YouSaid · the spoken record

Mark Dow

lines on the record: 132
first: 2024-04-15
most recent: 2024-04-15
sittings or episodes: 1
sources: podcast

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“And this is, mind you, we're talking about the sector where interest rates matter most because it's the most leveraged. Right. So you can imagine for the other sectors, it just didn't turn the dial because the balance sheets were in good shape and people had jobs. That's kind of how I look at it. And fortunately, I said these things before. All of this stuff happened, right? So it's not like I'm saying I'm making up the story now. I spelled this out beforehand, how I thought it would go and why I thought it would go this way. And it's kind of played out. Yeah, monetary policy has a role. to play, but it's just a much less powerful instrument, particularly in the globalized financial world with all kinds of shadow banking that we live in today. And of course, initial conditions are everything. And people just kind of started over that. They looked, oh, the last three recessions, this happened. So therefore, right, there was kind of that thinking without really examining difference. Listen, I've been in markets a long time. That's what tends to happen.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“A lot of it was already done. So, like I said, if we did not have the housing shortage and we didn't have that COVID shock, we wouldn't have had a lot of that got attributed to Fed policy, right? People kind of said, oh, this makes sense. Prices go up, prices go down, people refinance. And let's be honest, there are a lot of people that kind of have an anti-fed bias that need to tell a negative story. So they want to put it all on exogenous factors. But, you know, what always grounds me in these situations, Jack, because I stop and I start thinking about me and my friends and people I know and they're my friends' kids, what are they doing, right? What are they actually doing? What are the steps that they go through to do these things? And I think when you do that, you realize it's more about having the pregnant wife or there being a housing shortage than it is about race, except when the rates are moving fast, of course.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, sure, bitch. It's not so much the price or the, I mean, the yield matters, the spread not so much. I think that gets lost in the yield movements, which are much larger. And the yield movements we normalize to them, it's kind of like a sticker shock. And then we kind of get over it. But I just don't think that in part because we had that long period before where rates were really low and a lot of people had, I know I've refinanced a couple few times in that period. Other people did too. There weren't. It's called convexity burnout in the mortgage market when you've been up and down in that area so long that there are no mortgages left to refi when the rates when the rates go lower. Now, some people coming online had a chance to do that. It's true that everybody coming in who had low rates, but not as much happened.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“So, I have actually 40 basis points now, 40, but for MBS. And if you're owning like a whole loan mortgage, I think you get a way better deal than if you put it like that, this is for MBS and yours. I think yours is for direct mortgage. So like if you're a bank, you get way juicier yield. It doesn't matter. They are correlated, but I see your point that it's like the level of interest rates and the movement of the 10-year, the drastic. But you do grant that it does have an effect.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“I'm just taking basically, I'm taking the par mortgage and I'm subtracting the five year from it or something like that to get it. I don't know if it's apples to apples, but most people look at the mortgage spread and it's in the neighborhood of 130 basis points right now. What are you seeing?”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“So, the question is how many basis points? It's just not enough to really turn the dial for something. That's what I'm saying. Think about how many, when you're looking at your chart, how many basis points do you see from the low to where we are now?”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Agree with you 40 basis points is not going to make a change at all, but I am looking at the option adjusted spread for the S&P US mortgage-backed securities index. And it did drastically compress from March 2020 to the middle of 2021. And then it inched higher.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Guy with a pregnant wife from buying a house. So again, I'm not saying it doesn't matter. I'm saying because these things are rational and because they make sense in theory, we tend to overstate their power in reality.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“That they're paying for the house. They look at what they're paying monthly and can they handle that? So it's kind of a sneaky way to, if you want to call it that, to get buyers. So not only is there a housing shortage that we all know about, but the homebuilders now have a financing advantage with rates higher. If the rates are moving higher, it's not good for them. Then we all freeze up again. We go, oh no, what's happening? Because we don't like the movement. We don't like fast movement that scares us. But when things stabilize, even at higher levels, that demand comes back. And it kind of belies that whole notion that it was all driven by interest rates. And you think about it, even QE, how much is that going to change the mortgage spread? It didn't change the mortgage spread dramatically. Even if people thought it was a safe asset for the rest of their existence, it's still not going to, I mean, right now mortgage spreads are at 130 basis points. They might have been as tight as 90. 40 basis points isn't going to stop.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Because my wife is pregnant and we need to get out of the city. All those things start to happen. So I think when you really break it down, it ends up being, I'm not saying interest rates don't matter. And they certainly do in housing more than almost any other sector. It still matters less than these other factors. And we're going to see this again. That's why I'm still bullish homebuilders that kind of got out and got back in because they have massive, they have demand on tap and they have an extra advantage now with interest rates on the higher side and with people dealing with sticker shock is that they can provide subsidies that the banks can't when they lend when they when they lend. All they have to do is increase the price of the house a little bit and use that to fund to buy down the rates on the loans. And people don't look at the final rate.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“COVID, but I would argue it was less about interest rates than more about people getting me out of the city, get me out of urban density. And that fad passed and people are happily, I'm happy to see people are going back to New York, right? And other places. But I think we over, again, getting back to the us tending to be less rational than we think we are, a lot of that got ascribed to QE and to monetary policy when these other factors, I think were a lot more important. And you see that now because anytime we saw a little bit of this in 2023, we're starting to see it again, when interest rates just stabilize, even at a higher level, demand starts to come back, right? And there's some sticker shock people have to get over it. Sure, you're going to be more reluctant to get rid of, to move if you've got a great interest rate. But after a while, you say, you know, that other opportunity somewhere else is better or you start, I need to buy the house.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Well, it depends on the habit of 3% mortgage. But to go back for a second, when interest rates collapsed after the global financial crisis, there was no lending whatsoever at any price. Balance sheets were bad. Household balance sheets were, both the lenders and the borrowers had bad balance sheets. Now you have a case where the balance sheets are good overall. So yeah, you get a lower rate you want to lend. And there are sectors like cars and houses where interest rates matter a lot more, right? Like I said, it's not like they don't matter at all. But in the grand schema of the economy, they matter a lot less. And you have to realize that interest rate might have collapsed. But if you go back a few years, they've been zero for a long, long time. So there weren't even that all that many people to refinance. And part of the housing price, I think the bulk of the housing price problem, and this is why I was bullish homebuilders even before COVID, is the shortage of houses, right? They're just not building enough houses out there. Now, it was exacerbated by...”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Demand for loans to increase and provided that people are willing to do the loans, it does. And also if you have a Bank of America at 7% and it goes down to 3%, you just pay off your Bank of America and go someplace else. They're happy to do a 3% mortgage, right?”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Okay, I'm glad. The impact of interest rates on the economy The creation of credit, both the demand and the supply, wouldn't you say that when interest rates collapse like they did in March of 2020 or in 2003, for example? And there typically is a refinancing boom and it begins a new cycle, a financing boom or a refinancing boom. And if you had a 7% mortgage and then you can get one for 3%, obviously you pay for a fee, you do it. And new home sales exploded. And now when interest rates went up in 2022, refinancing fell off a cliff. Applications for new mortgages fell down. That's why people thought housing prices would collapse. They didn't because people were trapped in. Obviously, you know this. Wouldn't you say that when interest rates collapse, it causes.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Can be 50. Or you take the other extreme a distressed company. You buy a distressed company, you don't care what the discount the 10-year Federal rate is. All you care about are they going to make it? So the more uncertain the cash flows, the more you focus on the idiosyncratic risk. Growth risk or what have you, and the less you focus on the discount rate. Well, tech stocks are the ones that are the most volatile when it comes to the archetype names. Half of them aren't going to exist within five years. So why would the discount rate even matter? It's yes or no. Either it's going to work or it isn't. And if you focus on that, you'll make money. For the names like the MegaCap text, the other category that people sometimes refer to as right as long.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Altcoin or something like that, and you know he's dumber than you are, and he's making a lot of money, so I'm going to do it with even more leverage and make more money, that kind of at a very gut level. It's kind of ridiculous to call stocks long-duration assets because of the, not because they're not long in duration in theory. It's the uncertainty. The uncertainty of future earnings. Let's just take NVIDIA. You know, they're projected to double their earnings next year, and maybe they will. And that's fine. But a small change in that and keeping valuations the same is much, much more powerful to the price than 100 basis point changing the discount rate because you don't know what those, you know, the rule in finance is the discount rate matters more, the more certain the cash flows, right? And in a growth company, they're uncertain not because the company's not valid, it's because the growth rate can be 100%.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“In practice, it doesn't matter. And then some of the behavior got outright silly. I mean, it gets back to overestimating how rational we are. And some of that is kind of self-serving for us because we're in markets. We want to think we're smart. We want to think that we're the master of the universe. There's that conceit. We don't want to say, oh, we're just monkeys flipping coins. And trading sardines. There's a bit of that. But it's just a lot less rational than we make it out to be. Remember the long duration asset, the whole, that whole story. I'm not saying that earning discounted earnings don't increase when interest rates go down. Of course, they do. I'm just saying it doesn't matter nearly as much as hearing from your friend that he just bought.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Basically, there are tons of things that matter at least as much or more than monetary policy. And there are plenty of examples throughout your career and throughout history of interest rates being at 6% and there being a bubble in the stock market. And likewise, interest rates being at 0% in Europe over the past 10 years. And stock market there hasn't been doing so great. So there are plenty of counterfactuals. And yeah, I think on the equity valuation side, I actually think it is rational to feature interest rates heavily in how you value stock markets, but everyone is not rational. So I think the valuation school of discounted cash flows is very much influenced by interest rates. And, you know, I mean, you could get a 50 price to earnings ratio or 40 price to earnings ratio is extremely justifiable when interest rates are zero. And if they go from zero to 5%.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Single cycle has this characteristic. It starts with widespreads and people not wanting to lend, higher rates, typically high spreads, people not wanting to lend, and it ends with much tighter spreads and everybody wanting to lend. Why does that happen? That can't happen unless the process is driven by something much more important than price. And that's really the essence of why I think people got this wrong. They were focusing too much on price. And we can talk about QE in a minute, QT and the Fed and not enough on just behavior and initial conditions.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“The major lesson people should take, I think, from this cycle, if you want to call it that. For me, we're in a new cycle. The old cycle ended in October 2022. The risk recycle. But the lesson we should take away from that is the importance of initial conditions to the transmission mechanism of monetary policy. People just said, oh, three out of the last four recessions this happened. And they start talking about historical. It doesn't matter. What matters is what is your state going in, right? And in this particular case, the private sector, the financial, you know, most households, corporations, and the financial sector were in good shape. So to get back to one last little thing is you can see this too in the way people take risk. Like I was saying, it makes sense why people would borrow more when want to borrow more when other things equal when interest rates are low. But why would people lend more? When you look back at every...”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Then it starts to feed on itself. And the speed of it scares other people. They do the same thing and you get that cascading, that chain, that chain effect. Well, if you're not that far out over your skis, if you're not on margin when the economy, when the stock market tanks 2%, you're not worried. But if you're margined up to the hilt, you're going to say, oh, geez, I better liquidate something, right? That kind of mindset. So that works at the economy level, at the economy level too. So we were in better shape going in terms of our balance sheets and fiscal policy made it even stronger. We were leaning the wrong way, a lot of us, because we read Milton Friedman and we've heard about yield curve inversions and all these traditional things that don't really work that great in the modern economy. So people were bracing for it. And they were looking at past precedents, but they weren't there. They weren't applicable at least because this was such a sui generis situation.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Fiscal support made those balance sheets better, right? So you can't commit suicide jumping out of the basement window. Our balance sheets were in good shape. The way we get recessions, Jack and the nasty kind of cascading unwinds of risk that a lot of people had in their minds going into the end of this cycle, as it were, is everyone has borrowed too much and they've hired too much and they're out over their skis and they're taking a lot of risk because they're excessively optimistic about the future. And all of a sudden something happens to change that worldview. It can be anything. And the more extended you are, the smaller the event needs to be to trigger it. The trigger can be anything. And then people say, oh, geez, I need to real things back in. I need to fire people. I need to sell assets to bring down my leverage.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Yes, the Fed provides supplies money, as it were, but really for the humming of the economy, for the functioning of things, really it's the banks and the shadow banks that provide credit and they don't need the Fed as long as they're in within their prudential limits. They're not 33 times levered the way Lehman was going into 2007, 2008. So those are the secular reasons why the Fed has less control over the money supply and interest rates matter less. From a cyclical point of view, we know the story a little bit better there. It's been fleshed out. Some of us were talking about it way back when, but basically we came into this with better balance sheets.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Right, they've just created money. They didn't need reserves to do that. All they needed is to be within their ratios for adequate capitalization, adequate liquidity, all the leverage, all the prudential ratios. If they're within those, and these days banks are, obviously, then they can lend and they can create and they can create money. So the bulk of it is that. Now, in crisis, that shuts down because everybody becomes risk-verse, right? And that's where the Fed will matter because they come in to make sure. And typically when that happens, people say, oh, I want cash now because I'm less sure. I'm going to sell treasuries and take cash, right? Because treasuries settled T plus one and Fed funds settles on this settle on the same day. So if you're worried about the demands on your liquidity because there's some kind of shock to the system, we can imagine COVID, the COVID shock in March 2020.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Whatever the cheapest point is on the curve, and then they can use swaps to transform the maturity into a length that matches the duration of the loan. So they're not taking the classic interest rate risk. They're lending on spread. Because of these structural changes, the Fed has a lot less control over the global money supply, as it were. And you said something in your introduction about how the Fed can control the price of money, but then control the quantity. They can't really control the quantity. They can control the quantity in the settlement system. But the bulk of the money in our system is issued by chartered banks and shadow banks. They're the ones who create the bulk of the money, right? And you don't need reserves to lend. You know the mechanism. A bank says, I want to lend to Jack. And they lend to you. At the same time, they credit a deposit account with funds. The same amount.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Well, you can borrow at the point you lend. So you can borrow at the 10 year point. If you want to lend to bank X, Bank X wants to lend to entity Y, the lends a 10-year loan to the company Y. And then it says and funds however the cheapest.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Wasn't a good signal or at least a trustworthy signal. Now through swaps markets and maturity transformation with derivatives, you can lend it to 10-year mark and you can borrow to fund that lending at the 10-year mark. So it's not like you're borrowing short to lend long, the classic maturity transformation capital creation scenario.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Than people think the secular ones are the global monetary system has changed. The global financialization has led to insurance companies in Brazil where there used to not be or financial entities around the world really that didn't exist before. And guess what? They all need regulatory capital, right? And regulatory capital sometimes takes the form of US assets. We also have the explosion of the euro dollar market and the repo markets. Now people fund themselves through the shadow banking system much more than they used to. The Fed doesn't have control over, or at least not direct control, certainly not regulatory oversight over much of the shadow banking system. And then lastly, the financial markets have developed to such a point that people can borrow. So, and this is also goes to why invert yield curve.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Thesis that is called the Financial Instability Hypothesis. And basically it means stability breeds instability. When you can lead a banker to liquidity, but you can't make them lend. That's the problem. So if your balance sheet is bad or you don't feel like you're in a good position, you're not going to take risk no matter how low the interest rate is. You're just not going to do it. And late in the cycle, even if rates are high, if you think you're going to make 200% or 300% on your house or on your coin or whatever the speculative vehicle happens to be, you don't care if the policy rate is one or three or five. It's the same number to you. So I'm not saying that the rates don't matter is that they get swamped by these other factors, fear, greed, economic expectations. And that's what we've seen. Now, they're cyclical and secular reasons why monetary policy is less powerful.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Running into 2008, the global financial crisis for the three preceding years, that's when we had the highest quantity and most egregious quality of mortgages minted in that cycle. And the Fed funds rate was on average 5% and we didn't know what QE was. So everyone says, well, it makes sense to me if you're lowering rates that people should take more risk. Why would a lender want to lend more at lower rates? That's the part that really should make people stop and ask questions. So it just doesn't matter as much as people think it does because they don't think through the mechanism. The quotes I always cite is that one from JP Morgan, the famous banker who said nothing so undermines a man's financial judgment as seeing his neighbor get rich. And then Hyman Minsky, who I'm sure you've heard of, also...”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I was one of the ones, as you know, said that monetary policy matters less than we think it does. It's not that it doesn't matter, but it tends to get swamped by other factors. And there's a good empirical basis. It's extremely counterintuitive because you think, oh, lower price of money, people are going to borrow and they're going to take lower opportunity costs. They're going to take more risk and discounting cash flows and all that kind of stuff. So it's very intuitive. But in reality, there's a lot of empirical evidence to suggest that matters a lot less than other factors. Typically human factors, behavioral factors, animal spirit factors, they tend to be cyclical. So if you look back just to start off at 2000, the biggest bubble in my lifetime with the highest valuations, going into it, Fed funds was at 5% and the 10-year was at 7%. And we didn't know what QE was. We didn't even pay any attention to the Fed balance sheet, going.”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT
“Economic slowdown, but really had a re acceleration last year as inflation fell down, as you know. So I just want to say, can you share your thesis on how much monetary policy actually matters? I mean, were the people who thought that the Fed would cause a bear market? Were they wrong and why?”
2024-04-15 · Forward Guidance · Mark Dow: The Bears Are Making Stuff Up About Fed/Treasury Plumbing To Excuse The Fact That They Were Wrong · IDENTIFIED FROM THE TRANSCRIPT