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- [00:00]
A
I've spent the last three decades trying to better understand money across the boardroom, the newsroom, and the trading floor. That's longer than most podcast hosts have been alive. But even though I've got questions, Join me Marin Sumpset Webb Every week for my show, Marin Talks Money from Bloomberg Podcasts, where I have in depth conversations with fund managers, strategists and experts about how markets really work. And join me for a separate episode where I answer listener questions on how to make those markets work for you. Follow Marin Talks Money on Apple Podcasts, Spotify, Spotify or wherever you listen.
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B
Are you expecting a bonus this spring? Do you work in the UK? If you do, take the FT's anonymous bonus survey. Early indications show a lot of our British listeners are expecting big payouts this year. But how about you go to FT.combonUS or click the link in the show, notes. Pushkin. You know what? You win some, you lose some. The other day on this very podcast, we laid out an argument that the Super Soar away clamor for gold and silver was a speculative frenzy doomed to failure. Well, tick, we've had a big reality check there, but then after that we kind of said we thought maybe Scott Besant, the US Treasury Secretary, would be the next chair of the country's Secretary Central Bank. Wrong. Straight after we said that Kevin Walsh got the nomination. But hey, look, one out of two ain't bad, and I don't think listeners are looking for perfection. Right? Email to complain if you are robert.armstrongft.com Anyway, today on the show, a little bit on the President's Kevin of choice. This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London. Finally done with boring snoring dry January, and I'm joined through the magic of the Internet by Robert Armstrong, senior executive vice president of the Unhedged Newsletter in New York City and regrettably seemingly ruled out early from the job of chair of the Federal Reserve. Rob, I think we now know why you were ruled out. Because Kevin Walsh, according to Donald Trump, is, and I quote, central casting. Indeed, our colleague Chris Giles says that Walsh was passed over for the job in Trump's first presidency because back then he was too young and too good looking. So I think this explains it. Right?
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C
Katie, we all have our crosses to bear and mine is mine is devastating good looks.
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B
But, but also, I know we've spoken about this on the show before. Trump likes people with great hair.
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C
Yeah, that's not my strength.
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B
I'll admit that is not your strength. But Kevin Walsh does have central casting hair.
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C
So unbelievable hair. Rich, full, lustrous hair.
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B
Yes. I would also point out that apparently in 2017, reportedly Trump did not reappoint Janet Yellen for the role because she was too short. And I, as you know, am all of 5 foot 2. So I think all in all, this is me and you both ruled out for Fed chair. So Kevin Walsh, it was going to be one of the Kevins, people thought, and this is the Kevin of choice. Market's kinda like him. How do we know that and why?
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C
Well, we know it because neither short term interest rates nor the dollar weakened on the announcement, which if it had been the other Kevin, Kevin Hassett, we might have anticipated some weakness suggesting a Fed that is fully in the thrall of the President and willing to cut rates and loosen monetary policy willy nilly.
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B
Yeah. So we got the news that it was going to be Kevin Walsh. And it's not like stocks and bonds and the currency were all like, hooray. And there was this like massive jump in asset prices and the markets were like cheering. People were throwing streamers out of their windows and having parties and saying, hooray, it's Kevin Walsh.
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C
But nothing bad happened.
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B
Nothing bad happened. And that is these days, a win.
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C
Yeah, I would say that's right. And of course, the interesting thing about Mr. Warsh is you can see in him what you want to see because he holds two views about monetary policy that on the surface at least, point in opposite directions. He has been vocal in the last year or two that interest rates, the federal funds rate can be lower. Now there's a whole debate about whether he's just auditioning for the job when he says that and is he a hypocrite and a fake. And we can talk about all that. But that's one view that recently he's firmly espoused. His other view that he's been espousing for decades is that the Federal Reserve's balance sheet, which is big because of quantitative easing or bond buying, should shrink. And that's a tight money view. So this guy both has a loose money view and a tight money view. So you can totally Rorschach on him and see whatever image you want to in a certain way.
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B
Yeah, so there's that. Right. He kind of calls sort of for opposite things at the same time. But there is a large body of criticism of Kevin Walsh saying, and here I'm looking at the words in, in the New York Times from Katherine Rampel, who says that over time, Walsh has seemed more interested in slamming the brakes on the economy when a Democrat is in the White House than when a Republican is. So there is a concern out there that Walsh is a bit of a political beast, that he is keener on raising interest rates when there's a Democrat in the White House. And now that it's someone who appears to be more closely aligned with his broader political views, is happy to run the taps. A little bit hot. I guess from what you've been writing in your newsletter over the past few days, you kind of disagree slightly on how important that is, right?
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C
I mean, I have the dark view that all people are hypocrites and that they respond to the incentives that they're exposed to in a given moment. And so let me put it this way. This guy's life is about to change in a huge way. I describe him as the dog who caught the car. He used to be on the Fed board back during the financial crisis. I think he resigned in 2011. And even then, he was kind of an internal dissident. He was sitting there saying, whoa, whoa, whoa, whoa, let's slow down with this QE stuff. Let's not. And again, Obama was president. Let's not. Let's not go so crazy with policy here. There's going to be inflationary implications. So he was a dissident and very much in the minority, and he was, like, standing by the sidelines saying, well, maybe you guys are screwing it up. And since he left the Fed, he's basically been a professional fed critic for 15 years. Like you guys. You guys are doing it wrong. Here's the way you should be doing it. No, no, no. Well, if he gets approved by the Senate, he's gonna have to get off the sidelines and get in the game. He's gonna be accountable in a huge way, and he's gonna be under a very, very different set of incentives and under very, very different pressures than he's been for the last two decades. So whatever happens, we're gonna get a new person, a person we haven't seen before.
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B
Yeah. So to quote your words back at you from your newsletter the other day, for 15 years, Walsh has been able to criticize the Fed from the outside with nothing at stake. Now he has to put his money and ours on the table. That's a good point. Right. And people do tend to act somewhat differently when they're actually in charge than when they're in the peanut gallery, kind of just saying, oh, I wouldn't do it like that.
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C
And in the case of the Fed chair, by the way, the job is literally designed to cause that to happen. The job, the structure of the institution and of the chair's job is designed to insulate the chair from pressure from the executive branch. So Trump talks about how it's incredible how people change their views when they get the job. Yes, that is true and it is the whole point. Right?
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B
So, yeah, but Trump also apparently was at a dinner at the weekend and he made a little joke saying, oh, you know, I'm nominating Kevin Washington and if he doesn't cut rates quickly, I'm gonna sue him. But it's like, ha, ha, ha, hilarious. Please don't. Very funny joke. Please don't do that.
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C
Your honor. Your majesty, you are cool. You are so funny.
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B
Let's get to a little bit more on that in a minute. But in the meantime, another thing that you've been writing about and that Chris Giles has been writing about is the wash is cut from a somewhat different cloth than Jay Powell, who is currently the Fed chair, in the sense that Jay Powell with his little half moon glasses is very much like he's data dependent. He is. He, his, his public line has always been, I'm not wedded to one path of action or another. I will go where the data tells me and I will do whatever is in the best interest of the economy according to my mandate. Whereas Warsh is a bit like, I've got views and I think that they're going to work out in certain ways. So his big one is around productivity and he says, we've got AI, we've got all this wonderful whiz bang technology, and I think that's going to make everyone much more efficient, which is going to pull down inflation. Fine, that might be right, that might be wrong, but currently we don't know, which makes it a bit of a sketchy thing to base policy on.
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C
Okay, so just to make sure we understand the argument here, the argument here is you get inflation when demand exceeds the capacity of the economy to supply that demand, right? So people want more stuff and have money to buy more stuff than the economy can give them. And so the prices go up because there's not enough stuff or whatever relative to the money. The idea is if you get more productive, the economy can give you that more stuff so prices don't have to go up. There's just more stuff and everyone's happier. That's why productivity is so, so important. Right? Is it? It's what kind of wealth and dreams are made of. Okay, that's all good. Now Warsh's view is that the AI revolution is a bit like the Internet revolution in the 90s in that you didn't see that something big had happened in the productivity statistics. But Greenspan, who was chair then, was right not to raise rates because he knew the productivity was coming even though he couldn't see it. So he wants to be Greenspan 2 for the AI revolution.
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B
He also thinks with limited evidence that you can cut the Fed's balance sheet, right? So you can kind of work down on this massive pot of money that the Fed controls without that messing up credit markets and without it causing any sort of accident. Now again, he may well be right on this, but it is a bit of a punt, isn't is?
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C
Although I will say in his defense that the Fed did just go through a long period of allowing the balance sheet to run off again. What that means is they have all these bonds that they've bought and what they did for a while was when one of those bonds expired, they didn't replace it with another one. So they sort of let the balance sheet get smaller. So between 2022 and just recently, you know, a couple of trillion dollars, or about 25% of the balance sheets of the Federal Reserve's balance sheet disappeared, right? And nothing terrible happened. And what he's saying is we could do more of that. We could just let this thing wind down further with no harm. Now there's a lot of people out there who think when the Fed, when the balance sheet shrinks, when the Fed's balance sheet shrinks, what it does is basically suck cash out of the financial system. In other words, for reasons too technical to describe, the net effect of it is that you have more bonds and less cash floating around in private hands in the financial system. But the demand for cash, the need for cash doesn't go down. So the big worry is you have a kind of cash panic. Somebody needs to pay off a short term loan or roll over some debt and, and there's just not enough cash sloshing around in the financial system for that cash to be made available.
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B
A lot of it also would depend on how quickly he wants to wind down the balance sheet, right? If, as you say, you're just in a situation where bonds mature and you just don't buy any more bonds, then fine. That sort of is a process that is pretty much like watching paint dry. If, however, you go down the bank of England route and actively sell stuff that you own as a central bank that can put more upward pressure on borrowing costs, actually, and push down the value of bonds. So there's a kind of pacing thing here that can be a little bit difficult.
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C
Absolutely, a huge pacing. And also there's all kinds of other factors. There's a lot of factors that affect the liquidity in the financial system beside the Fed's balance sheet. So if you shrink it when times are good and people are willing to lend and credit conditions are loose and banks are throwing money out their windows, everything's fine. The question is, if the Fed is shrinking its balance sheet at a moment where people are scared and financial conditions are tight, then you could get a real problem. The big context here that you have to keep in mind is the huge fiscal deficits of the United States.
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B
Spending money you do not spend money we don't have.
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C
And so when the government is doing that, they're pushing all this debt into the financial system that has to be bought by somebody. And that's cash absorbing too. Right. So what, you know, the financial system has to be kept flush with cash because somebody's gotta buy all the U.S. debt. Right. So the question is, can you have both a smaller balance sheet and massive fiscal deficits at the same time and lower interest rates? And Warsh has this view that if you tighten the balance sheet, the deficits will go down. In other words, he thinks loose monetary policy in the form of Federal Reserve bond buying is actually encouraging deficit spending. The usual view, of course, is that the causality runs the other direction, that there's huge deficits, so there has to be bond buying. But he reverses the arrow of causation or at least thinks the arrow goes both ways. And I think that may be a fantasy. In other words, just because he changes Fed balance sheet policy doesn't mean the federal government is going to get religion about deficit spending. I just don't think that's realistic.
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B
One of the things sort of bubbling along here is that Walsh has not been one of the people really pushing back at the. The President's attack on the Fed. You know, he. He's kind of, you know, stayed on the sidelines of that and has not been a particularly noisy voice in favor of central bank independence. No, this leads me back to one of my hobby horses, which I swear I'm not wrong about. So a bunch of our lovely colleagues, including Claire Jones, Miles McCormick and Amelia Pollard, wrote a lovely story the other day about how, how Walsh got the job, basically, and the sorts of people in the room or in the process that really managed to win over Scott Besant, the Treasury Secretary who was advising on the nomination, were those who were looking for regime change at the Fed. And there is this sense that there could be some sort of more fundamental overhaul of the Fed's mandate or the way that it works. What's your take on that? Because again, that could be quite subtle and probably not the sort of thing that most, you know, ordinary people in the street would notice. Or it could be a really big rewriting of what the Fed is for. Are you still writing off the possibility that its mandate could get like a do over? Because I'm not.
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C
I think the Fed under Warsh, and most importantly, even under a WARSH and an open market committee that is sympathetic to Warsh, meaning let's assume that he talks all the committee members over to his side and he's a really powerful Fed chairman and he can do what he wants. You know, what do we think he wants to do? I don't think he wants to get rid of the employment mandate or the stable prices mandate or anything like that. I do think he thinks the Fed is just too big. So I wouldn't be surprised to see him say things like, let's sack loads of people, let's do less research, let's slim this whole thing down, let's stop writing papers about economic inequality and et cetera, et cetera. Let's just bare bones it a little bit and, you know, those are the kinds of noises he makes. He also makes noises about the Fed and the treasury cooperating more on monetary policy implementation.
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B
Yeah. And if you're a markets person, that rings a little alarm bell in the back of your head saying, hmm, how far could that go?
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C
Yeah. What does that mean? The bad version of that is where the Fed becomes a servant of the treasury and the treasury wants to do X. And the Fed's job with its monetary policy levers is just its little minion. Warsh's talk about higher Fed treasury cooperation absolutely. Should make you jumpy. And it is the camel's nose getting into the tent and I don't like it.
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B
Rob, we are going to have to come back in just one second with Longshore. Okie dokie. It is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate.
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C
Rob, you saying I'm long the theme park. I notice that the next CEO of Mighty Disney is going to be the guy, Josh d' Amaro, who used to run the theme park division. And I'm old Enough to remember, like a decade ago people would look at Disney and be like, why do they even run those stupid theme parks? They're so much more unprofitable than the movie business and the TV business. The world has changed and like suddenly the best part of the business is the live part where you go and actually do stuff. So while I personally don't like going to theme parks, I think, man, that's a good business. And in the world of AI, especially theme parks, it's the future. Once. Once we don't have to work anymore because AI does everything. We're just basically going to theme parks all day.
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B
You're going to spend all day on roller coasters. I'm kind of down with that. I like roller coasters.
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C
Me too.
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B
On a related ish note, I am short grindcore, so I don't know if you saw the piece the other day from Hannah Murphy on our page about this whole like, work hard, don't play at all thing that like thrusting young Silicon Valley people do. Apparently they're all into this thing called996, right? Which means you work from 9am to 9pm Six days a week. And there was a quote in her story from some 23 year old guy from an AI startup who's saying the current vibe is no drinking, no drugs, nine, nine, six, lift heavy, run far, marry early, track sleep, eat steak and.
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C
Eggs and die of boredom.
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B
Go to a sodding theme park, guys. Yes, like seriously, like lighten up.
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C
Don't get drunk at Epcot center like a normal person.
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B
Right? So if you are 23 and you're listening to this and you're eating eggs and going to bed early and not drinking and having zero fun, you're doing it wrong. You are working for the man. Trust me, when you get to my age, and certainly when you get to Rob's, you are not capable of having that sort of fun anymore. So you are wasting time. So that's my advice now, listeners. We're going to be back in your ears on Thursday. Listen up then. And in the meantime, thank you for your attention to this matter. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhead. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clarke, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30 day free trial is available to everyone else. Just go to ft.com unhedged offer. I'm Katie Martin. Thanks for listening.