Payrolls to pandemic — a conversation with Boris Schlossberg

From non-farm payrolls to US-China relations and the upcoming American election no one in foreign exchange is more knowledgeable and interesting than Boris Schlossberg of BK Asset Management. Join Joseph Trevisani, senior analyst at FXStreet, for a wide-ranging and informed survey of the state of the global economy, markets, and US politics.

Joseph Trevisani: I am very pleased to have with us today Boris Schlossberg, one of the best known and most knowledgeable FX analysts in the business. He and his partner Kathy Lien form BK Asset Management. 

Joseph Trevisani: Interesting day today. The NFP numbers were a total shock.  Do you think they are a reasonable basis for assuming the V-shaped recovery?

Boris Schlossberg: There is a lot of controversy on the numbers. One. The response rate was very low. Two. The employers appeared to have completely misclassified employees. The true number is much more in line with consensus. But even that is enough to keep the risk rally going, I think there are two very distinct realities now. The market reality which is basically based on easy money and positive rate of change, and the economic reality which is far, far worse than the market reality. 

Boris Schlossberg: But it is immaterial for now because consumers have PPP and unemployment funds so there is much less stress on income than you would imagine. Nobody has a clue - I think we can agree on that

Joseph Trevisani: Yes I saw that reporting. But it is also true that analysts have had a great deal of trouble modeling the economic response to the pandemic.  In the early days of initial jobless claims, the numbers were equally off-base. One of the hardest things for an economist to estimate are emotions, meaning Keynes animal spirits.

Boris Schlossberg: But the two things we know are that consumers have money to live for the next few weeks and credit markets have an unlimited bid.  For consumers to ramp up spending you have to assume that their income will remain in place 

Boris Schlossberg: I think the Trump administration will do anything to make that happen.

Joseph Trevisani: Agreed.  If the consumer ramps up spending then things may start to resume normal shape. 

Joseph Trevisani: One thing to watch may be auto sales. Most dealerships have been closed for two months.  If there is a spurt in sales that indicates those deferred sales are added to normal numbers for June or July that might indicate that the consumer confidence is there.

Boris Schlossberg: But that does not mean demand will come up to pre-COVID levels.

Boris Schlossberg: I agree, I actually think autos and iPhones will be key. Those are true show me the money items.

Joseph Trevisani: Ha...just by chance mine went on the fritz last night.  And it’s, I think a 6.  My kids think it is practically neolithic.

Boris Schlossberg: So the question is will you buy SE as I did?  A "cheap" iPhone because I saw no need to splurge on $1000 model

Joseph Trevisani: No. I had one of those once.   We did not get along.

Boris Schlossberg: I think many consumers will be making that type of choice and with cars too. Demand will come back but "splurge" demand may not.

Joseph Trevisani: It is difficult to see how the consumer resumes pre-pandemic spending levels. On the other hand, betting against the US consumer has a very poor track record.

Boris Schlossberg: I don’t think that matters now, it's all about the credit bid and fiscal spending. Globally, markets, as always, will overshoot massively. The US consumer has changed IMO [in my opinion]. Especially on the entertainment/tourist side. That sector will not revive quickly.

Joseph Trevisani: True, though I imagine it would be a great time to visit Venice.

Boris Schlossberg: It’s very hard to stand here and imagine a test of double bottom, just as it was very hard to imagine the vertical move we've had. That's why I say as traders our job is not to wonder why - but to bid and buy. 

Joseph Trevisani: One factor that I think gets underplayed because it is so hard to model, is the desire of everyone, especially business owners to reconstitute their lives. Every owner I know wants to reopen. Many, though I hope it is not most, may not, but the need and desire is strong.

Boris Schlossberg: I think all sorts of brick and mortar retail is dead. Mom and Pop are dead

Boris Schlossberg: And that leads to small banks dead too.

Joseph Trevisani: It was a difficult time already for brick and mortar stores and you may be right, this will certainly raise that mortality rate.

Boris Schlossberg: Ironically enough COVID will only consolidate the power of big business, even in retail. Whole Foods/Amazon are doing fine, Nail Salon - not so much.

Joseph Trevisani: One another topic with the demise, at least for now of the risk-aversion trade, will currencies return to economic comparison pricing?

Boris Schlossberg: Why bother with risk aversion when G-3 Central Banks will make a bid for anything - including bankrupt companies?  FX is now part of the "mo money" cycle

Joseph Trevisani: I wonder if the Fed and ECB are ready to become distressed private equity firms?

Boris Schlossberg: No one is trading on any economic data whatsoever.

Joseph Trevisani: That is true. I have written several pieces to that effect.

Boris Schlossberg: In fact I wonder why we need an economic calendar at all – it’s a quaint artifact of when we actually had interest rates.

Joseph Trevisani: So you think zero rates are here to stay?

Boris Schlossberg: Everything is looking like Japan- EXCEPT that Japan is a highly disciplined society and the US and EU are hardly that.  So we don't even have highways to nowhere, just potholes

Joseph Trevisani: Zero rates are a trap for central banks, it has always been a bit of surprise to me that the Fed under Yellen was so disciplined that it left the zero bound.

Boris Schlossberg: And that I think is the danger of the CB money model. Easy money only works if it’s distributed as a social good. What do you think is better for society?  S&P at 1500 and every bridge/highway speed train working at 21st-century levels or SP at 3000 and nothing working.

Boris Schlossberg: That is the reality of our life today and as Herb Stein who used to advise Richard Nixon said, if something is unsustainable it cannot be sustained.

Joseph Trevisani: Easy money as applied by the central banks tends to benefit the financial and investment sectors, general society not so much.

Boris Schlossberg: I would say that is a huge understatement. But it is also NOT the CBs fault. They are just trying to patch up a torn shirt, it’s the politicians who don't want to buy a new one.

Joseph Trevisani: No it is not. The central banks work with the tools and the system at hand.

Boris Schlossberg: Agreed

Joseph Trevisani: In that world interest rates are really their only tool, though the Fed's current loan program is more direct to the economy.

Boris Schlossberg: They are actually the last adults in the room - Ironically enough the unelected officials of the Fed are far more responsive to society's needs than the elected politicians.

Joseph Trevisani: In some ways, though the PPP program has addressed some of the issues created by the shutdowns.

Boris Schlossberg: They have been putting a band-aid on all our ills for quite some time. Yes that was the FIRST proper act of fiscal policy and it took near-apocalyptic conditions to get everyone on board

Boris Schlossberg: That is why markets are bid.

Joseph Trevisani: Yes, it was and I know several firms it has enabled to stay in business. 

Boris Schlossberg: No one has a job - but they have money.

Joseph Trevisani: True, but that is the way of politics, reaction rather than planning. An interesting spot for capitalism.

Boris Schlossberg: The bid Q is will this hodgepodge of PPP/endless QE be enough to stabilize demand?  

Joseph Trevisani: As long as someone buys the bonds, but I feel that Mr. Stein will have his moment and it will not be kind.

Boris Schlossberg: I am afraid not. Unless we do a 2 Trillion spent on infrastructure and $2 Trillion in grants to state budgets, we will fall into a "not enough" trap. I am a firm Keynesian.

Joseph Trevisani: Infrastructure would be an excellent choice, it is needed and produces real benefits. 

Boris Schlossberg: Since that is the only economic model that has actually worked in the real world, rather than the imaginary world of Hayek, Mises, and Freedman.

Joseph Trevisani: One of his greatest assets [Keynes] is that he approves of what politicians naturally want to do, which is to spend money.

Joseph Trevisani: On yet another topic, do you think the pandemic and its aftermath and HK will end the US-China trade deal? Which has never really gotten off the ground.

Boris Schlossberg: No, US-China are like an old married couple they can argue all they want but the will never divorce

Joseph Trevisani: Nor do I. Hahaha, the image, considering, is arresting.

Boris Schlossberg: You can't have #1 and #2 economies at war with each other and expect global growth

Joseph Trevisani: True, and for both current leaders economic growth is the sine qua non.

Boris Schlossberg: China has too much mastery in production to be replaced on any type of scale. Of course, human history has faltered on less.

Joseph Trevisani: Yes and it no surprise that they have chosen now, with the world distracted, to enforce their rule on HK.

Boris Schlossberg: WW1 was truly one of the stupidest moments in history, so you can never underestimate the power of xenophobia. But for now, I think the reality is a cold peace

Joseph Trevisani: The pandemic has, in a way, checked all sorts of ambitions.

Boris Schlossberg: HK will be sacrificed like all small actors are in history. One factor that could really blow this conflict up is Taiwan. That will not roll over so easy and if the CCP decides to make a play for that - then we DO have a potential WW3 conflict

Joseph Trevisani: I am afraid I agree with you and it was likely ever since the UK left.  That is true. There was a conflict there in the Eisenhower administration over two islands Quemoy and Matsui, but the Chinese backed down.  

Boris Schlossberg: But if you were going to describe the situation today in one word - I would say "brittle." Everywhere you look a tiny break can cause an earthquake.

Boris Schlossberg: NASDAQ up 8 straight 15M candles since we started talking. So risk ON baby.

Joseph Trevisani: The Dow is packing 900+ points, as you say let the good times roll.  The US is now routinely running trillion-dollar yearly deficits but no one and no market cares. If Mr. Stein is right is this a threat to the global economy or is the percentage to GDP all that matters?

Boris Schlossberg: It's impossible to say when deficits will matter. They will only matter when the Fed loses its ability to monetize them. That will happen when it loses its ability to control the credit market.

Boris Schlossberg: What will make that happen? Multiple 100 B bankruptcies?

Joseph Trevisani: It hard to imagine a financial system that doesn’t value Treasuries, if for no other reason than that there is no alternative.

Boris Schlossberg: I have no idea but it will have to be a credit event when the market finally says NO.

Joseph Trevisani: My guess that danger is why the Fed moved in early March, well before there were any real lockdowns in the US or layoffs.

Boris Schlossberg: So this could be one of those things where a small bankruptcy triggers a default of JP Morgan Chase, and only then does the Fed lose control.  Right now that is not a high probability scenario.

Joseph Trevisani: If JP goes down, as they say, we will all have bigger problems.

Joseph Trevisani: As a final topic let’s look at currencies again. The dollar is back to pre-pandemic levels, where do we go from here?

Boris Schlossberg: I have no clear view here. I been bullish Euro for a few weeks and continue to think that it’s the better bet.

Joseph Trevisani: In many of the pairs the levels now and in late February are a match.

Boris Schlossberg: One idea that no one seems to agree with me on is that the dollar is losing its safe-haven status if we do V ramp.

Joseph Trevisani: The euro has been boosted by the EU recovery plan, though I doubt it actually accomplishes much, and the general reversal of risk in the dollar.

Boris Schlossberg: Everyone will forget the protests and buck becomes king again.

Joseph Trevisani: Ahh, for once we disagree.  I don’t think it is losing that status.  

Boris Schlossberg: But if the economy falters and all the political resentment festers like an untreated wound, then I think I am right. Everybody either hates or laughs at the US right now, and it’s hard to stay safe haven under those conditions for long.

Joseph Trevisani: The US has an election coming up. I suspect you have opinions on that. What might the market views be of the two possibilities?

Boris Schlossberg: Ironically enough I think the market is ok either way. The great thing about Biden is that he just has to be non-Trump. He does not have to stand for anything - except repairing the Republic and maintaining the status quo. A much more incendiary candidate like Warren or Sanders would present a much bigger problem for the market.

Joseph Trevisani: My guess is that both sides have a similar view, the best asset of each is that he is not the other.

Boris Schlossberg: If that's the play then Trump loses big IMO. That is why Trump will do anything to gun up the economy, and if I was Pelosi I would tie him up in knots by doing a lot of blue state welfare before doing any additional spend

Boris Schlossberg: But if we learned anything in 2020 it’s that a week is a lifetime. So I think the single best advice I can give is - lose your opinion and do what I do - day trade.

Joseph Trevisani: That is certainly true.  February is a lifetime ago. And the next six months are likely to be interesting. As was said, the worst possible system except for all others. 

Joseph Trevisani: Boris, I would like to thank you for myself and my colleagues at FXStreet for taking the time to talk to us.  

Joseph Trevisani: It is always interesting and a pleasure.

Boris Schlossberg: Anytime. Thank you for having me.