Odd Lots Podcast Summary: "Harley Bassman on Trump, the Fed, and the Bond Market"
Release Date: November 7, 2024
Hosts: Tracy Alloway and Jill Wiesenthal
Guest: Harley Bassman, Managing Partner at Simplify Asset Management and Creator of Convexity Maven
1. Introduction
In this episode of Odd Lots, Tracy Alloway and Jill Wiesenthal welcome Harley Bassman to discuss the recent U.S. presidential election results, their impact on financial markets, and the looming Federal Reserve (Fed) meeting. The conversation centers on bond market volatility, the interplay between economic policies under the new administration, and future interest rate expectations.
2. Election Results and Market Reactions
Tracy Alloway opens the discussion by addressing the clarity of the election outcome:
"There's no ambiguity at all. It's been called." [01:30]
With Donald Trump securing the presidency, markets have reacted with a noticeable uptick in equities. Conversely, bond yields have increased, leading to a decline in bond prices. This dual movement underscores the market's complex response to the political shift.
3. Bond Market Volatility and the Move Index
Harley Bassman delves into the specifics of bond market volatility, introducing the Move Index—often referred to as the VIX for bonds. He explains recent fluctuations:
"The move was at 130ish. It's now 117ish." [05:00]
The Move Index spiked around the election period, reflecting heightened uncertainty. However, in the aftermath, it has shown signs of stabilizing, though it remains elevated compared to recent historical levels. Bassman anticipates further adjustments following the Fed's upcoming decisions.
4. Disconnect Between Stock Volatility and Bond Volatility
A significant point of discussion is the unusual decoupling of stock market volatility (VIX) and bond market volatility (Move Index). Bassman notes:
"This is the longest period of where there's been a disconnect between the two of them." [06:23]
Historically, fluctuations in the stock market often parallel those in the bond market. However, the current environment sees the VIX at near historical lows while the Move Index remains comparatively high, highlighting a unique market dynamic driven by uncertainties in interest rate trajectories rather than equity valuations.
5. Economic Growth and Deficit Concerns
The conversation shifts to how economic growth under a Trump administration might offset deficits, a common Republican viewpoint. Bassman addresses the challenges in predicting this relationship:
"Long and variable lags tend to dominate." [08:16]
Incorporating economic growth into bond rate forecasts is complex due to the delayed effects of policy changes. While tax cuts and deregulation could stimulate growth, their impact on deficits and, subsequently, on interest rates remains uncertain.
6. Federal Reserve's Upcoming Decision
The impending Fed meeting is a focal point. Tracy Alloway inquires about potential outcomes and their implications:
"The Fed's decision tomorrow and the election this week... let’s look at bonds." [02:24]
Bassman speculates on Fed Chairman Jerome Powell's motivations, emphasizing Powell's concern for his legacy:
"Jay Powell does not want to go down as Arthur Burns... he’s pretty worried about a resurgence of inflation." [10:37]
He predicts that Powell will exercise caution in adjusting rates to avoid reigniting inflation, likely leading to a more measured approach than the market anticipates.
7. Term Premium in Bond Markets
The term premium—the extra yield investors demand for holding long-term bonds—has been rising, influenced by Trump-era uncertainties. Bassman provides insight:
"The Fed will take rates down slower than expected in the 10 years." [12:28]
He explains that as short-term rates are adjusted, the term premium may expand, reflecting increased uncertainty and the market's expectations of future rate movements.
8. Trump Administration's Economic Policies and Market Uncertainty
Political policies under Trump, such as immigration reforms and tariff implementations, introduce significant variables into the bond market. Bassman underscores the economic fundamentals:
"The economy is people times hours times productivity." [14:00]
Decisions affecting labor force participation and trade can have profound impacts on GDP and inflation, thereby influencing bond yields and investor sentiment.
9. Historical Context: Trump and Fed Relations
Reflecting on past interactions between the Trump administration and the Fed, Bassman remarks:
"There’s a dual level here of what he actually wants to do versus what he says using the bully pulpit." [18:34]
He suggests that Trump's public pressure on the Fed may not align with his administration's private policy actions, creating a layer of ambiguity in market expectations.
10. Political Implications of Rate Movements
Rising interest rates can exacerbate the federal deficit through increased interest payments on existing debt. Bassman explains:
"The rates go up and therefore the deficit goes up." [19:08]
This fiscal strain could pose political challenges for the Trump administration, particularly in balancing economic growth initiatives with fiscal responsibility.
11. Conclusion and Final Thoughts
As the episode wraps up, Tracy Alloway and Harley Bassman emphasize the critical role of Trump’s cabinet selections on future economic policies and market stability. Bassman highlights:
"Uncertainty is hating by markets." [21:17]
He anticipates continued market volatility until clearer policy directions and leadership appointments are made, underscoring the importance of seasoned and predictable governance in maintaining investor confidence.
Key Takeaways
- Election Impact: Trump's victory has led to mixed market reactions, with equities rising and bond yields increasing.
- Move Index: Bond market volatility remains elevated, indicating persistent uncertainty despite low stock market volatility.
- Fed Expectations: Powell is likely to adopt a cautious approach to interest rate adjustments to safeguard his legacy against inflation resurgence.
- Term Premium: Rising due to increased uncertainty around economic policies and future rate movements.
- Policy Uncertainties: Trump's potential economic policies on immigration and tariffs continue to introduce variables that could affect GDP and market stability.
- Historical Relations: Previous interactions between the Trump administration and the Fed provide context but also highlight ongoing ambiguities in policy influences.
This episode offers a deep dive into the intricate relationships between political outcomes, Federal Reserve policies, and the bond market, providing listeners with valuable insights into navigating the current economic landscape.