“In a crisis, when you need to do something, divided government is bad, because you're not able to come to an agreement on the various priorities for the country.”
Jason Cummins is the Head of Research and Chief US Economist. In his role, he develops the firm's outlook for the economy, politics and markets, advises the traders on portfolio management, and manages the global research team. Jason serves as a trustee on the boards of The Brookings Institution (executive committee) and The Peterson Institute for International Economics (executive committee), and is a member of the Investment Committee of Swarthmore College. He was Chairman of the US Treasury Borrowing Advisory Committee, a government-appointed panel that advises on debt management, market structure, and financial developments. Formerly, Jason was a Senior Economist at the Federal Reserve Board, where he led the macro forecasting team.
Despite existing election laws, much of the process in the United States depends on candidates’ and campaigns’ willingness to abide by norms and customs. President Trump’s habit of challenging and/or breaking norms and customs was only heightened during an election that required implementing large scale vote-by-mail infrastructure. Experts knew this would cause a significant delay in results, offering Trump an opportunity to raise accusations of election fraud.
A Biden administration with unified Democratic control of congress will be highly beneficial in passing legislation to address the pandemic-born crisis. A Biden victory in 2020 has the chance to mark a major political pendulum swing that reverses the legislative priority away from financial capital and towards labor. The presidential elections of 1932 (pro-labor) and 1980 (pro-capital) represent the two previous political inflection points.
LISTEN AND SUBSCRIBE
SPEAKER
Jason Cummins
Head, Research & Chief U.S. Economist
Brevan Howard
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:07)
Hello everyone, welcome back to SALT Talks. My name is John Darsie, I'm the managing director of SALT, which is a global fall leadership forum at the intersection of finance, technology, and public policy. And it's great to be back in SkyBridge HQ today, here in midtown Manhattan. We're slowly starting to get back to normal. But SALT Talks are a digital interview series that we launched during this work from home period, and it's been sort of a blessing in disguise, because we've had a lot of fun doing this digital talks. And they're interviews with the world's foremost investors, creators, and thinkers.
John Darsie: (00:38)
And what we're really trying to do is replicate the experience that we provide at our global SALT Conference series, which unfortunately we had to cancel our Las Vegas conference in May. But what we're trying to do is both empower big important ideas that we think are shaping the future, as well as provide our audience a window into the mind of subject matter experts.
John Darsie: (00:57)
And we're very excited today to welcome Jason Cummins to SALT Talks. Jason is the head of research and the chief US economist at Brevan Howard. In his role at the firm he develops their outlook for the economy, politics, and markets, and advises the traders on portfolio management and manages the global research team. He also serves as a trustee on the boards of the Brookings Institution, the executive committee. And the Peterson Institute for International Economics. He's also on the executive committee there. And he's a member of the investment committee of Swarthmore College.
John Darsie: (01:31)
He was previously the chairman of the US Treasury Borrowing Advisory Committee, which is a government appointed panel that advises on debt management, market structure, and financial developments. Previous to that, Jason was a senior economist at the Federal Reserve Board, where he lead the macro forecasting team. He began his career as an assistant professor of economics at NYU, and he also taught at Harvard University.
John Darsie: (01:55)
Reminder, if you have any questions for Jason during today's talk you can enter them in the Q&A box at the bottom of your video screen on Zoom. And hosting today's talk is SkyBridge co-chief investment officer, partner, and senior portfolio manager, Troy Gayeski. And Troy, I'll turn it over to you for the interview.
Troy Gayeski: (02:14)
Yeah, thanks so much John. And thanks everybody for joining us for another very enlightening SALT Talks. And Jason, it's such an honor to have you on today's episode here. You have such a rich history, not only in capital markets, but academia, and other areas. Could you take us through the progress in your career and how you got to where you are today, and how passionate you are still about the work you do day in and day out?
Jason Cummins: (02:41)
Thanks. I really appreciate it. And thank you for having me on. It's a pleasure. I'm broadcasting here from Phoenix. And actually, we ended up in Phoenix because we wanted to be able to send our kids to school in-person full time. So, we had to move around the country and make some adjustments just like a lot of people. But I grew up on the west coast, and I mention that because of my background that's related to one of the things that we're going to talk about today, which is, I grew up in a very political family.
Jason Cummins: (03:07)
My uncle was the congressional representative from the fourth district of Oregon, my dad was an anti-Vietnam war activist. And so from a very early age I was exposed to everything from kind of passive, by osmosis, politics of having pictures of Eugene McCarthy on the wall with campaign posters, to really crazy discussions when we were having our Sunday dinners about politics.
Jason Cummins: (03:32)
So we'll talk some about politics today, but my interest in it goes all the way back from when I was a young kid. I went to Swarthmore College, as you mentioned. I'm on the investment committee there. And one of the things that maybe doesn't come out so well in the bio is, two strains of our kind of investment and commitment are, one, at Brevan Howard we take public service very seriously. So I spend a lot of time on the boards of Brookings, and at Peterson Institute for International Economics, as well as giving back to Swarthmore, because we feel that's a really important role for the firm that comes all the way from the top, where Alan's engagement is really second to none in terms of founding a center at Imperial of excellence and finance to his excellent work with some Jewish charities.
Jason Cummins: (04:23)
And so we all try and invest in that. And I'd also say, a key thing that comes out there that you didn't mention about my background is that I really take, not an academic approach to markets, but we have a background in really, academic training, and studying economics and finance. So I got a PhD at Columbia under Glenn Hubbard and Kevin Hassett, both of them were chief economists for Republican presidents, W, and then this president.
Jason Cummins: (04:49)
And then I went down to NYU as a professor. And so I met a lot of the people who were involved in the public policy discussion now when I was just a junior faculty member. And I've continued on with them over time, and overlap with them in these various public service areas, and professionally as well. But the strain of my career has moved increasingly towards markets, as I started when I was a professor, then I went to the Central Bank, where I learned really the art of teamwork, as well as forecasting and what goes on in Central banks, and then going with Alan to build my own team here at Brevan.
Jason Cummins: (05:20)
And I like to joke, we're now in our 17th year of my leadership here. I was the first employee outside of London. First employee in the US. And we had a run where we've enjoyed the ups and downs of the industry, and had our own ups and downs as a firm, but we really feel like this is a good environment for macro, and it's a great time for our firm as well. We think about it as kind of Brevan Howard 2.0 as we've launched more initiatives under Aron Landy, who's our new CEO's leadership.
Troy Gayeski: (05:54)
Yeah, that's a great background on your success, and all the success that Brevan Howard's had. We all had a really tough time watching that debate last night. I mean, it was such a disaster. But that being said, obviously politics, the upcoming election is a huge driver of markets right now. And so, when you guys are trying to model out various scenarios, what do you think the most likely outcome is in terms of the way the government is split post-election?
Jason Cummins: (06:23)
So, if you analyze this race with your left brain, your analytical side of your brain, and there's a lot of that kind of content you see coming out of FiveThirtyEight and other kinds of election watchers, it's really never been a particularly close race. Biden has led from start to the middle, he has a lead right now that is bigger than any lead since Bill Clinton's two elections. And so if you're just looking at the numbers, we wouldn't even really be having this conversation. We'd be talking about what Biden's policy initiatives were.
Jason Cummins: (06:53)
But we're in anything but a normal environment. And I think the key thing to understand is, because the country... And the Electoral College favors the states that appeal that Trump voters, it's more likely that Trump has a possibility. So Biden has to get up there and win the popular by two, three, four percentage points to kind of be odds on in the Electoral College. And then if you're talking about a seven point lead that he has now, you'd say, "Well, you're just kind of one polling error away from the president being able to pull it back in."
Jason Cummins: (07:24)
So you can see a way in which this race becomes more interesting, even if you're being quiet left-brained about it. But I think that misses some important new features of this election. Really, actually, unique ones. And what's happened is, because of the pandemic, we're going to be suffering, and some people enjoying, new methods of voting, which are going to necessarily make it almost impossible to adjudicate this race on the timeline that people have grown used to.
Jason Cummins: (07:50)
And what I mean by that is, you take a state like Michigan. You're going to be allowed to do mail-in ballots, and mail in-ballots will be in transit, and have a safe harbor, all the way up to the 17th of November. And so you're talking about, if there's, well certainly any kind of dispute, but any kind of closeness in that race, it's going to be case that you won't be able to call in Michigan for weeks after the election. And Michigan's not unique. The same is true for in transit ballots in North Carolina, in Pennsylvania, in Wisconsin, recently just over the last few days Ohio carved out a safe harbor this.
Jason Cummins: (08:26)
So it's a unique election in that regard, which makes it so that it's very hard to call. I think the thing that then combines with that is a couple other features. Which is that, there are going to be a huge number of legal challenges because of all this new methods of voting. It really is the case that the balloting methods are pretty complicated and prone to, I think mistakes, I don't see a lot of malfeasance out there. And then the president also is someone who, for good or for ill, is a breaker of norms and customs. And what people do not have a strong enough appreciation of, although they're beginning to understand it from a now, pretty well know, Atlantic article that was circulated last week about the potential of our disputed election.
Jason Cummins: (09:07)
What people really don't understand is that there's election law in the United States, and then a lot of elections are really governed by norms and customs. We do not have a good way to adjudicate contested elections. And I challenge anyone to go and read the governing law of this, which is called the Electoral Count Act from 1887, which followed the disputed 1876 election, which was one of the most contested in US history. You can't figure out how to deal a situation like this, and so we face a very real prospect of seeing things that we've never seen before.
Jason Cummins: (09:42)
And the prior kind of templates that a lot of investor use, I just don't think are particularly useful. I don't think this race is like 2016. I think the 2016 template does more to distort than inform this race. And I don't think the disputed elected in 2000 before Gore and W was a particularly good example of what could happen here either, except in one regard, it was the case that Florida's legislature under Jeb Bush's governorship was ready to send a slate of electors in favor of W in that election, in the event the Supreme Court stopped the [inaudible 00:10:16], which allowed Florida to certify Bush electors.
Jason Cummins: (10:21)
But the state of Florida was willing to send out electors without really the count being known. That is an important precedent to understand, because the state of Pennsylvania legislature is already talking about if they perceive that there's fraud, that they'll send out their own slate of electors, and in which case, it's very hard to figure out who has won the election, because again, we've governed this on norms and customs. Al Gore was gracious enough to concede. In other cases, Nixon in some ways was gracious enough to concede.
Jason Cummins: (10:51)
And so, as a consequence, we predict, as a baseline, a disputed election. I think it's more than a 50% chance that we won't know the winner of this election for a week, or potentially some weeks after. And you saw that alluded to. You started out your question with what happened in the debate last night. There are a number of markers that the president laid down in an otherwise quite uneven, and aggressive, and kind of self-indulging, but a performance where he explained what his thought pattern which is, dispute the election, try and draw it out, get it in to hopefully the Senate later on, and there's parts of the Electoral Count Act which suggest that Vice President Pence can decide among these electors.
Jason Cummins: (11:29)
It's a very, very complicated situation. But I think on election night you normally go into election night thinking there is 0% odds for dispute. And then as information accumulates you might raise those odds, like in the 2000 election. The way I'm thinking about going into this election is I start out at 100% chance that it's disputed, because that's the way this president is, and I'm going to winnow down those odds by watching, for example, Florida. Florida doesn't have the mail-in ballot problem, in the sense that they get all their mail-in ballots before November 3rd, they count them in advance, they come out really quick, and Florida is a mess in a lot of ways, but one thing they do well is, they get quick counts out.
Jason Cummins: (12:07)
And so the race could be over by 11:00 PM if Florida goes strongly in favor of Biden. But if it's the case that the president wins, you're going to then go to these other tipping point states like Pennsylvania, Wisconsin, and so on, that are ripe for disruption. You won't even know the count. And just to give you future casting of this, the networks are not going to call an election unless they're absolutely sure that one side is winning. And so if the president wins Florida, and you go to Pennsylvania, and it's a complicated race, and you're worried about the blue shift, and the fact that there are ballots in transit, you haven't even counted yet, Fox News, for certain, is not going to call this election.
Jason Cummins: (12:47)
And then you get into this complicated dynamic of the president's surrogates, going out and saying it was an election where they threw the ballots in the creek, and Fox News says he can't decide this. We need to have different electors. And then you're going to end up in a potential constitutional crisis.
Troy Gayeski: (13:01)
Definitely don't want to upset Karl Rove. I don't know if you remember, the 2012 election where he got pretty worked up that they called it, in his mind, early for Obama, when really, Romney had no chance. Well obviously, you're calling for election chaos. But getting through that, let's assume that there is a resolution, and we all know that this is going to lead to market volatility, we can get into that in a second.
Troy Gayeski: (13:26)
But based on the information you have, would you be comfortable with putting a probability on a Biden victory versus a Trump victory? Or are you just not comfortable doing that?
Jason Cummins: (13:35)
So I'll throw out a few probabilities and then I'll pick up on something implicit in your question, which is, for a lot of your investors, they don't trade the way we do. We're going to monetize a lot of risk premium in this interregnum period, between January 20th and November 3rd. This is a great opportunity for us. But for a lot of your viewers, they have longer horizons. And they're not going to be concerned about this kind of 60 days of potential volatility. So I want to pick up on the idea of what's going to happen when you actually have the next president?
Jason Cummins: (14:03)
When it comes to the probabilities, I would give it about a two-thirds probability, maybe you could walk me down a little bit after last night's debate, because the president was so singularly unsuccessful in kind of attracting undecided voters. But I would say that there's probably around a two-thirds chance that our baseline is right, that there's disputed election. That doesn't mean that there's a one third chance that Biden wins. I think it's still the lion's share of odds are on a Biden win.
Jason Cummins: (14:30)
So it as high as FiveThirtyEight's, 80%? Is it as high as The Economist's estimate, which is over 80%? I think it's over two-thirds. And I'm willing to go that far. I think where I differ in the odds is, if you're over two-thirds on a Biden win on the presidency you really should be much more higher odds on the Senate flipping Democrat. Because the airs are correlated. It's not the... in a big Biden win that Daines's lead in Montana is going to be maintained. It's probably the case that he pulls Bullock over the line.
Jason Cummins: (15:02)
It's probably the case that even Lindsey Graham has a tough race. Tillis probably loses by a couple points if Biden's winning by seven. So I would say, the odds of Biden are above two-thirds. And then the Senate is much more likely if he does win. So then you jump to, there will be a new president on January 20th. And I think you got to keep a couple major themes in mind.
Jason Cummins: (15:25)
In the event of settled but still divided government, i.e. Trump with a Democratic house, or Biden with a Republican senate, in that situation I think you need to flip around Wall Street's normal aphorism of divided government is good. In a crisis, when you need to do something, divided government is bad, because you're not able to come to an agreement on the various priorities for the country. So you can argue about whether you're in favor of tax cuts, or tax increases, more spending, or less spending.
Jason Cummins: (15:54)
But in this kind of crisis we face now, we will have put off, at least until January 20th, any fiscal deal. We'll need to be doing more in terms of unemployment insurance, state and local support, liability reform, all these sorts of things. And if you're in gridlock, that's bad. So I think Wall Street's normal go to of, divided government is good because government is going to stay out of Wall Street's way, that is not right. You actually need... And something I think we'll talk about later on, just kind of market psychology, one of the main legs that this market stands on is fiscal policy activism.
Jason Cummins: (16:27)
And if that's drawn into question come January, whenever this new government is seated, I think that's enormously bad for markets. The other thing I'd say is just, on our odds on scenario, we have dispute, plus a Biden sweep as our odds on scenario. In that kind of situation, I also think you need to take a more kind of Cinemascope perspective about what the change to Biden is. In my view, this election could be as momentous as the 1932 election and the 1980 election. And I cite those two elections, not because they ushered in famous leaders, although I'll mention that in a moment.
Jason Cummins: (17:08)
But those elections were punctuated changes in American politics where you began to swing the pendulum from, in the first instance in '32, an incredibly favorable environment for capital in favor of labor. And that pendulum continued to swing even through the Nixon years, and it began to swing back under Reagan. The Reagan Revolution was essentially swinging that pendulum back from favoring labor, through the Great Society, and the New Deal, back to favoring capital.
Jason Cummins: (17:39)
And even though we've had two two-term Democratic presidents since 1980, it's the case that this kind of move in favor of capital, financial capital, physical capital, and tangible capital, has really been almost interrupted in this whole period. Clinton was basically Wall Street friendly. Obama had Obamacare, which is an important asterisk to my point. But for six years, he wasn't able to legislate his agenda. And for two of those years he was worried about getting the economy back on its feet.
Jason Cummins: (18:06)
So you've had an environment where what investors need to remind themselves of is a very, very special situation, capital broadly, sees in this current market environment. It's almost unique in American history, how favorable we are to financial, physical, and intangible capital. And if Biden's elected, the first and second derivative of that are going to change, in every dimension. Regulation, personnel, legislation. And so I think these kind of more narrow focus, you take a guy like Kostin at Goldman Sachs doing his earnings analysis for the SMP under a Biden.
Jason Cummins: (18:42)
I think it's oh so very narrow, and misses the big picture, that this is a time in history where you're going to be able to call the trough and the labor share of income on a Biden sweep, and that's going to go up. I don't know quite what the slope of this is going to be, but it's definitely going up. And he's guaranteed it. It's been in front of your face Troy. He went to Pennsylvania and said, the era of shareholder capitalism is over. Amazon shouldn't pay zero tax. It's right there for people to look at, but Wall Street, as it does oftentimes, as it tries to figure out a narrative which will rationalize them the risk taking that it's already doing.
Jason Cummins: (19:16)
And that's why Brevan Howard does well in punctuated times, because that kind of ends up in a Wile E. Coyote moment sometimes. And I'm not saying the Wile E. Coyote moment is as soon as we figure out that there's a Biden sweep, but people are eventually going to figure out some pretty simple arithmetic which is, you cannot grow the economy fast enough to make up for as a corporation, the corporate tax going from 21 to 28 percent. It's just simple arithmetic. You can write it out on a little sheet here.
Jason Cummins: (19:43)
You grow your business an extra two percent, or four percent, but your tax rate went up by seven percentage points. That's not bullish for earnings, right? It's bullish for the people who are enjoying the benefits of that fiscal expansion. And those people are going to be primarily served by these kind of broader, in some ways, soft focused, but broader goals of inclusion, and Green New Deal, and all kinds of things. But those may be valid for a lot of people in terms of their politics. But I don't see why they're going to tell me that it's going to be good for growth. That's where I diverge from the-
Troy Gayeski: (20:19)
Yeah, Jason, no, I mean, first of all, you make so many good points. And I wanted to let you talk, because you expanded upon them so well. The first, I mean, it also amazes how do people think Biden can win with the Republicans can hold the Senate. Because that makes no sense at all when you look at the electoral map, for reasons you highlighted, particular Tillis. But secondarily, along the lines, from what you're saying, we completely agree, a Biden Dem sweep is good for the real economy, in terms of more massive fiscal stimulus, but medium to longer term it's obviously less friendly to equity markets because of corporate tax rates going higher, capital gains, tax rates going higher, etc.
Troy Gayeski: (20:57)
So first of all, you clearly, sounds like you agree with that assessment, right? Good for the real economy, but less good for financial markets?
Jason Cummins: (21:05)
I agree with that. I would just emphasize Troy, a point in there that some people may miss which is, there are definitely different timescales here, I think that there's going to be a bullish response. I think it could end up with a blow off top where you test prior peaks, and equity and risk. But I think, over the medium term, as you say, and economists are a little fuzzy about what the medium term is. Sometimes it's a one year, sometimes it's five years. It needs to be elastic enough so that I don't have to admit that I'm wrong.
Troy Gayeski: (21:29)
So no one can hold you accountable for messing up.
Jason Cummins: (21:35)
Exactly. But I am making the point that, beyond these kinds of movements and sentiment, and the shifts that will be necessary to kind of change around some people's portfolios to take advantage and hedge against some of the risks, I do want to point out that it's just going to be a less friendly environment for capital.
Jason Cummins: (21:49)
I'll give you examples on each one of those. Just very quickly. On physical capital, this sweep would make it so that the taxation of physical capital, in terms of depreciation and incentives and so on, is higher. It will be less attractive to invest in machinery and software. On financial capital, Biden has a plan to tax capital gains at ordinary income. Not good. Ron Wyden who will be head of Senate finance has a plan to tax capital gains on accrual.
Jason Cummins: (22:18)
So all the internet bros will have to sell their Google stock at the end of the year to pay tax. And then finally, on intangible capital, which is primarily pharma and tech, Biden has a plan to regulate those. And so in each major sleeve of capital, he has specific plans to push the pendulum back. And so I just think it's naïve, it lacks an understanding of history and what these forces are doing.
Jason Cummins: (22:47)
And the Biden team, you need to remember, the Biden team, or the Biden regulars, but the Biden team are a core of movement Obama people who want to get stuff done, and are frustrated that Obama had six years where he couldn't get anything done. These are movement, not super-liberals, but these are movement people who want to get things done. And this idea that he is going to sit around and be Sleepy Joe.
Jason Cummins: (23:13)
I just think, remember, FDR was thought of as an amiable playboy. People didn't take him seriously. Ronald Reagan starred in movies with chimpanzees. There was always this picture in people's minds of this cardboard caricature of what they were. FDR was one of the most effective presidents in US history. Ronald Reagan, one of the most effective presidents in US history. This idea that you just have in your mind, like, "Oh, it's Sleepy Joe, he won't get stuff done." It misses the point that sometimes it's, the person rises to the occasion, and the administration, certainly, around him, I think will rise to the occasion as well.
Troy Gayeski: (23:49)
Gotcha. Gotcha. Well that's very informative. And clearly, we all expect volatility around the contested election that you think is a higher probability than most. Now, let me take it one step further. And again, we'll put the medium term out here, just to give us some wiggle room, right? But, one of the theories behind a Biden victory Dem sweep, clearly more deficit spending, more fiscal stimulus, not only in the short term, but larger deficits in the longer term.
Troy Gayeski: (24:17)
And many have said this could lead to a material decline in the dollar, which right as the time they were saying that, obviously the dollar strengthened a lot last week, just to give people a little bit of pain for their efforts, which we always get a kick out of. But in any event, is that one of the potential outcomes from a Biden victory? Because the much higher propensity of even more elevated long term deficit spending? Or is that still an overblown kind of macro trade of the day talking point?
Jason Cummins: (24:49)
So, I am naturally a contrarian, but in this case I strongly support the kind of consensus view that a Biden sweep is bad for the dollar. And let me just go through some of the mechanics of why, so at least I'll sound smart while I'm telling you that I agree with everyone else.
Jason Cummins: (25:05)
Normally, when you do a lot of fiscal spending it pushes up interest rates, it's good for the currency. Normally you might think, "Well, the government's doing a lot, it might be putting in investments into areas that'll promote productivity later on." Also good for the currency. So higher rates, higher productivity. This could be potentially good for a kind of strong dollar trade. I think it misses the moment, again, in this situation.
Jason Cummins: (25:29)
The Fed's going to guarantee that interest rates are low. I'm not going for this kind of more journalistic screaming headline of, the Fed's going to do MMT or quasi-MMT, I think that doesn't understand what the Fed is actually doing. But, they are going to keep rates low, in which case, the benefits that you would normally get, as an investor in the currency, from a fiscal expansion, aren't there. And in fact, you then think about what the fiscal expansion's going to do, I have no problem with the social justice goals, I can argue for it, I can argue against it, I don't want to get into that area.
Jason Cummins: (26:04)
But I think it is indubitable that what you're doing in this situation is, that Biden has a plan to tax higher productivity areas of the economy and redistribute it to lower productivity areas in the economy. So now I've just undone the two reasons why fiscal expansion would be good for the dollar. We're actually going to have lower rates. And the likelihood is they're probably not going to be productivity enhancing. We're taking money from the kind of most innovative businesses and giving it to things that are lower valued projects, almost by definition, because they aren't being done.
Jason Cummins: (26:37)
So I think, just in the kind of more advanced textbook understanding of exchange rates, you'd see that this is bad for the dollar, the dollar goes down. But I want to give a more kind of convincing balance sheet style example which is, we run a giant deficit. And it's actually getting bigger now, after we've gone through some of the pandemic dynamics. We run a giant deficit. And so you just have to ask yourself. If you were a foreign investor financing this deficit, what is the landscape you're facing going forward? It's a very much change macro landscape.
Jason Cummins: (27:10)
One, the Fed is guaranteeing you that on the risk side of your investments, you're going to have pretty low excess returns. I mean, everything is pretty rich, so it's not the case that investing in stocks has extraordinary expected returns going forward. And the Fed is kind of guaranteed that those returns are low going forward, but he's also guaranteed you that you don't make that much money. Maybe a bit on a relative basis, because there are so many negative rates around the world. But you don't make that much money on US fixed income either.
Jason Cummins: (27:37)
So the Fed has made it so international investors now are being invited to finance yawning, historically unprecedented outside of war, fiscal deficits, where on both sides of fixed income and risk, they're guaranteed low expected returns. This is not a very sexy proposition if you're thinking about financing the US. So what has to adjust? The relative price of US-ness against other countries. And that is the currency.
Jason Cummins: (28:04)
And so I think that the Fed wouldn't even really blink an eye on a 10% broad orderly decline in the dollar. I think they don't even really start paying attention to it if it declined 20%, because that's kind of still within the range that we've seen, certainly in this century, but even within the last ten years. And I think-
Troy Gayeski: (28:23)
I think it looks, so much of what they do Jason, is to encourage looser financial conditions, right? So they would actually be very happy with a 10% deprecation, right? In order to loosen financial conditions further, no?
Jason Cummins: (28:35)
They would be delighted. And let me also give you some texture, which is that, people got used to thinking about Trump being a mercantilist, and him wanting the dollar lower. Let me tell you, Elizabeth Warren, should she be Treasury Secretary, or just generally influential in the administration, has a much more aggressive plan for dollar depreciation than the president did. She actually has a plan. You can go look at it on the Peterson website, it's authored by Fred Bergsten and Joe Gagnon.
Jason Cummins: (29:00)
And they say all the right things about how they're going to negotiate, almost in a [inaudible 00:29:04] way, to make sure that the dollar isn't too strong. But they have specific taxes on foreign investors to make sure that the dollar goes down. And Elizabeth Warren's smart enough to have a plan, and two of the best in the business to develop it for her should they want to try and push the dollar down, they would.
Jason Cummins: (29:22)
I think that's a little outside of their policy comfort zone. But I think you have to remember, the economic side of the Biden team is relatively less developed. He does have Jared Bernstein and some people around him for a long time. But when it comes to the key leadership for Biden, it's really from the foreign policy side. Tony Blinken, Sherman, these folks who have been with him for a long time, really care more about the foreign policy aspect of things.
Jason Cummins: (29:49)
It could very well be the case that economic policy is driven by the next Treasury Secretary, whoever she is. And in that case, I think you really have to open up your mind for, the possibility at least, of active currency management. And certainly-
Troy Gayeski: (30:01)
And so Jason, along those lines-
Jason Cummins: (30:03)
[crosstalk 00:30:03] let it go down benignly.
Troy Gayeski: (30:05)
Yeah. Along those lines, one of the debates people always have when they want to be sure with the dollar is versus what, because kind of everything else is garbage. China's obviously, currency's been strengthening recently. But they'd prefer to keep it low, right? And will pull out many tools to do so. So is that logic lead one to gold and digital currencies as a better place to play the dollar short? Or are you not that dogmatic about it?
Jason Cummins: (30:29)
So I think these small markets are definitely going to enjoy a lot of renewed interest. You already saw that, some of our traders were quite involved in those trades. I think they are exciting, once you get the position... What's happened lately is, as people realize there are more risks, you've just had to mop of the consensus positions. I think that actually leaves it cleaner to get into some of those trades that you're talking about, Troy.
Jason Cummins: (30:53)
But the world cannot go into Bitcoin and gold. It has to ultimately go into other meaningful asset classes. And those are going to have to be the Euro and the OMR. We can't do all of our adjustment against Bitcoin, silver, and Canada. It just doesn't work, okay? It doesn't work. So these are small, proxied, uniques, idiosyncratic markets. The big moves are going to have to come against the big players. And so despite all of the problems that Europe has, it has a current account surplus, it's doing serviceably well, not withstanding the recent setbacks of the pandemic.
Jason Cummins: (31:29)
And the main one is China. China's interest rates are higher than Brazil as I'm sure you pointed out to some of your investors. And it's nice that they don't want to let their currency appreciate, but what choice do they have ultimately?
Troy Gayeski: (31:42)
Yeah, it's gravity, right? It's gravity.
Jason Cummins: (31:44)
Gravity.
Troy Gayeski: (31:44)
Has reached a high. Yep, yep, yep. Well, that's great colors. So you think they'll be broader weakness versus the major trading counter parties as well as some of the alternative currencies. At least over the medium term.
Jason Cummins: (31:56)
I think that some of the-
Troy Gayeski: (31:56)
We'll just stick with the medium term.
Jason Cummins: (31:59)
I think for some of the macro traders who are more prone to hyperbole, even than myself, they've gotten excited about the same things. And I can see exactly why, which is, you can see a 20% move in the dollar and no one really blink an eye. I mean, we already had one in 2014 into '15 that we could reverse. And that take you outside the boundary. So it's just that sometimes people have a failure of imagination. It's much like our outperformance around COVID. People thought it was going to slice two-tenths from global GDP as we were saying otherwise.
Jason Cummins: (32:34)
And in this situation, as well, you have something that is a pendulum shift election, and people are talking about, "Oh, it might slice 10% off the SMP, and nothing's really going to change." I just don't look at that.
Troy Gayeski: (32:46)
Yeah. It is amazing how few people can do math in that corporate tax adjustment. And you didn't even mention the fact that look, the deductions are gone, right? So that's going to be a really 28% effective tax rate, right? It's not going to be 30% plus with 21% effective.
Jason Cummins: (33:05)
[crosstalk 00:33:05].
Troy Gayeski: (33:05)
But anyway, moving on, you talked about the four-legged stool, supporting markets recently. And could you give a little bit of color on those and where you see the progress? Whether it's the potential for a vaccine, or whether it's the abundant monetary policy support we've had so far? And then, which one of those legs do you expect to break first?
Jason Cummins: (33:28)
So, in our view, markets stand on four legs, making a stool for the markets that's quite sturdy. Optimism about the vax, which I mentioned. Active and dovish monetary policy, really extraordinary, but now broken for a time, fiscal policy. And then finally, positive data surprise. The fact the economy's growing, and it's growing better than we thought. Like a stool, you can lose one of those legs. So periodically, you'll have a narrative where you lose one of the legs. So-
Troy Gayeski: (33:58)
Like fiscal recently.
Jason Cummins: (34:01)
Exactly. Like fiscal recently. People thought the Fed was going to do a ton in August, he kind of last some of that in September. The stool was a little wobbly. If you lose two of these things you got a real problem. So we're coming into a very dangerous time. If you don't have fiscal for a while, and one of these vaccines causes someone to have ADE, and anybody who's following vax should know what ADE is. It's essentially your body's rejection of the vax.
Jason Cummins: (34:28)
And it's not unprecedented either. They did a cat study in a corona vaccine once where all the cats kind of died. So it can happen. And you saw with the Jenner vax that this is a possibility, we can end up with setbacks. You have no fiscal and a vax setback, it's like a trapdoor for the market.
Jason Cummins: (34:44)
Similarly, if the data rolls over and you don't have monetary policy for whatever reason then that's a big problem. There are just some combinations of things that are well within the data generating process that can be pretty unpleasant. And the biggest one I'm worried about is, we'll know probably by the end of the day whether a fiscal deal could possibly come together, but should they vote and get out of town, you're in this period of time into Q1 where there's no fiscal, people are literally starving. I mean, I have great empathy for the kind of economic challenges that people are facing.
Jason Cummins: (35:16)
And then if the perception is that the economy's rolling over, or the vax is a late-2021 story, then I think your risk taking is definitely under some degree of siege.
Troy Gayeski: (35:32)
Well, not to mention the contested election, which you think is an above 50% probability outcome, right? So, perhaps Florida will go Biden, that'll go away. But clearly if it doesn't and it ends up in Pennsylvania it's going to be a complete mess. So we don't have that much time yet, and given your expertise on the Fed, we wanted to discuss that with you.
Troy Gayeski: (35:50)
And at least, we've historically seen substantially continuity in Fed policy from president to president. Is that your expectation this time? And could you see any curveballs come out of the Fed in the near term that markets are under appreciating?
Jason Cummins: (36:05)
So there are two things to understand about this Fed. And this'll sound a little glib, but it's important to understand. JPow likes to be liked. And so he's not an academic, he's not even a technocrat, he hearkens back to a Greenspanian tradition where the Fed is working within the government.
Jason Cummins: (36:24)
I worked for Greenspan and he always said, "We're one government." And that was something that was, not put on hold, obviously Ben and Janet were very involved in dealing with the rest of the government, especially through the crisis. But their perspective was always a very academic one.
Jason Cummins: (36:40)
Jay's perspective is a practical one. And so he wants to work with the government to do whatever. And so he's opened up the possibility for the Fed to intervene in all kinds of markets, a marker I'll come back to in just a moment.
Jason Cummins: (36:52)
But the other thing to understand is that people have a very kind of monochromatic view about the Fed. They just say, "Are they dovish or not?" They just look at things on the distribution of hawk and doves. And it misses the key feature of this Fed. Jay Powell is just as dovish or more dovish than Janet, and Ben, and even Greenspan would have been. But the point is, there's another axis, draw yourself a Y-axis where they're all dovish out here in the right on the X-axis.
Jason Cummins: (37:16)
He is a guy on the dimension of discretion versus rules, or kind of a more academic approach to policy, commitments and so on, he is a guy who believes that discretion is optimal. Again, his favorite Fed chair was Greenspan. Greenspan, I was with him all the time about this, he always knew where the exit doors were and he was never going to foreclose any of them.
Jason Cummins: (37:35)
The academic approach to monetary policy, some of which I contributed, is the opposite. It is Odysseus, tying himself to the mast to make sure that you know, and everybody else knows, that everybody else knows, that they're going to be dovish according to a rule for five years. Jay doesn't believe any of that. And I can't emphasize how important that is.
Jason Cummins: (37:54)
Because he believes discretion is optimal, he is always going to kind of keep this powder dry, react quickly. He'll do the dovish thing, but he's not going to do the kinds of things that the market does. And I'll give you a few specific examples of how you could've understood the last few months based on that. People thought, "Oh, he'll do negative rates." He doesn't believe in any of that. He thinks it's nuts.
Troy Gayeski: (38:16)
Yeah, well that's a political loser. I mean, that's never going to happen unless-
Jason Cummins: (38:23)
[crosstalk 00:38:23].
Troy Gayeski: (38:23)
... every other thing is [crosstalk 00:38:23].
Jason Cummins: (38:23)
It's a zero probability event.
Troy Gayeski: (38:23)
Yes.
Jason Cummins: (38:24)
Yield curve control, no way. Not unless things got crazy out of him, because it ties his hands. Now, economists think it's good to tie your hands, because of the credible commitment. Jay doesn't believe that. He thinks that tying your hands ties your hands. And that's objectively bad.
Jason Cummins: (38:41)
So you need to understand that he always thinks that discretion is optimal. And that's why the next disappointment for the market is going to be, people think that the next thing they do is, they're going to ramp up QoE. They're not going to ramp up QoE, because there's not support for it. Practically minded people don't see the need to QoE. Economists think you should do more QoE, but he doesn't.
Jason Cummins: (39:01)
And so, understanding this discretion versus rule dimensionality to him, I think is really important. The other thing you need to understand about this Fed, it's always the case that the Fed will open some possibility, and then the next Fed chair. Or some Fed chair subsequent, will walk the Fed through it authoritatively.
Jason Cummins: (39:19)
So it's certainly the case that Jay did intervene authoritatively in credit markets, and munis to a lesser extent, and main street, and so on. The thing you need to keep in mind, and this is truly is a medium term point, because it comes around to the next Fed chair, who will come in February 2021. The next Fed chair is going to see that Jay intervened in every market and broke every taboo, and say, "Oh, well I can do that too."
Jason Cummins: (39:46)
Jay committed the original sin in credit markets. He committed the original sin in munis, in buying Illinois and MTA. He committed the original sin in backstopping main street. And you can sort of all-
Troy Gayeski: (39:58)
Illinois's got good credits Jason? Come on man.
Jason Cummins: (40:02)
Full faith in credit. No, so but that's exactly the point, we're all laughing about this, but you have a Fed chair, the next Fed chair who cares more about social justice goals, Wall Street's going to get a big shock, because the Fed balance sheet... Ben Bernanke did some QoE, then he did some more QoE. Then Jay comes along and does the biggest QoE in history, just as that progression work, where you opened the possibility and then somebody else did it big, the same thing is going to happen in pursuit of social justice goals.
Jason Cummins: (40:30)
So Wall Street is used to the Fed balance sheet being Wall Street's backstop. What I'm telling you in clean English is, in the future, under the next Fed chair, that balance sheet will be in service of broader goals. It's already right there in the statement of principles, where they've expanded their notion of what full employment is, to be more inclusive.
Jason Cummins: (40:50)
So, as an example, LA Unified, a bankrupt school district, will have to issue bonds. The Fed's going to buy them in 2025. And this is another thing that I think is important for the dollar trade, which maybe other people don't talk about, so maybe I'll add one bit to a pretty standard macro narrative, which is that, the rest of the world is going to hate it. The Fed expanding its balance sheet to buy distressed public debt for social justice goals is not the placard you want to put on your reserve currency.
Troy Gayeski: (41:19)
The Germans won't approve of that? Is that what you're getting at, yeah?
Jason Cummins: (41:23)
The Chinese are not going to think it's very clever that they're buying US paper that's being used to bail out LA Unified.
Troy Gayeski: (41:31)
Well said Jason. It's really interesting, along those lines, some folks took it as a disappointment that the Fed wasn't more explicit in inflation targeting recently. But the recent meeting, they came out and said, "Hey, guys, we're not hiking until 2023 at the soonest." And basically we're not doing it until we get back to a labor market that's equal to or better than what we saw in '19.
Troy Gayeski: (41:58)
At the same time, they ratcheted up their growth forecasts substantially, because as you highlighted before, the economy never contracted as much as people feared. It's already arguably back to 96, 96.5 cents in the dollar. So wasn't that a very bullish statement on the real economy? Meaning that, we're going to have ample Fed support for a long, long time, even though things aren't really nearly as bad as people feared?
Troy Gayeski: (42:26)
Let's ignore the market, because then you get into evaluations and money supply. But focused directly on the real economy. Wasn't that an incredibly bullish announcement for the real economy?
Jason Cummins: (42:35)
So this is where I push back on you, and I'll try to use some casual-
Troy Gayeski: (42:38)
Oh feel free, yeah, yeah, yeah.
Jason Cummins: (42:39)
I'll try to use some casual examples. Commitment matters. They made no commitments, they made cheap talk commitments which are subject to revision later on. So I [inaudible 00:42:51] invite the conversation. Many of us on this call are married. Suppose I went to my spouse and said, "We don't really need to be married, we don't need that commitment, because I just promise you in five years things are going to be fine, don't worry about it. Let's not be married."
Jason Cummins: (43:05)
Everyone on the call realized that's cuckoo. Nobody believes that, because you have to make the commitment. And you make the commitment in front of everybody else to know that it's credible. The Fed made no commitment. It's a soft focus commitment of intentions. So when people tried to nail down the Jell-O in the press conference of what Jay was saying he's like, "There's no formulaic rule. I'm not going to tell you how much we overshoot."
Jason Cummins: (43:32)
There's nothing of Bernanke in what he said. Bernanke spent much of his research time after he was chair developing systems, and rules, and commitments to make the Fed more credible and more dovish, more robustly dovish, to reset inflation expectations. He had this temporarily lookback rule on price level targeting.
Jason Cummins: (43:57)
Jay doesn't believe any of that. So that's not happening. So this commitment is about as good as my commitment that I'm going to go lose 20 pounds. You're like, "Yeah, you probably will." But unless I see the gym membership and you going every day I don't believe it.
Jason Cummins: (44:12)
So I believe that he's a good guy, he's an amazing public servant, he's probably one of the best Fed chairs ever, if not the best Fed chair in dealing with the politics of the place. But when it comes to the canon of what he believes in, what investors don't understand is, they think there's this uninterrupted arc from Bernanke, Yellen, to Powell. There's a huge discontinuity because he believes discretion is optimal, and Bernanke and Yellen, even though they're dovish, do not. They believe you have to commit to some rules in order to get better outcomes.
Jason Cummins: (44:43)
And he's not committing to anything. He's just saying, "Don't worry, rates will be zero for a while." And in that regard-
Troy Gayeski: (44:48)
So that goes back to your Y-axis argument, right? Where, okay, even though they said it and you and I can look at it and say, "Hey, maybe we'll be back to a similar labor market at the end of 2022." So since he didn't give a firm commitment, right? And he has the Y-axis of discretion, it could hike at 2022, right? It's a possibility. Whereas, if they firmly committed-
Jason Cummins: (45:12)
I'm actually more downbeat on the economy than, certainly the consensus, but they could. And the fact that I know that they could means that that commitment lacks as much credibility as if you tied yourself to the mast like Odysseus, and had the crew put in the earplugs. So I think it's a really important distinction.
Jason Cummins: (45:31)
It seems like a technical one, but a lot of the reason why you see so many frustrated Wall Street analysts, the Dave Zerboses, the [inaudible 00:45:39], etc, is that they've misjudged the man. They keep looking for him to behave like the economists that they love, who are going to Bernanke style stuff, or Japanese style commitments and so on. There's no there there when it comes to Jay. He doesn't believe in any of that, not-
Troy Gayeski: (45:56)
Jason, come on man, you love Zerbos, you love Zerbos, I know you do.
Jason Cummins: (46:00)
I love Dave, I love Dave. He has enormous [crosstalk 00:46:02]-
Troy Gayeski: (46:02)
[crosstalk 00:46:02].
Jason Cummins: (46:02)
... at the moment.
Troy Gayeski: (46:03)
Jason, it's been fascinating having this discussion with you today, and obviously your intellect shines through, as well as your ability to frame complex problems and articulate them incredibly concisely. But, we're going to turn it over to my colleague and partner John Darsie to wrap things up. We want to thank you everyone for being on the line and tuning in for latest SALT Talks, thank you so much.
Jason Cummins: (46:26)
Sure.
John Darsie: (46:26)
And I could let you guys go on for another two hours I think, and it would be rich and great content. And we're sort of in SALT overtime here, but I'm not going to cut this one short because I think it's fascinating. We have a couple audience questions, and a couple follow-ups from our agenda as well.
John Darsie: (46:40)
So I think what's unique about you, Jason, is that you have the academic side of monetary policy and economics down, but you're also a practitioner, you're on two investment committees at Swarthmore, and at the Brookings Institute. So I want you to distill everything that you're talking about, from an economic perspective. You talked a little bit about the dollar, and some relative value trades there, but what should investors be doing right now? Maybe talk about the average high net worth investor. How should they be positioning their portfolio based on some of the economic factors that you've talked about?
Jason Cummins: (47:13)
So I'm going to try and punctuate a couple of the points I've made into some simple investment advice for what it's worth. But at least this is the way I think about when I put on my public service hat and I'm sitting on those investment committees as Brookings and at Swarthmore. I'm really operating with two things in mind.
Jason Cummins: (47:30)
The first principle is, stay as far away from the Fed as possible. The Fed is going to destroy excess returns in those markets where they choose to intervene or they're likely to spill over and intervene further still on. So I want to avoid the Fed, because the Fed is the enemy of alpha.
Jason Cummins: (47:48)
An example of that, as an example, I saw a wonderful profile of Thoma Bravo in the Wall Street Journal the other day, which is a company that does software private equity, they have super low duration, because they get into the companies and get out within five years. That's a great business to be in. That is orthogonal to what the Fed's doing. That's as far away from the Fed as possible, it's in a specific industry, it's PE, and it has low duration.
Jason Cummins: (48:18)
So that's a specific example of staying far away from the Fed. If you are going into the standard kind of carry style investments, you're getting stepped on by the Fed. So those are not as attractive investments.
Jason Cummins: (48:28)
The second thing is that, I again, just think it's naïve to think that this macro landscape, because it's been relatively quiescent coming out of the pandemic part of the crisis is going to remain the same. There are all kinds of things that are changing in the policy sphere, and we're doing all kinds of things in order to try and... It's not a very sophisticated way to say it, but basically what we're doing is, we're mortgaging a lot of our policy credibility in fiscal and in monetary policy.
Jason Cummins: (48:54)
And eventually, like anything, we sometimes trade off these big discontinuities, but investors should be aware that we're moving into a very different environment when it comes to the macro, because we're living on borrowed time, when it comes to our policy credibility. And that centrally goes to the dollar.
Jason Cummins: (49:14)
I also saw, I don't know what your time constraint is, but I saw on the Q&A one thing that I could use to expand on a comment.
John Darsie: (49:20)
Yeah, that'd be great.
Jason Cummins: (49:21)
Okay. So I saw someone asked about consumer confidence. And I just want to expand on that point to explain why our perspective about the economy maybe is different from some perspectives that you're used to. Especially on Wall Street, and many of the prominent forecasting houses, they have a very financial conditions index-centric view of the economy. Basically, if stocks and housing go up in wealth, then the economy is going to do well.
Jason Cummins: (49:47)
So I'm an empiricist, ultimately, and I kind of... Not a hedgehog, more of a fox. I believe in the toolbox kit to thinking about economics, and finance, and markets. So I go into the toolbox, pick the right tool, and go ahead. One of the things we've observed over the last decade is that the linkage, the beta if you will, between wealth and those financial conditions indexes, and the real economy, is broken.
Jason Cummins: (50:10)
So if there's one reason to understand why we think that consumer confidence, which is levitated by the improvement in the stock market, in the housing market, and so on, is not so well translating, over time, into real growth. Is that that relationship broke, around about the middle of the last cycle. And you can appreciate that by noticing that consumer spending in the last cycle was slowing down as wealth was even kind of hitting a further gear up.
Jason Cummins: (50:37)
And we think the same thing's going to happen this time. There are lots of reasons why. Income inequality, different betas about spending for different kinds of households, is what I mean there. People don't believe that the wealth is real, they think that they could run into another crisis, so they're more conservative, they build up bigger buffer stocks of savings.
Jason Cummins: (50:54)
But I think it's just important to understand our background perspective of the economy is really pretty different from some others, because we think this kind of Wall Street to main street linkage, which did work before the 2008 period. Just hasn't been in the data for a long time.
John Darsie: (51:12)
Well Jason, we're going to leave it there. I think there's so much to talk about with you. I think, let's plan to have you on after the election, hopefully maybe two weeks after the election, once we know the outcome. Hence, your prediction that we're going to have some level of uncertainty after November 3rd. But we have a growing relationship with Brevan Howard, have a lot of respect for the firm and for you. So we look forward to hopefully having you on in the future. And hopefully back at one of our in-person SALT conferences in the future as well, once things get a little bit back to normal.
Jason Cummins: (51:39)
I'd be delighted. And hearkening back to my professorial experience, in advance of our meeting after the election, I encourage everyone, as homework, to read the Electoral Count Act. If they can figure it out.
Troy Gayeski: (51:52)
Jason, I'm going to get right on that as soon as I get off this call. But wanted to thank you again for all your intellect, it's been fascinating speaking with you.