openpolitics.com

Transcript

00:01

SVEN HENRICH: Sven Henrich, been running Northman Trader for about six years.

00:05

Originally, private investors, way background was corporate management actually in corporate

00:10

strategy internationally, always been looking at companies and opportunities.

00:14

Hence, the background and analyzing stock markets comes natural to me.

00:19

Our business model is really looking at identifying the big moves.

00:24

We’re not day traders where we’re looking at swings, so be it long be short.

00:27

Of course, as part of that, we’re looking at the macro environment markets in general–

00:32

central banks, what have you, although that’s secondary, the key is technicals and being

00:38

able to identify the big turns and that’s what we do.

00:41

You see me on Twitter, @NorthmanTrader or on the website, northmantrader.com.

00:48

Yeah.

00:49

In April, I had put out a piece called, “Combustion”.

00:55

It was this whole notion that both bulls and bears need to be mindful of potentially this

01:01

really uplifting scenario.

01:02

We had a big turn from the lows of 2018.

01:06

We’re literally all central bank policy combusted by them and the view was we’re going to be

01:11

raising rates, we’re going to be having a reduction in the balance sheet on autopilot.

01:15

Then of course, markets dropped 20% and then yields dropped, actually started the other

01:21

way around.

01:22

Basically, it was yields heading to 3.2% on a 10-Year in October, and that sparked a whole

01:27

selloff in my mind, but basically, central bank’s completely reverted policy.

01:33

The Fed had this whole job owning operation all year long from tightening to easing and

01:39

rate cuts are coming.

01:41

That’s what they’ve been doing all summer long.

01:43

In April, what I said was we’re going to keep going on this trajectory until something breaks.

01:50

We had a quick correction in May, we had some of the same negative divergences that we have

01:56

in the fall.

01:57

Something interesting happened here, because we had a temporary high and then we had the

02:03

correction.

02:04

Then in July, we came to a new high and we had a correction.

02:08

In June, actually, I had put out this piece called, “Sell Zone,” this was at the end of

02:12

June, just before the Fed meeting in July, and the notion was this period, this price

02:18

zone between S&P 3000 to 3050 is a sell zone, listed a whole bunch of technical factors

02:24

for that.

02:25

We had the initial reaction.

02:26

It was coming off the heels of the Fed rate cut, the first rate cut since the financial

02:30

crisis.

02:31

We dropped from 3028 down to about 2780 on the futures contracts.

02:37

A snappy technical reaction.

02:39

Then it all started again with trade optimism and more rate cuts coming and so we rallied

02:45

again into September.

02:47

My view in April was that would be this potential for a blow off top move and the ultimate target

02:54

of that was about 3100 as an extreme case.

02:59

Now, what I find interesting here is that in September, we got back to this 3000 zone

03:05

that I had identified at the end of June as a sell zone, 3000, 3050.

03:10

We got another rate cut.

03:13

The ECB cut, and we got to 3022, just below the July highs and we dropped again and so

03:21

now we have to rate cuts, two drops, potential for double top because we have these all new

03:28

highs up and sold in the last year and a half.

03:31

There’s not been yet evidence that any new highs are sustainable so markets have been

03:35

this wide range.

03:38

In 2019, primarily driven by multiple expansion, either by trade optimism, or by the Central

03:45

Bank put and my question in general has been, what’s the efficacy?

03:49

Is there a sign that central banks will actually start losing control of the price equation?

03:55

We’re at the edge of control here.

03:57

We’re still in this phase here with the China trade negotiations.

04:02

Global macro has been slowing down throughout the year, the US was the island and the sun,

04:08

if you will, because global markets actually peaked in January of 2018 and then the US

04:13

decoupled from the rest of the world.

04:15

Europe, very close to a recession here.

04:19

The manufacturing data is maybe now spilling into the services sector.

04:24

There is now risk that we’re ultimately going into a global recession into 2020 and what

04:30

central banks obviously, have clearly stated, their intent is to extend the business cycle

04:36

by any means necessary, and we can talk about that separately.

04:40

We’re now at this critical point.

04:42

Will we get a trade deal that’s substantive?

04:45

By substantive, I mean that actually impacts CEO confidence.

04:51

Keep in mind, this whole year and a half year with this trade war going on, companies have

04:57

been holding back on CapEx investments, business investments, and now, we’re seeing a slowdown

05:01

in hiring.

05:02

Remember, with a 50-year low in unemployment, the official unemployment rate, and jobs growth

05:08

has been slowing down.

05:11

If you get a– and I’ve been very consistent on this, if you get a substantive trade deal

05:16

that addresses all the big issues and causes companies to say, “Okay, now we’re more confident

05:21

again,” then yes, you can have a massive blow off rally and now, with easing central banks

05:28

and the oldest liquidity coming in, you can have that run.

05:31

The question is, are these parties really in a position to say we’re going to have a

05:36

substantive trade deal?

05:38

There does not appear to be any sign of that whatsoever.

05:41

We see a lot of positioning, actually this week even, we see China in the US aggravating

05:47

the tactical battle, if you will.

05:49

China is– in this morning’s indicating they may be open to a partial deal.

05:53

What does a partial deal really mean?

05:56

Is there probably a relief rally surrounding a partial deal?

05:59

Probably.

06:00

We can all speculate in the sense that, “Okay, well now, it’s not going to get any worse.”

06:05

It’s a stalemate.

06:07

We’ve basically, everybody’s waving the flag.

06:10

Mr. Trump wants to get reelected in 2020.

06:13

Can’t afford a recession.

06:14

The Chinese don’t want things to get worse either.

06:17

Everybody’s holding back.

06:18

Fair enough.

06:19

That could happen, but is it enough to then get confidence back to say, now, we’re ready

06:24

to invest when the big issues remain unsolved?

06:29

That’s obviously the question that no one can answer.

06:31

Now, of course, the flip side to this is there’s not enough that the parties either can agree

06:38

to that gives anyone any confidence because keep in mind, all the slowdown has perpetuated

06:44

in the last year and a half.

06:47

There has not been any sign of slowing down, maybe a little bit civilization in China but

06:51

now, the US is slowing down.

06:53

In fact, I think it was the Fed’s Rosengren that came out last week, and says he’s expecting

06:57

1.7% GDP growth for the second half of the year in 2019.

07:03

Not exactly convincing when you have a market that has rallied on nothing but multiple expansion

07:09

in 2019.

07:10

There’s a lot of risk both to the upside and the downside from my perspective.

07:19

On the one hand, yes, there’s some similar elements.

07:21

On the other hand, people like to say it’s different this time.

07:24

Well, it really is different this time because, look, in the past, we’ve had situations where

07:29

we’ve had high debt, and we’ve had yield curve inversions, we had all these things that are

07:33

taking place at the end of a business cycle, but never before have we seen so much intervention,

07:40

so much jawboning and never before have we come out of a business cycle where central

07:46

banks have not normalized in any shape or form.

07:50

This is uncharted territory.

07:53

I think we’re all– I don’t know what the expression is so maybe we’re all mollified

07:59

or pacified in a way because markets have changed so dramatically over the last 10 years

08:06

as a result of permanent central bank intervention.

08:09

I get it from any investor perspective, because we’ve all been trained, literally trained

08:16

to know that any corrective activity in markets is contained.

08:23

It’s contained within a few weeks, within a few days, within a few hours.

08:28

All bad news is priced in immediately.

08:31

We saw it in December.

08:33

This was the most substantial correction we’ve had since 2011.

08:37

Why did that happen?

08:38

It stopped right when Mr. Mnuchin came in with his liquidity calls to banks and with

08:43

Mr. Powell flipping policy on a dime.

08:46

We’re flexible suddenly.

08:49

This is this point where you never have anything that sticks from a price discovery perspective.

08:57

My concern in general and the voices in the summer was that we’re creating these markets

09:03

that disconnect ever farther from the underlying size of the economy.

09:09

Well, there’s two trains of thoughts.

09:14

First of all, this is a history part of it.

09:18

History actually tells us that the inversion we have on the 10-Year and the 3-Months actually

09:22

precipitates a recession every single time.

09:25

The question is the timing of which.

09:27

Now of course, you have other yield curves.

09:28

Some of them which are inverted, some of which are not, but it’s really the point of the

09:34

steepening.

09:36

Once that inversion reverts back into a steepening phase, that’s when usually the recession comes.

09:42

We’re not at the point yet where that steep learning has taken place.

09:46

However, the 10-Year and 3-Months, it’s been inverted for several months now and that’s

09:51

typically one of these classic warning signs.

09:55

There’s another school of thought that says basically, well, none of this matters anymore

10:00

because we have central banks intervening and blah, blah, blah, blah, blah.

10:03

I’m not of that viewpoint.

10:06

I think the signals are there.

10:09

What’s missing for the bear case, frankly, as I called it the missing link is the fact

10:15

that unemployment is still okay.

10:18

There’s not been a minute where it’s been slowing.

10:20

We haven’t seen that flip yet, where companies are suddenly really going into layoff mode.

10:27

That’s what interesting looking at Q3 earnings now, because a lot of companies will show

10:34

either flat or actually negative earnings growth, which brings me back to this multiple

10:38

expansion.

10:39

We’ve been running to market highs, not because of great earnings growth.

10:44

Earnings growth is flat to weakening here in this quarter and so companies are experiencing

10:51

margin compression.

10:52

Then there is that point where they want to start looking at the largest expense line

10:58

item, which is jobs.

11:03

What’s been so interesting and the reason I kept saying that all new highs are sells

11:08

is because all these new highs are coming on specific technical signals and sector divergences.

11:16

Especially looking at this year, again, we see– well, last year was basically again,

11:22

this was tech, it was Fang-led.

11:24

It was the big tech companies.

11:27

All new highs came on negative divergences on the technical basis and they were sells.

11:31

What was interesting, ever since 2018, the markup of the market has radically changed.

11:37

Last year, the banks were leading, the small caps were leading, right into these September,

11:43

October 2018 highs.

11:45

That has completely changed in 2009.

11:48

You overlay a chart with the SPDRs vis a vis small caps and transports and the banking

11:53

sector, it’s a horror show.

11:56

When we’re looking at the S&P like in September and again, within all-time highs, I can tell

12:00

you if you go back to exactly last year, the banking sector small caps and transports,

12:06

they’re all down to 11% to 13%.

12:09

They’ve not participated.

12:10

In fact, they’ve been in months long ranges.

12:15

It’s amazing because you see these rallies go up as and hey, people get bullish again.

12:20

Then they drop right back to the bottom but the bottom is holding.

12:24

Even this week, again, the small caps, transports and the banking sector, right on the edge

12:28

of support and they keep bouncing.

12:30

Now, I look at this from a technical perspective, I say, “Okay, well, the more often you tag

12:35

a certain area, the weaker it becomes either to the upside or to the downside.”

12:40

We’ve tagged these areas now multiple times and for a rally to convince, for new highs

12:47

to convince and to be sustainable, we need to see those sectors partake and get above

12:54

resistance.

12:56

Until I see that, I’m very suspicious of any new highs if we get new highs and from my

13:04

perspective, going back to this whole trade deal, unless we see a substantive trade deal,

13:09

I view any rallies to new highs as sells because that’s basically what they’ve been doing.

13:15

Just one more thought on this whole sector piece, there’s a chart I’ve been publicizing

13:20

quite a bit that’s called the “Value Line Geometric Index.”

13:23

It’s a fascinating technical indicator because all these indexes are market cap based.

13:30

The Microsofts, the Apples, the Amazons obviously have a dominant impact on an index like the

13:36

QQQ because they’re worth a trillion bucks each.

13:40

If you take all the stocks and put the same dollar value on them, let’s say everyone is

13:45

worth 100 bucks, and now track their relative performance, you get a completely different

13:50

picture.

13:51

What we’ve seen since 2018, since the September 2018 highs, is that all new highs that were

13:57

made on the S&P come on the lower reading on the value line geometric index.

14:03

That’s another one of those signals that tell you, “Okay, these new highs have been a sell.”

14:08

See that picture change, then you can have sustained new highs.

14:12

To me again, it comes all about efficacy of what the central banks are doing whether we

14:16

get a solid trade deal or not.

14:18

Because in so far, none of these things have shown any impact or suddenly changing the

14:24

growth equation in the economy.

14:31

Volatility has been fascinating.

14:32

I’ve been publishing quite a few pieces on the VIX in the last few months.

14:37

The VIX, I hear this all the time and I keep having to push back.

14:42

People are saying you can’t chart the VIX because it’s a mathematical derivative product.

14:47

Yes, you can chart the VIX.

14:49

In our job, what we do, obviously, we always have to look for what is relevant.

14:55

We can all have our opinions.

14:58

What markets should do or shouldn’t do, they will do what they will do and what we have

15:04

to do is keep ourselves on this and to see what is relevant.

15:07

We know a lot of algorithmic trading is part of markets.

15:12

They follow programs as well.

15:14

You always have to look at, “Okay, what are they looking at?

15:17

What are they sensitive to?

15:19

What are they reactive to?”

15:20

Because we want to be able to interpret risk reward short or long on that basis as well.

15:27

What the VIX has done over the last two years is fascinating.

15:30

There’s been very specific what I call compression patterns in the VIX, especially on the low

15:36

end.

15:37

It can drive people nuts.

15:38

It can get caught, consolidate on the low end and then boom, you have a spike.

15:44

That seemingly comes out of nowhere, but it doesn’t.

15:48

It’s in the charts.

15:49

I call them these compressing wedges.

15:53

Now, what’s been happening on the big picture on the VIX is as the S&P has made new highs

15:58

each time, the VIX and the in between periods has made higher lows.

16:03

There’s a trend of rising volatility.

16:06

Obviously, December last year was the big spike.

16:10

It’s the lows, what happens during the lows?

16:13

Remember, 2017 was the most volatile compressed year ever because we had global central bank

16:19

intervention, we had the upcoming tax cuts, there’s no volatility markets from a trading

16:25

perspective, I hate that.

16:26

I love volatility, I want to see things move, but now that we’ve had these selloffs, even

16:32

the smaller ones, if not been able to contain volatility to the extent that they’ve been

16:38

able to do in 2016 and 2017, since 2018, we have a trend of higher lows.

16:46

Now, the VIX is again in a compression pattern that suggests the possibility of a sizable

16:52

spike still to come this year so we may have one more hurrah before the yearend rally that

16:59

we so often see in markets.

17:05

I think this whole shift of passive is fascinating.

17:08

Maybe a couple of comments on that.

17:10

I haven’t seen this discussed anywhere.

17:12

Just my impression.

17:13

I’m wondering how much of the shift from active to passive investment is actually a consequence

17:20

of central bank intervention.

17:23

What is driving passive?

17:24

Well, you talk about management fees on the active side.

17:27

Well, the main driver for the movement to passive is that people have given up.

17:32

They see active investors lagging the indices.

17:35

Why are they logging the indices?

17:37

Because everything is geared towards the big cap stocks.

17:41

The intervention– if you’re really careful in analyzing and you’re smart and you have

17:46

a smart team, if you diversify in the universe and you get hammered anywhere you lag in the

17:54

indices, and passive allocations keep allocating passively.

18:00

It’s like this dumb machine that doesn’t care how much it pays.

18:05

It doesn’t care what the valuations are, doesn’t care about any of that.

18:11

To your point about signaling, yes, it’s amazing when you see– and that’s why I’m coming from

18:16

a technical perspective, you see charts that are massively, massively historically overextended

18:24

but no one cares because you have this passive machine that keeps investing.

18:28

I think I mentioned this last year, too, it’s like, are people actually aware what they’re

18:33

competing with?

18:35

Because you and I may have a sense of, “Okay, this is getting very expensive,” but a machine

18:42

doesn’t care what it allocates.

18:44

The ETF doesn’t care what it allocates.

18:47

It just has to do rule based.

18:51

You’re sitting in the market with entities that don’t care if they overpay.

18:57

Classic example is Apple.

19:00

Take that stock as an example.

19:03

It’s obviously hugely valued.

19:05

It’s a big company.

19:07

It’s a trillion dollar valuation, but it keeps buying back its own shares.

19:12

Obviously, as a big company, it benefits from these passive allocations.

19:16

What people don’t realize is that Apple has the same amount of earnings that it had in

19:24

2015.

19:25

Four years later.

19:26

Absolutely no change in earnings, same amount of earnings, but people are paying almost

19:29

twice the price for the same stock.

19:31

Why?

19:32

Because Apple’s been buying back its shares, therefore reducing the float and save for

19:37

the same amount of earnings produced a much higher EPS, earnings per share, bigger.

19:43

It looks like it’s growing, but it’s not.

19:45

That’s my point about this whole pacified machine that has been created.

19:52

You, since corrections are not allowed to take place for an extended period of time,

20:00

you’re looking at all of sudden at yearly charts.

20:03

We have stocks, as I mentioned before, like a lot of sectors are lagging behind, and the

20:09

big cap stocks keep holding everything together because all the money goes towards them.

20:15

Because corrections are so short, we have yearly charts that show nonstop gains for

20:23

10 or 11 years.

20:26

There’s absolutely– the December corrections even show up in these charts because they

20:30

were still up on the year in many cases, so you look at Starbucks and Disney.

20:36

Disney is a good example.

20:37

Up 11 years in a row.

20:39

Well, this is this fantasy that’s being propagated now.

20:43

Because I just put my money into passive funds, I don’t have to think about it.

20:47

It’s risk free central banks always intervene and so we have these massive charts that are

20:52

vastly extended.

20:53

Even the technical indicator I watch.

20:56

On any chart timeframe, you will find this useful.

20:59

Be it on the daily chart, the weekly, the monthly, the quarterly and the yearly, it’s

21:03

the five exponential moving average.

21:06

Even on a daily chart, you see vast extensions above it, it will reconnect either to the

21:12

upside or the downside.

21:14

If you see massive extensions on the weekly chart, at some point, it will reconnect.

21:19

The reason I mentioned this is there are stocks like Microsoft that are 50% above the yearly

21:27

five EMA.

21:29

Why is that relevant?

21:30

Because if you look at the history, look at a stock like Microsoft, you can go back to

21:35

its inception and this stock always connect every single year like clockwork.

21:42

There were two exceptions, Microsoft, my favorite example.

21:47

One was the year 2000.

21:48

It was in 1999.

21:50

It was completely extended, did not touch the fire a yearly five EMA.

21:54

Then the second year was 2001 when it went way above, and then it obviously plummeted

21:59

down with the NASDAQ crash and reconnected, and now.

22:04

It’s now on its second year, it hasn’t even touched it.

22:06

It’s vastly extended.

22:07

From my perspective, I look at all this with what central banks are doing here.

22:12

I see risk building that these reconnects, technical reconnects, will take place at some

22:19

point.

22:20

When they do all of these stocks all of the sudden have 30%, 40%, 50% downside risk.

22:28

This is the undiscovered country.

22:30

It really is.

22:32

Look, I’m coming from a training perspective.

22:35

I’m resentful of central banks simply because of the volatility compression that they have

22:40

aimed to do.

22:41

In fact, Jay Powell came out yesterday, made a very telling statement with regards to repo

22:47

and overnight money markets.

22:49

He literally said we have to calm markets down.

22:52

We need to calm.

22:54

Where’s that in your charter?

22:55

Where’s that in your job description to calm markets down?

23:00

Look, markets are supposed to be free flowing in price discovery, but it’s telling because

23:04

he has to control that aspect of the interest rate equations, he has to control it.

23:10

That’s the point.

23:11

Everything is controlled.

23:15

When I look at this experiment that has taken place over the last 10 years, and I’m just

23:21

absolutely flabbergasted that this is not being pressed more critically by journalists,

23:27

by the media and by the public discourse.

23:31

QE, lower rates were emergency measures to deal with a crisis.

23:37

That was the original intent.

23:39

Ben Bernanke, QE1.

23:42

Then came QE2, and then twists and turns, then QE3.

23:48

It morphed into permanent intervention.

23:51

The promise was always we’re going to normalize, becoming come out of financial crisis, everything

23:57

that we do, low rates were going to incentivize growth in the economy.

24:03

They haven’t.

24:04

It was the slowest growth recovery in history.

24:06

In the meantime, low rates have enabled this incredible debt expansion.

24:12

Now, we also got eyes always glaze over with debt no one even– the numbers have gotten

24:17

so big and continue to get ever larger that no one even can fathom these numbers.

24:22

Here’s a fun one.

24:23

In the last 10 years, the US has added more debt to its balance sheet than in the previous

24:31

42 years combined.

24:32

That’s this vertical curve we have and there’s no end in sight.

24:37

When the Fed, last year, tried to normalize its balance sheet and try to raise rates,

24:45

which they managed to get to, basically, the lowest point of raising ever, it all fell

24:52

apart.

24:53

The 10-Year hit 3.2% in October of 2018.

24:58

That was the end of it.

24:59

The debt construct cannot handle higher rates and so they were forced to capitulate.

25:05

My question and the answer to your question is, can they keep this going forever?

25:10

Which is interesting to me, coming back to this point I made earlier about valuations

25:14

of asset prices vis a vis the underlying size of the economy.

25:19

In the year 2000, when the NASDAQ bubble burst, the overall market cap of the stock market

25:26

got to about 144% of GDP.

25:28

That was it.

25:31

It was just too high above the economy.

25:35

That’s where the crash happened.

25:36

That’s where the recession came.

25:39

Then we re-inflated.

25:40

This was the lead up to the housing bubble.

25:43

Cheap money, who caused the housing bubble?

25:46

Well, we can argue it was the Fed with cheap money and this cheap money had to go somewhere

25:51

and so we offered credit and subprime mortgages to people who can’t really afford it.

25:57

The stock market rose to about 137% of GDP.

26:02

Guess where we topped in January of 2018?

26:06

144% market cap to GDP.

26:09

Where did we top in September of 2018?

26:13

146% stock market cap to GDP.

26:16

Where did we end this summer in July?

26:18

144% stock market cap to– there seems to be this natural barrier that says, “Okay,

26:24

well these valuations have to be justified somehow.”

26:29

When I now see the Fed saying, okay, well– back in September, where we’re back at 144%,

26:35

what are you trying to do here actually?

26:38

Obviously, what you have done, what all the central banks have done has not produced organic

26:44

growth anywhere near the growth that we’ve seen in previous cycles.

26:50

That’s why the ECB still in negative rates and they’re trying to do more than negative

26:53

rates.

26:54

For me, that the question is one of control, efficacy.

27:00

Does this produce another lasting jumping an asset prices?

27:05

There is no answer to that question yet, but there may be signs.

27:10

For me, the first sign was, okay, this July rate cut when we had that sell zone of 3000,

27:16

3015.

27:18

Does the Fed rate cut actually produced sustainable new highs?

27:21

The answer to that was no.

27:24

Then in September, we had the second rate cut.

27:26

Did that produce sustainable new highs?

27:28

No.

27:29

Yesterday, Jay Powell talked about increasing the balance sheet again, but don’t call it

27:36

QE, wink, wink.

27:38

We sold off.

27:41

Those are those three specific signs, events where the Fed has not succeeded in producing

27:48

new market highs or for that matter, new growth.

27:53

I think the question is very much outstanding.

27:58

Once we know what’s happening with this trade deal, we need to keep reassessing the mechanics

28:02

of markets and the technicals and see if we can actually see a sizable turn in the economy.

28:09

I’m highly skeptical.

28:12

Because all we’re doing is just keep enabling more debt and demographics are not changing

28:20

as a result of that.

28:21

The deflationary cycle is not changing as a result of that.

28:25

Beyond temporary highs, I have to see where that’s producing anything on the macro form,

28:32

and so far, it hasn’t.

28:36

I think we have to differentiate two things.

28:40

The MMT part, it’s your classic capitulation.

28:44

We don’t know how to solve any of the world’s problems, because that equation is ongoing.

28:51

Because we have demographics that are sending a very clear signal.

28:57

Working age population, by the way, I’ve posted out a few times.

28:59

I find it fascinating.

29:01

For the first time ever, the growth in working age population is actually going negative.

29:06

That tells you everything you need to know.

29:08

There’s a huge demographic change going on as the baby boomers were retiring, how do

29:13

you produce growth with those numbers, unless you believe in some AI productivity fantasy,

29:20

which we don’t have evidence for that yet.

29:25

MMT to me is the ultimate absurdity of it all.

29:32

Free party, free credit.

29:34

We keep printing money and there’s no consequences.

29:37

MMT adherence will obviously push back hard on this, but even central bankers like Jay

29:44

Powell are very much opposed to MMT.

29:47

I personally think is a fantasy, as well.

29:50

In terms of your question about fiscal policy, can now governments come up with infrastructure

29:58

programs or what have you to really push that equation?

30:03

This is where I’m going to have a different take on everything.

30:06

Now, this brings me back to what we’re seeing in the political sphere in the United States

30:10

and the United Kingdom, in Germany, everywhere across the west.

30:14

We have social fragmentation, the likes we haven’t seen in our lifetimes, at least.

30:24

It’s hard to see political cohesion anywhere.

30:28

Germany, for example, used to have three or four parties, not a six, seven and no one

30:33

has a majority of any sort.

30:36

The UK Brexit is a classic example.

30:40

It’s impossible to come to any agreeable solution that’s been going on for years.

30:46

The United States is, impeachment aside, what’s happening down that front, this fragmentation

30:54

has been going on for at least 20 years.

30:56

It just keeps getting worse and worse and worse, and how do you get to a complex policy

31:03

solution that enables you to actually implement structural solutions if you can’t agree on

31:10

a common reality, and there’s no common reality on anything right now.

31:15

Although to be fair, Democrats and Republicans in the US always agree to spend more money,

31:20

that’s what we just saw again in this latest budget round.

31:24

I remain unconvinced that fiscal– even though I hear Draghi claiming for more fiscal spending,

31:33

I don’t see the political cohesion to bring something like that about– German, interestingly,

31:40

on a side note, they’re actually running it surpluses.

31:43

They’re getting criticized for that, which makes actually, I think Germany really an

31:47

interesting place to– if we do have a global recession, what country is actually able to

31:54

really deal and stimulate ultimately.

31:58

They’ve been very disciplined and holding off on this point, but I suspect they may

32:02

have more ammunition than anyone else when we do hit a recession down the road.

32:09

How do you see the end of the cycle playing out?

32:11

I am actually looking for a yearend rally, because I think what happened in December

32:17

of 2018 was superbly rare.

32:20

It happened only once before and that was in December of 2000.

32:25

That’s how rare these December dumps are.

32:27

However, I’m just going by what I know now, and I don’t know what’s going to happen with

32:31

the trade deal and this time, the other.

32:32

What I do know now is basically what I see in the charts is there’s just another very,

32:38

very sizable volatility spike to come.

32:42

I can’t tell you when that comes, it would maybe make sense for that to happen in October

32:48

or into November.

32:50

Then that spike is probably be a buy in markets for a yearend rally, can see that happening.

32:57

I expect the Fed to cut rates again in October, maybe throw another one in December.

33:02

We’ll see.

33:03

I think ultimately, the question is, and I’ve been posting this chart for months now.

33:07

It’s this broad megaphone pattern.

33:09

If they can get above it, we can have a massive all liquidity and ala March 2000.

33:18

It was just crazy blow off the top.

33:21

I’m not predicting this.

33:23

I’d actually don’t want to see that.

33:24

I think stuff like that is just going to be horrid ultimately, because it will just exacerbate

33:29

the pain on the downside.

33:31

If markets cannot sustain new highs from here, I think going actually back to an earlier

33:37

question you asked about historical example, look closely at 2007.

33:42

We made a high in July, we made a high in July this year, then the Fed cut rates in

33:47

September of 2007.

33:49

Because that was their response when subprime was contained.

33:53

Don’t worry about– there is no recession.

33:55

That’s the same narrative we’re hearing now, there’s not going to be a recession.

34:00

The recession came only two months after– three months after the Fed cut rates.

34:04

It came in December of 2007, when no one saw or admitted a recession was coming.

34:11

After that rate cut in 2007 in September, markets peaked in October, and that was it.

34:16

No one– this is the fascinating thing, see, market tops are only known in hindsight with

34:23

enough distance.

34:24

They’re not apparent or anyone at the time.

34:28

That’s why I’m just using that as an interesting example and as a threshold to say we must

34:33

make new highs from here or we’re risking, we’re actually made a double top in July and

34:39

in September of this year, so I think people need to watch the price action very carefully

34:44

from here.

34:46

Just finishing up on 2007, when markets made on marginal new high in October of 2007, and

34:52

the Fed was cutting rates, Wall Street projected price targets of 1500 to 1600 to 1700 for

35:01

2008.

35:02

All of them.

35:03

All of them were bullish in December, not knowing that the session officially actually

35:09

started in December of 2007.

35:11

The S&P close the year at 800, 880, something like that, cut in half, basically.

35:20

I think what we all need to be closely watching for is efficacy of what happens on the trade

35:26

front, efficacy on what happens with the central banks and the price action in the charts.

35:32

Do we see participation coming from the small caps, transports and the banking sector?

35:40

Yes or no?

35:41

Will we see sustainable new highs or not?

35:43

If we don’t see new highs, risk for double top, watch what the VIX is doing and then

35:49

it remains a range bound market for now with opportunities and both sides but I think there’s

35:54

some critical thresholds that have taken place.

35:57

Punch line, no bull market without central bank intervention.

36:02

It remains an artificial construct.

36:05

I am worried that all of us have a warped perception of value of what markets should

36:13

be doing because, let’s be very clear here, we would not be at new highs in or we would

36:19

not have hit these current levels of 3000 in the S&P were it not for complete central

36:25

bank capitulation, four rate cuts, jawboning trade optimism, all these valuations have

36:35

to be justified at the end of the day.

36:38

You cannot lose one of these equations and so markets remain artificially inflated.

36:45

The question is if, like in 2000, or in 2007, central banks efficacy loses out.

36:52

Remember, they had to cut rates by over 500 basis points to stop the bleeding back then,

36:58

and now, they barely have 200 basis points to work with.

English