Predicting Terrorism with Market Intelligence: Stock Options

Jim Rickards explains why there’s a financial crisis coming, and in so doing, reviews the unusual origins of his predictive analytics tool. He also explores complexity theory and Bayesian statistics. Jim Rickards is a renowned author and the chief global strategist at Meraglim. Filmed on July 12, 2018 in New York.

 

This has roots that go back to 9/11.
12:24
Tragic day, September 11, 2001, when the 9/11 attack took place.
12:31
And what happened then– there was insider trading in advance of 9/11.
12:37
In the two trading days prior to the attack, average daily volume and puts, which is short
12:43
position, put option buying on American Airlines and United Airlines, was 286 times the average
12:50
daily volume.
12:51
Now you don’t have to be an option trader, and I order a cheeseburger for lunch every
12:55
day, and one day, I order 286 cheeseburgers, something’s up.
12:59
There’s a crowd here.
13:00
I was tapped by the CIA, along with others, to take that fact and take it forward.
13:06
The CIA is not a criminal investigative agency.
13:10
Leave that to the FBI and the SEC.
13:11
But what the CIA said was, OK, if there was insider trading ahead of 9/11, if there were
13:17
going to be another spectacular terrorist attack, something of that magnitude, would
13:22
there be insider trading again?
13:24
Could you detect it?
13:26
Could you trace it to the source, get a FISA warrant, break down the door, stop the attack,
13:30
and save lives?
13:31
That was the mission.
13:32
We call this Project Prophecy.
13:34
I was the co-project director, along with a couple of other people at the CIA.
13:39
Worked on this for five years from 2002 to 2007.
13:43
When I got to the CIA, you ran into some old timers.
13:47
They would say something like, well, Al-Qaeda or any terrorist group, they would never compromise
13:53
operational security by doing insider trading in a way that you might be able to find.
13:59
And I had a two word answer for that, which is, Martha Stewart.
14:03
Martha Stewart was a legitimate billionaire.
14:05
She made a billion dollars through creativity and her own company.
14:08
She ended up behind bars because of a $100,000 trade.
14:11
My point is, there’s something in human nature that cannot resist betting on a sure thing.
14:15
And I said, nobody thinks that Mohamed Atta, on his way to Logan Airport, to hijack a plane,
14:21
stopped at Charles Schwab and bought some options.
14:23
Nobody thinks that.
14:24
But even terrorists exist in the social network.
14:26
There’s a mother, father, sister, brother safe house operator, car driver, cook.
14:32
Somebody in that social network who knows enough about the attack and they’re like,
14:36
if I had $5,000, I could make 50, just buy a put option.
14:40
The crooks and terrorists, they always go to options because they have the most leverage,
14:44
and the SEC knows where to look.
14:47
So that’s how it happens.
14:49
And then the question was, could you detect it.
14:52
So we started out.
14:53
There are about 6,000 tickers on the New York Stock Exchange and the NASDAQ.
14:57
And we’re talking about second by second data for years on 6,000 tickers.
15:03
That’s an enormous, almost unmanageable amount of data.
15:06
So what we did is we reduced the targets.
15:08
We said, well, look, there’s not going to be any impact on Ben and Jerry’s ice cream
15:12
if there’s a terrorist attack.
15:14
You’re looking at cruise ships, amusement parks, hotels, landmark buildings.
15:18
there’s a set of stocks that would be most effective.
15:22
So we’re able to narrow it down to about 400 tickers, which is much more manageable.
15:26
Second thing you do, you establish a baseline.
15:28
Say, what’s the normal volatility, the normal average daily volume, normal correlation in
15:35
the stock market.
15:36
So-called beta and so forth.
15:37
And then you look for abnormalities.
15:39
So the stock market’s up.
15:42
The transportation sector is up.
15:43
Airlines are up, but one airline is down.
15:46
What’s up with that?
15:47
So that’s the anomaly you look for.
15:48
And then the third thing you do.
15:49
You look for news.
15:50
Well, OK, the CEO just resigned because of some scandal.
15:54
OK, got it, that would explain why the stock is down.
15:57
But when you see the anomalous behavior, and there’s no news, your reference is, somebody
16:03
knows something I don’t.
16:04
People aren’t stupid, they’re not crazy.
16:06
There’s a reason for that, just not public.
16:08
That’s the red flag.
16:09
And then you start to, OK, we’re in the target zone.
16:12
We’re in these 400 stocks most affected.
16:15
We see this anomalous behavior.
16:17
Somebody is taking a short position while the market is up and there’s no news.
16:21
That gets you a red light.
16:23
And then you drill down.
16:24
You use what in intelligence work we call all source fusion, and say, well, gee, is
16:28
there some pocket litter from a prisoner picked up in Pakistan that says cruise ships or something
16:34
along– you sort of get intelligence from all sources at that point drilled down So
16:38
that was the project.
16:40
We built a working model.
16:41
It worked fine.
16:42
It actually worked better than we expected.
16:44
I told the agency, I said, well, we’ll build you a go-kart, but if you want a Rolls Royce,
16:48
that’s going to be a little more expensive.
16:50
The go-kart actually worked like a Rolls Royce.
16:52
Got a direct hit in August 2006.
16:55
We were getting a flashing red signal on American Airlines three days before MI5 and New Scotland
17:04
Yard took down that liquid bomb attack that were going to blow up 10 planes in midair
17:09
with mostly Americans aboard.
17:11
So it probably would have killed 3,000 Americans on American Airlines and Delta and other flights
17:16
flying from Heathrow to New York.
17:18
That plot was taken down.
17:20
But again, we had that signal based on– and they made hundreds of arrests in this neighborhood
17:26
in London.
17:27
So this worked perfectly.
17:30
Unfortunately, the agency had their own reasons for not taking it forward.
17:37
They were worried about headline risk, they were worried about political risk.
17:41
You say, well, we were using all open source information.
17:45
You can pay the Chicago Mercantile Exchange for data feed to the New York Stock Exchange.
17:48
This is stuff that anybody can get.
17:49
You might to pay for it, but you can get it.
17:52
But the agency was afraid of the New York Times headline, CIA trolls through 401(k)
17:58
accounts, which we were not doing.
18:00
It was during the time of waterboarding and all that, and they decided not to pursue the
18:06
project.
18:07
So I let it go, there were plenty of other things to do.
18:09
And then as time went on, a few years later, I ended up in Bahrain at a wargame– financial
18:14
war game– with a lot of thinkers and subject matter experts from around the world.
18:20
Ran into a great guy named Kevin Massengill, a former Army Ranger retired Major in the
18:27
US army, who was working for Raytheon in the area at the time was part of this war game.
18:32
We were sort of the two American, little more out of the box thinkers, if you want to put
18:36
it that way.
18:38
We hit it off and I took talked him through this project I just described.
18:42
And we said, well look, if the government doesn’t want to do it, why don’t we do it
18:45
privately?
18:46
Why don’t we start a company to do this?
18:47
And that’s exactly what we did.
18:49
Our company is, as I mentioned, Meraglim.
18:51
Our website, Meraglim.com, and our product is Raven.
18:55
So the question is, OK, you had a successful pilot project with the CIA.
19:01
It worked.
19:02
By the way, this is a new branch of intelligence in the intelligence.
19:06
I-N-T, INT, is short for intelligence.
19:08
And depending on the source, you have SIGINT, which is signal intelligence, you have HUMINT
19:14
which is human intelligence, and a number of others.
19:17
We created a new field called MARKINT, which is market intelligence.
19:20
How can you use market data to predict things that are happening.
19:24
So this was the origin of it.
19:26
We privatized it, got some great scientists on board.
19:30
We’re building this out ourselves.
19:31
Who partnered with IBM, and IBM’s Watson, which is the greatest, most powerful plain
19:38
language processor.
19:40
Watson can read literally millions of pages of documents– 10-Ks, 10-Qs, AKs, speeches,
19:47
press releases, news reports.
19:51
More than a million analysts could read on their own, let alone any individual, and process
19:57
that in plain language.
19:58
And that’s one of our important technology partners in this.
20:02
And we have others.
20:04
What do we actually do?
20:07
What’s the science behind this.
20:09
First of all, just spend a minute on what Wall Street does and what most analysts do,
20:13
because it’s badly flawed.
20:15
It’s no surprise that– every year, the Fed does a one year forward forecast.
20:22
So in 2009, they predict 2010.
20:24
In 2010, they predict 2011.
20:27
So on.
20:28
Same thing for the IMF, same thing for Wall Street.
20:30
They are off by orders of magnitude year after year.
20:34
I mean, how can you be wrong by a lot eight years in a row, and then have any credibility?
20:38
And again, the same thing with Wall Street.
20:41
You see these charts.
20:43
And the charts show the actual path of interest rates or the actual path of growth.
20:48
And then along the timeline, which is the x-axis, they’ll show what people were predicting
20:52
at various times.
20:54
The predictions are always way off the actual path.
20:57
There’s actually good social science research that shows that economists do worse than trained
21:02
monkeys on terms of forecasting.
21:04
And I don’t say that in a disparaging way– here’s the science.
21:07
A monkey knows nothing.
21:08
So if you have a binary outcome– up, down, high, low, growth, recession– and you ask
21:17
a monkey, they’re going to be right half the time and wrong half the time, because they
21:20
don’t know what they’re doing.
21:21
So you’re to get a random outcome.
21:24
Economists are actually wrong more than half the time for two reasons.
21:28
One, their models are flawed.
21:29
Number two, what’s called herding or group behavior.
21:32
An economist would rather be wrong in the pack than go out on a limb and maybe be right,
21:37
but if it turns out you’re not right, you’re exposed.
21:40
But there are institutional constraints.
21:42
People want to protect their jobs.
21:44
They’re worried about other things than getting it right.
21:47
So the forecasting market is pretty bad.
21:48
The reasons for that– they use equilibrium models.
21:52
The capital markets are not in equilibrium system, so forget your equal equilibrium model.
21:57
They use the efficient market hypothesis, which is all the information is out there,
22:01
you can’t beat the market.
22:02
Markets are not efficient, we know that.
22:05
They use stress tests, which are flawed, because they’re based on the past, but we’re outside
22:12
the past.
22:13
The future could be extremely different.
22:16
They look at 9/11, they look at long term capital management, they look at the tequila
22:20
crisis.
22:21
Fine, but if the next crisis is worse, there’s nothing in that history that’s going to tell
22:25
you how bad it can get.
22:27
And so they assume prices move continuously and smoothly.
22:30
So price can go from here to here or from here to here.
22:34
But as a trader, you can get out anywhere in between, and that’s for all these portfolio
22:38
insurance models and stop losses come from.
22:41
That’s not how markets behave.
22:42
That go like this– they just gap up.
22:44
They don’t hit those in between points.
22:45
Or they gap down.
22:46
You’re way underwater, or you missed a profit opportunity before you even knew it.
22:51
So in other words, the actual behavior of markets is completely at odds with all the
22:56
models that they use.
22:57
So it’s no surprise the forecasting is wrong.
23:00
So what are the good models?
23:01
What are the models that do work?
23:03
What is the good science?
23:04
The first thing is complexity theory.
23:07
Complexity theory has a long pedigree in physics, meteorology, seismology, forest fire management,
23:13
traffic, lots of fields where it’s been applied with a lot of success.
23:18
Capital markets are complex systems.
23:20
The four hallmarks of a complex system.
23:24
One is their diversity of actors, sure.
23:26
Two is their interaction– are the actors talking to each other or are they all sort
23:30
of in their separate cages.
23:31
Well, there’s plenty of interaction.
23:33
Is there communication and is there adaptive behavior?
23:37
So yeah, there are diverse actors, there’s communication.
23:40
They’re interacting.
23:42
And if you’re losing money, you better change your behavior quickly.
23:45
That’s an example of adaptive behavior.
23:47
So capital markets are four for four in terms of what makes a complex system.
23:51
So why not just take complexity science and bring it over to capital markets?
23:55
That’s what we’ve done, and we’re getting fantastic results.
23:57
So that’s the first thing.
23:58
The second thing we use is something called Bayesian statistics.
24:03
It’s basically a mathematical model that you use when you don’t have enough data.
24:08
So for example, if I’ve got a million bits of data, yeah, do your correlations and regressions,
24:14
that’s fine.
24:15
And I learned this at the CIA, this is the problem we confronted after 9/11.
24:19
We had one data point– 9/11.
24:20
Janet Yellen would say, wait for 10 more attacks, and 30,000 dead, and then we’ll have a time
24:26
series and we can figure this out.
24:28
No.
24:29
To paraphrase Don Rumsfeld, you go to war with the data you have.
24:33
And so what you use is this kind of inferential method.
24:37
And the reason statisticians dislike it is because you start with a guess.
24:41
But it could be a smart guess, it could be an informed guess.
24:44
The data may be scarce.
24:45
You make the best guess you can.
24:47
And if you have no information at all, just make it 50/50.
24:50
Maybe Fed is going to raise rates, maybe they’re not.
24:53
I think we do better than that on the Fed.
24:55
But if you didn’t have any information, you just do 50/50.
24:58
But then what you do is you observe phenomena after the initial hypothesis, and then you
25:05
update the original hypothesis based on the subsequent data.
25:07
You ask yourself, OK this thing happened later.
25:10
What is the conditional correlation that the second thing would happen if the first thing
25:14
were true or not?
25:16
And then based on that, you’d go back, and you either increase the probability of the
25:19
hypothesis being correct, or you decrease it.
25:21
It gets low enough, you abandon it, try something else.
25:24
If it gets high enough, now you can be a lot more confident in your prediction.
25:27
So that’s Bayesian statistic.
25:29
You use it to find missing aircraft, hunt submarines.
25:32
It’s used for a lot of things, but you can use it in capital markets.
25:36
Third thing, behavioral psychology.
25:38
This has been pretty well vetted.
25:40
I think most economists are familiar with it, even though they don’t use it very much.
25:43
But humans turn out to be a bundle of biases.
25:48
We have anchoring bias, we get an idea in our heads, and we can’t change it.
25:52
We have recency bias.
25:54
We tend to be influenced by the last thing we heard.
25:57
And anchoring bias is the opposite, we tend to be influenced by something we heard a long
26:01
time ago.
26:03
Recency bias and anchoring bias are completely different, but they’re both true.
26:07
This is how you have to get your mind around all these contradictions.
26:11
But when you work through that, people make mistakes or exhibit bias, it turns out, in
26:16
very predictable ways.
26:18
So factor that in.
26:19
And then the fourth thing we use, and economists really hate this, is history.
26:23
But history is a very valuable teacher.
26:26
So those four areas, complexity theory, Bayesian statistics, behavioral psychology, and history
26:33
are the branches of science that we use.
26:35
Now what do we do with it?
26:37
Well, we take it and we put it into something that would look like a pretty normal neural
26:41
network.
26:42
You have nodes and edges and some influence in this direction, some have a feedback loop,
26:47
some influence in another direction, some are influenced by others, et cetera.
26:51
So for Fed policy for example, you’d set these nodes, and it would include the things I mentioned
26:55
earlier– inflation, deflation, job creation, economic growth, capacity, what’s going on
27:02
in Europe, et cetera.
27:03
Those will be nodes and there will be influences.
27:05
But then inside the node, that’s the secret sauce.
27:08
That’s where we have the mathematics, including some of the things I mentioned.
27:12
But then you say, OK, well, how do you populate these nodes?
27:15
You’ve got math in there, you’ve got equations, but where’s the news come from?
27:19
That’s where Watson comes in.
27:20
Watson’s reading all these records, feeding the nodes, they’re pulsing, they’re putting
27:24
input.
27:25
And then we have these actionable cells.
27:26
So the euro-dollar cross rate, the Yuandollar cross rate, yen, major benchmark, bonds, yields
27:36
on 10 year treasury notes, bunds, JGBs, et cetera.
27:41
These are sort of macro indicators, but the major benchmark bond indices, the major currency
27:46
across rates, the major policy rates, which are the short term central bank rates.
27:50
And a basket of commodities– oil, gold, and a few others– they are the things we watch.
27:55
We use these neural networks I described, but they’re not just kind of linear or conventional
28:06
equilibrium models.
28:07
They’re based on the science I describe.
28:09
So all that good science, bringing it to a new field, which is capital markets, using
28:13
what’s called fuzzy cognition, neural networks, populating with Watson, this is what we do.
28:19
We’re very excited about it, getting great results.
28:21
And this is what I use.
28:23
When I give a speech or write a book or write an article, and I’m making forecast.
28:28
This is what’s behind it.
28:32
So we talked earlier about business cycles, recessions, depressions.
28:37
And that’s conventional economic analysis.
28:40
My definition of depression is not exactly conventional, but that’s really thinking in
28:44
terms of growth, trend growth, below trend growth, business cycles, et cetera.
28:50
Collapse or financial panic is something different.
28:52
A financial panic is not the same as a recession or a turn in the business cycle.
28:57
They can go together, but they don’t have to.
28:59
So let’s talk about financial panics as a separate category away from the business cycle
29:04
and growth, which we talked about earlier.
29:06
Our science, the science I use, the science that we use with Raven, at our company, Meraglim,
29:12
involves complexity theory.
29:14
Well, complexity theory shows that the worst thing that can happen in a system is an exponential
29:21
function of scale.
29:23
Scale is just how big is it.
29:24
Now you have to talk about your scaling metrics.
29:27
We’re talking about the gross notional value derivatives.
29:28
We’re talking about average daily volume on the stock market.
29:31
We’re talking about debt.
29:33
We could be talking about all of those things.
29:35
This is new science, so I think it will be years of empirics to make this more precise.
29:39
But the theory is good, and you can apply it in a sort of rough and ready way.
29:43
So you go to Jamie Dimon, and you say, OK, Jamie, you’ve tripled your gross notional
29:50
value derivatives.
29:51
You’ve tripled your derivatives book.
29:53
How much did the risk go up?
29:54
Well, he would say, not at all, because yeah, gross national value is triple, but who cares?
29:59
It’s long, short, long, short, long, short, long, short.
30:01
You net it all down.
30:02
It’s just a little bit of risk.
30:04
Risk didn’t go up at all.
30:06
If you ask my 87-year-old mother, who is not an economist, but she’s a very smart lady,
30:10
say, hey mom, I tripled the system, how much did the risk go up?
30:14
She would probably use intuition and say, well, probably triple.
30:17
Jamie Dimon is wrong, my mother is wrong.
30:21
It’s not the net, it’s the gross.
30:22
And it’s not linear, it’s exponential.
30:24
In other words, if you triple the system, the growth went up by a factor of 10, 50,
30:28
et cetera.
30:29
There’s some exponential function associated with that.
30:32
So people think, well gee, in 2008, we learned our lesson.
30:36
We’ve got debt under control, we’ve got derivatives under control.
30:39
No.
30:40
Debt is much higher.
30:41
Debt to GDP ratios are much worse.
30:44
Total notional value, gross notional values of derivatives is much higher.
30:47
Now people look at the BIS statistics and say, well, the banks, actually, gross national
30:52
value derivatives has been going down, which it has, but that’s misleading because they’re
30:57
taking a lot of that, moving it over to clearing houses.
30:59
So it’s never been on the balance sheet, it’s always been off balance sheet.
31:02
But even if you use the footnotes, that number has gone down for banks, but that’s only because
31:07
they’re putting it over clearing houses.
31:09
Who’s guaranteeing the clearing house?
31:10
The risk hasn’t gone away, it’s just been moved around.
31:12
So given those metrics– debt, derivatives, and other indices, concentration, the fact
31:21
that the five largest banks in America have a higher percentage of total banking assets
31:26
than they did in 2008, there’s more concentration– that’s another risk factor.
31:31
Taking that all into account, you can say that the next crisis will be exponentially
31:37
worse than the last one.
31:38
That’s an objective statement based on complexity theory.
31:41
So you either have to believe that we’re never going to have a crisis.
31:44
Well, you had one in 1987, you had one in 1994, you had one in 1998.
31:49
You had the dotcom crash in 2000, mortgage crash in 2007, Lehman in 2008.
31:55
Don’t tell me these things don’t happen.
31:56
They happen every five, six, seven years.
31:59
It’s been 10 years since the last one.
32:02
Doesn’t mean it happens tomorrow, but nobody should be surprised if it does.
32:05
So the point is this crisis is coming because they always come, and it will be exponentially
32:11
worse because of the scaling metrics I mentioned.
32:14
Who’s ready for that?
32:15
Well, the central banks aren’t ready.
32:17
In 1998, Wall Street bailed out a hedge fund long term capital.
32:23
In 2008, the central banks bailed out Wall Street.
32:25
Lehman– but Morgan Stanley was ready to fail, Goldman was ready to fail, et cetera.
32:31
In 2018, 2019, sooner than later, who’s going to bail out the central banks?
32:35
And notice, the problem has never gone away.
32:37
We just get bigger bailouts at a higher level.
32:40
What’s bigger than the central banks?
32:42
Who can bail out the central banks?
32:43
There’s only one institution, one balance sheet in the world they can do that, which
32:46
is the IMF.
32:48
The IMF actually prints their own money.
32:51
The SDR, special drawing right, SDR is not the out strawberry daiquiri on the rocks,
32:55
it’s a special drawing right.
32:56
It’s world money, that’s the easiest way to think about it.
32:58
They do have a printing press.
33:00
And so that will be the only source of liquidity in the next crisis, because the central banks,
33:07
if they don’t normalize before the crisis– and it looks like they won’t be able to, they’re
33:11
going to run out of runway, and they can expand the balance sheet beyond the small amount
33:17
because they’ll destroy confidence, where does the liquidity come from?
33:20
The answer, it comes from the IMF.
33:23
So that’s the kind of global monetary reset, the GMR, global monetary resety.
33:28
You hear that expression.
33:31
There’s something very new that’s just been called to my attention recently, and I’ve
33:36
done some independent research on it, and it holds up.
33:39
So let’s see how it goes.
33:42
But it looks as if the Chinese have pegged gold to the SDR at a rate of 900 SDRs per
33:51
ounce of gold.
33:52
This is not the IMF.
33:53
The IMF is not doing this.
33:55
The Federal Reserve, the Treasury is not doing it.
33:58
The ECB is not doing it.
33:59
If they were, you’d see it.
34:00
It would show up in the gold holdings.
34:02
You have to conduct open market operations in gold to do this.
34:05
But the Chinese appear to be doing it, and it starts October 1, 2016.
34:11
That was the day the Chinese Yuan joined the SDR.
34:15
The IMF admitted the Yuan to the group was four, now five currencies that make up the
34:21
SDR.
34:22
So almost to the day, when the Yuan got in the SDR, you see this a horizontal trend where
34:29
first, gold per ounce is trading between 850 and 950 SDRs.
34:37
And then it gets tighter.
34:38
Right now, the range is 875 to 925.
34:41
Again, a lot of good data behind this.
34:44
So it’s a very good, it’s another predictive indicator.
34:47
If you see gold around 870 SDRs per ounce, that’s a strong SDR, weak gold.
34:54
Great time to buy gold, because the Chinese are going to move back up to 900.
34:58
So that’s an example of science, observation, base and statistics, inference, all the things
35:04
we talked about that can be used today in a predictive analytic way.
35:08
A crisis is coming, because they always do.
35:10
I don’t have a crystal ball, this is plenty of history to back it up.
35:13
It’ll be exponentially worse.
35:15
That’s what the science tells us.
35:16
The central banks will not be prepared, because they haven’t normalized from the last one.
35:20
You’re going to have to turn to the IMF, and who’s waiting there but China with a big pile
35:24
of gold.

Defensive Investing & the History of Recession (w/ Victor Sperandeo) | Real Vision Classics

Victor Sperandeo, President & CEO of EAM Partners, sits down with Adam Rodman, founder and portfolio manager at Segra Capital Management, to break down the relationship between shifting political tides and macroeconomic trends. Sperandeo provides his view on the history of recessions in the United States and on the current inflationary environment. Filmed on January 3, 2019 in Dallas.

Corporate Credit, Employment And Recessions – Putting It All Together

Summary

Investment-grade corporate bonds have been a major tailwind to the economic cycle as yields continue to drop.

Treasury bond yields are falling faster than IG spreads are widening, resulting in lower borrowing costs, but a major increase in late 2018 may have triggered a change in employment.

A rise in corporate bond yields impacts cash flows, margins and, eventually, employment decisions.

Corporate bond prices (yields) are a long leading indicator that impacts the economic cycle through changes in corporate capital spending and employment.

The corporate sector is more leveraged than previous economic cycles. A recession can be triggered if the Coronavirus outbreak causes corporate rates to rise, accelerating the decline in employment growth.

I do much more than just articles at EPB Macro Research: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Along with money supply, building permits and corporate margins, corporate bond prices or corporate bond yields fall into the “long leading” indicator bucket, according to “the father of leading indicators,” Geoffrey Moore. Geoffrey Moore’s work found value in using the Dow Jones Corporate Bond Price Index (graphed below), but any measure of corporate bond yields will likely yield similar results. If using bond yields rather than bond prices, the indicator should be inverted as higher corporate bond yields usually translate to lower profit margins and slowing employment growth.

Dow Jones Corporate Bond Price Index:

Source: Bloomberg, EPB Macro Research

As the chart clearly shows, lead times before a recession can be quite long while lead times for recovery are more abrupt. The recovery (or suddenly lower corporate bond yields) has historically been quite helpful in restarting the hiring process and capital spending process.

From an economic cycle sequence perspective, lower bond prices or higher corporate bond yields reduce margins/profitability and have a resulting impact on the rate of capital spending and employment plans. The drop in capex and reduction in employment growth is what ultimately leads to lower income growth, consumption growth, and, eventually, a recession.

In Lacy Hunt’s most recent Quarterly Review and Outlook, he outlined Milton Friedman’s work, which explains that monetary changes (interest rates) and economic cycle impacts typically cluster around two years.

As the research of Nobel Laureate Milton Friedman documented, the typical lags between monetary change and economic fluctuations cluster around two years, confirming the importance of the two-year time frame.

A change in interest rates today may impact future projects. Still, existing investments will likely continue, resulting in a lag between the change in interest rates and the impact on more coincident economic data such as employment.

As a result of this finding, when studying interest rates, it can be valuable to use a 24-month change formula rather than a year-over-year method to more closely capture the two-year cluster.

The last point to stress before highlighting some of the more recent trends is that the level of corporate debt is at a record high relative to GDP.

Corporate Debt to GDP Ratio:

Source: Bloomberg, EPB Macro Research

Thus, similar to federal debt, there are diminishing marginal returns or reduced efficacy of each new dollar of debt. More importantly, however, smaller changes in interest rates (corporate bond prices) can have a similar or larger impact on corporate health and the resulting repercussions on overall employment.

Throughout the rest of this note, we will look at the impact of changes in corporate bond prices (yields) and the lagged relationship to employment, as well as some considerations when making a recession forecast.

Currently, corporate bond yields are still falling because Treasury rates are declining faster than spreads are widening. Lower corporate bond yields are helpful on the margin, but the late 2018 spike (two-year cluster) may have been enough to start the process of reduced employment, something very evident in recent data. If the Coronavirus outbreak causes corporate bond yields to rise and accelerates the existing decline in employment growth, a recession is very much in the cards.

Today’s rate of employment growth is insufficient to trigger a recession based on past samples. Still, when an existing downward trend is coupled with a negative shock, recession risk must remain firmly on the table.

US Corporate Sector Health Heading Into 2018

Corporate America has been plagued by anemic economic growth in this economic cycle. Masked by the rising share price of roughly 500 companies, thousands of corporations that aren’t publicly traded have been forced to operate in a low-profit growth regime.

Financial engineering has allowed publicly-traded companies to report strong earnings growth. Total corporate profits reported in the GDP report is a far more accurate, albeit delayed, data source on the real (non-adjusted) profits generated by the corporate sector.

From 2014 through the start of 2018, corporate profits declined. The one-time spike in profits after 2018 was due to the corporate tax cut. Essentially, without the corporate tax cut, the corporate sector has seen virtually no profit growth since 2014.

Corporate Profits:

Source: Bloomberg, EPB Macro Research

On a five-year annualized basis, corporate profits have increased by just 2.2% with the latest year-over-year reading falling 0.3%.

Amazingly, corporate debt has increased, and share prices have soared with very little profit growth, a phenomenon exposed by persistently lower Treasury rates.

Corporate Profits Growth:

Source: Bloomberg, EPB Macro Research

Stacking together real estate debt, corporate debt, and consumer debt shows that the largest increase across economic cycles is coming from the corporate sector.

In the last economic cycle, corporate debt was only 25% of the credit market. In 2018, corporate credit increased to 38% of the total.

Corporate Sector Debt As A % of Total:

Source: Morgan Stanley, EPB Macro Research

As a result of lower profits and more debt, the leverage ratio in corporate America has surged to recessionary levels.

Importantly, the leverage ratio usually increases during a recession as profits (the denominator) fall. Morgan Stanley’s research from 2018 calls out that leverage is at an all-time high in a “healthy economy,” which highlights just how leveraged and sensitive to changes in interest rates the corporate sector has become.

Corporate Sector Leverage:

Source: Morgan Stanley, EPB Macro Research

When corporate borrowing costs rise, employment typically suffers as the increase in interest expense compresses margins.

Again, due to weak economic growth and lackluster profit growth across the entire corporate sector, margins (proxied below) have been compressing since the early stages of this economic cycle.

Lower margins foreshadow weaker employment growth and capital spending growth.

Corporate Margins:

Source: Bloomberg, EPB Macro Research

With corporate leverage at extreme levels and corporate margins already in decline, the corporate sector was particularly vulnerable to any spike in corporate borrowing costs as a result of an economic slowdown.

When the Federal Reserve embarked on a monetary tightening cycle, economic conditions globally started to deteriorate with a lag, hitting most economies in 2018 and 2019.

US corporate borrowing costs surged in late 2018 and early 2019, which triggered a more aggressive decline in employment growth and persistent weakness in capital spending growth.

Late 2018 Credit Event – Enough To Trigger A Recession?

Typically, before recessions, corporate bond prices decline (yields increase) as the Federal Reserve is raising interest rates, and the tighter monetary conditions eventually slow the economy, leading to wider corporate bond spreads.

Corporate bond prices declined three other times this economic cycle, coinciding with the three economic slowdowns before the current downturn.

The 2018 decline in corporate bond prices was larger than the previous three, a sign that economic conditions would weaken. When comparing to the past two recessionary samples, the decline in 2018 was marginally weaker than in 1999. Still, given the leverage ratio and decline in margins, a smaller decline could have a similar impact.

Corporate Bond Prices Tumble:

Source: Bloomberg, EPB Macro Research

Graphed another way, the chart below shows the 24-month change in Baa corporate bond yields.

The chart is graphed by the number of months before/after a recession with 0 on the x-axis indicating the start of a recession.

The 2018 rise in corporate bond yields was undoubtedly less than the previous three samples, only spending 14 months above 0% on a 24-month change.

Corporate Bond Yield 24-Month Change:

Source: Bloomberg, EPB Macro Research

The corporate sector is far more levered today, with weaker margins and lower trend growth as compared to the prior three recessions.

Thus it remains possible that the decline in corporate bond prices was enough to trigger a downshift in employment growth, an effort to preserve margins.

Impact On The Real Economy

Cycles in employment can be monitored separately from cycles in growth. Geoffrey Moore tracked cycles in growth, inflation, and jobs independently.

Leading indicators of economic growth turned lower very early in 2018, some in late 2017. Inflation indicators did not plunge until September 2018, and jobs growth did not inflect lower until corporate bond yields spiked in late 2018.

Cyclical employment, defined in the chart below as durable goods manufacturing, construction, and trade/transportation services, started to show rapidly-declining rates of growth.

Employment Growth Changed:

Source: Bloomberg, EPB Macro Research

If we track the change in cyclical employment growth before the three previous recessions, we can see recessionary periods begin with similar declines in cyclical employment.

Today’s current track of cyclical employment growth is currently insufficient to be recessionary based on past samples. However, if the trajectory does not flatten or inflect higher, history suggests that income and consumption growth will follow, leading to recessionary conditions.

Employment Growth Trend Relative To Past Samples:

Source: Bloomberg, EPB Macro Research

Employment growth over the next six months remains critical. If corporations continue to post weaker rates of employment growth or accelerate layoffs as a result of the Coronavirus outbreak, a recession is still firmly in play.

An existing trend of weaker growth and employment, originated by the Federal Reserve tightening cycle and deleveraging in China, exposed the economy to a negative shock.

It’s clear using the chart above how a negative shock (COVID-2019) coupled with an existing downturn in growth/employment can create a recession.

The Current Shock

The current economic shock has resulted in a widening of corporate bond spreads. Using popular credit ETFs (LQD) and (HYG), we can track the implied spread above Treasury bonds. Both investment-grade and high-yield credit spreads, particularly high yield, have been widening materially in the past several weeks.

Investment-Grade / High-Yield Corporate Spreads:

Source: Bloomberg, EPB Macro Research

Luckily, however, corporate yields are a function of Treasury rates plus a spread.

For investment-grade bonds, Treasury rates are still declining faster than spreads are increasing, resulting in lower investment-grade bond yields.

High-yield bonds, however, are starting to see higher yields, a firm negative for corporate margins and future employment.

Investment-Grade / High-Yield Corporate Bond Yields:

Source: Bloomberg, EPB Macro Research

The current slowdown in employment growth, specifically cyclical employment growth, is severe and can be seen in many economic data points. If leading indicators of economic growth were turning higher, however, and cyclical employment growth started to increase, the economy may very well avoid a recession.

The negative shock of the Coronavirus has likely caused employment plans to freeze, irrespective of any increase in borrowing costs.

If the Coronavirus continues to cause a sell-off in risk assets and spreads start to widen faster than Treasury rates decline, corporations will be faced with higher borrowing costs at a time when economic growth was on shaky ground to being with.

Employment Growth Trend Relative To Past Samples:

Source: Bloomberg, EPB Macro Research

Should an increase in borrowing costs accelerate the decline in employment growth, and the black line in the chart above drifts into the yellow circle, a recession will be tough to avoid.

Clearly, a call for a recession is premature, and my economic outlook has zero forecasts concerning the virus or any predictions regarding a conclusion.

Rather, when constructing an allocation to weather a shock, we must be mindful of the current state of the economy and the susceptibility to a recession from a negative event.

Currently, a recession is not imminent based on the data above. Still, the situation can evolve quickly, and the economy is far from immune to a shock in its current state.

Keys To Watch and Outlook

The increase in corporate bond yields late in 2018 was small in relation to other recessionary periods. Still, given

  • the level of corporate leverage,
  • anemic profit growth, and
  • weak economic conditions,

a smaller increase can have a more significant impact.

Employment growth has been in a downtrend since that late 2018 period, contributing to weaker rates of consumption growth seen in recent reports.

The economy is not imminently vulnerable to a recession, but that can change in a matter of weeks. The impact on employment is the key to watch when judging lasting recession risk.

Moving forward, if the current shock causes employment growth to suffer, already in a fragile state, recessionary conditions will be tough to avoid.

An acceleration in corporate layoffs will be exacerbated by higher borrowing costs, making credit spreads and bond prices a vital signal.

Given the susceptibility to a recession pending a worsening of conditions, investors should consider an added layer of protection should this negative shock take a turn for the worse.

If conditions worsen or simply do not improve for several weeks, a recession may be difficult to avoid, mainly due to the initial conditions before the shock began.

If the economy does tumble into a recession, risk assets are highly exposed, and a continued overweight allocation to Treasury bonds and gold will likely offer the best protection.

The model portfolio at EPB Macro Research continues to have an overweight exposure to Treasury bonds and gold.

Coronavirus Is A Match That Lit The Overvaluation Tinder

Summary

  • The stock market has been set up for a brutal fall for months now.
  • Valuations are stretched, revenue already was flat and economic indicators are past peak, heading the wrong way.
  • The central banks already are firing bazookas and seeing diminishing marginal impact.
  • If the stock market doesn’t hold support around 3000 on the S&P 500, we could see a retest of the December 2018 lows.
  • If the stock market does hold support, then you will want to look to sell into any rallies before it turns more decidedly down.
  • This idea was discussed in more depth with members of my private investing community, Margin of Safety Investing. Get started today »

In my annual outlook for 2020, I tried to warn people that the stock market was on thin ice. Risk management also has been my refrain for months on my weekly “Investing 2020s” webinars.

In my outlook, I suggested an early year “volatility event” would cause a small correction. It didn’t matter what the volatility was. The market has been looking for a reason to lower valuations.

On Jan. 23, I stated on my Twitter feed that Coronavirus “is actually the most important story in the world…” The Coronavirus COVID-19 outbreak has become the volatility event that’s driving a necessary stock market correction.

For many investors, the urge is to buy the dip here. That’s a bad idea. The stock market has a long way to fall sometime this year.

A better strategy is to reassess you risk tolerance and accept that valuations matter. Ultimately, you should be selling the rips on the very disrupted S&P 500 ETFs (SPY) (VOO), or rallies, in an attempt to bring your cash levels up temporarily. You will get opportunities to buy back into equities at lower valuations in coming quarters.

Thin IceHigh Valuations At Low Interest Rates Are A Warning

I have covered for members of Margin of Safety Investing for months now that stock market valuations are very high. A single-digit percentage stock market correction has not changed that.

Stock Market Valuations

Jill Mislinski

An argument is made that because interest rates are low, the stock market can sustain higher valuations. I would agree that is true, however, to what degree should be asked. Should the stock market be the third most highly valued in history?

LIRP Meets ZIRP

The chart above shows that despite low interest rates heading towards zero, corporate profits haven’t been growing much the past several years. What we have with low interest rates is a period of diminishing marginal returns.

Given that the stock market is a forward looking projector, what happens when lower interest rates or monetary stimulus cannot push corporate profits higher? What happens when businesses simply cannot borrow more for almost free to improve profitability via production or share buybacks? Clearly that challenge already is manifesting.

Q Ratio and Creative Destruction

If you believe that a stock represents the value of an underlying business, I point you to the Q Ratio. That’s total market cap divided by its replacement cost. Essentially, if you are a business person, here’s when you ask: Should I make an investment in the stock of a business or should I simply start a competing business?

The obvious answer for a business person seeing these valuations is to start a business and compete, rather than buy highly-priced stock. What do we know happens when more competition is introduced to a market? Prices fall.

I understand this is a simplistic way of looking at this. We are not going to see thousands of new businesses sprout up to compete, but we are seeing some. And these new businesses are in fact disruptive of many of the older businesses.

Consider the concepts of creative destruction. Think about the unicorns and all the disruption industries are seeing from tech innovation. At some level, perhaps how entrepreneurs get financing, high valuations are in fact encouraging competition to established players already in the market. That can’t be good for many companies or their stock prices.

As Stanley Druckenmiller said a while back: “Buy the disruptors, sell the disrupted.” We’ll come back to this thought below.

The Buffett Indicator

Now that everybody has gotten a chance to read Warren Buffett’s annual letter, let’s take a look at his favorite valuation metric for the broader stock market: The ratio of total market cap and U.S. GDP.

Buffett IndicatorMislinski with Spano annotations

In that chart I stake out the “old normal” for valuations and a hypothetical “new normal” based on lower interest rates and looser monetary policy. In either reality, the stock market has a long way to fall. I would suggest that we should consider it might fall to the place where the old and new normals overlap. That would imply a 30%-40% stock market correction is on the horizon.

What The Shiller PE Ratio Really Tells You

Many people criticize the Shiller PE ratio as unimportant or wrong. That’s a juvenile misunderstanding of what the ratio is. It’s not a short-term oscillator or predictor of imminent stock market movements. Rather, it’s an indicator of expected stock market returns on a normalized basis over the next 10 years based on the last 10 years earnings.

Because earnings move in cycles spanning rather long time frames, the Shiller PE ratio, though imperfect, is a good predictor of whether to expect big, small or middling stock market returns in the next decade.

Robert Shiller Data Yale University

It’s not hard to see that investing during periods of low Shiller PE yielded better long-term returns than investing during periods of higher valuations.

Shiller also overlays interest rates and earnings. The patterns should give us pause. Return to the question I asked above: What if interest rates rise?

There’s at least two very plausible scenarios over the next 10 years that make rising or higher interest rates a strong possibility: Modern monetary theory or helicopter money – more on these soon.

What the Shiller PE really is telling people today is that the 2020s will be more like the 2000s than the 2010s.

SPY Quick Technicals

Currently, the S&P 500 is a bit oversold and running into minor support levels. This could cause a slight relief rally.

SPY Weekly Technicals

Chart from TradingView

You will notice I’m using a weekly chart. Why not daily? Simply put, I’m not a day trader, I’m more concerned with bigger market moves over longer time horizons. The weekly charts help me get the intermediate term time frame (six months to two years) better in hand.

On the daily chart (not shown here) that most default to, the RSI is showing an oversold signal. On the weekly however, we can see that the S&P 500 has quite a bit of selling left to it before it’s truly oversold.

We also see that money flows, as measured by Chaikin Money Flow, can fall quite a bit further as well. Look to the fourth quarter of 2018 for a hint as to what might be on the horizon.

Finally, MACD, a measure of momentum, is indicating a longer-term downturn as it crosses over on the weekly time frame.

In February 2018, I covered How Low Can The Stock Market Go and about nailed it. The same story is playing out now, in my opinion. I believe the December 2018 lows are in play for later this year, possibly lower.

Stop Buying The Dips, Sell The Rips

Buying the relatively small dips is no longer a viable strategy through the next significant stock market correction. Instead, investors with a forward outlook and some sense of valuation reality will sell the rips in the short term, then wait to buy the big dips.

I believe that two or three times this coming decade we will see corrections of larger scale. In the short term, Coronavirus may have triggered a slight acceleration and potential deepening of what already was coming to a market near you soon. The economic impact is real and it could expand greatly. We simply do not know yet.

Also, don’t discount the impact of the coming election. At a minimum, it presents a case for uncertainty. Markets do not like uncertainty. Corporations already have slowed down capital investment which is not a good sign.

What if President Trump loses? The richest investors will want to lock in lower capital gains tax rates on highly-appreciated assets by year-end. That could perpetuate a late 2018 style sell-off.

The bottom line is to sell the S&P 500 indexes, which are full of disrupted companies to begin with, on any rips. Then, wait to make new investments later, at lower valuations, in the companies and industries that are disrupting the economy and showing real growth.

We believe the 2020s are going to be more volatile than the easy money inspired 2010s. We also believe that many companies and industries will be significantly impacted by disruptive technology.

With that in mind, we offer to help you build a margin of safety, while taking part in the opportunities that are emerging. Join me, Kirk Spano, and our other top ranked MoSI analysts for deep research and a 4-step approach to finding great growth and dividend investments.

A Historical Look at Recession Watch (w/ Kiril Sokoloff & Raoul Pal)

Investment visionary Kiril Sokoloff, chairman and founder of 13D Global Strategy & Research, draws on his deep knowledge of history and on the interplay between different market forces in order to forecast what’s ahead — and to suggest how savvy investors ought to position themselves today. In this deep-diving conversation with Real Vision co-founder Raoul Pal, Sokoloff helps answer the most pressing questions around markets and the economy. He also provides a read on how other significant minds are making sense of the increasingly powerful forces that are shaking our financial world. Filmed on July 10, 2019 in upstate New York. To learn more about 13D Publications, visit www.13D.com/trial Note: When this interview was filmed, gold was trading at about $1,400 per troy ounce.

 

There is a trust and debt problem.

Is A U.S. Recession Coming? with Raoul Pal | Recession Watch

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”

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
64:30
You can get a chance to win a premium subscription to real vision, but we’re not just giving away one
64:35
But 10 subscriptions. All you have to do is subscribe to our real vision youtube channel like this video and comment down below on
64:43
August 31st will contact the ten winners. So subscribe now for your chance to gain access to our critical series on
64:51
Recession as well as other series on tap about gold
64:55
Retirement crisis and many of the aspects of economic and investing life that will affect you and your savings