Latest / Bloomberg Intelligence / Vine Street's Harris on Lack of Quality Assets in Repos (Audio)

Transcript

Vine Street's Harris on Lack of Quality Assets in Repos (Audio) · Bloomberg Intelligence

• 0:02
  Speaker 1: Global business news twenty four hours a day at Bloomberg
• 0:05
  Speaker 1: dot Com, the radio, plus Globo Last and on your radio.
• 0:09
  Speaker 1: This is a Bloomberg Business Flash from Bloomberg World Headquarters.
• 0:13
  Speaker 1: I'm Katherine Cownery. Stocks remained higher and the dollars slept
• 0:16
  Speaker 1: after minutes from the Federal Reserve's last meeting did little
• 0:18
  Speaker 1: to alter perceptions for the timing of higher interest rates.
• 0:22
  Speaker 1: Concerns it fallout from the Brexit vote may spread drove
• 0:24
  Speaker 1: demand for havens. The SMP five thundered held games as
• 0:28
  Speaker 1: a minute indicated. May's week jobs report fueled uncertainty amount
• 0:31
  Speaker 1: among FETE officials about the economy. The data since, including
• 0:35
  Speaker 1: a report on the services industries today, helped rekindle investor optimism.
• 0:40
  Speaker 1: We check a Marcus every fifteen minutes throughout the trading day.
• 0:42
  Speaker 1: TOW Industrial Average currently up sixty four points a third
• 0:45
  Speaker 1: of a percent, trading at seventeen thousand, nine hundred five.
• 0:49
  Speaker 1: SMP five funded up nine points a half a percent
• 0:51
  Speaker 1: trading at two thousand ninety eight, then as to act
• 0:54
  Speaker 1: as hire by thirty three points, a gain of two
• 0:56
  Speaker 1: thirds of a percent, trading at forty eight fifty five.
• 0:58
  Speaker 1: West Texas intermediate crude oil up seventy five cents to barrel,
• 1:01
  Speaker 1: one point six percent to forty five spout rolled up
• 1:05
  Speaker 1: seven dollar sixty cents, agounts at thirteen sixty six thirty
• 1:08
  Speaker 1: and a ten year treasury unchanged with the yield of
• 1:11
  Speaker 1: one point three seven percent. And that's a Bloomberg business flash.
• 1:15
  Speaker 1: Thank you very much. Katherine Cowdery. It's time now for
• 1:17
  Speaker 1: the e t F report. Let's go to Catherine Cowndery
• 1:20
  Speaker 1: for news on exchange traded funds. It's another record for
• 1:24
  Speaker 1: Vanguard Group. The firm attracted one forty eight billion dollars
• 1:28
  Speaker 1: in new client money during the first half of the year.
• 1:31
  Speaker 1: Vanguard is benefiting from a growing preference for low cost
• 1:34
  Speaker 1: vehicles at track indexes. Bloomberg Intelligence analist Eric Beltuna says
• 1:38
  Speaker 1: Vanguard is branching out. They've got active ETFs in London
• 1:42
  Speaker 1: and in Canada now and they filled exempty relief to
• 1:45
  Speaker 1: launch them in the US. Here's why that's a big
• 1:47
  Speaker 1: deal is because right now, the average fee for an
• 1:49
  Speaker 1: active ETFs seventy six basis points. Vanguard's active ets would
• 1:53
  Speaker 1: probably cost in the range of twenty thirty right so
• 1:56
  Speaker 1: that would be a massive undercutting just like they always do. Right,
• 1:59
  Speaker 1: they come in a Vanguard a category. Beltuna says. When
• 2:02
  Speaker 1: Vanguard lowers its expense phase other firms follow suit. He
• 2:05
  Speaker 1: calls it a blessing in disguise. Remember, active managers have
• 2:09
  Speaker 1: to overcome their feed before they even get to zero.
• 2:12
  Speaker 1: Then they have to outperform from there. So the lower
• 2:14
  Speaker 1: their feed, the closer to the starting line they are,
• 2:17
  Speaker 1: and the more they all perform. Beltuna says, it could
• 2:20
  Speaker 1: lead to a renaissance in the active et F space.
• 2:23
  Speaker 1: That's your Bloomberg ETF report. I'm Katherine Calderie. This is
• 2:29
  Speaker 1: taking stock with Kathleen Hayes and Grim Fox on Bloomberg Radio.
• 2:34
  Speaker 1: The world wide bond rally, I think it might be
• 2:37
  Speaker 1: better to call it a stab peede continues as Japan's
• 2:41
  Speaker 1: twenty year government bond yield fell below zero for the
• 2:45
  Speaker 1: first time. As ultra low yields worldwide, many of them negative,
• 2:50
  Speaker 1: I now failed to deter investors from rushing to buy
• 2:54
  Speaker 1: government bonds, particularly as they'd rather get a little return
• 2:58
  Speaker 1: on their money if they can that benchmark ten your treasury,
• 3:01
  Speaker 1: as Katherine Calary just says at one point three seven,
• 3:04
  Speaker 1: the thirty year down to two point one. For what
• 3:07
  Speaker 1: does this mean? Are there signals from the bond market
• 3:09
  Speaker 1: we should be heating? Should we buy them now? Ira
• 3:12
  Speaker 1: Harris joins this now global macro trader and in house
• 3:16
  Speaker 1: analysts for Vine Street Trading out in Chicago, and his
• 3:19
  Speaker 1: fans in the bond world know him for his regular
• 3:23
  Speaker 1: missive notes from the underground. Ira, welcome back, Thanks you
• 3:28
  Speaker 1: great to be with you. Well, you know you've been
• 3:30
  Speaker 1: a bond guy for a long long time. When you
• 3:33
  Speaker 1: see so many bondyields turning negative, what do you think?
• 3:39
  Speaker 1: There is nothing to think because nobody in there. I mean,
• 3:44
  Speaker 1: I've been doing this almost thirty nine years going on
• 3:47
  Speaker 1: forty and I never saw anything. I didn't nobody could
• 3:50
  Speaker 1: have thought anything like this, And it only gets more
• 3:54
  Speaker 1: protracted and from me an investor's point of view, or
• 3:57
  Speaker 1: savers worse. So it's there really are no words to
• 4:03
  Speaker 1: describe it. All you can do. It's just that the
• 4:05
  Speaker 1: Fed has their reaction function and everybody who trains bonds
• 4:08
  Speaker 1: as their reaction function, and never the twain shall meet.
• 4:12
  Speaker 1: All right, let's talk about something that meets in the
• 4:14
  Speaker 1: European Union, and this is a sort of a brexit
• 4:18
  Speaker 1: vote that has to at least sort of work itself
• 4:22
  Speaker 1: out in some kind of reality. Is it? Is it
• 4:24
  Speaker 1: too crazy to think that perhaps if the European Union
• 4:27
  Speaker 1: isn't a sinking ship, that maybe it's taking on a
• 4:29
  Speaker 1: lot of water, and then in the future it's going
• 4:31
  Speaker 1: to look as though this Brexit vote was an intelligent
• 4:33
  Speaker 1: move them. I couldn't agree with you more. I think
• 4:36
  Speaker 1: that's exactly what's going on and why, because we know
• 4:41
  Speaker 1: that there's a rush for the ECB to purchase as
• 4:44
  Speaker 1: much as they're able to purchase and keep loading that
• 4:49
  Speaker 1: balance sheet up, and that's I would make it that
• 4:52
  Speaker 1: it's the most distorting factor going on in the market
• 4:54
  Speaker 1: right now because everything is a relative value. And I
• 4:58
  Speaker 1: was just going through Limburg's sheet that I look at
• 5:02
  Speaker 1: the two ten yields curves for most of the countries
• 5:06
  Speaker 1: and the two tens, you know, there's so much debt
• 5:09
  Speaker 1: right now that the UH, the ECB cannot even buy.
• 5:13
  Speaker 1: So they're moving down the quality ladder um quite a bit.
• 5:17
  Speaker 1: You know, as I'm looking at the sheet right in
• 5:19
  Speaker 1: front of me, they cannot buy uh. Certainly of the
• 5:25
  Speaker 1: two years they can't buy or they're close to not
• 5:28
  Speaker 1: being able to buy Ireland, they can buy Spain, they
• 5:30
  Speaker 1: can buy Italy, and I'm talking about the two year
• 5:32
  Speaker 1: debt here. They cannot buy the Netherlands, they cannot buy
• 5:36
  Speaker 1: a little Denmark, they cannot buy Germany, they cannot buy Frances.
• 5:41
  Speaker 1: They can do because they can only pay the the
• 5:46
  Speaker 1: rate overnight rate there is negative forty, so they cannot
• 5:49
  Speaker 1: die anything that is yielding less than negative forty. So
• 5:54
  Speaker 1: if you're at negative fifty, they cannot buy of that duration.
• 5:58
  Speaker 1: So if they keep pushing the some pustion, this was
• 6:00
  Speaker 1: less and less to buy, which is why they just
• 6:03
  Speaker 1: announced that they were lower in the quality of the
• 6:06
  Speaker 1: assets that they were able to buy. So the question
• 6:10
  Speaker 1: I have it's I think it's hard to sort out
• 6:12
  Speaker 1: any other time. If we had never heard of quantity
• 6:14
  Speaker 1: of these things, central banks buying bonds, if we've never
• 6:16
  Speaker 1: heard we've never heard of a central bank like the
• 6:18
  Speaker 1: Bank of Japan consciously moving towards negative rates, uh, we
• 6:23
  Speaker 1: would take via tremendous drop in bond yields and unprecedented
• 6:28
  Speaker 1: negative territory as a sign that the world economy must
• 6:32
  Speaker 1: be falling apart. Now it's not doing great, but it
• 6:35
  Speaker 1: doesn't seem to be falling apart. Is there a signal
• 6:39
  Speaker 1: other than just wow, I gotta grab some yell before
• 6:42
  Speaker 1: it goes even lower. Yes, you know I think that.
• 6:45
  Speaker 1: And plus you know Pim and uh Get you know,
• 6:49
  Speaker 1: you two have been reporting and around long enough to
• 6:52
  Speaker 1: understand this that they're in today's world, you know, with
• 6:57
  Speaker 1: the huge expanse of and you know Bloomberg has built
• 7:01
  Speaker 1: their life on it on the repall market. And when
• 7:04
  Speaker 1: you need repot, you need quality assets in order to repot.
• 7:07
  Speaker 1: Otherwise the market, as we saw back in two thousand
• 7:10
  Speaker 1: and seven, two thousand and eight, when people stop lending
• 7:14
  Speaker 1: the assets that you needed to facilitate the repot market,
• 7:19
  Speaker 1: it dried up. Now it's drying up only because there's
• 7:22
  Speaker 1: just not enough assets to back, you know, for quality repot,
• 7:25
  Speaker 1: I need a bund. If I'm going to go to
• 7:27
  Speaker 1: a repot in the European market, I need high quality assets.
• 7:31
  Speaker 1: And yes, you know. That of course gets a bigger
• 7:33
  Speaker 1: question that I wrote about last night and talked about
• 7:38
  Speaker 1: in that. I asked the question about zero risk weighted assets.
• 7:43
  Speaker 1: And I don't want to get too complicated here and
• 7:45
  Speaker 1: dig into this, but if you have a zero risk
• 7:47
  Speaker 1: weighted asset. And by law right now, by banking regulations,
• 7:52
  Speaker 1: I should say sovereign debt, all sovereignett is considered zero
• 7:56
  Speaker 1: risk weighting, so banks can buy this and not have
• 7:59
  Speaker 1: to old and he reserves against it. Now, tell that
• 8:03
  Speaker 1: to an Italian bank right now, you know him. That's
• 8:06
  Speaker 1: exactly right. So I asked that question to a jero
• 8:09
  Speaker 1: And Powell last week when he was in Chicago. I
• 8:11
  Speaker 1: always I like to go to see these people when
• 8:13
  Speaker 1: they come through. Yeah, And I asked him, you know,
• 8:18
  Speaker 1: point blank, and he said, well, that's just the way
• 8:20
  Speaker 1: it is a zero risk. Now. That was interesting to
• 8:23
  Speaker 1: me because two months earlier at the same forum we
• 8:27
  Speaker 1: had uh Homi Karuna, who used to be the big
• 8:31
  Speaker 1: Spain who is now at the b I S. And
• 8:34
  Speaker 1: I asked him that similar question now that he was
• 8:37
  Speaker 1: at the b I S, because he have a different
• 8:39
  Speaker 1: mindset about this, and his answer was very telling. He says, yeah,
• 8:43
  Speaker 1: I look at it quite differently, and he thinks that
• 8:46
  Speaker 1: savagn debt should not be equally zero risk ways because
• 8:50
  Speaker 1: Spanish debt is not the equivalent of German debt. Spanish
• 8:54
  Speaker 1: debt is not the equivalent of U S treasury debt.
• 8:56
  Speaker 1: It's just not the same and therefore why should it
• 8:59
  Speaker 1: carry this waiting. But we know the answer to that.
• 9:02
  Speaker 1: They're not going to change in the midstream right now
• 9:05
  Speaker 1: because can you imagine if they didn't have a zero
• 9:07
  Speaker 1: roust waiting on Italian debt what the impact would be
• 9:11
  Speaker 1: to the Italian banks who would have to go out
• 9:12
  Speaker 1: and raising Well, interesting because that's one reasons why the
• 9:16
  Speaker 1: banks said they bought Greek sovereign bonds, as you know,
• 9:18
  Speaker 1: Ira they said, but they were rated equally with the
• 9:21
  Speaker 1: German sovereign. So you're raising a very important point. Does
• 9:25
  Speaker 1: this mean anything for central banks? Well, they re should
• 9:27
  Speaker 1: they rethink their quantitative easing strategy? No, Ariana cultural Lakota
• 9:32
  Speaker 1: Um he's the former head of the Minneapolis Fed at
• 9:35
  Speaker 1: this point, very devish thinks the Fed should be lowering
• 9:37
  Speaker 1: it's Fed funds rate targets. Thinks they should consider considering
• 9:41
  Speaker 1: negative rates and all kinds of tools would But this
• 9:43
  Speaker 1: make the problem better or worse. Maybe not the problem
• 9:46
  Speaker 1: just this following yields Well, it is a real problem.
• 9:51
  Speaker 1: But let's take it to a bigger level, because we're
• 9:53
  Speaker 1: talking about central banks and the European Central Bank in
• 9:57
  Speaker 1: my mind is an anomaly because you know, and again
• 10:01
  Speaker 1: I asked your own power. The first part of the
• 10:03
  Speaker 1: I asked him a two part question, the risk zero
• 10:06
  Speaker 1: risk wading was the second part. The first part was
• 10:09
  Speaker 1: who guarantees the e c B? And of course he
• 10:12
  Speaker 1: gave me the classic answer, which is, all, the ECB
• 10:15
  Speaker 1: has a printing press, you know, And I really when
• 10:18
  Speaker 1: I pondered that, and I knew that's what he would say.
• 10:21
  Speaker 1: But well, let's think about that. Just because you have
• 10:24
  Speaker 1: a printing press with a fiat currency, that's kind of scary.
• 10:28
  Speaker 1: You know, the FED has a printing press, but they
• 10:30
  Speaker 1: still have to answer to the fiscal authorities, and the
• 10:34
  Speaker 1: and and the legislative authorities. He should be answers to nobody,
• 10:38
  Speaker 1: and they don't have a harmonized fiscal situation. So who
• 10:41
  Speaker 1: stands behind that balance? She of the e c B.
• 10:44
  Speaker 1: If it's only a printing press, I'm more you know,
• 10:48
  Speaker 1: which I know it is. It's pretty scary though, Thank
• 10:50
  Speaker 1: you very much for frightening us. Thank you very much.
• 10:54
  Speaker 1: Ira Harris is a global macro trader in house analyst
• 10:58
  Speaker 1: for a Vine Street of Trading based in Chicago. He
• 11:02
  Speaker 1: can be followed on Twitter at Ira Harris, that's y
• 11:05
  Speaker 1: R A H A double r i S. You're listening
• 11:08
  Speaker 1: to taking Stock and this is Bloomberg. H