that there's an expectation
that the technological advances, online learning like we've never had before, we're finally
figuring out telemedicine. There are lots of industries that are building up tech infrastructure,
that the market believes will lead to dividends in the long run.
So that's my best hypothesis, about why there's such a weird disconnect. And we can definitely
talk about whether if that is true, it's a good thing or a bad thing, but I think that's
probably got something to do with the weird stuff we're seeing.
>> Right, and, Nick, I want to talk more about technology in a second too because some people
think that's an enabler, some people think it's at a zeno, so.
>> Or both. >> Or both, that's right, but Nommy to go
back to economics here and finance, so, I think Nick is almost certainly right of course,
that the tech sector is holding up a big portion of the market, so that's partly the explanation.
But, do you know how much the Fed actually use the $4 trillion that they were allowed
to use in the CARES Act and how does that affect the market?
What does the Fed do, that then makes the stock price of a company higher? So the first
thing they did was create a situation where interest rates were zero. So what that basically
means is that whether you're a government either United States, whether you're a company
or whether you're a bank, you are effectively able to borrow money very very cheaply.
Now if you're a actual human like with a credit card or like a personal loan or student loan,
not so much you have much higher rates anyway. But that the net effect of the initial sort
of lowering of rates to zero the Fed was to basically make any kind of money cheap to
anyone who could get it, the large companies and banks and so forth.
And what they did before the CARES Act was even past is they bought, almost $3 trillion
worth of bonds from the market meaning from banks. So what they did before the CARES Act
was passed just as things were sort of dribbling along. Actually between 2019 and the coronavirus
pandemic was they expanded their balance sheet their books, the stuff that they bought electronically
by from 3.7 trillion last year, to 7 trillion this year some of which, ultimately related
to the CARES Act.
But it was already sort of ballooning towards that $7 trillion even before the Cares Act
was passed. What the CARES Act did was it allowed the Fed to buy corporate bonds, which
it hasn't bought a ton of but the very idea that it could, which was something that has
never been able to do before.
So not only purchase public debt or government debt, or publish corporate debt, allow corporations
who could access the market, who could work with their banks. The large banks to do so,
to basically borrow more from the markets or i.e more from investors through the banks
in the first five months of this year, than in all of last year.
And that was also because the Fed was there, as that sort of backstop for debt. In addition,
the Fed was also buying commercial mortgage backed securities, what's that? That's basically
stuff that's on the books of banks, that isn't doing well because people and companies aren't
able to pay their rents or they're going bankrupt, or landlords are having problems making payments,
or companies have shut down and the feds basically backstop that for the banks.
So the amount of money ultimately is up to 7 trillion on their books, with another, say
4 or 500 billion that they've spent through these different facilities, mostly through
purchasing, or agreeing to purchase through the banks. What that means is the market's
happy cuz it has this backstop.
It knows that no matter what happens, the fed's gonna be there any single way whether
it's for mortgages, commercial mortgages, corporates, public debt, government debt.
It'll just be there to kind of soak up, sort of the debt that's there and that means that
anyone who's investing in the market, whether it's in tech and and I agree with the tech
is obviously a place right now that's expanding also in its own right.
But what it means is that investors in the market are finding places, banks are finding
places hedge funds, private equity funds, finding places to take all this cheap money,
and make it be more money. And real people in the real economy just don't have that capacity.
>> But don't you think that's hurting things?
>> That's the whole thing real people, or many people are not a part of the stock market,
they're not a part of the financial assets or surplus that's going on right now. They
don't have access to really cheap money, and even if they did have to actually pay their
bills, pay their rent,-
>> No I mean Nommy, sorry Nommy just real quick, and I could talk about this all day,
but what I mean by that is, yeah, if you're a company and you know the Federal Reserve
is gonna back you up. And then there's also the issue of what happens, why would anybody
pay a high interest rate anymore, if the Fed is going to back up rescue loans and non risky
loans.
I don't know why people would get any interest rate at all, let alone the 9% or etc. It just
totally destroys the idea of a risky asset. But even if you weren't, you're a company
and you put, since it's cheap money, easy money, you put money into something, but at
the end of the day, somebody's gonna buy your products, don't they, or do they not?
>> Well, you can look good for a while as a company by elevating your own stock. Now
that's not happening as much now as it did towards the end of last year in terms of stock
buy bucks per sale although that is also happening because the money is there, it's also happening
through borrowing more.
So the companies that can do that, look like they can live another day, even if their products
aren't potentially selling. Which is why another reason you have this disconnect with some
of the stock market prices on certain companies that aren't really doing well at all, relative
to sort of individuals who are not buying their products, who are not buying them to
the extent that they did before the pandemic.
Or may not for a very long time because of their economic situations, it's like this,
the stock market moves very quickly. And so if there's money that's available, whether
it's through borrowing in order to place it into stock, whether it's investors saying,
well, where else can we get a return of a risk or risk less or doesn't matter a return
on our money, stock market is a fast place to do that it sort of feeds on itself.
Whereas the real economy, even if it had that same capacity connected to it and real people
don't operate that quickly, so companies have an incentive. Yes, they wanna sell their products
but they have an incentive, to also contribute to their stock level.