EQ. Magazine Summer Issue 2019

INTERVIEW
that will do to investor sentiment and
consumer confidence, and consistently
rushes in to apply its so-called PUT. And
these days almost everyone’s trading
models and their econometric models
apply that Fed PUT in their calculations.
So, the discounting gets discounted by
the assumption of Fed easing.
DH: And that’s just what we got, wasn’t
it? The Fed just saw equity markets
slip, not even 10%, and they came
rushing in with rate cut rhetoric.
That’s the PUT you’re
talking about.
SG: Precisely. Ah, this looks
like our food, what did you
order for our main course?
DH: That’s the Steamed King
Crab, the Truffle Braised
Whole Abalone, and lastly
the Prime Chili Diced Short
Rib. So tell me, what’s just
driven interest rates down
so quickly and why would
the Fed come in after rates
have been hammered lower
by strong buying, especially
of the Treasury 10-year, and
talk about cutting?
SG: First, on the rapid rise in
prices of bonds and the slide
in rates, I think a lot of that
is institutional trading. Big
Treasury buyers piled into
bonds to make a profit on price
appreciation, and it became a
momentum trade. At the same
time, and this is how these big
boys play, knocking down rates
makes it look like investors are
buying bonds as a safe haven
because the trade war and a
slowing economy is going to hit
stocks, while bonds will rally.
That’s well played. As rates
came down the financial news
media started talking about recession
fears being reflected in
the bond market, and low and
behold, the Fed stepped in with calming
words. And guess what? That push
lower in rates, that price spike, is where
traders like me sell the positions we just
accumulated.
But there’s more. Sadly, in my
opinion, it’s because we don’t have
“free markets” anymore. The Fed is the
economy’s central planner, and that’s
what we’re seeing increasingly. The
recent rhetoric by James Bullard, the St.
Louis Fed Bank president, who just said
he sees rate cuts potentially ahead, and
Fed Chair Jerome Powell talking about
acting appropriately, meaning cutting,
if the trade wars get out of hand, in the
Fed’s opinion that is, that’s their way of
signaling they’re at the ready to backstop
markets. Not the economy mind
you, markets. It’s a real problem, in the
long run, because we don’t know how
markets will ever “clear” if they’re not
allowed to. That means bubbles.
MULTI-FLAVORED
WHITE CHOCOLATE
SHELLS
DH: Glad you brought up the Fed and
the prospect of rate cuts. Interest
rates drive our business. How’s that a
problem for our business or commercial
real estate in general?
SG: It’s not a problem, it’s great for you.
In fact, you should be looking at a lot
more business. I’m sure your transactions
will increase markedly now that
rates have just been trounced, as long
as potential clients have not recently
Photo courtesy of DaDong
refinanced or over-leveraged themselves.
I’m sure you also watch the yield
curve. In my opinion, the flattening of the
yield curve is problematic for the same
reason, a flat yield curve doesn’t allow
for proper risk pricing. What’s coming
next?
DH: For our dessert I ordered
Multi-Flavored White Chocolate
Shells and Crispy Chocolate Rice
Pudding. Speaking of yield curves, in
my business it’s mostly about
banks, though hedge funds
and insurance companies are
increasingly go-to providers
of mortgage funds. How do
you see the banks these days,
especially given your hard
criticism, I’d say bashing of
them, during the financial
crisis and during the Great
Recession.
SG: The big banks are in much
better shape today than at any
time since the crisis, thank
goodness. But the flat yield
curve is cutting into their NIM
(net interest margin) and trading
is too up and down to be a
consistent, regular contributor
to earnings. They’re in good
shape, but I believe they’re still
over-leveraged. It’s the smaller
banks that I’d be worried about.
They have much different funding
and liquidity profiles.
DH: True. Lastly, where do
you see equities going?
SG: I see them going higher
as long as the Fed PUTs are
in place. If the trade war with
China gets resolved, equities
will rally in relief, maybe 10%,
maybe 20% if the economy
looks like it’s still growing.
On the other hand, if we don’t
get a resolution to the China
trade tremors and at the same
time tech stocks get the wind
knocked out of them by the Justice
Department and the FTC on anticompetitive
ground shaking, equity markets
could drop a good amount lower, as in
maybe 10% to 20% lower.
DH: Then I guess we’ll just have to
have you back soon to tell us what’s
next. Thanks, Shah.
SG: Until next time, Daniel, thank you
for a delightful lunch. ■
equicapmag.com
SUMMER 2019 ISSUE
EQ.
67