Ben HuntPlease note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.   

Erik:                Joining me next on the program is Dr. Ben Hunt, Chief Investment Strategist at Salient Partners. Ben, thanks so much for coming back on the program, I think it’s been almost a year since we had you on. Ben, I think that you are probably as well known for the Epsilon Theory blog as you are for your work at Salient Partners, and you recently penned a very interesting piece, where you see a sea change coming in terms of markets. So, please give us the rundown. We’ve got a link in our research roundup email for people who may be interested in reading that full piece, which is titled, “Tell My Horse”. Why the title, and what is that piece about?

Ben:               Well, thanks for having me back on here Erik, it’s really a pleasure to be back on the podcast here. You’re right, I have been writing for about four years now on the blog Epsilon Theory, and in the most recent article, it’s been the most well received article I’ve put out there on the blog to date, and it is about a sea change that I think is happening, you know, I wrote this about three weeks ago, before I think that a lot of other people picked up on the same thing, but the sea change is simply this- that central banks, particularly our Federal Reserve, are changing course, they’re changing, to use the $10 phrase that economists use, their “reaction function”, and all that means is that they’re now interpreting the world and looking for reasons to tighten rather than seeing the world and looking for reasons to ease on monetary policy. So, they’re taking away the punch bowl, and this is not just the case in the US, where the process has been building and acting for some time now, but it is also starting in Europe, and even in Japan, which has been the most active accommodationist central bank out there for the last couple of years. Even in Japan, they’re talking about talking about how to start tapering or changing the policy, because here’s the thing, what the Fed means by taking away the punch bowl is not just the traditional approach of raising interest rates. That’s the traditional tool that the Fed has- you cut interest rates when times are tough, and you raise interest rates when you’re concerned about inflation or you think you’re at full employment or the like. Well, the Fed is doing all that, I mean, we’ve now raised rates in three quarters, three successive quarters, and they’re signaling they’re going to do it again at some point this year, but more than that, more than simply raising rates, what the Fed is also doing, is they’re starting to shrink the balance sheet that they’ve grown over the last eight years. They’re starting to roll off, they’re starting to reduce the balance sheet that was at the core of the extraordinary measures that our central banks and other central banks have employed over the last eight years to try to juice the global economy, but more importantly than that, they’ve juiced financial assets.

Tian HeadshotPlease note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.

Erik:              Joining me next on the program is Tian Yang who heads up the research department at VariantPerception. For anyone who’s not connecting the dots VariantPerception of course is Jonathan Tepper's company. We’ve interviewed Jonathan Tepper several months ago in the program.

What I'm really glad to see in the beginning of your chart book and for our listeners if you didn't already get it you definitely want to download the chart book. The link is in your research roundup email if you're not yet registered we told you earlier in the program how to register and get the download.

I see here that you're starting because I think to some people the very name of your company VariantPerception is not even clear talk to us a little bit about the process that you use and how you identify these trading opportunities that are perhaps a step outside of where the herd is going?

Tian:             Yeah absolutely so I think when you look at macro oftentimes specific events will seem very unique when people look back in history, so you've got housing bust, you've got Russian default and so often it's not clear if you can repeat the investment process you had the time.

What we've tried to do at VariantPerception is essentially trying to create a framework that's robust and repeatable. So, we've looked back at the various historical boom and bust cycles and try to figure out what is persistent through time and different kind of political regimes in economic environment such that we can create this framework. So, here we’re heavily influenced by the works of the likes of Kindleberger and Minsky and so forth.

So, what we got out of that is basically what we see here on slides through the presentation. Essentially to us there’s two key cycles that we want to focus on. One is the growth cycle of the economic cycle and the second is the liquidity cycle.

Now obviously lots of people talk about growth cycles and there's lots of different definitions. For us there's really two key things that we want to focus on here, one is where leading economic indicators are taking us so that's a very short term three to six month kind of cycle and then two is we’re looking at very much investment or inventory to sales, so this is giving a sense of longer term where we are in a typical growth cycle.

Gurevich PhotoPlease note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.   

Erik:                 Joining me next on the program is Alex Gurevichin the CIO at HonTe Investments. Alex it's great to have you back on the program.

I want to start with the news that seems to be on everybody's mind this week which is poor Mario Draghi he’s apparently been misjudged by the market according to the ECB and of course the Bank of England is in the news this week, give us an update on what's happening with the central bankers in Europe and the U.K. and what do you think it means in the big picture of how it's going to impact global markets as we see maybe a change of direction to more hawkishness from the ECB

Alex:                Hello it's good to be back and the subject is definitely ECB and also Bank of England. Generally I think that would have developed a pattern over the last few years of ECB throwing curveballs to investors and the volatility after ECB meeting sometimes is somewhat strange.

Some people may remember the December 2015 ECB meeting which closed a huge move on euro interest rates while the message was rather mixed.

Personally I think that the ECB message is staying rather mixed and rather consistent. They are kind of switching towards tapering and towards a slightly less dovish stance it's very hard to call it hawkish. If they have negative interest rates and purchasing assets at a little slower pace and that may or may not happen sometimes several months from now.

So just think about how many layers we have here, we have fuel negative interest rates, we have them still aggressively purchasing assets and increasing their balance sheet and they are talking about possibly setting a time to decrease the pace of purchasing those assets, it's like we are talking about 4th and 5th derivative here and all of this probably not happening until 2018.

So, I think today’s market is just being skittish and they read Draghi a little too dovish a few months ago or a few weeks ago and they read him a little too hawkish now but in reality where are we going to be six months from now really has nothing to do with the current volatility of interpretations.

Having said that we are kind of almost in unprecedented area here, we have a central bank talking about tapering, we have one precedent of QE and tapering which of the United States.

There is no rule that it has to go exactly the same way but we have one thing to guide by and what happened after us tapered, we had a kind of knee jerk selloff in U.S. bonds which actually a few months later rectified and ended up in a huge rally.

jessefeldermacrovoicepicPlease note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.   

Erik:                Joining me next on the program is Jesse Felder author of the Felder report and Jesse sent us a fantastic book of graphs and charts I strongly recommend that you download it. Our registered users at can find the download link in your research roundup email. If you're not yet registered we told you earlier in the program how to get the download.

Jesse thanks so much for joining us. We've heard from so many people that are smart people really prominent people saying OK this is crazy, this market is overvalued, it's time for it to roll over and it was actually this week I saw one guy, very prominent guy, wrote that this is the most heinously overvalued market in all of history. Another guy wrote this is the most egregiously overvalued market. I'm thinking OK heinously or egregiously I'm not sure which is stronger.

But both of these guys left out the actual content from their articles about why they think now is the turning point and it's something I really appreciate about your work is you don't just talk about valuations being out of sight, which I think we can all agree on, but you see some very clear reasons and technical indicators that you think this thing's rolling over. So, why don't you tell us why that is and reference your chart book that you sent us?

Jesse:              Thanks Erik, first of all thanks for having me on the show. I'm a huge fan of Macro Voices I catch it as often as I can and so it's an honor for me to be on the show, thanks.

I am guilty of that same thing I've been writing about the market being overvalued for a few years now and I am a value guy at heart, so people will probably be surprised at the first several charts in this deck that I put together because they're mainly technicals.

One of the main technicals I use is the DeMark sequential indicator. And this is basically just as a signal of trend exhaustion. So it tries to identify turning points in trends. One of the things I wrote about last week – so these charts are a couple days old – is that I'm seeing these trends exhaustion signals on a variety of indexes across a variety of time frames.

So, I’m basically looking at Spy, QQQ and IWM the three main ETFs I look at and I'm seeing exhaustion signals on daily, weekly and monthly timeframes. So, when I get those timeframes lining up like that and exhaustion signals on multiple levels, multiple indexes, multiple timeframes that to me tells me that this trend is at risk of coming to an end.

Another thing I really look at in this regard is a variety of breadth indicators and that also helps me try and understand the strength of the trend. And when breadth is really strong that's a powerful sign of strong upward momentum and that's what we've seen in the markets for a long period of time until the last few months.

I really believe this last push higher in the stock market over the last few months is the final blow-off phase because these exhaustion signals are triggering but also because breadth is signaling that this final move up is really running out of momentum.

It's been all over the media people talking about how it's been just the fangs really driving the market higher over the last several weeks or if not months. We're seeing things like on balance volume that's really fallen off, even with the S&P hitting a new high this week it was only more than a third of the stocks in the index trade below their two hundred day moving average. So a lot of stocks are really starting to fall off at this point.

Then one of the most fascinating charts I think this is 14 in the deck is the ratio of the equal weight Spy to the market cap weight and when this ratio is rising it means that all the stocks in the S&P 500 are really participating pushing the index higher. When the ratios falling it means there's fewer and fewer stocks pushing it higher and the correlation between the S&P 500 and this ratio is usually very positive but it's been very negative over the last two months in fact it's been the most negative we've seen since July - August of 2007 which was right around the top of the last bear market.

If you look at that chart you'll see almost every time there's a negative correlation between these two to the degree we're seeing now at least precedes a correction. Last time that we saw in 2007 July and then December of 07 we saw a big divergence in this indicator.

To me I'm seeing exhaustion plus breadth signals that are confirming that this up trend is very very tired.

Keith McCullough headshotPlease note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.

Erik:               Joining me next on the program is Hedgeye founder and C.E.O. Keith McCulloch. Keith thanks so much for joining us I'm particularly keen to get your perspective on the dollar index which is where I'd like to start all of these macro interviews.

We’ve had a lot of guests on the program articulate a very intelligent bullish secular view on the dollar, but dude look at the chart it's not looking pretty. What do you think is happening next for the dollar?

Keith:             Well first thanks for having me on, it’s good to join you here. The dollar is near to my heart, I too start every day with a process that’s largely dollar centric, well I think the difference if you're looking at the dollar on a – what I call – the immediate term trend basis or an intermediate term trend basis both, we would call that bearish, but from a long term perspective which is a different duration of course, the dollar to me looks fine.

But you know why did it look weak on an immediate to an intermediate term basis? I think it's pretty straightforward. Inflation expectations are as we affectionately call it reflations rollover, that's one of our big macro themes and we had it before, all consensus started talking about it but the reality is that when you pound inflation expectations you get the very obvious falling domino which is the Fed is going to be less hawkish.

So, the way that I kind of see the dollar declining into the Fed, in particular today, is that the dollar is going to selloff into the news, it’s going to get dovish rate hikes, so they’re going to raise rates based on the prior rate of inflation, inflation is coming down quickly and our forecast is that inflation continues to go down through at least Q1 of 2018.

We think that the CPI headline probably drops closer to 1.1% which is still actually a lot lower than what the reported inflation was this morning. I heard [inaudible 00:01:34] say it was at 1.9%.

MACRO VOICES is presented for informational and entertainment purposes only. The information presented in MACRO VOICES should NOT be construed as investment advice. Always consult a licensed investment professional before making important investment decisions. The opinions expressed on MACRO VOICES are those of the participants. MACRO VOICES, its producers, and hosts Erik Townsend and Nathan Egger shall NOT be liable for losses resulting from investment decisions based on information or viewpoints presented on MACRO VOICES.

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