The Grant Williams Podcast: Peter Atwater

The Grant Williams Podcast: Peter Atwater

March 15, 2023

My returning guest in this edition of The Grant Williams Podcast is my friend Peter Atwater, Founder of Financial Insyghts and Adjunct Professor at the College of William & Mary. Peter’s stellar work on the importance of mood and confidence has long been an important touchpoint for me when evaluating market conditions and likely paths ahead – never more so than this week.

Given recent events, I wanted to try and add something to a conversation that has become noisier by the day. There are plenty of opinions and perspectives flying around (to which I’ll add my own in this weekend’s Things That Make You Go Hmmm…) and so it felt as though a conversation with Peter about the effect the twin collapses of Silicon Valley Bank and Signature Bank this week are likely to have on public mood was a better contribution than debating the fast-moving details of what’s happening.

The Grant Williams Podcast
The Grant Williams Podcast
The Grant Williams Podcast: Peter Atwater
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Grant Williams:

Before we get going, here’s the bit where I remind you that nothing we’ve discuss should be considered as investment advice. This conversation is for informational and hopefully, entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. And now, on with the show.

Welcome everybody to another edition of the Grant Williams podcast coming to you from Australia this time. It’s early in the morning here. It’s Monday afternoon in New York. And I wanted to talk to someone about what’s happening in the banking sector this week, obviously with the implosion of Silicon Valley Bank and Signature Bank. Now there’s an awful lot of noise out there. There’s an awful lot of people with opinions. I’ve been reading through them because I’m going to write about this weekend. How can I not? So I didn’t want to add to that noise. So I wanted to have a chat with my great friend Peter Atwater, who has been someone that I’ve followed for many, many years now. And his work on mood in markets has been so important to me personally in helping understand the shifting sentiments that tend to lead events like we saw over this past weekend.

So rather than add another opinion on whether it’s a bailout, whether it isn’t, whether the Fed and the regulators did a good job, whether they didn’t, I’ll get into that next weekend. I wanted to have a slightly different conversation and hopefully, add something to the discussion that won’t necessarily be being discussed, certainly not in the kind of depth and with the kind of background Peter has. So this is going to be my attempt to at least contribute to the debate around the failure of these two banks and see what happens from here. So without further ado, let me welcome Peter to the podcast.

Peter, welcome back to the podcast and thanks for doing this on short notice. What a crazy few days.

Peter Atwater:

It’s been a wild, wild weekend

Grant Williams:

Hasn’t it just? You and I were talking off mic just now before we started recording, and the reason I was so keen to chat with you is because I’ve read so many really well-thought-out, really interesting pieces about this, lots of opinion, lots of confusion, lots of dogma, lots of prognostications about what absolutely will happen. And it occurred to me that the only way I could really add to this would be to have a slightly different conversation. And you posted a piece yesterday, as you always tend to do at these points, that really, really was even by your own standards, an extraordinarily timely piece when you talked about the shift in mood. And so I thought it’d be a great chance for you and I to talk about that component of this crisis because I think it is important. I think it’s going to become more important and I think not enough people are paying attention to it.

So if you wouldn’t mind, rather than jump in with the mood today in New York, can you just go back and talk about how the moods has shifted in the lead up to this and what you’ve noticed and what you’ve chronicled along that journey?

Peter Atwater:

Yeah, and I’m going to rewind the tape to early 2021, which I know must seem like a millennium…

Grant Williams:

Four lifetimes ago.

Peter Atwater:

You know? BC. But it’s really important because what we saw a little over two years ago were two things that don’t normally happen together. One was a bubble in abstraction, SPACs, NFTs, ShitCoins, crypto, you name it. If it was on the wild frontier, there was insatiable demand for it. And in that regard, you could say this was dotcom 2.0 just on steroids. But the other thing that happened concurrently, which I didn’t think got enough attention, was the bond bubble peak. And you’ve got all these portfolios that are saying bonds do well when stocks do poorly in the reverse. No, no, no. We’ve just had a moment in time where everything did really, really well.

And so if I use that as the starting point, what we’ve actually seen is a pretty logical bubble break. The wildest things left the party first, which is always the case. Bubbles unwind on a LIFO basis. And so they’ve gone through their malaise through Tara, through FTX, through the Silver Gate. But now we’ve had this interesting alignment where the bubble and abstraction has now met the bubble burst in bonds. Because what unnerved folks was two-dimensional. You have this bank that is highly associated with the crypto space, highly associated with tech and venture, but the tipping point appears to have been the losses that they’ve taken in their bond portfolio. And so that convergence creates a guilty on all charges kind of a conviction. And that’s, I think, what precipitated this. And clearly then took Signature down because in many ways, they’re the East Coast brother of the West Coast bank. And so to me, there’s just an immense amount of logic to this.

Grant Williams:

But it’s funny that these two bank failures are two of the largest in US history. These are two banks that really, unless you were in those spaces, crypto, venture, Silicon Valley P, those kind of things, or on the West Coast, these names are not going to mean much to many people. Silicon Valley Bank sounds so localized. It’s hard for people to believe what an enormous bank it was. And Signature Bank, again, very few people will have heard of it because of the nature of its business. But these are two of the largest bank failures in US history. What does that do to people’s mindset as they find out what’s actually happened here?

Peter Atwater:

So it creates a sense of vulnerability, being unnerved by the fact that I didn’t even know these things existed. So what else might be out there that I don’t know anything about? And that’s, I think where you started to see the contagion fears develop, that who else has this exposure either on the bond side or on the crypto side. And that then precipitated, I think, the need for the government to step in over the weekend.

The other piece of it that I think doesn’t get enough attention in all of this is our starting point in terms of confidence wasn’t good, people were already feeling vulnerable before this hit. And I could say that this the climax of that vulnerability. I not convinced yet that it’s safe to say that. We need to start to see do we see a restoration in confidence in both stocks and bonds. But this has clearly been an unnerving thing because as you said, so few people were aware of the staggering size of it. And even if you looked at it historically, the growth is truly hockey stick shaped at Silicon Valley. It took in the cash that everybody was raising during that mania in late 2020.

Grant Williams:

So let’s talk about the piece you wrote yesterday because I say when I read that, it was so good and to me, highlighted really, really important points. And I say as soon as I read that, I cut and pasted it and tweeted that extract out that you put on the front page of that and the response to it was phenomenal as I felt it would be and should be and more people should be thinking about it. So talk a little bit about your piece yesterday, what the points you were trying to make were, and let’s go through them. Because I think it’s, for anyone that didn’t see the tweet, it’s an important discussion to have.

Peter Atwater:

Yeah. So there are a couple of dimensions to it. The first deals with power and power shifts between leaders and the crowd with confidence. When confidence is high, power rests with the leader. It’s in fact given to the leader from the crowd. When confidence is low, the crowd reassumes that power. It’s a response to the powerlessness that we feel that we need to take power back. And so what I think we have seen a lot of late is this crowd behavior where the crowd is driving outcomes more than leaders. Leaders are playing catch up.

And that was the second point that I was trying to raise, which was the question of time and pace, and I refer to it as Twitter time. The crowd today moves on Twitter time and that is fast, it’s widespread, it’s global. And if you’re a regulator, if you’re a bureaucratic leader, you can’t compete with that. You are always going to be behind that.

And I’m reminded by some history, because this is, I think, a relevant point and it’s going to seem archaic, but the panic of 1857 stands out in financial history because of its speed. Earlier panics took weeks if not months to play out and you shake your head and go, “Why?” Well, the prior panics required mail. Messages had to be delivered by somebody to someone. And in the panic of 1857 we had the telegraph. And you can fast-forward this in a pretty chronological way to the telephone with the panics in the 1890s, the radio in the crash of the 1920s. You saw the impact of television getting way ahead of institutions during the Vietnam War and Watergate. And we saw this with the dotcom bubble burst with the internet. And now I think we’re seeing it with the social media bubble in what’s happening today. And the reality is we are moving faster further than ever before, and there’s another dimension, online banking. So now we have given access to immediate information to the crowd and they are now positioned to do whatever they want with that immediately as well.

So there are people who are looking for lines in front of these banks. You’re late. If I’m scared and I’ve got online banking, I’m moving money from my bedroom, from my office, from the cab, and I don’t think our systems are set up for that. I don’t think anyone contemplated this kind of a modern bank run.

Grant Williams:

Well, it’s such a great point and I think when you had to go down to the bank and fill out a form to take your money out and move it, look, everybody at the heart, most people, are just lazy and they think, “Oh, there’s a risk, but can I be bothered to get in the car and go down to town and fill out my thing and take my money out?” And people would and that’s where the cues were, but most people would like, “Oh well, I’ll just give it a few more days.”

But to your point, we saw $42 billion leave Silicon Valley Bank in a timeframe measured in hours while the regulators spent days trying to come up with a solution and that was with their backs up against the wall. But it feels as though that crowd behavior is going to be very tough to wrestle the power back from that crowd because as you say, with the best one in the world, there is no way that regulators can keep up with this. It’s not like there’s a way they can come back and readjust the playing field and get back on level terms. It just feels like that crowd behavior now has been facilitated and unleashed upon the world. Is there anything that can be done then? If not, what does that mean? Because the crowd, as we know, is violently shifting in both directions all the time.

Peter Atwater:

Yeah. So if I’m a policymaker, and I’m sympathetic to their plight at this point because I think this is a big awakening. You’ve got to be working every lever you possibly can to ensure that the crowd has a greater sense of certainty and control in what’s going on. And that sounds abstract, but I joke sometimes that the difference between an airplane and a bank is that when there’s turbulence, you can exit a bank, but it’s the same crowd response when there’s turbulence. And when it involves our money and we feel powerless, we’re going to find that exit wherever we possibly can. And we have to now, I think if I’m in the regulatory environment, we have to find ways to cushion those moves, to expect that if the crowd moves, we’re going to have to have ways to either pour liquidity into the system or to limit those movements.

And here’s where I think the environment, on an international basis, has the potential to change dramatically. We can talk about this in the construct of the US financial system and a central bank that has done a lot, knows what to do in terms of stemming a liquidity tide. In a less stable environment, and if I’m running a country, I’m not sure I have any choice but to impose capital controls in a knee-jerk response. And again, I don’t think we’re thinking about those sorts of issues. If I’m running a global corporation and I’m used to this hub and spoke liquidity and capital management process, I’m potentially going to be at risk if governments conclude that to save their financial system, they’ve got to bring down the gates.

Grant Williams:

Well of course, the problem here at heart is that every bank is vulnerable. They live in a state of vulnerability because a bank run is something that, because the nature of fractional of reserve banking cannot be stopped. It’s a problem that faces every bank and it’s a problem that faces every regulator and it’s a problem that faces every president. And so this is why to me, this idea of confidence as it ebbs and flows is just so important because the system is one episode of supremely low confidence away from meltdown all the time. And of course, as you talk about the speed with which things can happen now because of the advancements in technology, it just makes that situation more and more fragile every day.

So if you are in the position of making policy, how do you deal with that? Because you have to start thinking very, very differently. And these are very arcane and archaic institutions. How do they do it? Do they have the capacity to do that even?

Peter Atwater:

Yeah, I think they do. The question is will they do it fast enough?

Grant Williams:

Right.

Peter Atwater:

The analogy I would say today is the financial system is like Boeing after the first MAX jet crash. The consequences of a second one would be perilous. And remember too, this is what? The third potential crisis since the new millennium. And I don’t want to say we are primed for them, but that repetition, I think, matters. And so people have a playbook for what to do in the event of a financial crisis.

Grant Williams:

So does it help because it was very interesting. The timing of everything yesterday was very interesting. The Signature Bank closure really got lost in the headlines because they came out and essentially backstop to the conveyor, said, “Oh look, by the way, we’ve just closed down Signature Bank, but nevermind that. Everything’s safe.” And so it’s very clear that that was all designed to avoid the look of contagion, that there were more banks falling. And I actually think they probably got away with that pretty well yesterday.

Signature Bank wasn’t really in the headlines. The headlines that I did read about Signature Bank, many of them were painting it as some bad actor, if not overtly, but there were an awful lot of articles that called it a crypto bank and how regulators are cracking down on crypto. Is that potentially one solution? To go after banks that have ties to something that can easily be sold as, “The reason for this closure is not a bank run and not insolvency. It’s because we are cracking down on X and so we need to get things in order?”

Peter Atwater:

I think that there’s the potential for a lot of conspiracy theory in terms of we’re going after this, we’re going after that. I don’t think that that’s at the core of the regulatory actions we’ve seen so far on the banking side. They’re trying to stem a bigger problem. I think for the regulators, they thought they had till the weekend to get Silicon Valley taken care of that proved to be woefully over optimistic. And as a result, you’re going to see regulators moving more aggressively preemptively.

The mantra of most banking regulators, and I don’t think people appreciate this, is shoot the wounded. Their goal is to get the wounded players off the field before contagion is a question. So seeing what we saw on Sunday says to me we now have regulators who are going to be very proactive in stemming problems by merging them out of existence, closing them down, but to prevent this cascading run. So I do think they were really wise on Sunday to at least try and get ahead of things in that process.

Grant Williams:

Yeah. I completely agree, and it pains me to give them high marks for this, but I have to do just that. But then when we go back to the depression, we saw some nine plus thousand banks close. We go back to 2008, I forget what the website was called now, but there’s a website that every day would keep you up to date with the banks that were being closed. And when we look at today and you talk about shooting the wounded, given the nature of the problems faced by Silicon Valley Bank, which was essentially, in my mind at least, an interest rate shock rather than necessarily poor management. There are nuances to it all obviously, but I think the speed with its rates rose is probably the main thing that crippled them. That’s obviously a problem facing every bank.

And so if you get to this shoot the wounded point in the cycle, do you risk amping up the contagion because you’re in a no win situation here. If you try and take the wounded off the field, you create this sense, “Oh boy. Every day another bank is being closed.” And look, right now, as people have pointed out, and that was a natural reaction and I’ve been talking about this with people for several weeks now, you can sweep your funds into a money market account and get 5% now. Do you need to have money apart to pay your bills and stuff on deposit at the bank? And there are so many cross currents here that make the job the regulators have almost impossible to thread the needle. So how are they thinking about mood and confidence? How are you thinking about things that we need to be wary of as this unvirtuous cycle continues to play out?

Peter Atwater:

Yeah. So a couple of things. I think the danger here is that people look at these institutions as one dimensional. So you talk about the unrealized losses in the bond portfolio. What’s not getting discussed is that the prudent risk management that many banks took in anticipation of that. So they’ve got gains and hedges. They’ve got other things that are offsetting this. And so the challenge from a regulatory perspective is folks are looking at one part without looking at things holistically and that’s a common behavior on our part when confidence is low, very simplistic, black or white thinking, I’m going to look at that one factor and that’ll be enough. But I think that the regulators, again, I don’t think they got enough credit last night either for the policy that they put in place to take securities at par. And this is where I think the government can step in and mitigate the problem of if I have to liquidate assets at a loss, I’m creating this perilous cycle.

And so I think that that too should help, but we’re now at a point where the issue at hand is not the consumer’s behavior. The issue is the corporation’s behavior. The large, what have historically been non-insured deposits because that’s where the money is moving fastest in all of this. There are very few individuals who are subject to the cap of $250,000. And so I think we need to be really frank about the fact that what’s going on is corporations are reawakening to issues of basic cash management. And it’s remarkable to me when you step back and say you’ve got all those cash in banks that have been under rewarding large corporations. Shame on them for not looking at the alternatives that were available to them.

But I think to your point again, one of the things that’s so unusual about where we are is there is no friction to deposits. It used to be the case that T-bill rates were below deposit rates and now we’ve got the inverse where you’re incentivized to leave. You can take less risk and get more return. And so that’s an imbalance that is going to have to be rectified.

Grant Williams:

But look, let’s face it, there’s one of two ways that can be rectified and only one of two ways. Either T-bill rates have to come down below deposits or deposit rates have to go up above T-bill rates. And this brings us to really the crux of the issue here because if T-bill rates are going to go down in the market, if you look at the two-year today in New York, you’ll see a dramatic repricing. Wild, and we can talk about the activity in the bond market today in a second. But obviously, if you’re a regulator and you are trying to stave off a potential run of the banking system, you realize that given the nature of their books, they can’t just raise deposit rates up to the level they need to. There’s no chance they can do that without exacerbating the run.

And for 20 odd years, the policymakers and central bankers have been in a position where a response of, “Well let’s cut rates,” would be the salve that would solve these problems. But of course now, for the first time in all that time, and this is the key part that I think a lot of people either haven’t understood or are just starting to understand, the problem that inflation brings on the other side of that particular dynamic is a very, very real one. And we’re a year away from an election a year and change away from an election in the US, and you don’t want rampant inflation when you’re trying to win a second term.

So with all that, kind of wrapped up, it’s not really much of a question. It’s just a big bundle of stuff I’m throwing at you. From a policy mindset point of view, what the hell is the solution to this? Because I keep trying to figure it out and it feels like the market is going to present a solution before policy makers are able to. And again, that is going to create another problem.

Peter Atwater:

Yeah, and the market will, because if you look at T-bill rates, T-bill rates have been ahead of the Fed at every one of these hikes. You can almost watch to see the Fed catching up with where the market is. So to your point, there’s no question in my mind the market is going to solve this problem well before policymakers have a chance. And today’s behavior has been helpful to the banks without question, but the broader issue is even if banks now raise rates, the pressure that cash managers are under to be more prudent is going to make that process far less effective in keeping money in the system. That having experienced a traumatic event over the weekend, every cash manager is now determined to never experience that again. So the money is going to move over the next days, weeks anyway no matter what happens to rates in the banks. That opportunity has been lost.

Grant Williams:

Yeah. We saw the same when the treasury froze those Russian assets. It’s not a question of we dodged a bullet. It’s okay, now we have to have a plan for in case we encounter this problem ourselves in the case of central banks at that point. And now as you say, there’s really no option for cash managers. And you get the situation where you start looking at, okay, well policy makers put in a very sound program as you said, where they would pay par for certain types of collateral. And if you’re a cash manager, you are going to say to yourself, “Well, we’re going to buy a lot more of that type of collateral and we’re going to sell or try and sell the collateral that they’re not going to pay us par on.” So again, you realize this whack-a-mole market that we’re in where every time you try and solve one problem, another one pops up.

This is what happens when markets aren’t free. And as soon as you decide you’re going to intervene in one way or another to avoid market forces taking their natural cause, you do create these problems down the line.

Again, what’s the mindset of policy makers now in terms of okay, you don’t have time to sit back and go, “Problem solved.” They are now thinking, as we are talking, “Okay. The natural consequences of what we did yesterday are this, and that is the next problem we’re going to have to mitigate. How do we put the floor under the AAA mortgage market where, for example, things may start to get squirrely or slightly less than pristine collateral?” How do they think about that, do you think?

Peter Atwater:

Well, I think the 2008 experience certainly changed the way they look at it. And I think that they’re trying to thread a needle of systemic liquidity versus inflationary liquidity. And we’ll see, that to me, is again a narrative that the crowd will decide whether it agrees or disagrees with. But there’s no question, Grant, that policy makers are in a really tough spot because they need the economy to slow down to give them the cover to stop the hikes, and I honestly think that they may get some of that. The decline in confidence that we’ve seen even before this is beginning to have an impact. New cars are unaffordable so that’s going to create a problem. I don’t think the economic community realizes that when everything is payment based, the impact of market changes moves right into the economy in a nanosecond. There’s no lag because my monthly payment on my car, on my house, on my credit card is immediately impacted by changes in rates.

And so I think unknowingly, there’s a lot of smothering that’s going on, in the consumer space at least, because of the increase in rates. 15% of all new cars involve a payment of more than $1000 a month. Well, that’s now making new cars unaffordable. So I think we’re going to see already, we’re seeing it in housing, we’re seeing it in autos, this suffocation of the consumer in terms of their monthly cash flows. And this is where the consumers now are having to choose between food, energy, Netflix. We’ve subscriptionized everything and we’ve exhausted the capacity for the consumer to take on any more monthly expenses. So something there is going to have to give.

Grant Williams:

Right. And as you point out, does it give quick enough? That’s, I guess, the big problem here because the longer the economy remains strong, the tougher it is. And now obviously, the Fed have another decision to make with their upcoming meeting. And it was fascinating watching the debate yesterday about they’re done hiking and most of the conversation, interesting enough, that I read, was around signaling. It wasn’t about whether they need a 25 basis points or a 50 basis points hike to continue the work they’ve done. It was all the conversation, certainly in the financial world, was around what’s the signal they need to send here? “If we don’t hike at all, we’re sending one signal. If we only go 25, we go 50.” So walk me through how you think about that because I think that is probably, correctly judged by the financial community, as the most important component of the next announcement.

Peter Atwater:

Yeah. I don’t know, Grant, what’s likely to happen. I’m watching the T-bill space because I think that’s the best proxy for what’s going to come in terms of the Fed action. And there, I think, we’re… 50 is certainly off the table. It wouldn’t surprise me to see 25, but I think it’ll be 25 with a lot of discussion around liquidity for the financial system if it needs it. So I think investors might give them the benefit of the doubt in terms of navigating those two together.

Grant Williams:

And what does that mean, do you think? Because again, we get to this point where Wall Street has been just waiting for “the pivot” and the pivot for the last, I don’t know how many months has been all about the point where they either reach high enough rates to be able to pivot or most likely, as people have thought, they would be forced into cutting rates because they broke something. And it’s interesting that the closure of these two banks feels exogenous. It doesn’t feel like people are conflating the two and saying this was the thing that they broke. It feels old and there’s a bank run. This is another problem they have to deal with.

Do you think this is the breaking point and if so, do you think the pivot does what Wall Street has absolutely with 100% confidence assumed it will do all along, which is jet fuel risk assets once more to new heights? Because I have my doubts about that now.

Peter Atwater:

Yeah. I think we’re at the tail end of a really long tug of war that goes back almost a year now. We had the June low last year and we’ve had these really material ups and downs that have really gone nowhere. And I think that people were making the assumption, over the weekend, that this is now going to break down. Today’s action now leaves that back undecided.

But what I know about tugs of war, these quarrels in the market, is that they don’t resolve quietly. Think of this as truly like a tug of war on a playground or something, where the rope is still, but there’s an enormous amount of energy expended on both sides to keep it there. So somebody is going to be really off sides. And if I look at the positioning today, potentially the bond bears are going to be off side because the positioning of treasury investors outside the banks is incredibly bearish. On the stock side, it until very recently, was very bullish with the whole no landing dream scenario. And we’re now testing both of those.

And I’m as curious as you are because if the inflationist scenario takes hold, yeah, you run the risk of some sort of a hyperinflation Turkey-like scenario where risk assets are where you want to put everything and we’re off to the races. The alternative is that you see some sort of classic recession where risk assets are the last place you want to be.

The thing that I keep reminding my clients is in the midst of this, your safest bet is things that have utility because we know that in either scenario, what matters to people in a crisis is going to matter to people in a crisis whether it’s inflationary or deflationary.

Grant Williams:

Yeah. No, it’s such a great point. The other, I guess, component of this is the global nature of it. And it’s been fascinating to me to see how little coverage the European Central bank have had in all this. This has been a US problem and yes, while the clear and present danger was Silicon Valley and Signature and that was the story and the policymakers’ response was the story, away from that, there is clear contagion possibilities on a global basis, not just through one banking system but globally. What’s the mood in Europe now, do you think? Is it kind of, “Hey, no one’s looking at us but we need to do something,’ or is it just plain phew, or what do you think policymaker mood and customer mood is like in Europe right now?

Peter Atwater:

So I don’t think it’s phew. I think it’s-

Grant Williams:

Good. Thank God for that.

Peter Atwater:

I think everywhere I look, there is a highly localized problem that people are focused on and it speaks to the problem of low confidence, which is when I don’t have confidence, my frame of reference really shrinks. You’ve heard me talk about me here now thinking.

Grant Williams:

Yeah.

Peter Atwater:

But self-interest, close physical proximity, short-term timeframes drive what I’m doing, which means if I’m in Great Britain, I’m focusing on the problems in Great Britain. If I’m in France, I’m focused on the retirement issue and the problems that are there. If I’m in Turkey, I’m focused on my problems there. And you’re in Australia, I suspect your Australian policy makers are focused on the problems in Australia. We’ve stopped looking at things on a global basis because our problems are right in front of us. And so that creates issues where global connections come at people out of the blue that surprises them, not unlike what we saw with the supply chain problems with COVID, where everybody’s focused on this immediate disease problem and is ignoring the implications on a global basis in trade, in finance, and I think we’re in that same environment today. People have enough on their plate to worry about in their own lives. Why bother looking at the problems around us? And so contagion could take hold and surprise people in lots of places at once.

Grant Williams:

Yeah. I was going to say you talk about mood. The fact that Everything Everywhere All At Once scooped the Oscars last night, if that isn’t the type of a future piece for one or both of us, I don’t know what is.

Peter Atwater:

Yeah.

Grant Williams:

But it seems like it could either be a very good thing, that people are locally focused, or potentially a very bad thing because when you talk about that mood and we talk about low confidence and uncertainty and shocks, if you are paying attention locally and something comes out of left field that was completely outside your purview, and the more you say we get to this me here now and pull inwards, naturally, one of the big consequences is that is there’s so much more that is removed from our peripheral vision and there are so many more potential shocks that can come at us. And that feels like the most likely outcome for me is that people will perhaps get comfortable locally much easier, but leave themselves open to many more exogenous shocks that could upset that fragile confidence.

Peter Atwater:

Yes, and particularly today, we have very synchronous low confidence around the globe. The only place right now that I see really high confidence is in the Middle East where you’ve got record profits at Saudi Aramco and things like that. But you get outside of there and global confidence is not good in most places.

Grant Williams:

But it is interesting because, and you made this point in your fantastic piece yesterday, about Saudi Arabia in particular. And I wanted you to talk about that, if you could, because as you say, that is a region that off the back of the World Cup and Neon and all these big things that are happening out there, there is a sense of confidence. But you highlighted as to why there’s a potential shortcoming. So I don’t want to steal your thunder, so I’d rather you talk about that than me, if you wouldn’t mind.

Peter Atwater:

Yeah. So several years ago, again in this buildup to the peak in 2021, I wrote a lot about what I was calling Silicon Arabia, about the interconnection in capital flows between Silicon Valley and the kingdom and the private investment funds. And this is not unique to the Kingdom of Saudi Arabia. You can substitute the UAE, you can substitute in Oman. It’s a broader phenomenon, but whether it was through Masasan and SoftBank or these other intermediaries, what I was seeing was just massive capital flows into abstraction. And you could see it in direct form with things like Lucid, but there’s far more that has been indirectly placed into the system.

And so we tend to think of the kingdom and the Middle Eastern environments as being isolated, as being independent of what happens elsewhere. But in a highly financialized global economy, they’re woven into the web. It has been incredibly beneficial to them so far. But if this is the beginning of a broader downturn in risk, the consequences of venture capital and private capital and the private equity, if those start to face similar skids, the consequences are going to go into governments and countries well beyond what people are paying attention to. And this is to your point about blind spots. We’re not looking at the interconnections. You probably read something from me today about El Salvador. It’s hard to imagine that El Salvador makes it through this if confidence continues to fall and therefore, impacting crypto again, in a negative way.

Grant Williams:

Just talk about that El Salvador piece because again, it’s this kind of second order thinking that you do so well and I’ve been so keen to highlight over the years because I just think it’s such a skill and it’s something that people can learn. It’s something that people can understand how to do. And I think this El Salvador piece was the perfect example of how to do this. So just run this through that, if you wouldn’t mind, so people can get a sense of how you connect those dots and how you think about it.

Peter Atwater:

Yeah. So this goes back to my LIFO point before that these bubbles unwind on a LIFO basis. And so what I tend to do is once I sense we’re at the peak of it, I then go back and look at everything that I’ve been writing about for the prior year or two and what names come up. Because if they were popular on the way up, they’re going to be vastly unpopular on the way down. And that deals with individuals, that deals with countries, companies. You can see an incredible change in tenor, for example, with somebody like Elon Musk who could do no wrong in early 2021. Man of the year, on SNL, and what’s happened since. And that’s a classic icon behavior, where those we adore and celebrate on the way up, we revile on the way down.

And El Salvador is one of those that was late to the party, played big and bold and was celebrated. And unfortunately, if confidence goes out, they will be taken out in the tide as well. It’s not personal or I have no axe in this. It’s just this is what the cycles of history suggest that if you were celebrated on the way up, there is a reckoning to come on the way down.

Grant Williams:

But I think with, going back to your point about abstraction and sticking with the crypto related stuff for the time being, because of that abstraction, it feels as though there’s the option of not just doubling down, is if not absent, it’s a very tricky one. Because in many people’s minds, there’s no there there. So how do you do anything but double down? And is doubling down at a point of low confidence, is that a sensible strategy? It doesn’t feel like one to me, but if you’re forced into it and what happens when you are forced to double down at a period of low confidence?

Peter Atwater:

Yeah. I think abstraction is crypto’s greatest threat, to me, has always been its greatest threat because when confidence is low, we like things that are concrete, that are tangible, that are real. We can agree or disagree about gold, but there’s a perceived tangibility that makes it appealing. It’s why we hoard water and canned goods and all of that stuff because there’s something there that we know is certain and crypto is not certain, at least I think for the crowd more broadly. And I think with confidence as low as is is, it will be very difficult to convince people of that.

So the question in my mind is what does the crowd choose as its go-to safe haven? Right now, we have everybody flying into T-bills and short-dated money market instruments. That could be it. I’m always reminded that in prison, having ramen noodles is the key to success. I don’t know what the thing is that the crowd will settle on in a panic, but it will eventually pick something that is the safe haven icon, the life jacket that everybody feels like it wants. Gold played that part in 2011, and I think people have forgotten that it already was cast in that role. So I’m not convinced that we’ll see it come back and do that a second time.

Grant Williams:

So as you sit here immediately after the Monday after the Sunday before, and you look at what’s happened and you look at mood and you look at how it’s changed in both directions over the last, what? 72 hours or so. Confidence and mood are both being whip sword in both directions. They’re naturally moving in one direction and being cajoled back in the other direction. Is one force more powerful than the other? Is the default now for lower and lower confidence and all the effort is going to be, all the heavy lifting is going to be to try and drag it back in the other direction? Or is the natural optimism of most humans make that job slightly easier, that we all want to believe that things are okay and once we’re told they’re okay, we feel much better about it? How do you see that mood landscape looking forwards from today?

Peter Atwater:

So what I see is bank failures like this tend to mark major lows in confidence. Confidence has already fallen. That’s why people are panicked to begin with. And so this is a climax event. The question is, “Is this the end?” In which case, to your earlier scenario, yeah. You could see the inflationary scenario come into place and we could see new all-time highs. That is the bullish case. The bearish case is that this is merely the next cascade in a longer series of cascades of waterfall to come.

And so we should know that soon because these bounces, to the extent they come, tend to be shallower and shorter. If I roll through the banking crisis of 2008, the preferred crisis to Bear Stearns was six months. Fannie and Freddy was three months later. WAMU was a month and a half, and then Lehman. So that the timeframe between these climaxes just gets shorter and shorter and shorter. So if this is the continuing unwinding of everything bubble, we’ll be back having this conversation in the not too distant future.

Grant Williams:

So what does it take, do you think, to… Because like everything else, there are overlapping cycles in confidence. There are short-term cycles in confidence and mood and there are longer term cycles in confidence and mood. When you think about coming out of the depression, there was a very long-term pervading mood around the world that may have had short-term euphoria, but the general feeling, and you can see it in the behavior of the generation that survived that for the rest of their lives, they were never in debt. They hoarded things. They would scrape everything out of a jar of jam or whatever before they threw it away. Gradually over time, that changes.

What has it taken this point, do you think? Because we’ve had a, almost on a mood basis, it’s been a by the dip mood. And so through that time, this by the dip mentality, it’s been pretty easy to get people back on the horse again. Do you sense that the overall cycle is starting to change? As you say, we’ve had three major crises in a relatively short period of time. Do you sense a shift in the overall mood that the path of least resistance is more somber, more depressive and that manic side of us is being tempered? Or are we not quite there yet? Because if we get to that point, then it changes the whole dynamic of the way we think about these things.

Peter Atwater:

Yeah. So I don’t think we’ve reached a hope is lost point yet, but we’re vulnerable to that. And here, I think we need to add one more dimension, which is there are five natural responses to the lows in confidence. Fight, flight, freeze, follow and fuck it. And that last one I think is important because we’ve seen nihilistic behavior on the part of many investors where they have gambled to the upside. There is nothing to say they will not gamble to the downside. A put us a call as a call, these are gambling instruments, not strategic investments. The goal is to make as much money as I possibly can in the shortest period of time.

And so if we see this swing, Grant, from buy the dip to sell the rip, then again, we have to prepare ourselves for an environment where everyone has the ability, not just to move money, but to position money on a bearish basis. And again, I don’t think we’ve thought through what that means when everybody has the means to do that on their phone.

Grant Williams:

Yeah, absolutely. Well, before we finish, Peter, just give us a sense of what people should be looking for in terms of headlines, in terms of behavior, both from markets and from policy makers to sense where we are as we take the next steps. I’m sure there’s more ripples to come this week, but what are you looking for in terms of mood shifts of headlines and behavior, that kind of thing?

Peter Atwater:

Yeah. So what I’m looking for is indications where the crowd feels more or less vulnerable. Vulnerability is the opposite of confidence. And so do people feel more powerless or do they feel a greater sense of control? Do they feel certain or uncertain? And we’ll see this in headlines. I think this morning was a great example of a panicked move in everything, which would suggest a lot of hopelessness. And the question now is do we begin at some sort of a slow recovery?

Traumatic events are not things that we recover from quickly. And so we need to realize that we’re still… The worst of it may have passed in the short term, but we’re still on very uneven ground here. And so I’m looking for headlines that you’re seeing people more optimistic in terms of investing, committing to things on a longer term basis. One of my best proxies for mood, as you know, is the cruise lines. So they tend to be a really good measure of mood because any sort of planning, particularly of a expensive trip, gives us a sense as to whether we’re moving away from that me here now mindset.

Grant Williams:

Well look, Peter, it’s been a fascinating conversation. I really, really appreciate you doing this on such short notice and giving people a chance to listen to a slightly different, hopefully, discussion to the ones that they’re being bombarded with every 10 minutes over the last couple of days as far as I can work out. But look, for the people that are new to you, having heard you on this podcast, can you just let them know how to find more about you on Twitter and financial insights? Because as I say, I’ve been banging this drum for a long time now. I think what you do is so important and so unique. And so the more people that can understand what you do and follow what you do, the better for everybody, I think.

Peter Atwater:

Sure. So they can follow me on Twitter, I’m @Peter_Atwater on Twitter. They can find me at peteratwater.com. And then I have a separate website for Financial Insights with insights spelled I-N-S-Y-G-H-T-S, put the Y in there.

Grant Williams:

It’s only an amount of time before you take out the S at the end and make it a Z, insyghtz.

Peter Atwater:

Yeah, there we go. There we go.

Grant Williams:

A bit more zeitgeisty. Peter, again, I really appreciate it. Thank you so much, my friend. It’s always a joy to see you and this conversation was all I hoped it would be and so much more. So thank you again.

Peter Atwater:

Oh, happy to help, Grant. Thanks.

Grant Williams:

Well, there you go, folks. Peter Atwater is just a phenomenal guy. He’s a great person, but he’s a fantastic resource when it comes to looking at things that you won’t find in mainstream coverage and that really will help you understand things that you need to understand in order to make sense of a lot of what’s happening and to try and get ahead of it.

Between Peter and Ben Hunt’s focus on narrative, I think both of these, mood and confidence on Peter’s front, and narrative on Ben’s front are really, really important tools to have when you’re trying to figure out really the one question that matters, what the hell’s going to happen next? Picking through the wreckage of what happened yesterday is one thing, but trying to get a step ahead of it. And as Peter pointed out so beautifully there, the mood of the crowd is such an important factor in dictating what does happen next. If you can understand the mood of the crowd, it really does help you figure out which way it’s going to turn, and that turn will necessarily take asset prices with it.

So I hope you enjoyed that conversation. If you want to listen to more conversations like it, you can go over to the website, grant-williams.com and find out about the other podcast that we do as well as Things That Make You Go Hmmm… and my video series, About Time. It’s been an awful lot of fun talking to Peter. I’ll be back again with another podcast soon. In the meantime, thanks for listening.

Nothing we discussed should be considered as investment advice. This conversation is for informational and hopefully, entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.

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