Transcripts

Erik:      Joining me now is Stone X head of global macro strategy, Vincent Deluard. Vincent, It's great to get you back on. It's been too long. Let's start with the markets and what you see coming. I think you've had a pretty good spring. You kind of called the correction in March. What's the outlook now? I think you were looking for a deeper correction in the summertime. What's the outlook? What are you forecasting, and what's what do you see coming?

Vincent:   So we had a call for a March correction bear market called "Beware the Ides of March.” I must say, I got a bit lucky with the tariffs. I got some help from Orange Man. And then when we saw the market in dislocation, by late March, early April, it was clear that the TACO trade, things would bounce off. So, we published a report called “Spring Rebound, Summer and Fall Correction.” The idea was that the market would retrace most, if not all, of its losses, and then kind of hang around the summer, which is typically a boring period, and then in the fall, we'd meet some of the unsolved issues that hadn't been addressed in the spring. I've updated that because the rebound has exceeded my expectation. I mean, we’re basically back at an all-time high. The market went up almost like 15 days in a row after the pause on tariffs, what I thought would be the trigger for the second leg, which is rising bond yields, has also happened. I mean, we are at a cycle high in a 30-year, the 10-year is not far behind. So, I'm starting to wonder that this kind of second leg, maybe a retest of the low, or maybe not, we go fully too low, but certainly significant drawdown would happen in July instead. And July would seem like an inappropriate date for correction. This is when the 90-day pause on tariff ends. I doubt that we'll have big, beautiful deals with 200 countries. Since we don't have somewhat BS deal, we have one, the UK, now. So we'd better get signing right now. So, with this policy risk on the tariffs, this policy risk on the Fed, obviously, we kind of pushed out the rate cuts, but that means that the July meeting is the one that becomes key, partly because there's a part of the market that expects cuts, and certainly they expect guidance on these cuts, which may not come. July is also going to see the impact of tariffs filter through the economic data. I think now we’re enjoying this kind of almost illusionary relief, where, oh, look, Q1 is fine. Of course, Q1 is fine. I mean, the first tariff payments were made. If you look at Daily Treasury Statement on April 22, so you're not going to see that on the Q1 data, and you're barely even going to see it in most of the Q2 earnings, either. I think that the way you're going to see it is going to be the guidance towards Q3, Q4, which will be made in July. July, of course, will be earning season. When companies are about to report earnings, they can't complete buybacks. So, if we see some weakness in the market, there wouldn't be that buyback bid to stop it, which I think was a factor when we had the big waterfall decline in April. There was no buyback to stop it. Now, eventually, the buybacks will come back as companies report, but there will be that window of weakness, and then finally, from a flow perspective, stocks have completely destroyed bonds. This quarter, we are up 20 plus percent on stocks, while bonds are flat to down. So, if you are a target date fund, which is the way most US retirement savings are managed now, you are way overweight in stocks and way underweight bonds. So, you'll probably need to sell some stocks, buy some bonds, or at a minimum, when you see the paychecks come in June for Q2, you'll allocate all that money into bonds and none of that in stocks. So, you have policy risk, you have Trump risk, for lack of a better word, earnings, I think is going to be okay, but let's call it garden risk. And on top of that, you have poor liquidity due to lack of buybacks, and then the target date funds at a time when, typically, people are on vacation. So, yeah, I think we had a very nice run. I'm not structurally bearish. I don't think stocks are actually that expensive, but I would put some hedges ahead of the summer season.

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Erik:    Joining me now is Mike Green, Chief Strategist and Portfolio Manager for Simplify Asset Management. Mike, it's great to get you back on the show. It's been way too long. I want to start with something that you've been talking and writing about lately, which is, when you have the scope and level of change in government that we're seeing under the Trump administration, not only does that change the economy, but it also brings into question the metrics that we use for measuring the economy. Tell me what's going on in your assessment. Is the market correctly discounting what the real economic effects of Trump policy are? Or, is Trump policy actually interfering with the way we measure these things to the point that we're losing track?

Mike:   Well, I think it's a combination of the two. And I don't think it's unique to the Trump administration, although I do think the disruption that is underway in the Trump administration will play a role as we roll forward. Your listeners who have heard me talk before know that my primary area of research, my primary focus is on the market structure impacts of the growth of passive investing. And what that leads you to understand or believe is that the market is being inflated by our style of investing. You put money into a passive index fund, it allocates very large sums of capital to the largest companies. Those companies are highly inelastic in their price response, meaning small changes in supplier demand can cause significant price change. You can think about it as a multiplier, right? So, the traditional thought process behind something like the Efficient Market Hypothesis is that a dollar into the market has very little impact on security prices because it's really an information exchange. You’re saying I have a strong view about X, but somebody on the other side of the trade has an equally strong view that X is not true, or they have their own reasons for selling. And so, the net impact of flows into the market under the EMH are very, very small. We now know that is not true. The academic research that has emerged in the past decade, starting with Ralph Koijen and extending to his work with Xavier Gabaix called the Inelastic Market Hypothesis (IMH), identified that stocks are highly inelastic. And in fact, what we're seeing is somewhere in the neighborhood of about $7 to $8 worth of market cap created for every dollar that flows into the markets. That suggests that the EMH is misspecified about 800 to 1. That research has now gone further, augmented by an individual named Valentin Haddad at UCLA, who has looked at the market cap impact of that. And I've done a lot of work with Valentin at this point. And what we're finding is that for many of the largest stocks, the NVIDIA's, the Apple's, et cetera, of the world, that inelasticity is an order of magnitude higher there.

So, we're seeing between $75 and $100 of market cap created for each dollar that flows into the market. As long as people have jobs and are contributing to 401Ks and their retirement flows continue to be positive, and that's been augmented by policy choices like Secure Act 1 and Secure Act 2 that have increased participation and increased employer contributions, that means that the market isn't really pricing anything anymore. What it's really doing is reflecting those flows. And Trump's policies, while they've interjected uncertainty—uncertainty doesn't mean fire the workers you desperately tried to obtain over the last five years—we basically have businesses in a holding pattern where they're starting the process of thinking about firing people. You just saw Facebook introduce performance metrics, et cetera, and the objective being to move to a GE type model where they lay off the bottom 10% of performers on a continual upgrading basis. That's telling you that the uncertainty is likely to morph into some form of increase in unemployment. We see this in employee uncertainty indices. ‘Jobs hard to find’ are getting higher relative to ‘jobs plentiful,’ fear of losing your job is starting to rise. All of those are telling you that we're looking at a scenario in which unemployment could begin to rise fairly significantly. And if that happens, then those flows can change. But in the meantime, we're used to thinking about markets as discounting mechanisms, and we ask ourselves, what is priced in? If the market is going higher, it must be good, things are about to occur. The market is discounting something positive in the future. I just don't think that's true. I think that it really reflects the fact that companies have not yet laid off the employees despite the fact that we're seeing significant weakness and demand.

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Erik:    Joining me now is Bianco Research founder, Jim Bianco. Jim, it's great to get you back. I got to tell you, buddy, I think you were probably the most prescient of our guests this year, this calendar year, or in the last year, for that matter. The last time that I had you on, you said, look, it's time to reset our expectations. The Trump and Bessent have big, big ideas. They're not just jiggering a little thing here and there. They really want to change the structure of the system. We've got to be ready for them to have some big ideas, and you perfectly set the stage for what was coming with the tariffs. Now, what I'm seeing, Jim, is almost everybody seems to be feeling like, okay, seems like maybe this tariff battle is starting to wind down. And I don't know what your take is, but my feeling is okay. If that's really winding down, the right question to ask would be, what does Trump have next on his list, after tariffs? And it feels to me like everybody's saying it's done now? Is it done now? Is something ending, or are we just at the beginning? And how should we be thinking about where we are in this process?

Jim:    No, thank you for the kind comments. I think no, we're kind of at the end of the beginning is where we're at now. As far as tariffs winding down, let me take that part first. I've said, you know, the problem I have right now, within the messaging that you get out of tariffs, there's two messages that a tariff can employ. One is leverage. I'm going to use this club to beat you unless you give me what I want. And what I want is freer trade and more access to your markets. If you're going to use tariffs for that, I think everybody's fine with that, and that is what kind of everybody wants, and that's a bullish outcome. But if you're going to use tariffs as a source of revenue and create the external revenue service, and we're going to raise all this money, and we could do away with income taxes, that's just a massive tax increase, is what that is. And that is problematic. The issue that I have with Trump, Trump especially, is he kind of says that they're both tariffs and revenue in the same sentence. And I was like, well, they can't be both at the same time. They're either one or the other. So, when people start to say winding down, that the tariffs are winding down, I think what they mean is there’s going to be leverage. The leverage is going to result in what we saw with the deal with the UK, an opening of markets, a less restriction on being able to push goods into each other's markets, a leveling of the playing field. I'm not so sure that that's really what it's going to be at this point, and so we'll have to see where we go with the tariffs.

Now, to the second part of your question, what's next? As well, when I was on with you last time, I said, look, he is talking about a reordering of the financial system. I'll remind everybody that in June of last year, Scott Bessent spoke at the Manhattan Institute, and he said that we're in a rare period of time that only comes around once or twice a century when we completely reorient the global order. And now he's talking about the monetary and trading order, maybe not the political order, but that might flow from it, and that he wants to be part of it. And, well, he's the Treasury Secretary, so he's definitely going to be part of it now. And so, I think that that that's the second part that's coming, and what that's really going to be is, if I had to put it bluntly, the United States has a debt and deficit problem. We have too much debt. Our deficits are too big. There is an inability of Congress to cut spending, and so we need to find more revenue. Tax the rich. Well, that's not going to work, we've tried that. Tax the middle class. That's not going to work. We've tried that. Well, who else is there to attack, tax? Tax somebody who doesn't live in the United States. And so that's what tariffs are. That's where the other thing that's been kind of lost in the shuffle a little bit, is the idea that Europe needs to step up and spend more on their defense so we don't have to.

And then the other idea, which is this, from when we're recording the week before Trump gave a speech in Saudi Arabia where he talked about, that the main benchmark going forward from here is not going to be ideology and war. It's going to be trade. And I want to do deals with Iran. I want to do deals with Gaza. Remember, he wanted to build a hotel in in Gaza City. He wants to do economic deals with everybody, which means less of an impetus for the idea of conquest in war. So, this is very different than what we've seen before, and this is a different type of global order that we're going to. And the last point I'd bring up about this is, I agree with Trump that the status quo could not hold. We were at a point with debt, deficits, the imbalance of trade. Look, we set up a World Trade Organization, and we set up a lot of these trading rules over a generation ago, and they're not really applicable for the kind of economy that we have now. We had to change. Now, we can quibble whether or not this is the right change, and this is my pushback against the Trump critics. He's proposed a bunch of radical policies to change. Okay, you don't like them. The answer is, let's just go back to the status quo. The answer is, give me another set of radical policies to change it to. But we're going forward with this kind of change, and we have to start to accept it and the ramifications for financial markets they're in.

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Erik:    Joining me now is Gavekal co-founder, Louis-Vincent Gave. Louis, it's great to get you back on the show. Let's start with the burning topic on everybody's mind, Trump tariffs, China-US. Okay, first we thought it was this great big tariff build up. Then it seemed like we had really high tariffs. Then all of a sudden, there's a weekend deal. I think everybody's head is spinning, kind of feeling like, Okay, where are we in this story? When do the weekend deals end? When do we get to stability? Are we almost there yet? Are we just in the first of several rounds of negotiation? How is this all going to wind up, and how close are we now in terms of the latest revision to the trade deal?

Louis:   My head is spinning for sure. Anyway, thanks for having me, Erik. It's great to be back. Good to catch up with you. It's been too long since we caught up. I'm delighted to be here. So, thanks a bunch for having me. And yeah, it's probably a good time to catch up as to where we are in the world. It's been, obviously, a pretty roller coaster two months, you know, a lot of facts changing on the ground, a lot of policy shifts. China moving towards more stimulus, Europe moving towards more stimulus. Now, you mentioned this weekend, we have the Geneva deal between the Chinese and the US, we also have, yesterday, we had the US government dropping in a budget that's pretty stimulative. When you think that just a month ago, the discussion out of the Trump administration was all about DOGE and cutting spending and tightening belts, etc., that seems to have gone out of the window almost as fast as the tariffs against the penguins.

So, to your point, where do we stand now? I think we stand where we're probably going to end up, which essentially is 10% on pretty much everybody, and then China somewhere between 25% and 40%. And out of all of this, you could say we could have started here and foregone all the drama, foregone all the other headaches. Of course, that would have made it less exciting, that would have meant less time in the media for the for President Trump and for the various members of his administration. How does the world look with 10% on everybody? I think 10% on everybody really doesn't move the needle all that much. It does end up, I think, still being a little bit inflationary for the US, especially since, contrary to a lot of people's expectations, turns out that tariffs do not strengthen your currency, it probably weakens it. And so instead of going up on this news, the US dollar had a tendency to sort of pull back. So, if you think, okay, we have 10% on everybody. We have tariffs that bring up some of the cost, even if perhaps some are eaten by a little bit by the producers. The bigger question mark is, where does China end up? Is it going to be 25%? 30%? 40%? If you end up at 40% for most of the Chinese goods, I think that could still lead to some supply chain dislocations, that could still lead to some issues. Now, granted, perhaps the big difference is, if you'd said, okay, we're putting China at 40% and we're leaving it there. Maybe you get a different outcome than where we're now. What we've just experienced, where you start up saying, oh, we're going to put China at 130%, everybody freaks out. Everybody is very worried the impact on growth, the impact on supply chains. Then you turn around, you say, actually, forget it. We're not going to do 130%, we're just going to do 40%. 40%, but we're just going to do it for those 90 days, and then we'll see afterwards. And now, if you're Walmart or if you're Costco or Home Depot, you think, hmm, okay, 40%, I don't like it, but I can live with it. So, I'm just going to load up now, make sure the shelves stay stacked for the summer. Load up on everything I can. I think this is essentially where we are, which perhaps we wouldn't have been if we'd started at 40%. Bottom line, here we are, 10% on everyone, 40% on China, probably an inflationary impact for the United States, especially if at the same time you get an easing of fiscal policy. I guess that's where we stand.

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Erik:    Joining me now is Energy Outlook Advisors managing partner, Dr. Anas Alhajji. Anas, it's great to get you back on the show. And very timely, because what we've had happen in the last several days is the group of eight OPEC+ voted to increase production that immediately resulted in the Western press basically going into overdrive saying, okay, look, this is war. What this means is OPEC+ is declaring a price war on US shale producers. We should basically hunker in for much lower prices. OPEC is going to try to drive the shale guys out of business, that's the only thing this could mean. You published a report on Saturday, just after the vote that was completely non consensus. You're on a completely different page than everybody else. And frankly, based on the tape action on Monday, it looks like you were – Monday and Tuesday – it looks like you may have already been proven right. So why did you have the out of consensus view? Why do you not think this is a price war? And what do you think is going on, going back to your Saturday report.

Anas:   Erik, it is always a pleasure to be on MacroVoices, always. So, thank you very much for this opportunity. I would like to kind of take my time explaining this, because it is very clear that not only the media misunderstood what was going on, even analysts misunderstood what's going on. So, let's start with the fact that, especially for the audience who are not well versed in the oil business, that we have OPEC, which is the Organization of Petroleum Exporting Countries, which has 12 members. And then after 2016, the 10 other members joined them to form OPEC+, which include Russia and Kazakhstan. So, we have 12 members of OPEC, and then we have 10 other members. So, the total of OPEC+ is 22 and what happened here is, after the major increase in prices in 2022, prices start declining, inventory start building up. Demand growth starts weakening. They felt that they need to cut production to prevent a major increase in inventories. OPEC+ met and they did cut production, but few months later, they realized that was not enough. They needed to cut more. Just for context, they did cut twice, big time in 2008 during the recession. So in a sense, there is precedent about big cuts in the past. So when they met, they encountered the problem, many members of the 22 country coalition refused to cut. And the decisions in OPEC+ and previously in OPEC, are made by consensus, which means that any country can say no, and any country can have a veto power, so 8 of them decided to go for voluntary cuts, and they cut by 1.6 million barrels a day. Few months later, they found out that was not enough. Inventories continued to build, so they went for another cut, which was a voluntary cuts of 2.2 million barrels a day on the condition that they will unwind those as soon as possible.

So, the conclusion here is this, we have OPEC, we have OPEC+ and we have the group of 8, which I call the V8, V for voluntary. So, we have those three groups. The V8 includes Saudi Arabia, include Russia, include Kazakhstan, include Kuwait, UAE, Oman and some other smaller members. But the idea here is we have those 3 groups, therefore the press that focused on OPEC+ cuts are wrong because it wasn't OPEC that cut, and it wasn't OPEC or OPEC+ that increased production. It was the group of 8, and we have three cuts. The first one is from OPEC+, and the other two cuts are from the group of 8. Now what happened is, they try to unwind the 2.2 million barrels a day quickly, and they couldn't, because the market was not supportive. So every time they met, they delayed the decision. And as you recall, they delayed four or five times. Finally, they said, that's it. We are going to unwind in October 2024. But by October 2024, they realized we have a presidential election in the United States in November. So they said, okay, let's delay for one more time until we figure out who is going to be the president. So, they delayed the decision until December. In December, they made the decision to unwind the 2.2 million barrels a day starting April 1, 2025, over a period of 18 months. So, it would be gradual increases over those periods. And they emphasized the idea that those countries that over produced in the previous year, they have to compensate for all the increase they made. So, the first fact here is, those who claim to be surprised by the decision to add production, it's nonsense, because they already said this in December, so it should not be a surprise. So, we came into April and they started and winding production, which the amount is about 140,000 barrels a day. If you look at the data right now, since already passed, we found out that the exports of OPEC+ declined. It did not go up. And the exports matter, because that's what the supply to the international market is. Then they shocked the market when they met and they said, okay, we are going to change our policy. We are going to triple the increase in May, so they are going to expedite the unwinding of production. That took everyone by surprise, and the question is, why? What happened? The problem at that time is the media picked up the first part of the story and ignored the second part of the story. The first part of the story, which was increasing or expediting the unwinding of the cuts, the second part of the story was, instead of spreading this return of production over 18 months, they stopped it completely. And they said, now we are instead of meeting twice a year, we are going to meet once every month, and we are going to decide in this meeting what to do the following month. So the media mentioned the first part of the increase in production, but they did not mention the second part, which means that they can literally stop all the increases or even cut. So here comes June, and the decision for June, all expectations in the market was that they are going to repeat what they've done in May, in June. And after they did it, and they agreed on Saturday that they will add 411,000 barrels a day in June, all of a sudden, we've seen many analysts are surprised, and they were predicting a doomsday. Well, if you go to their writings, and if you go back to their tweets and everything else, they were predicting this a month ago. What changed? They were predicting this.

So, the issue here is this. First of all, the increase was 140,000 in April, 411,000 in May, and on top of that, 411,000 in June. So, we are talking about an increase of 950,000 barrels a day. Now, you might tell me, well, this is a significant amount, and it will lower prices. And our reply said, no, it should not lower prices, because that oil already exists in the market. That oil was the overproduction the 300,000 of Kazakhstan and the 400,000 of Iraq and the others. That oil is already in the market. All they did, basically, is raise the ceiling and legitimize the illegal oil. So, to answer your question, this is the first answer, that most of the oil is already in the market. There is no reason to panic, because it's not the new oil coming to the market. So that's number one. Number two, analysts missed the fact that in the oil producing countries, and if you recall from previous shows, we discussed this several times over the years, in the oil producing countries, in the summer, demand for oil increases substantially. We are not talking about the consuming countries, we are talking about the producing countries. We're talking about the Middle East and North Africa, for example, because the demand for cooling is very high, they demand large amount of electricity. And to provide that, they need to burn a lot of oil and power plants. And based on our estimate in the Arab world alone, that adds about 1.2 million barrels a day in the summer of demand. What that means is, whatever they are going to increase in term of production, some of it is going to be burned inside those countries, and whatever is going to be available to the world is very little.

So, aside from the fact, so number one, that most of that oil is already in the market. The second one is demand increases in the summer because of the heat in the summer. And if the summer is very hot, we might end up really bullish this summer, if the summer is really hot in Middle East and Asia. The third point is very interesting, and that was missed by everyone, the Hajj. The Hajj, the pilgrimage, the pilgrims, millions of Muslims from all around the world come to Saudi Arabia a certain time of the year to perform the Hajj. And when we talk about Hajj, we are talking this year, since Hajj basically is based on the lunar system – so we cannot talk about the solar calendar – but to use the Gregorian calendar, it corresponds to May and June. That's when those millions of people travel Saudi Arabia and they leave, and where the increases and where they expedited the production, May and June. So, what happened in Hajj? You have millions of people coming in, the demand for gasoline goes through the roof. The demand for diesel goes through the roof. The demand for jet fuel goes through the roof, and they have to provide electricity, 24/7, for two months for hundreds of thousands of hotel rooms with cooling because the area is very hot. So, the demand in Saudi Arabia, because of the Hajj, increases substantially. What that means is one, two, three. One, we are talking about the most of that oil is already in the market. And then whatever additions is going to go for the summer cooling in power plants, and the second one is going to go for Hajj so what is left? So that's why, on Saturday after the meeting, basically, we decided to publish this note telling people, look, you got to be very careful. This is really not bearish, the way you guys are looking at it.

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