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https://youtu.be/V7zEXiqiiqA

Due to the precarious construction of the recent economic expansion, the resulting damage of a recession could be unusually devastating. In this deep-diving presentation, Raoul Pal presents many specific indicators of weakness, speaks to the potential market impact, and explains how a “doom loop” could quickly take matters from bad to catastrophic. He also suggests steps that savvy investors could take to prepare themselves. Finally, he previews some of the conversations he plans to have over the next two weeks on Real Vision, as he seeks to better understand both the current risks and the potential opportunities. Filmed on July 8, 2019 in New York.

Clip Summary:

Q: Why was Christine Legarde brought in to the European Central Bank?

A: Europe is in a “Doom Loop”. Legarde is a politician and lawyer, not an economist.  She is the head of the IMF, which makes sense because she is going to negotiate the nationalization of the banks.

The Corporate Debt “Doom Loop”

Transcript

00:00

So today I’m gonna talk to you as

00:02

Ralph’s pal from global macro investor not real vision because real vision doesn’t have a view of our markets and a view about economies

00:09

But I do have a view I’ve got a strong view that’s been developing for a while

00:12

Now as most of you know, I’m a student of the business cycle

00:16

I look at the ups and downs the undulations of GDP and you realize that

00:21

Things aren’t linear and most economists. Don’t put some sort of cycle into their forecasts once I realized how cyclical things were

00:29

I realized there is an element of predictability

00:32

Now obviously sometimes with the cycle things don’t work out exactly as you imagine. The timing doesn’t work

00:36

For example, I did think we were going to get a full recession in 2015 didn’t quite happen

00:42

That way we came very close to at a manufacturing recession around the world

00:45

We had a few emerging market crises, but it didn’t quite get to full recession, but it came incredibly close

00:52

but now we’ve got to a point where I’ve been monitoring how the cycle is developing and

00:57

I’ve come on to real vision a couple of times to talk about the bond trade because I said look the cycles turning the best

01:03

Thing to do is be long bonds and that’s been a spectacular trade

01:07

So particularly the short end in the euro dollar market and even in the long end whether it’s TLT or bond futures

01:13

There’s been a huge amount of money to be made in that

01:16

But now we’re getting to the point where the Fed looked like they’re about to start to ease and we need to decide

01:23

Okay, how far are they going to go and are we going to go into a recession?

01:26

this is probably the only

01:28

Call that matters, and I’ve talked before there’s the only asset class that matters right now is the dollar which is range-bound

01:35

So it’s currently not the predominant factor

01:38

Outside of that it’s chand aside is the world gonna go into recession and is the u.s. Going to go in recession?

01:44

My hypothesis is it looks like that is the case

01:48

Now one of the things anybody who knows me knows that I don’t talk in certainties

01:52

So I’m not saying look it’s definitely a recession. We’re all screwed whatever it is

01:56

I don’t even know how severe it can be but what I’m interested in is the probabilities and the

02:02

Probability that we’re going into recession or even in recession now are very high

02:07

so having realized this I thought you know, I’m

02:13

Not the only person who thinks this but there is a whole group of people who think the opposite

02:18

And it’s one of those turning points where I fell insecure to know am I right or not? I

02:24

Think I’m right and I think that people I advise

02:28

They think I’m right

02:30

but there’s a whole group that doesn’t and I thought it would be really

02:34

Interesting to explore this thing fully on real vision for me to essentially take over the platform for two weeks

02:40

To really dig in and interview all of the best people I can find in the world

02:44

People have really respect people who doesn’t don’t have the same view as me whom may happen to have the same view or just different

02:51

Perspectives to find out really what’s going on and it’s going to help me and all of you go on a voyage of discovery

02:58

To really figure out are we going to recession or not?

03:01

And then we’ll try and figure over the course of these two weeks as well

03:05

The opportunities and the trades that we can make to protect ourselves or to make money whichever way this goes

03:30

So let’s start at the beginning

03:33

the Fed started raising rates a while ago back in 2016 and

03:37

it was really incremental and that incremental rate rise really didn’t

03:43

Mean a lot to most people we kind of brushed it off because rates were going from a very low level to another low level

03:48

But they kept going up. There were rate rise off the rate rises off the rate rises, but all very incremental and small

03:55

Then the Fed started cutie quantitative tightening

03:58

They started shrinking some of their balance sheet as well

04:01

And again, it didn’t look a lot compared to how much the balance sheet had grown over the previous decade

04:08

But that our continued for a while and nobody was that concerned about it. I started getting a different perspective

04:15

From about August of last year and it really came to the fore in September October, November and December

04:22

where I suddenly thought the Fed of over-tightened and

04:26

That nuanced shift happens incredibly quickly because everybody at the time was saying the Fed aren’t tightening enough and oh my god

04:34

The economy’s heating up and if you remember everyone was arguing about labor inflation wage inflation

04:39

The Fed are behind the curve and from everything

04:42

I looked at the Fed had gone too far already and they pretty much baked a recession into the cake

04:47

So what was I looking at?

04:49

The first thing I looked at is it’s the rate of change

04:51

of interest rates that count and I think I I showed this on my last presentation on real aversion back in I think it was

04:57

October last year the rate of change of

05:00

LIBOR so that’s just interest rates

05:04

They had gone up enough over 2-year rates of change basis that it was the largest

05:09

percentage increase in rates in all history and

05:13

Again, many of us a year, but the rates are so low. Why does it matter but the point being is in fact almost everybody

05:21

Refinanced at the lows. So everybody with the house everybody with the business

05:27

every corporate balance sheet every Bank

05:30

Everybody took out

05:32

more debt at low rates

05:35

and debt exploded

05:37

So even my mortgage had gone up 40%

05:41

And I was a little bit sure. I hadn’t realized and it was only what I suddenly got this statement through her Wow

05:47

Forty percent and then I got I wrote about a global macro investor and there was a large family office

05:53

And the principal the family office

05:55

called me up and said

05:57

We financed all of our debts

05:59

For the family office all the leverage that they used and all the other bits and pieces in their businesses and all of that stuff

06:04

He said I refinance in 2015. He said it’s gone up 80%

06:09

I’m like wow and how much leverage if you got I said well reasonable because money’s been free

06:14

So we took reasonable answer leverage, but it’s gone up and it’s meaningful. So I started think they really have over tightened

06:19

So if you look at this chart of the two yawns here year LIBOR and I put it against the business cycle

06:25

So I use a Curie you can see it suggests that the business cycle

06:30

should fall

06:32

Significantly from here now. That’s one thing. The other thing is

06:36

The Fed are still tightening by the balance sheet that’s not stopped yet

06:41

We don’t know whether it’s in the July meeting the September meeting

06:45

When are they going to stop doing that but really there’s a mass tightening going on and if you can see that keeps going on

06:53

month after month

06:55

there is another nuance about to hit us and that is the

06:59

debt ceiling at some point

07:02

They’re gonna have to agree a new debt ceiling. It’s most likely to be this summer and

07:08

That will also mean that the Treasury who have been funding the government in the meantime

07:14

Are going to start withdrawing the funding by issuing bonds

07:17

So there could be a huge tightening to come in the August September October time period of this year

07:22

So there’s some further tightening to come even if the Fed end up cutting interest rates

07:27

The other thing that most people don’t realize is even with these ultra low rates

07:32

People have been really penalized and if you talk about what upsets people about the kind of 1% and the 99%

07:39

one of the simple things where this shows up is credit cards if you look at interest rates on credit cards there in fact at

07:46

all-time highs

07:47

High and they were we interest rates were much higher in the 90s the early 90s

07:53

2000s. It’s extraordinary how much people are being penalized to borrow money while and that’s at a household level while at

08:01

The corporate level there’s many corporates around the world not yet in the u.s

08:04

Who are borrowing at negative rates and I’ll come on to a whole lot about the corporates in a bit later in this whole thesis

08:11

So you can see we’ve got the set up where it feels like

08:15

Rates may have gone too far

08:17

And I’ve come a lot more on to the rates market later in the yield curve and some of the signals there

08:22

but you see what turns a

08:24

Slowdown and we started to see the slowdown happening in December

08:27

We saw the volatility rising again in the equity markets and we started to see the bond market rallying like crazy

08:32

the yield curve inverting super fast all across the curve is

08:37

What then happened is what you normally need to turn what looks like something about

08:43

2015

08:44

Into a much harder bility of being a recession is the extraneous event and that was trade wars

08:55

So you trade wars are not what everybody thinks there was a lot of noise about them and at first

09:01

People weren’t sure what Trump was going to do, but he first went after the Chinese

09:07

anyone after the

09:08

Europeans and then he’s been going around off the Canadians and the Mexicans and then he’s done the deal with the Mexicans and he’s done

09:14

a deal with the Canadians

09:15

But trade wars are happening and China. The Chinese situation is very very complicated

09:21

And with Europe – we haven’t got anywhere in the Europe negotiations yet. You see the problem is is his aggressive

09:28

Negotiating tactics have created a knock-on effect that most people don’t understand

09:33

If you are a corporate and you have this game of cat-and-mouse with China in the u.s

09:38

about not only normal trade, but also

09:42

about technology and the banning of

09:45

Technology to stop technology spreading there is a definite move within the US administration

09:51

To really isolate China in numerous ways, but particularly economically

09:56

But don’t forget we’ve come from the most globalized world. We’ve probably ever had

10:02

so if we back up maybe six years with the epicenter of globalization and

10:07

Everybody has decided that China is the future

10:10

All the big corporations around the world whether it’s BMW of General Electric have all moved to China. They’re building factories

10:18

They’re outsourcing and they have supply chains

10:21

Suddenly, they’re being told. Well, you don’t know whether those supply chains are going to stay you

10:27

Don’t know whether you can actually stay in China, or maybe even the Chinese end up booting you out

10:31

You don’t know whether you can produce cars in Mexico or not

10:34

It’s really confusing because it’s Trump gonna go back against what he’s just done with the Mexicans what happens with the Canadians?

10:40

How does that work?

10:41

Is there any labor arbitrage anymore in a world where he’s even going after Vietnam a country so small to be irrelevant to?

10:47

Stop the Chinese

10:49

Circumventing trade tariffs. He’s also manipulating OPEC and you don’t really know where this world is and you know

10:57

No doubt, there’ll be a timer and start picking on India as well

11:00

So he’s picking on all of the countries in the world

11:02

And that’s all well and good and I’ve talked about this on television before is a shift away from globalization

11:07

It’s not the end of the world

11:08

It is the shift itself that rates have changed that matters that rate of change is incredibly unsettling for corporate America

11:17

particularly and the global corporations the multinationals almost in cross every boardroom around the world right now as a conversation is

11:24

can we outlast Trump and

11:27

that’s a bet if we don’t we’ve got hell to pay with our shareholders if

11:32

Something happens and we don’t have an answer. We’re in trouble

11:36

Well, okay, we’ll build some inventory

11:38

So everybody’s built inventory just to give them some sort of buffer and now they need to make the decision

11:43

Do we pull the plug now or do we wait wait and see whether Trump goes wait and see whether there’s any option

11:50

So those two outcomes are really interesting to me

11:53

Because if you pull the plug now you break the global supply chains that’s happening everywhere

11:57

We’ve seen the announcement from Apple this week alone that they’re doing it the others decide

12:03

Well, we’ll wait and see so what does that really mean? That means corporate expenditures stops?

12:08

They tend to then spend a fortune on something like McKinsey or KPMG or somebody else

12:13

Who’s going to give them the advice on building new global supply chains bringing their business back to the US?

12:18

it’s a two three or four year projects before they make the choice of where they’re going to spend and

12:24

Rebuild their their supply their factories and all of this stuff. So

12:28

That generally means it’s a big crimp on borrow on spending that comes from corporations

12:33

Particularly in FDI. So that’s going to hurt several countries around the world particularly China

12:38

but there’s a lot of countries and a lot of companies who are going to see this spending freeze and

12:42

Have to wait and sit it out

12:44

So that is going to have the effect of lowering growth and I think that is what tipped this

12:49

Situation from a merely a slowdown that was looking nasty

12:52

Into it for me an almost certain recession. So the question is is where are we now?

12:58

Many of you will remember I used to use the is M. It’s my main way of looking at the business cycle

13:02

I don’t use it much morning more because

13:04

It kind of got a bit broken and the reason got a bit broken was not because of fed manipulation or anything else

13:09

It’s because the oil sector became so large that the oil price became the largest

13:14

influence of the I am itself particularly the refinery cycle every year

13:19

So I shifted away to the egg cream and that’s the economic

13:22

economic cycles Research

13:24

Institute

13:24

Measure and it’s a weekly

13:26

Indicator and I use the urine year return of the weekly indicator to give me the business cycle

13:30

It works very much like the is M and it correlates with everything like GDP. So you see the chart here of

13:36

At Crete with quarterly GDP and you can see how well correlated it is. It’s indicating that we’ve got some weakness to come

13:44

Okay

13:44

So that’s the first interesting point

13:46

Then I’d like to put the ikura against a number of other indicators that may be forward-looking and this is where it gets interesting

13:52

I’m going to show you a whole series of charts now for you to look at

13:55

So this chart is the cash freight shipments index

13:59

You can see how dramatically freight shipments have fallen and how much they’re

14:05

suggesting that the could fall from here and therefore

14:08

the

14:09

GDP as well

14:11

Car loadings a similar way of looking at transportation. It’s collapsing capsule goods orders

14:17

These are the big-ticket items the things that a lot of times you use financing for or are involved in the global supply chains

14:25

You can see how they are rolling over as well and following eccrine lower

14:29

If you believe in this supply chain story and it seems to be bearing itself out in the press almost daily

14:35

Then you’ve got to imagine the capital goods orders are going to come lower but households are also struggling with the with the rates

14:42

So you’ve seen that and how much car sales are fallen, so calf sales have languished and they’re expected to go further

14:49

Clothing sales have collapsed in recent months as well, which has been an extraordinary move and restaurant sales as well have been extremely weak

14:56

So your sons are seen not only as shipping and moving Goods around week, but you’re also seeing a weakness in

15:05

The consumer and a weakness in business expenditure another great global indicator. I’ve looked at is semiconductor sales

15:13

semiconductor sales are

15:15

Extraordinarily weak right now and eight who are suggesting the global business cycle has a lot further to fall back in the US

15:21

We’ve also got the housing cycle

15:23

It looks like that the the Case Shiller house index is starting to weaken significantly

And is now at the weakest level since before the previous recession

And we also have weakness in house prices overall and construction so I’m concerned that all

Parts of the economy are showing evidence of weakness

And I know many people say well unemployment’s not unemployment strong

Unemployment interestingly enough is the most lacking of all indicators and just remember that every time the Fed cut rates and unemployment

Was below 4% We went to a recession almost immediately afterwards

They’re all lagging

16:01

So don’t get trapped in the in the unemployment look at the forward-looking indicators and they’re looking problematic

16:08

So those are just some of the u.s. Indicators that I’m finding concerning

16:12

There is a general theme of weakness that lies ahead and if you go back to that first chart

16:17

I showed you of the two-year on 2-year rate of change of LIBOR of interest rates

16:22

Then you’re going to expect to see a creek come down further and all of these things that are correlated come down further

16:29

Also, don’t forget the equity correlates perfectly to asset prices if you look at the year on your SMP

16:34

It basically is the business cycle now

16:37

I understand that equity prices as part of the equity calculation

16:41

But I can use hard data and a bunch of other variations of the business cycle and they all show the same thing the equity

16:46

Market is cyclical right now just because of the construction of what he was doing last year. It’s at all-time highs

16:52

It should actually significantly weaken in october/november if the equity stays where it is

16:57

the other thing to bear in mind is that looks like there is in marginal pause in the data and you’ll see that in the

17:03

global data in a second

17:04

so that’s one of the things I’m waiting for over the

17:07

Summer is let’s wait and see how this plays out and whether we get some weakness further on again, which is my expectation

17:14

but it’s really want to pick people’s minds about I

17:20

Look at the world PMI, you can see the world PMI is just heading into recession territory. So it’s weak

17:27

It’s telling us that there is a definite susceptibility to anything else going wrong, and I’ll come to some of the banana skins later

17:35

But anything going wrong is going to turn this from a slowdown into something much uglier

17:39

I think the tum the Trump trade situation. Is that very thing?

17:43

We’re starting to see many central banks around the world expressing concern and thinking about cutting rates

17:50

In response to this kind of very weak economy that’s starting to develop

17:55

The other thing is is that trade tariffs are showing up in the data when we look at world trade volumes

18:02

Well trade volumes have started to come off sharply and I think that’s really important

18:06

We also have a GMI indicator for world trade and it is also coming off very dramatically

18:12

So it’s something we need to be very careful of to see how this develops and again the one thing and I’ll talk about it

18:18

Later that we really need to be worried about is if the dollar goes higher than here another concern for me is the European economy

18:25

the European economy

18:27

was really led by Germany, which is

18:30

different this time around it’s not the the

18:33

peripheral European economies

18:34

It was Germany that started first firstly a relatively strong euro and secondly trade disputes. So trade issues those two things

18:43

suddenly started to mark a turn in Germany and

18:46

Germany has gone pretty much to recession GDP is not negative yet

18:50

but all of the forward-looking indicate are showing that Germany is going towards recession if you look at for example

18:55

industrial production or if we look at

18:58

Exports, we can see that there’s some concerning signs in Germany

19:01

And if we look at the zoo survey, which is their forward-looking PMI, it suggested that GDP is going to go negative 2 percent

19:07

That’s quite a big move for one of the largest economies in the world and the largest economy in Europe

19:12

But you see it’s not just at Germany level

19:15

We’ve got Italy that is actually in recession again a mild recession right now and we have France that is starting to weaken

19:22

And is only just growing so we’ve got the three largest economies in Europe. Not in great shape

19:27

Spain is the only one that looks ok right now when we get to pour chill again, it’s getting weak and

19:34

Holland doesn’t look great

19:35

so Europe is looking a bit of a mixed bag and we’ll come back to Europe later because it’s one of the weak points and

19:40

I think it’s one of the places that we all need to understand in this globalized slowdown

19:44

We can also get a bit granular with China

19:47

China struggled from load of monetary tightening if a couple of years ago and

19:53

the government trying to rein in the speculative excess of

19:57

A cheap money boom that came out of the back end of the global recession

20:03

So China’s been tight and it kind of broke the financial system doesn’t function

20:08

Properly in China any longer and the government is involved frequently trying to keep some sort of liquidity

20:14

They’re not interested in bailing out the rest of the world by another liquidity event. It’s just not in China’s interest

20:20

They just don’t have the ability to do so and why should they why should they when the rest of the world’s being so antagonistic?

20:26

So the point being is China’s very domestically focus

20:30

They’re trying to unwind their bubble

20:32

They’re trying to stimulate enough just to flatten it out trying the Japan way of doing things

20:38

But that means that China which was the marginal rate of change of growth of the global economy. They’re just not players right now

20:44

They are negative in terms of imports

20:47

for most of most of the raw

20:49

Materials so then they’re not going to be driving other countries GDP growth and I think that’s a really important matter

20:55

We’ve talked about the u.s. There’s no real growth there. We’ve talked about China

20:59

There’s no real growth there and we’ve talked about Europe and there’s no real growth there. So where is the growth engine?

21:04

There isn’t one and then when he broaden out to the rest of Southeast Asia

21:08

You can see that South Korea is also starting to slow down

21:12

Exports there a week and the same in Taiwan and we can assume the same as across Asia

21:17

Overall, Australia far too small the economy to matter in the globalized context

21:21

but as we know

21:22

Australia and has we feature on real vision has a problem with its own domestic economy with its massive house price broom and the

21:29

Overhang from the mining boom as well. So the Australia’s are cutting rates. They’ve got a slowdown going on

21:34

they’re trying to manage it the best they can without it turning to ugly and without it turning and

21:39

Rotting the banks at the core. We have to wait how that plays out

21:41

but again

21:42

It just tells you the number of countries who are in a similar situation

21:45

And the same can be true and said of Canada – which is one of the larger countries in the world

21:50

But again, they’ve had some problems. They’ve got the back end of a commodity boom

21:54

plus they’ve got an excessive leverage in the

21:57

Housing industry and that all needs to unwind and they too are going to be cutting rates so I don’t see a situation where anybody

22:05

Can save this and we’ve got I think the tipping point with tariffs that over overrides all of this

22:12

So this is why I’m really start to get concerned

22:18

But you see I

22:20

may be picking this up, but the bond markets always smarter than everybody and

22:24

I always incredibly amazed how right the bond market gets these things

22:31

Everybody argued when the yield curve was flattening the bond markets wrong. It’s just the Fed

22:35

Everyone says it doesn’t mean anything the yield curve. It’s just a different world right now

22:40

The yield curve started flattening then they started inverting and they started inverting all the way across the curve

22:47

We got the twos tens

22:50

US

22:51

Swaps curve which is the main one every time it gets to zero we go to recession

22:55

Shortly after we’ve hit that we had the ones twos curve going to the second most inverted in history

23:03

So that means two-year rates were trading below one-year rates suggesting that the easing that was necessary was large

23:08

They were screaming the Fed had gone too far

23:10

And then we had two year rates versus Fed Funds the magnitude

I think 70 odd bate 75 basis points

so the magnitude of that was also

extraordinary and was telling you the Fed had gone too far and things had to change quickly the Fed suddenly started realizing this by

December January February, they started changing their tune

Now we are here with the market saying well

We had a good employment data the Fed know that they’ve cut 25 or not to talk. They don’t need to do this. It’s ridiculous

these

Bond market indicators have never been at these levels without the Fed cutting 50 basis points immediately and 50 again soon after

so my core view is if this continues in any way unless

23:55

We see some sort of trough in the very near future in the forward-looking data

23:59

Then the Fed are going to cut 50 and 50 again. I don’t see the point of the Fed trying to cut 25 and

24:06

disappointing the bond market

24:07

I

24:08

Think if they have to play a very very careful game here and what they need to do is at least try to be in

24:13

front of the curve

24:14

That to your auntie row year rate of change tells you they can’t be ahead of the curve the curves well ahead of them

24:20

But the market needs some sort of perception, but I do think there’s a backup coming in the bond market

24:26

we’ll talk about this in a bit in a bit as people are trying to readjust the probabilities to do zero did the

24:31

25 to 350 I think in a completely reverse is this a bump up?

24:35

Meltdown coming, you know, I see all this noise on Twitter all day and we’ll address some of that in a bit

24:44

See the other thing

24:45

The Fed have got is the Fed of got a problem because they still tightening the balance sheet as I talked before

24:50

But when they look at what they’re trying to do they have that dual mandate that you’re – employment

Well employment looks fine right now and it always does at the peak of the cycle and they always cut one employee when unemployment is

Almost at the all-time lows

But the key is inflation expectations. They’re collapsing. They’re collapsing all across the world

25:11

But if you look at the ten-year break-even rate

25:13

It’s breaking this big Head and Shoulders pattern and it looks like we’re going down to 1% or so

25:18

That’s enough to be a 50% miss on the 2% implicit target that feds got on inflation. And this is 10 years out

25:25

So it’s telling you that the rates are so tight because there’s so much leverage within the akan me that they can’t raise rates without

25:32

Collapsing future inflation expectations and future demand. So I think that’s a really

25:37

Important indicator we could also you see the five year on five year inflation expectations

25:42

That again is breaking towards all-time lows

25:45

There is a complete collapse in inflation expectations regardless of the narrative that we heard

25:49

Only up until November December of wage inflation. It’s all going to come back

25:54

that was my if you remember my premise for the bond market rally was that narrative was wrong that appears to be playing out but

26:00

Not only does it appear to be playing out. It appears to be going from benign to

26:03

Nasty, so I think it’s something we need to watch but inflation is not just collapsing in the u.s. It’s collapsing around the world

26:11

So the rest of the world is also seeing an inflationary

26:14

Deflationary or disinflationary issue. I think the most extreme is Europe if we look at the five-year five-year breakevens in Europe

26:22

We see this enormous collapse in in inflation expectations and that’s with an economy with negative interest rates

26:28

I mean what the hell do you do about that? Europe is going to become a big issue again

26:33

Something will come on through in a second

26:34

But that is a real warning of how to generate inflation in a world straddled by debt. It becomes really complex

26:40

And how do you stop the downside?

26:42

Becoming a much larger event that it ordinarily would be when I look at these kind of theses

26:47

I like to cross-check against asset classes

26:50

I like to look across the world and see okay, how asset class is trading and the first one I look at copper

26:57

I look at the chart of copper and it’s a clear head and shoulders top and to me that’s telling me

27:02

That the economy is slowing down

27:03

What’s also interesting if I put the copper chart against the ten-year break-even?

27:07

You can see it’s the same chart

27:09

So copper basically is a real-time example of future inflation expectations

27:14

And they look like they’re going to break down together. If I look at the CRB industrial metals index

27:19

You can see that this big uptrend and this major

27:22

Topping pan a huge topping pattern is forming and I think that it’s likely to break that

27:27

And why I think it’s likely to break is one of the I think it’s probably the second ugliest chart pattern in the world

27:33

Which is the CRB commodities index if you look at this chart?

27:37

It looks like we’re going to go into a secular bust income

27:41

Due any day now and to last into the next few years as we reach for that final bottom

27:47

And I think that bottom could be uglier than many of us are

27:50

expecting a because of the size of the boom that we had the amount of capital that flowed into it and

27:56

particularly in the oil space and other some of the mining space as well and

28:00

also because what I think is going to happen to the dollar

28:03

So these charts are really ugly charts to mean it makes me very concerned that there is a broader

28:09

Disinflation or deflationary world out there that’s developing and it’s something I talked about in the last video. I did for real vision

28:15

That’s subsequently now develop further

28:19

So, let’s talk a bit about the risks

28:21

So I think I’ve established a case why it looks like there’s a possible recession coming. My probabilities are higher

28:28

They may be higher than yours. You may think I’m wrong

28:30

That’s okay. But you have to works you have to understand that the likelihood of something happening here is

28:38

reasonable so you’re gonna have to factor this into your investments or your working lives or all the things that a recession can affect and

28:46

I think that’s really important. Your business is – so let’s think about the risk now. One of the risks is China I

28:53

Don’t think an implosion of the Chinese economy is much of a risk because the US are basically forcing everybody out of China anyway

29:01

So it’s happening in slow motion

29:03

We’re also finding there’s a trade ban going on with many other issues with a try at China

29:07

So that’s not great. The Chinese themselves going to be propping up their economy. They’re trying to stop their banking system falling over

29:15

Okay, so that’s relatively stable because it’s a closed system. They’re gonna have some inflows from MSCI

29:20

And that was the inclusion of China both debt and equity is in the indices

29:24

Although I think the US are going to try and overturn that by putting political pressure on MSCI themselves

29:30

We’ll wait and see about that

29:31

But I know it’s just it’s a way for China to get capital and that’s what China needs its dollar starved and the u.s

29:38

Knows it

29:39

so if China’s dollar starved

29:41

well

29:41

the best weapon you’ve got is the dollar and if you look at the chart of the Chinese RMB

29:48

It has been pressing its nose against that seven ceiling for a while forming

29:52

What is one of the largest cup and handle?

29:54

Mason’s I’ve ever seen if that does go and seven breaks

29:58

Then we’re going to see an almighty move in the dollar against the RMB now, it doesn’t necessarily mean there’s a catastrophic

30:06

Devaluation coming out of China but a shift in the terms of trade which has massive global ramifications

30:12

And we’ll obviously knock on all the way through and I think you can see also if I look at the ADX Y

30:19

Which is the Asian currency index if I look at the big monthly chart?

30:23

There’s an enormous head and shoulders top that’s looking to break

30:26

this is the largest chart pattern I’ve ever seen in any currency market, but that is a

30:31

incredible chart pattern that tells me there’s a potential currency crisis in the making and

30:36

it’s to do with a strong dollar the other one that’s affected by the strong dollar and the weakness in global trade and

30:42

Particularly interest rates is Europe

30:45

So the European banks something I’ve talked about

30:48

Extensively for many years on real vision as the European banks have gone lower and lower and lower and I said there’s a big problem

30:54

Here and I know many bank analysts will say well, you know, there’s not solvency problem here. There’s you know, it’s different

31:01

They’ve got the right capital resources. Well, I look at the share price

31:04

I just look at the share price and it looks like the share prices want to go to zero

31:09

So the worst chart in the world

31:11

I’ve got a label at the GMI worst chart in the world is the European banks Index charts. It is a truly

31:18

terrifying chart because this is all of the banks in Europe and it looks like if

31:23

They break that key support then we’re going into a full banking crisis in Europe. And I think that’s a reasonable probability and

31:31

Here’s why you see the European banks are

31:34

international in nature Deutsche Bank

31:36

even the Swiss banks credit Swiss UBS Societe Generale in France Santander BBVA

31:42

All of these banks are international funded banks

31:45

Yes, they get their funding and the collateral with the ECB

31:48

but the reality is the day to day funding is the dollar euro dollar market and

31:53

They don’t get access to all the capital they need there’s a shortage of dollars out there, which is a problem

31:58

I think the dollar goes higher which creates a problem for these banks

32:02

If you look at that European banks index and look at it compared to the 10-year bond yield you can see the highly core

32:08

So as bund yields go down the banks go down, but you see the problem here is the ECB has one mandate alone

32:14

They’ve got the mandate of inflation and we showed you before the inflation expectations in Europe are collapsing

32:20

So it’s a one-trick pony the ECB can only do one thing cut rates

32:24

I talked to the ECB recently at a Goldman Sachs event that I was hosting in London, and I asked them

32:29

Okay. What are you gonna do?

32:30

what are you gonna do with the next recession comes and they’re like

32:32

Well, we can cut rates a bit more and we can do a bit more QE

32:35

but you can see there’s a general understanding that they can’t go that much further and

32:40

that’s a

32:41

problem for the banks because how do you stimulate so the banks are falling because these yields are really bad negative yields are bad for

32:47

Banks, the flattening yield curves not good for banks. The whole situation is a bad setup for the banking system and

32:54

The Europeans can only deal with it by cutting rates, which is bad for the banks

32:58

So you’ve created a bit of a Doom loop there. So there’s a bit of a cycle. That’s not good. So the question is is how do you stop it and my

idea is Christine Lagarde was brought in specifically for this

Why would you want her as a central banker? Why would you want her as the head of the ECB?

The ECB was a very technical Bank

It’s always very good with technical monetary policy because it was it was very policy driven He was less kind of broad-based macro driven than the Fed. He was really in the weeds

But Lagarde is not that

She is the head of the IMF. She’s a politician and she’s a lawyer and

what does she do she negotiates and

If you put something like that in control of the ECB

It tells you that there is going to be a shift or from in the ECB which is moving towards

Probably Negotiation for this banking settlement somewhere. Everybody has to get together and do something. It’s not just Germany here. It’s not just Deutsche Bank

That’s the you know, the poisonous one. There’s not one poisonous Apple here. It’s a whole system that’s in a mess

There’s still too much debt in that European banking system. That’s not been written off properly

so if these banks are probably going to have to go in the hands of the

Governments, they’re going to probably have to wipe out the equity holders somehow and the bondholders will become the government

So that’s the way you stop a systemic crisis

But somebody’s gonna have to pay for all of that and that’s gonna be a ton of issuance of debt

So if somebody has to negotiate new treaties

to allow all these companies to exceed their deficits and to increase their funding and the ECB to buy more of this funding and there’s

A whole load of stuff that needs to get done. There’s much more political and legal than it is

34:43

Than it is monetary policy. So I think that’s why Lagarde is there if you want somebody for the next recession

34:49

Clearly the person who ran the IMF that deals in

34:52

Bailouts is the right person so I get that and I think it makes sense. But Europe, that’s a tricky mess

34:58

This is not a quick fix overnight and it makes me concerned that this can go from not very good to very ugly very quickly

35:05

And I have a feeling if I look at the share price of the banks that by the end of the summer

35:09

We could be there already where we’re starting to see some of the real strains and where the Deutsche Bank ever gets to its full

35:15

Restructuring before they have to do something about it

35:18

My guess is hearing the story of Renaissance capital pulling its prime broking lines

35:24

from Deutsche Bank means that we’re potentially in the death spiral where it goes from not being a

35:29

Solvency problem to potentially being a solvency problem. Who knows wait and see

35:33

You know getting in the weeds of the banks is not my thing

35:35

But looking at the macro setup, I can see that this is a problem waiting to happen or is happening right now

35:44

The other thing I think is further to develop is the tech market I think there is a complete

35:55

Euphoria that has taken place in the private sector

35:59

Particularly within the private investment sphere. So it’s private equity and VC. I think too much money has been allocated

36:07

without the thought of getting the money back and I think no

36:10

better example than the poster child of soft bank and

36:14

how they put a hundred billion to work plus added leverage in and just basically

36:20

completely rewrote the rules of valuation of any firm out there with no clear sight of how to get out of I

36:28

Think there’s some huge problems with what he is signaling

36:33

Mercy Sun is signaling by trying to IPO the whole of the vision fund to start another fund if you’ll try IPO

36:42

Kind of a VC fund on this scale

36:45

Without actually the companies themselves going public

36:48

It’s telling you he doesn’t think the future IPO value is the same as the current

36:54

Private value and we’ve seen that with some of the recent tech issues

36:58

They traded higher as private companies than as it as public companies that there is a different

37:04

dichotomy between this and that’s telling me that things got to

37:07

effervescence in the private sector and it’s starting to come off and it will knock on through as

37:12

People realize that that the future of tech is not yet

37:16

not quite as bright as people thought it was and there are some really system merit

37:21

Systemic problems because the owner over ownership of this sector and the expected returns that’s embedded within it

37:27

I’m really worried about

37:29

Softbank I’m really worried about what it says for the world

37:32

So we’ll wait and see how that develops but I think there’s a tech problem

37:35

I also think as I’ve mentioned many times before I think there’s a tech problem coming as I mentioned before there’s a problem coming with

37:41

Google and Facebook and their battle with the DOJ and various other parts of the US government

37:46

I think they’re going to be treated as monopolies. I think they’re going to have shown to to have abused their monopolistic power

37:53

I think they are also

37:56

Using data in ways that people

37:58

Don’t want and I think their power is going to be curtailed and I’ll be broken up in various ways

38:02

So I think that’s coming and I think it will come over all through this next recession

38:07

So there is another Delta on the bad news something that can drive a little bit further

38:11

That worries me and I’m monitoring all of these themes as they all kind of come together

38:16

And it makes me worried but there’s two really big ones left

38:20

That I haven’t yet talked about on real vision

38:22

Some of you will have read it in global macro investor for those year of subscribers

38:26

And then recently I published much less than a publishing global macro investor. I published it in macro insiders and in think-tank

38:33

Wide Doom loop article and if any of you are interested in this piece

38:37

I think you should go back and have a look at that article

38:39

If you’re not subscribers sign up for a free trial and go and have a look through

38:43

This article and this goes through all of what I’m talking about in great length

38:46

I think there is something really interesting in macro insiders Julian Britton and myself

38:51

debated at length about

38:52

what this really means and whether or accession is coming and I think will probably show that later on this week as well because somebody

38:57

from macro insiders I think will really add value to you much like this Doom loop article, but the issue is

corporate debt

39:04

And this is when it gets really big

39:06

So bear with me and maybe get stiff drink while I sit down and talk to you about the Doom loop

39:14

You see every recession needs a poster child there’s always one there’s always the thing you pin it on

Back in 1990 is the savings and loan crisis

Back in 2000. It was the tech wreck

And then back in 2008. It was the housing market and

This time I think there’s an even bigger and more concerning one. I think it’s the corporate debt sector

I think this is the poster child of the next recession and let me explain why firstly you’ve got to realize that

Debt is basically a function of the business cycle and you have is most cycles

You have a super cycle and you have the normal cycle

So the normal credit cycle is very clear

If I look at the Aerie against the let’s say the hyg ETF. You can see how highly correlated they are

And also if you look at the area’s Moody’s be double-a to triple-a credit spreads

You can see it’s basically a function of the business cycle

so the business cycle drives credit spreads and it drives the

availability of credit and it drives the excess use of credit and all of the issues that come along with it and obviously the

Fed Drive, the credit cycle by raising interest rates or lowering interest rates also the behavior of credit

Availability which is the credit managers and how they give out credit again is really cyclical so we can look at the index

40:39

against the area and we can figure out that if at Kri the business cycle turns

40:44

Then we’re going to see some problems emerging in all of the debt market now. Here’s an interesting chart for you. Talk about recession

40:51

I find hilarious that the New York Fed publishes a recession probability index

The recession probability index is in the 30s now 30% chance of recession

It’s ridiculous because if you look back at every single time has ever been at this level

It’s been a recession. So when it gets to about 20 something it’s a hundred percent chance of recession

So the Fed New York Fed is basically telling you were going into recession

41:11

So if we’re going to recession, which is my core hypothesis, then we’re going to see credit spreads widening ordinarily. That’s not a big problem

41:20

Because that’s what happens and we had it in 2008 and you know corporate spreads widened out and they narrowed

41:25

Yes the banks that was a whole different issue the bank debt and household debt. We’ve had that as well

41:31

But this time around it’s somewhat different see this time

41:36

since that previous recession the size of the global corporate debt market has

41:41

Exploded and in particular in the u.s

41:44

US corporate debt as a percentage of GDP is the highest in all recorded history by using the fed data we get about

41:52

47 percent of GDP in debt, but if I use other data, particularly the IMF we’re getting numbers of about

41:59

75% the Fed data’s on taking account off balance sheet

42:02

So if it’s off balance sheet derivatives and all the other debts that’s on corporate balance sheets

42:06

Which we know are all over the place then we get to about 76 percent of GDP in debt

42:11

That’s a really really high number. So in nominal terms

42:16

Debt is now 10

42:18

Trillion dollars and it’s just gone up in a straight line as I said doubling in size since the last recession and this is extraordinary

42:25

Amount of debt don’t forget. This is the same time. The households have been gently easing out of debt

The financial system has been easing out of debt and the government has not but the government’s been kind of relatively flat

But the corporate sector went on a massive debt orgy

it was one of the largest increases of debt we’ve ever seen in history in 10 years a

Truly monumental debt buildup. What do they do with this debt? Well, this debt has been

Basically used for one thing. That’s equity buybacks

They bought back more equity than any other time in history. In fact

They’ve been pretty much the only buyer of the equity market if we look at all forms of other equity market ownership

They’ve been all in decline for the last five years while buybacks have been stepping up stepping up taking into account

All of the net sellers and pushing the market higher and there’s less liquidity

Around because you’re taking more shares out of the market by buying them back

so the less liquidity the more your shares go up and then when you add in passive indexation

43:28

It’s been pushing the markets higher from this enormous debt issuance. That’s all well and good but

43:35

once you start flooding the market with debt you create dynamic which is little understood and

43:40

That’s the lowering of overall credit quality of the entire market and this is not a u.s. Penomet

43:46

It’s a global phenomena, but in the u.s. Now

over 50% of the entire bond market this triple be

Trouble B is essentially one large notch above junk bonds

It used to be a world where there’s a lot of triple-a credit double-a credit

They’re all falling by the wayside

What you’re getting is?

everybody taking so much debt that they’re becoming triple B and all of the main bulk of American large cap firms are now triple B debt and then beneath that

you’ve got a trillion dollar so you got four trillion dollars of of

triple B and you’ve got a trillion dollars of

junk that

junk alone is the largest the junk bond markets ever been but the real growth in this whole thing has been

44:34

The triple B sector, you can see from this chart that if we put all the different types of bonds in a nice

44:41

stack next to each other the size of the triple B market is absolutely

44:46

Enormous and when you break down the u.s. Triple B debt market you can also say it’s pretty lumpy

44:51

there are five large beer moths that account for

44:55

seven hundred and seventy billion dollars of debt

44:58

And if you add in the US shale industry you’re talking about a trillion dollars of debt. Those companies are

45:05

General Electric General Motors

45:08

AT&T forward and Dell they account for everything here. It’s huge

45:13

You’re obviously there’s a massive tier of corporations behind it that triple-b

45:17

But really the risk comes down to five big firms just to understand how leveraged these companies are. Here’s the chart of debt-to-equity

General Electric is over 200% debt-to-equity

General Motors 250

AT&T about a hundred percent

Ford about four hundred and fifty percent and Dell about one hundred and twenty five percent of AT&T is

the largest the most indebted

Company the world has ever seen

it is a hundred and seventy billion dollars in debt and

Is over a hundred percent of market cap in debt that dynamic can change?

45:58

Dramatically if the share price Falls it’s digested an enormous acquisition in Time Warner

46:03

And if you remember a o L Time Warner was ringing the bell of the top of the last cycle

46:07

It kind of feels like AT&T Time Warner may be ringing the bell for this cycle – and it was a debt owed you’d allowed

46:13

To do it because AT&T thought fine, you know, we’re a phone company we get plenty of cash

46:19

The problem is is corporate cash flow is correlated to the business cycle

46:23

If you look at the Eckrich and look at S&P cash flow, you see they’re highly correlated

46:27

So what looks affordable acquisition now suddenly becomes unaffordable later if that starts to happen

46:32

Then you’ve got a problem and you’ve got a problem because look AT&T is not going bust

46:37

Well, at least I don’t think so, but it’s gonna get downgraded to junk

There is no way on earth the junk bond market can take a downgrade like AT&T

46:46

Realistically if you start to get in a recession

46:48

You should see I don’t know 10 20 % of these triple B’s get downgraded. So we’re talking

huge numbers that have to get absorbed into that junk space

But there’s only a trillion dollars there and the buyers are different and this is a crucial thing here

the buyers of

Junk bonds are not the same buyers as the buyers of investment a great credit

Those bars invest in great credit will have to sell if it gets downgraded

So that means that there is a huge amount of selling

But the people in the junk bond market don’t have 30% more 40% more cash suddenly to buy this stuff

so the only way of doing it is by obliterating the junk bond mark

So these get downgraded in any way shape or form you want to find that out the junk bond market?

becomes completely insolvent, but what’s worse here is

if you look at the

Debt that’s coming up

It’s a complete wall of the stuff that needs to be renewed over what looks like it’s going to be the next recession

That’s going to be a huge problem to try and roll all this financing that all comes to you at the same time

When the banks aren’t gonna be particularly keen on

Letting this financing out and the companies are going to be desperate to get it but their cash flows are gonna be going down

So the affordability becomes a little more problematic even with rates being cut

This is why the Fed need to cut rates and need to cut rates fast because this corporate thing is an avalanche

Waiting to happen and the butterflies flapped its wings and the avalanche is starting to crumble

But you see this issues not just the US as I mentioned a couple of times it’s global

When we look at the global corporate debt-to-gdp

we’re at 95%

This is the same color of la-la-land levels that we had on household debt back in 2008

There is an extraordinary amount of corporate debt. And the worst thing about it. Almost all of it is in US dollars globally

It’s in u.s Dollars except in Europe and that’s all trading at negative yields now because it’s European debt that could be used as collateral

That has a huge value for the system. That’s slightly

insolvent

so we’ve got a huge problem because if you think about that, it’s globalized and it’s in dollar funding and

There’s not enough dollars around certainly not to roll all of this debt

Particularly if the banking system in Europe is going to desperately be sucking for these dollars

We’ve got a big funding issue to come

And again if the dollar starts going higher

It becomes a much bigger problem

For all of these corporates to deal with and a big big problem for the junk bond market to deal with overall and the investment-grade

Market, see I’m not the only one talking about this Stan Druckenmiller has been talking about it

there’s a number of people who talked about it and

49:29

The BIS and the IMF have both warned about it much like they did ahead of the 2008 recession

They’re saying there is a huge problem with corporate indebtedness. There’s a huge problem with the buybacks

There’s a huge problem with the dynamics that it’s creating

And this is the thing. It’s the knock-on effects that I’m really worried about in this whole equation a credit event

Okay, a secondly credit event really nasty but with a couple of other things thrown in like a retirement crisis

Then we’ve got something really really concerning that we have to avoid the Fed have to be

Really aggressive in this or we’ve got a much bigger problem than we realized. You see the bond market is supporting equity markets

I talked about before it’s all the book buyback. So here’s the graph of the buybacks that I talked about before

They’re basically supporting the whole market

So if the corporate bond market gets a little bit tighter and cash flows go all of the corporates gonna stop by equity the largest

50:20

Bar will have left the room very quickly. So let’s go through the causation here ari widens. It starts falling south for the reasons

50:27

I’ve talked about it starts widening out the spreads as soon as the spread starts widening out corporate cash flow start going with Acree and

50:35

Corporate start going. Okay. I need to be careful here. So what they do is they stop buying back shares

50:40

So that’s the largest equity market buyer who’s left the room. So that’s a really big deal

50:46

So let’s go back to the area chart with the year on your S&P

50:50

The equity falls and this credit cycle Falls then the SMP is gonna fall with it in the year-on-year terms and also an outright terms

50:57

So we’re setting ourselves up for something that could be quite interesting. Now. We know that

51:02

Consumer confidence is pretty much tied to the equity market right now

51:05

and so if the equity market starts

51:07

falling because the buybacks have gone then it’s gonna build on itself and then it’s gonna build itself in a way that’s going to bring

51:13

Out the baby boomers and I’ll come on to that in a sec. So there’s another issue here

51:17

We had a guest on real vision who talked about the corporate bond market and the pension system

51:22

You see I’ve talked about the pension system a lot and I’ll come on to that in a sec again

51:25

but

51:26

the pension system has been a bar of equity but increasing bar of corporate bonds because there’s been some yield there and

51:33

Also as you get an aging population and people are getting closer to retirement you need more bonds

51:37

But they need you to take as much risk as possible

51:39

So they’ve bought a ton of junk and a ton of this triple B stuff. So they’ve been the big buyers

51:44

Now what’s been really interesting is they’ve been in a loop like the buyback loop which has been drift by tax receipts

51:51

you see place like, Illinois who have

51:54

bankrupt pension systems

51:56

Have been raising taxes and with that tax receipts they have been

52:01

Then putting it into the pension system to fill the gap the pension funds have been buying bonds

52:07

So you’ve got this cycle with tax receipts coming in and you’re buying bonds

52:10

You just create this loop the problem is is tax receipts are also cyclical

52:15

So once that happens and the tax receipts start falling because level of business activity is falling well

52:21

Then guess what the corporate debt bar goes away, too

52:23

So you’re creating a market where there’s no equity buyer a no corporate debt buyer because of how the pension funds operate

52:31

That’s a real problem. And then if anything gets downgraded to junk who’s the bar of that junk that doesn’t really exist

52:37

Either you can see the chart here of US state and local current tax receipts

52:42

Year on year and it’s basically the same as the business cycle

52:44

No surprise and it’s gone negative as tax receipts have been lower than expected

52:50

Recently and again, that should stop pushing the credit spreads wider and that brings us back to the baby boomers

52:56

These are the guys who all these assets are the equity investments and the bond investments

53:02

They’re the they’re the owner of all of this stuff and they need to sell them to

53:06

And they need to sell them because they’re going to retirement and if there is a risk in the system

53:10

They cannot take the risk of losing their money

53:13

Because that is their pile that they retire with and I talked about this at length in the retirement crisis video

53:19

so the chances are there’s a behavioral adjustment of which they become net sellers in two rallies and

53:25

Sellers in two dips as opposed to buyers in two dips

53:29

And that’s because they don’t have work or the amount of work needed or income needed to sustain an investment portfolio

53:35

It’s more about living expenditure. And those that retire they don’t have more money to put back into the market. That is their pool

53:42

They’re done. So they need to reduce risk fast. So when you’ve got a situation where

53:47

Everybody is a net seller. You’ve got a problem that happened in Europe and it happened in Japan

53:53

We’ve seen what it does it basically lowers

53:57

for decades the price of equities and

54:00

Changes the structure of markets for a long period of time and I think that is one of the potential outcomes again

54:05

I’m not saying it’s necessarily going to happen, but there’s a potential outcome here. So you start to see the various knock-on effects

54:12

I’ll put them on the screen here and then I’m going to go through a bit again. Later

54:15

Because there was a lot of points to get across so as the triple B credits get downgraded to junk and the debt markets freeze

54:21

Pensions will be forced sellers and take enormous losses and were switched to Treasuries at 1% yields or less

54:26

This will essentially bankrupt the defined benefit pension system

54:29

It has to default on its promises when you throw in the net divesting of assets

54:33

The baby boomers will do in the next recession. You have the perfect storm. There’ll be no buyers of equity

54:37

There’ll be no bars of debt corporations will not be able to service the debts or roll them

54:41

The pension system will break then throw in the EU banking system, which is fragile and needs dollars and the entire

54:47

Bloody system will freeze all over again. This is why I called the Doom loop and it’s small incremental steps that create something quite quick

54:56

Can the Fed get in the way of it?

54:58

Can they stop this Doom loop because there is a cycle here because the moment you start widening credit spreads

55:03

You start creating selling you start creating less buybacks the equity market Falls if the equity market Falls then AT&T share price Falls

55:09

Then they stop and pricing default wrist or downgrade return to AT&T

55:13

And then what you know is the junk bond spreads widen the whole thing works in this endless cycle

55:19

So let me go through the points of the cycle again as well just to clarify

55:22

Phase 1 the business cycle weakens credit begins to widen

55:27

corporate cash flow worsens our tad and shares fall and volatility increases

55:31

I think that’s where we’ve got to now I think phase 1 we accomplished and it started really in about October

55:38

Phase 2 the business cycle weakens again credit widens more cash flow gets worse as do profits tax receipts fall and state pension funds

55:46

Stop buying debt big triple B stocks fall and bonds fall even more sharply equities fall hard

55:51

So I think this is the next phase and I think it’s coming after the summer. We’ll wait and see my forward-looking indicators suggest that

55:58

The Europe has a sesee up cycle right now. There’s a bit of stabilization of data

56:03

I have a feeling that if I’m right about the debt ceiling or the dollar breaks higher

56:08

Then I think we’re going to start to see

56:11

phase 2 come in when we start seeing phase 2 we know where this is going because then the story becomes very

56:17

Their face one was the alarm bells face – they strap yourselves in. Okay, let’s go into Phase three

56:23

This is when things get ugly the baby-boomers starts a panic to get out of equities permanently. There’s down grades of triple beads

56:28

Junk the EU banks can’t take the funding stress and the ECB and the government step in credit spreads explode credit seizes up entire list

56:35

Pension funds are forced sellers on downgrades equities going to tailspin

56:38

There are no natural buyers credit widens dramatically offered only no bids junk bond market

56:44

Overwhelmed pension funds get to trouble defaulting on obligations big famous companies are being forced towards bankruptcy

56:50

Unnecessarily, that’s the really ugly face and that’s the one

56:55

Where I think many of us have got a sense that there was an end game

56:59

That’s at the end of all of this if there is one it lies in the heart of that whether we get there or not

57:03

It’s going to be a function of what the Fed does and what the central banks do and how they deal with this

57:09

And there’s many outcomes for that and it is not going to be a straight battle

57:12

But all I do know is these things tend to accelerate much faster. I’m very cognizant of what happened in the UK

57:19

with

57:20

with Woodford’s fund and Neil Woodford’s fund and also with HC o new Texas, these are

57:27

these are

57:28

liquidity problems and we’ve talked a lot on real vision about liquidity in the lack of liquidity and markets and if you put in a

57:35

Bad event with low liquidity you’ve got a problem and I think we’re starting to see alarm bells coming

57:40

so as I said

57:40

We phase one let’s see what happens with phase two. The end of it is the Fed are gonna have to buy credit

57:46

They’re gonna have to stop this they have to stop the Doom loop

57:49

And the other thing they will do is underwrite the pension system

57:53

and this is part of the MMT and also part of the way that you get rid of the

57:59

quantitative easing giving money

58:01

to the rich or the people who need it the least the people who can borrow and

58:05

This way you give it to people who have a pension and there also happened to be voters huge numbers of baby

58:11

Boom voters you’ll be bringing back into the system

58:13

So it’s actually a very attractive thing for both the Federal Reserve and the government to push to do

58:19

So I think that’s what comes of it

58:21

You’re gonna have to do something about this pension plan black hole and this is probably the way to do it

58:25

You see Europe in the UK dealt with a lot of this in the past because they started to

58:30

put restrictions on what pension funds could do and the kind of risks that they could take but they’ve still got a

58:36

Problem with with credit for sure and I think the Europeans will be involved in having to support their own pension system as well. So

58:46

Where does this all leave us? Well, that’s what this week’s gonna be about

58:50

you can see how important this all is and this is not just

58:54

Doom mongering. This is the reality of the probabilities. You cannot deny that the business cycle is weakening

59:00

You can deny that it’s going to a recession, but we need to find out more. We need to find out from other people

59:05

I really want to find out I want to have that debate with people

59:09

because I

59:11

Really want to know and assess the probabilities and figure out whether my probabilities are right. So I’m gonna leave you with a few things

59:19

the things that really matter to me

59:22

I’ve given you a bunch of chance to look at that

59:24

You can follow I would use that your stocks banking index has one very important chart

59:30

You can use maybe FedEx for world trade tariffs and stuff like that. FedEx looks pretty bad

59:35

But I think the primary chart is the chart of truth that I’ve always called it

59:39

which is the bond market the

59:41

Thirty-year Channel and how it perfectly kind of POTUS head at the top of the channel and then reversed. It’s telling us that

59:47

bond yields are gonna go probably down to zero that’s ten-year bond yields if I show you the chart here of the

59:55

Long-term pattern of two-year bond yields. It’s very clear that they’re going to go negative and this chart suggests

60:01

They’re going to go to negative two percent now

60:04

For somebody in America that might sound outrageous

60:07

To anybody else in the world. It’s normal, right Europe’s had negative rates now for a long time as of Japan

60:13

You know all across the place we’ve seen negative rates. So get used to it. It’s the mindset of what’s coming

60:20

I don’t think you’re gonna be able to avoid it because of the confluence of events that we’ve got coming with the excessive debt that

60:27

Massively built up over the short period of time and then with the wave of retirees coming and the Fed having over tightened

60:34

I think the dollar chart is extremely important. I think use the broad trade-weighted dollar index

60:40

it is a

60:41

Huge cup and handle formation as well. And if it breaks this 130 level then we’re going to see the final

60:50

Catastrophic large rise in the dollar that could break the rest of the system. I’ve been warning of this for some time

60:57

The dollar has been range-bound. It keeps looking like it’s going to break down then suddenly break up and then break down

61:01

I don’t know, but I do know it’s gonna break and it’ll be the last of the asset classes

61:06

To make its move if it breaks down

61:09

Okay, we’ve got to give ourselves some breathing space. We’re going to save emerging markets

61:13

We’re gonna save some of this debt situation for another day and we’ll extend. What is the longest business cycle in all history?

61:20

but if not

61:21

Then we’re going to start to accelerate all of these events and a global recession with some really nasty outcomes

61:28

It’s becoming more and more likely and also

61:30

the

61:31

Abxy, the Asian dollar currency index. I think that’s an important chart to keep on your screens and maybe keep your focus on the

61:38

EEM the equity market the emerging market ETF

61:42

These things are all within this basket what we need to be looking at and in the end

61:46

What do I think the trade is my personal view? And again, I’m gonna talk to other people about this I think

61:52

It is bonds if I’m right and we’re gonna get worse. We may see about a bounce in bonds now

61:57

I’ve just taken profits and a whole bunch of my bond positions, but I’m looking to aggressively add now. This is one of the biggest

62:04

Highest conviction trades I’ve ever had and I think that the bond market particularly the short end the Eurodollar futures in the two year futures

62:11

You need to leverage up and buy as much as you can of these into any bands

62:15

I think we’re hopefully getting a short bounce now

62:17

But I think once we get through and we start to see the economic data weakening once more

62:24

You won’t be able to buy bonds. I think I’m really interested in buying dollars. I’d like him to break

62:30

Once they break higher then I want to add all sorts of dollars. I

62:34

Don’t want to short the equity market. It’s too dangerous. It’s too difficult

62:38

And I think it’s a balance ii trade versus the bond market trade

62:41

Obviously I will be get drawn into it again

62:43

But every time I try get my ass handed to me, so I’m gonna try and avoid doing that one the last two

62:48

I’m pretty obvious one is gold because gold is an option on the end

62:53

So if we are going to go to extreme monetary policy, which looks like I’ve walked you through a set of pretty easy

62:59

Probabilities that that could happen in the next 18 months. Well, then gold has to go higher now

63:04

It’s sure if the dollar goes higher Gold’s gonna come back a bit but over time

63:08

I think the dollar on gold go higher and gold goes a lot higher over the longer run and it’s now

63:13

acting as that probability on this endgame and the final one is Bitcoin bitcoin is

63:19

Again, a probability on the ability to build a different financial future. We’re seeing noise coming out of China about building a cryptocurrency

63:25

We’ve seen the very interesting thing that Facebook’s done

63:27

It’s another thing that I will do for real vision at some point is talk about that more debt

63:32

Not that I think the Facebook cryptocurrency is the answer but the globalized currency and what they were doing with the globalized currency

63:39

I think really is very interesting some that talks about on real vision from the very beginning maybe in the first ever interview

63:44

They were all talking towards coming towards this moment now

63:48

This is why we started real vision and also this is why I do global macro investor. We’re in a very macro environment

63:54

It’s super interesting, but it’s also super dangerous. So me publishing global macro investor. I thought had to get this across to you

64:02

So everybody understands the risk ahead and can do their own work on it

64:05

So I’m really looking forward to taking you with me on this journey

64:08

There’s going to be a lot of learning. There’s gonna be a lot of debate and I’m going to bring different angles

64:12

I’m gonna bring people from the oil market the retail market the car market the VC market

64:17

I’m doing macro experts Bitcoin experts gold experts

64:20

I’m gonna bring everybody to the table and we’re gonna talk it all out and figure out ok

64:24

What the hell is going on and what the real probabilities are. Guess what we’re doing a sweepstake

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