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The outlook for the Fed under the Biden administration

Mike Tiedemann, Tiedemann Advisors joins the Yahoo Finance Live panel to discuss the latest market news and the outlook for the Fed under the Biden administration.

Video Transcript

AKIKO FUJITA: We are seeing treasury yields slipping today on the back of disappointing data out this morning-- jobless claims rising to 742,000, the first increase we've seen since early October. And the 10-year right now at 0.84, and the 30-year trading at 1.56 for the yield there. Let's bring in Mike Tiedemann. He is with Tiedemann Advisors.

And, Mike, as we talk about all of this, of course, we're looking ahead to where policy is likely to shift under this incoming administration. You've essentially said that, look as it relates to monetary policy, not a whole lot is going to change because we've seen the Fed very clearly indicate that rates are going to remain low for a very long time.

MIKE TIEDEMANN: Yeah, for a couple of reasons. And if history is any guide, if you look at Japan over the last 30 years and obviously what's been occurring in Europe, that will remain the case. But their stated inflation target above 2%, an unemployment target below 4% gives them a huge amount of coverage to wait and to do very little. So there's going to be more stimulus. The risk of rising rates would actually pose such a huge budgetary issue that we really don't see any reason, really any room for them to change their policy.

ZACK GUZMAN: Mike, I mean, when we think about where the Fed's at right now, I feel like if we hear Fed Chair Jerome Powell come out and say that Congress needs to do more here and that they're running out of options for the Feds to do these things, I think he's going to pop, because it's just constantly putting the pressure back on Congress to get that stimulus bill done. What's your estimate, though, in terms of how many tools the Fed still has to play their part in really keeping this recovery going?

MIKE TIEDEMANN: Well, you know, I think we've all learned that when we think that the Fed is done creating new tools-- I mean, no one would have expected them to be buying corporate bonds and high yields you know, at the depths of the crisis. But what we're seeing right now and what's really the key differential is the health of the banking system-- and I don't mean the large multinational banks, but really a lot of the community and regional banks.

For now, they are actually in much better shape, certainly, than they were in 2008. So low rates with a banking system that is lending and a banking system that is generally pretty healthy actually has-- and that's what you're seeing in the housing market. You're seeing anyone who-- you're seeing credit available, and that is a huge flow-through that didn't exist coming out of '08, '09, '10. All those years, the banking system was in reverse.

That's a very big difference that the Fed has to benefit their own efforts. But in terms of other creative measures, what they're really saying is they've done enough for capital markets. They've done arguably too much for capital markets. But now the small businesses, a lot of the cyclical industries, the ones that have been really damaged will need two things.

They'll obviously need continued low rates, and they're going to need investor capital. They're going to need restart capital. And that's an area that a lot of interesting strategies that we focus on are really beginning to gear up, because I think the pressure will continue for the next six months, for many industries at least.

And then a lot of these great brands that have done everything right and nothing wrong but have been severely damaged by the pandemic will have an opportunity to raise capital. And it is distress, but it's more of a sort of restructuring of sorts.

AKIKO FUJITA: Yes. So Mike, what does that low rate, low yield environment mean for you from an investment standpoint?

MIKE TIEDEMANN: Well, you've never had to take more duration risk to earn as little as you have in history ever. So we are at the low end of our quality bond holding levels. We think there are opportunities, as I was just mentioning, in sort of what we call diversified. And that includes assets like gold. And for those who want to own Bitcoin, we don't tell them not to. But the less liquid portions of the credit markets have only begun recovering.

The liquid portions that were linked to ETFs, what have you, recovered very quickly, and higher quality corporate bonds. And that was due to the Fed's involvement. So we still think there's some interesting stuff within that space-- structured credit, mortgages linked to the housing market, the health of the housing market. And then within equities, our focus continues to be really high quality businesses.

You're obviously seeing more recently a rotation into cyclical or assets that were left behind. And in terms of a valuation standpoint, mid-cap equities-- we think there are a lot of good businesses that have been really left behind this very narrow equity market recovery.

ZACK GUZMAN: Yeah, when we talk about the risks, the unintended consequences of some of that arguable overdoing it coming from the Fed here, Michael. When you look at some of these zombie companies that are now just piling on the debt-- and we were already at record corporate debt levels heading into the pandemic now. And you see companies like Carnival Cruise Lines coming out and issuing more and more debt. You have AMC doing the same thing. Talk to me about some of the risks there as rates stay low and what that will do to growth here as these companies just sit there, I guess, surviving, but not really growing.

MIKE TIEDEMANN: Well, there's always a tipping point for industries. And you know, obviously, the aggregate level of debt relative to their equity valuations and the health of their business-- there's a duration in which that naturally can tip over. So without focusing on one industry or business like Carnival Cruise, I would say the dynamic of low rates and the ability to refinance at lower and lower rates has enabled businesses that are being disruptive to last longer. It has confused a lot of value investors who see this free cash flow as being generated today. And by any measure, these companies look cheap are generating free cash flow.

But ultimately, they are being disrupted. And what changed in 2020 in a dramatic fashion is investor appetite for the prospect of future cash flow has traded at a premium we've never seen before-- and obviously growth-- and the recognition that these businesses are not only disrupting in the future, they're disrupting today and will continue to do so. And so that's been a huge dynamic.

You have to sift through value, cyclical, and businesses. And depending on the industries that have been most impacted by COVID, you've got to ultimately make a choice whether or not-- how to project a recovery and ultimately how to structure an investment into that business.